I’ve spent years reading about economics. Call me a nerd but I enjoy understanding how the economy works. But monetary policy? It’s pretty much voodoo to me. I’ve been doing a lot of reading to try to understand why the Fed is doing what it’s doing. Either I’m failing to understand it, or the Fed has put us on a collision course with high inflation and a worthless dollar.

Monopoly Money
The administration and the Fed have been printing money like it’s going out of style. They believe that injecting cash into the economy will help stimulate it. Many experts disagree with this approach to stimulate the economy. And there’s risk with this policy. The more money you print, the less it’s worth. The dollar becomes devalued. And eventually, inflation sets in.

Inflation
What happens when the dollar is devalued? Lots of things. One in particular that we need to pay attention to is the price of commodities. They’re on the rise. Have you noticed grocery prices lately? They’re going up. And they’ll likely to go up a lot more. Cereal prices are going up. The price of milk is going up. It’s all going up.

In the last year, the cost of manufacturing has risen tremendously. The price of the materials used to create products has risen substantially. This has not yet been apparent in retail prices. Companies have held their pricing as long as they can. Who wants to raise their prices during a down economy? But it can’t last. Companies cannot continue to eat these losses and survive. In our industry, dramatic rises in the price of cotton are leading to significant increases in the prices of apparel. It’s coming folks. It’s coming.

Monetizing Debt
When the fed buys toxic assets (like mortgages from Freddie and Fannie), we’re monetizing our debt. This week when the fed announced that we’re going to buy $600 billion in bonds from ourselves, this is monetizing our debt. This has been referred to as QE2. Like printing money, this devalues the dollar. It’s been estimated that within a couple of years, that the dollar will be worth 20% less. Do you have $1000 in the bank? Well guess what. In a couple years, that $1000 is only worth $800 in today’s money. Are you watching the stock market rise this week? It’s up. Seems like that would be good news. But all it means is that we’re treading water because the dollar is worth less.

QE2
The QE of QE2 stands for quantitative easing. The Wall Street Journal explains QE this way:

It’s the electronic equivalent of starting up the Fed’s printing presses to create money for buying financial assets in the market – in this case long-term U.S. Treasury bonds. Buying bonds pushes down their yields, and the interest rates across the debt markets that are closely tied to U.S. Treasury rates.

What are the possible ramifications of QE2? Again from the WSJ:

Printing more money tends to push down the value of the dollar. While that would tend to help U.S. exports, it also risks pushing up the price of oil and other commodities, threatening an inflation surge that could be difficult to stop if the economy picks up. The dollar already has fallen substantially, and the resulting flood of money to emerging markets with higher interest rates and more robust growth is pushing up their currencies more than some of their governments want. That has led some countries to intervene to resist the rise in their currencies, sparking tensions between the U.S. and emerging markets and talk of “a currency war.”

Why the 2? Because we’ve already tried quantitative easing once to help the economy to the tune of about $1.7 trillion. You should read this article from the Wall Street Journal.

And from Investors Business Daily:

…starting in 2009, the Fed embarked on what it called quantitative easing — a fancy term for creating money out of thin air. Over a little more than a year, it bought more than $1.7 trillion in assets, mainly U.S. Treasury and agency debt.

Today, U.S. bank reserves are close to $1 trillion — an enormous amount compared with the normal $4 billion to $8 billion.

On Tuesday, with the economy struggling and many Fed officials still worried about the specter of deflation, the Fed embarked on a second round of quantitative easing, dubbed QE2. The plan is to spend $600 billion to buy even more government debt, hoping to push down long-term interest rates to boost consumer spending, home sales and business investment.

We appreciate the Fed’s dilemma. Interest rates are already at zero, so there’s nothing left to cut. That leaves gimmicks such as quantitative easing as the only tool. But we’re also concerned about the unprecedented amount of money that’s being created — funds that won’t be easily taken out of the banking system once inflation takes off.

With its latest bout of quantitative easing, the Fed will have created $2.5 trillion out of the blue. Yet we’ve had no job growth since it began. So calling it “stimulus,” as some do, is simply false.

IBD goes on to explain:

What the Fed calls quantitative easing used to be called monetizing the debt — printing money to cover a profligate government’s debts. It was anathema to a generation of economists. But not today. Given our 9.6% unemployment and a fear of deflation, lots of smart people think QE2′s the right thing to do.

