Calling All Democrats

Your Country Needs You.

By John Lumbard.

The really worrying thing about the unfolding spectacle in Greece isn’t the insolvency of Greece.  Low-cost loans from Germany and the rest of Europe will patch over the near term crisis.  But Germany has already stated that it will not and cannot bail out Spain and Portugal, which are spiraling downward. 

Would you lend money to Spain right now?  Investors who have the courage to buy Greek bonds can get a yield of 11%, but the yield on Spanish bonds (loans to Spain) is less than half that.  In the short term the Spanish government can hold interest rates down by printing money, but the eventual result would be inflation and higher interest rates.   You’d be crazy to take on the risk of Spanish debt at a low yield when there are good alternatives elsewhere—right now the shares of AT&T yield 6.7%—so it’s a pretty good bet that the Spanish government will soon find itself paying interest rates above 10%.

And so could we.  Last year the US Treasury took in tax revenue of $2.1 trillion and spent $3.5 trillion;  yes, those numbers were skewed by temporary factors, but the truth is that the long-term outlook is every bit as bad.  Once the Baby Boomers start to retire in numbers the federal budget will burst at the seams, because there is nothing in the Social Security and Medicare trust funds except IOUs.  We can cash in the Treasury bonds sitting in those vaults, but the Treasury—that is you, the taxpayer—will have to come up with the money to pay those bonds off.

Would investors ever shy away from lending money to the US government?  They’re already demanding a higher yield on long-term US Treasuries than they get on top rated corporate bonds.  And fully half of our government’s debt is held by foreigners, who could send our government’s borrowing rate to 10% by just selling a small part of their holdings.  Not only do we need them to continue to hold the bonds that they have, we need them to buy more, every month.

Our government’s debt is now a hair less than $13 trillion, but it doesn’t pay interest on the part that’s in those Social Security and Medicare trust funds.  Right now we’re paying interest on about $8 trillion, at extraordinarily-low rates that have  caused the yield on your money-market fund to drop to just about 0%.  Last year the Congress only had to pay $207 billion in interest.  Push that interest rate up to 10% as a result of a widening fear of government defaults, and we’d quickly find ourselves paying $800 billion.  And we know for a fact that our “net” debt will reach $10 trillion in the next couple of years, so now we’re talking about interest of $1 trillion ($1,000,000,000,000) per year.

That means a deficit that’s $800 billion larger than expected, and a budgetary death spiral that can only be avoided by offering foreign investors a plan for balancing our budgets in the future.  After watching Greek citizens disown any responsibility for their government’s debts, those investors won’t be placated by assurances that we’re going to roll up our sleeves and make hard choices.  They’re going to want to see a balanced-budget amendment to our Constitution, and some other guarantees to ensure that our clever Congress doesn’t find a way to circumvent the new discipline.  These measures don’t have to take effect next year, or in 2012, but we must establish a road map to fiscal responsibility as soon as possible. 

That’s the idea behind our Pledge of Fiscal Responsibility.  The need for action is very clear, but until recently the public has been willfully ignoring the dangers that lie ahead.  Conventional wisdom says that nobody foresaw the crash of the tech stocks in 2000, the bursting of the real-estate bubble, or the collapse of the mortgage markets;  but there were plenty of warnings.  Once again we need to turn the thundering herd before it runs off the cliff, and it can’t happen unless large numbers of people—Democrats, Republicans, and Independents—all cooperate to steer the nation to safety.    

So please join us.  Explain these issues to everyone you know, and contact your legislators.  There are signs that independents will turn out in numbers to vote for fiscal responsibility in the November elections, so candidates from across the political spectrum would be well-advised to add the balanced-budget amendment (or at least a line-item veto) to their platforms.  And if you would like to write, from a progressive perspective, for our blog, please contact us right now, while you’re thinking about it.  We’ll get back to you as soon as we can.

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