It was widely feared a few weeks ago that the U.S. government would be forced to shutdown over an impasse on the federal budget as Demograts and Republicans stood miles apart in their negotiations. Luckily for the whole world, President Obama and the Republicans were able to compromise on a deal at the 11th hour that would see $38 BB cut from federal spending for the rest of this fiscal year. Politicians immediately began taking credit for the deal and the President claimed that America was "beginning to live within its means".
Putting aside the fact that the Congressional Budget Office estimates that the bill will only cut $350 MM in the 2011 deficit instead of $38 BB, we would like to take a step back and ask how significant these cuts would be in the grand scheme of things?
- $38 BB is 2.6% of the CBO forecasted deficit of $1,480 BB for fiscal 2011.
- $38 BB is 0.55% of the cumulative CBO forecasted deficit for fiscal 2012 to 2021 of $6,971 BB
- $38 BB is 0.27% of the $14.3 T in U.S. public debt outstanding (which incidentally, is already above the $14.3 T debt ceiling that will be the topic of debate for the coming weeks)
- $38 BB is 0.038% of the U.S. government's $100 T in unfunded liabilities, as estimated by Dallas Fed President, Richard Fisher back in 2008
Seriously? American politicians are fighting tooth and nail over $38 BB in federal spending? Even Obama's much heralded $4 T in deficit reductions in 12 years is barely a drop in the bucket!
We see 3 scenarios out of this mess:
- The U.S. government will have to raise taxes significantly (90% top marginal tax rate, anyone?)
- The U.S. government will have to renege on its promises (Come on, the unfunded liability is 7 times the U.S.'s GDP! How can the government possibly ever satisfy these obligations?)
- The U.S. will have to inflate away the obligations (note that some obligations are inflation adjusted)
None of the scenarios are pleasant. We would like to know if anyone has thoughts on possible alternatives out of the mess.
The Aspiring Analyst
