The Deficit – One Big Hoax (Part I)

This is undoubtedly a startling statement to make in the light of all that is coming out of Washington and from our media. But the statement is absolutely true.

We have stopped questioning the urgency of resolving the deficit because we have now been pounded with this proposition for many month, more than a year, by the media, by the Republican Party, and now even by our Democratic President.

But none of this makes it true! Well it is fair to ask, if it is not true then why are all these sources more or less on the same page. I submit that each has its own rationale.

Republicans have created most of this deficit and are now trying to panic the country into dealing with it by draconian cuts, I submit with deliberate intent to justify their long sought goal of decimating all the social programs and regulations, going back not only to Franklyn Roosevelt, but even to his Republican namesake, Theodore Roosevelt, who was President from 1901 to 1909.

The media because in part they slavishly report what any political mouthpiece declares without questioning its validity, and in part because much of the media is the mouthpiece of the Republican party, such as the media empire of Rupert Murdoch e.g. in New York City of Fox News, The New York Post and the Wall Street Journal to mention just a few and the rest because it is safer to go along then to strike an independent course.

And finally, the President, because once this has become a truism in the public mind, it is political suicide to try to oppose it.

But those of us who try to go beyond the “common wisdom” can, and indeed should, always question that which has become accepted by constant repetition.


In fact many articles have been written raising questions, but I will refer to one in particular because it is not a political one, but appeared in a stock market advisory letter published by Fidelity Monitor in its May 2011 issue.

I quote the pertinent portions of the article:

Predictions of doom and gloom have become the latest sensation. Media hounds tell us the Federal debt will grow unchecked. Inflation will surge. Foreigners will unload treasuries. The dollar will crash. From the pundit’s point of view, bold predictions get you air time. And if you’ve made a number of wrong predictions, like PIMCO manager Bill Gross has, you’ve got nothing to lose by throwing another one out there. Especially if the publicity helps bring new money into your bond fund...

A high level of government debt, by itself, is not enough to cause a currency to collapse – if it was, the yen would have gone bust over a decade ago…

But the doom and gloomers seem convinced that Congress will remain gridlocked for the next 20 years while deficits grow unchecked. Even if that’s what ends up happening, it still may not necessarily tank the dollar. It would probably take a decade for the Federal debt to reach 200% of GDP (comparable to what Japan has now). By then, a positive trade balance could make it relatively easy to finance with domestic capital, just as Japan does…

The newsletter industry has it own cadre of doom and gloomers. Some have been perma-bears since the 1970s. The Hulbert Financial Digest has tracked some of these guys throughout the years, and they have horrible track records. Fear, it turns out, does wonders for selling books and attracting television viewers, but in the long run it destroys value.

Once you embrace a doom and gloom theory, there can only be a bad outcome. Sooner or later, conditions improve, and your portfolio misses out on the rewards that come with a solid investment strategy.

For the full article see here.

Now let me address my assertion that Republicans have created most of this deficit. In 1992 at the end of the G.H.W. Bush Presidency, the deficit stood at 300 billion dollars. By the end of the Clinton Presidency in 2000 we had surplus of in excess of 200 billion dollars. At the end of the G. W. Bush Presidency in 2008 we had a deficit in excess 400 billion dollars and a recession bordering on a ’29 depression to boot.

To be sure, as Republicans have claimed, the deficit accelerated markedly during the first year of the Obama Presidency, but of course the recession cut tax receipts markedly and required substantial additional outlays, but despite this, the Council on Foreign Relations, as can be seen from the chart above, projected a substantial decrease in the deficit in the years to come, based not on a cut in expenditures, but on the assumption that the Bush tax cuts would not be renewed, which as a result of the Obama compromise with Republicans did not occur. But if nothing else it shows how canceling the Bush tax cuts would by itself have made a major dent in the deficit without any cuts. This, I believe was a major blunder on the part of the Administration and one that I cannot understand.

But let me be clear! The deficit does matter! It needs to be reduced over time. But there is no urgency about doing this, and it can, and should be done with some targeted cuts, which I will identify hereafter, and with mostly revenue enhancement.

But I have up to this point not adequately covered my contention that the deficit was created with deliberate intent to justify their long sought goal of decimating all the social programs, as well as regulations that benefit the general public, going back not only to Franklin Roosevelt, but even to his Republican namesake, Theodore Roosevelt, who was President from 1901 to 1909. In order to keep this post within reasonable length, I will address this in my next post, which will be named “The Deficit – One Big Hoax (Part II)”