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DAVID KRUSE

By Staff | Apr 22, 2011

It a well worn quote from Margaret Thatcher, but appropriate never the less to current events that, “Socialism works until you run out of other people’s money.”

The politicians have built a social state of entitlements with the voter’s blessing that are as generous as they are unfundable as the costs are extrapolated into a future that eventually runs them off a cliff.

That future is bearing down on the fiscal health of the country and the time to begin putting on the breaks to stop before the result is terminally unavoidable, is now. The deficit and pending U.S. fiscal insolvency has not been first and foremost on the public’s agenda, but it needs to be.

There is a growing number of elected officials in Washington who understand that and are finally beginning to put the information into a context that the public can begin to get its collective mind around so that it can decide what comes next.

There are still many who will demagogue the issues for every vote that they can get. Some are more afraid that the welfare state will be dismantled than they are over pending U.S. insolvency. Issues such as the recent budget compromise and the pending debt ceiling debate have been used to call public attention to the need to figure a way out from the pending financial crisis that the country faces.

It is still a solvable crisis but like an infection, if allowed to fester, it will soon become incurable resulting in the financial debilitation of the U.S. The country has already passed the point of an inconsequential prognosis.

While the deficit ceiling debate is a good thing as it brings focus to the issue, there needs to be a resolution that falls short of default as a shaky house cannot stand such a shock to its foundation. The only saving grace at this time to the surging U.S. debt is that interest rates have been historically low so that the interest cost of servicing the U.S. debt is manageable.

In the Ag depression of the 1980’s when agriculture was as overleveraged as the country is now, we saw interest rates soar to 18 percent. One could not even imagine what a remotely similar change in interest rates would do to the country’s fiscal viability today.

Not raising the debt ceiling may impress the demagogues but it would blow up the budget as it raises the cost of financing as faith in U.S. credit worthiness and willingness to pay creditors is threatened. You can push it to the brink but you do not want to go over, or what is a longer term fiscal crisis would surge to the immediate present.

Creditors are not going to put up with an irresponsible borrower and failure to raise the debt limit can bring the roof down now. The dollar would collapse.

I don’t think that there is a great deal of argument that the country needs to accept fiscal austerity before it is shoved down its throat. There is risk of interest costs rising as it is so we don’t need to drive rates higher by our own actions.

The GOP is leading the effort to push for a long term budget resolution that can restore long term fiscal solvency. Representative Paul Ryan released a plan that while shrinking the deficit to a level seen as manageable, does not eliminate all the red ink.

Spending and revenue do not come together in his plan, but they come together the closest of any plan yet floated. Ryan’s plan was meant to further the process and most welcomed it. Some believe that his revenue projections were optimistic and he did protect a few sacred cows such as defense spending.

As a general statement, the GOP constituency funds the entitlement state and the Democrats constituency benefits from it. The direction both parties are coming from in this debate is obvious, but the problem even for the Democrats goes back to that statement from Margaret Thatcher. The country will run out of money and they can see that end from here.

The entitlement state is not sustainable. The political debate revolves around revenue and spending. The GOP wants to solve it by reducing government spending. The Democrats would raise taxes. As in the case of the budget impasse settlement, compromise is inevitable even if both sides are not ready to concede yet.

I don’t think that up until this point that Americans were given enough information to be able to come to an educated conclusion over what the fiscal choices were. Laments made such as, “Stop the spending, but don’t touch my Medicare,” are simply unrealistic.

That education process appears to have begun in earnest now. Some will facilitate the process and others will attempt to take political advantage from it. Americans will have to accept changes in the status quo. Making educated choices voluntarily now will avoid having no choice in fiscal matters later when interest and entitlement expenditures consume all the revenue the country can conceivably produce.

They can’t source enough revenue to feed the entitlement programs and if they go down that road, they would find that supply side economics works in reverse, that often tax increases produce less – not more revenue.

There will be plenty of details to go over as this great debate decides the country’s fate and we see how well Americans step up to solve a looming fiscal Armageddon that will define the future ability of the country to sustain its own destiny.

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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