Most Americans probably would say that we already have a budget crisis. They have heard crisis talk long and often -- like the little boy crying "wolf." They have seen stories of riots and belt-tightening from Greece and elsewhere in Europe, but those countries are far away and very different -- America is "exceptional," after all. The current dislocation in the U.S. economy -- very high unemployment and very low interest rates and inflation, not typical of budget crises -- arose in 2007, before budget deficits spiked. It is not surprising that many citizens have come to conclude that "deficits don't matter."
I am far more concerned, for three reasons. Past warnings were intended not to announce then-impending disaster, but rather to keep the country from ever straying as close to a true budget crisis as it now has. A crisis well beyond today's apparent public understanding can happen here. However, most Americans have no conception of the serious, even dire, potential consequences of a true budget and debt meltdown.
No one knows precisely what will happen if our nation continues to accumulate massive amounts of public debt, because our situation is truly unprecedented. World War II is not a valid model; then, the nation accepted extreme measures -- rationing, forced saving, income tax rates rising above 90 percent, and price controls among them -- to limit the growth of the public debt. There are no signs of such public tolerance today. Moreover, at the end of the war, demand for American products from flattened foreign nations and demobilized troops swelling our labor force were the exact opposite of today's intense trade competition and population aging. We will not "grow out of" today's debt as we did World War II's.
As to the size and the immediacy of the problem: The best measure of our budget woes -- the size of the public debt relative to our collective income (to economists, the "debt-to-GDP ratio") -- is now at a level not seen since 1953; almost triple its low point of the middle 1970s; almost double the level of ten years ago; and higher than the level that triggered the 1990 bipartisan budget summit. Moreover, it is rising by the day, much faster than at any time since World War II. By reasonable projections, the debt could reach its highest levels in history within this decade, and still be rising at a rate nearly as fast as that during World War II. Over the last 25 years, in effect, the little boy was crying "wolf" to call his neighbors' eyes to the horizon; now, the wolf is almost to the door.
America is exceptional; and our accumulated public debt is becoming exceptional as well. Our debt-to-GDP ratio is the twenty first highest of the 28 OECD-member developed countries, and the nations with larger debt -- Japan, Italy, Iceland, Greece, Belgium, Hungary, and France -- are not the best role models. The status of these nations ranges from crisis to struggling to fend off the worst. The troubles of the euro and the yen, and the peg of the Chinese renminbi to our dollar, have left the dollar to this date in the role of a safe haven, the world's reserve currency. However, continued mounting debt will shake that status, sooner or later, as some alternative investment is perceived safer. The more debt we accumulate, the greater the ultimate risk that overseas holders of dollars will panic, and the harder our nation's eventual fall.
The path to a crisis is clear enough today. Our elected policymakers continue to follow a course that is politically -- though certainly not economically or financially -- risk averse: refusing to raise taxes, and refusing to consider spending savings in Social Security, Medicare, and defense -- or to specify precise savings anywhere else in the budget. If the financial markets conclude that our two political parties will continue this game of chicken no matter how large and fast-growing the debt, the wide range of possible consequences is uniformly dire.
A new report from CED, This Way Down to a Debt Crisis, describes several alternative plausible ways in which the nation might blunder into a full-blown debt meltdown, and what the chilling consequences could be:
The nation can wait until the financial markets revolt, and then respond in a panic and rush through a weak budget agreement -- essentially at the barrel of an economic gun -- or elected policymakers from both political parties could put statesmanship and stewardship ahead of political gamesmanship. The two sides could agree not to argue over who deserves the credit, which certainly would be better than pre-scheduling an argument over who deserves the blame for an inevitable economic and financial catastrophe.
If the American people understand the stakes, surely they will demand action.
Follow Joe Minarik on Twitter: www.twitter.com/JoeMinarik
Currenlty, tax-payers fork-out about half their income to the govt as Federal, State and Municipal taxes, fees, permits etc etc. And this is felt every two weeks in ourpay-checks and every time we fill our gas tanks.
The extremes on the Left and Right are each only about 10% of the electorate; but both groups contribute to most of the decibels in political discourse. They are devoted to their causes and deep down, both want a lean, mean, prosperous America, devoid of the waste and corruption.
We have met the enemy, and the enemy is us. The crises will rapidly escalate starting this year with 1 million boomers added to SS and Medicare and an additional burden of 1 million added on every year for the next 20 years. So there is no money into SS Trust fund from which the govt could 'internally borrow'. In fact SS will start being a net outflow instead of a cash-cow adding to the govt deficits.
A far more important problem is the unemployed and their direct impact on the GDP and debt/deficit for states, cities and the FEDs.
Less tax revenues from 16%-20% of the work force is dramatic and its impact far reaching.
While we all want the best Government, one that ia fiscally smart, efficient, and progressive, we unfortunately we have a Congress that is beholden to many interests that do not support the 80-90% of us.
Our crisis is within the Congress and its crazy deficit cutting and debt ceiling reduction dance that will create more unemployed and impoverish many more Americans.
I do agree the crisis will rapidly escalate but not because of the baby boomers collecting SS!
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"A surprise "lender's strike" " - BS - How does the Treasury actually spend money? Ans: by marking up checking accounts electronically. For the purposes of spending money, they don't know or care about tax revenues or security issues. The Treasury can always meet it obligations regardless.
"An outright federal government default " - BS - See above - the government will always have the ability to make its payments.
"The Federal Reserve could implicitly ..." WTF? This isn't even an independent point. It's a hypothetical that is nonsensical. Central bank operations target interest rates - not to provide fast cash to the treasury.
"Economic growth will be hobbled " BS - The public sector does not compete with the private sector for available funds - so there is no "crowding out". Taxes are not used to pay interest on the debt - taxes serve to decrease spending power as checking accounts are debited.
The CED would do well to read this to learn some basics about monetary operations http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
Of course your job may be gone, but I hear they're hiring at Wal-Mart.
http://michael-hudson.com/2010/11/schemes-of-the-rich-and-greedy/
Alan Greenspan explained this very clearly a decade ago. He said there’s something wonderful about debt: it’s cured the labor problem. The workers are now one paycheck away from homelessneÂÂss. If they go on strike or if they’re fired because they complain about working conditionsÂÂ, all of a sudden their interest rate goes up on their credit card, all of a sudden they miss their mortgage payment, they’re losing their home.
Don't you think this has been the plan all along
I'm thinking the endgame will be a combination of default and hyperinflation from the FED Quantative Easing as no one else will buy the treasuries crap. We’ve got us right where they want us.