Can budget cuts save the US economy and pay down the debt?

There are two answers to that question – short and long. The short answer is: No.  The long answer is: No. Here is why.

The United States Executive Branch implemented what they deem to be cost cutting measures by aggressively trying to reduce the outlay of funds by cutting personnel and budgetary expenditures on programs set out by the Congress.  Now, I am not going to debate or expand on the Constitutionality of such actions, I am not a lawyer nor a constitutional expert.  I leave that question to be debated by those who are experts in the matter, such as the courts and the litigants.  What I will discuss, however, is how realistic is it to expect results from a financial perspective based on the principles of money creation and money management in society.  How a FIAT, debt based monetary system works and why these measures will ultimately fail to reduce the debt and the deficit. I’m sure there will be a lot of people out there who will say right away that my opinion makes 0.00 difference and in the grand scheme of things, they are correct.  My opinion will make no difference during actions undertaken.  I can almost see what some of the reactions will be.  “Are you saying you are smarter than the team of people who are engaged in cost cutting measures?  What makes you think you are right, Einstein?  Do you think you can do better?  Are you seriously questioning the abilities of the world’s richest man to balance the US government?  The guy is the richest man in the world!  He knows a LOT better how money works than you do!”  And those will be the kind ones.  The ones filled with expletives will by and large be ignored, because in my opinion, expletive laden statements smack of ignorance and a general aversion of facts hence, not worth my time to read, let alone reply to. 

So let us dive in with both feet right away and discuss why these measures will fail to implement long term, meaningful changes that will ultimately bring down the deficit and balance the federal budget.  To set the record straight, I don’t mean the changes will be derailed by the rumored tax cuts, which will probably offset any savings that are implemented what so ever, the tariff wars, which are starting in earnest and will probably devastate the US export industry, if reciprocal  ones are added by targeted industries and countries (and there certainly will be), a huge strain will be put on domestic industries that rely on foreign suppliers to stay in business and the increased costs put on consumers thereby reducing the tax base and further exacerbating the problem.  I don’t mean that.  Each one of those issues deserves a separate study, or perhaps a series of studies and that is certainly not going to happen in the next few weeks or months if the economy goes into survival mode. 

What I am specifically talking about is the monetary machinery that is currently in existence in the US and almost every single other country in the world and the way it is designed, structured and operated negates the possibility of putting even the smallest dent in the deficit or the debt – that is as if people care about the standard of living and having the ability to continue using currency to purchase goods and services.

The monetary system in the United States is a FIAT, debt-based system.  What does that mean?  That means the following – a FIAT system is defined as a monetary system that operates based on a perceived decree.  It is almost as simple as that.  Why does a 100 dollar bill have value?  Because it is decreed to have value and because it is accepted by society as something of having value – but without an actual intrinsic value item backing it up.  FIAT is a Latin term – it means “let it be done” and it is used to justify the perceived value of currency that is issued without an expressed backing of something intrinsic, such as gold or silver.  FIAT means nothing if the societal norms deem the currency to be worthless and decide to decline trading goods and services for said currency.  Some of the examples for this in recent memory include the German Mark during the Weimar Republic, the Italian Lira from the end of the Bretton Woods system until 2002 when the EURO replaced it or the Zimbabwe dollar which is so hyper inflationary that you need suitcases full of it to buy a loaf of bread.  Under the FIAT based system, the value of money or currency is defined to be based on several factors, but the main one is always the stability of the economic system that backs it.  The United States, having had the greatest economic engine in world history, has a strong and durable monetary system but the nature of the currency being FIAT negates the possibility that said system is immune to fluctuations and forces that can push the value of the currency lower if economic conditions allow for it.  Once we all agree on the fact that this FIAT-based system is vulnerable to market fluctuations, we are on track to being able to recognize the first problem the current market conditions present in the dollar maintaining its secure and strong status in the world.  If the perception is that the government is weak and prone to outbursts of wild uncertainty, the Dollar will fluctuate right along with the perceptions and behave in a manner one would expect it to under such conditions.  The perceived value of it will go up and down based on what the latest rumor or expected action is from the Executive Branch and the uncertainty will deprive the Government of being able to make predictions that can potentially be cost saving in the long run or stable enough to yield to economic forces seeing the dollar as a reliable partner.  This uncertainty will for sure cause the value of the dollar to plumet in relation to other world currencies and that can only mean one thing.  A weaker dollar will necessitate larger quantities in circulation to be able to service the same level of debt but with more dollars.  This self-feeding loop will prove to be incredibly inflationary since the more dollars will be necessitated for the same level or even a reduced level of services or debt to be serviced, the weaker the dollar will be, and the more currency will be needed to service the debt.  The more currency in circulation will mean a higher inflationary dollar and the less value it possesses.  But that is the nature of a FIAT currency and even if we regard the potentially huge and destructive effect it will have on the population – less services for veterans, less services for the overall population, less stability in which to operate for businesses, etc – as a necessary evil to decrease the debt or the deficit, it will not be enough to put a dent in it. As of today, based on numbers published, the team working on the Musk program, has found and cut (depending on who you believe) between 55 billion and 155 billion dollars from the budget.  Lets ignore the fact that those cuts don’t actually translate into savings because virtually none of that money will go towards paying down the debt after all is said and done and they will be tied up in litigation for years to come anyway, all it will do is hurt people who depend on the government and in the vast majority of cases paid into the system for years and years – but lets ignore that fact all together.  Lets be really generous and scale up the cuts based on the most liberal number we can find and lets say the Musk team actually did find 155 billion dollars of savings in 2 months.  Lets presume that we are really generous, and we will grant them the ability to continue to find between 70-80 billion dollars a month to find to cut from the federal budget.  Now.  Let’s do some math. 

