So what else is new? (The Budget Battle - continuação)

[Paciente]

You ask: "So what else is new? Isn't that
how Washington has always operated?"

No.

Sure, almost every era in American history has had its share of corruption and scandal. But for the most part, when it came to the central pivot of our government — its budget — the government's accountants were serious scorekeepers that did everything in their power to avoid hanky-panky.

The whole notion of "off-budget" accounting and major expenditures left hanging outside of the "official" budget process was both unknown and unimaginable.

Moreover, throughout American history, most budgets were balanced or at least very close to balanced. The Office of Management and Budget (OMB) puts it this way:

"... except for periods of war (when spending for defense increased sharply), depressions or other economic downturns (when receipts fell precipitously), the Federal budget was generally in surplus throughout most of the Nation's first 200 years."

The facts:

1. For our first 60 years as a Nation (through 1849), cumulative budget surpluses and deficits yielded a net surplus of $70 million ...

2. Between 1901 and 1916, the budget hovered very close to balance every year.

3. The budget was also in surplus throughout the 1920s.

However, the OMB recounts that this historic pattern was broken by the Great Depression and World War II, when there occurred "a long, unbroken string of deficits that were historically unprecedented in magnitude."

Still, those debts could be at least partially justified by the unusual circumstances.

No similar justification is possible, however, for the 1980s. That's when the historic pattern of running large deficits only in times of war or economic downturns was broken.

According to the OMB,

"In 1982, partly in response to a recession, large tax cuts were enacted. However, these were accompanied by substantial increases in defense spending. Although reductions were made to nondefense spending, they were not sufficient to offset the impact on the deficit. As a result, deficits averaging $207 billion were incurred between 1983 and 1992."

The main reason: Huge, structural problems emerging in the budget deficit — especially in non-discretionary spending and the rising cost of defense.

Extra revenues and reduced social costs during the booming 1990s helped cover up those problems. But it didn't help fix them. Instead, our leaders merely perpetuated the age-old pattern of conveniently leaving the thornier issues to future generations to deal with.

Now, WE are that future generation.

The True State of the Union

Consider this speech:

"I have referred to the inescapable need for economic health and strength if we are to maintain adequate military power and exert influential leadership for peace in the world. Our immediate task is to chart a fiscal and economic policy that can:

(1) Reduce the planned deficits and then balance the budget, which means, among other things, reducing federal expenditures to the safe minimum;

(2) Meet the huge costs of our defense;

(3) Properly handle the burden of our inheritance of debt and obligations;

(4) Check the menace of inflation;

(5) Work toward the earliest possible reduction of the tax burden;

(6) Make constructive plans to encourage the initiative of our citizens."

"It is important that all of us understand that this administration does not and cannot begin its task with a clean slate. Much already has been written on the record, beyond our power quickly to erase or to amend. This record includes our inherited burden of indebtedness and obligations and deficits." ...

"Unless budgeted deficits are checked, the momentum of past programs will force an increase of the statutory debt limit." ...

"The first order of business is the elimination of the annual deficit. This cannot be achieved merely by exhortation. It demands the concerted action of all those in responsible positions in the Government and the earnest cooperation of the Congress."

"Already, we have begun an examination of the appropriations and expenditures of all departments in an effort to find significant items that may be decreased or canceled without damage to our essential requirements."

"A balanced budget is an essential first measure in checking further depreciation in the buying power of the dollar." ...

"Reduction of taxes will be justified only as we show we can succeed in bringing the budget under control. As the budget is balanced and inflation checked, the tax burden that today stifles initiative can and must be eased. Until we can determine the extent to which expenditures can be reduced, it would not be wise to reduce our revenues."

"Meanwhile, the tax structure as a whole demands review. The Secretary of the Treasury is undertaking this study immediately. We must develop a system of taxation which will impose the least possible obstacle to the dynamic growth of the country." — Dwight D. Eisenhower, State of the Union address, February, 1953.

That was said over a half century ago.

Yet, the greatest cause for surprise is not how much time has elapsed ... but how little has changed. Some important lessons:

Lesson #1. Despite the best efforts of Eisenhower — and almost every president who followed him — we are still facing most of the same dilemmas and issues today as we faced back then. How to prevent spending from running amuck, how to reform an outdated tax system, what to do about the dollar.

Lesson #2. In Eisenhower's time, the numbers were far smaller, even in proportion to GDP.

Lesson #3. In those days, our government usually confronted those smaller numbers head on. Today, while the numbers are larger, politicians from both parties are mostly looking the other way.

Lesson #4. In his last year in office, Eisenhower finally cut the deficit by 100%, with the help of a nation-wide grassroots campaign started by my father's Sound Dollar Committee. Now, even if you ignore the ominous omissions in the budget delivered to Capitol Hill this morning, the very best the president says we can hope for is a deficit cut by 50% by the end of his term.

Advice:

- Prepare for a great budget battle over the coming days and months.

- Don't be surprised if the battle turns out to be disruptive to financial markets — especially Treasury bonds, the U.S. dollar, and American stocks.

- Get ready for much higher interest rates. So far, the interest-rate rise has been limited to the short-term side of the market. Soon, it is bound to spread to the long-term side as well.

- Brace yourself for more inflation and inflation fears, especially in commodities, regardless of the final decision regarding the government's commodity price supports.

- Don't be fooled by sharp moves in the opposite direction from that of the major trend. For example, long-term interest rates have declined, the dollar has enjoyed a rally, and gold has suffered a setback.

Until and unless you see a fundamental improvement in the U.S. budget deficit, the U.S. trade deficit, and our government's complacency regarding both, the big-picture trends are bound to remain firmly in place: A falling dollar, rising inflation, and rising interest rates.

Good luck and God bless!

Martin

Martin D. Weiss, Ph.D.
Editor, Safe Money Report