Why Debt Should Be Washington’s Main Concern

 – “The budget should be balanced; the treasury should be refilled; public debt should be reduced; and the arrogance of public officials should be controlled.”  -Cicero.  106-43 B.C.

Hardly a day goes by when we are not bombarded with information, both valid and misleading, about the sheer size of the national debt of the United States.  The average American has a tendency to dismiss the reports as too big for him/her to worry about.  In truth, they should be very worried as the national debt influences our personal financial lives in many ways: rising interest rates, higher taxes and inflation among them.  As federal debt increases investors lose faith in the ability of the government to pay, and the borrowing for the productive private sector dries up.  Yet in 2010 the federal government is projected to issue almost as much new debt as the rest of the world combined!  The real indebtedness is close to $53 trillion dollars when future Social Security and Medicare liabilities are included according to David Walker, former Comptroller General.

In addition, some economists argue that the government is manipulating the inflation rate by understating the Consumer Price Index which ignores food and energy costs.  If they took these factors into consideration, the CPI, our inflation rate would be considerable higher, but that would cause increases in pensions, benefits, and federal deficits.  This would require higher interest rates and the government bailouts would overwhelm the federal and state budgets and the financial sector would face an even greater crisis.

The Office of Management and Budget lays the blame for our massive debt in three areas:  an imbalance between federal revenues and spending that predates the recession and the recent turmoil in financial markets, sharply lower revenues and elevated government spending, and the various federal policies implemented in response to the conditions.  They forecast the debt in 2019 to be 76.5% of GDP, but other sources place it there right now in 2010.

Further increases in federal debt relative to GDP almost certainly lie ahead if current policies remain in place.

Murray Rothbard, a libertarian economist, warns that a long-term reliance on borrowing by government to pay for public goods and services is a recipe for disaster.  He says that this incurring this massive debt places a growing and intolerable burden on the society and economy, both because they raise the tax burden and drain resources from the productive to the non-productive.

Another economist, Milton Feldstein says that common sense tells us that the ratio of debt to GDP should not be allowed to rise year after year.  A country should recognize that it is in trouble if it sees the ratio of debt to GDP rising year after year.  Deficits are popular with politicians because deficits are not visible to voters as the burden is shifted to future generations. 

This entire spending mind-set started with John Maynard Keynes in the early 1940s, and was supported by ever-growing numbers of university educated economists.  However, these policies have left one important question:  How soon and how deep will the crash be in this credit-fueled and speculative-dominated economic cycle?

The heads of President Obama’s national debt commission, Alan Simpson and Erskine Bowles, told a meeting of the nation’s governors that they cannot count on the federal government to bail them out any further.  “This debt is like a cancer,” Bowles said.  “It is truly going to destroy the country from within.”  According to EconomicPolicyJournal.com, 32 states have already run out of funds to pay for any unemployment benefits.

In testimony before President Obama’s new bipartisan commission, Ben Bernanke stated that the government deficits threaten the American economy.  This commission is smacking of hypocrisy.  The President tells everyone that he is working to control the problem and fix the economy, yet his actions are just the opposite of the appropriate requirements.  He calls for a “spending freeze” at a historically high level both in real terms and as a percentage of GDP.

Of special danger to the American economy is the amount of debt held by foreign countries.  Recently, Russia and China had a meeting to discuss how they could team up to weaken the dollar.  Although nothing official came from that meeting, the danger persists.  Over the last ten years foreign ownership of our debt as increased from 29% to 48% of the outstanding total.

The rest of the world recognizes that the Congressional Budget Office has, for some time, been cooking the books to make President Obama’s economic decisions look good, and they consider our fiscal policies very dangerous. 

IN FACT, IF YOU SPENT ONE MILLION DOLLARS EVERY DAY SINCE THE BIRTH OF CHRIST, YOU STILL WOULD NOT HAVE SPENT ONE TRILLION DOLLARS BY NOW!