01.31.2011 0

Will the U.S. Ever Pay the Debt?

  • On: 02/01/2011 09:03:48
  • In: Fiscal Responsibility
  • By Robert Romano

    Imagine a borrower looking to take out a home mortgage, and the lender does a credit check only to discover that the borrower never actually repays any of his debts. Instead, every year, he just takes out ever larger loans and uses credit cards to pay principal and interest owed on the previous debts.

    When the lender asks the borrower if he ever intends to repay the debts, he smartly quips that he doesn’t need to. He can just borrow from himself and his family, in addition to going to the banks, to constantly refinance his obligations. He also has worked out arrangements with his neighbors to borrow money. Those arrangements are contingent his lending them money for their own spending sprees.

    As long as he can keep borrowing with an unlimited credit line, he tells the lender, it doesn’t matter. In fact, so steeped in debt is he, that his creditors cannot afford for him to stop borrowing. There is simply no other way to honor the obligations. Therefore, if he stops borrowing new money, he warns the lender, he would default, leading to catastrophic losses for the creditors.

    In short, he is too big to fail.

    While any responsible lender would probably tell the borrower that he had very poor credit, and that he was not qualified for the mortgage, we’re not just talking about any lender. We’re talking about the bond market. Similarly, we’re not just talking about any borrower. In fact, the above circumstance describes the financial position of almost every advanced economy in the world, including the United States, Japan, and many European states as it relates to sovereign debt.

    Every year on end, the national debts of these countries go up, because every year they fail to balance their budgets. They spend more than they take in, and thus they must borrow. Therefore, they never get around to paying down the accumulated debt. And increasingly, they cannot afford the interest owed on the debt.

    This will become increasingly problematic over the next ten years because the national debt is due to almost double by 2020, from $14 trillion today to over $25 trillion, according the Office of Management and Budget.

    It’s hard enough for the Treasury to refinance the $14 trillion, as is evidenced by the Federal Reserve’s purchases of more than $1.1 trillion of U.S. debt. So difficult is the task now, the Fed has already resorted to simply printing money to refinance the debt.

    By 2020, the Treasury will have to constantly be refinancing $25 trillion worth of debt. By 2030, that number could easily top $40 trillion. Does anyone see a problem here? At what level does the debt become unpayable? At 100 percent of GDP? 200 percent? How about 300 percent? Because that’s where we’re headed.

    The larger the debt becomes, the harder it will be to refinance it in its totality and to roll it over without printing money. The more money that is printed to pay the debt, the less confidence creditors and markets will have in the dollar. In short, the larger a can grows, the harder it becomes to simply kick along to future generations.

    Eventually, it can no longer be kicked. There actually is an upper limit to how far this scam can be perpetuated. It’s when somebody, whether China, Japan, or one of our other major creditors declares that repayment will no longer be accepted in dollars. At that point, printing dollars will not be sufficient to refinance the debt.

    The alternative is for Congress to actually require a balanced budget and that the debt be repaid by a fixed amount, say 10 percent of revenue, every year, not unlike a fixed mortgage payment. Unfortunately, the current system of financing never contemplates debt repayment, which is the only way to prevent collapsing under an expanding debt that cannot be paid.

    That is because several institutions depend on the debt never being repaid, namely, the banks that are profiting off of interest owed. We’ll call them the drug dealers. The government, obviously, is the drug addict. The drug is unlimited spending powers. If governments kick the habit, and stop spending, the banks will lose their cash cow.

    Therefore, treasuries sales every year, now well over $2 trillion, are only marketable if we never repay the debt. So rigged, corrupt, and perverse are the rules of this system, that if the U.S. does not raise the debt ceiling and agree to expand its debt into perpetuity, it would likely be downgraded by credit rating agencies. That’s what Moody’s threatened to do in 1996 when the same issue came up, as noted by former lead analyst at Moody’s, Vincent Truglia.

    That’s what happened to Iceland recently, a nation that after its housing bubble popped, courageously refused to bail out its banks, many of which failed. They were greeted with a downgrade.

    This leaves lawmakers with quite a conundrum. Either, we don’t raise the debt ceiling, get downgraded and watch as the dollar collapses. Or, we raise it with only making token spending cuts, and eventually get downgraded anyway because the growth of the debt is actually unsustainable. And still the dollar collapses.

    The only rational option is to voluntarily kick the spending habit and tell the drug dealers to pound sand. It must be required that the budget be balanced, spending be limited to a fixed percent of the economy, and that the debt be repaid at fixed intervals. It is the only way to avoid the collapse that now is all but certain.

    Robert Romano is the Senior Editor of Americans for Limited Government.

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