by Dick Morris
Most of the $700 billion in TARP loans was never spent. Banks just held on to the money (or asked the Fed to hold on to it for them) so that nobody would have cause to doubt their financial solvency. There would be no runs on banks as there were in 1933. After a few months, banks repaid the money. Among private companies, only AIG, the most seriously impaired one, couldn’t repay its loans. And, of course, the two federal government agencies that borrowed TARP funds—Fannie Mae and Freddie Mac—were awash in insolvent debt so that they, too, could not repay it.
In all, about $500 billion of the $700 billion Bush had lent out was paid back. But no sooner did the money come back to the Treasury than Obama sent it back out again in new federal spending. This time, however, the money went out never to return. It was spent, not lent. The budget deficit, which should have dropped to about $900 billion once the $500 billion in TARP money was paid back, went up to $1.6 trillion instead—or 10.6% of GDP.54 But this time, the deficit was permanent—the money wasn’t coming back.
Obama’s massive spending and borrowing did nothing to stimulate the economy, but just added to the deficit and the debt. Families and businesses pocketed the extra cash, reducing their debts. All Obama really managed to do was to transform private family and business debt into government debt.
This level of government debt has made recovery impossible. Every dime he borrowed cut the money that could flow to businesses and consumers in private sector lending. The spending and the borrowing it triggers are like a tapeworm embedded in the innards of our economy. Whatever capital we generate, savings we accumulate, or resources we aggregate go first to keep our government afloat. After the government’s appetite for borrowing—which now runs to $150 billion per month55—is satiated, there is nothing left over for the rest of the economy.
The interest on the debt will cripple our government and force high taxes and spending for years—or decades—to come.
We have yet to feel the full impact of Obama’s insane borrowing because, as fast as the debt has increased, interest rates have declined. In fact, the total the government has to spend servicing the debt has risen from $237 billion in FY2008 to $251 billion in FY2011.
But this statistic is illusory. It only works while interest rates are low. Once the rates rise, our debt payment obligations will soar.
With the Fed pouring money into banks buying up securitized mortgages, interest rates are extremely low. Insecurity about the euro in the wake of the financial difficulties of Greece, Portugal, Spain, Italy, and Ireland has generated a flight to the dollar by cautious investors. Holding dollars instead of euros, they buy U.S. government bonds with their money, holding down interest rates.
Sooner or later, however, rates are going to rise because the world is simply running out of money. Every country is running a deficit and has to turn to the bond market to borrow enough to pay its bills. Eventually, the Fed has to stop printing money or massive inflation is inevitable. When it begins to taper off its purchase of securities and bonds from banks, a global shortage of capital will undoubtedly set in.
The world produces $60 trillion of goods and services56 each year (global GDP) and, by the broadest indication of its money supply, has $58.9 trillion of capital.57
But global debts far outstrip these resources. The governments of the world, combined, owe $40 trillion.58 Private companies, banks, and individuals owe an additional $120 trillion.59
So a world worth $60 trillion owes itself $160 trillion. As soon as the current euro-panic subsides and the Federal Reserve stops printing money, interest rates will have to rise to attract the kind of capital needed to repay or even to service that kind of debt.
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HOW MUCH DEBT IS THERE?
Government Debt: $40 trillion
Private Debt: $120 trillion
Total Debt: $160 trillion
Source: The Economist
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So who will lend us the money for Obama’s deficits? Not the Chinese or Japanese. They are divesting themselves of U.S. government debt as fast as they can. The key lender will be none other than the Federal Reserve Board itself. The Fed will lend money to the federal government. Where will it get the money? It will create it. It will print it. At some point, this Ponzi scheme has to catch up with us and the credibility of the dollar has to come crashing down.
As these pressures are beginning to come to a head, interest rates on federal debt are bound to increase. No longer will the government be able to borrow money at its current rate of about 3.5% interest.
And, when this happens, the drain on the United States budget will become especially severe. As deficits continue, each year adding to the debt, and interest rates rise, the debt service obligations will absorb more and more of the federal budget.
The United States will become like a family inveigled into taking out a subprime mortgage by initially low teaser rates. Then the rates go up, and they find that their monthly mortgage bill is too high and they can’t pay their debt. Though the U.S. will pay its debt, it will do so with an ever greater sacrifice in other important public spending. Or, worse, it will pay the debt by printing money, debasing the currency and setting the stage for inflation like that which gripped Germany in the 1920s.
