Tags: Romney | Obama | debates | deficit

Debates Will Not Matter, Debt Reduction Will

Wednesday, 17 Oct 2012 07:39 AM

By Ashish Advani

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Another debate between the president and the challenger has come and gone. We will now see the spin doctors claim victory from both sides. Each party will extol the virtues of their candidate or worse, spin and bring down the other side by claiming that the data presented are false.

I am a big believer in democracy. Debates and discussions are a big part of democracy. But the best laid plans are worthless unless there is execution and hopefully flawless execution. In the present circumstances, forgive me for not believing either of the two candidates.

One actually has a poor record of reducing deficits. The other has a plan with no details and the best I have heard so far is that his plan of reducing taxes is deficit “neutral” — not deficit reducing, neutral at best. That is if there are any details to the plan and if they are executed flawlessly, which is a high expectation from anyone these days.

The U.S. government recently hit $16 trillion in debt about six weeks ago, after reaching the $15 trillion mark last November. It took 200 years to accumulate the first trillion dollars in debt and 286 days to accumulate the most recent trillion.

History is littered with examples of how countries have gotten crushed by debt when the situation got out of control. Let’s look at some examples.

The French monarchy was spending 30 percent of its tax revenue servicing debt in 1780. When the revolution began, the debt servicing became 62 percent as the country took on excessive debt.

The Ottoman Empire faced financial ruin due to excessive debt too. During the end of its reign, the debt service ratio went up from 17 percent of taxes collected to 52 percent. Eleven years later, the Empire was bankrupt and in default.

While it is history, it is very relevant today. Let’s review the numbers at home and now.

Throughout most of the last decade, in fact, the U.S. government spent roughly 9 percent of its tax revenue on debt service. But in 2009, the figure hit 9.75 percent, then 10.5 percent in 2010, then 11.5 percent in 2011. For the fiscal year that just ended on Sept. 30, the Bureau of Public Debt reported cumulative interest expense of $375.8 billion on income of $2.45 trillion, a rate of 15.3 percent.

The biggest challenge to the public is the massive and ever growing debt. The fiscal cliff is a real challenge and probably the first real step in debt reduction. Yet, I suspect no matter who wins, the fiscal cliff will be avoided and a compromise reached to push out the real reforms and true debt reduction until much later rather than swallow a bitter pill today and start the austerity drive in America.

I have yet to find a nation that has successfully spent its way out of a debt-crisis problem. Most have tried to distract the masses by starting wars and distracting attention. While we did start a couple of wars, we only dug a deeper hole and created a bigger mess and a much, much larger deficit.

So we now have to pick between a president who has his heart in the right place but a dismal record of reducing the deficit versus a challenger who cannot elaborate his plans to reduce the deficit and plans to make policies and laws that might not make the deficit worse.

This is truly a dilemma with no real winning alternative.

Europe might not be perfect, but at least they are trying to grab the bulls by the horns and attempt real deficit reductions. There are still real opportunities in many pockets in Europe, such as Turkey, which has my attention. More on investments in Turkey in the future.

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