Were the United States any other country, its bonds would soon be downgraded to junk.
Just like Greece and other profligate nations, the United States suffers from slow growth, a ballooning welfare state – in the particular case of the United States, a terribly inefficient healthcare system – and growing public debt to support them.
Entitlements and interest payments now consume more than 60 percent of the federal budget, and according to the Congressional Budget Office, those are on track to take it all by 2027.
Households and businesses save a great deal but not nearly enough to finance both private investment and the federal appetite for debt. Consequently, the nation consumes more than it produces through a $500 billion annual trade deficit and by selling foreigners private assets – for example, choice real estate in New York, equities and corporate debt – and government bonds to finance it.
Net of what Americans own abroad, private citizens and Uncle Sam have more than $8.3 trillion in IOUs out to the rest of the world. That is about 45 percent of gross domestic product, and it should easily surpass
60 percent by 2027.
In recent years, no nation has seen its indebtedness reach that level without a reversal of its trade deficit – and often an accompanying financial crisis and wrenching internal adjustments – as foreign investors lost confidence in its government’s ability to raise money to service its debt.
Of course, the dollar is the reserve currency – foreign central banks hold dollars and Treasuries to back up their currencies – and the United States, unlike other big debtor nations, can print dollars to service its debt.
This has created a false sense of security among politicians and most economists. Many conservative Republicans and pundits talk about big tax cuts and ignore CBO and private scorings that show those could not possibly be financed solely by the additional growth generated. Big spending cuts – a.k.a. entitlements reform – are essential.
Substantially raising taxes would likely prove self-defeating too. With U.S. corporate and private businesses taxes already more burdensome than in other industrialized countries, more businesses and intellectual property would move offshore. GDP and tax-revenue growth would slow. And payouts from federal benefits programs to further assist the unemployed – including those discouraged and not looking – would rise even more quickly than currently projected.
Only stronger economic growth and curbing entitlements will avoid a train wreck. The upcoming showdowns over Medicaid, other entitlements and cuts to other federal spending as part of efforts to raise the debt ceiling and to define targets for spending in the 2018 fiscal year appropriation bills will reveal the Republican majority’s stomach for spending reform and courage to lead the country out of the fiscal wilderness. Their performance during recent efforts to repeal and replace Obamacare was not encouraging.
Cooperation will be required from Democrats in the Senate, for example, to increase the debt ceiling and pass 2018 appropriation bills – or at least continuing resolutions. They will likely resist any cuts to entitlements. However, now that the Republicans control the Congress and the White House, they are in a position to win out in a government shutdown if they reach consensus among themselves about spending cuts and exercise party discipline.
Foreign central banks and investors do not have an infinite appetite for U.S. dollars and bonds. If the Congress and President Donald Trump do not step up, the Treasury will be issuing many more new bonds over the next decade than foreign private investors and central banks will be inclined to absorb.
Too many dollars in circulation may not cause inflation immediately, but it will stoke fears that long term, prices could get out of control.
As Washington continues to spend and borrow, the Treasury will have to offer much higher rates on new 20- and 30-year bonds, making comparable securities issued in 2017 and earlier worth less in the resale market.
That interest rate risk makes long-term U.S. Treasury securities lousy investments.
Washington’s monopoly on printing dollars makes difficult the work of bond-rating agencies, which assign grades between AAA and D on sovereign debt. U.S. Treasuries cannot default but long term, investor capital is still at significant risk.
Perhaps a special grade is needed: “F” – flee now before you get stuck.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. © 2017, The Washington Times.