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The Daily Reckoning

US government spending is unsustainable

Government spending and increased debt have been sold to the US as sound economics, but as history has shown us government spending does not make people rich.

By Guest blogger / April 29, 2010

The uncontrolled spending of the US and other 'old' democracies around the world has been justified as good for the people, but history has shown that big government spending has never enriched the masses.

Charles Dharapak/AP

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“Panel will tackle national debt,” says a headline in this week’s Washington Post.

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Would anyone like to bet?

Who writes these headlines? What are they thinking? Are they thinking at all?

While the bi-partisan group of bumblers may do something; tackling the national debt – or even slowing it down – is not one of them. It would be going against the tide of modern financial history, which rolls debt into bigger and bigger piles and turns small problems into huge ones.

Let us look back. What has been the major trend of the entire past 50 or so years? Government has played a larger and larger role in the US and most western democracies. Only in the formerly (and for many, still) communist countries has government been rolled back.

The communists learned their lessons. They proved that government spending does not make people rich. But now…what’s this…? The US and other countries are greatly increasing the percentage of GDP spent by the government.

The communists proved that central planning didn’t work. But again, the US and others are now planning their economies more than ever – managing interest rates, directing capital to one industry while denying it to others, raising taxes on this…subsidizing that…regulating everything that moves…

The communists also proved that state ownership of industry was a bad idea. But the US and others now own banks, insurance companies, almost the entire mortgage business, and one of the world’s largest automakers.

Perhaps most importantly, almost all the ‘old’ democracies – notably the US – are taking on much more debt. Bankers do stupid things – the feds take over the debt. Homeowners do stupid things – the feds give them more low-cost credit. Politicians do stupid things – and the feds run up even more debt.

And it’s killing them. They can’t raise enough money through taxation to fund their spending plans, so they have to borrow. And borrowing exposes them to big risks.

In a few days, America’s first time house buyers’ tax credit program expires. It’s been a great success, say supporters.

Let’s see, how did it work? According to the news reports, the government gave away $12.6 billion in tax credits. Of course, some people would have bought a house anyway…and could have afforded one without the tax credit.

Wait…that means that the only additional sales came from people who 1) didn’t really want to buy a house or 2) couldn’t really afford one. According to economists’ estimates, each one of these people cost the feds $30,000 worth of tax credits.

And according to the results of an audit, $139 million was paid out to people who hadn’t bought a house at all. And one of the people who got the credit was only 4 years old.

A perfect federal program – it accomplished nothing at great expense…

And it adds to the debt!

Yesterday, the Dow sold off 213 points. Gold rose $8. In the aftermarket it soared even more.

What’s bugging the markets? Debt. Specifically, the debts of Greece…and Portugal…and Spain

Last Thursday was “Black Thursday” for Greece. News reports told the world that Greece’s budget problems were bigger than people had thought. Traders dumped Greek bonds.

Greece’s debt is now ‘junk’…the rating agencies say that if the country is forced to reschedule creditors could get back only 30% of their money. Naturally, lenders are nervous. And investors fear that Greece’s problems are not limited to the Hellenes. Sovereign debt problems are as ‘contagious’ as HIV. All it takes is a little hanky panky of the wrong sort…and you’ve got it!

Greece’s budget deficit is 8.7% of GDP.

Portugal’s deficit is the same.

Spain’s is higher – at 10.4%.

Where’s the US deficit? Last time we looked it was projected to be as high as 12% of GDP.

By many measures, the US is actually in WORSE shape than Greece. And the rating agencies have already warned about a possible downgrade of US debt too.

And by all measures, the US has the biggest pile of debt in the world… Just wait until the sparks hit it. You’ll see the world’s biggest blow-up!

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