Tags: jacob | wolinsky | cuts | debt | economy | us | default

US Is Doomed Unless it Makes Big Cuts Right Now

Thursday, 30 Jun 2011 08:29 AM

By Jacob Wolinsky

The Wall Street Journal ran an op-ed this week, which was one of the scariest articles I have ever read. The basic premise of the piece was that under any of the plans currently proposed, the debt problem won't be solved.

Three reasons were used to back up this argument:

• Interest rates will rise, causing the yield on Treasurys to rise by trillions of dollars;

• President Barrack Obama is being far too optimistic in his growth projections for the economy, if the estimates are only slightly off, the budget deficit will grow by trillions of dollars;

• ObamaCare will cost far more than the estimate that was initially “sold” to the public

The article was an open-eyer, especially on the first and second facts.

The reasoning for this, is that either the economy gets healthier and interest rates/ and the cost of Government borrowing rises, or the economy doesn't do well and the debt gets worse as our economy flounders.

Having deeply analyzed the authors’ arguments it was very hard to find any holes in it. Most of the counterarguments were political hacks blaming the budget problems on former President Bush, while ignoring the authors’ points.

Here is a brief quote from the article on the first point:

At present, the average cost of Treasury borrowing is 2.5 percent. The average over the last two decades was 5.7 percent. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020.

The authors are right; the yields on Treasurys are ultra-low right now.

The only buyers right now are the Federal Reserve and investors who lack a better alternative. Since, interest rates are practically at zero, some investors are buying treasuries to get higher yield.

However, this situation will not last forever, if interest rates rise or investors see a risk of a U.S. default.

So what is the solution? The only way to solve the problem is by drastically decreasing the debt quickly. This way the debt problem won't have to rely on rosy estimates by the Obama administration or a rise in interest rates.

Most of the plans being currently being offered solve the debt problem over 10-12 years. Additionally, Obama’s plan cannot be trust since as with Obamacare all the additional debt was supposed to kick in at a later date.

Putting the brakes on government debt is a near political impossibility, and likely will cause another economic downturn. However, lawmakers must choose between the above or the U.S. debt problem getting to the point where it is unsolvable.

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