The Real Cost of Too Much Government Spending

Whenever the Federal Government spends more than it collects in taxes, that difference is called the federal “deficit.” As these deficits mount up year after year, their total is called the “National Debt.” During the eight years of the Bush Presidency the national debt increased by $2.5 trillion. The 2009 budget, for which Bush and Obama must share responsibility, will add an additional $2.6 trillion in public debt. President Obama’s budget will add an additional $4.9 trillion in public debt from the beginning of 2010 through 2016. To put this in perspective, the entire US economy produces about $13 trillion a year.

Where will the federal government get this money that it doesn’t have? There are only two options to handle federal deficits; the federal government can (1) borrow the money or it can (2) print the money. Let’s briefly examine both of those options.

When deficits occur the US treasury realizes that the Congress has committed it to spend more than it will collect in tax revenues. The treasury borrows the difference by selling US bonds to American citizens, foreign governments and other investors. The US government pays interest on those bonds, competing with other borrowers for limited funds. This drives up interest rates in the US economy, which eventually causes recessions and unemployment.

Printing money (now called “quantitative easing”) occurs when the Federal Reserve System buys back from lenders US bonds or corporate tarp money debt by simply increasing the checking account balances of the lenders. By making these bookkeeping entries, the Federal Reserve System isn’t running the printing presses, but the effect is exactly the same; the government “prints” money to pay back its debts. This is the classic definition of inflation.

According to an article in the May 26, 2009 Financial Times by Stanford Economist John Taylor, under President Obama the federal debt is exploding. If it stays at the levels projected, the outcome will be devastating for our economy, threatening our republic. Click HERE to see Taylor’s article.

To quote Taylor: “The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.”

Wonderful; if we don’t drastically reduce the spending plans of the federal government, we’ll have the choice of a 60% tax increase or a doubling of prices. Is this the America in which you want to live?

Government spending needs to be curtailed at once before it is too late. We have become a nation of over-schooled, un-educated fools who believe that government has the answer to all of the world’s problems. We have elected people to serve us in Washington who are, simply, separated from reality.

The average person knows in his heart that no person (or government) can spend more than it produces for very long without serious consequences. Nothing can be consumed unless someone produces it. The old saying is true; there is no free lunch! It is time for citizen legislators, not professional politicians, to run the country again. We need term limits. We need balanced federal budgets. We need to stop this madness of nationalizing banks, insurance companies, and automobile companies and return to the private enterprise that made us the most prosperous country on earth. We are on a very dangerous path that, if followed much further, will lead to our fiscal and political ruin.

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