80 billion a month times 12 is 960 billion dollars.  Let’s give them an extremely generous and liberal ability and say that the cost cutting team will find 1 TRILLION dollars’ worth of savings this year.  1 trillion.  And let’s assume that ALL the 1 trillion dollars is put towards paying down the debt.  All of it.  Every cent.  What does that get us after 1 year?  The debt now stands at close to 36 trillion dollars and we have to pay interest on that debt that is approximately 1 trillion dollars so what would a payment of 1 trillion dollars do for us?  Little or absolutely nothing. Why?  Because the government does not run like a business or a household.  The government doesn’t operate like your budget or my budget.  We pay off debt like a mortgage or credit cards or other things we borrow money for, but the big difference is we are not responsible for the well-being of our neighbors.  We are not responsible for the maintenance of critical infrastructure projects, such as dams, national highways, the shipping channels, the airways for planes to travel in, the safe landing and take-off of thousands of planes every week, the monitoring and safe keeping of Americas health systems, the safety of our food systems, the water we drink, the common defense of not only our nation but the upkeep and supplying of our extensive military capabilities across the globe, etc. The government, however, IS responsible for all those things.  All that takes money.  You can’t tell the Admiral on deck of a carrier in the middle of the Pacific to stand down and stop operating their aircraft or stop fueling and supplying their support vessels because money ran out this week or there are no funds available.  You can’t tell the Corps of Engineers to stop working on a dam that is about to flood 15 towns and kill thousands of people unless massive measures are undertaken because you want to pay the debt down.  You can’t tell the Social Security administration to stop sending out monthly checks to millions of Seniors who all paid into the system for decades, because you want to cut a measly 50 billion dollars of the budget this month.  You cannot run the government like a business because you will hurt millions, if not tens of millions of Americans for no practical reason what so ever because even if you cut a trillion dollars, the best case scenario you can point to is that we will wind up right in the same spot where we started but that is the very best case scenario.  In fairness, you have a better chance of winning the Daytona 500 in roller skates than for a trillion dollars to be paid towards the debt based on savings anyone finds. 

Those are all the reasons you shouldn’t cut services.   But here is the reason why you won’t be able to simply cut a trillion dollars from the budget even if you stand on your head and start whistling Dixie out of your ears – you will crash the economy.  Here is the simple and agonizing prospect why cutting the debt by a trillion dollars is an unrealistic thing to do. 

Under our FIAT – debt based monetary system; every single dollar that comes into existence is borrowed into existence.  This is a 100% fact, there is no other way around it, it is an incontrovertible truth that is a fact of life and an undeniable economic reality that we live with every single day.  Every dollar in your pocket, in your bank account, in anyone’s bank account, even in the government’s pocket, was borrowed by a person or a business or an entity into existence and that means that every single dollar has an IOU attached to it which means every dollar is backed by a debt that someone or something undertook to bring that money into circulation.  The government does its part in bringing currency into reality by issuing billions of dollars’ worth of treasury bonds and other vehicles for raising money which it then sells through certain banks to anyone willing to buy it every week, every month, every year.  This is done because there is a deficit between the government’s income and expenses.  For example, in a recent year, the government took in about 4.7 trillion dollars in revenue, but it spent over 6 trillion dollars on expenses.  About 860 billion of that was servicing the debt.  The cumulative amount of deficit added up over time, or about 36 trillion, is the national debt.  This is what the government borrows money for, to pay for services and then it issues bonds against it. 

Now then. Knowing that the debt-based currency system we have operates on the principle of borrowing money into existence to pay a debt against which the currency is borrowed into existence in the first place, if a debt is paid off including the principle, that money effectively ceases to exist.  Let me give an example.  If you borrow 100,000 dollars from a bank to buy a house – in the middle of nowhere – and the bank wants you to pay it off with interest, which you dutifully do so in 10 years, the principle you submit to the bank vanishes after the payments are complete because now you no longer owe that debt and the money that was lent against it disappears along with the debt.  The only thing that remains is interest, which is the bank’s profit.  Here it is the same thing but in crude terms – if all the money that was issued against all the debt was used to repay all the debt in the country, all our currency would virtually cease to exist and the 3% or so of paper currency we have in circulation would be worthless.  There would be no value to it whatsoever.  The only thing left would be the interest owed on that debt, which in this scenario would be outstanding and uncollectable.  Every single entity that counted that interest as part of their portfolio of assets, would then be forced to write it off as a loss.  So.  If you are the government and you were to take a trillion dollars and claw it back from the citizens who rightfully can lay claim to that money because they paid into the system all those years, but lets say you took that money and paid it towards the debt, the debt that was issued against that trillion dollars, that debt would cease to exist – but so would the trillion dollars.  Effectively you would withdraw a trillion dollars of currency from circulation.  The effect would be overwhelming and far reaching and the Federal reserve would have to take extraordinary steps to mitigate the ensuing storm. 

No matter how this is spun, the notion of reducing the debt or getting on some sort of path to balancing the budget cannot be done by cutting allocated spending.  It cannot be done by firing federal workers, which the federal work force is roughly 4% of the federal budget so basically peanuts compared to say, the budget of the Pentagon or Social Security. 

This is nothing but an exercise in futility and it will ultimately end in failure but the impact on American households will be severe and long reaching.  It will take decades to recover from this and some of our fellow Americans never will.