The American public gets it. The American public gets it even if successive administrations don't. We have been running on empty for more than a decade, through two administrations, with government and consumer debt rising to unsustainable levels—and beyond. Erskine Bowles, the co-chairman of the National Commission on Fiscal Responsibility and Reform, has called it the most predictable crisis in our history. Who'd dispute that when our government has to borrow roughly $4 billion every day just in order to function?
More than 11 million American families know the danger of too much debt. They have had firsthand experience with the risks, for they own homes where the mortgage now exceeds the value of the home. Millions more have credit lines that exceed their capacity to repay what they borrow.
America is on the verge of a crisis of confidence in our fiscal management that could awaken the bond vigilantes and cause a collapse of the Treasury bond market. One warning sign is the stern rebuke this month by the International Monetary Fund to its largest shareholder, namely the United States: It lacks, says the IMF, a "credible strategy" to stabilize its mounting public debt. Almost anything could trigger a bond market shock. We are at risk of the chaos theory's so-called butterfly effect, in which the smallest, remotest change in a complex system can create ripples that become waves and ultimately a tsunami. It could be a state failing to roll over its debt, a crop failure, a casual utterance by someone in a pivotal position, or a vote in a committee in Congress that convinces the financial community that congressional gridlock dooms any chance of resolving our fiscal crisis.
Here is one flap of the butterfly's wings. Last month, the world's largest bond mutual fund sold all of its U.S. Treasury bills and notes. Its founder, Bill Gross, perhaps the most respected figure in the world of fixed-income securities, stated his belief that the United States would default on its debt if it did not reform its entitlement programs, citing an estimate by analyst Mary Meeker that our government's unfunded liabilities stand at about $75 trillion. He has lost confidence in the willpower of our leadership to do what is necessary.
That is the kind of incident that could cause rates on Treasury paper to soar in order to induce people to buy the paper, which would then depress the prices of Treasury bills. Gross was so concerned that not only did Pimco, his company, sell all its Treasury bills, but it has now started to sell Treasury bills short.
Knowledgeable people in finance are quite aware that the Federal Reserve has been buying roughly 70 percent of all new Treasury paper, making the government by far the largest client for its own debt. This is only possible by increasing the money supply and the balance sheet of the Federal Reserve and is, in essence, a national Ponzi scheme that sooner or later will blow up.
Our national debt is literally an "existential threat" to our finances. It suggests an erosion of the nation's character over the last 50 years. We have indulged ourselves for way too long, finding ways to extract money from future generations and leave them with the bill. We may have become a nation that is morally incapable of living within its means.
This cannot continue ad infinitum. It is compounded by political malpractice reflected in a leadership that has failed to produce a budget and has no clear plan to reduce the deficit. Time is running out.
The record has not been promising. Last year, President Obama created the bipartisan fiscal commission, with former Wyoming Republican Sen. Alan Simpson as Bowles's co-chair. Obama pledged to be "standing with them" as they produced recommendations. Alas, the president declined to endorse their report, enraging and saddening innumerable members of the Senate. They are still waiting for Obama to stand with them and support the proposals.