Crumbling Under Debt

By John F. Ince
AlterNet

Saturday 08 April 200

Last month, for the third time during the presidency of George W. Bush, the U.S. Congress raised America's debt ceiling. By bumping up our own credit limit, the country's leaders allowed us to technically avoid defaulting on our loans, but the move raises disturbing questions about the resolve of our leaders to ever put the country on a sustainable borrowing path.

Economists and businesspeople have been warning for some time that sooner or later, America's binge of borrowing must come to an end, or we will all suffer drastic consequences. Despite widespread concern about America's increasing debt load, the issue lacks the sort of "sex appeal" that the media needs to go at the issue more aggressively. And without media attention, politicians feel little pressure to deal with the issue in a substantive way.

According to Peter G. Peterson, former secretary of commerce under President Nixon, and today chairman of The Blackstone Group, "There are very serious people that believe our current fiscal irresponsibility is heading this country towards a hard landing." A hard landing is a period that combines rising interest rates with rising inflation rates. That would hit Americans right where it hurts, in the pocketbook, by decreasing their purchasing power at a time when everything costs more.

Today, the average American's share of the national debt is $27,000 and rising. How much longer can this continue? While no one can predict the day of reckoning, this much is for sure: Every day we ignore the problem, we increase the chances that the problem will have severe, if not catastrophic, consequences.

"Sooner or Later" Is Rapidly Becoming Sooner

In the last few weeks, we began to see signals that the consequences may come sooner than most Americans expect. According to Business Week, both the European Central Bank and the Bank of Japan have raised their interest rates - which could signal that the days of foreign investors propping up the U. S. economy may soon be on the wane. Bottom line, this potentially will have serious consequences for all Americans, but especially for average Americans living on the edge of poverty.

The first consequence will be a rapid decline in Americans' standard of living. Fed Chairman Ben Bernanke insists the economy is strong, because many of the traditional measures of economic growth remain solid. Inventory levels, corporate profits and unemployment statistics all point towards continued growth. But what about the $3 billion a day that Americans cumulatively spend on interest payments? What about the estimated $834 billion that Americans have borrowed off their mortgages last year alone? Do average Americans have any kind of savings to use as a cushion in the event of a "hard landing?" Can an already-hard-working single mom just go back into the job market to make ends meet when serious inflation kicks in?

Second, should our debt levels continue to increase at unsustainable rates, we will soon reach a point where foreign investors demand an interest rate premium for lending to us. Or worse yet, they may simply decide to put their money in other financial instruments than U. S. Treasury bonds, which will suck the wind out of the U. S. economy very rapidly and likely lead to recession or a depression.

Third, weaknesses in the U. S. economy will cause the value dollar to weaken relative to foreign currencies. When this happens, as it inevitably must, everything Americans buy from abroad will cost more. And considering that America's manufacturing base has all but evaporated, we buy just about everything from abroad. With our dollar worth increasingly less, virtually every industry will start to feel inflationary pressures, leading to layoffs and a further downward cycle for the economy.

Fourth and most fundamentally, our debt crisis has serious implications for America's status as a world leader. When Britain was the world's most powerful country, it was the world's leading moneylender. But when England became a debtor nation, their stature in world affairs rapidly declined. The lessons of history are clear: A nation's borrowing from abroad is generally a precursor to decline. Harvard economics professor, Benjamin Friedman, says in the TIME-BOMB documentary, "Again and again it has always been the world's leading lending country that has been the premier country in terms of political influence, diplomatic influence and cultural influence. Today we are no longer the world's leading lending country. In fact we are now the world's biggest debtor country, and we are continuing to wield influence on the basis of military prowess alone."

How Did We Get in This Mess?

The root causes and consequences of this situation are explored thoroughly in the TIME-BOMB documentary, and they go much deeper than simply movements in interest rates and capital flows.

