Defaulting On The National Debt

Margaret Atkins MunroLet's Talk About MoneyLeave a Comment

Greece, the birthplace of democracy, is known more today for widespread tax evasion, inefficient government bureaucracy, and a monumental national debt that now exceeds its annual gross domestic product (GDP). Austerity measures demanded by the European Union, including massive public service job cuts, huge tax increases, reductions in public pensions and wages, and selling off the country’s infrastructure to private concerns, have led to mushrooming unemployment, business failures, and increasingly violent riots in the streets. And still it finds itself teetering on the verge of economic collapse as it struggles to pay its bills.

The question of a Greek default on money borrowed from bondholders has moved from “if” to “when”. This sense of inevitability has raised the average interest that Greece pays to borrow from 4.5% four years ago to 26.65% today, and has ratcheted unemployment from under 10% in 2006 to a current rate in excess of 16%, including a whopping 42.5% of 15-24 year olds–and all this before Greece is late or short on a single interest payment. When the default happens, whether by modifying the terms of existing loans, or attempting to walk away from them altogether, the Greeks will have trouble borrowing at any price, and the consequences to the larger economy will be catastrophic.

Parthenon, Athens, GreeceThere’s nothing new here; the same scenario, with the same results, played out in Argentina ten years ago. When Argentina defaulted in 2001, its economy collapsed. At the height of the crisis, unemployment figures exceeded 25%. Today, Argentinean debt is still considered risky; while unemployment figures have recovered to 7.5%, interest rates have fallen from a high of 125% in August, 2002 to a current rate of 9%, more than double the 4.25% long-term interest rate paid today by the U.S. Treasury.

Greece and Argentina are naked realities, not fiction. When a country defaults, it negatively impacts the life of the vast majority of its residents. Defaults create runs on banks and chaos in the stock markets, causing businesses to falter and public safety to collapse, bringing riots and looting to the streets.

Unbelievably, this possible scenario is what the U.S. Congress has been debating for the last days, weeks and months. If the federal borrowing limit isn’t raised by August 2, 2011, the U.S. Treasury will be unable to pay monies Congress has already authorized. Social Security checks, veterans’ benefits, federal employees’ wages, promised payments to states for road works, for education, for healthcare, will all be effected. Saying that we just don’t have the money to make these payments is an excuse akin to saying “the dog ate my homework”. And that’s not even taking into consideration all the interest that can’t, or won’t, be paid to investors on the accumulated $14.3 trillion we’ve already borrowed to pay earlier bills.

Congress apparently fails to recognize that lowering future spending won’t impact the amounts that are owed right now. Still, factions within Congress are determined to tie increasing the debt ceiling to reducing the federal deficit. These are two separate, equally vital discussions, but the timeline for the debt ceiling is far more immediate than that for the deficit.

What is at stake here is huge: Congress is endangering the current gold standard of the world economy, the so-called “full faith and credit of the U.S. Treasury” by holding it hostage to a reduction in the federal deficit. Until now, no one ever questioned whether lending money to the U.S. government carried any risk; going forward, all lenders will wonder.

The debt ceiling must rise to prevent default; however, we cannot ignore the size of the annual deficit and the national debt. But dealing with the debt ceiling does not have to be accomplished in tandem with lowering, or even reducing the deficit. Our accumulated debt is staggering, and even with historically low interest rates, we are still paying $275 billion dollars on interest (or debt service) for the fiscal year ending September 30, 2011. That’s $275,000,000,000 that could be spent on Social Security and Medicare, education, repairing our roads, or dealing with the damage from the disasters that have rained on every corner of the country. Unless we can somehow miraculously bring in more than we spend, turning our deficits to surpluses, that number will only rise as our debt increases in size and perceived risk. And you need only look as far as Greece and Argentina to see how the combination of more, and riskier, debt can jack up total interest payments, taking an ever-increasing bite out of the tax revenue pie.

I don’t mean to be alarmist, but the time on this clock is fast running out. Now is not the time for individuals to claim that talk of default is a scare tactic from the other side, nor is it a time for party dogma and rhetoric. Instead, now is a moment for practicality, for compromise, and for statesmanship. Now is an opportunity to do what is in the country’s best interest, to raise the debt ceiling, free of conditions. To fail in this for whatever reason is inadequate, irresponsible, and ultimately, unpatriotic.