Chapter 11 for the Government?

In my last entry I elaborated on how federal spending, after spending every dime of tax revenue, which crowds out every dime of domestic investment and uses every dime of the current year’s capital account to sell bonds to foreign entities, was still $547 billion short.  As it turns out, this shortfall is a bit greater than the interest paid on the public debt in 2008 ($451 billion) and more than likely the rough amount of the interest to be paid in FY 2009 ($320 billion through June, with June’s payments at $106 billion); see US Treasury, Bureau of the Public Debt for more info on those numbers.

Paying the interest on the debt is analogous to the minimum payment on a personal credit card – if it isn’t paid, the debt is considered to be in default; if this a regular event,  the card holder is well on the road to bankruptcy.  The “Banana Republics” are considered to be in default on their debt, and thus bankrupt, when this obligations goes unpaid.

I am by no means saying that the US Government is necessarily going to default (although would anyone be surprised…); however, I am saying that in order to avoid default, We The People are going to need to come up with $547 billion.  Let’s assume, for argument’s sake, that the means that I would recommend (cutting expenditures and reducing the marginal tax rate across the board to stimulate consumption and reduce the cost of doing business to stimulate hiring and capital investment) will be rejected by The Hope And Change Crew out of hand and we’ll be doing something else instead.

Obviously, The Big O would like nothing better than to raise marginal tax rates to “spread the wealth around”; however, since the shortfall is greater than 25% of existing tax revenues even he knows that this sort of tax hike would be economically ruinous (he does know this, right?).  So how do “We The People” stay out of Chapter 11?

1. Increase the domestic pool of capital.  This essentially means increasing the savings rate; the traditional means (outside of scaring the financial hell out of the populace which results in cash hoarding) is by making savings more attractive by raising interest rates.  Exactly what an economy in recession needs (not).

2.  Sell even more debt instruments to foreign entities.  Since we’ve expended allow of the dollars available in the capital account, we’ll need further dollar outflows via a larger trade deficit (the $547 billion shortfall represents about 80% of the expected 2009 trade deficit).  In addition to dollars, this sends jobs to provide the demanded goods and services overseas as well.  Again, exactly what an economy in recession needs (not).

3. Crank up the printing presses at the Bureau of Engraving and Printing, use the crisp new dollars to artificially inflate the GDP to “make the numbers work”, and wait for hyperinflation to kick in down the road (which will need to be cured with severe liquidity tightening).

There are other, more extreme measures, such as government assuming control of the means of production of goods and services and using the proceeds (whatever there may be) to fund expenditures (that’s socialism – they’d never do that, right?), but it appears Barry and Babbling Joe have chosen what’s behind door #3 for now?

I can’t wait for my first “Hope And Change Brewery” beer, which will cost $1000…