Facing the Fiscal Cliff

December 4, 2012by Hoy Grimm0

We all have a higher authority to answer to. While voters spoke in November by reaffirming divided leadership, the government must ultimately answer to whoever finances our debt and deficits.

In August 2010, Joint Chiefs of Staff Chairman Admiral Mike Mullen declared that our debt is our largest national threat. Standard and Poor’s brought the issue back into focus when they downgraded the country’s credit rating in August of 2011. But with the cost to borrow money for 10 years at 1.65 percent, the market doesn’t appear worried about our national debt.

Eventually, the market may force the government to a workable solution by increasing interest rates on our debt.

We owe 1.6 trillion dollars to China, 1.1 trillion to Japan, 242 billion to Brazil, 191 billion to Taiwan, and 165 billion to Switzerland. For now, these countries are eager to own a large amount of our debt paying nearly zero interest. While lawmakers have legal and moral obligations to citizens, they have a financial obligation to debt holders.

These countries are the bull elephants that could easily start a Greek-like stampede out of Treasury debt. Stampedes are irrational, binary events. They happen fast and are unpredictable. Lawmakers must act rationally now to prevent an irrational market force.

Aging demographics in Japan and China will eventually force them to dip into their respective reserves (3 trillion dollars in China). As their citizenry ages, Japan and China will likely need to offer some sort of social safety net to their citizens. In 10 years, Japan will move from a net saver to a net spender, forcing them to sell their U.S. Government debt to finance these expenditures.

We need a plan to pay off our debt ahead of these massive demographic shifts.

What will work? Our one-trillion dollar annual deficit cannot be closed by higher taxes alone. We have to cut discretionary spending, which accounts for around 35 percent of the Federal budget. The rest is defense and entitlements. The right solution is one that shares the burden on both the spending and tax side.  

Healthcare advances are extending our longevity, and the work we typically do is more service-based than the back-breaking manual labor jobs of the industrial revolution. Our long-term debt solution will likely mean we work until 70 or longer before receiving government benefits.

As the largest economy on the planet, we have more time to find a solution than Greece or Spain, but we need to do so quickly. Without compromise by both parties, we will not fix the debt problem.

 

Hoy Grimm

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