Buy the Book

The Shadow of Debt

Nation in the Red is a grim read.

By 12.2.13

Wikimedia Commons

Riots, massive unemployment, hyperinflation, savings accounts wiped out, financial markets in chaos — these are potential scenarios for America’s future, but exactly when and how the nation’s debt crisis will unravel is still a matter of speculation. Most economists doubt that the United States will soon experience the kind of catastrophic meltdown that struck Greece in recent years, but the U.S. national debt is now more than $17 trillion and growing, with no plans to pay it back. The national debt, which was about $11 trillion when President Obama took office, is now larger than America’s annual gross domestic product (GDP), and is expected to increase by about $700 billion in the next year.

Even though budget sequestration has slowed the rate of deficit spending, the federal government continues hemorrhaging red ink, and the national debt will be nearly $20 trillion by the time Obama leaves office in January 2017. America already has the ninth worst debt-to-GDP ratio in the world, and the piling up of unpaid debt cannot continue forever, says Murray Holland.

“The laws of economics are like the laws of physics — they can’t be changed by government action,” says Holland, a Texas business executive who has just published A Nation in the Red: The Government Debt Crisis and What We Can Do About It.

Attempts to defy the laws of economics have only made the nation’s fiscal problems worse, according to Holland. Even with White House forecasts that Murray considers “unrealistic” in their optimism — projecting annual economic growth rates at 5 percent or higher — the annual interest payments on the national debt would reach more than $1 trillion a year by 2022. Interest payments would then be the largest category in the federal budget, and that’s an optimistic scenario, which not only assumes robust economic growth, but also assumes that the government will continue to be able to borrow money at low interest rates. Both of those assumptions are almost certainly wrong, for reasons that Holland explains at length in A Nation in the Red.

Economic growth will be impeded by the steadily accumulating government debt and, at some point, financial markets will require higher interest on U.S. debts – “risk-adjusting” — with serious consequences that Holland explains. “Today, the government is paying a blended rate of around 2.2 percent for all outstanding Treasury securities, for an annual interest expense of $360 billion.… In the event the economy rebounds and interest rates return to normal, we can see an average interest rate on Treasury securities of 6 percent. Applying that to $12 trillion in debt to third parties, would mean an interest expense of $720 billion [annually]. If the market risk adjusts due to loss of confidence, average interest rates could easily reach 10 percent, meaning there would be an interest expense of $1.2 trillion.”

This is where what Holland calls “the Debt Trap” clamps shut, triggering the types of problems that have affected Greece and other countries caught in a fiscal crisis: “The markets will require the United States to cut expenses or raise taxes to balance the budget, but in doing so, the government takes that much money out of GDP and the country falls straight into a deep recession or depression.” The resulting recession, in turn, causes government revenue from taxes to decrease, so that the budget is squeezed not only by higher interest payments but by declining revenues, forcing drastic reductions in government expenses, affecting everything from social services to military spending.

If the prospects are so dire, why aren’t more people worried about it? The basic psychology of Americans is a factor. “We want to live in freedom from having to deal with all these issues,” Holland said in a recent telephone interview, adding that the problem is not isolated to one political party, but is systemic, especially in Congress. “Your job is to spend other people’s money,” Holland said, explaining the congressional mentality.

Holland calls his book “a call to action,” but the feasible options for action are limited. Examining and rejecting various “gimmicks” that have been tried by debt-strapped countries like Argentina to avoid the consequences of the Debt Trap, Holland sees only two realistic solutions: Eliminating deficit spending and increasing economic growth. “The biggest problem is the demographics,” Holland says, discussing the problems caused by an aging population. “We will have economic decline because of that.”

Ultimately, America must confront the reality expressed by the late economist Herb Stein: “If something cannot go on forever, it will stop.” But what happens when the federal government’s ever-increasing debt problem reaches its stopping point? Nobody really knows. In terms of fiscal and monetary policy, with the Federal Reserve’s resort to “quantitative easing,” the United States entered uncharted economic waters, the terra incognito marked on ancient maps as “Here Be Dragons.” The safest prediction for the looming debt crisis may be reflected by the millions of “doomsday preppers” who are stockpiling food and ammunition in anticipation of a nightmare scenario of violent anarchy. “At first, I was a little unsure of their ‘extremist’ views,” Holland writes in A Nation in the Red, but concludes: “They are not crazy.”

If the folks who are preparing for an apocalypse are not crazy, this means the rest of us are not entirely sane. But if Americans were sane, Barack Obama never could have been elected president — and he was elected twice.

Be afraid. Be very afraid.

Like this Article

Print this Article

Print Article
About the Author