But how real is the deflation threat? Not very. Reuters quotes a San Francisco Fed study that puts the threat of actual deflation over the next three years at 5% or less. Others are in the 20% to 22% range.

As for inflation, it’s already here. The dollar has plunged in value, raising prices on everything we buy overseas. Commodity spot prices hit an all-time high in September and continue to rise. Gold? Also at record highs. Oil? It has doubled in a year to $83 a barrel.

Other common goods — from rubber to sugar to copper to rare earths — are surging, with some near all-time highs.

It’s only a matter of time before these prices are felt in the cost of consumer goods. At present, home prices are distorting inflation figures. Year over year, housing costs have fallen 15 straight months.

The risk? Once the economy takes off, inflation may spike. And once inflation gets imbedded in the economy, it’s tough to get rid of. If you don’t think so, go back and review the history of the 1970s.

Bernanke is as smart as they come. But adding another $600 billion to the $1 trillion the Fed has already stuffed into the banks does nothing to boost economic activity.

And if inflation returns with a vengeance to decimate the economy as it did in the 1970s, he’ll come in for tough questioning by a new GOP-led Congress that isn’t as enthusiastic about quantitative easing as the Democrats.

China
The world is concerned about our monetary policy. China is warning us that we’re heading down the wrong road. Why? Let’s say your friend loans you $100. But the value of the dollar drops by 20% from the time your friend loans you the money, and you pay him back. The repayment is now only worth $80 comparatively.

China and other countries have been loaning us a TON of money. And we’re going to be paying them back with a devalued dollar. How long do you think they’ll continue to loan us money? And if they do, what rate do you think they’re going to be charging us for the loan? What happens when they cut off the flow of their money?

Conclusion
Don’t you find it interesting that the Fed announced QE2 the day after the midterm elections? I do. You only hide announcements like this behind the “big news” when you’re hoping that it will get buried on page 44 of the newspaper.

What does it mean that the Fed wanted to bury this news as much as possible? I’m not sure.

But here’s what I do know. We must get our financial house in order. Devaluing the dollar is not a good long-term strategy to economic growth. Deficit spending and the national debt are much bigger risks to our nation right now than unemployment and a sluggish economy. And the only way we’ll turn around this economy, and create jobs, is to fix our financial problems.

Lots of subjects to touch on today, so let’s jump right in.

Don’t Ask Don’t Tell
The majority of Americans want Washington to repeal Don’t Ask Don’t Tell. I think the administration has the right approach on this one. They would prefer we settle this in Congress than in the courts. I’ve been a longtime supporter of gay rights, and hope that we’ll do the right thing by repealing Don’t Ask Don’t Tell. But doing so through legislation in the Congress is a much better course of action than allowing our courts to make this decision for us. Now if only Congress would do the right thing.

Thoughts on Juan Williams and NPR
I’m a fan of NPR. I think in many respects they do a tremendous job with their reporting. I’ve listened to their morning broadcast on KPR literally thousands of times — almost every weekday morning for the last 15 years. As a former employer and business owner myself, I have had to hire and fire a lot of people over the years. Let me tell you, firing people sucks. I will defend NPR’s right to fire people all day long. But I want to make a couple points.

1. If you listen to the entire exchange between Juan Williams and Bill O’Reilly, it’s very clear (at least to me) that Williams is not an “islamophob”. He certainly said something that can easily be taken out of context without hearing the full exchange. And he said something that’s not “politically correct”. It made me cringe the first time I heard it. But I’ve seen enough of Williams over the years to be confident that he’s not prejudice against Muslims.

2. NPR did not fire Williams because he expressed an opinion (and technically, this was not an opinion, but a personal feeling). NPR has long allowed their reporters to express opinions in the media. CEO Vivian Schiller never bothered to speak with Williams directly before making her decision, or after.

3. Schiller’s public comments were reprehensible. Did you see her quote? Schiller told an audience in Atlanta on Thursday that Williams should have kept his comments about Muslims between “himself and his psychiatrist.” The feedback against Schiller and NPR has been substantial. Schiller later apologized for her comments, but never apologized to Williams directly. (This is called “cover your ass” in legalese.) As a former employer myself, I can tell you that this is complete incompetence. You should NEVER make a comment like this about a former employee.

