If future historians look back on the ruins of the American economy after a U.S. bond crisis struck in the second decade of the 21st century, many causes will be noted. Obviously, it will be seen that for decades before the catastrophe, the U.S. was spending vastly more than it could afford on government health and retirement programs.
And, just as after the Great Depression, Pearl Harbor and Sept. 11, 2011, blue-ribbon commissions will be incredulous that all the telltale signs of the coming disaster were in plain view, yet were ignored.
But the central indictment for the catastrophe that ended American prosperity and world dominance will be justly laid at the feet of those Washington politicians who continued to play for short-term partisan advantage, even as the economic earth was beginning to move under their feet.
Of course, it may be claimed in partial mitigation of their guilt that the politicians, like the witch in Goethe’s “Faust,” had become acclimated to the noxious brew: “Here I have a bottle. From which, at times, I wet my throttle; which now, not in the slightest, stinks.”
But the cup of Washington partisan politics is raising a higher and higher stink among the public. And if the crisis comes while some Washington politicians continue to get drunk on their business as usual brew — the public is likely to choke on the defense of “governing while drunk on partisanship.”
Former Clinton Secretary of the Treasury Robert Rubin warned in January that most dangerously, there is a risk of disruption to our bond and currency markets as a result of much higher interest rates due to fiscal imbalances, fear of inflation and efforts to monetize our debt (print money). Significant deficit premiums on bond market interest rates would follow and seriously impede private investment and growth, causing an economic crisis.
To look more deeply just at the impending interest burden on the federal budget, consider the assessment of economic analyst Craig Steiner last week: “The problem is that the United States, with a $14 trillion national debt, cannot afford to pay a higher rate of interest. President Obama’s budget proposal outlines interest rates of 3.2 percent this year, going up to 5.3 percent in 2021, and that produces interest payments of $205 billion this year to $928 billion in 2021. The projected annual deficit is going from $841 billion in 2015 to $1,116 billion in 2021. That means in 2021, 83 percent of the money we borrow will be to pay interest on money we’ve already borrowed.
“If instead of 5.3 percent interest in 2021 we’re paying 15.8 percent (like we did right after President Carter), our interest will be $2.7 trillion per year, and our annual deficit will be almost $3 trillion … almost all on interest! Using President Obama’s own estimates, the GDP in 2021 will be $24 trillion per year. So we’d be paying 11 percent of our GDP on interest.”
It is in the face of the inevitably of the current path leading to eventual crisis, and the distinct possibility of the crisis hitting at any time (as Democrat Rubin, former Fed Chairman Alan Greenspan and many other distinguished experts have publicly warned) that Obama’s terribly ill-advised speech last week may well be harshly judged by history.
Putting aside, for the moment, that the central policy the president prescribed for dealing with the deficit was trillions of new tax dollars to be raised, the speech may be judged an historic tragedy because 1) even if it passed and worked as planned, a reduction in predicted cumulative deficits of only $4 trillion over 12 years is grossly insufficient to deal with the magnitude of the deficit and debt, and 2) the openly partisan tone (his characterization of GOP Budget Committee Chairman Paul Ryan’s policies as un-American — while Ryan sat right in front of him as a presidential guest at the speech) has dangerously raised the level of political bile just at the moment that we desperately needed to lower it.
Even if there is only a one-in-three or a one-in-six chance of the bond crisis hitting before 2013, the down side risk of such a calamity is so immense that no responsible Washington political leader would take it. It is like playing Russian roulette with our future. Would anyone put a six-shooter with even one bullet in the chamber to his or her head? Of course not. Yet that is the where, so far, the Democratic Party leadership (and some elements of the GOP Senate) have placed themselves.
Even the Ryan plan, solid as it is, will probably be judged as not enough deficit reduction not soon enough.
The only proposal so far put forward that clearly deals with the danger is the Republican Study Committee’s, led by Congressman Jim Jordan. Where Obama would reduce the deficit by $4 trillion (and never get to balance) and Ryan would reduce about $6 trillion (and get to balance in the late 2030’s), the RSC/Jordan plan would reduce it by $9.1 trillion and get to balance by 2020.
If the Jordan plan, or something like it, is not enacted into law in the next year and a half and the crisis hits, its non-passage may become one of the great tragic “what ifs” of history.
As this column was going to print, Standard & Poor’s announced it was downgrading the outlook for the United States Treasury bonds to negative, saying it believes there’s a risk U.S. policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.