Skip to comments.National Debt Makes U.S. Vulnerable; Lender Nations Could Wage 'Financial Warfare'
Posted on 06/30/2008 6:06:46 AM PDT by Diana in Wisconsin
Tax rates could double. Spending on education, research, health and even Social Security could be squeezed tighter than ever. And foreign governments could use powerful financial leverage, rather than military force, to impose their economic and political agendas on the United States.
All because the U.S. national debt - which is being financed on a daily basis by the governments of China and a host of oil-exporting states, among others - has made this country far more vulnerable than its elected leaders let on, says David Walker, who recently finished a 10-year stint as U.S. comptroller general and head of the Government Accountability Office.
The nation's former auditor-in-chief will outline this crisis scenario today in Milwaukee, when he and an entourage of like-minded Washington policy analysts make their latest stop on Walker's Fiscal Wake-Up Tour.
Foreign governments and investors now hold fully half of the United States' total outstanding debt, making Washington susceptible to a new form of geopolitical conflict that Walker calls "financial warfare."
"I'm sure that people during the Roman Empire never thought that that Rome would fall," Walker said in an interview last week.
The tour began over two years ago and has visited 40 cities so far. The idea is to stoke change at the grass-roots level because, Walker said, elected leaders have been unwilling to address America's impulse to live beyond its means. Tour participants say they are acting in the spirit of Paul Revere.
"I believe we will wake up and make tough choices," Walker said. "The question is when. Will it be before, or after, a crisis?"
Walker and his group span a wide ideological spectrum. Appearing with him in Milwaukee are:
Stuart Butler, vice president of the conservative Heritage Foundation, which has close ties to the Bush Administration.
Alice Rivlin, former director of the Office of Management and Budget under President Clinton and now with the center-left Brookings Institution.
Robert Bixby, director of the centrist Concord Coalition, which focuses solely on national budget policy. Its board includes former Federal Reserve chairman Paul Volcker, former Clinton Treasury Secretary Robert Rubin, and former senators Sam Nunn, a Democrat, and Warren Rudman, a Republican.
Since March, Walker has been working as founding president and chief executive of the Peter G. Peterson Foundation. Peterson, a billionaire co-founder of the Blackstone Group private equity firm and commerce secretary under Richard Nixon, launched the foundation to lead a fiscal reform movement.
In congressional testimony last week, Peterson called the nation's borrow-and-spend practices "undeniable, unsustainable and yet politically untouchable." He said if policies remain unchanged, federal commitments including debt service over the next 75 years will total $53 trillion - which comes to $175,000 for every man, woman and child in the U.S. today.
"A lot of politicians know we have this problem and don't do anything about it," Bixby said. "What gets us on the road is a shared concern that we're dumping a huge - and some argue an immoral - burden on future generations. The immoral part is that we know we're doing it and we don't care."
As the 2008 presidential campaign began, Walker's tour began shadowing the primaries. Stops have included New Hampshire, Ohio, Michigan, Iowa and a February visit to Madison.
Bixby follows the spending and tax pledges of both party's candidates. Without quibbling about what he calls the questionable budget math of John McCain and Barack Obama, Bixby arrives at a different point: Even if either candidate is able to finance his campaign pledges in a budget-neutral way, the nation's fiscal imbalances will continue to worsen.
"We cannot afford the fiscal policy that we already have," Bixby said.
Even before the baby boomer generation has begun to retire, Social Security, Medicare and Medicaid constitute 42% of the federal budget, he said. In the next 30 years, the share of population that's older than 65 will hit 20%, from 13% currently, which commensurately inflates the cost of those programs. At the same time, inflation in health care costs far outstrips economic growth, meaning that Medicare and Medicaid in 40 years will be as big as the entire federal budget today.
In less than 20 years, those three programs, plus interest payments on America's debt, will consume all the tax revenue the nation can expect by then, Bixby said.
"You'd get a crisis long before this," Bixby said.
And then there's what Walker calls financial warfare. Japan and China are America's two biggest lenders. Great Britain is third, followed by a bloc of oil-producing states including Iran, Kuwait, Saudi Arabia and Libya.
So in trade and military disputes, China, as America's No. 2 lender, holds considerable influence.
Foreign lenders, Bixby notes, can demand conditions - or threaten to stop buying U.S. Treasury securities, or even dump their existing holdings outright. To lure other buyers of Washington's debt, U.S. interest rates would then have to rise sharply, throttling the nation's economy.
"It means foreigners have more leverage on us and we have less leverage on them," Walker said. "You have to pay attention to your bankers."
"I don't think we should assume that we are too big to fail," Bixby said.
Growth not enough
All on the tour agree it's a fantasy to argue that the U.S. can grow its way out of its debt, Bixby said. "The economy would have to grow at an implausible rate forever," Bixby said.
