Last week, Standard and Poor’s warned the British government that it could lose its triple-A rating for sovereign debt if large budget deficits persist in coming years, as currently projected. S&P noted that the U.K. net government debt burden is expected to reach 100 percent of the country’s annual economic output soon — and stay there indefinitely.
Yesterday, John Taylor of Stanford and the Hoover Institution noted in a piece in the Financial Times that there’s every reason to expect the U.S. will soon find itself in the same boat as the British.
At the end of 2008, our national debt burden stood at 41 percent of GDP. The Congressional Budget Office (CBO) expects the Obama budget plan to push it above 82 percent at the end of 2019.
And that’s before the retirement of the baby-boom generation hits with full force. Between 2020 and 2030, the number of Americans age 65 and older will increase from 53.7 million to 68.9 million — a jump of 16 million over a decade.
Meanwhile, the Obama administration is working feverishly with Congressional allies to enact the largest new entitlement since 1965 — for universal health insurance — with only the vaguest notion of how the country will pay for it in the decades to come. Despite much talk of “bending the cost curve,” there is nothing under consideration now that should give anyone confidence — including S&P — that this new entitlement will grow any less rapidly than the ones already on the books.
Taylor argues persuasively that this irresponsible U.S. fiscal position is creating a systemic economic risk of mammoth proportions. At some point, these large and persistent budget deficits will push our debt burden so high that current lenders will become saturated with Treasury securities. The consequence will be either monetization of the debt — and hyper-inflation — or crushingly high interest rates. Either way, the economic consequences would be devastating and make our current recession look like a picnic.
We are now experiencing early signs of an economy emerging from a recession. If, in fact, growth resumes in the second half of this year, the Obama administration and congressional leaders would be well-advised to heed Taylor’s warning and get serious about a large fiscal course correction.
Don’t hold your breath, though.