The chart below tells us how much we would have to pay in debt service from our federal budget if the deficits that we expect do materialize (no cut in spending) and interest rates rise:
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HOW MUCH WE WOULD HAVE TO PAY IN INTEREST ON OUR DEBT IF RATES RISE
Debt levels (in us $ billions)
Annual Debt service at varying Average interest Rates (in us $ billions)
Fiscal Year: 2010
Total Debt: 13,562
3%: 406.86
4%: 542.48
5%: 678.10
6%: 813.72
Fiscal Year: 2011
Total Debt: 14,904
3%: 447.12
4%: 596.16
5%: 745.20
6%: 894.24
Fiscal Year: 2012
Total Debt: 15,818
3%: 474.54
4%: 632.72
5%: 790.90
6%: 949.08
Fiscal Year: 2013
Total Debt: 16,565
3%: 496.95
4%: 662.60
5%: 828.25
6%: 993.90
Fiscal Year: 2014
Total Debt: 17,289
3%: 518.67
4%: 691.56
5%: 864.45
6%: 1,037.34
Fiscal Year: 2015
Total Debt: 18,082
3%: 542.46
4%: 723.28
5%: 904.10
6%: 1,084.92
Fiscal Year: 2016
Total Debt: 18,976
3%: 569.28
4%: 759.04
5%: 948.80
6%: 1,138.56
Annual debt levels as projected by the CBO.
Total Debt for Fiscal Year 2010 is actual as reported by the U.S. Treasury.60
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Our debt service obligations could take over our entire federal budget. If rates went to 5%—a likely scenario—we would soon be paying more than $1 trillion in interest on the debt. That is about equal to our current Medicare and Social Security spending combined!
This huge and growing debt service obligation will force Congress and the president to cut the deficit and reduce the rate of growth in the national debt. The question is: how?
Our task is to make sure that it is not through tax increases!
OBAMA’S PENDING TAX HIKES PARALYZE THE ECONOMY
During the spending phase of Obama’s presidency, the government proffered an open hand filled with cash. But everybody knows that just over the horizon loom huge tax increases, particularly on those most prone to spend their cash. Like hogs in a stockyard, we look skeptically at each day’s feeding trough, knowing that the day of slaughter is coming. We have all come to realize that we are being fattened up for higher levels
of taxation and we are hoarding our cash in anticipation.
The consumer anxiety that is bottling up spending and causing cash to stay in checking accounts, CDs, or credit card balance sheets is not just a general angst about the economy. It is a very specific and very well-deserved fear of looming tax increases.
Some have assumed that once Obama agreed to extend the Bush tax cuts, he wouldn’t raise taxes. That is a fool’s assumption. Not only will he raise rates on those making more than $250,000 a year, but he has a long list of new taxes he wants to impose in the meantime.
We must stop him!
Already, he has succeeded in reimposing the inheritance tax as part of his deal to extend the Bush tax cuts. Starting in 2011, and for the next two years, the tax will be 35% on estates of more than $5 million.
The problem with the inheritance tax (or death tax, as the GOP calls it) is not the relatively small number of rich people whose heirs will have to pay more from their estates. They can fend for themselves. The problem is that no tax is more certain to kill economic growth than a levy on estates.
Consider the case of the aged millionaire contemplating his mortality with increasing concern. If he reinvests his profits in his business, creating more jobs, he’d better not die anytime soon. If he does, his heirs will have to pay 35% of his estate (minus an exemption of $5 million) to the federal government. If all his money is tied up in the business (or in farmland or housing), the only way to pay the estate tax would be to sell off assets—a forced quick sale that will not fetch the best price. To assure that his heirs don’t have to do that, the wise elderly entrepreneur will hoard cash and not invest his profits in his business. When he dies, his heirs will just cash out some CDs and pay the taxman. But, before his death, his wealth does us all no good, because he is keeping it liquid.
And Obama is determined to reduce what little relief from taxes the current system of deductions affords us. Americans have come to depend on the deductions they take for home mortgage interest payments, state and local taxes, and charitable deductions to decrease their tax exposure. The home construction industry and charities of all shape and size depend on these deductions to provide incentives to build or donate. And politicians in state and local governments earnestly hope that their tax hikes will be better received by irate constituents if they can deduct them on their federal income tax forms.
But Obama wants to cap the deductions for mortgages, taxes, and charitable donations at the 28% bracket. This would reduce the value of your deductions by between a quarter and a third depending on your income.
If you are in the top tax bracket of 35%, Obama wants to let you deduct only 28% of your tax, mortgage, or charitable payment. So you will lose 7%, or one-fifth, of your current deduction. Those in the 33% bracket would lose 5%—or one-sixth—of their current deduction.
The National Commission on Fiscal Responsibility and Reform, appointed by Obama and the Democratic majority as a fig leaf for their tax proposals, went even further and recommended replacing the mortgage interest and charitable donations deduction entirely with a 12% tax credit for the actual amount of the mortgage payment or the charitable gift. This would cut the amount the deductions for charitable and mortgage interest save taxpayers even more drastically.
For a family that is in the 25% tax bracket with a monthly mortgage bill of $1,000, this would cut the amount they save in taxes in half. Under the Obama Commission proposal, they would lose a deduction that saves $3,000 in taxes and replace it with a credit that would save only $1,440—half as much.
Currently, the deduction is available to all mortgages of under $1 million. The Commission would only make the new tax credit apply to loans of under $500,000.61
And Obama would also limit deductions for state and local taxes to 28%. Taxpayers are able to survive high federal and state tax rates because their state taxes are deductible on their federal tax return. But now Obama would deny this relief.
