(Jim Clark) – President Obama recently traveled to China to assure People’s Republic officials that US Government Treasury Securities held by the Chinese Government are sound.
At the same time House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid were twisting arms to try to pass a huge new health care spending bill, the admitted cost of which will run between $800+ billions to well over a trillion dollars, depending on which version is finally agreed on.
PBS’ News Hour with Jim Lehrer never slants the news. They do an excellent job of inviting adherents of both sides of an issue and then firmly but gently grilling them so viewers can get a broad perspective. But do they juxtapose news segments so as to convey irony?
After reporting on the Obama visit and the Reid/Pelosi wrestling match in Congress Lehrer went to another feature with Harvard University Professor Kenneth Rogoff and University of Maryland Professor Carmen Reinhart who had jointly written a book they titled: “This Time Is Different”, a history of financial crises and their results.
The two economists researched financial crashes from an Italian banking panic in the 1300’s through currency debasement during the reign of Henry VIII and up to the present “sub-prime” mortgage fiasco which triggered our current problems.
Their quixotic choice of titles was used because historically, over the huge range of crises they studied, they found that people refused to acknowledge that excessive debt accumulation poses greater systemic risks than is ever recognized in financial boom times.
“Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable than they really are” they wrote, concluding: “most of these booms end badly.”
In short it’s déjà vu all over again.
The Chinese, like many Americans, already know all this and they are understandably nervous about holding huge chunks of US debt and earning insignificant interest on it. When the inflation stage of the current crisis kicks in US Treasury debt holders will be paid back in ever cheaper dollars. Rogoff and Reinhart believe this will be every bit as serious a default by the government as when Argentina simply refused to pay bondholders.
Former Reno banker and economist Robert Barone expanded on this theme in his Reno Gazette Journal business column explaining that only 9 years ago the national debt was $5.7 trillion while today it is close to $12 trillion. America’s ability to pay its debts is a function of gross domestic product (GDP) . . . the value expressed in dollars of all goods and services produced in the US. In 1981 the ratio of national debt to GDP was 32%, according to Barone, and currently it is 90%.
Using government projections of $1 trillion in annual deficits going forward and a 3% annual growth in GDP at the end of ten years the national debt will be $22 trillion or 122% of GDP. All this is without the added burden of Obamacare. Barone agrees with Rogoff and Reinhart that US will deal with such crushing debt loads through currency devaluation, rapid inflation or both (anyone remember the Jimmy Carter years with no economic growth, gas lines and a 25% bank prime rate?).
You’d think after 700 years we would have learned something.
(Jim Clark is President of Republican Advocates, a vice chair of the Washoe County GOP and a member of the Nevada GOP Central Committee. He can be contacted at firstname.lastname@example.org)