June 23, 2024

The Terminal Debt Trap

US Could Be Facing Debt “Time Bomb” This Year

WASHINGTON – With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world’s appetite for financing U.S. government spending.

Despite those actions, the economic outlook has continued to darken. Now, Obama and congressional Democrats are debating as much as $850 billion in new federal spending and tax cuts to create or preserve jobs and slow the grim, upward march of unemployment, which stood in November at 6.7 percent.

Congress is not planning to raise taxes or cut spending to cover the cost of those programs, because economists say doing so would further slow economic activity. That means the government has to borrow the money.

Economists from across the political spectrum have endorsed the idea of going deeper into debt to combat what many call the most dangerous economic conditions since the Great Depression.

“When you accumulate this amount of debt that we’re moving into, it’s not a given that our foreign friends are going to continue on the path they’ve been on,” said G. William Hoagland, a longtime Republican budget analyst who now serves as vice president for public policy at the health insurer Cigna. “There’s going to come a time when we can’t even pay the interest on the money we’ve borrowed. That’s default.”

The unanimous conclusion of the politicians and economists seems to be that we can borrow our way to prosperity via fiscal stimulus conducted with borrowed funds or printed money.

It is, of course, delusional to think that we can spend and borrow our way out of a financial crisis caused by over spending and over borrowing.   The reason we are in a financial crisis is due to excess leverage and credit at every level of our economy.  The attempt to subvert free market solutions by socializing every loss will only expand and prolong our economic mess.

Foolish politicians promising easy and painless solutions are pandering at best.   Quantitative easing, fiscal stimulus, bailouts and guarantees are no solution.   We have a crisis because we spent our future.  The solution of hard work and a lower standard of living will eventually be forced upon us.   Massive new spending and borrowing at this point only brings us closer to a terminal debt trap where we have neither the capacity to repay nor the ability to borrow.

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