Many Americans have grown numb to headlines about trillion-dollar deficits and a national debt that will destroy the U.S. economy. It has become routine to hear that Washington has added yet another trillion dollars to the tab. The public has no belief that there is a problem. After all, we have heard it all before, and nothing bad has happened yet.
But what would a true debt crisis look like, and how close are we to having one?
NATIONAL DEBT CROSSES $38 TRILLION FOR FIRST TIME IN HISTORY
If current fiscal trends continue, the United States could face a reckoning far sooner than many policymakers admit. Some economists warn that within five years, when the federal debt may approach $50 trillion and annual deficits reach over $2 trillion, the Treasury could find itself unable to sell enough debt to fund government operations. Yes, the supply of debt would overwhelm the demand. When that day comes, austerity measures alone will not be enough to avert disaster.
A crisis of this magnitude would likely begin quietly, perhaps with a failed Treasury auction, a moment when the federal government offers bonds and investors refuse to buy them at reasonable interest rates. The Treasury Department relies on constant borrowing to roll over maturing debt and fund deficits. If buyers suddenly demanded sharply higher interest rates or declined to participate altogether, the shock to global financial markets would be immediate.
The Federal Reserve might attempt to intervene, purchasing large quantities of government debt to avoid default. But it would not be sustainable. It would require the Fed purchasing about $15 trillion of U.S. debt. That is simply printing new money to finance government obligations. Hyperinflation would automatically result, and all confidence in the dollar would be completely lost. There would be a worldwide breakdown of the monetary system.
The ripple effects at home and abroad would be devastating. Stock and bond markets would collapse, wiping out the savings and retirement accounts of millions of Americans. It would lead to a calamitous depression or a complete breakdown of our economy, leading to long lines of unemployment and growing social unrest.
Banks would close their doors, credit would evaporate, and confidence in government would vanish. Protests would erupt in cities and towns across the country as people confronted a standard of living not seen in generations. Money would become worthless. Chaos would ensue as desperate people resort to desperate actions. There would be worldwide devastation.
This grim scenario is not inevitable, but time is running short. The only way to prevent such an outcome is to restore fiscal sanity now. Policymakers must take meaningful, structural steps to rein in spending and stabilize the nation’s debt trajectory before markets impose painful austerity on their own.
A serious effort must begin with the education of the public about this bleak future. This could be through the creation of a statutory Fiscal Sustainability Commission, a bipartisan, independent body empowered to engage the public, analyze the long-term fiscal outlook, and educate the public about the serious problems we face and what must be done to avoid this catastrophic outcome. Citizens need to understand not only the scale of the problem but also the consequences of inaction. By raising awareness, such a campaign can build the public support necessary for meaningful fiscal reforms and help ensure that policymakers have the political cover to make difficult but essential decisions. An informed electorate is the first line of defense against fiscal irresponsibility.
Policymakers should also adopt a fiscal responsibility constitutional amendment to ensure that both current and future Congresses maintain long-term discipline. The federal budget process itself must be reformed to maintain fiscal balance, so that spending and revenue decisions are evaluated based on their long-term impact, not short-term political gain.
To implement the changes and attain fiscal responsibility, the size, scope, and function of the federal government must be reassessed. Entitlement programs and the tax system need structural reform to ensure sustainability while providing for the truly needy. The objective is not austerity, but a stable fiscal foundation. A fiscally responsible limited federal government will enhance growth, opportunity, innovation, and prosperity for generations to come.
GOVERNMENT SHUTDOWN WILL ADD TO THE FEDERAL DEBT
The longer we delay, the fewer options we will have and the more painful the eventual correction will be. A failure of fiscal leadership today will lead to fiscal collapse tomorrow.
The U.S. has faced daunting economic challenges before and emerged stronger because we acted decisively and honestly. We must do so again. Avoiding a debt crisis is not merely an economic imperative. It is a moral one. Future generations deserve to inherit a stable and prosperous nation, like the one we inherited, built on sound principles of fiscal stewardship and public trust.
Les Rubin is the founder and president of Main Street Economics.