The Corner

Exploding Debt Threatens America

Over at the Financial Times, Stanford University’s John Taylor worries about our debt.

Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,” as the risk rating agency stated last week.

Massive tax increases (60 percent across the board) or inflation (100 percent) would help balance the budget. In other words, it’s not good.

And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.

He rightfully concludes that now is the time to do something, but that government is not the solution as it is the biggest source of systemic risk in the system. He thinks the good news is that it’s not too late. And that’s where I start to worry. Time is only useful when there is someone in Washington interested in tackling our debt problem. Yet, I don’t see that such a person exists. As Instapundit’s Glenn Reynolds reported recently, the Obama administration’s policy boils down to acknowledging that we are out of money, but that it’s not its fault (which it’s not entirely or wasn’t at first) and then use this fact that we are broke to push even more spending.

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