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This is no time for jack-in-the-box economics — or Republican leaders downplaying our alarming condition.
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To be sure, the U.S. is not Greece. Our legislature is slightly less dysfunctional than theirs, our president is only slightly more economically ignorant than their prime minister, and our health care system is only now being turned into the socialist disaster that Greece proved is destined to fail our nation’s old and sick. Most importantly, we have a Fed that can print money and “monetize the debt” which, in a debt crisis situation, might make interest rates appear nominally stable, at least compared to Greece, but at the expense of destroying the value of our currency and creating substantial inflation.
So what about the country that is much less of a basket case, namely Italy, the eighth largest economy in the world?
As you can see in the chart below, Italian interest rates had moved slightly higher over the course of 2010 but stayed below 5 percent until July 2011 when the “looming” problem turned into an “immediate” one. Rates spiked to over 7 percent for much of the fourth quarter of 2011 before drifting back down to under 5 percent today. But like Greece, the true damage was already done despite today’s bailout-backed interest rates masking true human suffering caused by years of government over-spending.
Italian unemployment, which had been fairly steady just above eight percent since late 2009, began a persistent, painful climb at about the same time the interest rate breakout about 5 percent began, and it has never looked back. An economic report released this month noted ominously “Italy Jobless Rate Jumps to Record High of 11.7 Percent in January.”
But these economies are small compared to the United States, and their debts, while high as a share of their GDP also pale in comparison to America’s national debt which is nearing $17 trillion. (Greece’s debt is about $470 billion, and Italy owes about $2.6 trillion.)
As the Wall Street Journal noted last year, the Congressional Budget Office calculated that “every 100 basis-point (one percent) rise in government borrowing costs over the next decade will trigger almost $1 trillion in new federal debt.” If there is an American debt crisis, the move in interest rates will be more than 100 basis points unless the Federal Reserve is willing and able to turn the U.S. Dollar into the Zimbabwean Dollar. (Perhaps Mr. Mugabe has a few containers full of billion dollar notes he could loan us… assuming we don’t quite get to needing hundred trillion dollar notes.)
And if you thought that the various debt problems in Europe shook the United States, imagine the impact on the world when the roles are reversed. This is what will happen when American jack-in-the-box economics turns the crank once too often.
The Treasury Department is wisely looking to extend the average maturity of U.S. debt, now at around 65 months. This remains low among the major economic powers and adds to the risk of increasing interest rates. Yes, the shorter-term money was cheaper, but it means that about half of the publicly-held federal debt will mature in the next few years. If interest rates go up in that time – which could happen despite Helicopter Ben Bernanke’s best (or, as many rational economists think, worst) efforts – our budget deficits will increase much faster than anyone has expected.
And if that happens, the required “austerity” will make the Ryan budget, which slightly slows the rate of growth of federal spending, look impossibly extravagant. The massive budget cuts that will be required will cause serious short term pain in much the same way that cutting off a dope addict’s supply causes him to shake and sweat. Yes, breaking the habit is a long run benefit, even a necessity, but our national DTs will be ugly and painful.
Governments around the world have used rhetoric like Barack Obama’s to kick the debt can down the road for decades. The can is kicking back with potentially disastrous consequences. Republicans should not abet this president’s dismissiveness of the fiscal sword hanging over our children’s future by making comments that Democrats and the mainstream media (if you will pardon my redundancy) will spin into reasons to remain on our current doomed path.
While Boehner and Ryan are right in an academic sense that our debt crisis is “looming” rather than “immediate,” they should reframe the discussion as not to give aid and comfort to the big-spenders in Washington, D.C. Republicans should aggressively argue that prudence dictates we act as if a crisis is hours, not years, away. We should do now what we would do if interest rates had already begun their inevitable climb, in order to ensure that the climb is gradual and limited rather than sudden and frighteningly large. Playing down the financial peril our nation faces substantially increases the chances that we will do nothing until it is too late.
Barack Obama, ever the economic enfant terrible, is treating the United States national debt like a jack-in-the-box. We don’t know how many turns we have until it pops open. Republicans must make sure the American electorate knows what a dangerous game our president is glibly playing with our nation’s future, and that the difference between a “looming” crisis and an “immediate” one, like the difference between a closed jack-in-the-box and one that pops open, is just a few turns of the bond market.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
Was the President done in by the economy, or by the politics of the economy?