04.30.2009 0

The Ticking Sovereign Debt Bomb

  • On: 05/28/2009 10:19:22
  • In: Fiscal Responsibility
  • By Robert Romano

    The debt bomb is ticking. And unless it is disarmed, the American people will inevitably be plagued with out-of-control inflation, confiscatory taxes, and higher interest rates.

    As congressmen across the nation work out of their home districts this week, they will undoubtedly meet with scores of constituents on a host of issues facing the nation. And the one they may most wish to ignore is the one that their constituents must most urgently bring to their attention.

    Before it is too late.

    Last week, Moody’s downgraded Japan’s sovereign credit rating from AAA to AA2. The UK suffered a similar fate from Standard & Poor’s as the medium-term outlook on her Majesty’s debt was lowered from “stable” to “negative.” These are not mere fleeting ratings bearing transitory significance—these are definitive red flags that governments the world over are spending themselves into the Abyss.

    Britain, in particular, faces a 1 in 3 chance of losing its AAA rating as their debt approaches 100 percent of its Gross Domestic Product (GDP). In layman’s terms, it’s simple: One cannot borrow their entire net worth and expect to be a worthy credit risk.

    Amid the ensuing economic and political fallout, now all eyes are turning to the largest sovereign debt in the world. Ever.

    It is held by the United States government. And, it is a ticking time bomb. With every vote congressmen make to plunge the nation deeper into debt—now more than $11.3 trillion (and growing)—the clock draws closer to zero. Even Barack Obama has to admit that it is “unsustainable,” although in the same breath he proposes another trillion dollar bailout or a vast expansion of the government health care monstrosity.

    As the federal government attempts to monetize the national debt through Federal Reserve purchases of Treasury bonds, as the budget grows to $3.6 trillion and the deficit to $1.8 trillion, and as China slows its purchases of treasuries and proposes creating a new international reserve currency, the totality of this grim reality is beginning to come into full view.

    The Financial Times’ John Taylor brings the picture into full focus from the debt to GDP perspective: “The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.”

    He also indicates that if there is no course reversal by Congress, in 2019 it would take 100 percent inflation to bring the debt to GDP ratio down to 2008 levels. So, $2,000 an ounce for gold, perhaps $300 for a barrel of crude. And sayonara, solvency.

    The picture grows even dimmer when the nation’s unfunded liabilities are brought into the ever-darkening picture: $104 trillion owed to Medicare and Social Security, or $89 trillion and $15.1 trillion, respectively. As the American Spectator aptly notes, the U.S. economy only produces $14 trillion on an annual basis. So, those kinds of debts—no matter how far off the balance sheet Congress puts them—could be pretty tough to pay off.

    Especially when one realizes that right now the economy is actually shrinking.

    Tick. Tick. Tick.

    All of which raises important questions for the American people, their representatives, and to future generations that are being shackled with this debt: What is the current source of a nation’s wealth? And what will it be in the foreseeable future?

    At this moment, it is the public treasury, and not the people themselves, their productivity, and their ingenuity. Certainly, with spending running 50 percent over revenues—$3.6 trillion to $1.8 trillion—the government is being run with a credit card, long since maxed out.

    But to what end? Clearly, this is unsustainable. The government has promised more than it can ever deliver—and at a price far more than the American people could ever pay.

    American allies overseas are already feeling the pinch. And as the nation’s debt rapidly approaches 100 percent of GDP in just a short 15 years—that’s just 3.75 presidential terms and 7.5 Congressional terms for political junkies—lawmakers have a defining, historic choice to make: To disarm this ticking bomb, or to dress it up with pretty bows and deliver it to the American people.

    There is no question that without courageous, no-nonsense political leadership, this bomb will explode. Then the debate will shift to simply how to cope with the catastrophic and fatal damage to a once-great nation. And the term “empty rhetoric” will acquire a whole new tragic meaning.

    Robert Romano is the Senior Editor of ALG News Bureau.

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