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You can't wish away the genie of US debt

Source: Agencies | July 7, 2009, Tuesday | Print Edition

THE US Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It's the national debt.

The country first got into debt to help pay for the Revolutionary War.

Growing ever since, the debt stands today at a staggering US$11.4 trillion - equivalent to about US$37,000 for each and every American. And it's expanding by over US$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 Barack 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.

A national 'blessing'?

The debt is different from recent annual budget deficits, which fluctuate from year to year.

Interest payments on the debt alone cost US$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.

The United States went into the red the first time in 1790 when it assumed US$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." Since then, the US 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.

Locked in debt

The odometer-style "debt clock" near Times Square - put in place in 1989 when the debt was a mere US$2.7 trillion - ran out of numbers and had to be shut down when the debt surged past US$10 trillion in 2008.

The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites 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 US$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 US$11,518,472,742,288 last Wednesday. The overall debt is now slightly over 80 percent of the annual output of the entire US economy, as measured by the GDP.

By historical standards, it's not proportionately as high as during World War II, when it briefly rose to 120 percent 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.

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 US 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 US debt.

But as the US 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 US bonds and other securities.

And if major holders of US debt were to flee, it would send shock waves through the global economy - and sharply force up US 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 federal retirement 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.


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