But what if this is not true? What if, eventually, the discipline in the market will come back with a vengeance and override the artificial life support provided by the Federal Reserve. At that point, interest rates may skyrocket and the Federal Reserve may not be able to continue buying bonds, for fear of further discipline enacted by the bond market. It has already been shown that enormous budget deficits will not be financed by foreigners, certainly not to the extent that trillion dollar deficits demand.
At that point, the only remedy will be to get serious about balancing the budget, and in a hurry. And while it seems impossible that the government could ever cut that much out of its budget, it could if it simply went back to levels projected by yearly inflation during the 2000s.
The chart below shows U.S. government spending (the blue line) during the fiscal year of 2000 and then the years of 2007 through 2012. The red line shows the yearly surplus for fiscal year 2000 (that year would have actually have had a modest deficit except for the inclusion of off-budget Social Security income). The yearly federal budget deficits are then shown for the years 2007 through 2012. (In this graph deficits are shown as positive numbers.)
I then projected what federal spending would have been if the government limited yearly spending increases to the same level as CPI, its reported level of yearly inflation. This line is indicated in yellow. Clearly spending would have been much more restrained and even now, federal spending would still be below the level of $2.5 trillion, far below the $3.5 trillion and higher spending we have seen in recent years. That projected level of spending, combined with actual tax revenues over the same periods is shown by the dotted dark green line. If the government had been willing to limit yearly spending increases to its reported inflation increases, the largest budget deficit over the period would have been a relatively modest $217 billion in 2009 (as opposed to the actual $1.4 trillion for that year). Four of the seven years in question would actually have produced surpluses with total surpluses over these seven years exceeding half a trillion dollars.
Of course, that is not what we now have. During the fiscal years from 2007 to 2012, federal spending exceeded inflation-based spending by over $6 trillion. As a result, the "gross domestic debt" nearly tripled from 2000 to 2012, to over $16 trillion.
Every year promises are made by politicians that (this time) they are really serious about getting spending under control. They state that that it's not fair for our children to suffer under the burden of debt hoisted upon them. Yet when it comes time to do any real cutting, or even maintaining spending at current levels, the tough talk is gone, and the promised discipline is replaced with weakness for love of power and returning the favors for those who keep them in power.