The Debt-Sea Scrolls

The Debt Sea, that ocean of red ink that threatens to overflow its banks and inundate every nook and cranny in America from Main Street to Wall street, is bordered on the south by the Potomac River, to the east-southeast by the Anacostia River, to the north-northeast by Prince Georges County, Maryland, to the north-northwest by Montgomery County, Maryland and to the immediate west by Georgetown and the historic 175-year-old Chesapeake-and-Ohio Canal.

The Debt-Sea Scrolls tell a story of evolving fiscal folly that could represent one of the greatest man-made disasters ever — the destruction of mankind’s most successful experiment in governance and the crippling of an economic system that produced the greatest sustained prosperity the world has ever known. The first of the Debt-Sea Scrolls was written around 80-years ago when the government believed it could spend its way out of the Great Depression with money it didn’t have…with money it didn’t even almost have. The programs (known as the “New Deal”) described in the first of the Debt-Sea Scrolls didn’t succeed in revitalizing American industry. It was The Second World War and the massive Lend-Lease program with which we became the “Arsenal for Democracy” that finally succeeded in revitalizing American Industry. By the time the war was over, so was the Great Depression. Unemployment had plummeted to below 2.0% by the time the war ended in 1945 from 14.6% in 1940, which was essentially the rate of unemployment during the early years of the depression and seven years of New Deal Keynesian prime-the-pump policies. Following the war, American industry converted from wartime to peacetime production and the rate of unemployment remained below 6.0% for over a decade and for most of the half century that followed.

We learn from the Debt-Sea Scrolls that unsustainable national debt, fueled by easy credit that required borrowers to have very little skin in the game (sound familiar?) was, more than any other factor, generally credited with igniting the economic conflagration we now know as the Great Depression. Ironically we are now, seventy years later, adding unsustainable debt (to already unsustainable debt) at a level many economists believe will seriously impede our recovery and may end any hope of returning to robust prosperity. We are, systematically, mortgaging the future of our children, their children and their children’s children as well.

Let us pause to consider the debt-spawning spending spree on which the government has embarked and proposes further to accelerate.

We recognize, of course, that ours is an enormous economy, $14.25 trillion of GDP to be exact. In fact, we would wager that there are few people who can fully comprehend the marvel of such national commerce and industrial output. Similarly, we doubt that very many people (if any at all) can fully comprehend the magnitude and complexity of the attendant potential burden, risk and consequence of a national debt of approximately the same size. In fact, as we have previously reported, President Obama recently signed legislation that elevates our debt ceiling to $14.3 trillion. The debt ceiling is there (or, we should say, was there) for a reason. It is there (was there) to place a limit on the Congresses ability to spend money that the Treasury doesn’t have. Congress, however, has a long history of simply raising the statutory limit on debt whenever its spending makes that limit obsolete. For example, it seems clear that, barring an economic miracle, we’ll have to borrow an additional $1.3 trillion next year (on top of the $1.6 trillion we have to borrow in the current fiscal year) which would necessitate yet another increase in our so-called debt limit to at least $15.6 trillion. At that point, our debt will exceed the value of our entire projected economic output or GDP.

And it gets worse when we consider the full enormity of our debt burden, which also includes our unfunded liabilities, (including future Social Security, and Medicare benefits) estimated to be over $106 trillion as well as the debt of the many states and municipalities throughout the land (estimated to be slightly over $2.0 trillion). It also doesn’t include the guarantees we have made to Fannie Mae and Freddie Mac or any other federal guarantees of debt from all sources, all of which are off-balance sheet and therefore not included on the federal balance sheet. Not a pretty picture.

The Debt-Sea Scrolls remind us that the economy is in trouble now, as it was in 1929, because America has been spending much, much more than it can afford. When the banking system’s liquidity became stretched way beyond what the collective equity or collateral of the borrowing public could even remotely justify, the system broke down. Thus came the infamous bailouts and the non-stop spending that has gone unabated ever since. We had to raise the debt limit last month or the United States of America would not have been able to pay its bills. You can mark our words; Congress will not hesitate to raise our debt limit again whenever that limit interferes with its determination to spend money we don’t have. We believe the new stratospheric debt limit will be raised to even higher limits by this time next year.

