Downplaying Debt Fears
Headlines are looking great this week as earnings reports are released, with the vast majority of corporations beating expectations.
Unfortunately for big companies, they won't be able to keep as much of their profits if President Obama has anything to say about it. Lately the White House has released statements reflecting a desire to raise taxes, particularly on oil companies.
Obama's plan is to eliminate tax breaks and subsidies provided to oil companies, which amount to roughly $4 billion per year. Given his penchant for subsidizing wind and solar projects, one must wonder whether Obama needs this $4 billion to help infinitely-less-profitable alternative energy companies.
Since his inauguration, many similarities have been drawn between Mr. Obama and President Jimmy Carter, and they are beginning to look more and more alike as of late. Some may recall the Windfall Profits Tax passed under Carter in 1980 in response to increasing oil prices (sound familiar yet?).
Unfortunately for the Obama Administration, every study we have seen shows that raising taxes simply won't cover the government's deficit. In order to stay afloat the government absolutely MUST cut spending, especially if it hopes to avoid inflation.
Not surprisingly, the national debt is the biggest concern that we hear about from the investing public; and while it certainly isn't a non-issue, we have little doubt that American can grow its way out of this crisis.
From where we sit, we simply see too many ways for the government to deal with the surging national debt to cause serious worry. Let's recap a few options:
Cut spending. This is essentially a must, and most Americans agree at this point that the federal government needs to cut its obligations and tighten its purse strings. Some fiscal responsibility should go without saying.
Monetize. In other words, we "inflate it away." This certainly isn't our favorite choice, and it certainly isn't good to do it all at once (Zimbabwe, anyone?). However, modest rates of inflation over an extended period of time - say a decade - could feasibly eliminate our national debt without causing substantial loss in purchasing power; assuming the economy continues to grow to accommodate this inflation.
Refinance. Now, this is a little different than taking advantage of lower interest rates to secure a lower mortgage payment. If the Federal Reserve raises interest rates, which will inevitably happen sooner or later, then the value of outstanding bonds will fall. Then the United States can reissue its debt at higher rates and buy back the old debt at a portion of its original value.
Default. The world isn't going to stop just because the US government defaults on its debt. There won't be mobs in the streets. Life simply wouldn't change that drastically. Just ask any Russians who lived through their debt default in the late '90s. The impact will be much more significant on banks than on the average citizen (ESPECIALLY when compared to massive inflation).
There is a serious misconception of government default among Americans. Few understand that a default on government-issued debt affects holders of that debt far more significantly than ordinary citizens. In the past thirty years there have several credit crises leading to defaults in Russia, Argentina, Mexico, and several other countries.
During the Latin American debt crisis in the late '90s and early 2000s that led to defaults by Argentina and Mexico, Brazil also nearly defaulted on its sovereign debt. Now, ten years later we can look back and see that since then it has been one of the fastest growing economies in the world. In fact, most of these countries that experienced defaults were stable and recovering within a decade.
To be blunt, Americans need to get their heads out of the sand and quit fretting over the national debt. Yes, government spending needs to be stifled; yes, fiscal responsibility has been long absent from our nation's capital; and no, we're not happy about it either. Nevertheless, if people would quit worrying and focus instead on getting back to work and get our economy growing again, this nation's debt problems will take care of themselves.