In Greek mythology, Greek Sea monsters Scylla and Charybdis were situated between Sicily and Calabria in Italy. They were so close to each other that they posed an inescapable threat to passing sailors; avoiding Charybdis meant passing too closely to Scylla and vice versa.
America has its own version of this Greek mythological tale.
On one side the prospect of trillion-dollar deficits will curtail its ability to borrow at reasonable rates.
On the other side, high debt levels will rise from the current level of 5 percent to approximately 25 percent. The added interest costs will force policy makers to curtail social programs and military procurements, or try to borrow even more money.
Interest rates have recently increased to the highest point in 18 months. Demand for government securities waned for the auctions that took place during the week of March 21-28 — auctions because our budget is out of control.
High interest rates can compromise the Federal Reserve’s ability to provide a “soft landing” when their monetary stimulus ends.
Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of California have argued that historically advanced economies growth rate declined when their debt-to-gross domestic product exceeded 90 percent.
According to the Office of Management and Budget, or OMB, total U.S. public debt will exceed 100 percent by 2012.
In “This Time Is Different, Eight Centuries of Financial Folly,” these same authors refuted the claim that “deficits do not matter and the old rules of valuation no longer apply.” Instead, they proved that high deficits repeatedly caused currency crashes, government defaults and hyperinflation.
Bill Gross, manager of the world’s largest bond fund for Pimco, said in an interview with Tom Keene on Bloomberg Radio that “excess borrowings in the U.S will eventually lead to inflation.”
At some point, foreign investors might refuse to finance these deficits on terms compatible with United States prosperity.
N. Gregory Mankiw, a professor of economics at Harvard, said that it is illogical to project massive budget deficits for extended periods. He stated this position in a New York Times story on Feb. 13.
Mankiw said the most troubling feature of President Obama’s budget is that it fails to return the federal government to manageable budget deficits. By 2020, the end of the planning horizon, the annual deficit will be 4.2 percent and rising. As a result, our government’s debts will grow faster than the economy.
To partially address the deficit, House Speaker Nancy Pelosi hinted that a value-added tax was “on the table.” A value-added tax is like a sales tax, but rather than being collected entirely at the retail store, it is collected in stages along the chain of production. It raises consumer prices, lowers real wages, depresses economic growth and taxes everybody.
In 2009, federal revenues were $2.5 trillion and expenditures were $3.8 trillion. Simply said, revenues have to increase by 50 percent, or expenditures need to decline by 33 percent, to get a balanced budget.
By 2020 interest costs will crowd out other government priorities such as social programs and military procurement.
The Peterson Institute for International Economics projects that the international economic position of the U.S. is likely to deteriorate enormously.
By 2030, the United States would be transferring a full seven percent — $2.5 trillion — of its entire economic output to foreigners every year in order to service its external debt.
Maybe Scylla and Charybdis have been reincarnated.
Paul Kennedy, the author of the “Rise and Fall of Civilizations,” wrote that an inability of great empires to fund military endeavors led to their decline.
We have not funded our generation’s promises to provide extensive social programs and military budgets. Cutbacks on these will inevitably lead to mass unrest and end our position as the world’s No. 1 superpower.
Originally published in the Sarasota Herald-Tribune
