In August of this year, Admiral Michael Mullen, chairman of the Joint Chiefs of Staff, advised Congress that "The National debt is the biggest threat to our national security." In November, voter sentiment against the debt and deficit led to an historic rebuke of Congressional incumbents. In December, the President's Debt Commission laid out in stark terms the imminent economic impact of continued deficit spending. Apparently rejecting these clarion calls, the President and Congress acted in the lame-duck session to cut not one dime of federal spending, while increasing the national debt by nearly $1 trillion. They are ignoring a glaring problem that, if not addressed soon, will cause a panoply of other problems.
Some insist that the problem with increasing the debt by nearly $1 trillion is that the borrowed money will be loaned to us by China. Concerning as it is that we have become the world's largest debtor to a foreign sovereign whose interests are (to put it mildly) not always in harmony with our own, that's not the biggest problem. What ought to be of even greater, more immediate concern is the fact that China will refuse to loan us the money.
From October 2009 to October 2010, we financed $734 billion of our $1.690 trillion deficit through loans from foreign entities. And while China remains our largest creditor, China actually reduced the amount of U.S. debt it holds by $32 billion over the last year -- from $938 billion to $906 billion. Through its actions, China has indicated that it will no longer fund the U.S. government's practice of perpetual deficit spending.
So if not China, then who? That's the problem.
The largest increase in U.S. debt holdings over the past year was a near five-fold increase by the UK -- from $108 billion to $477 billion -- and a near three-fold increase by Canada -- from $44 billion to $125 billion.
The reality is that the UK and Canada do not have another half-trillion dollars to loan the U.S. in 2011. According to the World Bank, the entire economic output of the UK and Canada combined is only about $3.5 trillion annually.
So if China won't and the UK and Canada can't, who is going to loan us a trillion dollars in the next 12 months? Nobody knows.
The economic threat from China and other foreign countries loaning us trillions of dollars is like falling off the Empire State Building. It isn't the fall itself that kills you"? it's the sudden stop.
Commonwealth investors increased their U.S. holdings last year as they fled debt holdings in the Eurozone, nearly collapsing several EU government-bond markets derisively referred to as the PIIGS -- Portugal, Italy, Ireland, Greece and Spain.
It is instructive to look to Europe to forecast what could happen to the U.S. Having been forced to find religion, every EU country is now embracing austerity. Our circumstances will soon convert us to the cause of fiscal fundamentalism as well.
One option would be to continue borrowing wildly, like the PIIGS, until the bond markets simply proclaim, "No more!" The ensuing lack of confidence hit the PIIGS economy, causing unemployment rates in those countries to double over the last three years to an average of 13.3%. (Spain's unemployment is now over 20%).
The other option necessarily involves forcing Congress to live within its means by adopting a balanced budget amendment. Germany has benefitted substantially from taking a similar step two years ago. With a constitutional mandate to balance its budget by 2016, Germany now has an unemployment rate of 6.7% -- its lowest in 18 years. Switzerland has long had a balanced budget requirement and currently enjoys a 4.4% unemployment rate, the lowest in Europe.
The need has never been greater for the U.S. to balance its budget by cutting spending. But as the President and Congress have once again shown, it simply will not take that difficult step unless it is forced to do so. For that reason, we need a balanced budget amendment -- ideally one patterned after the amendment proposed by Pass the BBA (of which I am national chairman). It is calling on Congress to vote on the BBA on October 1, 2011 -- the first day of the next fiscal year. We should all pray that it will not be too late.
Set aside for a moment the threat of the U.S. debt crippling our children decades from now or our grandchildren a generation from now. With China unwilling to loan the U.S. additional money, and the rest of the world likely unable to loan us enough money, the debt threatens to cripple our economy now.
We can either act to pass a balanced budget amendment this year -- the only way to ensure Congress will act -- or China and others will force upon us a more abrupt and painful balanced budget. The choice is ours"? but not for long.
Letter to the Editor
Ken Blackwell, national chairman of Pass the Balanced Budget Amendment (Pass the BBA), is a former U.S. ambassador to the United Nations Human Rights Commission and a senior fellow at the Family Research Council.
Fine idea. Does Mr. Blackwell propose that we balance the budget in 2012? 2015? 2025?
Just asking.
PCC, I believe the title of the column was Balance the budget NOW.
That's not possible, Danny. If you take just the direct debt (not counting obligations that are promised, like Medicare, SS, gov't pensions in the future - BTW the promises will be broken), it is in the range of $13,000,000,000,000 (13 trillion bucks). Don't quote me on these exact numbers, as I am going by memory and rounding, but all the taxes paid by all US citizens and corporations are ~2.1 Trillion. That includes payroll (SS/MC) taxes too, as there is no "trust fund" and the money paid in there is just part of overall receipts.
So, with a budget of ZERO for all government programs, even the ones that are constitutional like Federal Courts and the Navy, Fedzilla still would need to collect the same amount of tax as now for 6 or 7 years to pay off the debt.
