US Debt - Is It Too Late Already?

I'm not an economist (would I admit it if I were anyway?).  So this post is more back of the envelope thinking.  The budget deficit is forecasted in 2011 to be 1.5 trillion dollars or roughly 10% of US GDP.  Let's just assume politicians could do the right thing and somehow balance the budget in 2011.  This means government would be a 10% drag on GDP (possibly more depending on the multiplier).  Imagine a 10% reduction in GDP?  That would reduce tax receipts and thus cause a deficit again.  Let's assume the deficit is reduced from 1.5 trillion in 2011 to 1 trillion.  That is still a massive drag, not stimulus on an economy that two years after recession still cannot grow absent government spending.   As odd as this sounds perhaps the only chance the US has at any meaningful debt reduction in FY 2011 is if the Fed continues to expand its balance sheet through additional QE.  Problem with that though is at some point the bond market will demand higher yield causing higher debt service for the existing debt that is currently rolled about every four years.

So with the looming debt ceiling being reached there will be lots of talk about not raising it but that seems simply impossible.  One really has to wonder have we already reached a point of no return from a fiscal standpoint.   This economy is very fragile right now and susceptible to any shock event.  The government is in little to no position financially to stimulate beyond QE.  In our current financial environment any debt reduction most likely will reduce GDP, reduce tax revenue while increasing the need for emergency unemployment while further limiting an already constrained consumer.  Debt reduction is truly needed unless our true plan is to do what Iceland did and simply default.  

Unfortunately our economy has nothing currently to truly grow.  Imagine if during the crisis of 2008, the trillions used for bailouts instead were used to truly invest (sorry Obama but your investment is still spending) in alternative energy.  Products that the US could play a lead role in developing and exporting.  It would have been a tough few years but we would have worked through many of the inefficiencies in our economy today.  Our debt level may even have been higher but we would have an economy poised for true demand not spending driven growth.  Unfortunately, a great opportunity was wasted due to failed and misguided leadership on both sides of the aisle.  

US Debt - Is It Too Late Already?