Saturday, February 06, 2010

National Debt, Deficits and our National Security

Deficit Balloons Into National-Security Threat
[...] The U.S. government this year will borrow one of every three dollars it spends, with many of those funds coming from foreign countries. That weakens America's standing and its freedom to act; strengthens China and other world powers including cash-rich oil producers; puts long-term defense spending at risk; undermines the power of the American system as a model for developing countries; and reduces the aura of power that has been a great intangible asset for presidents for more than a century.

"We've reached a point now where there's an intimate link between our solvency and our national security," says Richard Haass, president of the Council on Foreign Relations and a senior national-security adviser in both the first and second Bush presidencies. "What's so discouraging is that our domestic politics don't seem to be up to the challenge. And the whole world is watching."

In the 21st-century world order, the classic, narrow definition of national-security threats already has expanded in ways that make traditional foreign-policy thinking antiquated. The list of American security concerns now includes dependence on foreign oil and global warming, for example.

Consider just four of the ways that budget deficits also threaten American's national security:

• They make America vulnerable to foreign pressures.

The U.S. has about $7.5 trillion in accumulated debt held by the public, about half of that in the hands of investors abroad.

Aside from the fact that each American next year will chip in more than $800 just to pay interest on this debt, that situation means America's government is dependent on the largesse of foreign creditors and subject to the whims of international financial markets. A foreign government, through the actions of its central bank, could put pressure on the U.S. in a way its military never could. Even under a more benign scenario, a debt-ridden U.S. is vulnerable to a run on the American dollar that begins abroad.

Either way, Mr. Haass says, "it reduces our independence."

• Chinese power is growing as a result.

A lot of the deficit is being financed by China, which is selling the U.S. many billions of dollars of manufactured goods, then lending the accumulated dollars back to the U.S. The IOUs are stacking up in Beijing.

So far this has been a mutually beneficial arrangement, but it is slowly increasing Chinese leverage over American consumers and the American government. At some point, the U.S. may have to bend its policies before either an implicit or explicit Chinese threat to stop the merry-go-round. [...]

It goes on to give many more examples of the threats this is creating to our sovereignty and our national security. Yikes. What ARE we doing? And what should we be doing differently, to stop or reverse this trend?

More on that theme follows, in this interview with David Walker, author of the book "Comeback America: Turning the Country Around and Restoring Fiscal Responsibility." Here is an excerpt of the interview:

What Every American Should Know About the National Debt

Q. Who do we owe the money to?

A. Fifty percent is owed to foreign lenders. China is number one, Japan is number two, a block of oil producing nations comes next.

Q. Do you think that affects our foreign policy toward China?

A. Yes, it does. It's already been manifested because one of the reasons American tax payers now guarantee $5 trillion in Fannie Mae and Freddie Mac debt is because the Japanese and the Chinese demanded it.

Q. Is there a point at which China could say, 'We've decided to stop lending you money?'

A. What's more likely is that China will say, 'We're not going to lend you money unless you pay us higher interest rates.'"

Q. What should people expect their elected officials to do if they're acting responsibly and taking care of the country?

A. In the short term the deficits are going to be high because of the recession, because of two wars, because of unemployment, but what we need to deal with is the structural imbalance. Once the economy recovers, once unemployment gets down, and the wars are over, we still have large and looming deficits. That's what threatens the ship of state.

President Obama says he wants to freeze a part of discretionary spending for three years. That's a good first step, but we're going to have to do a lot more than that. He supports pay-as-you-go rules, but there are big loopholes in the pay-as-you-go-rules. Thirdly, he talks about creating a fiscal commission that would make recommendations on tougher budget controls, Social Security, Medicare and tax reforms. We clearly need to do that to engage the American people and to get a vote in Congress in 2011. That's very, very important to maintain the confidence of our foreign lenders...if we lose the confidence of our foreign lenders, we're in deep trouble.

Q. What does trouble look like?

A. That means the dollar will drop dramatically, interest rates will go up, unemployment would go up dramatically and you'll have something much worse than a recession. It would be ugly. The important thing is we can avoid that and that's what the book's about. [...]

More and more this is becoming obvious. When will the the politicians in D.C. "get it?" Walker has written a book about solutions, it's not as if there aren't any. We need to start applying those solutions NOW.

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