National Debt: 2013 Archives
Harvard Professor Niall Ferguson (and noted British historian) agrees that the national debt has reached crisis stage and Obamacare will only make it worse. A huge new entitlement is something the nation cannot afford.
An entitlement-driven disaster looms for America, yet Washington persists with its game of Russian roulette.
By NIALL FERGUSON
Wall Street Journal
In the words of a veteran investor, watching the U.S. bond market today is like sitting in a packed theater and smelling smoke. You look around for signs of other nervous sniffers. But everyone else seems oblivious.
Yes, the federal government shut down this week. Yes, we are just two weeks away from the point when the Treasury secretary says he will run out of cash if the debt ceiling isn't raised. Yes, bond king Bill Gross has been on TV warning that a default by the government would be "catastrophic." Yet the yield on a 10-year Treasury note has fallen slightly over the past month (though short-term T-bill rates ticked up this week).
Part of the reason people aren't rushing for the exits is that the comedy they are watching is so horribly fascinating. In his vain attempt to stop the Senate striking out the defunding of ObamaCare from the last version of the continuing resolution, freshman Sen. Ted Cruz managed to quote Doctor Seuss while re-enacting a scene from the classic movie "Mr. Smith Goes to Washington."
Meanwhile, President Obama has become the Hamlet of the West Wing: One minute he's for bombing Syria, the next he's not; one minute Larry Summers will succeed Ben Bernanke as chairman of the Federal Reserve, the next he won't; one minute the president is jetting off to Asia, the next he's not. To be in charge, or not to be in charge: that is indeed the question.
According to conventional wisdom, the key to what is going on is a Republican Party increasingly at the mercy of the tea party. I agree that it was politically inept to seek to block ObamaCare by these means. This is not the way to win back the White House and Senate. But responsibility also lies with the president, who has consistently failed to understand that a key function of the head of the executive branch is to twist the arms of legislators on both sides. It was not the tea party that shot down Mr. Summers's nomination as Fed chairman; it was Democrats like Sen. Elizabeth Warren, the new face of the American left.
Yet, entertaining as all this political drama may seem, the theater itself is indeed burning. For the fiscal position of the federal government is in fact much worse today than is commonly realized. As anyone can see who reads the most recent long-term budget outlook—published last month by the Congressional Budget Office, and almost entirely ignored by the media—the question is not if the United States will default but when and on which of its rapidly spiraling liabilities.
True, the federal deficit has fallen to about 4% of GDP this year from its 10% peak in 2009. The bad news is that, even as discretionary expenditure has been slashed, spending on entitlements has continued to rise—and will rise inexorably in the coming years, driving the deficit back up above 6% by 2038.
A very striking feature of the latest CBO report is how much worse it is than last year's. A year ago, the CBO's extended baseline series for the federal debt in public hands projected a figure of 52% of GDP by 2038. That figure has very nearly doubled to 100%. A year ago the debt was supposed to glide down to zero by the 2070s. This year's long-run projection for 2076 is above 200%. In this devastating reassessment, a crucial role is played here by the more realistic growth assumptions used this year.
As the CBO noted last month in its 2013 "Long-Term Budget Outlook," echoing the work of Harvard economists Carmen Reinhart and Ken Rogoff: "The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline. Those economic differences would lead to lower federal revenues and higher interest payments. . . .
"At some point, investors would begin to doubt the government's willingness or ability to pay U.S. debt obligations, making it more difficult or more expensive for the government to borrow money. Moreover, even before that point was reached, the high and rising amount of debt that CBO projects under the extended baseline would have significant negative consequences for both the economy and the federal budget."
Just how negative becomes clear when one considers the full range of scenarios offered by CBO for the period from now until 2038. Only in three of 13 scenarios—two of which imagine politically highly unlikely spending cuts or tax hikes—does the debt shrink from its current level of 73% of GDP. In all the others it increases to between 77% and 190% of GDP. It should be noted that this last figure can reasonably be considered among the more likely of the scenarios, since it combines the alternative fiscal scenario, in which politicians in Washington behave as they have done in the past, raising spending more than taxation.
Only a fantasist can seriously believe "this is not a crisis." The fiscal arithmetic of excessive federal borrowing is nasty even when relatively optimistic assumptions are made about growth and interest rates. Currently, net interest payments on the federal debt are around 8% of revenues. But under the CBO's extended baseline scenario, that share could rise to 20% by 2026, 30% by 2049, and 40% by 2072. By 2088, the last date for which the CBO now offers projections, interest payments would—absent any changes in current policy—absorb just under half of all tax revenues. That is another way of saying that policy is unsustainable.
