The Corner

Deficit of Will

The Washington Post has an interesting article by Joel Achenbach this morning about the national debt and its implications.

The short term looks awful, and the long term looks hideous. Under any likely scenario, the federal debt will continue to balloon in the years to come. The Congressional Budget Office expects it to reach $20 trillion over the next decade — and that assumes no new recessions, no new wars and no new financial crises. In the doomsday scenario, foreign investors get spooked and demand higher interest rates to continue bankrolling American profligacy. As rates shoot up, the United States has to borrow more and more simply to pay the interest on its debt, and soon the economy is in a downward spiral.

More interesting, the author correctly argues that the biggest of our problems is the lack of will in Washington to address the looming financial crisis, and how this might play out with our investors.

Over the past decade, lawmakers have avoided the kind of unpopular decisions — tax increases, spending cuts or some combination — needed to keep the debt under control. Federal Reserve Chairman Ben Bernanke testified recently that, for investors, the underlying problem with the debt isn’t economic. “At some point, the markets will make a judgment about, really, not our economic capacity but our political ability, our political will, to achieve longer-term sustainability,” he said.

The poor reception by Republicans and Democrats of Congressman Paul Ryan’s Roadmap is more evidence of the lack of will in Washington to cut spending and reduce our debt.

Sadly, I have no faith in the deficit commission, nor do I believe that sudden extraordinary economic growth will get us out of this mess. I don’t believe that a VAT is the solution to our growing deficits, either. This time, there is no way around cutting spending and reforming entitlement in order to send the signal to our investors that lawmakers are serious about fiscal responsibility. So let’s hope that Washington will get its act together – otherwise we will be in big trouble.

[Michael] Burry, one of the protagonists in Michael Lewis’s account of the financial crisis, The Big Short, believes the federal government is behaving like the companies that lost billions in mortgage-backed securities. He told me he sees the common mistake of focusing on short-term benefits — whether quarterly earnings or the next election.

The world doesn’t want America to go broke, he points out. Americans are the planet’s greatest consumers. But if this is a bubble, it will burst with little warning, Burry said.

“Strictly looking at the monthly Treasury statement of receipts and outlays,” Burry said, “as an ‘investor,’ you see a company you might want to short.”


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