We have committed over a trillion dollars to so-called stimulus programs between the first stimulus package and the new “jobs bill” (a rose by any other name), seventy percent of which will simply pump up public sector payrolls in the name of economic stimulus. Of course, with unemployment stubbornly hovering around 10% it seems pretty clear that we aren’t stimulating much of anything, and certainly next to nothing in the private sector. As we reported last week, one prominent Harvard economist has determined that over the next five years we will trade about $900 billion in private investment for around $600 billion in public investment. One can also be sure that the amount of money used to pad public payrolls will never diminish. Government-sector jobs are stubbornly resistant to productivity cuts.

President George W. Bush was not a good steward of the national fisc, but he was an absolute piker compared to the unbridled spending of President Obama and the Democratic controlled congress. Given that we know the role our national debt played in precipitating the Great Depression, a reasonable man or woman might assume that our elected officials would be ever vigilant in seeking out ways to bring the government’s profligate spending under control. Instead, it seems our elected officials are ever vigilant in identifying new opportunities to spend money we don’t have. And if our generation doesn’t have the means to bear this enormous debt, who does? It’s a rhetorical question. We know the answer. Our plan, if you can dignify what Congress and the president are doing by calling it that is to kick the proverbial can down the road and ask our descendants to solve the problem out of the weakened economy we hand over to them, not least of which is the problem of servicing the debt we are piling up. We hear that all the time…that we are leaving an enormous tab for our children, but what exactly does that mean? Well, for one thing, it means that the next several generations are almost certain to experience a much lower standard of living than we have enjoyed. They may well be the first generation in the history of the country that will not do as well as did their parents.

Why would we risk doing that to them? Why would we insist on a new massive expansion of the federal role in health care when virtually every poll (and every state-wide election) screams that the people do not want the government to do that? Why would we even flirt with a highly speculative tax on carbon emissions in the name of climate control that would transfer tens of trillions of dollars out of the American economy at a time like this? Why in the world would our government propose borrowing an additional $1.3 trillion in order to spend a record $3.8 trillion during the coming fiscal year? And as we have previously warned, the increasing debt service costs and the rates our lenders will demand from a country whose currency is likely to be under severe pressure… and the percentage of our annual budget devoted to servicing that debt … risks our ability to maintain our influence as the leading (maybe even a leading) world power.

Since President Obama was sworn into office, he and the Democratic Congress have increased discretionary spending by $1.4 trillion. This is money that is simply sucked out of the private economy and redistributed through the government. This is not an efficient way to stimulate the economy. It grows the deficit and, hence, the nation’s debt.

The government says it will fund this inefficiency over the next decade, in part, by wringing over a trillion dollars from the nation’s taxpayers through increased taxes. Of course, the government also projects fairly robust economic growth during this same period of time. If those growth projections prove to be overly optimistic the government will have only three alternatives to stay afloat: slash spending; wring even more out of the nation’s taxpayers or borrow even more. So far, we see no evidence by this Administration or this Congress of any real interest in slashing spending. That leaves higher taxes and increased borrowing to prop up the government’s cost of doing business. And, as most economists will attest, as our debt continues to increase beyond the size of our economy, economic growth will diminish, thus, accelerating a vicious and dangerous cycle.

Given that nearly half of the nation’s tax filers pay NO income taxes, the White House seems to be following a game plan that is certain to prove very divisive in the months and years ahead. Indeed, the early signs of a tax revolt are already quite apparent, and the President’s assurances that only the wealthy (assuming there are any left) will see any increase in taxes rings with a very dull thud.

The Debt-Sea Scrolls will be here long after the current Administration and the current Congress are gone. They will comprise the indelible record of the road America traveled during a critical time in its history. Perhaps the audacity of hope will be enough to steer the nation back to prosperity. The audacity of wishful thinking is, however, almost certain to steer us to ruin.