4. So why was Williams fired? NPR has long disliked Williams’ association with Fox News. Williams, an admitted liberal, does not neatly fit into NPR’s perception of what a liberal should be. I suspect that NPR has long considered firing Williams, and was waiting for the right opportunity. And they quickly pounced on Williams’ “politically incorrect” statement.

5. People will argue that Williams is an islamophob and deserved to be fired for his comments. But when I see such broad support for Williams, I wonder who was really offended by his comments? I’ve seen support on the left from people such as Whoopi Goldberg and Bob Beckel. I’ve seen support on the right from people like Karl Rove. I’ve seen support from moderate Muslims. From Republicans and Democrats alike. And if the reactions among NPR’s own audience is any indication, then NPR has a big problem on their hands.

6. I’ve long believed that we should eliminate public funding for the media. We’ll see if this becomes the triggering point for defunding NPR and all publicly funded media.

Midterm Elections
I’ve been following the polls, but find it difficult to predict what the outcome will be in the upcoming election. So I’m not going to try. The general consensus is that Republicans stand a good chance of taking back the House, and a much slimmer chance of taking back the Senate. The polls attempt to determine “likely voters”, but with a midterm election, that’s a tough thing to determine. Dick Morris generally has a pretty keen insight into the polls and voter behavior. He predicted months ago that the Republicans would win huge gains this election cycle, and take back both the House and the Senate. We’ll see. That might prove to be hopeful thinking on his part. Morris has become a very outspoken critic of the left.

I wrote a post back in January about how Scott Brown’s win in Massachusetts could help President Obama win a second term. My comments still seem relevant given the likelihood that Republicans will make gains in Congress. If you missed it the first time, you can read it here.

European Socialism
Are you watching the meltdown in Europe? This has been building for months. In France, the government wants to raise the retirement age from 60 to 62. And the unions are rioting in the streets. But it’s not just France. Several countries in Europe have all come to the same conclusion — that an entitlement society is financially unsustainable. Countries across Europe are enacting huge cuts in benefits and spending, and are eliminating hundreds (if not thousands) of government programs.

I’ve long considered writing a post explaining that socialism is a failed economic model, but just haven’t gotten around to it. It’s the road that the President and Congress have been taking us down these last two years. Though technically, state capitalism is a better description of what we’re becoming than socialism.

The same thing could happen here if Congress ever decides to restore fiscal discipline.

The Federal Budget
I find it incredibly irresponsible that Congress has failed to pass a budget for 2011. And it’s not just that they failed to pass a budget. They didn’t even attempt to pass a budget. Many have predicted that the Democrats will pass a budget after the midterm elections when they return in December. The thought being that passing a budget before the elections would only hurt the Democrats at the voter booth.

My take? I don’t expect them to pass a budget in December either.

Why? Because they don’t want to be on the hook for what comes next. Once a budget is passed, then we’ll compute the upcoming budget deficit for 2011. There is no way to avoid a budget deficit next year. As our national debt increases, we will soon be approaching our national debt ceiling again. (Last January I wrote about Congress raising the debt ceiling by $2 trillion in order to push that next increase beyond the 2010 midterm elections. I was right.)

So what happens next? Call my cynical, but I think this has been the plan all year. Let’s assume that the Republicans take back the House and the Senate. One of the first things they’ll have to do is pass a budget for 2011. And unless their initial budget includes SIGNIFICANT spending cuts (which the President will never sign), then Congress will soon be faced with another vote on the debt ceiling. There will be no way around raising the debt ceiling again.

The Democrats will then scream “See, they’re the same old Republicans”.

What comes next? Have you been watching Europe?

Lots of stuff going on in the news. Thought it was worth some quick thoughts.

Alan Grayson is a Douchebag
Politics is a contact sport. Politicians and political groups twist the truth. They exaggerate. They misrepresent. And sometimes they flat out lie. Florida’s Alan Grayson has been running maybe the most despicable ads I’ve seen in many years against his opponent Dan Webster. From FactCheck.org:

In a new ad, Grayson accuses his Republican opponent Daniel Webster of being a religious fanatic and dubs him “Taliban Dan.” But to make his case, Grayson manipulates a video clip to make it appear Webster was commanding wives to submit to their husbands, quoting a passage in the Bible. Four times, the ad shows Webster saying wives should submit to their husbands. In fact, Webster was cautioning husbands to avoid taking that passage as their own. The unedited quote is: “Don’t pick the ones [Bible verses] that say, ‘She should submit to me.’ “

