Recently
by Peter Schiff: The
Not So Super Hero

For much of
the past few generations, the debate over balancing the federal
budget has been a central feature of every presidential campaign.
But over time, the goalposts have moved. As the amount of red ink
has grown steadily larger, the suggested time frames to restore
balance have gotten increasingly longer, while the suggested cuts
in government spending have gotten increasingly shallower. In recent
years, talk of balancing the budget gave way to vague promises such
as “cutting the deficit in half in five years.” In the
current campaign, however, it appears as if the goalposts have been
moved so far that they are no longer in the field of play. I would
argue that they are completely out of the stadium.

It says a great
deal about where we are that the symbolic budget plan proposed last
year by Congressman Paul Ryan, the newly minted vice presidential
nominee, has created such outrage among democrats and caution among
republicans. The Obama campaign warns that the Ryan budget is a
recipe for national disaster that will pad the coffers of the wealthy
while damning the majority of Americans to perpetual poverty. The
plan is apparently so radical that even the Romney campaign, while
embracing the messenger, is distancing itself from the message (it
appears that Romney wants to bathe himself in the aura of fresh
thinking without actually offering any fresh thoughts). In interview
after interview, both Romney and Ryan refuse to discuss the details
of Ryan’s budget while slamming Obama for his callous “cuts”
in Medicare spending.

(It is extremely
disheartening that the top point of contention in the campaign this
week is each candidate’s assertion that their presidency could be
the most trusted not to cut Medicare. Mindful of vulnerabilities
among swing state retirees, Republicans have also taken Social Security
cuts off the table as well. What hope do we have of reigning in
government spending when even supposedly conservative Republicans
refuse to consider cuts in the largest and fastest growing federal
programs?)

So what was
the Ryan Budget’s radical departure from the status quo that has
caused such uproar? If enacted today, the Ryan budget would so drastically
upend the fiscal picture that the U.S. federal budget would come
into balance in just… wait for it…. 27 years! This is because
the Ryan budget doesn’t actually cut anything. At no point in Ryan’s
decades long budget timeline does he ever suggest that the government
spend less than it had the year before. He doesn’t touch a penny
in current Social Security or Medicare outlays, nor in the bloated
defense budget. His apocalypse inducing departure comes from trying
to limit the rate of increase in federal spending to “just”
3.1% annually. This is below the 4.3% rate of increase that is currently
baked into the budget, and farther below what we would likely see
if Obama’s priorities were adopted.

Because there
are no actual cuts in his budget, Ryan hopes that fiscal balance
can be restored by 2040 only because he assumes that we achieve
returns to the annual economic growth that are equal to levels averaged
for much of the last century. In other words, he sees slow growth
of the last four years as the aberration, not the new normal. As
with all other government projections, this is on the extreme optimistic
end of the spectrum. In truth, there is nothing on the horizon that
should make anyone think these growth figures will be achieved.
America’s crushing debt, burdensome regulations, political paralysis,
and nagging demographic problems bode poorly for the return to trend
line growth anytime soon. More likely, based on the speed towhich
republicans will shrink from popular backlash, is that the “cuts”
that Ryan proposes will be abandoned as soon as they prove to be
politically unpopular.

In fact, among
his other overly-optimistic assumptions are that the unemployment
rate falls to 4% by 2015 and an unprecedented 2.8% by 2021, another
real estate boom begins almost immediately, and there is an average
inflation and ten-year treasury rate for the next ten years of 2.04
and 4.15 respectively. These are assumptions that would make even
the most rabid economic cheerleaders sit on their pompoms. Despite
these pollyannish economic growth and record low unemployment projections,
Ryan still assumes interest rates will remain near historic lows
and that none of the cheap money showered onto the economy will
ever find its way into the CPI. In other words, it’s the economic
equivalent of winning the lottery twice in a row while failing to
account for the higher taxes that accompany such good fortune.

Like all other
government forecasters, Ryan never considers how rising interest
costs on the many trillions of dollars of outstanding government
debt holdthe potential to completely upend budget projections. For
more on this, see my recent commentary “The
Real Fiscal Cliff.”

More likely,
the continued accumulation of unsustainable levels of debt under
the Ryan plan will eventually cause our creditors to lose confidence
in our ability to repay. It will cause interest to spike, the economy
to tank, unemployment to soar, spending to rise, revenues to decline,
and the budget deficit to spiral out of control. Rising interest
rates hold the potential to spark a sovereign debt and currency
crisis that will render the entire plan irrelevant anyway.

While I appreciate
that Ryan has the courage to take a position at the vanguard of
his party in the campaign for fiscal responsibility, the modesty
of his plan is just the latest reminder of how utterly divorced
from reality Washington politicians remain. Like all of his brethren,
Ryan is pinning his budget battling plans on the pain free “grow
your way out of it plan.” But as long the government consumes
so much of the nation’s productivity, the conditions to create that
growth will never occur. Hope is not a strategy.

August
18, 2012

Peter
Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets and Crash
Proof: How to Profit from the Coming Economic Collapse. His
latest book is The
Real Crash: America’s Coming Bankruptcy, How to Save Yourself and
Your Country.

Copyright
© 2012 Euro Pacific Capital

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