Worry about hitting debt wall, not ceiling

Imagine having friends who earn $100,000 per year. They've continually outspent their income, charging $45,000 annually to credit cards. Their debt balance exceeds $700,000 and their interest rate is increasing. Facing two kids in college and retirement without savings, they plan to borrow more — from you!

My hunch is you'd tell them to Think Again. With little prospect of earning more, they must destroy their credit cards, live within their means, pay off their debt and save for retirement.

If this scenario sounds farfetched, please Think Again. It actually parallels the U.S. government's fiscal crisis, from which Americans can't just walk away. Like the parent who confiscates a child's over-spent credit card, Americans must honor our government's obligations, for we back “the Full Faith and Credit of the U.S. Government.”

Those words once implied the gold standard of credit-worthiness, attracting global investment to America. Now, they jeopardize our standard of living since we're collectively responsible for the $14.3 trillion balance on the national credit card.

As treacherous as debt is for individuals, its repercussions are worse for an economy. Countries with excessive debt suffer disproportionately from recessions when credit markets unduly tighten, forcing businesses and consumers to forgo investments and purchases.

Because our debt has grown to a historically high percentage of our economy (it's up $5 trillion, or 54 percent, since January 2008), implications for the next recession are ominous. We've hit another debt ceiling, raised 90 times in 60 years, rendering the concept of “debt ceiling” as meaningless as Social Security “lock-box.”

According to the Bi-Partisan Debt Commission, the national debt is in “unfamiliar territory” heading toward “unsustainable levels” due primarily to mandatory spending, prompting the International Monetary Fund and ratings agencies to downgrade the U.S. fiscal outlook to negative. It's no surprise. Despite perennially promising wise financial stewardship, politicians have overspent every year since Elvis Presley's first record — 1954.

Spending growth is made worse because the eventual costs of mandatory programs like Social Security, Medicaid and Medicare (comprising most of the federal budget) are habitually underestimated in order to win approval. Launched in 1966, Medicare's advocates “conservatively” projected an annual expenditure of $12 billion in 1992, by which time actual costs exceeded $107 billion. Now, Medicare spends $600 billion and rising due to aging baby-boomers and escalating medical expenses.

Restructuring unsustainable spending programs is critical to America's fiscal stability and to protecting the health and retirement security of our citizens. If only it weren't such a political hot potato.

Politicians who win votes by advocating mandatory spending programs knowing (and withholding that) their long-term costs are unsustainable resemble sub-prime mortgage salesmen. Though the mortgage salesmen helped low-income borrowers achieve home ownership dreams by peddling loans with initial low payments, they knew payments would eventually balloon beyond the borrowers' capacity to pay, but they banked origination fees anyway. Ultimately, this deceitful behavior undermines everyone's economic security.

Most worrisome, our fiscal crisis is understated because accounting gimmicks allow future mandatory spending obligations to remain “off-balance sheet.” The U.S. Treasury's real liabilities are estimated to exceed $75 trillion, five times larger than officially acknowledged.

So, rather than agonize over hitting another debt ceiling, we should worry about hitting a debt wall, just like the friends who over-borrowed to maintain their spending habits.

America's deteriorating finances mean purchasers of U.S. debt require higher interest rates to compensate for increased risk. That's why the Federal Reserve is buying 70 percent of U.S. Treasuries, according to Pimco, manager of the world's largest bond fund. This means every day our government spends $4.5 billion it doesn't have, of which $3.1 billion is borrowed from itself. No wonder Pimco dumped its U.S. holdings and shorted U.S. Treasuries.

Who will buy U.S. debt after the Fed stops this summer? Beware of “bond-market vigilantes” who usually force immediate and unfavorable consequences on economies in fiscal distress.

Increased interest rates could cause a disastrous chain-reaction: Interest expense compounds and, like Pac Man, cannibalizes other government expenditures necessitating draconian and sudden spending cuts. Higher interest rates increase the cost of doing business, causing economic stagnation. U.S. assets depreciate as import and commodities prices continue rising. Paychecks buy less so businesses sell less, the global economy declines, lending slows, more jobs are lost and stagflation sets in.

After the Clinton administration was forced by “bond-market vigilantes” to Think Again about its fiscal policies, advisor James Carville said, “If there was reincarnation ... I would like to come back as the bond market. You can intimidate everybody.”

Rather than suffer “intimidation-by-bond-market” putting our whole society at risk, better to intimidate politicians to Think Again about raising the debt ceiling without first assuring our fiscal stability.

Cut up the national credit card, for the sake of America's children and for generations to follow.