Saturday, July 30, 2011

Monty...What Happened to Door Number Three?

...there ain't no door number 3.

Imagine having a credit card with no limit on it. No matter how much you ring up, two things always happen. You have enough money to pay the interest but never enough money leftover to pay the principal. The banker always allows you to charge as much as you want. In a scenario like this, the game goes on until one of two things happens. You no longer have enough money to service the minimum interest payments; or the banker tells you your credit line is maxed out.

So it is that one day you suddenly realize, that you can't afford the interest payment anymore. Your other expenses have gone up. The bank has moved your interest rate up because that is always in the fine print. Your credit rating is in decline. If you do not have enough money to pay the interest- you will default on the terms of the agreement.

You lack the capacity to add a third job. You cannot borrow any more money because you have already borrowed to the hilt. Nobody, including the relatives, will loan you one more thin dime. You have no lines of credit available. There is only one alternative.

You must slash every other expense that you have to the bone. Not just enough to make interest payments. You must slash everything to the extent that you are able to pay off principal. Everything is on the table. You begin by selling cars and assets. You get rid of payments. You cancel the cable TV and the newspaper subscription. You quit wasting 30 bucks a week on Starbucks. You take this newly freed up capital and use it to pay down the existing principal. Ultimately, you survive because you were wiling to do the only thing that made sense.

Your government is in far worse shape than you are. Not only has it rung up a debt that it cannot pay- but unlike you it has trillions more of social security, medicare, and now Obamacare debts coming due. Think of them as giant balloon payments that your government has no way to pay. All coming due as you are adding another 3 trillion to the national debt. 

Then think about the ridiculous argument going on now. Raising the debt limit at this point is catastrophic. You can barely service your existing interest now because of artificially low rates and you sure as hell can't service the debt if the interest rate moves up because it certainly can't go down (refinancing the debt, or risk premiums) and now all of those balloon payments come due.

Under our current scenario you are only left with two alternatives. Two doors. Continue to raise the debt ceiling and thereby guarantee a future default; or cut spending to the bone. Eliminate entire bureaucracies, stop your wars, and put everything on the table. Use the savings to pay down principal while there is still time. Those are the only two doors you have left.

In a perfect world, there might have been a door number three. That is the illusion that most Americans still cling to. The same illusion that Obama and the Kleptocrats whisper into your ear. We have the capacity to turn this around- we always have. That is simply not true anymore. Losing thirty million jobs- and shrinking existing salaries- has virtually guaranteed that we lack the capacity to pull ourselves out of this. Rising health care costs are literally destroying any excess financial capacity that an aging population once had. Instead, this delusional administration is hell bent on running us into the ground.

Slash and burn all government expenses or die a slow painful death. There is no other alternative.

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