But this isn’t Grayson’s first misrepresentation of Grayson in an ad. Just a week earlier, FactCheck.org wrote that Grayson had falsely accused Webster of being a draft dodger:

Democratic Rep. Alan Grayson of Florida is falsely accusing his opponent of evading the Vietnam War draft, claiming “he doesn’t love this country.” Republican candidate Daniel Webster didn’t “refuse the call to service,” as claimed in a vicious TV ad featuring pictures of military graves and the sound of “Taps” being played on a bugle. In fact, the former Florida Senate majority leader was given routine student deferments until he completed his undergraduate degree. He then reported for a military physical and was disqualified for medical reasons.

It’s rare that I feel sorry for a politician, but I feel sorry for Webster. This is about as bad as it gets, and Grayson is a douchebag.

Is this the worst ad you’ve seen lately? If not, what is? Please share.

Pledge to America
Did you read it? Yawn. You can read it here.

As a fiscal conservative, there are points in here I like. But in the big picture, this only scratches the surface of what must be done to fix our country and fix our economy. This really smacks of republicans trying to tell the Tea Party “See, we’re on your side.”

From a political perspective, it probably wasn’t necessary. And not sure it matters.

President Urges College Journalists
Did anybody notice this? Does anybody care? Saw this story on CNN.com the other day. President Obama urged college journalists to take his message to college students:

Speaking on a conference call to student journalists, the president said he wanted to send a message to “young people across the country [about] how important this election is.”

This is a call to arms for young journalists. Obama went on to explain to these college journalist why they should take up his message:

Obama warned the students that the GOP push to extend all of the Bush tax cuts — including for families making over $250,000 — could result in student loan cuts, among other things.

Nice scare tactics Mr. President. If this had been ten years ago, a big part of this blog would have focused on media bias. And sooner or later I’ll devote some time to my disgust for the media. But I find it disturbing that the President can attempt to rally young journalists around his cause and nobody even gives it a second thought.

Unions, Socialists and Communists, Oh My!
Today begins the One Nation Working Together rally in Washington. According to their website, the purpose of the rally is: “One Nation Working Together is a social movement of individuals and organizations committed to putting America back to work and pulling America back together. Coming from a diverse set of backgrounds, experiences, beliefs and orientations, we are determined to build a more united country with good jobs, equal justice, and quality public education for all.”

The list of endorsing organizations is rather eyeopening. (Click here for full list.) I find it interesting that these groups have banded together with one vision for the future of our country. The list includes several of our most powerful unions (such as AFL-CIO and the UAW), socialist organizations (such as the New York City Democratic Socialists of America and International Socialist Organization), communist organizations (including the Communist Party USA), and far-left advocacy groups (such as Climate Crisis Coalition, Sierra Club and the Rainbow PUSH Coalition). This list is long and impressive.

Should organizations be judged by the company they keep?

As you know, the Bush tax cuts are set to expire at the end of the year, and it doesn’t appear that Congress is in any hurry to bring this to a vote. Why? Because Pelosi and Reid don’t have enough votes to achieve their desired outcome — increasing taxes on the rich. What’s most disappointing is that this is really an opportunity for Congress to do something right, and they’re not going to do it.

What we see are three positions on the Bush Tax Cuts. The administration and the left would like to extend the tax cuts except at the highest tax rates, ultimately increasing taxes on the “rich” now. (I love the rebranding, where Pelosi is calling this the Obama Middle Class Tax Cuts.) The moderate democrats, who ultimately would also like to increase taxes on the rich, understand that increasing taxes on anybody during a down economy is a bad idea. They would like to postpone the higher tax rates on the rich until the economy is back on its feat. And of course the right will fight all tax increases.

Let’s start with a couple of quotes from Treasury Secretary Tim Geithner, who has attempted to make the case that a failure to raise taxes on the rich now will harm economic growth.

In a speech to the Center for American Progress: “Others have suggested we delay, by extending all Bush tax cuts temporarily, for a year or two. But the world is likely to view any temporary extension of the income tax cuts for the top two percent as a prelude to a long term or permanent extension.  That would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits.”

