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Rising national debt may be the next economic crisis
USA TODAY
By Tom Raum
The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.4 trillion – equivalent to about $37,000 for each and every American. And it’s expanding by over $1 trillion a year.
The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.
“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Federal Reserve Chairman Ben Bernanke recently told Congress.
Higher taxes, or reduced federal benefits and services – or a combination of both – may be the inevitable consequences.
The debt is complicating efforts by President Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.
Interest payments on the debt alone cost $452 billion last year – the largest federal spending category after Medicare-Medicaid, Social Security and defense. It’s quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.
The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.
Alexander Hamilton, the first treasury secretary, said, “A national debt, if not excessive, will be to us a national blessing.”
Some blessing.
Since then, the nation has only been free of debt once, in 1834-1835.
The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply – except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy.
The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.
The odometer-style “debt clock” near Times Square – put in place in 1989 when the debt was a mere $2.7 trillion – ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.
The clock has since been refurbished so higher numbers fit. There are several debt clocks on websites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.
The debt gap is “something that keeps me awake at night,” Obama says.
He pledged to cut the budget “deficit” roughly in half by the end of his first term. But “deficit” just means the difference between government receipts and spending in a single budget year.
This year’s deficit is now estimated at about $1.85 trillion.
Deficits don’t reflect holdover indebtedness from previous years. Some spending items – such as emergency appropriations bills and receipts in the Social Security program – aren’t included, either, although they are part of the national debt.
The national debt is a broader, and more telling, way to look at the government’s balance sheets than glancing at deficits.
According to the Treasury Department, which updates the number “to the penny” every few days, the national debt was $11,518,472,742,288 on Wednesday.
The overall debt is now slightly over 80% of the annual output of the entire U.S. economy, as measured by the gross domestic product.
By historical standards, it’s not proportionately as high as during World War II, when it briefly rose to 120% of GDP. But it’s still a huge liability.
Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.
Where does the government borrow all this money from?
The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world’s safest investments.
That’s one of the rare upsides of U.S. government borrowing.
Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.
But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities.
And if major holders of U.S. debt were to flee, it would send shock waves through the global economy – and sharply force up U.S. interest rates.
As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits.
While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government’s mushrooming debt – and what it might mean for future generations.
If things can’t be turned around, including establishing a more efficient health care system, “We are on an utterly unsustainable fiscal course,” said the White House budget director, Peter Orszag.
Some budget-restraint activists claim even the debt understates the nation’s true liabilities.
The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments.
That would put the nation’s full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation.
Fed borrowing could reach $4 trillion
FROM WND
Welfare spending, unemployment balloon deficit
By Jerome R. Corsi
 U.S. Treasury |
NEW YORK – The federal government will have to issue record levels of debt in the next two years – up to $2.5 trillion in 2009 and as much as $4 trillion in 2010.
The record federal debt financing is required to fund the social welfare programs called for in the Obama administration’s nearly $1 trillion deficit-spending economic stimulus plan and to overcome a likely shortfall due to falling tax revenues, according to BustedBudget.com, a website dedicated to “tracking the government’s shameful overspending one painful day at a time.”
BustedBudget.com noted that factors leading to the increased federal government borrowing needs include the cost of the Troubled Assets Relief Program, amounting to approximately $700 billion, plus the nearly $1 trillion in deficit-spending that will be required to fund the proposed stimulus package.
Another contributing factor forcing the Treasury to plan for an unprecedented amount of federal borrowing this year is the unanticipated unemployment resulting from the economic downturn, with the resulting drop in employment tax revenues to the U.S. Treasury.
A total of 3.6 million jobs have been lost since the recession officially started in December 2007, according to U.S. Labor Department reports cited in the Wall Street Journal yesterday.
The Wall Street Journal also reported the U.S. unemployment rate for January is expected to grow to 7.5 percent, the highest since 1993, as 525,000 jobs were lost last month, up from the 524,000 shed in December.
The possibility that the U.S. Treasury will be forced to raise as much as $4 trillion in debt in 2010 just to finance the federal budget deficit raises the question of how long the Obama administration can continue to increase social welfare spending unless millions of new jobs are created as a result.
Given the Labor Department’s estimates, the Obama administration will have to create over 3 million new jobs, just to replace the job losses that have occurred since December 2007.
According to the minutes of the U.S. Treasury’s Borrowing Advisory Committee, or TBAC, a key advisory committee to the Treasury Department, Acting Assistant Secretary of the Treasury for Financial Markets Karthik Ramanathan said estimates for Treasury borrowing needs range between $1.5 trillion and $2.5 trillion in the current fiscal year.
The TBAC warned that federal borrowing in fiscal year 2010 could reach levels as high $4 trillion. The U.S. government defines fiscal year 2009 as Oct. 1, 2008 through Sept. 30, 2009.
Whatever the deficit is this year, the Obama administration will be forced to have the U.S. Treasury sell Treasury bills and notes in that amount.
The Treasury debt will be sold largely to foreigners, predominately in China and Japan, the two biggest foreign buyers of U.S. Treasury debt.
