It’s NOT the Debt Stupid!

Posted by Eric Solis on June 22, 2011 under National Debt, Public Policy, Saving & Investing, Uncategorized | Be the First to Comment

This will shock many and I am sure cause a reaction in some, but the cure to the economic woos facing our nation is not the national debt in isolation, as the national debt is an unsolvable problem under the current tax schema. Bottom line…America has a structural deficit and the problem can’t be fixed without first converting from a consumer based society to a nation of savers. The problem with our national debt is that we are not “self funded”. As you know the US relies heavily on external capital from nations that do not share our values and/or interests.  This so called “hot money” can be expatriate back to its home country without warning.

 What is the solution?  We MUST generate enough domestic savings to absorb the delta between tax receipts and government deficit spending. In other words, private sector savings can offset government spending on the cash flow statement of USA Inc. The debt will still rise, but if Americans hold the debt, then it is like borrowing money from ourselves. In the absence of addressing the private savings rate, spending cuts alone will not solve the problem as the debt bucket has a hole that no amount of duct tape can fix.  In the absence of a complete overhaul of the tax system, which is out dated and built on a industrial era platform of American consumerism, the USA will collapse from the weight of its debt and will make Greece look like a wealthy nation in comparison, and NO amount of tax cuts can change this course if left uncorrected. 

On the other hand; an increased savings rate will have an inverted multiplier effect on public debt reduction. Meaning that for every dollar saved, the net effect will be an equivalent reduction of government debt. Savings is to de-leveraging, as leverage is to consumption. We MUST also let go of Keynesian dogma that asserts that savings hurts the economy. We need to think about becoming healthy financially so we can sell best of breed products into a global economy which has  the potential to explode in the years to come. If America gets serious about causing China to play by the rules (i.e. re-valuing the Yuan) then America will once again be in position to compete for high paying manufacturing jobs. 

 Re-valuation will also reverse the tide of our massive trade deficit and move us toward a balanced current account, furthering the reduction of aggregate US liabilities.