On “This Week” on ABC, he said, “We think that’s the responsible thing to do (letting tax cuts expire on the highest income brackets) because we need to make sure we can show the world” that America is “willing as a country now to start to make some progress bringing down our long-term deficits.” Mr. Geithner added, “I do not believe it will affect growth.”

Let me say this very simply so that even Mr. Geithner can understand: Raising taxes will NEVER benefit the economy, and WILL negatively affect growth.

Uncertainty is the Problem
What Geithner fails to understand is the real problem — uncertainty. Consumers do not like uncertainty. Business people do not like uncertainty. The markets do not like uncertainty. And the economy does not like uncertainty. What do we have right now? A whole bunch of uncertainty.

What is creating the uncertainty? Huge budget deficits as far as the eye can see, and a ballooning national debt. The economy understands that if the federal government fails to control its spending, there is only one solution — massive tax increases on everybody. You cannot tax the rich enough to solve this problem. You cannot tax businesses enough to solve this problem. And when you tax businesses, it’s ultimately the consumers that bare the financial burden anyway. Taxing business IS a tax on all Americans, rich and poor alike.

So how do you solve the problem of uncertainty? Show that you’re willing to make the tough budget choices that will limit government growth, and create fiscal discipline.

Just Stop It
I’m tired of the right pretending that tax cuts are the panacea to all of our problems. What makes 35% the magic tax rate and everything higher is wrong? And I’m tired of the left playing class warfare and their soak the rich mentality. They say that the only way to fix our budget shortcomings is to raise taxes. Well I have a simple suggestion for you: CUT SPENDING!

The Art of Negotiation
Here is where I say that Congress has an opportunity to do what’s right for the American people, and our economy. There’s a solution to all of this. And it’s really not that hard to understand.

1. To get the moderate democrats onboard, what you do is ask for a slow escalation of the top tax rates. For instance, leave the tax rate as is in 2011, and then increase the top bracket by a small amount each year over the next five years until you reach 39.6%. And then make them all permanent. By doing this, you have removed one piece of uncertainty. Businesses can now make long-term plans because they understand what their tax consequences will be. But this is not enough to create a more stable future.

2. If you want to get republicans onboard, and decrease economic uncertainty, you must cut spending. This is called “compromise”. Candidate Obama said that he would cut spending on government programs that don’t work. Well it’s time for some cuts. They’ve had a year and a half to evaluate these programs. As a first step, the administration and Congress must identify several dozen programs that do not deserve federal funding. And during this same time period where we’re slowly escalating the tax rate on the highest tax bracket, we reduce funding to these ineffective programs by 20% per year, until all funding is cut to these programs. And the goal needs to be significant, such as $500 billion in cuts per year.

Now you’ve shown the economy that you’re truly interested in fixing our budget problems.

The Tax System and Budgets
Now let me also explain that all of this is still only a band-aid. And it’s not the long-term solution we need. But it’s a step in the right direction. Manipulations of our current tax code is like attempting to make chicken salad out of chicken shit. We need a COMPLETE overhaul of our tax system. And a COMPLETE overhaul of our budget. But these solutions will need to wait for another day. Today, let’s just do what’s right.

Oh it’s funny how things change in politics. The Senate recently passed The Small Business Jobs Act of 2010 by a vote of 61 to 38. The democrats received help from two republicans to pass the bill — George Voinovich of Ohio and George LeMieux of Florida. The bill will likely pass the House soon. This is the type of bill that would typically receive republican support — tax cuts and help for small businesses. However, this is a strange year for politics, and most republicans fought against this bill. (Read the specifics of the bill in the piece in the NYTimes.)

While the bill includes a few targeted tax breaks for small businesses, the emphasis of the bill is to provide funding to help the SBA and community banks make loans to small businesses. In theory I think this bill is fine, and well intentioned. In practicality, I’m not sure it will do much.

Why? Because this assumes that the banks don’t have money to loan. Yet when I see bankers interviewed, and having talked to bankers in my own community, the problem is not the availability of funds. The problem is finding borrowers who are stable enough to repay loans. In other words, the banks are attempting to avoid lending money to people who may not be able to repay it. They’re avoiding “risky” loans.

For  the last 15-20 years, banks have been encouraged by our government (even rewarded by our government) to lend money to families and businesses who in the past may not have been able to qualify for loans. But once the financial industry started falling apart, the government demonized the banks for providing these risky loans. So what did the banks do? They stopped providing risky loans. Now the government is urging the banks to loan money, even if it means providing higher-risk loans again.

