World

U.S. debt and the rapidly greying president

Neil Macdonald on rising tide of U.S. exceptionalism. Meaning someone else pays.

This country's rapidly greying president, wearing a grey tie and a greyer suit, stood at a White House podium this week and announced what amounted to a political cave in.

Not once, in the news conference that followed, did he utter any of his old slogans about changing the way Washington does business. That would have just sounded foolish given the circumstances and Barack Obama is a smart enough fellow to know it.

A somewhat testy Barack Obama, at a White House news conference on Dec. 7, 2010, taking on some of his own party members for critiquing his tax deal with the Republicans. ((Jim Young/Reuters))

Here is basically what Obama and the Republicans in Congress had just done: With the national debt exploding to historic proportions and with the nation's spending literally out of control, they got together, examined the options and decided to borrow hundreds of billions more.

Both parties ended up with what they wanted. The Democrats can now increase spending (extending federal unemployment benefits), and the Republicans secured the now famous Bush tax cuts for rich people.

It was a thoroughly American compromise, in other words. One ideally suited to a nation that seems to consider itself immune to the laws of economics that govern everybody else.

American exceptionalism

Millions and billions and trillions tend to blur into a haze of zeros, but the essentials here are pretty clear.

The U.S. government borrows about 40 cents of every dollar it spends and it is on track this year to borrow about $1.3 trillion. That is the equivalent of borrowing Canada's entire economic output for 2009.

And that deficit will be piled onto the debt, which now stands at about $13.8 trillion and rising. Actually, if you add all the liabilities that Washington simply doesn't have the money to pay for (social security and Medicare are the biggies), the real debt is something like $40 trillion, which is a figure that defies comprehension.

Certainly, it defies repayment.

Now, most developed nations accept that when they've dug themselves into a deep fiscal hole, the solution is first to stop digging, then impose a combination of spending cuts and tax increases.

Canada did that in the 1990s and several European countries are doing it right now.

Meanwhile in Dublin on Dec. 7, one of many protesters stands outside government buildings as a tough-minded austerity budget is announced. ((Cathal McNaughton/Reuters))

Not America, though. Because this is an exceptional place.

There's even a doctrine of American exceptionalism, accepted by pretty much everyone here, but embraced with particular passion by conservatives.

Potential presidential candidates such as Sarah Palin, Mitt Romney and Mike Huckabee are even making it a theme, with the Republican primary races just a year away.

"To deny American exceptionalism is in essence to deny the heart and soul of this nation," is how Huckabee, a former Arkansas governor, put it recently.

And so, exceptionally, America isn't subjecting itself to any restraint at all. The remedy here, at least so far: Tax cuts and spending increases.

What frugality?

If that all sounds politically craven or, at the very least, irresponsible, remember, this is the most democratic country in the world and the politicians in Washington are only channeling the people who sent them here.

Current statistics indicate the so-called "new austerity" that was supposed to have gripped a newly sobered nation two years ago during the credit crisis has evaporated, if it ever existed at all.

Americans are enthusiastically spending again, even if they don't have any money.

They're apparently sick of waiting for things to get better, and the notion of reducing one's debts and saving for purchases is just not the American way.

"People are going through frugality fatigue," financial analyst Marshal Cohen explained recently in Newsweek.

"You stop spending and you stop living," a financially delinquent Las Vegas waitress told the magazine.

Sure, the debt piles up. Sure, you eventually get to the point where just paying the interest sucks up all your disposable income. But that's what bankruptcy is for.

That's why almost every other television commercial in this country advertises companies that will "stand between you and your creditors." Or between you and the tax collector.

For a fee, these companies will haggle for you and you will get away with paying a fraction of what you owe. Or at least that's what the commercials claim.

Indeed, what the government's figures indicate is that the majority of U.S. household debt that has disappeared over the past two years hasn't actually been paid off. It's been erased due to defaults, foreclosures and bankruptcies.

Meaning the bank haggled, or the debtor simply walked away, or someone waved a legal wand and made the debt disappear.

Printing money

For the federal government, making debt disappear is even easier.

Washington has an option the ordinary people don't. Last month, the U.S. Federal Reserve announced $600 billion worth of "quantitative easing," which is a euphemism for printing money.

Basically, the Fed creates the money out of thin air, then lends it to the government by buying long-term U.S. Treasury bills. That means expanding the money supply, which of course makes every dollar already out there worth a little less. Which, in turn, impoverishes anyone who holds American debt.

Technically, it's a form of default. Expect more of it. It neatly solves the problem without any unpopular spending cuts or tax increases.

It also forces the rest of the world to share America's pain and the world is probably just going to have to put up with it because, like those Wall Street banks, the U.S. government is literally too big to fail.

Just watch. It won't be difficult for the exceptionalists to talk themselves into endorsing the idea. America's been good to the rest of the world, they'll say, it's time the rest of the world gave a little back. The world needs to start paying for the security America provides. Here in America we write our own rules. Etc., etc.

The speeches almost pen themselves.

Of course, it is always possible politicians here might do the right thing. Maybe they'll emulate the Europeans and explain the arithmetic of debt to the American electorate.

Maybe they will even acquire the spine to make difficult, unpopular decisions. Maybe the American voter will accept real austerity.

Maybe. But how much of your money would you bet on it?