PoliFiLogic.com

In the Navy a shot across the bow of a ship is a serious warning. It can mean a number of things, including a warning to change course. It also means that if the receiving ship doesn’t comply, a more drastic volley of cannon fire will follow.

The United States of America received a shot across the bow today as Standard and Poor’s changed its outlook on Treasury debt to negative. S&P kept the rating at AAA, but suggested a downgrade is possible. The response from the White House was something to the effect that S&P is too pessimistic as to the ability of the White House and Congress to solve the budget problem – a laughable response. Why should S&P have confidence in a government that has been fiscally irresponsible for more than fifty years?

There are two budget reduction proposals on the table. President Obama offered one that would reduce the budget by $4 trillion over the next ten years. The other, proposed by Representative Paul Ryan, would reduce the budget by $6 trillion over the same period. Sound good, don’t they? Dig a little deeper and the tone changes. The budget deficit is $1.6 trillion right now, and will total $16 trillion in the next ten years. Both plans fall drastically short of solving the budget problem. These plans rely on tax receipts to grow and make up the difference. Well, that would take growth of 53% in ten years, or 5.3% a year. Gross Domestic Product is forecast to grow 2.3% a year over that time. Nope, growth probably won’t do it.

Today, US debt exceeds $14 trillion. Assuming these proposals result in a compromise and a plan is developed to save $5 trillion over the next ten years, the national debt will reach at least $25 trillion ten years hence. Solving the problem, and starting a debt repayment process, would require at least three more such deals; each cutting $5 trillion. Who among you believes anyone in Washington has the courage to suggest such a thing, least of all to actually do it?

But, it’s worse than that. You know as well as I that upon passage of one of these deals (assuming that ever happens) Washington will go back to its old ways and start spending more. Furthermore, the American public will do what it always does, yawn and watch reality TV. The Tea Parties, having believed they’ve accomplished something great, will disband and go home. That’s when the second shot will cross the bow. That’s when US debt will be downgraded from AAA to something lower.

You’ve heard, or will hear, a lot about discretionary spending and how little room there is to cut. You will hear a lot about how Social Security and Medicare must be cut. But, there’s another key figure to keep your eye on, and that’s the portion of discretionary spending represented by interest on the national debt. I’ll make a prediction; the house of cards that is America’s fiscal structure will collapse when interest expense exceeds thirty-five percent of discretionary spending. That’s when the last of the investors who hold Treasuries will panic and rush to sell.

In 2010 interest was approximately 13.2% of discretionary spending, but interest rates were historically low. If rates were at normal levels, interest would have been about 22%. Of course, rates will get a lot higher as investors get increasingly concerned. For example, the yield on two year Greek bonds reached 20% today. It’s logical to assume that there are a lot of people, many with Chinese names, who are thinking about interest rates in light of S&P’s announcement. If rates on US Treasuries should reach 10% interest expense will be right around my prediction of 35%. The scary part is that a jump to that level could happen very quickly. After all, Greek bond yields were 7% only a few days ago.

In the meantime, what discretionary spending will we cut to offset growing interest payments? The answer is simple. We will do what the ancient Romans did – cut defense spending. Guess where that leads. Where’s the Roman Empire today?

Last year I ran for public office. I suggested that America needs lawmakers who understand these issues, not incumbents who stood by and watched them develop. I talked about Maryland’s fiscal deficits and the huge debt the state owes as a result of seriously underfunded pension and medical plan liabilities. I could see the eyes of those in the audience gloss over. I could hear my opponent and his wife chuckle, reflecting their lack of understanding or appreciation of the problem. Meanwhile, the clock continues to tick, and the problems continue to grow.