Isn’t that what got us in trouble in the first place?

In this bill, the government is providing a 90% guarantee to the SBA for their most popular loans. The are taking the “risk” out of the loan for the SBA, which ultimately means that when these loans default, the taxpayer will again be left holding the bag.

A few years ago I was exchanging emails with a friend who is a devout liberal. He wrote a very eloquent paragraph about liberalism and what being a liberal meant to him. I wish I had saved it. The paragraph described him well. It also described me well except for one sentence, and I remember it well: “We want to empower the government to help the people.” This is really the core difference between fiscal liberals and fiscal conservatives. For me, I would rewrite this to be: “I want to empower the people to help themselves.”

Strip away the politics. Strip away the political party rhetoric. Strip away the name calling and the finger pointing. What really separates fiscal conservatives, moderates and liberals? Their ideals for the size and role of government.

So how do we measure how conservative, moderate or liberal our government is? By how fast our government is growing. The faster our government grows, the more power they wield. The more control they wield. The more they regulate. The more they redistribute our collective money through social programs. The more they impose their will on our economy. The more liberal they become.

And who controls government growth? Not the President. I have said for years that the President gets too much praise when things go well, and too much criticism when they don’t. Congress is the one who writes our laws and sets our budgets, not the President.

It’s interesting that in just the last fifteen years, we’ve been able to witness three pretty distinct fiscal groups controlling Congress. The fiscal conservatives controlled Congress from the 1994 election through the end of the ’90s. Congress become more moderate from about 2000 until the democrats took over in 2006. And since then a liberal Congress has dramatically increased the size of the federal government.

This list shows the yearly increase in federal expenditures (size of government) calculated in current dollars:

1995: 3.7%
1996: 2.9%
1997: 2.6%
1998: 3.2%
1999: 3%
2000: 5.1%
2001: 4.1%
2002: 7.9%
2003: 7.4%
2004: 6.2%
2005: 7.8%
2006: 7.4%
2007: 2.8%
2008: 9.3%
2009: 17.9%

Before I calculated these numbers, I suspected that this was about what I’d find. I would designate anything less than 4% growth as fiscally conservative. Would probably lump 4-8% growth as moderate. And anything above 8% as fairly rapid government expansion. The only number that really sticks out is the 2007 number, but keep in mind that we were beginning to suspect that a recession was coming, and the 2007 budget was written by the 2006 Congress BEFORE the democrats took control following that year’s mid-term election.

Now nothing exists in a vacuum. During this time we’ve had two recessions, 9/11 and two subsequent wars. But do you know that in the last 40 years, the only years we’ve had a budget surplus were from 1998-2001? The economy was strong, unemployment was low, and government growth had been constrained by a fiscally conservative Congress and President Clinton. Coincidence? I don’t think so.

It’s no coincidence that our largest budget deficits coincide with the rapid expansion of our federal government. And it’s no coincidence that this rapid expansion of our federal government is continuing to stifle our economy.

Empower the government or empower the people? I will trust empowering the people every time.

Note: Information about federal outlays provided by the Tax Policy Center.

“Unfortunately, over the last decade, we have not done what is necessary to shore up the foundation of our own prosperity. We have spent over a trillion dollars at war, often financed by borrowing from overseas. This, in turn, has short-changed investments in our own people, and contributed to record deficits. For too long, we have put off tough decisions on everything from our manufacturing base to our energy policy to education reform. As a result, too many middle class families find themselves working harder for less, while our nation’s long-term competitiveness is put at risk.” This is from President Obama’s speech on Iraq, August 31, 2010.

“You know, it’s easy for the Monday morning quarterback to say what the coach should have done, after the game is over. But when the decision is up before you — and on my desk I have a motto which says The Buck Stops Here’ — the decision has to be made.” This is from President Truman’s farewell address to the American people given in January 1953.

President Obama has continued to blame “eight years of failed policies” for our current economic climate. Never mind that the democrats have been in control of Congress since the 2006 election. Never mind that recessions are cyclical and unavoidable. But now President Obama has stated that the war on terror, and the money spent in Iraq and Afghanistan, is to blame for our current lack of prosperity. Hhhmmm, one trillion spent over the last decade fighting terrorism, or this year alone where we have a $1.3 trillion deficit due largely to out of control spending from the White House and Congress. And projections for another trillion plus next year in deficit spending.

