The Single Most Terrifying Thing You Will Read Today About The Future Of Our Country
As you may know, Standard & Poor’s moved America’s debt outlook from stable to negative. That means we could lose our Triple A rating on our sovereign debt within 2 years. This is not a problem that can be fixed with a bailout, a speech, or a blue ribbon panel. It will require actual painful choices, none of which our leaders in D.C. seem to be willing to make. If we lost our Triple A rating, the interest rates we’d have to pay would explode and it would be the beginning of a cataclysmic economic maelstrom,
Here’s the thing to watch: Nobody really knows what interest rate the bond market is going to demand to finance U.S. debt in the future. Right now, the Fed is buying most of the bonds Treasury puts up for sale, and simply printing money to do that. This “quantitative easing” is scheduled to end this summer, at which point Washington will find out what it is really going to cost to finance its debt. In FY2010, we spent $164 billion just on interest payments on the debt — up 18 percent from the year before. And that’s at historically low interest rates. If rates should go back up to their 1970s or 1980s levels, we could easily end up spending more on debt service than we spend today on big-ticket items like Medicare or national defense. That’s the hidden landmine on our national balance sheet: We don’t have to be worried only about the trillions of dollars in new debt that Obama proposed to load upon our backs, but also about what that proposal is going to do to the cost of paying interest on the debt we already have. We already know that we cannot afford the new debt that Obama would have us endure, but the real crisis will come when we find out that we cannot afford the debt we already have.
PS: Here’s another scary little detail about how far away we are from being able to pay off not just our debt, but the much, much larger unfunded liabilities we have for Medicare and Social Security.
The total present value of payments expected under Social Security and Medicare beyond what is expected to be collected under current tax laws is about $100 trillion. One way to put that amount of money in context is to note that it is about twice the amount of all the net private assets that exist in America today.
To answer (that) question directly, the best back-of-envelope estimate is that meeting this unfunded portion of our Social Security and Medicare commitments would require roughly an immediate 80 percent increase in federal income taxes, sustained forever.
That is one end of a spectrum. The other is to cut out $100 trillion of present value of anticipated entitlement spending.
….If you think about it, any real solution to the federal deficit problem is currently politically impossible; yet we know mathematically that, barring a productivity miracle, the situation cannot persist indefinitely. Therefore, we know that some change that currently seems politically impossible is all-but-certain to happen sooner or later.