Monday, March 14, 2011

Escalating national debt threatens future

The future of America can’t be built on the foundations of debt, deficits and lack of fiscal discipline.
Ensuring the prosperity and sustained growth of the American economy requires federal, state and local governments to make serious and drastic changes to their profligate spending habits.
Current levels of government spending can’t be maintained, and at their current rate, threaten our economy, way of life and national security.
Deficit spending has been a financing tool widely used by both political parties in Washington.
The growth of the national debt paints a grim and sobering picture of what we are passing down to future generations:
● The national debt has nearly tripled over the last decade, growing from $5.5 trillion in 1998 to more than $14 trillion in 2011.
● In fiscal year 2010, Washington ran a budget deficit of $1.3 trillion, the largest since World War II, for a record spending of $30,000 per U.S. household.
Another major reason for concern is the increased dependency of our federal government on foreign lenders to pay for our spendthrift ways. Foreign lenders own more than 49 percent of the U.S. public debt.
Records show some of the largest holders of our debt are foreign governments whose policies and economic ambitions may be on a collision track with our best interest.
Research by economists Kenneth Rogoff and Carmen Reinhart puts the spotlight on the impact of high levels of debt on the economy. Their findings show that debt weighs heavily on GDP growth. Once a nation’s public debt exceeds 90 percent of GDP, the “tipping point,” the growth rate of the economy slows down by 1 percent.
The U.S. economy with a debt to GDP ratio of 84 percent is approaching this critical threshold.
The looming state, local and pension fund imbalances could easily push our debt levels beyond this critical point and this doesn’t bode well for our economic future, lower unemployment and a sustained recovery.
The key question is then, what’s the solution?
If history is a guide, research by the McKinsey Global Institute can help us find the answer. Their analysis of 32 episodes of deleveraging that followed a financial crisis shows that responses to a crisis fit into one of the four archetypes:
1. “Belt Tightening”
2. “High Inflation”
3. “Massive Default”
4. “Growing Out of Debt”
Although historically, “Belt Tightening” was the most common response, there is no credible signal from Washington of a legislative strategy to reign upon government spending — making the required cuts to entitlement programs (Medicare, Medicaid, Social Security), eliminating perks, increasing taxes and shrinking the size of government.
The likelihood of “Massive Default” is extremely low, but things could change and “Growing out of Debt” is a nice, theoretical discussion.
The most likely scenario, given the Federal Reserve predilection for keeping interest rates low via quantitative easing programs is “High Inflation” (printing money).
Each tax dollar that goes to pay for interest on the debt is a missed opportunity to invest in America’s future, improve its schools, update its aging roads and bridges, invest in innovation and find new sources of energy to lessen our dependency on external energy sources.
In our present course of spend now, pay later, we are not being fair to future generations. It is not part of the American character that built the most affluent and freest nation on earth. They deserve better. We need to live within our means and pay for our own expenses.
Edgar Ortiz is founder and CEO of Strategic Analytic Solutions LLC, an Atlanta-based consultancy in business planning, strategic marketing and information-based strategies.

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