National Debt Crisis Is an Existential Threat
Mortimer B. Zuckerman
Soaring budget deficits show the United States has become morally incapable of living within its means
May 9, 2011
The Federal Reserve said it shouldn't be blamed for higher gas prices
The American public gets it.
The American public gets it even if successive administrations don't. We have been running on empty for more than a decade, through two administrations, with government and consumer debt rising to unsustainable levels--and beyond. Erskine Bowles, the co-chairman of the National Commission on Fiscal Responsibility and Reform, has called it the most predictable crisis in our history. Who'd dispute that when our government has to borrow roughly $4 billion every day just in order to function?
More than 11 million American families know the danger of too much debt. They have had firsthand experience with the risks, for they own homes where the mortgage now exceeds the value of the home. Millions more have credit lines that exceed their capacity to repay what they borrow.
America is on the verge of a crisis of confidence in our fiscal management that could awaken the bond vigilantes and cause a collapse of the Treasury bond market. One warning sign is the stern rebuke this month by the International Monetary Fund to its largest shareholder, namely the United States: It lacks, says the IMF, a "credible strategy" to stabilize its mounting public debt. Almost anything could trigger a bond market shock. We are at risk of the chaos theory's so-called butterfly effect, in which the smallest, remotest change in a complex system can create ripples that become waves and ultimately a tsunami. It could be a state failing to roll over its debt, a crop failure, a casual utterance by someone in a pivotal position, or a vote in a committee in Congress that convinces the financial community that congressional gridlock dooms any chance of resolving our fiscal crisis.
Here is one flap of the butterfly's wings. Last month, the world's largest bond mutual fund sold all of its U.S. Treasury bills and notes. Its founder, Bill Gross, perhaps the most respected figure in the world of fixed-income securities, stated his belief that the United States would default on its debt if it did not reform its entitlement programs, citing an estimate by analyst Mary Meeker that our government's unfunded liabilities stand at about $75 trillion. He has lost confidence in the willpower of our leadership to do what is necessary.
That is the kind of incident that could cause rates on Treasury paper to soar in order to induce people to buy the paper, which would then depress the prices of Treasury bills. Gross was so concerned that not only did Pimco, his company, sell all its Treasury bills, but it has now started to sell Treasury bills short.
Knowledgeable people in finance are quite aware that the Federal Reserve has been buying roughly 70 percent of all new Treasury paper, making the government by far the largest client for its own debt. This is only possible by increasing the money supply and the balance sheet of the Federal Reserve and is, in essence, a national Ponzi scheme that sooner or later will blow up.
Our national debt is literally an "existential threat" to our finances. It suggests an erosion of the nation's character over the last 50 years. We have indulged ourselves for way too long, finding ways to extract money from future generations and leave them with the bill. We may have become a nation that is morally incapable of living within its means.
This cannot continue ad infinitum.
It is compounded by political malpractice reflected in a leadership that has failed to produce a budget and has no clear plan to reduce the deficit. Time is running out.
The record has not been promising. Last year, President Obama created the bipartisan fiscal commission, with former Wyoming Republican Sen. Alan Simpson as Bowles's co-chair. Obama pledged to be "standing with them" as they produced recommendations. Alas, the president declined to endorse their report, enraging and saddening innumerable members of the Senate. They are still waiting for Obama to stand with them and support the proposals.
He didn't by any means do that in his April 13 speech. He didn't reach across the aisle as he had done in setting up the Bowles-Simpson commission. The New York Times fairly described the speech as "often combative and partisan," dominated by a political attack on the Republican approach of House Budget Committee Chairman Paul Ryan. The Ryan plan did put too much of the burden of cutting the budget on Medicare and Medicaid and too little on tax increases, but the president then made a viable agreement virtually impossible by rejecting any fundamental changes in those two entitlement programs--the main drivers of our deficits. And he failed to put forth a concrete plan to reach his objective of $4 trillion in deficit reduction.
We cannot continue to overspend and undersave. It brings to mind the Wimpy character in the Popeye cartoon, who used to say, "I'll gladly pay you Tuesday for a hamburger today." The result is the most frightening fiscal future since the Great Depression. And that's not the only risk. We are penalizing growth, which could bolster revenues and reduce debt. The two leading economists who specialize in the risks of a debt overhang, Carmen Reinhart and Kenneth Rogoff, analyzed data from 44 countries over 200 years. They found that economic growth "deteriorates markedly" when total government debt exceeds 90 percent of the gross domestic product, and we have already exceeded that standard. Yet we casually add billions of dollars every day to our debt, increasing the odds of a European-style debt crisis in a few years.
For budget action to be successful, it must be bipartisan and it must involve the president. Both parties must work together so that neither can blame the other for the necessary, unpopular actions. Both parties must make concessions if we are to achieve substantial spending cuts and increased revenues from taxation in the context of a multi-year budget deal. Failure is simply not an option. For if we fail, interest rates will soar. Which would mean that if you want to buy a car or a home, or send your son or daughter to college, it would be a much more expensive proposition. The result would not only be a big spike in interest rates but also a credit squeeze--and a worse recession than the one we are coming out of now. That's what happens when there is a sovereign debt crisis, which we thought could only happen to small countries on other continents.
Nothing will be achieved without positive leadership. Nobody will like the cuts or the tax increases. But at least the country has changed to the point where people are debating how much and what spending to cut, and how to increase taxes.
There is an immediate test and a long-term test of whether the government is serious about getting control of its credit cards. The immediate hurdle is the national debt ceiling, currently set at about $14.3 trillion. It's very close to being broached.
The greater challenge will be dealing with the cost of health insurance for the elderly. There simply is no way of restoring our fiscal health without structural changes in Medicare and Medicaid, given the impending retirement of the baby boom generation and climbing medical costs. Today we pay directly for treating the elderly, including both hospital care and doctor costs. The fact is, there is no real control on costs and much is wasted in the process. This was a glaringly missed opportunity in Obamacare.
The necessary benefit cuts and tax increases are a political minefield. Our politicians know that millions of senior citizens will vote against any change in their healthcare and retirement programs, and they represent roughly 16 percent of the electorate. Much will turn on the support of independents, who are focused on fiscal probity and represent some 29 percent of the electorate.
But financial discipline will elude us unless we also implement enforceable legislative rules. The most effective tool is the reconciliation process, part of the Congressional Budget Act. This enables Congress to order its committees to revise laws within their jurisdictions so that they remain within certain deficit reduction goals. If the committees balk, then the budget committees can step in to make the changes.
Sixty-four senators recently wrote to the president urging him to develop a comprehensive plan to rein in America's debts and to build upon the recommendations of the fiscal commission. There is support, too, from the Gang of Six, three Democrats and three Republicans, who have been working for several months to patch together a fiscally prudent program.
But there can be no substitute for presidential leadership. The president has to be specific in his proposals and willing to confront and absorb the political costs and eschew short-term calculations of political benefit. The stakes are too high for either side to seek talking points against the other. This is not about the president or indeed about Congress. It is about the very viability of the United States of America as we've known it. If it took you two minutes to read this column, the government has most likely had to borrow another $55 million of its daily $4 billion. Scary!
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