U.S. politics has been pre-occupied since November 6 with short-term fiscal problems. Will the fiscal cliff be avoided and if so, by what measures? This is the seventh order of economic smalls.
The crucial issue – all but ignored by a people who have lost all interest in the long-term future of their nation – is what will happen if the United States continues down its current path to an unsustainable rise in the national debt.
At best, current fiscal cliff discussions will leave in place annual federal deficits of the order of $1 trillion. By 2016, the nation’s national debt will approach $20 trillion. Global markets will not tolerate levels of debt that so outreach the nation’s gross domestic product.
Just when the adverse market reactions will occur cannot be predicted. But when they do so, the U.S. economy will be crushed by an avalanche of unstoppable magnitude.
Once creditors determine that U.S. Treasury’s are no longer the safest form of investment available, demand for those Treasury’s will decline, interest rates will rise, and the cost of servicing the debt will explode. Even a modest 1 per cent interest rate increase, for example, would wipe out all the deficit reduction included in last year’s Budget Control Act. In other words, all the pain envisaged in the fiscal cliff would provide no deficit relief at all.
In reality, if market forces move against U.S. Treasury’s they would not impose a 1 per cent cost. Interest rates would increase more likely to 5 or 6 per cent per annum on the initial tranche. Such penalties would require massive and immediate cuts to Social Security Medicare and National defense and most likely would take Medicaid right off the federal accounts. Even the Congressional Budget Office projects that, under the most likely scenario, in 30 years from now, net interest payments on the U.S. national debt will amount to $3.8 trillion per annum in real 2012 dollars. That is more than total government spending in 2011.
“As Harvard economist Kenneth Rogoff recently explained, ‘By the time (markets) lose confidence, it’s too late: The option to tighten from a position of strength has evaporated.’ Senator Mike Lee, ‘After fiscal cliff comes fiscal avalanche’, The Washington Times, November 26, 2012
No one expects a seeming economics’ ignoramous like Barack Obama to be able contemplate such reality. A majority of the electorate, in its collective stupidity, chose economic incompetence over experienced success. Now every American will have to live with the sad consequence of the economic avalanche that is sure to come.