Between Paul Ryan’s misguided economic commentary and President Obama’s deficit fear mongering we confirmed that our most important leaders still have no idea how the US monetary system works. In tonight’s State of the Union President Obama compared the US government to a household even though the two are operationally incomparable. He said that we need to save at the government level in order to invest despite the fact that a sovereign government with money supply of currency never needs to save or raise funds before spending:
“Now, the final step — a critical step — in winning the future is to make sure we aren’t buried under a mountain of debt.
We are living with a legacy of deficit-spending that began almost a decade ago. And in the wake of the financial crisis, some of that was necessary to keep credit flowing, save jobs, and put money in people’s pockets.
But now that the worst of the recession is over, we have to confront the fact that our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.
So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years. This would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president.
This freeze will require painful cuts. Already, we have frozen the salaries of hardworking federal employees for the next two years. I’ve proposed cuts to things I care deeply about, like community action programs. The Secretary of Defense has also agreed to cut tens of billions of dollars in spending that he and his generals believe our military can do without.”
Worst of all, he says we need to run a government that is more akin to the deficit fearing government of Dwight Eisenhower – a president who managed to preside over three recessions in just 8 years. Not surprisingly, Eisenhower helped to promote two budget surpluses that immediately sent the country into recession in 1958 and 1960. This is not something America should strive for. Eisenhower was a great man, but an economic guru he was not.
While Obama’s comparisons to a household may make for good political rhetoric and they might appease those who fear monger over the inevitable (and impossible) “bankruptcy of the USA”, the truth is that it is this sort of thinking that keeps the USA from reaching its full capacity and maintaining the economic stability that its citizens deserve.
Hopefully, these “painful cuts” won’t be made until well after this balance sheet recession is over. For now, this looks like strong rhetoric and nothing more, but it displays a systemic problem in America that begins with the ignorance of our leaders. Unfortunately, tonight confirmed that our most important leaders still fail to understand the system in which we live and therefore guarantee that millions of Americans will suffer through a continuing boom/bust cycle that inevitably results in unnecessary pain.
Like President Obama’s, Representative Paul Ryan’s comments were just as misguided. Only this time he raised the oft cited European nations to prove his point:
“Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.
Their day of reckoning has arrived. Ours is around the corner. That is why we must act now.”
Unfortunately for Mr. Ryan, the Eurozone’s single currency system is dramatically different from our own and his comparison only confirms that he does not understand what he is discussing. I’ve hammered on this point for a long while now, but this is a message that more people need to begin understanding. We are not Greece. We are not Ireland. The systems are simply not even comparable. Although the UK is a sovereign issuer of their own currency they were fooled into thinking that they were at the tipping point and yesterday’s negative GDP print proves that they are willingly driving themselves over the cliff edge with austerity measures. Thus far, we have avoided talking ourselves off the edge of the cliff. Hopefully, the strong political rhetoric will continue to be ignored and so-called “experts” like Paul Ryan will fail to make any meaningful impact on the US economy.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.