Most pointedly, there has been a fundamental shift in political attitudes towards debt, leading towards fiscal irresponsibility by our leaders in Washington. Since taking office, the Bush administration has added $2.5 trillion to the national debt, from $5.662 trillion when Bush took office in January 2001 up to $8.170 trillion on New Year's Day 2006. This represents an astounding increase of 44 percent during a period when prior projections suggested a $4 billion surplus. Despite this alarming increase in the debt during Bush's presidency, no one in a position of power has seriously proposed any measures that would address the root causes of the problem.

Simply put, Americans have become mired in a culture of debt. We buy things we don't make and don't need with money borrowed from abroad. America's economy has shifted dramatically in recent decades from an "old" economy based upon manufacturing capability to a "new and improved" economy based upon services. But increasingly, the services that America offers the world are financial in nature, designed to make it easier for Americans to live beyond their needs. Hence we sink even deeper into debt, comforted by the delusion that foreigners will continue to prop up our economy.

The Blanche Dubois Syndrome

America now relies upon the kindness of strangers to finance almost 50 percent of the government debt, with the lion's share coming from the Asian central banks. We now borrow over 6 percent of our GDP from abroad. Billionaire investor Warren Buffet puts this in perspective: "If the country does not change course, within 10 years the rest of the world would end up owning $15 trillion worth of the United States, equivalent to owning every share of American stock."

Many experts are worried about our increasing debt load. According to Harvard economics professor (and former chief economist at the IMF), "this is not a normal state of affairs. And it's certainly not something we expect to see from the world's richest country."

America has been able to get away with this so far, largely because of cheap foreign capital, cheap labor in China and India for manufacturing, and relatively cheap energy. But China's economy is now booming, moving labor costs ever skyward. And with energy costs now on the rise, it's only a matter of time until these costs get passed on to American consumers in the form of higher prices for "cheap" imports.

This will send shock waves through the U. S. economy. Real estate markets, already cooling, would enter a downward spiral. Mortgage foreclosures and personal bankruptcies, already approaching record levels, would soar. And this could all put the solvency of major banks in jeopardy, further risking more virulent forms of inflation or, in the worst case, hyperinflation. History buffs will recall that hyperinflation was the situation in post-World War I Germany that created the social conditions exploited by Hitler in his ascent to power.

So what can we do to prevent this from happening or at least reduce the severity of the eventual reckoning?

Because many of these problems are so complex, most Americans have no clue what to do. This unfortunately results in a near total lack of organized pressure on our elected officials to make any structural changes, and nothing gets done. Perhaps the most insidious aspect of all this is that the problems increase only incrementally, until a point at which it is too late to do anything, at which time the economy suddenly goes into a tailspin.

Our challenge is to address the problems before they reach this stage. To do this we must make a commitment to understand what is really happening. Things you can do are elaborated on the website www.time-bomb.org, but for starters here are six concrete things you can do.

First, become knowledgeable about the problems. The website for the documentary film contains links to source material that will enable you to speak intelligently about the problem.

Second, contact Howard Dean at the Democratic National Committee (hdean@dnc.org)) and urge him to make dealing with America's unsustainable borrowing patterns a higher priority of the Democratic Party. Urge him to develop concrete proposals to deal with this issue.

Third, urge activist groups such as MoveOn and TrueMajority.org to elevate this problem in their list of priorities. Only through concerted action can we begin to apply pressure on our elected officials to address the root causes of the problems.

Fourth, write your local newspaper or TV station and ask the editor to cover these issues more aggressively.

Fifth, sign the "Petition for Fiscal Responsibility" on the website, and urge your friends and colleagues to do the same. The signatures will be collected and presented to elected officials in Washington.

Most importantly, at every opportunity we should seek to raise this issue in political forums related to the 2006 midterm elections. Already Bush & Co. have risked serious disaffection on this issue from one of their key constituencies, fiscal conservatives. Only when our elected officials realize that their continued fiscal irresponsibility may cost them their jobs will they begin to take real action to address the problems.

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John Ince wrote, directed and produced the documentary film, Time Bomb.