The question I am asked most often is: What will it take to get the government to stop running up the debt? A Republican president? A Republican president with a Republican House and a Republican Senate? A Republican president named Ron Paul?
My guess is that none of these is sufficient. The government will continue to borrow money for as long as the market remains willing to lend it money. Which is why Germany’s failed bond auction is of interest. From the Financial Times:
Germany saw one of its poorest debt sales on Wednesday in what was seen as a failed auction by many market participants amid fears the eurozone’s debt crisis is spreading all the way to Berlin.
Marc Ostwald, at Monument, said “I cannot recall a worse auction … If Germany can only manage this sort of participation, what hope for the rest. Yields are at completely the wrong level.”
Germany is suffering because of pan-European problems, not because of specifically German problems. But when Europe’s most solid economy is having a hard time raising money in the marketplace, that should be a wakeup call.
When governments take bonds to market and the market doesn’t want them, governments have two options: One, stop borrowing money. Two, raise interest rates in order to make bonds a more attractive investment. The ability to borrow money is the thing that makes being in politics fun and rewarding, so No. 2 is the go-to option.
In the United States, we have historically low interest rates right now. We’re also monetizing a great deal of debt, which is an invitation to inflation, and governments also raise interest rates to fight inflation. So there is good reason to suspect that interest rates will go up in the future. (No, I’m not guessing when or by how much. If I could forecast that with any accuracy, I’d have Lloyd Blankfein skimming the bubbles off my Moët-filled swimming pool.) But we do have some historical precedents to consider. As recently as June of 1984, interest rates on 30-year Treasury bonds went to 13.44 percent. To do a little thought experiment: What would happen if it suddenly cost Washington 13.44 percent to finance our deficit spending?
At an interest rate of 13.44 percent, it would cost just a little over $2 trillion a year to finance our current $15 trillion or so in debt — not counting future borrowing. Total federal revenue in 2010 was also just over $2 trillion. Which is to say that if financing costs should return to what they have been within recent memory — hardly a historically unprecedented level — then the cost of financing our debt could equal or exceed all federal revenues combined. If you’re in a position necessitating that you borrow money just to pay interest on your current debts, you’re in a pretty weak credit position, and so there will be pressure for interest rates to go even higher. A government isn’t a household, but to use the household comparison: If your income is $5,000 a month and the minimum on your credit cards is $5,500 a month, you’re going to have a hard time getting new loans.
In that situation, we could cut all federal spending beyond debt service to $0.00 and still not be able to pay our bills. No turkey on our national table that Thanksgiving.
There are two ways of looking at American prosperity. One way is say: Wow, Americans are only 5 percent of the world’s population, but they get to divvy up nearly 25 percent of the world’s economic output — lucky Americans! The other way is to say: Wow, Americans are only 5 percent of the world’s population, but they produce nearly 25 percent of the world’s economic output — lucky world! Thanks, Americans!
Both are valid. But however you look at it, it is absurd that a country with 5 percent of the world’s population and a quarter of its economic output cannot responsibly manage its public finances. As we count our blessings this week — and our national cup truly runneth over — it is worth keeping in mind that American prosperity is neither random nor accidental, nor is it a fixed state of affairs. This didn’t just fall out of the sky: We are prosperous in no small part because we had good ancestors — and we should work to be better ancestors ourselves, that future Americans may continue to count the prudence of their forefathers among their many blessings.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.