What Would Happen If We Balanced the Budget? (Vol. 207)

America cannot borrow its way to prosperity. Fiscal responsibility remains the surest path to growth and stability.

Let me dream for a moment.

What if Americans truly understood the danger we face from our wild, out-of-control government spending? What if more citizens grasped not only the risks of endless deficits, but also the enormous benefits of something as simple as a balanced, or near-balanced, federal budget?

Maybe, just maybe, we might finally see support for fiscal sanity in Washington.

Because one thing is clear: we do not have fiscal sanity today. Worse, the projections from the nonpartisan Congressional Budget Office show things getting much worse, not better.

And those projections are actually optimistic.

Why optimistic? Because they do not account for new spending programs, recessions, wars, pandemics, or any other unforeseen costs. History tells us some of those events will happen. They always do.

Even under those rosy assumptions, the numbers are staggering. We are carrying roughly $39 trillion in interest-bearing debt today, approximately 125 percent of GDP. In just 10 years, that debt is projected to reach $64 trillion, or 137 percent of GDP. Absolutely unsustainable.

And that does not include enormous unfunded obligations that sit beyond the official debt of almost $100 trillion.



If we do not fix this problem, it will get worse. How much worse? No one knows.

Every rational scholar, informed citizen, and serious economist sees the danger. But much of the voting public, the silent majority, still does not. Problem? What problem?

That should concern every American.

This is not merely a policy challenge. It is a mortal danger to our country.

The day will come when our debt Ponzi scheme fails. I use that term deliberately. It is a Ponzi scheme because the only way we pay our current obligations is by selling even more debt.

That system fails when we can no longer sell our debt at reasonable interest rates.

When that day arrives, we are out of bullets. There are no painless solutions. We either default on the debt or print massive amounts of money to cover it, which is, in effect, a default. Both paths lead to disaster.

And contrary to what some believe, once we reach that point, there is no amount of fiscal austerity that can solve a problem of that size.

So how do we avoid catastrophe?

The answer is remarkably simple.

Balance the budget.

Near balance would also work. But continuing to run enormous deficits year after year will eventually kill the goose that laid the golden eggs.

Now back to my dream.



What would happen if we balanced the budget?

First, the federal government would stop borrowing massive sums to finance annual deficits. That means government would no longer compete so aggressively for scarce capital.

Who benefits? The private economy.

And the private economy is the one that actually produces the goods and services we consume every day. If more capital remains in private hands, businesses and individuals can spend, save, and invest more.

That means growth. Real growth.

Second, if government did not need endless borrowing, it would not need excessive expansion of the money supply. Money creation could grow at a reasonable pace, aligned with population and economic growth.

That means little or no inflation. Why? Inflation is always a result of excessive money growth.

Third, lower inflation leads to lower interest rates.

Interest rates are largely a function of inflation and inflation expectations. Markets want a real return on money.

To simplify, if investors want a real return of 2.5 percent and inflation is 4 percent, nominal interest rates will need to be around 6.5 percent.

But if inflation falls to 1 percent, rates could be closer to 3.5 percent.

That is a dramatic difference.

So let’s summarize.

A balanced budget leads to:

• Higher economic growth

• Lower inflation

• Lower interest rates

That is a winning formula.

Need proof? We have seen this before.

After World War II, America’s debt was extremely high, around 114 percent of GDP due to wartime spending.

But once the wartime economy normalized, the United States returned to modest government and fiscal responsibility. Debt grew less than 1 percent annually for roughly 20 years.

Meanwhile, the economy grew at approximately 6 percent per year.

The debt did not decline in absolute dollars, but because the economy grew so rapidly, debt fell to less than 50 percent of GDP, a very comfortable ratio.

That is how responsible nations recover.

Fiscal responsibility is the cure for a disease that will eventually destroy our economy.

Yet most people are not looking at the future. They are focused on today.

And today, the economy appears relatively strong.

So many assume nothing can hurt us.

We have heard warnings for years. Trouble ahead, they say.

It has not happened yet, so many conclude it never will.

Quit bothering me. Problem? What problem?

Wrong.

The times we are living in are unlike anything we have witnessed in American history. The scale of our debt and the speed of its growth are unprecedented in peacetime.

There is real danger if we keep doing what we are doing.

It is time to wake up. Listen to what our own government is telling us: ‘we are on an unsustainable fiscal path.’

Time is not on our side.

Bottom Line

The longer we wait, the harder it becomes to avoid catastrophe.

Please take time to understand the problem and the enormous benefits of a balanced budget. Then tell your elected representatives something simple:

Fix this fiscal mess, or I will vote for someone who will. That will get their attention.

That is the only real solution.

And it may be our last chance to avoid disaster.