Do you remember the Great National Debt Ceiling Debate of July 2011? The United States government was approaching its self-imposed debt ceiling of $14.3 trillion, and Republicans in Congress were refusing to increase the limit. But Democratic President Barack Obama and his Congressional allies refused to slash government social service programs, and the entire national government lurched painfully towards a full scale default.
At the last moment, the parties compromised by passing a short term spending measure, along with legislation to create a bipartisan “super committee” of Congressional leaders to negotiate a long term solution to the crisis. They gave the committee until this week to reach an agreement on restoring fiscal sanity to the federal budget process.
Meantime, in just the last four months, the pile of debt has soared from $14.3 trillion to well past $15 trillion. And how much progress has the super committee made towards reaching an agreement on balancing the budget and paying down the debt?
Apparently, none whatsoever.
The Threat of Sequestration
The politicians all hit the Sunday morning talk shows this weekend, full of blame for the opposing parties. The Democrats continued to paint their opponents as the party of the wealthy, while the Republicans countered that the Dems would tax and spend the nation into oblivion.
Lurking in the background, though, is a fail-safe trap door called “sequestration.” In order to ensure that the financial markets would not panic at any hint of a super-committee failure, last July’s budget law arranged for discretionary spending to be slashed across the board in an automatic, indiscriminate manner if no agreement was in sight by this week.
That’s exactly where the process appears to be heading, although both parties seem to agree that indiscriminate slashing would harm the national interest. Democratic Defense Secretary Leon Panetta and Republican South Carolina Senator Lindsey Graham, for instance, appear to fully agree that such budget reductions would gut the nation’s military capabilities.
And what if the United States simply decided to continue spending its way into a larger debt burden? We can easily glance across the Atlantic Ocean, to a similar crisis unfolding in Europe, to foresee the consequences of such a choice.
Three Weeks, Three Fallen Governments
As in the United States, the nations of the European Union (EU) are attempting to address their own debt burdens. Although the EU itself is not in danger of default, several of its member nations are now unable to borrow money on the credit markets at reasonably affordable interest rates. Their response has been to resort to deeply unpopular austerity measures to conserve cash flow to pay down debt.
The public response, predictably, has been angry. Two weeks ago, the Greek government was swept out of office by a disgusted public that had been rioting in the streets of Athens. Last week, as protests grew in Rome and other Italian cities, Prime Minister Silvio Berlusconi resigned from office as well. And just last weekend, the conservative Popular Party of Spain swept back into power, dislodging a Socialist Party that had ruled since the early days of the deeply unpopular Iraq War.
Skeptics continue to raise concerns that the entire euro currency may be doomed if the EU fails to establish a process to bail out debt-burdened member nations. Expecting the EU to do so is somewhat analogous to expecting the federal government of the United States to bail out bankrupt states like California … except that, unlike the EU, America’s federal government itself is drowning in debt.
Things To Come
So what can we expect to occur in the United States in the near future? It is indeed highly doubtful that the political parties will suddenly be seized by a spirit of compromise and achieve a comprehensive agreement on balancing the annual budget and then paying down the $15 trillion of accumulated debt. That is a particularly unlikely scenario, given that the presidential election campaign is about to shift into high gear with the Iowa Caucus and New Hampshire Primary in January 2012.
It is likely, though, that some last-moment stop-gap measure will be arranged before the process of sequestration begins to eviscerate the U.S. Defense budget and other discretionary funding programs. And as long as other regions of the world appear unstable, the global credit markets may continue to demand American debt, thereby bidding down the interest rate that America must pay to borrow funds.
But sooner or later, global investors will inevitably begin to grow nervous about American profligacy, and will finally look to other governments who wish to borrow money. That is when interest rates paid by the United States government may climb to unsustainable levels, and when the American debt bubble may finally burst.
In European nations, national governments tend to fall once their interest rates rise beyond 7%. Although the American government is still borrowing at rates below 1%, it should not assume that those rates will remain low indefinitely.