07.19.2011 1

‘Cut, Cap, and Balance’ or Bust

By Bill Wilson – Today, the House of Representatives is voting on the “Cut, Cap, and Balance Act,” legislation that would cut $111 billion out of the budget immediately, cap spending to a percent of the Gross Domestic Product, and send a Balanced Budget Amendment to the states in return for increasing the $14.294 trillion debt ceiling.

The “Cut” part of the plan itself uses the Ryan-proposed-and-passed budget of the House for its formula for immediate spending reductions, which has ten-year savings of $5.8 trillion from the current baseline.  It also uses the “Cap” from Ryan’s plan, starting at about 22 percent, reducing to 19.9 percent by 2021.

Above all, because it includes an amendment to the Constitution — the only mechanism by which to limit Congress’ powers to spend — it happens to be the strongest proposal on the table.

The American people, with the “Balance” demand, are really not asking for that much.  Including it in a debt ceiling vote is politically speaking, rather innocuous.

It takes three-quarters of all states to adopt an amendment, usually by state legislatures, several of which are still controlled by Democrats, who are unlikely to support the amendment.

Nonetheless, legislatures need the option to adopt the amendment should the financial situation in this country deteriorate beyond reckoning.  Considering the nation’s economic state, putting such an   amendment to the states is actually very wise.  It will give the American people an option that previously did not exist, which they may need at a later date.

Taken together, “Cut, Cap, and Balance” certainly is stronger than the Obama Administration’s vague proposal to “save” $4 trillion by raising taxes on job creators while cutting less than $5 billion in  spending, according to some accounts of the White House debt talks.

While it is impossible to say how the vote will come out, Americans for Limited Government (ALG) is strongly urging passage.  This bill should be sent to the Senate immediately.

We sincerely hope the $5.8 trillion in savings will be sufficient to meet the debt crisis head on.  Because whether or not “Cut, Cap, and Balance” passes, the swirling dark clouds on the horizon are impossible to ignore.

Credit rating agencies Fitch, S&P and Moody’s have all warned that without significant deficit reduction being enacted now, the United States’ gold-plated Triple-A credit rating is being reviewed for a downgrade.  Significantly, S&P gauges a 50 percent likelihood of a downgrade in the next three months alone.

These warnings could not be clearer.  The agencies are saying that raising the debt ceiling alone is not enough to salvage the Treasury’s creditworthiness.  That there must also be a comprehensive plan for fiscal consolidation to accompany the increase.

To counter this threat, “Cut, Cap and Balance” more than meets Moody’s call for a fiscal consolidation plan of at least $4 trillion.

It is no time for half measures.  After all, if the worst-case scenarios showing the nation headed for the financial Abyss are even half-true, the nation’s solvency and the dollar’s status of the world’s reserve currency is surely in jeopardy.

Treasuries have been stockpiled worldwide based on the nation’s ability to grow robustly economically and meet its obligations.  That’s because America was a good investment.  During the post-WWII period, revenues had doubled like clockwork, because the growth of the economy far outpaced the growth of debt.

Until the 2000’s.  Now, the roles are reversed, and the growth of debt far outpaces the growth of the economy.

And the only way the U.S. can meet its obligations is with a printing press.  Already, the Federal Reserve has had to take up the slack in treasuries markets to deal with Washington’s expanded demands for financing, and is now a larger lender to the Treasury than China.

If something is not done to restrain spending in Washington, it will not be long before our creditors question the value of their holdings, and dump the dollar as the reserve currency.  In fact, if rates rise to just 5 percent, their historical norm, gross interest owed on the debt will total $1.3 trillion by 2021.

Despite the intractable situation, the White House has already threatened to veto the “Cut, Cap, and Balance” plan, saying that it “will likely leave the Nation unable to meet its core commitment of ensuring dignity in retirement.”

Read that carefully.  Barack Obama is telling seniors and Baby Boomers that a balanced budget, which is desperately needed to save the nation from collapse, is incompatible with the government keeping the promises it has made to entitlement recipients.

money for entitlements runs out sooner than anyone thinks.  In just the past year, the Social Security and Medicare trustees have moved forward the dates when the trust funds will be exhausted, from 2037 and 2029, to 2036 and 2024, respectively.  When the trust funds are exhausted, benefits will have to be cut anyway.

Yet, politicians, central bankers, and regulators have described the calamity we face as a liquidity problem as if the solution was to simply load a few more ink cartridges at the Federal Reserve.  It is not.

Instead, we face fundamental insolvency crisis, where we spend far more than we take in via revenue, which will invariably cause the Treasury to collapse under its own weight.

“Cut, Cap, and Balance” may be our last chance to turn the Ship of State around.  The only way to prevent from sinking into the Abyss is a reconfiguration of the promises government has made to the people that cannot be kept.

In short, the social contract must be rewritten.

Today, the House through “Cut, Cap, and Balance” is attempting to begin that process in an orderly way, before a disorderly, catastrophic default down the road turns Washington into Athens.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

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