Budget Cuts?

As violent protests erupted outside, the leaders of the world’s largest economies plotted the future course of the global economy at this weekend’s G20 summit.  So what was decided?  Well, according to various reports in the mainstream media, it was the “deficit hawks” who got their way.  Apparently the consensus of the G20 meetings was that a round of tough budget cuts is the medicine that the world economy needs.  In fact, the G20 leaders all pledged to cut their respective budget deficits in half by 2013.  Canadian Prime Minister Stephen Harper, one of the key advocates of budget cuts, said that the G20 nations need to walk a “tightrope” between stimulating their economies and debt reduction.  But as the largest economies around the globe transition from reckless government spending to budget reductions and austerity measures, what is that really going to mean for the world economy?

Well, the truth is that as good as “budget cuts” sound, they can have some very nasty short-term side effects.

You see, there is no getting around the fact that whenever governments spend more money it is good for economic growth.  The problem is that a large number of governments around the globe have been consistently spending way beyond their means for decades and now they find themselves up to their eyeballs in debt.

The exploding sovereign debt levels around the globe are not sustainable by any definition, and so it was undeniable that something had to be done.

In fact, European Commission President José Manuel Barroso put it quite succinctly during the G20 meetings in Toronto when he told the press the following….

“There is no more room for deficit spending.”

The reality is that nations such as Greece, Spain, Portugal and Italy are already on the verge of default.  Japan has accumulated so much debt that it makes headlines almost constantly in the newspapers over there.  The exploding U.K. debt was one of the key factors that enabled the Conservatives to take power in the most recent election.

But nobody has more debt than the United States.  As of June 1st, the U.S. National Debt was $13,050,826,460,886.97.  The U.S. government has accumulated the most colossal mountain of debt the world has ever seen and it is exploding at a rate that is breathtaking.

So, yes, the largest economies of the world have a major problem with government debt.

But are budget cuts and austerity measures the correct solution?

It depends who you ask.

The reality is that the U.S., the U.K. and many of the other most powerful economies in the world now find themselves between a rock and a hard place.

If they continue recklessly going into debt their economies will continue to be stimulated (at least to some degree), but interest expenses will continue to spiral upwards and borrowing costs will go through the roof as credit ratings fall.  In the end, nation after nation would end up defaulting and the world financial system would crash hard.

However, if the G20 nations actually do implement the hard budget cuts that are necessary to get their debts under control, it will suck a ton of money out of the system and could send the already vulnerable global economy into a devastating deflationary depression.

The truth is that neither option is a good option.

Either path is going to contain a good amount of economic pain.

So what do you do when there is no good solution?

Stephen Lewis of Monument Securities recently argued that the path of “fiscal stimulus” has been totally played out and so there is no good reason to continue to go down that path….

“Growth could be negative again as soon as the fourth quarter. There is no easy way out since fiscal stimulus has already been pushed as far as it can credibly go without endangering US credit-worthiness.”

However, Chris Whalen, a former Federal Reserve official and now head of Institutional Risk Analytics says that unless the printing presses are quickly cranked up again we are definitely headed for deflation….

“The party is over from fiscal support. These hard-money men are fighting the last war: they don’t recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again.”

So what is the right answer?

For now, G20 leaders have decided that budget cuts and austerity measures are the right answer.

Not that Barack Obama and U.S. Federal Reserve chairman Ben Bernanke didn’t fight behind the scenes for additional “stimulus” for the world economy.

You see, when it comes to “Helicopter Ben”, his first instinct is to always pump more money into the economy.  In fact, according to one major U.K. newspaper, U.S. Federal Reserve chairman Ben Bernanke has been fighting an intense behind the scenes war for control of U.S. monetary policy.  Bernanke is reportedly frightened that the U.S. could be headed for a deflationary spiral and has been pushing the idea of a fresh injection of money into the U.S. economy.

But for now Bernanke has lost.  Barack Obama has joined the other leaders of the G20 in promising to cut their budget deficits by 50 percent by 2013.

Not that we are actually going to see that happen.

We all know how reliable Barack Obama’s promises are.  He was busy breaking his 2008 campaign promises before he was even sworn in.

And the day will come when Barack Obama needs to turn the economy around in order to win some votes, and when that day arrives the temptation to “stimulate” the economy with some more government spending will prove irresistible.

But for the moment, Obama is lining up with the other G20 leaders and is swearing that he is going to get spending under control.

That should settle world financial markets down for the moment, but the reality is that as all of the major economies around the world suddenly see a dramatic reduction in government spending, a substantial economic slowdown will be inevitable.

When the world economy slows down, unemployment will spike, the global real estate mess will get even worse and “austerity riots” could even break out in many areas of the globe.

So at some point, the pendulum will once again swing back towards “stimulus” and world leaders will indulge their debt addictions once again.  But that will only make the long-term global economic problems even worse.

The truth is that the entire world economic system is broken.  It is built on a fraudulent pyramid of debt, derivatives, central banking and paper money that is doomed to fail.  But world leaders will continue to keep it alive for as long as they can.

