In the midst of a season that has provided riveting political theater – the budget extension impasse and the impending battle over raising the debt ceiling – a bright ideological line has emerged between the two major political parties. It is not about whether we must reduce our debt (both sides ostensibly agree that we must), but about where those cuts should come from. But let’s be clear; without a serious challenge by congressional Republicans, the seriousness of America’s debt situation would not occupy its’ rightful place the forefront of the political debate.
Let’s face it. The U.S. Government is bankrupt. Its liabilities exceed its revenues by over 200% by some estimates. If it were not for America’s status as a reserve currency – a status earned by the nation’s long history of political stability and economic growth -- we would find ourselves in the same position as Greece and Portugal. Those countries are not only unable to repay the principle amount they’ve borrowed, but also have trouble meeting the minimum debt service payments without additional borrowing. In what appears to be an inexorable death spiral – borrowing costs rising, while revenues are falling – it appears those countries are going into default.
While the European Central bank has tried to bolster Europe’s failing economies with lending of last resort, it has thus far failed to stem the tide of economic logic: At a certain level, when you owe more than you make, your creditors get skittish and demand higher interest rates to compensate for the risk of default. Creditors in Europe fought their version Fed, and, contrary to popular wisdom in the U.S., they appear to be winning, putting the people of those countries at their mercy. In sum, the people of Greece and Portugal have become serfs in their own country. The land they live on and the houses they live in do not belong to them anymore. Moreover, their political system is being increasingly controlled -- not by their elected leaders, but by unelected supers-sovereigns such as the IMF and ECB.
America has been spared the problem thus far. Mostly, it seems, because Europe’s problems seemed much worse in the eyes of major creditors. But this cannot continue. The major holders of U.S. debt appear to be getting skittish. The threatened downgrade in America’s AAA rating by S&P this week is merely a shot across the bow signaling a much worse situation to come. Meanwhile, Secretary of the Treasury Geitner and other administration officials seem to have shrugged off the potential political effects of foreign countries holding so much U.S. debt. They reason that U.S. investors could easily make up any slack from a threatened sell-off by China.