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U.S. 'Deficit-Reduction' Talk Is Nonsense: Opinion

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Bullion Bulls Canada) -- In every way, the "negotiations" between Republicans and Democrats on "deficit reduction" are a complete joke. As always, the best place to start when engaging in logical analysis is with definition of terms. A "deficit" is the annual budget-gap between what a government spends, and what it brings in with revenues. Officially, the U.S. deficit has never exceeded $1.6 trillion. Obviously, you can't "reduce" a number which has never exceeded $1.6 trillion by $4 trillion -- but it sure sounds impressive when you spout such drivel.

Back in the real world (a place shunned by both U.S. politicians and the mainstream media), here is what is really taking place at the political circus in Washington. Republicans and Democrats are (supposedly) negotiating to reduce a small portion of future U.S. deficits, totaling $4 trillion over a period of many years. Suddenly this "Grand Bargain" doesn't sound quite so grand, does it?

In fact, if they wanted, U.S. lawmakers could proclaim an even "bigger deal" when these anti-climactic "negotiations" mercifully come to an end: they could "reduce the deficit" by the same amount each year -- but continue this "deficit fighting" over a 100 years (or a thousand), and "reduce the deficit" by $20 trillion, or $50 trillion (depending on how "hard" these deficit-hawks were prepared to "fight").

The general problem here is an obvious one: the U.S.'s debts, liabilities, and current deficits are so gigantic (and totally unsustainable) that merely reducing the annual deficits by 15%, or even 25% falls far, far short of what is necessary for the U.S. to avoid outright bankruptcy. Thanks to the harsh mistress known as "compound interest," the only way the U.S. economy can avoid bankruptcy is to eliminate the deficit completely now, and return to real budget surpluses -- not the "smoke-and-mirrors" budget "surpluses" which the Clinton regime pretended to achieve.

If the U.S. were forced to pay the same interest rates that Greece is paying today, this alone would double the current U.S. deficit, and increase the cumulative total of U.S. deficits by well over $10 trillion (during the same interval in which Republicans and Democrats claim they could "reduce the deficit(s) by $4 trillion"). I'll return to this topic later, but at the moment I wanted to get to the specific reason why this entire debate is unrealistic to the point of absurdity.

A large portion of the current U.S. deficit is "structural" in nature. For those without a background in economics, this is the opposite of a "cyclical" deficit, where the deficit exists merely because of a trough in the business cycle -- and it will disappear on its own (or at least most of it) as soon as the economy "returns to normal." Generally, this is what our political leaders are pretending in all Western economies, but specifically this is the implicit assumption which forms the basis of the "plan" being publicly cobbled together by Republicans and Democrats.

Meanwhile, back in the real world, the vast majority of the current U.S. deficit is "structural" in nature: specifically, it is an economy which is now "structured" to produce far too little revenues to fund the U.S. government. This is no "secret." I showed this conclusively in a chart I included with a recent commentary.

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