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Thoughts from the Frontline

The Cancer of Debt and Deficits

February 18, 2012

Choose your language

We are coming to the point in the United States when even the US government will no longer be able to borrow at very low long-term rates. That point is a few years off, and we have time to change paths; but as I have shown in previous letters, the longer we wait to get the deficit under control, the fewer choices we have and the more painful they are. NO country can run deficits the size we are currently running, along with unfunded deficits over four times the size of the economy and a growing overall debt burden, without consequences. At some point, investors in bonds will start wondering exactly what the process is by which they will be repaid. And what will the value of those future payments be?

One by one, the countries of Europe are losing their ability to sell their bonds at an interest rate that is sustainable for their economies and revenue bases without severe and socially disruptive restructuring, even if a central bank that will accommodate their spending by printing money or other countries will tax their citizens to pay for someone else's debts.

The US will soon be faced with that same problem if we…

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Gordon Davis Jr

Feb. 19, 2012, 7:49 p.m.

I’ll admit to not reading every comment, so this may be redundant, but we should inject a bit of reality into the discussion of a vat tax.  First of all, I am in favor of such a tax.  The problem is it is a political impossibility given the reality of our current system of taxation.  My understanding is that roughly 50% of the population pays no federal income tax.  Out of that group, those with jobs pay 7.65% (less the current tax holiday) in payroll taxes.  A 20% vat would clobber the lower half of the 99% with a draconian tax increase.  Hard to imagine the Ds would tolerate such a massive increase for what is clearly their constituency.  If we start subsidiziing or otherwise protecting the less fortunate, a 20% vat is unrealistic.  Maybe 25% or even 30% would be necessary to maintain revenue neutrality and that isn’t likely to get off the ground with either party.  Please explain to me where I’m going wrong.

Richard Merrick

Feb. 19, 2012, 4:53 p.m.

The problem with a Value Added Tax is raising the cost of goods extremely through compounding.  At every level of production, the 20% would be added.  When the wheat is planted and harvested…add 20%.  When it is processed into flour…add another 20%.  When it is baked into bread…add another 20%.  Now you have transportation and marketing.  Welcome to $6.00 a loaf bread.

In conatrast, the Fair Tax is designed to lower taxes at each level of contribution.  If the farmer does not have to pay income taxes, could he not afford to sell for something less?  How about the baker, trucker, the store?  Makers the compounding work for the consumer.

The collection system for the fair tax is already in place in most states.  Simply have the states collect this sales tax along with their existing sales tax collection.  The departments already exist for collection, auditing, filing, rules for exemptions, etc.

No need for income tax, most IRS and CPAs.  Wouldn’t be any filing costs nor record keeping expenses.  No cheating possible with foreign accounts, or special interest deductions, simple…everyone pays something and rich pay more with the bigger houses and their cadillacs.

Chris Steele 34944

Feb. 19, 2012, 12:04 p.m.

The GOP has painted itself into a corner with it’s insane ‘no new taxes’ pledge.  The democrats, because they stink at messaging, haven’t painted themselves into quite as tight a corner with an ‘entitlements forever’ promise. 

Leaders of both parties and probably most members of congress understand (1) the way we collect revenue is completely nuts [but it works nicely for getting money from lobbyists], (2) taxes must be raised, (3) entitlements must be cut. 

While its hard to be optimistic, our best shot at doing the above is probably the reelection of President Obama.  A lame duck could have the courage to lead when others do not.  While I wouldn’t wager much Obama actually tackling the budget/revenue/spending problem, I would bet a HUGE sum that a republican president and congress would not ask the country to pay more and get less, certainly not in a republican president’s first term.

Those who think, ‘republicans are the answer’  apparently have short memories.  Those who think ‘democrats are the answer’ also have short memories. 

And those who think the public actually cares about the imbalance of revenue and spending are living in a fantasy world.  The problem is us:  We want the goodies and we’re pleased to put them on the Chinese credit card.

As you think about healthcare, a problem that causes people to shout at each other with ears closed:  The VA medical system is socialized medicine.  The people in the system are quite but not perfectly satisfied (primary complaint:  some appointments are hard to get).  Those in the system were in the military defending the country.  Do they care that the system is as socialist as Great Britain’s? 

Not in my experience.

While I am not in the VA system, I would gladly give up my $6500/year premium for a healthcare plan that has a $6300 annual deductible.  I’d do it tomorrow if I could.

If you shout “rationing,” I’d say, “Of course.”  We have rationing today.  A future system will include a method for rationing.  Wouldn’t you prefer something that rations based on efficacy and costs v. benefits instead of one based on access.

