Controlling obesity is all the rage now in America as, indeed, it should be. Feeding the American appetite with too many of the wrong kinds of calories is exacting a terrible toll on the health of Americans of all ages. Obesity, like cigarettes, kills. In recent years, Congress, along with a compliant President Bush and now with an enthusiastic President Obama, has been appeasing another kind of appetite with reckless abandon. The toll this fiscal obesity will exact from America and our people is incalculable and Jenny Craig will be of no help.
Clearly, most Americans do not want to be force fed programs they haven’t asked for and that they know neither they, their children nor their grandchildren can possibly afford. People throughout the country are beginning to dig in their heels and a growing number of congressmen and senators know it. Seventy years ago, Japanese Admiral Isoroku Yamamoto is quoted, following his successful and deadly attack on Pearl Harbor, “I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.” It appears that the American electorate, long apathetic and used to acquiescing by default to reckless government spending may be awakening from its long slumber. Let’s hope so, for it is the last best hope we have to rein in the destructive behavior of so many of our elected representatives of both parties in Washington and the White House strategists who lead them on.
As we noted in this column two weeks ago, Moody’s has fired the first warning shot over the bow of our ship of state. The international credit-rating agency warned that America’s AAA credit rating would be in jeopardy (given our spiraling debt) if economic growth does not keep pace with the projections made by the Obama Administration. China and Japan, our largest sovereign creditors, fired two more warning shots at last week’s treasury auction when they decreased their purchases of U.S. debt. But is anyone in Washington listening?
Let us stipulate that our concern is not that America is in danger of defaulting on its ever-mounting debt as Greece and, perhaps, Spain, Italy, Ireland and Portugal might very well be. We will always pay our bills: even if we have to print the money with which to meet our obligations when they come due. Should our creditors here in America and those abroad, however, begin to worry that they will be paid back with dollars that are worth a lot less than the dollars they loaned us, they will demand a higher rate of interest to offset that risk. If our creditors, to whom we are more beholden than ever before, were to decide they want a substantially higher rate of return on their money than we currently pay (approximately 3.6% for 10 year maturities and 4.6% for 30 year maturities) every segment of our society could be drastically affected.
Of equal if not greater concern, however, is that the dollar’s continued position as the world’s reserve currency is no longer certain. As our deficit widens and our debt grows nations on whom we depend are beginning to explore alternatives to the dollar as the world’s reserve currency. This should be causing many sleepless nights for those in Washington who are responsible for the health of our economy. The loss of the dollar as the world’s reserve currency would not merely be a loss of prestige. Such an occurrence would cause the dollar’s purchasing power to plunge and affect the standard of living of nearly everyone. A reserve currency is the currency nearly all nations hold in order to transact all international business (such as for commodities) that are priced in the reserve currency of the day. Think oil, gold, copper, etc. In many instances it is the currency nations use to settle their debts as well, and it is also the currency nation’s hold for the proverbial rainy day. A transfer of the world’s reserve currency status from the dollar to, say, the Chinese renminbi would cause a run on the dollar as sovereigns began trading their collective trillions in dollars for renminbis. Loss of reserve currency status could represent a crisis of unimaginable proportions causing a sudden and precipitous drop in the value of the dollar. Far fetched? No, not at all. In fact, there is a serious move among a number of nations, including China, which during this century will become the world’s largest economy, to begin preparing for such a development. Nations on whom we depend for trade, loans and investment are eyeing developments in Washington with alarm. Again, we ask, is anyone in Washington listening?
While few people can really predict when and if such an adverse event might occur, there is no question that the odds go up as our national indebtedness goes up. And it is going up exponentially.
Our total debt is now as large as our entire economy, if we include what we owe here in America (to domestic holders of treasury obligations) and what we owe to China, Japan, the Saudis and an assortment of oil-supported sheikdoms and other smaller foreign creditors as well as what we owe to our own Social Security and Medicare trust funds and our collective state and municipal obligations. Greece, the basket case of Europe, has total debt of 108% of its economy. Our total debt stands at just a fraction under 100% (98.2% to be exact) of our entire economy ($14 trillion of total debt vs. $14.25 trillion of total economic output. While we suppose we can always cancel some (or all) of that portion of our debt that is the result of what our government has borrowed from the so-called Social Security and Medicare trust funds, this is not a pretty picture.
Carmen Reinhart and Kenneth Rogoff, economists at the University of Maryland and Harvard, respectively, in their recent book with the tongue-in-cheek title, “This Time is Different: A Panoramic view of Eight Centuries of Financial Crises,” sound an ominous alarm. They note that every time an economy begins precipitously to run up debt, various, so-called, experts are always there to provide comforting advice that “things are different” and we needn’t be concerned about the debt “this time.” The authors then go on to demonstrate, convincingly we think, that this invariably has been, and continues to be, just plain wrong. They found that, even in a developed economy, once public debt reaches 90 percent of economic output, it begins seriously to stifle economic growth. While we make no pretense of being qualified to attest to the findings of these accomplished economists, we get little comfort from the reassurances of the Obama Administration’s economists that, “this time it’s different.” We fear that it is not. We are spending with abandon and exaggerating (outrageously, we think) what this spending is accomplishing. “Hail Mary” passes rarely work in football and certainly never work as economic policy.
We have now spent (or committed to spend) nearly a trillion dollars to “stimulate” the economy (exclusive of the TARP bailouts and new stimulus proposals) and all we really have to show for it is the fastest increase in our deficit in history. Claims of jobs saved are fatuous. How do we even begin to assess the cost of a trillion dollars being vacuumed out of the capital markets by the government instead of being available for private investment and job creation in the private sector?
Harvard economics professor Robert Barro, writing in the Wall Street Journal last week took serious issue with Christina Romer’s (Chair of President Obama’s Council of Economic Advisors) estimates of the multiplier effect of government stimulus dollars. Professor Barro’s analysis indicates that, over five years, the President’s stimulus package trades $600 billion of public spending for $900 billion of private expenditure. It is, he notes, a bad deal.
Given that 77% of the stimulus money was still sitting in Washington at the end of last year, the notion that the stimulus program was putting people to work (net of jobs that otherwise would emerge in the private sector) in any significant way was patently absurd. As Democratic Senator Evan Bayh, one of the more respected and analytical members of the Senate, said when announcing his decision not to seek re-election, “if I could create one new job by working in the private sector, that would be one more job than Congress has created in the past six months.” Notice how no one mentions, “shovel-ready jobs” anymore. It was an empty sales line a year ago, and it’s an empty sales line now. But this time everyone knows it. We know that roughly 50% of the stimulus money will be directed to existing government agencies such as Health and Human Services and the Department of Education. Again, a tremendous increase in spending to existing government agencies disguised as economic stimulus. Worse yet this added spending will become the baseline for future budgeting.
It would be wrong and unfair to lay this gathering storm at the feet of President Obama. The storm clouds began gathering long before President Obama became president, indeed, long before President Obama was even old enough to vote. But President Obama came to office promising change and has governed, instead, by greatly compounding the errors of his immediate predecessor and most other democratic and republican administrations of recent decades.
It would take a courageous and masterful leader and a magical moment to say to the American people, “the government has made entitlement promises to you that we can’t keep…that we can’t afford, and that we can’t place on the shoulders of our children. We’re going to have to establish a “means test” for Social Security and Medicare and even the age at which our people will be eligible to begin receiving benefits. We’re also going to have to eliminate hundreds, maybe thousands, of programs that are wasteful or redundant or that we can do without. Henceforth, there can be no programs that are ‘untouchable.’”
It seems we will have to wait for such a leader and such a magical moment. We can only hope he or she arrives in time.