In August of this year, Admiral Michael Mullens, Chairman of the Joint Chiefs of Staff, advised Congress that “The National debt is the biggest threat to our national security.” In November, voter sentiment against the debt and deficit led to an historic rebuke of Congressional incumbents. In December, the President’s Debt Commission laid out in stark terms the imminent economic impact of continued deficit spending.
Apparently rejecting these clarion calls, the President and Congress acted in the lame-duck session to cut not one dime of federal spending, while increasing the national debt by nearly $1 trillion. They are ignoring a glaring problem that, if not addressed soon, will cause a panoply of other problems.
Some insist that the problem with increasing the debt by nearly $1 trillion is that the borrowed money will be loaned to us by China. Concerning as it is that we have become the world’s largest debtor to a foreign sovereign whose interests are (to put it mildly) not always in harmony with our own, that's not the biggest problem. What ought to be of even greater, more immediate concern is the fact that China will refuse to loan us the money.
From October 2009 to October 2010, we financed $734 billion of our $1.690 trillion deficit through loans from foreign entities. And while China remains our largest creditor, China actually reduced the amount of U.S. debt it holds by $32 billion over the last year—from $938 billion to $906 billion. Through its actions, China has indicated that it will no longer fund the U.S. government's practice of perpetual deficit spending.
So if not China, then who? That's the problem.
The largest increase in U.S. debt holdings over the past year was a near five-fold increase by the U.K.—from $108 billion to $477 billion — and a near three-fold increase by Canada — from $44 billion to $125 billion.
The reality is that the U.K. and Canada do not have another half-trillion dollars to loan the U.S. in 2011. According to the World Bank, the entire economic output of the U.K. and Canada combined is only about $3.5 trillion annually.
So if China won't and the U.K. and Canada can't, who is going to loan us a trillion dollars in the next 12 months? Nobody knows.
The economic threat from China and other foreign countries loaning us trillions of dollars is like falling off the Empire State Building. It isn't the fall itself that kills you ... it's the sudden stop.
Commonwealth investors increased their U.S. holdings last year as they fled debt holdings in the Eurozone, nearly collapsing several E.U. government-bond markets derisively referred to as the PIIGS—Portugal, Italy, Ireland, Greece and Spain.
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