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DAVID KRUSE

By Staff | Oct 30, 2009

What do you suppose it takes for a Federal deficit and debt to rise to in order to get Washington to focus on it with active policy and not just talk? One of the claims President Obama ran on was bringing fiscal discipline back to the government. Republicans spent so much, Senator John McCain described it as “enough to embarrass a drunken sailor” when the GOP controlled Congress.

That’s how the party in power tries to insure its re-election, by giving constituent groups money; yet, in what I regard as blatant disregard of fiduciary responsibility to tax payers, the Obama administration approved handing out $250 to social security recipients for no reason whatsoever, except that they are really nice people and the President or his political cronies obviously thought that they should be given a little extra cash to spend.

That was no act of Robin Hood, as they took the money from every taxpayer, rich or middle class, and gave it to all collecting social security, some of whom are the wealthiest group in the country. This was a glaring example of blatant fiscal irresponsibility.

It’s not the Obama administration’s money to give away, but it is $13 billion added to the deficit for no justifiable reason whatsoever. Whatever gift they bequeath to current social security recipients will be deducted from future benefits of the next generation.

While Social Security is one of several entitlements that are unfunded in the future. That didn’t stop the Obama administration from deepening the deficit by choice. Their only answer to deficit control is to raise taxes. Like their predecessors, they never stop spending. The Federal debt went up from $5 billion to nearly $11 under George W., so where is the change here?

It looks to me that in almost every instance, the Democrats are pursuing the same general economic policy as the Republicans did. They have differing constituencies that they favor and shower with gifts, but in the broad sense of lack of fiscal responsibility, they are little different except in the imagination of political partisans. You talk to a Republican or talk to a Democrat and it’s always the other party who spends more.

The truth is they both have and they both do. The deficit and debt that we have today is not a GOP or Democratic deficit. It’s a GOP and Democratic debt. The only difference is that Democrats raise taxes while Republicans borrow more from the Chinese.

A lot of citizens attending tea parties are no more pleased with Republicans than Democrats. The problem here, however, is the deficit and the failure to recognize that it is the biggest Gorilla in the room and its growing to the point it won’t fit into any confined area anymore, so will threaten to bring the house down if Congress and the Administration do not change the path they are on.

Congress rarely does what Fed chairmen tell them to do. Ignoring Ben Bernanke’s advice to reduce record budget deficits may carry dire consequences. The problem was that Bernanke wasn’t specific with any suggestions as how to accomplish that. Unspecific recommendations are easy to ignore. The U.S. will have to increase its savings rate in order to finance a record deficit which pulls money that would otherwise be invested to produce economic growth.

When the economy recovers, demand for money from the private sector will climb to compete with demand for money from the government. When the two competitors bid up, interest rates will go higher. So will the cost of servicing the enormous new public debt born by taxpayers.

Bernanke calmly stated, “The performance of the U.S. economy and the dollar, which has fallen 7 percent against a basket of currencies this year, will depend on the government’s success in controlling its budget deficit.” If that’s the case no wonder the dollar is declining. Who in their right mind would have confidence in fiscal policy determined by Congress?

The Democrats in Congress show no propensity for belt-tightening whatsoever. They undermine fiscally sound policy by not implementing spending cuts written into existing law. Eventually, if balance in government spending and revenue is not restored, lost confidence in the dollar will send investors to hard assets that produce panic.

A bet buying gold today is a bet that the government fiscal policy makers will fail. We conclude that from the evidence seen today that is not a remote possibility.

Former Fed chairman and inflation slayer Paul Volker is advising President Obama on fiscal policy. Frankly, there is no evidence that they are following it. One of Volker’s statements that I thought was remarkable was, “We have to regain our ability to produce goods. Moving money around does not necessarily provide dinner on the table. You can’t run an economy where the financial sector is making 40 percent of the profits.”

Volker said it was difficult, but necessary, to start draining the billions of dollars in liquidity even while the unemployment rate remained high as the U.S. battles out of recession. “You have to act against what seems like common sense. If you wait, it’s too late.” The U.S. government’s politicians do not appear to have an ability to be proactive. They only respond to crises of their own making.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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