MLLG

The Trillion Dollar Question

The Trillion Dollar Question 

– It’s readers’ turn to decide how to reduce the deficit

GEORGE NOGA

Jan 28, 2024

Over the years, I have presented many different and (hopefully) compelling ways to put the US spending crisis into proper perspective. Now it is your turn. Following is the government spending for the fiscal year ended September 30, 2023. These are real numbers – actual dollars out the door – not projections or estimates.

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  • Health care programs¹ . . . . . . . . . . . . . . $1.6 trillion
  • Social Security . . . . . . . . . . . . . . . . . . . . . $1.5 trillion
  • Discretionary non-defense . . . . . . . . . . $1.0 trillion
  • Defense . . . . . . . . . . . . . . . . . . . . . . . . . . $0.8 trillion
  • Interest on the national debt . . . . . . . . $0.7 trillion
  • Other mandatory spending² . . . . . . . . $0.5 trillion
  • Total federal government spending . . $6.1 trillion

Other relevant numbers are GDP $26.2 trillion, government debt $33.7 trillion and the debt to GDP ratio 129%. Let’s stipulate the goal is to freeze the debt ratio at its present level of 129%. This is the dead minimum necessary to prevent a death spiral.

If GDP grows this FY by 3% to $27.0 trillion, the maximum debt must be no more than $34.8 trillion (34.8/27.0=129%). This means the total debt cannot increase by more than $1.1 trillion (33.7+1.1=34.8). Since the annual deficit is running at $1.7 trillion, that means $0.6 trillion of spending must be cut (1.7-1.1=0.6). We aren’t finished.

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Interest on the debt will increase this year by $0.2 trillion due to higher rates and more borrowing. Social Security and health care expenses are ballooning due to adverse demographics. To cut to the chase, immediate spending cuts of one trillion dollars ($1,000,000,000,000.00) are needed simply to freeze the ratio at 129%. Moreover, this does not solve our debt problem, it merely keeps it from getting worse.

It’s Your Turn; Where Would You Cut $1 Trillion?

So, where would you cut $1 trillion? You can’t cut interest on the debt; that would result in default. Do you cut defense spending given the dangerous geopolitical situation? Do you cut pensions and the VA? If you don’t cut Social Security or Medicare (political suicide), that leaves only discretionary non defense spending (cost of running the government) which coincidentally was $1 trillion last fiscal year.

So, it is up to you. Where do you cut one trillion dollars immediately? The old canard of cutting waste, fraud and abuse won’t fly – it is endemic and impossible to cut due to the nature of government. Raising taxes is a possibility and plausibly could be one (small) part of the solution. However, higher taxes stifle economic growth, which reduces tax collections, which increases the deficit, which leads to more tax hikes and results in a vicious circle. The problem is not low taxes, it is out of control spending.

If We Don’t Cut Voluntarily, Markets Will Do It For Us

If we do not make the spending cuts needed to freeze the debt ratio, the markets will do it for us by blowing up the market for US Treasury securities, i.e. buyers no longer would be willing to finance America’s deficit because they believe (correctly) that they would not be repaid in full.³ There are only three possibilities.

  1. The Fed prints money (most likely scenario) which leads to hyperinflation
  2. Draconian tax increases (carbon, VAT) which make the US economy a basket case
  3. The US defaults on its debt

Foreign holdings of US debt have plunged by 35% from ten years ago, In November, there were not enough buyers and Treasury was unable to sell all the debt it wanted. Who will be the last person on Earth to buy US government bonds?

One way or another, the spending cuts are inevitable and America will be forever changed. Imagine the political and societal chaos that would result from drastic cuts to Social Security, Medicare and all other government programs. America will suffer a lost generation and become a European style no-growth welfare state where people lead lives of quiet desperation.

If something cannot go on forever, it won’t!

1. Includes Medicare, Medicaid, CHIP (Children’s Health) and ACA (Obamacare)
2. Includes government pensions, VA and veterans benefits
3. This already has begun. Some buyers are refusing to buy 30-year bonds and have forced the Treasury to shorten the duration of the bonds it issues.
© 2024 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com