The U.S. government borrows an astounding $40,000 every second. You would think that racking up debt at such a rapid pace could be entertaining, but the reality is far from amusing.
Perhaps within the confines of Washington, D.C., where politicians seem to be engaged in a spree of fiscal indulgence, there is a sense of thrill. Still, for the rest of us, the situation feels more like a foul odor, reminiscent of fresh manure, wafting from the capital. Some Congress members appear to believe that if they accumulate just a bit more debt and enact more misguided laws, everything will turn out fine.
According to Treasury Secretary Timothy Geithner, the United States borrows an astonishing $125 billion each month. As noted by Reuters, “With that amount, the United States could provide an Apple iPad to every one of its over 300 million citizens.”
While a free iPad may seem enticing to some, especially those looking to secure a vote, it’s worth considering the long-term implications. The burden of this debt, including interest, will ultimately fall on our children. Thus, government-sponsored giveaways can often feel more like an affront than a gift.
More Debt Limit Reflections
Since 2001, Congress has increased the debt ceiling ten times. Until recently, these votes were little more than formalities. However, the dynamics have shifted. A new wave of Congress members has been elected with the intention of curbing spending, leaving the current administration in a precarious position. How did we arrive at this point?
The Second Liberty Bond Act, passed in 1917, introduced the first statutory cap on U.S. public debt. Although it’s unclear what the original limit was, it’s safe to assume that Treasury Secretary William McAdoo would have been taken aback if he were told that, within a century, the figure would swell beyond $14 trillion.
Regardless of the initial limit, one certainty remains: it was never enough. Each time the ceiling was reached, Congress raised it further.
Around 1980, the national debt surpassed $1 trillion. By 1981, President Reagan remarked that a stack of $1,000 bills representing the U.S. government’s debt would stand approximately 67 miles high. “Since then,” reported Reuters, “the national debt has escalated to $14.3 trillion, which would now reach over 900 miles if stacked in $1,000 bills.”
But that’s not the end of it.
“If measured in $1 bills, the distance would extend to the moon and back twice.”
When the U.S. Treasury Bond Bubble Finally Bursts
At present, the national debt stands at $14.3 trillion, while the GDP is at $14.7 trillion. This means the national debt is nearing 100 percent of GDP, a milestone that could lead to significant repercussions. We can’t predict what will happen when this ratio hits 100 percent, but it certainly adds to our concerns.
Before even beginning to tackle the national debt, we first need to eliminate the deficit. Revenues must surpass expenditures, allowing some capital to be allocated toward debt repayment. However, merely addressing the deficit is a monumental challenge.
The projected deficit for fiscal year 2011 is an alarming $1.4 trillion. This means the government is currently borrowing 40 cents for every dollar spent. Clearly, this cannot continue indefinitely. While the United States may enjoy some degree of leniency from its creditors—primarily China and Japan—exceeding a national debt of 100 percent of GDP carries potential ramifications.
For example, Greece’s national debt is approaching 170 percent of GDP, which has led to a downgrade of its debt rating by Fitch into junk status. Furthermore, Standard & Poor’s recently warned that Italy, with a debt at 140 percent of GDP, risks a rating downgrade if it fails to curb borrowing and boost economic growth.
Recently, yields on five-year and seven-year treasury notes dropped to five-month lows as European investors abandoned Greek, Italian, and Spanish debt. In the short term, this may help the U.S. manage its borrowing. However, this should be a cause for concern, as a failure to adjust course could make the U.S. debt a major market disaster.
That’s when the bubble surrounding U.S. Treasury bonds may finally burst.
Sincerely,
MN Gordon
for Economic Prism
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