In August of this year, Admiral Michael Mullen, chairman of the Joint Chiefs of Staff, advised Congress that “The National debt is the biggest threat to our national security.” In November, voter sentiment against the debt and deficit led to an historic rebuke of Congressional incumbents. In December, the President’s Debt Commission laid out in stark terms the imminent economic impact of continued deficit spending. Apparently rejecting these clarion calls, the President and Congress acted in the lame-duck session to cut not one dime of federal spending, while increasing the national debt by nearly $1 trillion. They are ignoring a glaring problem that, if not addressed soon, will cause a panoply of other problems.
Some insist that the problem with increasing the debt by nearly $1 trillion is that the borrowed money will be loaned to us by China. Concerning as it is that we have become the world’s largest debtor to a foreign sovereign whose interests are (to put it mildly) not always in harmony with our own, that’s not the biggest problem. What ought to be of even greater, more immediate concern is the fact that China will refuse to loan us the money.
From October 2009 to October 2010, we financed $734 billion of our $1.690 trillion deficit through loans from foreign entities. And while China remains our largest creditor, China actually reduced the amount of U.S. debt it holds by $32 billion over the last year — from $938 billion to $906 billion. Through its actions, China has indicated that it will no longer fund the U.S. government’s practice of perpetual deficit spending.
So if not China, then who? That’s the problem.
The largest increase in U.S. debt holdings over the past year was a near five-fold increase by the UK — from $108 billion to $477 billion — and a near three-fold increase by Canada — from $44 billion to $125 billion.
The reality is that the UK and Canada do not have another half-trillion dollars to loan the U.S. in 2011. According to the World Bank, the entire economic output of the UK and Canada combined is only about $3.5 trillion annually.
So if China won’t and the UK and Canada can’t, who is going to loan us a trillion dollars in the next 12 months? Nobody knows.
The economic threat from China and other foreign countries loaning us trillions of dollars is like falling off the Empire State Building. It isn’t the fall itself that kills you… it’s the sudden stop.
Commonwealth investors increased their U.S. holdings last year as they fled debt holdings in the Eurozone, nearly collapsing several EU government-bond markets derisively referred to as the PIIGS — Portugal, Italy, Ireland, Greece and Spain.
It is instructive to look to Europe to forecast what could happen to the U.S. Having been forced to find religion, every EU country is now embracing austerity. Our circumstances will soon convert us to the cause of fiscal fundamentalism as well.
One option would be to continue borrowing wildly, like the PIIGS, until the bond markets simply proclaim, “No more!” The ensuing lack of confidence hit the PIIGS economy, causing unemployment rates in those countries to double over the last three years to an average of 13.3%. (Spain’s unemployment is now over 20%).
The other option necessarily involves forcing Congress to live within its means by adopting a balanced budget amendment. Germany has benefitted substantially from taking a similar step two years ago. With a constitutional mandate to balance its budget by 2016, Germany now has an unemployment rate of 6.7% — its lowest in 18 years. Switzerland has long had a balanced budget requirement and currently enjoys a 4.4% unemployment rate, the lowest in Europe.
The need has never been greater for the U.S. to balance its budget by cutting spending. But as the President and Congress have once again shown, it simply will not take that difficult step unless it is forced to do so. For that reason, we need a balanced budget amendment — ideally one patterned after the amendment proposed by Pass the BBA (of which I am national chairman). It is calling on Congress to vote on the BBA on October 1, 2011 — the first day of the next fiscal year. We should all pray that it will not be too late.
Set aside for a moment the threat of the U.S. debt crippling our children decades from now or our grandchildren a generation from now. With China unwilling to loan the U.S. additional money, and the rest of the world likely unable to loan us enough money, the debt threatens to cripple our economy now.
We can either act to pass a balanced budget amendment this year — the only way to ensure Congress will act — or China and others will force upon us a more abrupt and painful balanced budget. The choice is ours… but not for long.