United States sovereign debt passed the $14 trillion threshold last week. To put that enormous sum of money into perspective, it calculates to $46,000 for each man, women and child living in the United States today — more than $180,000 of debt for each family of four. The interest on that debt alone will exceed $11,000 per each U.S. resident this year. The principle and interest payments required to pay that debt back over the next 20 years exceeds $300,000 for each American family of four. Each family would have to pay $1,300 per month for the next 20years to retire their share of the debt.
As recently as 2008, our sovereign debt held at $5.8 trillion, or about 40 percent of our gross domestic product (GDP). Two years later, at the end of fiscal year 2010, the debt reached nine trillion dollars, or about 62 percent of GDP. The debt will reach the $14.3 trillion three federal debt ceiling in early March according to the national debt clock. It is rapidly approaching 100 percent of our $14.6 trillion GDP. Incredibly, the growth of our sovereign debt by $300 billion in only two months calculates to a rate of increase of about $500 in additional debt per person each month.
Recent news reports state that bond rating agencies such as Moody’s, Fitch, and Standard and Poor’s are seriously contemplating downgrading the rating of U.S. Treasury bonds. The rating agencies recognize that both the total amount, as well as the rate of increase, in our sovereign debt is simply unsustainable. They can calculate that our national debt per capita as well as our national debt to GDP ratios, are substantially worse than those of Portugal, Ireland, Greece, Spain and other European countries, whose economies are on the verge of collapse.
We may expect that the interest rate on U. S. treasury bonds will increase if the bond ratings are downgraded. The increase in the interest rate will be commensurate with the increased risk of default. The U.S. government will pay higher interest rates to borrow money just like families with poor credit histories must pay higher interest rates because they are more likely not to pay their debt.
Much of the U.S. sovereign debt is held in relatively short term treasury bonds. Those short-term bonds must be periodically refinanced at the interest rates that are available when the bonds mature and must be repaid. This is very similar to a home mortgage, creatively financed at a very low, short-term interest rate. The mortgage must either be paid in full, or it must be refinanced at the market interest rate, when the mortgage term expires. The only alternative is default on the mortgage debt.
The total interest costs on the short-term U.S. treasury bonds may be expected to increase significantly as they are refinanced at higher interest rates. Like the home mortgage, the U.S government’s only choices will be to either pay the higher interest rates to refinance the bonds, to pay off the bond principle, or to default on the debt. The rating agencies note that the U.S government continues to borrow nearly $5 billion per day, through issuing short-term treasury bonds. They rightfully conclude that paying back these vast sums of money, along with increased interest costs, may be problematic.
The rating agencies also recognize that government borrowing and spending is actually a form of taxation that reduces output, employment and production. Our private sector economy is actually being smothered by all that government borrowing and spending. Moreover, the agencies know that significant private sector economic growth will be required if our nation has any hope of paying the debt service on the more than fourteen trillion dollars that we owe. Unfortunately, the current tax, borrow and spend mentality is preventing that critical growth in GPD.
Recent U.S. history demonstrates that our people prosper, and that GDP grows rapidly, when federal government spending is reduced. For example, at the end of World War II in 1945, federal government spending reached more than 30 percent of gross domestic product. That spending was reduced to about 14 percent of GDP by 1948.The private sector economy grew at a rate of more than 7 percent each year during that same period and continued its rapid expansion for more than a decade.
The ratio of federal government spending to gross domestic product was reduced by 4 percent between 1992 and 2000. Federal borrowing was curtailed and the expansion of debt slowed. The growth in the private sector economy was second only to the boom years following WWII during that period.
Congress will be voting soon on whether to raise the federal debt ceiling. Default on existing debt will almost certainly occur if Congress refuses to increase that debt limit. Conversely, voting to increase the debt limit will perpetuate the structural deficit that will certainly lead to fiscal collapse.
In my opinion, Congressional leaders must immediately identify and implement significant spending reductions as a prerequisite to any vote to lift the debt limit. Regardless of party affiliations, as concerned citizens we should all encourage our congressional delegation to curtail federal government spending before our economy collapses. Equally important, we can and must reduce Oregon government spending by at least twenty percent. Moreover we must build a spending formula that will sustain those reductions at least a decade into the future.