Since the financial crisis began, many ivory tower economists have argued that it really doesn't matter how much debt the U.S. takes on in the name of "rescuing" the economy, because the current output gap, among other things, means there is little risk that it will lead to inflation.
However, as was the case before the whole house of cards "unexpectedy" fell apart, many of the so-called experts can't see the forest for the trees. Among other things, they don't seem to understand that there are limits to what creditors will put up with, not to mention the fact that there are other economic risks besides inflation.
They also fail to grasp that our nation's financial position isn't just an economic matter, as history and the following two articles seem to make clear:
"Deficit Balloons Into National-Security Threat" (Wall Street Journal)
The federal budget deficit has long since graduated from nuisance to headache to pressing national concern. Now, however, it has become so large and persistent that it is time to start thinking of it as something else entirely: a national-security threat.
The budget plan released Monday by the Obama administration illustrates why this escalation is warranted. The numbers are mind-numbing: a $1.6 trillion deficit this year, $1.3 trillion next year, $8.5 trillion for the next 10 years combined—and that assumes Congress enacts President Barack Obama's proposals to start bringing it down, and that the proposals work.
These numbers are often discussed as an economic and domestic problem. But it's time to start thinking of the ramifications for America's ability to continue playing its traditional global role.
The U.S. government this year will borrow one of every three dollars it spends, with many of those funds coming from foreign countries. That weakens America's standing and its freedom to act; strengthens China and other world powers including cash-rich oil producers; puts long-term defense spending at risk; undermines the power of the American system as a model for developing countries; and reduces the aura of power that has been a great intangible asset for presidents for more than a century.
"We've reached a point now where there's an intimate link between our solvency and our national security," says Richard Haass, president of the Council on Foreign Relations and a senior national-security adviser in both the first and second Bush presidencies. "What's so discouraging is that our domestic politics don't seem to be up to the challenge. And the whole world is watching."
In the 21st-century world order, the classic, narrow definition of national-security threats already has expanded in ways that make traditional foreign-policy thinking antiquated. The list of American security concerns now includes dependence on foreign oil and global warming, for example.
"Huge Deficits May Alter U.S. Politics and Global Power" (New York Times)
WASHINGTON — In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.
The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.
But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.
For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.
Or, as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”
The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade.
Mr. Obama himself hinted at his own concern when he announced in early December that he planned to send 30,000 American troops to Afghanistan, but insisted that the United States could not afford to stay for long.
“Our prosperity provides a foundation for our power,” he told cadets at West Point. “It pays for our military. It underwrites our diplomacy. It taps the potential of our people, and allows investment in new industry.”
And then he explained why even a “war of necessity,” as he called Afghanistan last summer, could not last for long.
“That’s why our troop commitment in Afghanistan cannot be open-ended,” he said then, “because the nation that I’m most interested in building is our own.”
Though all very true, what is continually lacking in these discussions are the future obligations of the U/S. government. Yes, the debt is growing, but what about the bankrupt Medicare and Social Security system? Needless to say, the whole system is broken. As in the last days of Rome when the wealthy and Senators plundered the few remaining gold coins, our Senators and elites are doing the same. Personally, I feel there is no longer any way to avoid a slow and complete collapse of the present economic model - in reality, the frog is probably already in the water and the water is getting hotter.
Posted by: austincompany | February 03, 2010 at 09:32 AM