[Read the U.S. News Debate: Is Going Over the 'Fiscal Cliff' Necessarily the Worst Outcome?]
Of course, we can go on whistling in the dark until we run into the reality of a crisis we sometimes hear vaguely mentioned, when it is mentioned at all. It is not so much a matter of politicians meeting in the small hours to raise the debt ceiling (or refuse to raise it). It is what will happen when investors lose confidence in the ability of the federal government to put its finances in order. That will be reflected in their unwillingness to buy our debt at current low levels of interest. Look at Greece, where the interest rate on bonds went from about 5 percent to more than 16 percent in a short time. Look at how much more Greece has to pay on its bonds by comparison with Germany.
The question is not whether we must make the tough choices to put our nation's finances in order. The question is whether we will do so before the market forces us to do so.
The result of a debt crisis would be not only a significant increase in the interest rates we have to pay (and think of what that would do to the "recovery"), but also a potential decline in the value of the dollar. We have managed to keep up appearances, but the performance is less and less credible. Investors who have relied on the good faith and trust of the U.S.A. look at how we fudged and fumbled and name-called to the edge of the fiscal cliff, and they're focused on what we do or not do. No one knows when investors will lose confidence in the willingness and the ability of the federal government to put its financial house in order. No one knows how much interest rates would go up, but we do know it would be just as sudden and dramatic as it has been in the endless Eurozone crises. Nobody knows precisely when and if this crisis will occur, but for now we'd do well to rely on the sagacity of one character in a Hemingway novel, who, when asked "how did you go bankrupt?" responds: "Two ways. Gradually and then suddenly." That's what we face when investors lose confidence. Interest rates will surely rise quickly, and each percentage point will force the federal government to pay an additional $150 billion annually in interest.
[See a collection of political cartoons on the European debt crisis.]
Doing nothing to address this level of fiscal irresponsibility is simply not an option. We can't inflate our way out, for inflation doesn't solve our Social Security and Medicare challenges. We can't raise taxes beyond the point where they curtail growth, not to mention that a punitive level of taxation is neither culturally or politically acceptable.
We will know if the government and Congress have finally gotten the message when we see:
- How far they can agree to go on spending cuts in almost all major budget categories, with exceptions only for Social Security and interest on the federal debt.
- How far they agree to broaden the tax base by eliminating deductions, and enforce a means test on entitlement programs by increasing contributions and raising the eligibility retirement age of Social Security (especially considering that life expectancy is rising at least one year every decade and it is now 78.5 compared to the 60 it was when the program was initiated in 1935).
- How far they devise and enforce statutory control of our healthcare costs. Three-quarters of the nation's annual debt, sooner or later, will be due to the spiraling cost of Medicare and Medicaid.
We must change course now, before we are engulfed, with devastating consequences for tens of millions of Americans. As skiers and mountain folk know, by the time the distant sound becomes a roar, it's too late to get out of the way.
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