The question is what on earth can be done to prevent the debt explosion. The CBO has a clear answer: "[B]ringing debt back down to 39 percent of GDP in 2038—as it was at the end of 2008—would require a combination of increases in revenues and cuts in noninterest spending (relative to current law) totaling 2 percent of GDP for the next 25 years. . . .
"If those changes came entirely from revenues, they would represent an increase of 11 percent relative to the amount of revenues projected for the 2014-2038 period; if the changes came entirely from spending, they would represent a cut of 10½ percent in noninterest spending from the amount projected for that period."
Anyone watching this week's political shenanigans in Washington will grasp at once the tiny probability of tax hikes or spending cuts on this scale.
It should now be clear that what we are watching in Washington is not a comedy but a game of Russian roulette with the federal government's creditworthiness. So long as the Federal Reserve continues with the policies of near-zero interest rates and quantitative easing, the gun will likely continue to fire blanks. After all, Fed purchases of Treasurys, if continued at their current level until the end of the year, will account for three quarters of new government borrowing.
But the mere prospect of a taper, beginning in late May, was already enough to raise long-term interest rates by more than 100 basis points. Fact (according to data in the latest "Economic Report of the President"): More than half the federal debt in public hands is held by foreigners. Fact: Just under a third of the debt has a maturity of less than a year.
Hey, does anyone else smell something burning?
Mr. Ferguson's latest book is "The Great Degeneration: How Institutions Decay and Economies Die" (Penguin Press, 2013).
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If you want to understand why the Republicans are correct in battling against Obamacare and tying it to the debt crisis the nation is facing, read this article.
October 3, 2013
The rollout of ObamaCare and the subsequent government shutdown have engaged the attention of millions of Americans. Unfortunately, both issues are inconsequential compared to what will likely be another battle over raising the debt ceiling. Even more unfortunately, most Americans have little grasp of the economic issues that have brought us to the precipice for the second time in two years.
Most Americans do know the nation is $16.7 trillion in debt, but far fewer understand the implications of such debt. In fact, precious few Americans even know which nation underwrites more of our debt than any other. The overwhelming majority believes it is either China or Japan. The overwhelming majority couldn’t be more wrong. The largest underwriter of U.S. debt is the United States of America, courtesy of the Federal Reserve.
The Fed’s Keynesian-economics-on-steroids buying spree is called “Quantitative Easing” (QE). It consists of spending $85 billion per month, with no end in sight. Of that total, $40 billion is spent on mortgage-backed securities and $45 billion on longer-term Treasury securities.
Where does the Fed get the money to buy these securities? It “prints” money to buy them. To put this in household terms, the Fed is essentially paying down one credit card–by charging it to another credit card. During the Obama administration, QE, along with Congress spending additional revenue we don’t really have, has increased the national debt by an additional $6 trillion. QE has also debased the currency, since creating more currency makes each piece of currency worth less–on the way to becoming worthless.
The Fed has coupled this idea with a Zero Rate Interest Policy (ZIRP), thoroughly convinced that both agendas will “stimulate” the economy, because borrowing money is cheap, and the new money has to go somewhere. That “somewhere” has been the stock market, which has been pushed to record highs as a result. Fed Chairman Ben Bernanke and his fellow Keynesians believe that pumping up the market will result in a “trickle down” effect, as those Americans who feel wealthy with regard to their stock portfolios will spend money and create new jobs. The Fed has pursued QE in one form or another for five years.
During those same five years, the official unemployment rate has never dipped below 7.4 percent, according to the Bureau of Labor Statistics (BLS). That number is a fraud because it fails to acknowledge that we have lowest workforce participation rate in 35 years, and BLS doesn’t count the people who have given up looking for work as unemployed. If the workforce participation rate were the same as it was just before the financial crisis hit in 2008, the unemployment rate would be approximately 11.3 percent.
Furthermore, despite the nation being in a so-called recovery since 2009, we have record numbers of Americans receiving food stamps, record numbers collecting disability checks, and a record number of Americans living in poverty. Americans’ annual household income has also declined by 4.4 percent during the recovery, which is worse than the 1.8 decline that occurred during the recession.
As for inflation, the Fed claims it is under control. Americans might argue otherwise, considering the reality that food and fuel prices have gone up substantially under this administration. Yet many of those same Americans are unaware of the reality that food and fuel prices are not included when the government calculates the inflation rate. While not counting the price of fuel might have some validity, since many Americans use public transportation, every American has developed a habit of eating to sustain themselves.
In short, the Fed’s QE approach is nothing less than disastrous.
