NCPA - National Center for Policy Analysis


April 21, 2010

The global financial system is again transfixed by sovereign debt risks.  This evokes bad memories of defaults and near-defaults among emerging nations such as Argentina, Russia and Mexico.  But the real issue is not whether Greece or another small country might fail.  Instead, it is whether the credit standing and currency stability of the world's biggest borrower, the United States, will be jeopardized by its disastrous outlook on deficits and debt, says the Financial Times. 

America's fiscal picture is even worse than it looks, says the Times: 

  • The Congressional Budget Office just projected that over 10 years, cumulative deficits will reach $9.7 trillion, and federal debt 90 percent of gross domestic product (GDP) -- nearly equal to Italy's.
  • Global capital markets are unlikely to accept that credit erosion; if they revolt, as in 1979, ugly changes in fiscal and monetary policy will be imposed on Washington.  

How bad is the outlook? 

  • The size of the federal debt will increase by nearly 250 percent over 10 years, from $7.5 trillion to $20 trillion.
  • Other than during the Second World War, such a rise in indebtedness has not occurred since recordkeeping began in 1792.
  • It is so rapid that, by 2020, the Treasury may borrow about $5 trillion per year to refinance maturing debt and raise new money; annual interest payments on those borrowings will exceed all domestic discretionary spending and rival the defense budget.
  • Unfortunately, the health care bill has little positive budget impact in this period. 

Why is this outlook dangerous?  Because dollar interest rates would be so high as to choke private investment and global growth, says the Times. 

Source: Roger Altman, "America's disastrous debt is Obama's biggest test," Financial Times, April 20, 2010. 

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