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Wednesday, April 13, 2011

Deficit reduction talk-- running in place

Today, President Obama announced a debt plan that would reduce the deficit by $4 Trillion over the next 12 years.   There will be plenty of time to break it down and address the specifics of his plan and compare to other plans being chatted about in Washington circles.

For now I want to keep things very simple and understandable..

1)  $4 Trillion divided by 12 = a yearly deduction of $333 billion/year

2)  It is 2011 12 years, it will be 2023

3)  The National Debt is over $14 Trillion- Obama's plan is to cut the deficit-  

Debt and deficit are Not the same... A debt is what you owe to others.  A deficit is the gulf between what you are paying and what you Need to be paying to reduce your debt.

Example:  You have a credit card- you owe $5k..  your minimum payment is $120/month.  The $5k is your total 'debt'..  If you pay minimums, you make no process.  If you pay say $200/month, you're reducing your deficit which makes your monthly payments smaller but debt with interest remains.  And if you make larger, meaningful payments, now you're paying down your debt.

4)  All plans being circulated naively assumes the US will never face an economic emergency over those 12 years.  Some perspective: In Sept 2008, the Treasury Sec at the time, Hank Paulson asked for and received $700 Billion from Congress- the 1st of many many bailouts to come.

Two years of deficit reduction under Obama's plan saves $667 billion.

In other words, the economy has to run absolutely perfect for next 12 years where no spending increases are needed for the deficit reductions to mean anything.

Simple Example- I plan on saving $1200 over 12 months by cancelling cable.  Yet I will still go to the movies weekly, get my coffee in the morning, and drive as much as I want even when prices keep rising.  So on one hand, I "saved" $1200 by eliminating the cable TV, yet I set up no budgetary contingencies which prevent that savings to end up going to other places.

Ultimately, basic economics is not complicated-  If you spend more than you take in, you accumulate a debt.  If you take in more than you spend, you create a surplus.  And if you make reductions to A while increasing spending to B, you're simply running in place.

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