BUT, WAIT! That would be if all the money were in zero-interest loans. The Chinese, the Brits, the Japanese, and even the Canadians (sorry ;-) are not stupid enough to have loaned us money interest-free. The rates are exceptionally low right now, as forced by the FED, but figure even 1 % right now of $13,000,000,000,000 (though I'm sure it is more complicated than one rate). That's$ 130,000,000,000/yr, 130 billion bucks a year. So, you can take that off of the 2.1 Trillion bucks collected each year first thing, as if you don't pay the interest, the banks wants it's money back NOW, plus penalties. That gives you 1.96 Trillion to pay off the debt with if there were no government expenses at all.
You may think "that'll work, it'll just take 7 years instead of 6 to pay off the debt, if we had no Fed. government (we wish!)" WAIT! That assumes a low, low interest rate of 1 %. As an exercise for you, Danny, figure the payment plan out for a 5 % rate. OK.
(I will continue with another thought to add.)
oops, my continuation - I almost forgot:
Now, you, say, OK, let's be reasonable, the best we could do is cut the Fed. Gov't spending by 1/3 ( any more than this and you will be cutting people's medicare and SS checks right now ). Well, since right now the government borrows more money to cover about 1/3 of it's expenditures (so, only 2/3 of the total expenditures come from receipts), then cutting 1/3 of that 2/3 (i.e., 2/9 = 22% of the expenditures), will not even have us even.
More than 1/3 of the Fedzilla budget must be cut in order to just break even, meaning the time to pay off the US Federal debt is either infinity or set by the book of Revelations, whichever comes first.
I hope that explains to you why the debt can't possibly be paid now. I don't say this, Danny, as an apologizer for the US government - I just mean to show you what kind of seriously bad shape we are in.
(Oh, I haven't gotten into Americans' personal debt and personal and commercial real estate yet - I don't want to depress you)
oops, brainfart there - forget my 2/3 x 1/3 (22 %) part. The 1/3 cut would be 1/3 of budget, so yeah, we would need to cut the amount of the Fed budget equal to how much we borrow now to be even, OF COURSE (mad at myself for this silly mistake).
C'mon, Mel... are you intentionally being obtuse? The point of the article is "balance the budget NOW", NOT "pay off all our debt NOW"... those are obviously not the same thing. Yes, paying off our debt is part of a balanced budget program, but these are separate things.
No, Ned, I guess I was being accidentally obtuse ;)
Really, I was thinking of the debt as a whole, and how that relates to any type of Constitutional Amendment to balance the budget.
I'm all for constraining the Fed. Gov't to only spend what it takes in - I still don't know how the debt would be paid, in that case. A balanced budget would indeed be a great step in the right direction, but, man, each yearly budget will continue to have a portion of it allocated to interest payments - the problem won't be seen as really, REALLY, serious until the interest rates rise.
Imagine a balanced budget of 2.5 trillion bucks a year, in which 50 % of expenditures are just interest payments. That would continue for all time, unless something additional is done besides just a balance of the yearly budget.
If we could just get to that point of stasis, that would be a necessary first step in the right direction. Then we might have some breathing room while we figure out how we start paying the debt down so we are not paying 50% of the annual budget to interest on the debt forever.
One way might be for the government to form a partnership with the oil and gas companies to drill, baby, drill. The government allows the energy companies to make a handsome profit on getting the product out of the earth and into the market, while the government takes a percentage off the top because ultimately it 'owns' the raw product that is being drilled, pumped, refined, and sold. The proceeds from the government's take are used specifically and only to pay off the debt. Any other use is a criminal offense resulting in mandatory prison sentences for all government officials involved, whether elected or appointed.
You guys are looking at this all wrong. The way the system works with fiat money requires debt to be issued. To take real resources out of the economy to pay off the debt is very deflationary & will kill any growth. As pointed out earlier it is mathematically impossible anyway. What happens in the end is either a frank default or a stealth default via inflation. Then we issue a new currency & start it all over again. This is how paper money works.
Yep (on the defaulting/hyperinflation scenarios). If you are at all ahead in your finances, you'd better put it something that will hold value - not dollars.
Congratulations! Your point is well taken, but who will take it up?
Soon-to-be Speaker of the House John Boehner has proclaimed that spending levels must be cut back to 2008 levels.
When you consider that federal tax receipts peaked at 2004 levels and are currently in a trough between 2000 and 2004 levels, the 2008 proposal appears to be another con from the politically elite inside the beltway.
The Fiscal Commission you mention laid out a dramatic scenario but that scenario was only laid out so they can justify further spending, not spending cuts. The Commission proposed many tax increases or other schemes to increase revenues and paid lip service to cutting spending. In fact, if the recommendations are carried out there will be further hard hits to the economy as citizens become further puzzled as to the long term safety of the personal economics as well as their investments.
There does not appear to be any real committment to cutting the size or responsibilities of the federal leviathan and that's the real problem.
Further artificiality can be found in the fact that the Fiscal Commission was made up of recycled political hacks who created many of the problems we face today.
The balanced budget concept is OK, but it would also make sense to cut spending 1 or 2% a year until unemployment falls below 5.9%.
It would also make sense to create a government review committee whose mission would be to review every agency and every employee to determine what is outdated and what is not.
Part of the problem is that once the government creates a bureaucracy, it never goes away but only gets larger.
The whole concept of federalism should be put under the microscope. Keep the best and get rid of the rest. And there's plenty of slack that can be cut.
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