Consumer Credit Depression, CBO Deficit Armageddon, Government Warnings of Financial Fiascos!

Economics / Great Depression II
Sep 27, 2010 - 07:57 AM

By: Martin_D_Weiss

For my family, fiscal balance is not — and never was — a partisan issue. My father, for example, had little interest in politics but was passionate about savings, hard work and avoiding waste.

When I was a toddler, he used to sit me on his knee, teaching me and my older brother that money is not a toy or a game; it’s to be valued, kept in a piggy bank, and treated with due respect.

And later, by the time I was a teenager, that same lesson had evolved into an equally serious discussion about sound banking, avoiding excess debt and balancing the government’s books.

Also at the time, Dad was fighting the greatest budget battle of the 20th century. He had just founded our nonpartisan Sound Dollar Committee. And with the blessing of friends like Democrat Bernard Baruch and Republican Herbert Hoover, he was busily rallying grassroots support for President Eisenhower’s extremely unpopular proposal to balance the budget of fiscal year 1960.

Dad taught us that when any country, family, or corporation lets its debts grow beyond reason, they follow one of three paths. —

They go bankrupt …

They cheat the system, or …

They do the right thing by tightening their belt and trying to work even harder.

Most of the time, Dad explained, most people and institutions do the right thing.

Some get the idea right away. Some take longer to figure it out. But sooner or later, voluntarily or involuntarily, they realize it’s the only real choice.

Households, start shunning credit, saving more, and spending less.

Banks that don’t go under move swiftly to cut back lending and build up cash reserves.

Politicians, he’d say with a laugh, are not nearly as smart. But even they eventually get it.

The tipping point, he estimated, comes when federal deficits grow beyond around 5 percent of GDP. Then, beyond that threshold, there are only three conceivable scenarios:

• Scenario A — Bankruptcy. The government defaults on its debts and is promptly blacklisted by lenders, plunging the nation into extreme poverty and political upheaval.

• Scenario B — The Cheating and Stealth. The government prints paper money to fund its debts, trashing its currency and leading to a calamity similar to the default scenario.

• Scenario C — Austerity. The government makes swift spending cuts, shrinks in size, and encourages the entire society to make similar sacrifices.

Given the nature of politics, he admitted the austerity scenario might sound unlikely.

But given the hard realities, Dad insisted it was actually the ONLY viable option for the United States.

Why After Seven 50 Years of Wild Spending, Austerity Is Now Inevitable

Dad won the battle of the budget in 1960. It was balanced, and the country suffered a moderate recession as a result. But throughout the half century since, even in years when the federal government supposedly ran a “surplus,â€