Denial puts U.S. deeper in debt

By Scott S. Powell

The national debt has grown by $3 trillion since President Barack Obama took office, the most rapid growth under any president since FDR’s war-time defense buildup. Federal government spending — now at 25 percent of GDP — is crowding out private investment. Worse, liabilities of Social Security and Medicare are now cash-flow negative, threatening to add hundreds of billions to the debt each year. The Cato Institute estimates that unfunded Social Security and Medicare liabilities now exceed $115 trillion.

The American people are looking for leadership. Most don’t buy into Washington’s illusion that the nation can spend its way to prosperity, and they are ready to tighten their belts. People sense that deficit spending and printing money, which may help them feel better in the short run, is like a narcotic. In the long run, it becomes addictive — requiring ever larger doses for the same effect — and it leads to disaster.

It borders on denial, when today the U.S. is supposedly in economic recovery, yet the CBO projects a record high deficit of $1.48 trillion for 2011 — with more near trillion dollar annual deficits ahead.

Sustainable growth cannot be based on a course of excessive deficit spending, maintaining abnormally low interest rates and flooding the world with cheap dollars — a path that adds to an already perilous financial condition. Official government statistics that portray consumer inflation at bay also foster denial.

The reality of rising food and energy prices are all around, and servicing the federal debt becomes more costly when interest rates rise in response to that inflation.

Last year saw the doozy of all denials when the Democratic-controlled Congress refused to consider simple fixes to reduce Medicare costs, but instead pushed yet another health care entitlement program. No one knows just how costly this will be. But at 17 percent of the economy, the U.S. health care sector is massive and this new entitlement that empowers a dizzying number of new bureaucrats is bound to blow out the deficit.

Obama said that “the new rules of the Wall Street Reform and Consumer Protection Act would prevent another financial crisis.” Denial again. The new law does little to end bailouts. Worse, it provides a false sense of security by deflecting attention from fiscal and monetary policies being pursued today that are paving the way for the next financial crisis.

Excessive debt and easy money facilitated the financial crises of the past 12 years: In 1998 it was long-term capital management that melted down; in 2000-2002 the dot-com bubble burst; and starting in 2007 the housing and mortgage market collapsed — leading to the current predicament. The debt dynamics that underlay these crises are alive and well today, only larger and more fundamentally systemic. Risk has now shifted from the private to the public sector, with the U.S. government debt market being the new bubble.

Even after wake-up calls emanating from last year’s riots and near collapse in Greece and the November 2010 U.S. election results, Obama and much of Washington and the media elite remain in denial about the urgency of entitlement reform and the need for radical reduction in government spending.

A collapse in the dollar and the global U.S. Treasury debt market is now a very real risk, requiring proactive leadership.

Leadership requires getting out of denial and making tough decisions. The risk factors that could trigger a crisis of confidence in the dollar and U.S. Treasury debt are many. It’s no time for delay and half-measures.

Scott S. Powell is a visiting fellow at Stanford’s Hoover Institution and a managing partner at Alpha Quest.