Saturday, March 20, 2010

Scary times to come

At what point will the level of its budget deficits and resulting national debt become the greatest threat to its national security that the United States has faced in decades? This past February, President Barack Obama signed a bill raising the federal debt limit to $14.3 trillion, thereby allowing the United States to continue paying its day-to-day expenses. Surely there must be some practical limit to how much national debt the Americans can carry. The much-respected and non-partisan Congressional Budget Office (CBO) said that the budget shortfall in President Obama’s 2011 budget proposal will remain above four per cent of gross domestic product (GDP) for the foreseeable future, while the publicly held debt will reach $20.3 trillion, or 90 per cent of GDP, by 2020.

These numbers are truly frightening, or so they seem to me. Just think of how much of future national income will be devoted to debt service alone.  Economists consider deficits exceeding three per cent of GDP to be unsustainable because, above that level, government debt is growing faster than its ability to repay it. Current forecasts have the American deficit running at a far higher rates than that.

When last the United States got so much in debt—in 1945 at the end of the Second World War—the way out of debt was the ending of the war and its related spending. But in 2020, one assumes both the Iraq and Afghanistan wars will have wound down and the budget savings are already reflected in the above forecasts. How then will the Americans pay the piper?

They could allow their currency to depreciate even more substantially than it has recently. This would, one expects, result in higher exports and lower imports. This could then be coupled with a government policy of higher taxes and cuts in services services and military spending. The country would earn more and consume less. However, lenders would have to be compensated for the money they’d lose from the decline in the dollar and would demand higher interest rates. And with higher rates suppressing domestic consumption even more, Americans will face some pretty tough times—a decade or more of tough times.

Given the political reality in Washington, I can’t see any government taking the necessary steps any time soon to face up to the hard choices ahead. And that’s really scary for all of us.

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© 2010 Russell G. Campbell
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  1. Publicly held debt will reach $20.3 trillion by 2020.

    Does this include the projected shortfall in social security funding which is already in the hundreds of billions? Does it include the billions in Medicare funding that will be required just to make that program solvent again?

    I hope your numbers are all inclusive, because if these things aren't included the debt to GDP will be about 125%.

    Either way, it doesn't bode well for Canada and the rest of the world.

  2. Indeed, Powell. The USA may not be the engine behind future growth for the rest of us.

    As to what's in the 2020 debt forecast, you can see for yourself at