Sunday, April 23, 2017


Updated – 23/4/2018 - Please refer to the bottom of the column for updated GAP analysis

Vasu Reddy from Chicago

All democracies of the world are managing their budgets in the red (many public corporations are on this list except a very few exceptions) meaning that they are run on a fiscal deficit.  This happens every year (year after year) for the USA government.  The gap between revenues and outlays continues get big/ger (governments keep expanding the limits), the old debt and cost of servicing the debt gets larger, the combination of new debt and debt servicing increasing burdensome on the nation/s.

For those who really care about gap analysis, the rem is self-explanatory.  For some reason the democracies are not managed as we expect publicly traded companies, which should not only be socially responsible but also create profits for shareholder equity.  Typically, democracies are being run to cater to vote banks and political ideology of the parties.

The obvious and politically much advertised revenue and spending GAP is discussed as every political party’s nemesis.  Once the election is over, the national debt and deficits are constantly expanded and with political consent.  USA, being the world’s largest economy, world’s largest national budget also has world’s largest national debt and most times on an annual basis a budget deficit.  In 2016, the USA budget was $3.54 Trillion with a GDP of $16.5 Trillion, and the debt burden was $20.1 Trillion.  All are stunning and extraordinary numbers which keep growing, and the debt number is the one that is growing faster than any other positive indicator in the USA economy.

Outside of the national debt/deficit the state and local level budget deficits are also a common feature in the USA.  If a common man adds national, state, local and village level budget deficits, cost of debt handling and the continued expansion of the needs of the citizens, no one can go to sleep.  You will worry, and will not have an uncomplicated way to balance the budgets.  The deficits are mind boggling (and politicians have no problem raising the ceiling every time they want to) to imagine how much money all levels of governments owe, and how they have no issues in raising the debt ceiling and how little effort is made to become balanced budgets.

Our governments keep spending money we don’t have, and they keep expanding the debt.  Irrespective of how you manage money, there must be a way to balance the budgets.  The individual families and the corporations are all required to not only balance their budgets, but also have savings.  Only the government doesn’t have this initiative or intention.  The national interest to be self-funding and self-sufficient is enforced on people who are represented by the government, but don’t want the government to be held to the same standard.  President Trump pronounced that he can not only balance the budget, but also eliminate the entire national deficit in 10 years.  Trump has the experience of complex real estate enterprise and bankruptcies and reassignment of balance sheet.  People have voted him to power, and the wish list should include a balanced budget.  We shall know very quickly when we see his first budget.

The country must spend on military and we must service the debt.  Both line items are the largest contributors to the spending.  The debt servicing is also the largest line item in most of the state and local government balance sheets.  While recognizing that the USA has the largest managed national debt, the country is not alone in the world.  There are less than a handful of nations which have zero budget deficit and zero national debt.  All most all the large democracies continue to rake up the debt.

Politics and debt are like siblings.  They try to foster each other’s growth.  A resolution to force a balanced budget and political populism don’t really work well together.  For generations, political will has never been in place to put the country’s interest first, always all the time political survival is paramount.  Spending borrowed money (a lot of it misspent) has been a powerful political tool for survival.

At some point of time there will be a breaking point.  If unchecked the alternatives can only result in in a default or bankruptcy.  Both these scenarios have been real in the recent past.  We must recognize that a large city like Detroit declared bankruptcy.  It was the last resort to a worst-case scenario in the largest economy on earth, and a major city with the USA.  While declaring bankruptcy wipes out the debts, it creates a long term and negative impact on building a positive future.  No one will want to provide you a credit facility to conduct normal business.  The temporary impact of resetting the balance sheet adversely impacts the normal functioning of the enterprise.  The bankruptcy also creates a massive financial burden on everyone who is involved with the enterprise, individuals and companies will be wiped out because of their losses that stem from the bankruptcy.  Eventually the public and tax payer is the one who gets to take the hit on every decision that forces a bankruptcy. One reset doesn’t reset any positive renewal, rather it gets spread around to everyone, it is simply redirected to many from a few.  Anyone, any government at any level can default and declare bankruptcy, and pass on the poor management to the public.  The overall cost of mismanagement is simply redistributed, rather than managed for efficiencies.

There is no self-correction of misappropriation.  It should be rather well directed and well managed budget.  Trump can make decision that will force a balanced budget and deficit reduction.  It will never satisfy everyone in the nation to force balanced budgets, but once there is a zero-deficit nation the public will simply see their cost of living become the best in the world, and future safe and secure.  It just needs a bit of political will.

Updated – 23/4/2018

Shalin Siriwardhana
Growth Specialist | Creately

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