Right now their big solution is to get all of the major industrialized nations to agree to huge budget cuts.  These budget cuts, if they are actually implemented, are very likely to lead to a severe economic slowdown and potentially even a deflationary depression.

But continuing on the path that the G20 leaders were on would have resulted in a wave of sovereign defaults and hyperinflationary meltdowns.

So the G20 leaders have decided to change course and they are hoping that they can navigate the economic minefield ahead and bring our economies through all of this okay.

But in the end they are going to fail.

Stimulus Waste

Back in February 2009, the U.S. Congress passed an $862 billion “economic stimulus” bill to help the struggling American economy recover from the horrible financial crisis of 2007 and 2008.  Right now, federal agencies are spending this stimulus money at the rate of approximately 196 million dollars an hour, and they will continue to spend it in staggering amounts up until the September 30, 2010 deadline.  Unfortunately, instead of being spent on useful projects that would revitalize U.S. industry and put American workers back to work, much of this money is being flushed directly down the toilet on some of the most wasteful projects imaginable.  The truth is that nobody is better at wasting money than the U.S. government.  In fact, some of the things that the U.S. government has been spending money on are absolutely mind blowing. 

The following are just some of the examples of “stimulus waste” that we have seen over the last 16 months….   

*Florida Atlantic University in Boca Raton, Florida used $15,551 in stimulus money to pay two researchers to study how alcohol affects a mouse’s motor functions.

*The U.S. government handed over a staggering $54 million in “stimulus cash” to Connecticut’s politically-connected Mohegan Indian tribe, which runs one of the highest grossing casinos in the country.

*Syracuse professor of psychology Michael Carey received $219,000 in federal stimulus money for a study that examines the sex patterns of college women

*$1.15 million in stimulus funds was allocated for the installation of a new guard rail around the non-existent Optima Lake in Oklahoma.

*Researchers at the State University of New York at Buffalo received $389,000 to pay 100 residents of Buffalo $45 each to record how much malt liquor they drink and how much pot they smoke each day.  Instead of spending nearly $400,000, the U.S. government could have achieved the same goal by having a couple of scientists join a fraternity.

*$100,000 in federal stimulus funds were used for a martini bar and a brazilian steakhouse.

*A dinner cruise company in Chicago got nearly $1 million in stimulus funds to combat terrorism.

*$233,000 in stimulus money went to the University of California at San Diego to study why Africans vote.

*The Cactus Bug Project at the University Of Florida was allocated $325,394 in stimulus funds to study the mating decisions of cactus bugs.  According to the project proposal, one of the questions that will be answered by the study is this: “Whether males with large weapons are more or less attractive to females.”

*One Denver developer received $13 million in tax credits to construct a senior housing complex despite that fact that the same developer is being sued as a slumlord for running rodent-infested apartment buildings in the city of San Francisco.

*Sheltering Arms Senior Services was awarded a contract worth $22.3 million in stimulus money to weatherize homes for poor families in Houston, Texas – but a new report from Texas Watchdog says that the weatherization work was performed so badly that 33 of the 53 homes will need to be completely redone.

*A liberal theater in Minnesota named “In the Heart of the Beast” (in reference to a well known quote by communist radical Che Guevara) received $100,000 for socially conscious puppet shows.

*California’s inspector general found that $1 million in stimulus funds for a program to give summer jobs to young people was improperly used for overhead expenses such as rent and utility bills.

*Landon Cox, a Duke University assistant professor of computer science, was awarded $498,000 in stimulus money to study Facebook.

*The town of Union, New York is being urged to spend $578,000 in stimulus money that it did not request for a homelessness problem that it claims it does not have.

*Lastly, who could forget the $3.4 million “ecopassage” to help turtles cross a highway in Tallahassee, Florida?

Yes, the U.S. government sure knows how to waste money.

And the truth is that there is simply no way that the U.S. government would have been able to accumulate a debt of over $13 trillion dollars (and growing exponentially) without being incredibly skilled at wasting money.

In fact, the Pentagon says that there are literally trillions of dollars that it cannot account for.

Now how in the world do you lose track of trillions of dollars?

That takes some major league incompetence.

It is enough to make you want to pull your hair out.  We were once the wealthiest, most prosperous nation on the planet, but we have recklessly squandered our great wealth.  Over and over we kept voting for corrupt politicians who endlessly wasted our money on the most ridiculous things.

So now we will pay the price.

We are already being taxed brutally, but because of all the debt our “leaders” have gotten us into we are going to be taxed even more.  We did not demand accountability from our government, and so now we get to face the consequences.

But no amount of taxes will ever be enough for this government.  If we give them more money they just take that as a signal to get into even more debt.  As a nation we are on a path that can only be described as financial insanity.

So is there any hope that the U.S. government will stop wasting so much money?  Not with the current collection of Republicans and Democrats that currently inhabit Washington D.C. 

The truth is that both parties have been wasting our money for decades.  Many politicians will often talk about the need to “control spending”, but when time comes to do it very few of them are ever willing to take action.

So until the American people decide to start sending a different kind of politician to Washington D.C. we are probably going to continue to see huge mountains of money being wasted. 

Wake up America. 

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