Washington: This year, the US government is borrowing 50 cents of every dollar it spends. If that were just a blip caused by a historic financial crisis that necessitated a $787 billion (around Rs37 trillion) fiscal stimulus and a $700 billion bank rescue in the space of about three months, there would be little cause for concern.
But it is not a blip. It is a relentless curve of red ink that will, within the decade, take US debt levels to the record reached at the end of World War II, from 40% of the nation’s output now to 80%, and then rapidly thereafter into the realm of banana republics.
3“We are accumulating a massive debt. We owe about half of that debt to foreigners, including the Chinese and others whose foreign policy is not always well aligned with ours,” said Isabel Sawhill, a former Clinton administration budget official who now codirects the Center on Children and Families at the Brookings Institution. “So we are really losing control of our economic destiny and possibly losing control of our foreign policy as well.”
Red ink: A worker organizes dollar notes. The US borrows 50 cents of every dollar it spends. Glen E Ellman / Bloomberg
Japan has lost its AAA credit rating, the UK may soon follow, and there is talk that the US is headed fast down the same path.
The markets fired a warning shot last week when the treasury department announced a huge sale of new debt—$162 billion—as part of its financing of the government’s $1.8 trillion deficit this year. That’s as much as the entire government spent just eight years ago. Within hours, interest rates on US treasurys shot up.
In recent weeks, the prices of credit default swaps on US government debt—a measure of the risk that the government could do the unthinkable and default—have risen to record levels.
The market reactions highlight a growing disconnect between the Obama administration’s ambitious spending plans, including a $1.5 trillion overhaul of the US healthcare system, and the money available to do it.
As if to underline the point, the Social Security and Medicare trustees, who include three Obama cabinet officials, issued their report saying the finances of the two bedrock social programmes are dire.
“We are heading towards very high debt-to-GDP (gross domestic product) ratios very soon,” said University of California, Berkeley, economist Alan Auerbach. He said the rise in perceived risk of the federal government going bankrupt is sobering.
As it is, the US does not even meet the standards for admission to the European Union, because its deficit and debt levels are too high, said senator Judd Gregg, the top Republican on the Senate budget committee. The federal government faces either enormous tax increases or inflation (regressive taxation in another form), to remedy the problem, he said.
“That means people, instead of having money to buy a home, have to send it to the government to pay the interest on the debt,” Gregg said in an interview. “There are no ways around this. This is not academic. It’s not theoretical. It’s real. The numbers are there.”
The appetite for US debt has remained robust, and treasurys were viewed as a safe haven amid the financial turmoil last fall.
Budget analysts have been warning about the sorry condition of the county’s finances for years, and nothing happened. But the UK credit warning has turned many eyes suddenly to the US.
“Nothing happens until it does,” said Auerbach. “People were warning about the housing market and the bubble, and nobody seemed to worry about that, and now a lot of us are sorry. The US can go on for several more years doing absolutely nothing responsible to get the debt under control and things may be fine, but at some point, and it’s impossible to predict when, people can lose confidence in the US government’s ability to deal with its problem, and things can unravel. Whether that happens in five years or 10 or even longer, it’s impossible to say.”
The idea that something very bad will happen is now a consensus view among budget experts.
“Our creditors are beginning to ask questions, and it's only a matter of time before something bad happens,” said Saw-hill. “None of us can predict exactly when or exactly what, but we know that we’re putting ourselves in very high-risk situation as a country.”
Even House majority leader Steny Hoyer, the top lieutenant to speaker Nancy Pelosi, said this month, “If a fiscal meltdown comes, there will be no one to bail out America.”
©2009/THE NEW YORK TIMES