America Sinking Under Obama's Towering Debt

Nile Gardiner Daily Telegraph July 2, 2010

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By Nile Gardiner World Last updated: July 2nd, 2010

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I hope the White House is paying attention to the latest annual Congressional Budget Office Long-Term Budget Outlook, which offers a truly frightening picture of the scale of America's national debt, with huge implications for the country's future prosperity. According to the non-partisan CBO, â??the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War IIâ?:

As a result of those deficits, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation's annual economic output (as measured by gross domestic product, or GDP), a little above the 40 year average of 36 percent. Since then, large budget deficits have caused debt held by the public to shoot upward; the Congressional Budget Office (CBO) projects that federal debt will reach 62 percent of GDP by the end of this year"â?the highest percentage since shortly after World War II.

In its report, the CBO also offers two alternative long-term scenarios. The first long-term budget scenario, the more conservative extended baseline scenario, is worrying enough:

Federal debt held by the public would grow from an estimated 62 percent of GDP this year to about 80 percent by 2035. Interest payments, which absorb federal resources that could otherwise be used to pay for government services, currently amount to more than 1 percent of GDP; under this scenario, they would rise to 4 percent of GDP (or one sixth of federal revenues) by 2035.

The second, far bleaker budget outlook, is the alternative fiscal scenario, which â??incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period.â? Under this scenario:

With significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035.

The CBO warns of potentially devastating consequence for the United States if this debt mountain is not tackled, and even points out that its "projections understate the severity of the long-term budget problem because they do not incorporate the significant negative effects that accumulating substantial amounts of additional federal debt would have on the economy"?:

Large budget deficits would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment"â?which in turn would lower income growth in the United States. Growing debt would also reduce lawmakers' ability to respond to economic downturns and other challenges.

Over time, higher debt would increase the probability of a fiscal crisis in which investors would lose confidence in the government's ability to manage its budget, and the government would be forced to pay much more to borrow money.

The CBO assessment is probably the most important economic report the President of the United States will read this year. And it should be a huge wake-up call for the Obama administration, which has so far adopted a policy of sticking its head in the sand in the face of an impending Greek-style financial crisis in the very near future.

In striking contrast, the new British government has acknowledged the scale of the debt crisis in the UK, and has launched a tough austerity package to deal with it. The White House needs to wake up to reality, and aggressively reduce borrowing, cut down on public spending, and dramatically reduce the size of the federal government. If it doesn't, there will be devastating implications for the United States as the world's only superpower.

With his reckless big government policies, Barack Obama threatens to run his country into the ground, with American decline the inevitable end result. It is not too late to reverse course, but so far there is not a shred of evidence that the president is willing to do what is necessary. Not only will the United States suffer from this kamikaze-style approach, but the world will too.

Tags: Barack Obama, Congressional Budget Office, US national debt

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