Monday, October 11, 2010

What if David Stockman is Right?

Okay, the David Stockman interview mentioned in the previous post wasn’t pretty.  It depressed me.

I can’t believe I am writing this.  I need to entice readers into looking at what he says.  Yes, he says very important things.  Yes, there are warnings that should be taken seriously.  But wow!   Talk about speaking loudly and carrying a toothpick.

Here are just a few of his observations.

Over the past 40 years, we have had only 2 years in which we had a surplus.  That is 38 years of adding to the National debt.

If we elect a Republican Congress, we will have 2 years of gridlock with a split White House and Congress.  Nothing will get done, including deficit reduction.  Once we can be in a position to reduce the debt, perhaps as early as 2012, we will have added an additional $16 trillion in total debt with state and local debt added in.  That will surpass the nation’s GDP.

After 40 years of deficit spending, we no longer have the balance sheet to support the budget cuts that Republicans want to extend.  There is a 10% gap between revenue and expenditures in the National budget, and Republicans are “faking it” when it comes to budget cuts, and that means raising taxes.  When there is no will to cut spending, then raising taxes must be used to balance the budget.

The recovery is over.   The news flash is that we had a short recovery and we are now in a new normal of slow 1% to 2% growth with 9%, perhaps 10%, unemployment for years.  (See, I told you he was depressing.)

This is a bad environment to work on the deficit problem but we can’t wait.  We must start now.   We have excessive debt at all levels, and we must de-lever at all levels, including our personal individual debt.

He was asked about going back on the gold standard.  Before the Nixon Presidency, the dollar was tied to gold before Nixon let it float.  Stockman did not advocate returning to it, though he did advocate getting positive in our current accounts internationally.  Hmmmm….sounds like a future post on this subject.

I had to turn it off.

But if David Stockman is right, what should we be thinking about?  First, we have a long way to go to get into a growth economy.  Second, deficit reduction will be tough.  Third, we are so over leveraged with debt that we can no longer stimulate the economy through debt.

Stimulus programs don’t work, but tax cuts may not work either?  Well then, what will?

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