Unwilling to violate his campaign commitment not to raise taxes on the middle class, Obama has decided to reduce their deductions instead! If you fail to see any difference between these approaches, join the club.
So this president, who pledged not to raise federal taxes on the middle class is, in effect, forcing a state tax increase by limiting the amount of the state and local income tax deduction.
The most important impact of the Obama tax deduction changes would fall on the 67% of Americans who own their own homes.62 Home owners facing foreclosure or falling behind on their mortgages will suddenly find that the limitations on the deductibility of their mortgages will add thousands to their real debt burden.
A full quarter of all tax filers—and about half of those who actually pay federal income taxes—take a mortgage interest deduction. In 2010, it saved them $104 billion in taxes and, by 2013, it will save them $135 billion—if Obama and the Democrats let it live!63
The president’s proposals will not only soak the taxpayer, they will snuff out whatever growth there still may be in the home construction industry.
While the Federal Reserve Board is busy printing money to try to keep mortgage interest rates low and stimulate home buying and construction, Obama will be raising taxes on mortgage interest and making most mortgages one-quarter or one-third more expensive. With mortgage interest rates now running at 4.6% for a thirty-year fixed mortgage,64 that is the equivalent of adding 1.2 to 1.6 points of extra interest! On a $100,000 mortgage, that adds between $100 and $133 to the payments each month! Some incentive to buy or build homes!
Home ownership has fallen to a ten-year low with the high rate of foreclosures and tighter lending restrictions, according to the National Association of Realtors.65 Could Obama pick a worse time to cut back on the mortgage interest deduction?
Chairman of the Mortgage Bankers Association Michael D. Berman said, sensibly, “A rollback of the mortgage interest deduction as proposed by the commission would have a devastating impact on both present and future homeowners in this country. It would immediately stop in its tracks any stabilization we are seeing in the housing market and would effectively increase the cost of homeownership for millions upon millions of people.”66
Reducing this deduction would also cost us a huge number of jobs. The construction of 100 homes generates 305 jobs, $14.5 million in wages, and $8.9 million in tax revenue.67
The National Association of Realtors estimates that cutting the mortgage interest deduction so drastically “could critically erode home prices and the value of homes by as much as 15%, according to our research.”68
Carlos Bonilla wrote for the American Action Forum, a center-right policy group, that it would be reasonable to expect that “housing prices will fall” by an amount equal to the decreased value of the deduction. “Homebuyers don’t get the tax deduction for nothing—they’ve actually paid for it in the cost of the house they purchased. It has simply been capitalized over the years they will be paying their mortgage.”69
“This would result in an enormous blow to the 60% of Americans who presently own their homes,” Bonilla goes on to say. “We’ve already experienced double-digit home value declines in the past few years; do we really want to see them drop another 10–15% instantly because of a change in tax policy?”70
And Obama has also taken aim at charitable giving. Most cynically, this president, who trumpets concern for the poor, will undermine charities across the nation by limiting the deductibility of their donations. With national charitable giving at about $304 billion a year,71 his proposal would increase taxes on those who give by $35 billion a year.72
As with curtailing the mortgage interest deduction, the Obama-appointed National Commission on Fiscal Responsibility and Reform goes even further in cutting the charitable donation deduction. The Commission would give taxpayers a credit worth 12% of their donations—but only if they contributed 2% or more of their adjusted gross income to charity.73
The proposal would confine the benefit to the wealthier donors who give that hi
gh a proportion of their income to charity. The average churchgoer who earns $50,000 a year would be hard pressed to equal the $1,000 threshold that would trigger the deduction.
And it would, of course, slash the deduction for wealthier taxpayers. A $1,000 donation to the Red Cross by an upper-income taxpayer (assuming he is above the 2% threshold) would lead to a tax savings of $350 under current law. But if the Commission’s proposal passes, it would save only $120 in taxes, a cut of more than two-thirds.
USA Today reports that “wealthy givers are more sensitive to the impact of tax policy on their contributions than they’ve been in the past, according to a new survey by the Center on Philanthropy at Indiana University and Bank of America.”74
“People give because they care about a cause or for other reasons, but certainly, tax conditions affect the timing of the gift, the level of the gift and the manner in which they give,” says Una Osili, director of research at the Center on Philanthropy.”75
When you combine Obama’s proposed increases in the federal tax brackets (i.e., letting the Bush tax cuts expire) with his plans to limit deductibility, the effect is horrific—about a 25% increase in federal tax payments!
Consider a home owner in Nancy Pelosi’s San Francisco:
Option One—Household Income: $75,000
If the family makes $75,000 a year
And has a mortgage of $120,692.67
And has property tax payments of $1,404.86
And has to pay $4,983.90 in state income tax
And gives 4% of their income to charity
Then, they will find their federal income taxes rising by 27.9%, or $1,459.81, under Obama’s proposals.
Option Two—Household Income: $150,000
If the family makes $150,000 a year
And has a mortgage of $166,780.22