Market in free fall. Who do you believe?

I think it was Groucho Marx who asked, “Who are you going to believe, me or your lying eyes?”

In response to the downgrade of U.S. debt by Standard & Poor’s, President Obama says that regardless of what any rating agency says, the U.S. will always be a Triple A rated nation. He says that “our problems are eminently solvable, and we know what we have to do to solve them.”

Do you think that’s true? Or do you think as I do that our problems, like Europe’s, are in fact enormously complicated and unlikely to be solved or even addressed anytime soon? We now know who and what the market believes.

The cartoon character Pogo once observed that “we have met the enemy, and it’s us.” At the root of our problems is our strong desire to have something for nothing, good benefits like Social Security and Medicare, but without obligation to fully pay for those benefits. We also have gotten used to thinking of ourselves as an imperial power, or if you prefer a superpower in the world, again without having to pay in taxes for that privilege.

We end up having to borrow 40 cents out of every dollar the U.S. government spends. Fortunately for us, China and other lenders have chosen to keep lending to us in order to keep us buying their goods and to keep as many Chinese workers employed as possible. But the Chinese economy in particular keeps expanding with a corresponding increase in domestic consumption and demand. So China may not be as dependent on our buying their exports in the future. And then what happens?

Republicans say we have to make big spending cuts. Democrats say we have to impose tax increases on our highest income citizens and companies. If you’re old enough to remember the Certs mint commercials on television, you remember the punch line, “Stop! You’re both right!”

As the Deficit Reduction Commission chaired by Erskine Bowles and Alan Simpson patiently explained to us last year, we need to slash government spending, including on defense, and also increase taxes, and not only on the rich, but on everyone. In addition to raising income tax rates, we need to eliminate or reduce popular tax breaks like the home mortgage interest deduction, and also impose much higher taxes on gasoline.

No elected officials have embraced the recommendations of the Deficit Reduction Commission. If they did, they would not be re-elected. So instead they give us platitudes on the importance of bi-partisan cooperation, and advocate only minor tweaks in spending and taxes to try to keep kicking the can down the road.

The latest deal on raising the debt ceiling pushes the national debt over the threshold of 100% of gross domestic product. And that will only get us past Election Day 2012 before we need to raise the ceiling again. That’s no way to run a country. Standard & Poor’s knows it. And investors in the market know it.

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