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Debt doomsday imminent

By Barbara Whelehan ·
Friday, May 20, 2011
Posted: 2 pm ET

By now you've heard that judgment day is at hand. The rapture is scheduled to unfold on Saturday, May 21. And with all the natural disasters and global political unrest we've had lately, it doesn't seem so far-fetched.

In preparation for this event, I have made no retirement planning changes whatsoever. In fact, I expect to awaken Sunday and go about business as usual, which includes going to church and thanking the good Lord for all my blessings.

But I fear a different type of judgment day may be fast approaching.

Failure to raise the debt ceiling

It's not the economic cataclysm that Timothy Geithner warned of in his letter to Sen. Michael Bennet. In there the Treasury Secretary spells out the economic consequences of failing to raise the statutory debt limit. If Congress doesn't act, the U.S. will be forced to default on its legal obligations, which in turn "would inflict catastrophic, far-reaching damage on our nation's economy, significantly reducing growth and increasing unemployment."

In the letter, Geithner paints a grim picture of the future should this default occur, even raising the specter of a return to the panic of the 2008 financial crisis. Ultimately, consumers would have to pay higher rates for mortgages, car loans, student loans and credit cards, and they'd experience "a sharp decline in household wealth." Our 401(k) plans and IRAs would take another hit, and we'd be in for a double-dip recession.

Raiding federal pensions

In the meantime, as of Monday, Geithner began dipping into federal pension funds to tide the country over until Congress gets around to raising the debt limit. He calls it a "debt issuance suspension period," but he will redeem or suspend new investments amounting to $84 billion in the Civil Service Retirement and Disability Fund, and he'll suspend reinvestment of another $130 billion in the Government Securities Investment Fund, a money market fund in the federal employees' defined contribution plan. He must take these actions to "avoid breaching the statutory debt limit." This suspension period began Monday, May 16 and will last until August 2.

Earlier this week I called Kay Bell, Bankrate's Taxes blogger, to ask why Geithner would resort to such an extraordinary measure: dipping into federal pension funds to pay the bills. "It's not the first time this has happened," she said reassuringly. "That doesn't mean you shouldn't feel outraged about it."

She's right. It has happened on five previous occasions -- 1996, 2002, 2003, 2004 and 2006. By law, the federal accounts will be reimbursed once the impasse is over. But these actions are troubling nonetheless. They're akin to borrowing money from your kid's 529 plan to pay the bills until your lenders increase your credit limit. Only much worse because of the scale of the debt.

The judgment day I fear is the one that happens after the debt limit is increased. Will Congress do something to contain and pay down this debt? We're at $14.3 trillion now. How much deeper can we go?

One trillion is a big number. If you could spend $10 million a day, it would take nearly 274 years to spend a trillion dollars at that rate. To spend $14.3 trillion would take about 3,918 years.

The American people are keenly aware of the need for reining in spending, as they're cleaning up their own household finances. And some are even willing to pay more in taxes if it means we can leave our children and grandchildren a financially sound nation in which they can flourish.

Ways to pare down debt

Maybe it's time to put forward some creative ways to whittle down at least some of the debt:

  1. Implement the recommendations made in the Government Accountability Office's recent 345-page report to streamline duplication, overlap and fragmentation of government services. Estimated cost savings: hundreds of billions of dollars.
  2. Create a claw-back provision on bonuses paid since 2009 to the Wall Street executives who were responsible for the magnitude of the 2008 financial crisis and apply that money to the national debt.
  3. Impose a 50 percent tax on the income of lobbyists and public relations firms whose purpose is to influence Congress and distort public opinion, the effect of which is to increase the national debt.
  4. Make corporations pay their fair share of taxes.
  5. Revert to the income tax levels that were in place before former President George W. Bush (under whose administration the debt level increased from $5.7 trillion to $10.6 trillion) took office.

An alternative: We have $9 trillion in our IRAs and defined-contribution plans, according to the Financial Research Corporation. We could donate the money to defray the national debt.

I'm being facetious on that last idea, of course.

You have any ideas?


Follow me on Twitter: BWhelehan

NOTE: An earlier version of this post stated incorrectly that the national debt level increased from $4 trillion to $10 trillion while George W. Bush held office.

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July 18, 2011 at 11:38 pm

Something on my dollar bill says "Backed by the full faith and credit of the United States of America". Oh really? What Credit?

Bob From District 9
July 18, 2011 at 10:35 am

Yeah, I have a suggestion. First, tell us how you were excoriating the Bush administration that left Obama with a debt pushing $12Trillion. Tell us how you excoriated the Reagan/Bush I administrations that quadrupled the national debt.

Then drop the $14.3T debt rhetoric, and focus on the debt burden of about 90% of GDP. That's the one you have to watch. And remember, Bush left Obama a debt burden pushing 90% of GDP, and he has to solve a major recession with that hanging over his head.