And despite everything you hear from this president, his administration, and the rest of the Democratic Party that purports to care for “ordinary Americans,” aka the middle class, it’s precisely the middle class that is being squeezed. ZIRP is a so-called “one-percenter’s” dream, because it pumps up the banks and Wall Street, even as the middle class that prefers not to invest its hard-earned money in the stock market can’t get decent return on savings anywhere else. On the other end of the spectrum, the aforementioned dependency class is also getting taken care of, due to the reality that the statist party is more than willing to countenance increasing numbers of Americans on the government dole in return for their loyalty.
This dual accommodation of both the financial and entitlement communities has engendered a monstrous amount of national debt, fueled by the record-setting, trillion dollar-plus annual deficits needed to pay for it. And despite the Fed’s money printing prowess, even they can’t pony up the kind of revenue necessary to underwrite the entire effort.
Thus we tax, and we do borrow from other nations.
On the tax side of the equation, those who pay them have done yeoman’s work. For the first 11 months of FY2013, the federal government received a record-setting $2.47 trillion in revenues. Yet they spent all of it, plus an additional $755 billion during the same period. Thus, on the borrowing side of the equation, we are constantly adding to our national debt, and have again “maxed out” our spending limit, reaching the so-called debt ceiling.
Yet even as we constantly bump up against a new debt ceiling, we continue paying interest on the debt we’ve already accumulated. In 2012, the interest on that debt totaled $360 billion. Like the minimum payment on a household credit card, that massive amount of spending does nothing more than maintain the debt at its present levels. Nothing is being paid down.
For the nation in the short term, the media-driven hysteria about the notion that America would default on paying its debt if we don’t raise the debt ceiling, is pernicious nonsense. Currently, interest payments are running about 7 percent of revenue. The worst case scenario is that the Treasury Department would be forced to prioritize where the rest of the money would be spent. Undoubtedly this would ignite a huge fight, as Congress and the administration would be forced to decide which government programs are truly important, and which, to use the jargon-du-jour, are “non-essential.”
Such a fight would be extremely unpleasant, but the nation would survive. Furthermore, neither party has said they are willing to default on our debt, but Republicans want concessions aimed at bringing the debt under control.
Why Republicans want those concessions brings us back to the Federal Reserve and their ZIRP. What the overwhelming majority of Americans don’t know is that we’re paying a record low interest rate of 2.4 percent just to maintain the status quo.
The average interest rate the Treasury paid on U.S. debt over the last 20 years is 5.7 percent. Americans might tolerate paying 7 percent of every dollar collected just for interest, but what about 10 percent, or 20 percent–or more? Not for more Social Security, Medicaid, Medicare, military, or any other government program. Just interest. Just to maintain. How many American families could sustain themselves if 20 percent of their income or more did nothing but keep their credit card debt right where it is now?
And 20 percent may be an optimistic number. CNBC’s Peter J. Tanous explains that just our public debt–as opposed to the money the government owes itself because the politicians have raided the Social Security “lockbox,” for example–will be $16.6 trillion in seven years, according to Congressional Budget Office (CBO) estimates. At an average interest rate of 5.7 percent, the interest payment will be about $930 billion. In 2012, the IRS collected $1.1 trillion in personal income taxes. Based on that figure, debt service would consume 85 cents of every dollar Americans pay in personal income taxes.
Tanous notes something else as well. “Some economists will also suggest that interest rates may go much higher than 5.7 percent largely as a result of the massive QE exercise of printing money at an unprecedented rate,” he warns.
What then? It is not inconceivable that America could be headed for a real debt ceiling, described by National Review’s Kevin Williams as one where immutable reality boils down to “a more or less identical partial shutdown of the government plus suspending most or all Social Security payments indefinitely, eliminating federal health-care benefits, and/or defaulting on our bonds and enduring the subsequent economic chaos” (italic in the original).
An American politician vividly expressed the consequences of continually raising our borrowing limit and accumulating more debt as a result:
“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” he said. “It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”
That politician was Barack Obama in 2006.
Barack Obama in 2013? ”Raising the debt ceiling, which has been done over a hundred times, does not increase our debt; it does not somehow promote profligacy.” Except that it does. Every time we have raised the debt ceiling, our debt level has increased.
Thus, “insane” Republicans are demanding concessions for raising the current debt ceiling. Those concessions include a one year delay of the new and massively expensive (more than triple its original cost estimate) healthcare bill, a blueprint for tax reform, medical malpractice reform, approval of the Keystone pipeline, and an increase in offshore drilling for energy. The president’s Twitter response is telling. ”I won’t negotiate on anything when it comes to the full faith and credit of the United States of America.”
Due to unprecedented levels of government spending by both parties–nothing more, nothing less–the full faith and credit of the United States of America is hanging by a thread. Either we stop engaging in that insanity or we are finished as a nation. Politicians lie. Math does not
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