On the heels of recent action by the U.S. House, the Senate has approved a two-month increase in the federal debt limit. The temporary boost allows the government to cover financing needs over the next two months.
Interest rates are very low today, by historical standards, but they will not always be low. When interest rates rise, the interest cost on the same amount of debt will be higher. If current interest rates were to double, over a period of time, the $451 billion interest cost would double to $902 billion. The United States government has dug itself into a very deep hole over the past 28 years. We are in so deep that we can barely see the dim light at the top of the hole. Unfortunately, instead of filling the hole in, our government is digging it deeper and deeper!
“For the next decade or two, on some reasonable sets of assumptions, our borrowing cushion shrinks significantly, threatening to test our capacity to raise funds to finance unprecedented deficits,’’ Greenspan said in testimony to the Senate Homeland Security and Government Affairs Committee.Greenspan warned that the rising public debt leaves the government’s fiscal position vulnerable to a rise in interest rates.
In answer to a question about why rising debt is a concern, Greenspan said: “The critical issue that economists worry about’’ is the spiral that occurs with ever-rising debt and debt service, often followed by higher interest rate. As a consequence of that, “the debt service becomes explosive and that moves directly into the budget deficit,’’ he added.
"If we don't pass it, here's the guarantee," Obama said. "Your premiums will go up, your employers are going to load up more costs on you ... Potentially they're going to drop your coverage, because they just can't afford an increase of 25 percent, 30 percent in terms of the costs of providing health care to employees each and every year."
He added that the costs of Medicare and Medicaid are on an "unsustainable" trajectory and no is action taken to bring them down, "the federal government will go bankrupt."
"If we don't do this, nobody argues with the fact that health care costs are going to consume the entire federal budget," Obama told Gibson, the ABC anchor who is retiring this week.
For more than two centuries, we have been able to hold the level of U.S. federal debt to well below our long-term capacity to borrow.
But for the next decade or two, on some reasonable sets of assumptions, our borrowing cushion shrinks significantly, threatening to test our capacity to raise funds to finance unprecedented deficits.
The challenge to contain this threat is more urgent than at any time in our history, in part because of today’s limited flexibility of adjustment, especially of entitlement spending whose constituencies are well entrenched.
Republicans in the House are trying to derail Democratic efforts to lift the national debt limit, though they acknowledge it may be too late this time around.
House Majority Leader Steny H. Hoyer (D-Md.) stated on December 11 that the federal government must borrow at least $1.8 trillion more in 2010 if the United States is to avoid defaulting on its debts. This would be over and above the current $12.1 trillion national debt limit. Democrats are trying to stick together to pass a bill that would raise the federal debt ceiling to $14 trillion. By doing this now, they hope to avoid dealing with the issue closer to next year’s midterm elections.
Yet the politically unpopular move of putting the nation deeper into debt is being resisted by more than 50 moderate “Blue Dog” Democrats. They are vowing to withhold their votes unless a “pay-as-you-go” law is included in the debt-increase legislation.
“The truth, of course, is that the national debt affects us all.”Rolens points out that there are only so many ways a nation can attempt to control or offset its debt, and all the those ways diminish the individual citizen’s ability to fulfill his or her needs and goals.
“Experts can get highly technical in explaining the dangers which necessarily accompany an exploding national debt,” say Rolens, “but the basic explanation is pretty simple. Bottom line, a nation can do two things to cut debt: the first is to raise taxes, and the second is to cut services. The higher the debt, the greater the tax hikes and the more severe the service cuts. In other words, you have fewer tax dollars and you get less for each dollar that you do have ... everything, from schools and the highway system to environmental programs and national security, suffers. ”
IT'S TIME to stop worrying about the deficit -- and start panicking about the debt. To put it another way, short-term deficits aren't the real problem. The punishing hangover of borrowed money is. The ballooning national debt once looked like a long-term problem. Now, the long-term has become the middle-term, fast-forwarded by the cratering economy and the unavoidable and immense spending in the service of saving it.
Consider: In the space of a single fiscal year, 2009, the debt soared from 41 percent of the gross domestic product to 53 percent. By way of comparison, the average for the past half-century has been 37 percent. This sum, which does not include what the government has borrowed from its own trust funds, is on track to rise to a crushing 85 percent of the economy by 2018. Getting the debt back down to a reasonable level will require extraordinary, almost unimaginable, fiscal discipline and political cooperation. Failing to do so will lower the national standard of living and ultimately threaten America's economic stability.
The U.S. government must craft a plan next year to get its ballooning debt under control or face possible panic in financial markets, a bipartisan panel of budget experts said in a report on Monday.
Though the government should hold off on immediate tax hikes and spending cuts to avoid harming the fragile economic recovery, it will need to make such painful changes by 2012 in order to keep debt at a manageable 60 percent of GDP by 2018, according to the Peterson-Pew Commission on Budget Reform.
Without action, investors could lose confidence in the United States, driving down the dollar and forcing up interest rates, said the former lawmakers and budget officials who crafted the report. That could cause a sharp decrease in the country's standard of living.
During a speech about the economy next week, President Obama is likely to endorse using some of the government's $700 billion financial bailout for a new jobs-creation program, the White House said Friday.
"The president thinks we should and must do everything in our power to create an environment for job growth and job creation," press secretary Robert Gibbs said. When asked whether Obama will talk on Tuesday about the use of bailout funds, Gibbs said, "I think that's likely."
As unemployment spikes, the cost of compassion is going up too.By as much as $100 billion.
That's the potential price of a push by Democrats in Congress to continue providing extra help to the jobless beyond the core 26-week unemployment insurance package provided under permanent law.
The jaw-dropping numbers combine the approximately $85 billion cost of continuing emergency benefits through 2010 for the long-term unemployed — jobless more than six months — plus an estimated $15 billion to continue subsidies to help pay health insurance premiums.
Even before the last new round of extended benefits in November, the cost of unemployment compensation was estimated by the White House to exceed $140 billion for fiscal 2010, which began in October. Just two years ago — when the unemployment rate was 4.8 percent in contrast to the current 10.2 percent — the cost of unemployment benefits was only $43 billion.
Extending unemployment benefits again is an obvious solution to Democrats preaching compassion for the long-term jobless, as well as to economists who say cutting off the flow of money could harm the economy.
"This is the most effective way to get money into the economy. It's given to people who are simply out of money," said Rep. Jim McDermott, D-Wash., a key supporter. "They're spending it. They're not socking it away in a mattress somewhere."
Several temporary benefit extensions dating from mid-2008 are set to expire Dec. 31. In January alone, an estimated 1 million people will lose benefits as their extended coverage runs out. By March, 3 million people will have lost benefits averaging about $315 a week.
Also expiring is a program subsidizing 65 percent of insurance premiums for unemployed people who sign up for a continuation of health benefits formerly provided by their employer under the so-called COBRA program. The nine months of COBRA subsidies and the additional weeks of unemployment benefits were both core pieces of February's economic stimulus plan.
