By Steve As we should all remember, late in the night on New Year’s Eve, Congress and the President reached a brief stop-gap agreement to keep the Nation operating while they worked on the Budget. Unfortunately, in the months that followed the political infighting stopped any resolution and so, a drastic series of cuts automatically took effect called “Sequestration”. It was never intended to take effect but rather was designed by our leaders in Washington to create an alternative so bad, that it would force them to cooperate with each other in solving our nation’s financial problems. But how bad could it be?
Under Sequestration, Federal spending for 2013 alone will be cut $85.4 Billion nearly half of which will be in military spending with over 25% more coming from domestic cuts to health, education, and public safety. On top of this, the Fed are schedule to cut spending by another $110 Billion is each of the next 9 years! So why is the economy booming? There appears to be two reasons:
First, many of the Federal agencies, especially the military, have been working through pre-funded contracts, most of which are now being completed. We haven’t felt the cuts yet but these will impact any new contracts to be made. Few people will directly lose their jobs but we’ll all likely feel the trickle-down effect in the months to come;
Second, while the Feds are cutting, over at the Federal Reserve they’ve been continuing a Policy called “Quantitative Easing”. This has two forms: 1) printing more money which the government then uses to buy bonds from big banks – in effect giving them cheap loans – which in theory will stimulate the economy by driving down interest rates and through this make business expansion and the purchase of homes, and other assets; or 2) selling government bonds to raise cash which the also feed into the economy. Since December, 2012 this stimulus has equaled $85 Billion per month!
So, on the one hand, the government is cutting its spending while on the other it’s pushing cheap money into the economy and expanding the national debt. Can this economic system work? Well, note what happened two weeks ago when the Fed Chairman, Ben Bernanke, announced that the Fed was going to cut back the stimulus. Interest rates immediately jumped, slowing the economy.
Back in Congress, the fights over how to fix this mess have continued without resolution. The …read more
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