It is agreed among fiscal conservatives that the US is on a collision course toward a fiscal train wreck.  I think many democrats, including President Obama, recognize this.  In fact he has proposed a freeze on all non-discretionary government spending for three years.   Unless dramatic actions are taken -- and soon -- we will be facing a grave economic future.  There are many constructive ideas out there as to what to do to bring fiscal sanity back to America.  A presidential committee will report recommendations to the President in November.  The Tea Party has their ideas and have listed them on the Internet. Here are a few of my thoughts on the subject.

One way to stop providing government the money it wants to spend on new programs is to starve it.  We may or may not be able to starve it through paying less taxes, but we can take awayits borrowing power, at least to some extent.  I suggest that if you are angry about reckless government spending, stop lending money to the government -- any government, federal or state.  If everyone that buys federal government or state bonds stopped, government would be forced to live within its means.  It is the one thing individuals can do.

Boycott government treasuries and bonds and those institutions that buy them.  If we can have "green" and "socially concerned" pension funds, we can certainly have government debt free pension funds. Just as there have been "buy American" campaigns, we should have a "don't buy government debt" campaign.

Redirecting your lending to productive companies whose products you use and enjoy is preferable to supporting a government that is working against your interests.  To the degree that we all boycott lending to government we deprive government of that which they have neither earned nor deserve.  On principle, all fiscal conservatives should promote investments that compete with government, not support government, regardless of the party in power.

This may sound like a small thing, but it is something that is directly within our control.  Any movement whatsoever toward a trend of this kind will shake government to its core.  We as individuals can not do a lot to change the course of government policy but it is us that government is dependent upon.  By withholding our money and urging others to do so, including institutions, we can make a difference.

Something a little more dramatic would be to freeze the national debt.  This would totally deprive government of additional cash to spend.  A constitutional amendment to limit spending will take too long to pass.  And a freeze on government spending can be bypassed easily as the "pay as you go" rule has been.  We just passed $290 billion in new spending since the first of the year without paying for it under the guise of "emergency spending".  Pay as you go does not prevent government from spending on emergencies, so everything now is an emergency.  It is not out of the question that enough votes in Congress to block the next hike in the national debt could be possible in 2011.  A "new" Congress is needed to accomplish this task.  Consider this fact in the voting booth this November.  Which candidate up for office in either party has the character to force the government to live within its means?

Another thing that can be done is to freeze taxes where they are.  The present tax rates are set to expire; by making them permanent, we would provide the nation with predictability.  People will be able to plan long-term.  Once we know we are not going to tax or borrow any more than we are today, we will know our budget and our limits.  Congress can fight it out on where best to spend the money.  But the money will be finite.

I know a lot of you want to slash government spending and cut tax rates.  I seriously doubt that is politically possible, or advisable, under current conditions.  You don't drastically cut spending or reduce or increase taxes in the bad times.  You do that in the good times -- in times of stability.  We have certain obligations we have promised which we need to meet.  What is politically possible, however, is to freeze taxes and spending at present levels.  This is not a cut.  It is a limit.  Politically it can be sold because it freezes revenues and expenditures at the highest levels mankind has ever known.  But it also says to government "no more"!

However, cuts will still need to be made in government due to the fact that we are running a deficit.  If the cuts are fair it is very doable.  For example, I would offer cutting all corporate welfare and tax loopholes together with all business and farm subsidies over five years for a return of an equal cut in entitlements and cuts in needless bureaucracy.  I would suggest that the republicans make up the list of government cuts while the democrats make up the list of business cuts.  Could get interesting.

By starving government we would force it to shrink over time.  There will be, and must be, casualties.  But, for every bureaucrat that is fired and forced to find a productive job in the private sector, the government will shrink and the private sector will grow.  As expenditure's stay the same and tax receipts rise due to a growing private sector, over time our government deficit will dwindle until it goes into surplus as it did a decade ago.

It may take a decade to get there but once the markets believe that the direction has changed, confidence will return, the dollar will firm, and credit will flow normally. Individuals and businesses will be able to make long term plans and economic activity will increasewhile unemployment decreases.  On receipt of the first surplus we need to set up a rainy day fund.  A portion of the surplus should be set aside for emergencies and unexpected expenses.  I know to contemplate a surplus in these times sounds ridiculous but it also did in 1980.  If you freeze government expenditures and the GDP grows, so will tax receipts over time.  A surplus is inevitable at some point under this scenario.  The key is to stick to thekind of discipline that wasenforced during the Clinton Administration with the help of a republicanCongress -- proof that it can be done.

None of what I have suggested addresses the unfunded liabilities set to overwhelm this country in the coming decades.  For that we will need to raise the retirement age for those under 50 and index it to longevity actuaries.  Medicare services will have to be either limited or paid for through non-governmental means. Deductibles and co-payments may need to be raised and means-testing employed.  But, the problem is solvable if we get on it immediately.

Many other good suggestions are being talked about and debated and will surface during and after the election.  They will attempt to tackle the coming entitlement crisis.  All rational individuals involved in this debate know thatinaction is not an option. But unless we stop feeding "the beast" we will certainly be devoured by it. A growing and broke government is a dangerous critter to let run wild. Yet, that's what we are facing today.

A lot of people believe that this nation is doomed to collapse.  The course of future events is not yet written.  It is dependant on the decisions ahead made by governments here and all over the world.  To the degree we return to fiscaldiscipline and face up to the hard choices necessary to achieve that goal we will prosper over time.  To the degree we don't -- we won't.

It's that simple.

Market Outlook:

News reports suggested on Friday that some new, unknown nations may have hidden the amount of debt they actually have accumulated in order to stay in the ECU which has strict limits on national indebtedness.  This is spooking the markets and the DOW fell over 300 points, just Friday alone.  The unknown is never market friendly.

And there were rumors that a major French bank had leveraged derivatives from 35 to 50: 1 and was in trouble.  The news on Hungry that came from out of the blue are leading some to speculate that a European style melt down is out there.  The result is that European bank to bank lending has been reduced.  Again, shades of 2007-2008.

I held my position in TZA, which shorts the market at a 3x leverage as this ETF made double digit gains on Friday.  If the market drops dramatically further, I will be tempted to take some profits.  All commodities, except gold fell as the deflationary implosion continued.  Once again we have seen a major divergence between gold and silver indicating that the deflationary trend is accelerating. 

For the first time in memory, gas prices fell into Memorial Day instead of rising.  "Food fights" between restaurants have broken out as some discounted prices 33 to 50%.  And Copper has made recent lows.  As markets fall, wealth evaporates and exasperates deflationary forces.  The one market that has benefited is the bond market where interest rates have fallen and bond values have risen.  Speculation that the 10 year bond may fall to the mid 2.5% area have surfaced.  And Robert Reich, a voice to the left of Barak Obama, said Friday that the odds off a double dip recession have risen to fifty-fifty.

Unless you are an active trader the best strategy is to sit on cash and gold with some long term positions in resource exploration stocks.  While these stocks can fall with the market, they have the potential of exploding at any time from buy outs, take overs, mergers, or new discoveries.  But stay light and stay defensive.

Paul Nathan
Paulnathan.biz