War Tax, Our National Debt, And The Illusive Terrorist

This is one of the few times I actually want more taxes! Read the full article on a proposed war tax here. The average American doesn’t recognize the immense cost of maintaining an expeditionary force overseas. I would rather have to fork out the extra money in taxes than continue to grow our astronomical national debt, the majority of which lies in the hands of the Chinese.

"There ain't going to be no money for nothing if we pour it all into Afghanistan," House Appropriations Chairman David Obey told ABC News in an exclusive interview. "If they ask for an increased troop commitment in Afghanistan, I am going to ask them to pay for it."

Obey, a Democrat from Wisconsin, made it clear that he is absolutely opposed to sending any more U.S. troops to Afghanistan and says if Obama decides to do that, he'll demand a new tax -- what he calls a "war surtax" -- to pay for it.

"On the merits, I think it is a mistake to deepen our involvement," Obey said. "But if we are going to do that, then at least we ought to pay for it. Because if we don't, if we don't pay for it, the cost of the Afghan war will wipe out every initiative we have to rebuild our own economy."

There was another article on MSN regarding the immense costs of borrowing that we as Americans are dealing with. Not only is it an immense cost now but it may get much worse in the near future.

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

I am always amazed at the propensity for government officials and political pundits to try and defy the laws of finance based on the premise that government spending is different than personal finance. I disagree. There are some obvious differences, however basic principles like the cost of capital, the power of compounding interest, and spending more than you make aren’t moot just because a sovereign government is doing the spending. That is why I think developing a clear “end state” or perhaps more accurately an “exit state” for Afghanistan is so important. Right now we are likely going to bolster troops in a war that to my knowledge has no clear goal other than to prevent the harboring of terrorists. That argument might be enough if the majority of the terrorists in the 9-11 attacks hadn’t masterminded in Europe. A more recent example is the Ft Hood tragedy. It is a new world out there with bolstering interconnectivity of those worldwide. And if we continue to treat these terrorists as if they are actors of a nation state we will continue to be behind the eight ball when it comes to combating them. Terrorist activity, as has been proven time and again, can arise from anywhere. It can cross any border into any nation and is more of a mental disposition than a national association. If we are going to continue financing a war without an end state in mind we may as well do it from our own pockets vice the interest bearing dollars of other nations.

The US China Relationship

Although this article from MSN Money may be a bit too simplistic and a little more gloom and doom than I like, I think it does a awesome job explaining China and the United States' interdependency. It is very interesting to read a simplified history of how we came to depend on each other and how our relationship poses some problems for the future.

Imagine becoming so successful at your job that you stack up $2 trillion in income, which you conservatively place in short-term U.S. Treasury bonds for safekeeping.

Now imagine that when you try to cash in those bonds to buy a few things for your kids, the clerk at the bank abruptly shuts her window and tells you to go away.

That is essentially the situation faced by China these days as it wonders whether its plan to manufacture goods for U.S. consumers over the past two decades in exchange for a pile of credit slips was really such a hot idea.

I have heard little political tidbits and people's random remarks about how China basically owns us. I always had a gut feeling this was exaggerated paranoia, however my ignorance on the topic had me refraining from commenting. The one positive I took away from this article is that as scared as many Americans are about China having such a large possession of US bonds, the Chinese may be just as scared to have such a large position in US bonds.

Well, now think about this in the context of a Ponzi scheme such as the one perpetrated by disgraced financier Bernie Madoff.
Madoff's clients for years thought they were rich because he sent them brokerage statements that said so. But that scheme worked only as long as new money kept coming in. When international money flows seized up last year and too many people wanted to redeem their accounts at once, Madoff's $50 billion game fell apart. Then his victims suddenly discovered that their brokerage statements were worthless pieces of paper. Madoff clients' households crashed, and now one-time millionaires are broke. The reality is that they were always broke; they just didn't know it yet.

The credit that has kept American families afloat for the past 10 years is similar to those Madoff-produced brokerage statements. The credit is good only so long as China keeps recycling funds through the Ponzi scheme. But if Beijing leaders ever decide that it's just too risky to own U.S. dollars and debt, then the system is going to come crashing down. Of course, it is not really in China's interest to stop the scheme, even if it wanted to, because its own economy would likewise blow up. Satyajit Das, a credit derivatives expert in Australia, likens this to stepping on one of those land mines that are activated by the weight of a victim's body. As soon as the weight is lifted, the mine explodes, and the person's leg is blown off.

China is thus frozen in place, damned if it does and damned if it doesn't. It's a classic Catch-22. China's cache of U.S. bonds isn't worth anything unless the bonds are sold. But selling them on any kind of scale will gut their value.

"People need to realize that China doesn't actually have any real U.S. money," Das says. "Unless they can turn in their bonds and exchange them for something else, they're only paper assets. Yet if they try to exit the position, they'll destabilize the dollar, and the value of the rest of their assets will plunge. And that's not even their biggest problem. It's that they also need to keep buying Treasurys, or interest rates will go up and their capital losses will be terrible."

I don't really know if the situation is 'mutually assured destruction' like author Jon Markman claims, yet I don't really know the path to changing it either. Hopefully the recession has served as a wake up call that we cannot as a nation merely borrow our way to 'wealth'. Couple the wake up call with access to more information (financial education information) than ever via the Internet and maybe the US will begin to start living the Badskiblog definition of being rich.

China and Our Growing Deficit

I read this article on multiple websites today, however it has been replaced on ABCnews by Jennifer Aniston's relationship status update. I think this article is a huge wake up and it should be a huge boost for fiscal conservatism. However, thinking that America will come together to embrace one belief is naive and...well very un-American.

I think what the article does illustrate is a fatal flaw that our nation, its elected officials, and the media has embraced. We believe that there will always be a market for our nation's debt, with complete disregard for the financial state of our nation and its ability to repay that debt. To me this is no different than the mentalities that have led us down the numerous financial crises that mark our nations history. This is the same mentality that recklessly handed out mortgages to all that applied because home prices would always rise. The same mentality that caused price to earnings ratios of pets.com to soar above that of Coca Cola or Toyota. The same mentality that had the Dutch mortgaging their future away to buy tulip bulbs. You know when the Chinese and our interests are suddenly aligned (making sure that we can handle our debt) that things are getting interesting to say the least. My college coach used to say, "Don't try and make chicken salad out of chicken shit" when players tried to do too much. I am worried that if we overextend ourselves as a nation we will be in the same scenario; a handful of bad debt that we can't make good on.