12.15.2010 0

Sovereign Debt Crisis Can Happen Here

Debt Riots in Greece

By Bill Wilson

All year long, Congress has failed to address the budget. Instead, the government is currently operating on a continuing resolution that expires in less than ten days. So, it needs to pass another one just to keep the government running, like the one that passed the House on December 8th.

The House-passed budget resolution will lock in current spending levels at $3.5 trillion until September 30th, 2011. That includes $1.1 trillion for discretionary spending, and does nothing to rein in the spiraling costs of entitlements.

Senate Democrats want to go even further by turning the continuing resolution into a 1,924-page omnibus monstrosity with even more spending, including year-long funding for ObamaCare and $15 billion to the International Monetary Fund to bail out Ireland.

This is nothing more than a transparent ploy by Nancy Pelosi and Harry Reid to negate the impact of the November elections. The American people spoke out against the unbridled spending, the growing $13.8 trillion national debt, and government overreach into all areas of the economy.

Within mere weeks of the election, how has Congress responded? By producing a nearly 2000-page budget resolution during the lame duck session that will add more than a trillion dollars to the national debt.

The idea is to lock in current levels for a whole year without any spending cuts. Lawmakers will probably get their wish — unless Senate Republicans stand in the way.

By all rights, Pelosi and Reid should have no power to set the nation’s budget priorities right now, having been so soundly rejected by the American people in November. If the current members of Congress have no political will to cut spending now, they should just get out of the way.

This is an area where Senate Republicans can and should take a stand. This measure should be defeated, and the fate of the FY 2011 budget left to the next Congress. The case for inaction is compelling.

Because the tax deal now under consideration similarly does not include drastic spending reductions (it spits out another $56 billion in unemployment benefits and underfunds Social Security by $120 billion), and the Senate omnibus bill will actually increase spending, there could be as much as a $1.5 trillion deficit in 2011.

As a result, Moody’s is once again warning that the agency may switch the outlook on U.S. debt to negative next year if the deal passes as proposed. Because there is a strong bipartisan consensus not to increase taxes during a severe economic downturn and risk a double-dip recession, our fiscal house can only be brought into order, and the $13.8 trillion debt reined in, with spending cuts. The continuing resolution is the proper vehicle for that reform.

This is not Moody’s first warning shot across the nation’s bow. It has previously threatened to downgrade the gold-plated Triple-A credit rating if interest owed on the national debt rises into the 18 to 20 percent range. And according to Congressional Budget Office estimates, that level will be reached by 2018, if not sooner, as reported by Investor’s Business Daily.

Moody’s is not alone. Dagong, a Chinese credit rating agency, has already taken the unprecedented step of downgrading U.S. debt — twice. That is highly significant, considering that China held some $883.5 billion of treasuries as of September, more than any other foreign creditor.

If Congress passes another budget with a trillion-dollar deficit, the likelihood of a credit downgrade by Western rating agencies increases substantially. A credit downgrade will increase borrowing costs, result in a funding crisis, threaten the dollar’s status as the world’s reserve currency, and risk another global financial meltdown.

Based on these repeated warnings, no longer can anyone claim with a straight face that the spiraling national debt is a “long-term” or even a “mid-term” problem. The debt is an imminent threat to the nation’s prosperity. The crisis we face will make the riots in Greece, France, and the UK over austerity measures appear to be benign.

If action is not taken to reduce spending, next year the Federal Reserve will become the number one holder of U.S. debt — in the world — with more than $1 trillion in treasuries. That’s more than China. Overall, the total debt will soar past 100 percent of the Gross Domestic Product in just a few short years. Do the American people want a debt that is larger than the entire economy that can only be paid by printing money?

The fiscal challenges facing the nation are daunting, and the choices facing lawmakers are unappealing. Either Congress cuts spending now, or else the U.S. will become the latest, largest victim of the sovereign debt crisis. It can happen here.

There is another way. A recent International Monetary Fund study shows that successful fiscal consolidation programs around the world have relied primarily on spending cuts, not tax increases. Congress should, instead of passing the continuing resolution, start the budget process next year with baseline FY 2007 levels of $2.7 trillion across the board. That would automatically result in about $800 billion in savings.

Then, if members wish to keep entitlements at current levels, that would have to mean offsetting spending cuts of about $172 billion from elsewhere in the budget. And then, after that, keep on cutting. Get rid of whole departments and agencies that are unnecessary, refuse to accept any sacred cows, get rid of corporate welfare and other subsidies, and flatten and reform the tax code with less exemptions and lower rates.

The continuing resolution represents a big test for Congress. Even more than the tax deal, the budget continuing resolution Congress is about to vote on is what will really add more than a trillion dollars to the debt.

After the outcome of the November elections, will members now vote to accept, out of the gates, another trillion-dollar deficit in 2011? Because that’s not what the American people voted for.

Bill Wilson is the President of Americans for Limited Government.

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