Where does the buck stop? I guess with Obama it still stops with the last guy.

I have some bad news for you. We will have another recession. I’m not sure when, but it’s coming. Want to know how I know? Because there’s ALWAYS another recession.

President Obama has continued to blame eight years of failed policies for our most recent recession: “The policies that crashed the economy, that undercut the middle class, that mortgaged our future, do we really want to go back to that, or do we keep moving our country forward?” says Obama.

Yet one of the administration’s themes about raising taxes on the “rich” is because we’d be returning to the tax rates of the ’90s, and the ’90s were such a glorious economic time. It must have been the higher tax rates that allowed us to thrive through the economic boom of the ’90s. Yet what did the economic boom of the ’90s create? A recession that began with the tumbling of the NASDAQ in March of 2000. And yes, Bill Clinton was still president in March of 2000.

So was the boom of the ’90s because of successful economic policies? Or was the recession that followed because of failed economic policies?

“Theoretically, economic recessions are unavoidable as in a perpetual fluctuation of economic boom and decline,” says  Yang Yang the EconGuru. “Not a single nation is doomed with forever recession nor are they blessed with forever booming.”

Do you know how many recessions we’ve had since the beginning of the Great Depression? From the recession of 1937 through now, we’ve lived through 13 recessions. That’s one recession about every six years.

How many years were there between the recession that followed the ’90s boom and our most recent recession? Six years.

Recessions have come during or on the coattails of the presidencies of Roosevelt, Truman, Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter, Reagan, Bush, Clinton and Bush. That’s every president since the Great Depression. (See this list of recessions.) This doesn’t include pre-depression recessions.

Using President Obama’s logic, it appears we’ve had failed economic policies during every presidency for the last 70 years.

Government Policy
So now that we’ve established that recessions are unavoidable, can the government prevent a recession? Should the government attempt to prevent future recessions? The answer is simple: no.

One of my greatest fears about the economy is that the federal government will do everything it can to prevent future recessions, but all they’ll end up doing is creating a climate that will stifle growth and prevent future booms. Government policy cannot prevent future recessions. But it certainly can stifle economic growth and opportunity.

The Blame Game
I guess it’s human nature to assign blame. And the government certainly bares some responsibility. It was (failed) economic policy from the ’90s that created the housing bubble that was never fully corrected in the recession of 2001. And (failed) economic policy certainly contributed to the atmosphere that created the recent failures in our banking industry. But even if the government does everything right (and they never do), I can guarantee you one thing: We will have another recession.

Our national debt has now passed $13 trillion, and will surpass $14 trillion before the year is over. That is just amazing to me. Take a look below at the escalation of our national debt in recent years, and notice the huge jumps during the last few time periods.

So what does this mean? Nothing good, I guarantee you that. A ballooning national debt will be a significant drag on our economic recovery, and could be partially responsible for driving us into another recession — what many refer to as a double-dip recession.

A Look Back
In 1990 our national debt was approximately $3.2 trillion. Despite the strong economic times of the ’90s, our national debt grew to approximately $5.6 trillion by 2000. That’s an increase of 75% over a ten year period. While that seems like a lot to me, that’s by far our best decade since 1960-70 where our debt increased by only 31%.

In comparison, from 1970 to 1980, our national debt more than doubled from $381 billion to $909 billion. And from 1980 to 1990, our debt increased more than threefold from $909 billion to $3.2 trillion. (During the ’80s, Reagan was spending tons of money on the military, and the democratically controlled Congress was spending tons of money on everything else. The ’80s were an interesting economic period that we can discuss at a later time.)

Now let’s look at what’s been going on this last decade. From 2000 to 2010, our national debt will have increased from $5.6 trillion to approximately $14.4 trillion, though that’s still an estimated figure. It could end up higher than this. That’s almost a tripling of our national debt in only 10 years.

Finger Pointing
This is why I don’t like either party. The Republicans like to pretend that they’re the party of financial discipline, but while they largely controlled Congress from 2000 to 2006, our debt grew from $5.6 trillion to $8.4 trillion. While not a booming economy, this was certainly a period of steady growth. There’s no good excuse for increasing our national debt by 50% during this six year period.

