A business enterprise is solvent when its operations are supported by its after-tax cash flow. Should cash flow be temporarily insufficient, borrowing against accounts receivable is the classic remedy. With serial borrowing however, operations-plus-debt-service eventually becomes unsupportable by cash flow, real or anticipated. Creditors withdraw when they see this, it’s insolvency or near enough. The business closes, its assets are liquidated and the proceeds distributed among its creditors. This is what’s happening to the Continue reading, aside from the liquidation part. Debt repudiation by inflation—watering down the currency—holds such comeuppance at bay, at least for a while.
… I’ve spent days analyzing the bill… and frankly, it’s a joke. You can read the 200+ pages yourself if you like, but here are the important points–
As we’ve discussed before, US government spending falls into three categories.
1. Discretionary spending is what we normally think of as ‘government.’ It funds everything from the military to Homeland Security to the national parks.
2. Mandatory spending covers all the major entitlement programs like Social Security and Medicare.
Then there’s (3.) interest on the debt, which is so large they had to make it a special category.
The latter two categories are spent automatically, just like your mortgage payment that gets sucked out of the bank account before you have a chance to spend it. The only thing Congress has a say over is Discretionary Spending. Hence the name.
But here’s the problem– the US fiscal situation is so untenable that the government fails to collect enough tax revenue to cover mandatory spending and debt interest. In Fiscal Year 2011, for example, the US government spent $176 billion MORE on debt interest and mandatory spending than they generated in tax revenue.
In Fiscal Year 2012, which just ended 6 weeks ago, that shortfall increased to $251 billion. This means that they could cut the ENTIRE discretionary budget and still be in the hole by $251 billion.
This is why the Fiscal Cliff is irrelevant. The automatic cuts that are going to take place don’t even begin to address the actual problem; they’re cutting $110 billion from the discretionary budget… yet only $16.9 billion from the mandatory budget.
Given that the entire problem is with mandatory spending, slashing the discretionary budget is pointless. It’s as if the US economy is a speeding train heading towards a ravine at 200 mph, and the conductors are arguing about whether they should slow down to 150 or 175.
Oh, and there’s just one more problem… go here