A Failure To Communicate?

President Obama met with Senate Minority Leader, Mitch McConnell, and came away with no breakthroughs.  McConnell maintains that tax increases are off the table during the current debate over raising the US debt ceiling.  This is not a new demand, so what part of “no” did President Obama not hear?

When lenders begin to fear they will not get repaid for their loans to a sovereign power, their first action is to raise the interest rate on all new loans.  Suddenly the debt service begins to seriously crowd out other government spending, unless, of course the government does not borrow even more.

So far, lenders have been very willing to loan the US all the money it wants, and at very low interest rates.  This speaks volumes about what other options are available to big time lenders.

Sooner or later, however, some lenders simply say “no more”.  When that happens the borrowing country is between a rock and a hard place.  They cease to have a source to continue their rate of expenditures.  Without a sharp reduction in expenditures or a marked increase in taxes, they are soon in bankruptcy.

Some countries ask for interest “holidays” where they do not pay any interest for some period.  Investors do not like this.  Others ask for “forgiveness” where lenders agree to forfeit some amount of principle they have loaned in return for payments on the rest.  Investors really don’t like this options.

But in bankruptcy, what other options does a lender have?  Consequently, lenders try to pressure governments to impose rapid solutions to their running deficits.

This week we are seeing a modern country struggling with massive debt.  Greeks took to the streets with violent protests over proposed cuts in entitlements, government jobs, and other benefits coupled with tax increases.  “No way”, Greek protesters cried.

The EU has said that without significant cut backs in Greek Government spending along with increases in taxes, they would not extend any more loans (even at the higher interest rates).  No more loans is the death sentence for the Greek economy.

The amazing aspect of these demonstrations is that the cuts in government jobs and benefits will take place whether Greece can qualify for more loans or not.  In fact if Greece defaults, it is arguable that the impact upon Greek citizens will be more severe.  In default, the government will have too little money to maintain the rich entitlements Greeks have come to enjoy.

The US situation has many similarities.  Congress continues to spend more than it brings in taxes.  Congress continues, for political reasons, to avoid dealing with entitlements, defense spending, and tax code loop holes.

Somehow I think that the American public could understand the argument to reduce spending and increase tax revenues if only it would be made.  Greece could have averted their current situation by having discussed their situation openly with Greek citizens several years ago.  (The current Greek crisis is not a new event, it has been brewing for several years.)

The issues in both the US and Greece are similar.  Spending more than a country takes in taxes will eventually bankrupt any country.  Failure to deal both with spending and taxes fairly makes finding a solution extremely difficult.  Electing public officials whose higher priority is maintaining their elected jobs is a country’s death wish.

It is these officials who contribute mightily to the failure to communicate.

Advertisement

Explore posts in the same categories: Barack Obama, Democratic Party, Politics, Republican Party

Tags: bankruptcy, congress, eu, greece, greek, mitch mcconnell

You can comment below, or link to this permanent URL from your own site.