By Rick Sherman
Well, we survived the “fiscal cliff” and have a few weeks until the next financial crisis -- the expiration of the debt ceiling -- becomes the catchword of the day. The longer these crises continue the clearer it becomes that most Americans do not understand -- and make little effort to get a handle on -- what the real issues are and what the Congress and the Administration are doing (or not doing) to address them.
As a qualified Pollyanna, let me help you simplify both the problem and the solution.
The basis of all the sound and fury emanating from Washington and Wall Street can be subsumed in one word: DEBT. For several reasons, the United States owes its debtors a record amount. And that amount is growing at an alarming rate every minute. America’s situation is akin to those sitcom episodes where the poor schnook goes crazy with his/her credit cards and accumulates balances far beyond his/her ability to service. That’s our nation!
For the most part we owe that debt to ourselves, in the form of the various bonds and other instruments issued by the Treasury, the Federal Reserve Bank, and other entities of government. If you hold Treasury bonds, Savings Bonds, or even War Bonds left over from 1945, you are one of our country’s creditors. What upsets many in the Congress and elsewhere isn’t what we owe you, but rather that many of the largest of your fellow creditors are national entities such as the People's Republic of China. China, along with most other viable national economies around the world, invest in U.S. instruments for a very good reason—they are solid investments with as guaranteed a payoff as can be found anywhere.
Now that you understand (in a most elementary way) what form our massive problem takes, you might well ask “why did we accumulate such debt?” Again, the answer is not complicated. We went into debt for the same reason your family may, from time to time, do so: in order to have the things we want but cannot afford using available resources. Simple, no?
Yes simple, but in the case of our national debt it was not a new car or college tuition we wanted to finance, it was all those things we believe we need to continue functioning as a nation like: social services; health care; physical infrastructure; national security, etc.
During ‘normal’ times servicing our national debt is achieved through a healthy, vibrant national economy which grows at around 3% or better annually. With normal prudence on the spending side, such growth provides us with enough governmental income to pay the interest due on all those bonds. But, when we have an economic slowdown such as we’ve experienced since 2008, the only way to pay off debt interest is to issue more bonds. At the same time, largely because of the poor economy, the needs on the spending side increased. You can see that this leads to a vicious cycle whereby we—as with that poor schnook on the TV show—find ourselves in a black hole, unable to see light.
But, as a true Pollyanna, I must insist that there is light! The solution to our problem lies both on the revenue side and on the expenditure side. Eventually our economy will improve. Employment will rebound, more taxes will be collected, and a balance (of sorts) will be struck whereby the crisis-level debt can be reduced. At the same time, the Congress and the Administration will quit bickering and focus on reform of our tax structure; simplify and economize health care; and get on with rebuilding our infrastructure, and all the other things we expect of government. Furthermore, through this new cooperation they will find ways to make reforms permanent.
There - I told you I’m a Pollyanna!! But to even the hardest-headed pessimist those repairs clearly must be made if we are to avoid an eventual Greece-type meltdown, Just let me throw one more stat at you for deep thought:
AT OUR PRESENT RATE OF ACCUMULATION, THE NATIONAL DEBT IN THIRTY YEARS WILL EQUAL 250 TIMES OUR GROSS DOMESTIC PRODUCT. If that doesn’t cost you sleep, then you’re just not paying attention.