Walker and his entourage also concur that few politicians are prepared to deal with an issue that will require sacrifices and hard choices - telling Americans that they cannot borrow forever.
But the next president and Congress cannot duck the issue entirely. For instance, a large portion of President Bush's tax cuts are scheduled to expire in 2010, and many want to extend them.
Walker and the Peterson Foundation are pressing the issue in several other ways.
The foundation recently acquired distribution rights to a documentary film, "I.O.U.S.A.," to be released in 13 cities in August. Walker calls it an "economic 'Inconvenient Truth.' "
The foundation has published "A Citizen's Guide to the Financial Condition of the U.S. Government" on its Web site, www.pgpf.org.
As for the tour, Walker said the biggest audience response comes from the slide he reserves until the end - his three grandchildren.
"We are not only putting ourselves in debt and expecting our kids to pay for it," he said, "we're cutting back on investments in the future."
The inflation question was asked at the Madison event earlier this year. Dave Walker said that entitlements are indexed to inflation so it wouldn’t do any good.
I know - that is the rock/hard place problem and why the FED lies about the true rate of inflation. BUT - The FED can NOT control anything but very short term interest rates. Medium and long term rates are set by the market and I think that is going to change and go much higher.
I have been looking into RTPIX, RRPIX, PST and TBT as a way to invest to what I think is going to happen...
This would be good advise to our government.
A. A billion seconds ago it was 1959.
No it it up to 1976. That means this email has been around for 17 years. (1 billion seconds = 31.69 years)
B. A billion minutes ago Jesus was alive.
And quite cranky at about 110 years old. (1 billion minutes = 1901 years).
E. A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.
Now it is closer to 3 hours. ($1 billion / $2.9 trillion * 365 days * 24 hours = 3.02 hours)
“I’m sure that people during the Roman Empire never thought that that Rome would fall,”
...and yet, where would we be today, if it hadn’t?
For many people, #s 2 & 4 are extremely hard to do at the same time and it never works out that way.
1B Zimbabwe $ = approx 1 US $
Good article, unfortunately written about five years too late.
Can we sell ‘debt credits’ to other governments like the ‘carbon credits’ proposals?
Oh, higher interest rates for sure, but of greater concern are the radically higher tax rates (since even at high interest rates, US debt will be treated much like CDO debt is today)
So, if, as one poster pointed out, that entitlements indexed for inflation are honored (they won't be....but that's another story) and nobody will loan us money, then where will the government get the money? “The Rich”.....”Big Oil”....”Greedy CEO’s and their company's” The productive will be put out of business (or forced into the black market).
For the GOP to redeem itself its going to take people coming forth with revolutionary ideals - not more of the same stuff we have been seeing for the past 20 years or so.
The article says that we are increasingly having to rely on China and oil exporters to bail us out. The national debt problem would never have gotten to where it is without our trade imbalance.
Borrowing puts our national security in peril. One of the few modifications to the Constitution that I would support is a balanced budget amendment.
The article says many things.
The question is: are they true?
The national debt problem would never have gotten to where it is without our trade imbalance
Really? So it is impossible for a country with a positive trade imbalance to borrow money?
Or, alternatively, it is impossible for a country with a negative trade imbalance to delever?
Here's a hint: our trade imbalance is currently $61 billion. Our total economy is $13.5 trillion.
In other words, our trade imbalance is 0.4% of our economy.
Meant to ping you to 34.
What did the founding fathers think about debt?
“I place economy among the first and most important of republic virtues, and public debt as the greatest of the dangers to be feared.” -Thomas Jefferson to William Plumer, 1816
“Within our own borders we possess all the means of sustenance, defense, and commerce; at the same time, these advantages are so distributed among the different states of this continent as if nature had in view to proclaim to us be united among yourselves, and you will want nothing from the rest of the world.” Samuel Adams July 4, 1776, on Independence
“No generation has a right to contract debts greater than can be paid off during the course of its own existence.” - George Washington to James Madison 1789.
No comment? The article is total BS. The foreign investors cannot call in the debt. They are stuck, powerless, watching their investment deflate every day. Tough.
“The Roman Republic fell, not because of the ambition of Caesar or Augustus, but because it had already long ceased to be in any real sense a republic at all. When the sturdy Roman plebeian, who lived by his own labor, who voted without reward according to his own convictions, and who with his fellows formed in war the terrible Roman legion, had been changed into an idle creature who craved nothing in life save the gratification of a thirst for vapid excitement, who was fed by the state, and who directly or indirectly sold his vote to the highest bidder, then the end of the republic was at hand, and nothing could save it. The laws were the same as they had been, but the people behind the laws had changed, and so the laws counted for nothing.” - Teddy Roosevelt
I just bought a twelve-pack of Foster's. I added to our trade deficit. I didn't do squat with regard to our budget deficit.
If our level of 66% means we're doomed, I guess Japan died about 5 years ago.