The Democrats condemned the Republicans as fiscally irresponsible. So what has happened since they took control of Congress in 2006? Our national debt is expected to balloon to $14.4 trillion by year’s end. They’re close to doubling our debt in only four years. Add to that another whopping increase anticipated over the next five years of approximately $5 trillion. By 2015, it’s expected that our national debt will be approximately $20 trillion.

The Recession
Democrats are going to write to me and tell me I’m wrong. That our national debt is ballooning because of the recession caused by Bush, and that recessions reduce tax receipts to the federal government. And they’re partially right. Recessions DO decrease tax receipts. (We can debate at another time the primary causes of this recession — Bush was only a piece of the puzzle that was built over the last 20 years that caused this recession.) But that’s why we MUST pay off debt during periods of economic growth. A small level of deficit spending during a recession is needed, in my opinion. You can’t shut down federal programs that our public relies on for everyday life. That’s why I do not support a balanced budget amendment. But the only way deficit spending during a recession makes sense is when you’re paying OFF the debt during periods of economic growth.

So why do I say that they’re partially right? Because the out of control spending from our federal government is HURTING our economy, not helping it. And by hurting the economy, they have further exasperated the problem of reduced tax receipts to the federal government.

What To Do
They’ve got to get spending under control. It will be painful, but it can be accomplished. Some economists are predicting a lost decade. That we can’t return to economic prosperity any time soon. I say they’re wrong, but I’m an optimist at heart.

People are beginning to think I’m obsessed. “What’s the big deal about these deficits?” they ask. One person mentioned that even though the projected deficit is $1.56 trillion this year, it’s supposed to go down to $1.3 trillion next year. So I guess it’s time to explain why all of this is such a big deal.

Deficits vs Debt
I think this is the primary area where people get confused. People think these two terms mean the same thing. Or accidentally use these words interchangeably. But they are very different. The deficit is the one year snapshot of how much more our government spends than it receives. The converse would be a surplus which doesn’t appear to be a problem in the foreseeable future. The debt is like the ongoing scorecard of our deficits and surpluses.

Example: You make $40,000 this year. You spend $50,000 this year. You have a deficit of $10,000. Doesn’t sound that bad. But do that for ten years straight, and you now have debt of $100,000, plus interest (servicing the debt).

So saying that the deficit next year is going down to $1.3 trillion, still means we’re adding another $1.3 trillion to our debt.

Budgets and Deficits
The president puts together a proposed budget for the federal government, and passes it along to Congress. But it’s really Congress that has the power at this point. The Congress decides how much to spend, and where to spend it. Sometimes they pretty much do what the president has asked. And sometimes they ignore the president’s proposed budget and do what they want. Of course they also typically pass new spending bills throughout the year that were not included in their original budget.

Our government also has to project how much money they will receive through tax revenues — the lifeblood of government. The difference between revenues and expenditures is either a surplus or a deficit. These numbers are still just projections at this point. It’s not until the following year that we know for sure how much was spent, and how much was collected.

Guns and Butter
The old debate in government spending was how much to spend on guns (national defense) and how much to spend on butter (domestic programs). But as our debt grows, so does the amount of money it takes to service the debt. The more money we spend servicing our debt, the less money we have for guns AND butter.

Example: Many of us have gotten over our heads in credit card debt. I’ve done it twice in my life. You think I would have learned the first time. You reach the point where you’re barely able to make the minimum payments, and you realize that all you’re really doing is paying the interest, and not paying down the debt.

The dollars that will soon be required for servicing our national debt are staggering. A significant portion of our tax money is already spent servicing our debt. Not on guns. Not on butter. And not on paying down the debt.

Did You Know?
Did you know that our national debt is more than $12.3 trillion and growing?

Did you know that we have run federal deficits every year since 1969 except for four? See this report from the CBO. The four years of surpluses were from 1998-2001.

Did you know that are government’s “plan” is to grow our debt by another $1.56 trillion this year?

Did you know that in 2009, the Treasury Department spent $383 billion of our money on interest payments on our national debt? Compare that to how much is spent on other items such as NASA ($19 billion), education ($53 billion) and the Department of Transportation ($73 billion).

Large deficits and debts are the enemy to a robust economy. Want to fix the economy? Washington needs to get its own house in order. And economic prosperity has a chance to return.