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3 Budget Problems That Dwarf the Debt Ceiling

The real issues: Social Security, inflation & federal jobs


Some argue Social Security has always been a Ponzi scheme. I disagree. As I wrote in a column last February, when functioning Social Security is a crucial “safety net” for millions of Americans – even if some of us think we could get on just fine without it.

Unfortunately, the potential good of this program will be a moot point if the surplus has been depleted. Once my generation finds out all the taxes we’ve paid over the years have been raided by corrupt bureaucrats, the label “Ponzi scheme” will be quite accurate if the balance sheet is just a fiction.

Only time will tell whether the amount of money borrowed from the surplus will be replaced in time to cover future benefits. Many contend the borrowing from entitlements is not theft solid, since it is backed by U.S. Treasury securities. But given the politicization of the debt ceiling and focus on borrowing, we should be very worried that the money in Social Security’s coffers isn’t cold, hard cash.

2. The Dollar’s Decline and Inflation’s Rise are Inevitable

Inflation Ahead SignThe dollar has been volatile since the financial crisis, but the trend is strongly downward. In the 12 months, the British pound has gained about 20% on the greenback. The Australian dollar has also been strengthening, up about 30% in the last 24 months. Even the lowly euro, amid all the sovereign debt woes across the Atlantic, is up about 35% against the dollar in the last year.

Some like to tout the advantages of a weak dollar, such as increased competitiveness abroad as American exports see favorable currency exchange rates. And of course, higher profits for multinationals like McDonald’s (NYSE: MCD) who do a lot of business overseas. But the flip side is that as a currency deteriorates, it becomes more expensive to import goods and inflation ensues.

Typically a central bank intervenes by raising interest rates when inflation gets out of control – but as we saw during the 1970s, a rising interest rates and runaway inflation can combine to create an ugly economic scenario. And as the numbers show, it’s going to take more than just a few basis points to get things under control. Read my previous column about 9 signs inflation is crushing America.

Unfortunately, any interest rate hike could cripple the already fragile state of the federal budget. In 2010, the average interest rate on the various debt service instruments like t-bills, notes, and bonds was a little over 3%. If you add a few percentage points to the interest rate and a few hundred billion dollars each year to the already staggering $14.3 trillion in public debt, it’s not unrealistic to think interest payments could approach $1 trillion by the end of the decade – or nearly half last year’s total tax receipts.

Article printed from InvestorPlace Media,

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