Cut Cap Balance
Research for Online Investors

by John Dalt

6/24/11

The negotiations in Washington to raise the debt ceiling have been eclipsed by events around the world. That is about to change. House Majority Leader Eric Cantor (R-Va.) from the House and GOP whip Senator Jon Kyl (R-Ariz.) ended participation in the “Biden” meetings yesterday. Why? Democrats would not drop their demand for increasing taxes as part of the package.

The U.S. hit the debt ceiling of $14.294 trillion on May 16.  Since that time the Treasury Department has employed “extraordinary” measures to fully fund the government without going over the debt limit.  One of the extraordinary measures is borrowing money already deposited in federal employee retirement accounts.  One has to wonder, do we have to pay it back?

The GOP has outlined clear negotiating points; no tax increases and entitlement reform.  They have voiced willingness to raise the debt ceiling as long as the amount of the increase is matched by cuts to the budget.  The GOP has never explained what time frame they would consider the cuts savings over.  Recent news reports have assumed a ten year time frame.  One trillion dollars over ten years is $100 billion per year.  Taking $100 billion out of a $3.456 trillion annual budget cannot be declared “hard work.”  This is a 3.5% reduction.  If that is the goal, me thinks the fix is in.

If I made $100,000 dollars a year, and my paycheck was cut $3500 per year or $67 per week, I wouldn’t miss it.  That is not heavy lifting.  Put another way, the government is set to borrow $1.5 trillion dollars in 2011.  Not borrowing $100 billion dollars would only reduce the deficit to $1.4 trillion.  This would be equal to the sales tax on your lunch at McDonalds.  Hardly cutting the “fat” out.

You can read the 2011 Budget as prepared by the Office of Management and Budget.  It is 192 pages of fun and frivolity, with some interesting tables at the end.

The wild card from Republicans, and one that gives us hope, is a demand for “binding budget process reforms to ensure that we don’t continue to max out the credit card” according to Eric Cantor. They have a new slogan of Cut, Cap and Balance that explains what they want to do. It is very simple, cut spending now to bring it under control. Cap growth in government to only spend 20% of GDP (or less) which is above the historical norm. Pass a Balanced Budget Amendment that forces the legislature and administration to balance the budget every year, unless the congress declares WAR or approves spending with a super majority in both the house and senate. You can read more about the Cut Cap Balance Pledge being signed by candidates, citizens and legislators.

The House is expected to debate and vote on the Balanced Budget Amendment next week.  The Balanced Budget Amendment has been cosponsored by all 47 GOP Senators.  You can read the Balanced Budget Amendment that has been reported out of the House Judiciary Committee.    It is not like most government bills; one page with nine specific restrictions on our government.

Passing a balanced budget amendment is THE game changer.  It would tie the hands of future socialists.  If the republicans make this a condition of increasing the debt ceiling, we have won…no matter the other spending cuts that can be extracted.  All other cuts pale in comparison to the lasting effects a constitutional amendment would have.  A constitutional amendment must be passed by three-fourths of the states to take effect.  This may be a steep climb, but is attainable and will save our republic.

These are exciting times.  Let us hope that is not as in a Chinese curse!

The mailbag:
I’m moving to Canada.  The loonie makes more sense.---subscriber J.P.

As a Viet Nam veteran, I have learned that old men start wars, until they grow tired of them, and young (men and women), full of patriotism and pride, are sent to fight them...A lot of young men die and politicians are re-elected boasting about how they support democracy and our freedom. Nothing really gets accomplished.---Long Term and Buy, Sell, Hold subscriber R.A.

John: I agree, is so disappointing.  I saw one headline about the caution one general gave Obama. Don't "Snatch defeat from the jaws of Victory" he told him. That is probably what we have done.  There is no way to "win" at these things when we tie both hands behind our troops back. It is SICK...men dead for a bunch of politicians to thump their chest, and an Afghan society that doesn't give a damn about the sacrifice our men make.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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