While you are at it, don't prattle on about leaving our children and grandchildren buried in debt. My generation the early baby boomers, inherited a debt burden worse than this. I was born in a year, 1947, when the debt burden had come down to 110% of GDP. From 122% in 1946.

Worry instead about the lack of jobs. Manufacturing jobs mostly, the ones that actually pay the bills. And worry about the fad solutions to the jobs problems. No level of research jobs or green jobs will make up for the lack of factory jobs. It just don't work that way.

Though I do like the solutions you do offer, but jobs are the real solution, long term.

July 14, 2011 at 5:48 pm

The American Fiscal Recovery and Responsibility Amendment
PART 1. To provide funding for the Constitutionally required minimum government services,, We the People of the United States of America do hereby command the Congress to enact a National Sales Tax to replace ALL other national taxes in effect at the time of this amendment's ratification. The Congress shall have one year from the date of Ratification to enact a budget
that will be balanced using only the revenue derived from this tax using Part 3.3 as the guide for said budget. If the Congress is unable to do this, then no sitting member of Congress will be allowed to stand for re-election at the next regularly scheduled election.
This tax SHALL NOT:
1. Exceed 10%
2. Be applied to food necessary for nutrition, medicine and medical devices necessary to sustain life, or clothing necessary for protection from the elements.
3. Be applied to any good or service that any individual is mandated to purchase by any level of government.

PART 2. To ensure that our current debts are repaid and that debt will not be needed in the future and fund those things which should be the responsibility of ALL the people,, We the People of the United States of America do hereby command the Congress to enact a National Sales Excise Tax not to exceed 5%
to be applied to all goods and services.
This tax shall ONLY be used:
1. To pay off the national Debt.
2. When the debt is paid then to establish a National Contingency Fund not less than 2.5 but not greater than 3.5 times the average of the previous three annual expenditures paid for by the National Sales Tax. This fund SHALL NOT be invested in any government backed security or in the voting stock of any
publicly traded company.
3. To provide additional funding for war efforts during a Constitutionally declared war against a sovereign Nation that first attacked the United States,it‘s Territories, or Possessions.
4. When the debt is paid off and the National Contingency Fund exceeds the 2.5 minimum and the nation is not at war, then this tax Rate shall be automatically set to .1% and paid into the National Contingency Fund. When the National Contingency Fund exceeds the 3.5 maximum the tax rate shall automatically be set to 0% (ZERO).

PART 3. To ensure that We the People always know what these tax rates are, what they are being spent on, and have more control over these rates and expenditures.
1. The rates SHALL require annual authorization by a 51% majority vote of the combined members of the House of Representatives, the Senate, the several State Governors, and each legislative body of the several States.
2. These votes shall be held at 6 pm local time on the 2nd Saturday of each April.
3. In the event that a rate is rejected as too high, the Congress SHALL cut expenditures with National Defense being the last and least to be cut on a percentage basis to establish a new rate and a new vote taken within 30 days with the existing rate remaining in effect.
4. In the event that new rates cannot be approved before the next election, no sitting member of the House of Representatives or the Senate shall be allowed to stand for re-election.

The American Fiscal Recovery and Responsibility Amendment

There is a major push happening to enact either a flat tax or a so called "fair tax" national sales tax.

I am not against a flat tax provided it is done with a Constitution amendment that abolishes the current income tax and has a specific maximum rate and specifies minimum deductions. So far none of the proposals to get the flat tax include any of the safeguards so I don't see it going anyplace.

I am more concerned about the national sales tax. AS proposed by the "Fair Tax" supporters this would hand the Marxists one of their dreams on a silver platter.

As proposed this amendment would authorize the establishment of an initial national sales tax at a rate of 23% on all new goods and all services including the necessities of life.

AS proposed the politicians would be expected but not required to send everyone in the country a "prebate check" equal to the tax that would be paid on the necessities of life needed to live at the "national poverty" level. If this is actually implemented on a per individual basis then at the current rate, everyone in the country would start getting a check for about $210.00
each month. If the tax rate went up, the check would go up. If the tax rate went down, the check would go down. (YEAH RIGHT!!. Like anyone is ever going to vote for a politician that is calling for a reduction in the tax rate.)

The other expectation of the proposal is that once the politicians had the new tax revenue that they would then abolish all other federal taxes. Again, YEAH RIGHT!!

Now the Marxists have their dream. They have a reason to send everyone in the country a check every month that can easily be morphed into a Guaranteed National Income. They have a revenue source to fund it with. They still have the Income Tax to equalize the incomes between those who work and those who don't and this will give them the money they need to pay for National Health Care and National Education.

At this point they essentially have the Communist Manifesto implemented in the USA!