And don’t say, “Everyone is covered.  All they have to do is show up at an emergency room.”

Show up at an emergency room with a broken arm, lung cancer and no money, your arm will be put in a cast, and you’ll be sent away.  That’s how the system works.

Girish Vinod

Feb. 19, 2012, 10:04 a.m.

Its a good idea to have GST or Vat whatevet uou name it.
Only condition that must be strictly followed is no exemptions and additions for small special interest groups.

Brad Hobbs

Feb. 19, 2012, 9:53 a.m.

Thank God that your daughter is doing well… Thank Him too that ObamaCare is not yet implemented with year-long waiting lines or she would be doomed.

Hang emhi

Feb. 19, 2012, 2:07 a.m.

I can’t even get past the first paragraph - such a complete lack of understanding of what the US Gov debt and deficit is.  A “cancer”?  Really?  Such a smart guy, so blind and dumb on this one oh so important piece.  Your “end game” is never going to happen the way you think because you get this so wrong.

The US Gov must have a “debt” for the private sector to save in US dollars.  No US Gov debt - than no private sector savings - no Dollars in circulation.  The debt grows ever larger for both good and bad reasons.  We DO need to contain or stop the bad - but the worst of the bad is behind us.  The housing bubble and the $14 trillion in private sector debt that households malinvested, is now in the past.  Except the bill is still due, and being paid off every day with TODAY’s earnings.  That means money is literally evaporating from the economy.  Less and less money in circulation every day due to deleveraging.  Soooooo…. the US Gov deficit spends, and grows the debt, to replace that money.  To not do so would be a “cancer”. 

I don’t expect most people to understand what I just said…. not when the great John Mauldin hasn’t the slightest idea of what I just said…. even though if you re-read my comments with an open mind, it is blindly obvious that the debt/deficit is nothing at all what you think it is.

K Knight

Feb. 19, 2012, 12:53 a.m.

While economic issues are very important, social issues will dictate the direction of the USA. There is practically no discussion on topics of personal responsibility. Everyone talks of freedom, but no one talks of the responsibility that goes with freedom. What about abortion; over 55 million (55,000,000) humans have been killed in the name of “convenience.” Think of the lost productivity and inventions these people would have produced. This alone would have most likely solved our current economic crisis. What about “taking care of your own” from welfare to Medicaid. Our founding fathers did not sacrifice their lives to have this country become a socialistic state; where we are rapidly headed.

Robert Dumper

Feb. 19, 2012, 12:17 a.m.

Robert Dumper

Do you really mean “If you make less than $100,000 you pay nothing?”


I believe that one of the worst things you can do is to allow some people to pay no taxes at all.

Paying no taxes just leads people to believe that all the government provides is free. They have no incentive to limit what the government spends. Their incentive is to just take all they can. I believe that people earning less than $100,000 would make up over half the electorate. You can imagine what kind of political force they would represent. They would have no investment in the system. I think this would be a recipe for financial disaster. I guess the Bad News is that almost half our current electorate pay no income taxes today, and look what that has done for us.

Clearly, one can earn substatnially less than $100,000 and still afford some taxes. For those that earn little or nothing, perhaps they should be required to perform some number of hours of community service in lieu of taxes. This might be as unskilled as picking up litter, or some more skilled service by trained people who are temporarily out of work. Such a solution should both improve our overall quality of life, and hopefully make everyone feel they have some investment in our society. Of course, it would probably require another government department to provide administration.

Russ Abbott

Feb. 18, 2012, 8:14 p.m.

To say “‘There is no Social Security Trust Fund.” is simply a lie. The Social Security Trust fund consists of US Treasury Bonds. If you don’t think these have any value, then why not default right now?  Or are you suggesting that we default on the bonds held by the Social Security Trust Fund but not on any other bonds.  Instead why not default on the bonds owned by foreign interests. Then we will owe the rest of our debt to ourselves. We will have a much smaller debt and we will be much better off. 

I’m not suggesting that seriously, but I want to make it clear that the scare talk about “‘There is no Social Security Trust Fund.” is just that. Scare talk. Yes, the deficit is real and we must deal with it. But let’s do it seriously and honestly, not as by being in a state of unreasoning panic.

David Dawson

Feb. 18, 2012, 7:42 p.m.

Would either Ron Paul’s plan (http://www.ronpaul.com/media/RestoreAmericaPlan.pdf) or the Paul Ryan plan (http://budget.house.gov/fy2012budget/) cure the cancer?

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