Bernanke: Federal Reserve caused Great Depression
FROM WND
Fed chief says, ‘We did it. … very sorry, won’t do it again’
By David Kupelian
The worldwide economic downturn called the Great Depression, which persisted from 1929 until about 1939, was the longest and worst depression ever experienced by the industrialized Western world. While originating in the U.S., it ended up causing drastic declines in output, severe unemployment, and acute deflation in virtually every country on earth. According to the Encyclopedia Britannica, “the Great Depression ranks second only to the Civil War as the gravest crisis in American history.”
What exactly caused this economic tsunami that devastated the U.S. and much of the world?
In “A Monetary History of the United States,” Nobel Prize-winning economist Milton Friedman along with coauthor Anna J. Schwartz lay the mega-catastrophe of the Great Depression squarely at the feet of the Federal Reserve.
Here’s how Friedman summed up his views on the Fed and the Depression in an Oct. 1, 2000, interview with PBS:
PBS: You’ve written that what really caused the Depression was mistakes by the government. Looking back now, what in your view was the actual cause?
Friedman: Well, we have to distinguish between the recession of 1929, the early stages, and the conversion of that recession into a major catastrophe.
The recession was an ordinary business cycle. We had repeated recessions over hundreds of years, but what converted [this one] into a major depression was bad monetary policy.
The Federal Reserve System had been established to prevent what actually happened. It was set up to avoid a situation in which you would have to close down banks, in which you would have a banking crisis. And yet, under the Federal Reserve System, you had the worst banking crisis in the history of the United States. There’s no other example I can think of, of a government measure which produced so clearly the opposite of the results that were intended.
And what happened is that [the Federal Reserve] followed policies which led to a decline in the quantity of money by a third. For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing from beginning to end, with millions of people having their savings essentially washed out, that decline was utterly unnecessary.
At all times, the Federal Reserve had the power and the knowledge to have stopped that. And there were people at the time who were all the time urging them to do that. So it was, in my opinion, clearly a mistake of policy that led to the Great Depression.
Although economists have pontificated over the decades about this or that cause of the Great Depression, even the current Fed chairman Ben S. Bernanke, agrees with Friedman’s assessment that the Fed caused the Great Depression.
At a Nov. 8, 2002, conference to honor Friedman’s 90th birthday, Bernanke, then a Federal Reserve governor, gave a speech at Friedman’s old home base, the University of Chicago. Here’s a bit of what Bernanke, the man who now runs the Fed – and thus, one of the most powerful people in the world – had to say that day:
I can think of no greater honor than being invited to speak on the occasion of Milton Friedman’s ninetieth birthday. Among economic scholars, Friedman has no peer. …
Today I’d like to honor Milton Friedman by talking about one of his greatest contributions to economics, made in close collaboration with his distinguished coauthor, Anna J. Schwartz. This achievement is nothing less than to provide what has become the leading and most persuasive explanation of the worst economic disaster in American history, the onset of the Great Depression – or, as Friedman and Schwartz dubbed it, the Great Contraction of 1929-33.
… As everyone here knows, in their “Monetary History” Friedman and Schwartz made the case that the economic collapse of 1929-33 was the product of the nation’s monetary mechanism gone wrong. Contradicting the received wisdom at the time that they wrote, which held that money was a passive player in the events of the 1930s, Friedman and Schwartz argued that “the contraction is in fact a tragic testimonial to the importance of monetary forces.”
After citing how Friedman and Schwartz documented the Fed’s continual contraction of the money supply during the Depression and its aftermath – and the subsequent abandonment of the gold standard by many nations in order to stop the devastating monetary contraction – Bernanke adds:
… Before the creation of the Federal Reserve, Friedman and Schwartz noted, bank panics were typically handled by banks themselves – for example, through urban consortiums of private banks called clearinghouses. If a run on one or more banks in a city began, the clearinghouse might declare a suspension of payments, meaning that, temporarily, deposits would not be convertible into cash. Larger, stronger banks would then take the lead, first, in determining that the banks under attack were in fact fundamentally solvent, and second, in lending cash to those banks that needed to meet withdrawals. Though not an entirely satisfactory solution – the suspension of payments for several weeks was a significant hardship for the public – the system of suspension of payments usually prevented local banking panics from spreading or persisting. Large, solvent banks had an incentive to participate in curing panics because they knew that an unchecked panic might ultimately threaten their own deposits.
It was in large part to improve the management of banking panics that the Federal Reserve was created in 1913. However, as Friedman and Schwartz discuss in some detail, in the early 1930s the Federal Reserve did not serve that function. The problem within the Fed was largely doctrinal: Fed officials appeared to subscribe to Treasury Secretary Andrew Mellon’s infamous ‘liquidationist’ thesis, that weeding out “weak” banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were small banks (as opposed to what we would now call money-center banks) and not members of the Federal Reserve System. Thus the Fed saw no particular need to try to stem the panics. At the same time, the large banks – which would have intervened before the founding of the Fed – felt that protecting their smaller brethren was no longer their responsibility. Indeed, since the large banks felt confident that the Fed would protect them if necessary, the weeding out of small competitors was a positive good, from their point of view.
In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn. …
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
Best wishes for your next ninety years.
Today, the entire Western financial world holds its breath every time the Fed chairman speaks, so influential are the central bank’s decisions on markets, interest rates and the economy in general. Yet the Fed, supposedly created to smooth out business cycles and prevent disruptive economic downswings like the Great Depression, has actually done the opposite.
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