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Common Cents

Ground the debt

Ralph Murphy

(2/2016) Federal Reserve Chairperson Janet Yellen stood before an electric billboard at a recent meeting that showed the national debt had risen to over $18 trillion this past year. Congress had just passed an "Omnibus" package of varied bills that permitted the annual budget to clear about $1.1 trillion and President Obama quickly signed the measure.

The total American economy is expected to earn about $17 trillion in 2016 and the shortfall in revenue to programs was about $426 billion for the year's budget. Bills aren't being cancelled as they are reviewed, nor are contractors competing for those deemed necessary. Expected funding as it relates to the debt issue is no longer within the realm of possible repayment and the system has to be reviewed as it's in real threat of collapse.

The Omnibus bill is suspect as to its real purpose because government programs that could probably be terminated during case review based on their merit, are continued as the proponents support similar efforts to other billings. Key to the issue is discretionary funding associated with twelve Congressional committees in the House and Senate that merge bills designed to be independent of each other, but are brought together almost as a "wish list" and routinely approved for funding. Once programs are approved they are very difficult to defund given vested interests and lack of scrutiny.

Cases in point include the Export-Import Bank that was created in 1934 during the Great Depression to help US firms finance projects abroad when the banking system was near collapse. The system largely recovered, there are issues now but the Import/Export bank functions at about $21 billion annually and could easily be replaced by sound corporate alternatives. If there isn't a genuine legislative effort to kill that type of bill and there's "big money" involved they can be expected to continue despite the lack of real need. The private sector would drop that type of issue as non "cost effective", but the government standard allows them to move forward.

Omnibus bills have been legally admitted since the 1850's. While problematic at times they didn't become a survival concern until deficit spending was allowed by President Franklin D. Roosevelt during World War II. His predecessors were restricted by legal issue from debt issue based on projected earnings as a matter or course. President Herbert Hoover was the last to preside over a balanced, non-debt fiscal policy associated with tax receipts as well as limited government investment gains. The private sector banks collapsed during his reign and he couldn't restore their role for investors. He resisted legislation that would have allowed deficit spending.

While banks were once again solvent with sound oversight it paralleled the debt financing associated under Roosevelt and the "National Recovery Act" or later "New Deal" and "Great Society Spending" of subsequent Democrats. The programs were basically just about debt issuance, but could have been avoided by a stable capital market regulatory regimen. However, they continue to this day as legally unchecked- short of a government "shut down" and the question of debt issuance itself has unfortunately never caused one.

That may change shortly. The debt is a real, legal obligation of the federal government to contractors or creditors. The money will never be available to pay it off- barring a sudden change in the production pattern- all of it turned over to the tax authority, that is larger than the nationís annual income! Most of the debt again is simply unchecked profit for the contractors.

There is no legal mandate to balance the budget- just understandings and they have now broken down because of greed and opportunity. If you can prove a billing is fraudulent, a legal case could be made against a contractor. If itís just an unchecked profit margin- by law it must be paid. If itís a stolen real asset based on earnings- as what is now paid at the gasoline pump, it also could afford legal redress and one day that will surely happen. For now the government just pays it - it has even perpetuated the programs and again the bills arenít challenged. There are scant internal controls or incentive for legislative review.

Budgets based on revenue worked before World War II. Unfortunate circumstances lead to undisciplined capital markets and their collapse, but that could have been countered with sound oversight to insure a competitive framework without funding it. If the government can't make interest and principle payments- like in the case of private sector, Ponzi schemes- creditors will lose their investment.

Budgets based on revenue without deficit financing must be restored before radical programs such as Germany's Weimar Republic response of printing money to pay bills, debases the money supply. That led to World War II, which allowed the deficit financing and unchecked profit as well as unneeded programs and the current climate of fiscal permissiveness. Governing authorities should only spend beyond their means in real emergencies and that with securable assets as collateral. The current deficit is impossibly high. This standard must end with program review, justification and asset- based tax payment that the accepted system simply canít afford.

Verify the need and pay it- the debt issue must end.

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.

Read past editions of Ralph Murphy's Common Cents