According to an article posted Monday, July 25, 2011, by Reuters, “the International Monetary Fund (IMF) warned on Monday that the United States must raise the debt ceiling quickly and get its debts under control for the sake of the global economy. ‘Directors (on the IMF board) highlighted the urgency of raising the federal debt ceiling and agreeing on the specifics of a comprehensive medium-term consolidation program’.
Further, the IMF said some action to get debts under control must start in fiscal 2012, which begins on Oct. 1, or the United States will face a disruptive loss of credibility.
‘The strategy should include entitlement reforms, including additional savings in health care, as well as revenue increases, including by reducing tax expenditures,’’ it said. IMF staff said risks to the U.S. outlook were rising. Those include the possibility of a sudden increase in interest rates or a sovereign downgrade in U.S. debt — basically a decision to rank the United States as less creditworthy — if agreement to raise the debt ceiling and install a medium-term plan for debt reduction is not soon reached.
‘These risks would also have significant global repercussions, given the central role of U.S. Treasury bonds in world financial markets’.
While calling for a debt-reducing agreement, the global lender also cautioned that an ‘excessively large upfront fiscal adjustment’ should be avoided because that would further dampen domestic demand and slow growth.”
I felt it important to quote major sections of this article as it is the most clear and concise amalgamation of the entire concept for the framework of the solution for the debt-ceiling crisis, and also the frightening budget deficits and the incredible amount of public debt the U.S. has accumulated.
Let’s break this down, but not necessarily in the order presented in the article, taking each talking point and review some definitions. Unless otherwise noted, the figures are taken from the CIA World Fact Book.
We must get our debts under control.
Right now we have a public debt level of approximately $14.5 TRILLION-which is about equal to the entire annual economic output of the country ($14.66 T est.)-representing an individual obligation of $47,200 for every man, woman and child in America.
We must get our annual budget deficit under control.
Right now we have total annual tax revenue of $2.092 Trillion, against expenditures of $3.397 Trillion, leaving an annual budget deficit of $1.305 Trillion. These are figures from fiscal year 2010, but more recently reported estimates put the current year deficit at $1.600+ Trillion–a single year change large enough to retire the public debt of Greece.
It is necessary to eliminate our annual budget deficit and return to a surplus (money left over), in order to be able to begin to reduce our public debt.
We must raise the debt ceiling “quickly”.
It has been widely reported that Treasury Secretary Timothy Geitner has established August 2, 2011 as the deadline for raising the debt ceiling, after which the federal government would have to rely on tax revenue cash flow only, which has been estimated to be $200 Billion per month, to pay current obligations. Now, unless Secretary Geitner is overruled by President Obama, there is an inherent priority for payment of these obligations, such as $20 Billion for interest on the public debt to avoid and Social Security at $29 Billion, followed by Medicare, Medicaid, Veterans Benefits, etc.
However, after paying these priority obligations there will still be a cash short fall, where 44% of our obligations due will have to wait–or be immediately cut from the budget.
Now, the IMF did state that any such large “upfront fiscal adjustment be avoided”, so as to minimize the loss of jobs, which would thereby increase unemployment and significantly reduce spending by these individuals, further depressing our already struggling economy.
We must “agree on specific terms for a comprehensive, medium-term, consolidation plan”.
Specific terms would require ignoring or eliminating any “plans” that are delivered in the form of a speech, because the Congressional Budget Office (CBO) stated that they could not “score” a speech to determine if would actually produce the changes claimed.
Further, all written plans would have to declare the name of the program and the form(s) and dollar amount(s) of the reduction(s), before submission.
Comprehensive, means across the board modifications, changes, reductions and eliminations covering all departments, agencies and programs; this includes entitlement programs–primary source of the deficit and debt problem.
Medium-term in business refers to a forward looking plan of 3 to 5 years, because any assumptions that are used either change or become irrelevant beyond that time frame. For example, Net Flix has evolved through significant changes every 1 to 3 years.
Consolidation generally refers to a total top-down review of the structure of the organization and all operating elements, with the objective of combining programs, reducing management layers, and eliminating outdated or otherwise unnecessary programs. The Heritage Foundation identified 90 programs from which annual savings of $343 Billion could be realized—that is about 10% of our annual expenditures.
The IMF further states ‘The strategy should include entitlement reforms, including additional savings in health care, as well as revenue increases, including by reducing tax expenditures.’’
The U.S. must now do what Europe is already doing, reversing decade’s long bloated, socialistic programs and limitless open immigration policies, which by their very nature have attracted people from all over the world to enjoy the benefits of generous society.
All entitlement and healthcare programs, and the tax code, must be given a top-down review by independent consulting companies who have the training and experience necessary to handle such herculean tasks. They must have complete access to the people and information necessary, while operating under a “special powers act” such as with an “independent prosecutor”. Their objective will be to determine how such programs can be modified, combined or eliminated in favor of a more efficient operating model and report back to a special congressional council, whose members are selected for their expertise and experience in business and economics.
As the date of August 2nd is looming, and all the negative consequences of not having some debt ceiling increase, action must take place now, but with an iron-clad agreement to take immediate [August 3rd], positive actions to begin this process, apart from the normal, hidebound congress.
In my opinion, the only plan available that the world markets will take seriously is a combination of the plan worked out between Boehner and Reid (which President Obama scuttled on Sunday), whereby an immediate debt ceiling increase equating to six months of government operations would be granted, simultaneous with the senate’s passage of the “Cut, Cap and Balance” (CCB) bill, which would include the additional tax revenue generation from the closing of unnecessary tax loopholes for corporations and [typically] wealthy individuals, in return for the lowering of the tax rates for both individuals and corporations.
Thereafter, in six month increments, milestones for the implementation of CCB, including the special powers consultants to manage the review process, would be evaluated as part of the process for any additional debt ceiling request. This is the only way to keep the process front and center where it belongs, to move ahead.
Again, as the IMF stated, this action must begin immediately, with significant effect in fiscal year 2012, otherwise risk financial peril at the hands of the rating agencies and the world market.
Consider the present situation with Italy, the third largest economy in Europe, where according to Bloomberg News the cost of borrowing on its 10 year bonds skyrocketed to 5.50% versus the 3.00% rate enjoyed by Germany, the largest economy in Europe.
Can you imagine our debt service rising from $20 Billion per month to $37 Billion per month? That would definitely require swift “Draconian” cuts in programs and employment–just to get back our AAA credit rating.