By Nathan Tucker
Though the media constantly refers to the looming tax hikes and spending cuts at the end of the year as the fiscal cliff, the reality is that we’re already over the edge and are free-falling towards the bottom. We’re just experiencing the pillaging before the eventual thud at the end.
The single biggest threat facing America is its pending, inevitable default on its promises. It is only a question of when we default, to whom, and what the consequences will be. There is only one option that would make the pain tolerable—switch off the spending now.
At our current pace of adding $1 trillion of new debt every nine months, our debt limit of $16.4 trillion will be maxed out in early 2013. Total debt by the end of Obama’s second term is expected to range from $20-25 trillion dollars. This doesn’t even take into account the government’s unfunded liabilities (i.e., the money it will have to borrow to keep all of its entitlement promises). Estimates of this future debt range from $62 trillion, to $84 trillion, to $120 trillion, to $238 trillion. It really doesn’t matter what it the actual number is; it can’t be paid.
We continue to delude ourselves that our debt can be paid, but that it will be the problem of future generations. Sadly, neither assumption is true—the total liabilities of the United States can never be paid, but the default will be felt by current generations.
While it continues to pay the interest on its debt, the government no longer makes any effort to pay off its principle. Instead, it simply “rolls over” its principle by selling new bonds to pay for the old ones when they come due. Like other Ponzi schemes, it can continue indefinitely until you no longer have enough new money coming in to pay the old debt.
Our creditors understand this game and will continue to play it so long as they are confident that there will be buyers of new Treasury bonds so the government can in turn use that money to pay them. They know that the United States can never pay its current and future principle, but are merely confident that they won’t be stuck holding the “hot potato” when time runs out.
In other words, the real debt fear is not that China wants to own our debt to enslave us, but that neither she nor any other lender will want our bonds any more, leaving us without other people’s money to pay back existing principle when the game of musical chairs ends. The day is fast approaching that, if we don’t impose a debt limit upon ourselves, the rest of the world will.
The point at which our creditors stop buying our debt occurs when the interest payments on our bonds become unsustainable. Indeed, that tipping point may well be upon us. Already, our mandatory spending (i.e., debt interest plus entitlements such as Social Security and Medicare) is hovering at or above our tax revenue. Which means that, even after cutting spending on everything else—defense, homeland security, prisons, infrastructure, education, etc.—we still couldn’t balance the budget.
Under its best case scenario, the non-partisan Congressional Budget Office (CBO) predicts that this mandatory spending alone will be $4 trillion a year by 2022 ($3.5 trillion in entitlement spending and $0.5 trillion in debt interest), an amount nearly twice the average annual tax revenue for the past 15 years. It would take an incredulous, unattainable 75% increase in revenue just to pay for this mandatory spending without going into more debt, just five years before the CBO predicts that the economy will shut down in 2027.
Instead of our current annual trillion dollar deficits, we could, by 2022, be facing deficits of two trillion a year as far as the eye can see. And this assumes that the interest rates on our bonds remain low. If they should return to their historic average of 5% (once the Federal Reserve stops artificially lowering the rate), interest payments alone would be at least a trillion dollars annually.
Lenders will have fled our Treasury auctions by this point of unsustainability, causing the Ponzi scheme to come to a screeching halt with a spending spree of over $25 trillion to pay for. Problem is, we don’t have anywhere close to that kind of money available to pay the bonds when they mature, which will lead to our default and the ruin of our credit.
It remains to be seen how high inflation will rise, the severity of the depression, the number of times the nation ends up defaulting, what political savior (and policies) it will turn to in an attempt to keep Uncle Sugar spending, and whether secession will become more than mere talk. (There is no such thing as a bloodless secession, especially when it means seeing your tax base walk away.) Default is only the beginning of America’s troubles.
The only alternative to defaulting on our promises to our creditors is to default on our promises to ourselves by breaking our addiction to spending. Interest payments can only remain sustainable in the future by ending deficit spending now. But this can only be accomplished with drastic reforms to current entitlement spending, with nothing left over for future generations. Though painful, such a managed default to ourselves will leave our country in a much better position than an unmanageable one that leads to national turmoil.
The die is cast; it’s time to choose our penance.
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