Shock and Awe: The U.S. Deficit Problem
CNBC Senior Talent Producer
Earlier this week I was driving my kids to school when I saw a vandalized street sign that was so striking that I had to pull over and take a picture of it.
Someone had spray painted over the a sign announcing that a road work project was funded by "The American Recovery and Reinvestment Act." The words spray-painted on the sign: "Funded by China."
I live in a nice quiet, country town in New Jersey where the bear and deer are seen on a regular basis, coyote sometimes pop up and even the occasional mountain lion has been spotted. It's hardly the kind of place where you'd expect vandals to be making comments on international debt flows.
The three words scrawled on that sign should be a warning shot for Congress. Many Americans are deeply troubled by the amount of debt the government is accumulating. The level of reliance on foreign capital, especially Chinese capital, to support our economy is worrying. I decided to get to the phones after I clicked that picture to get some Congressional reaction to what I saw.
House Majority Leader Steny Hoyer (D-MD) told me: “When our country was faced with a deep recession, our top priority was to create jobs, so we took the advice of economists from the left and right and passed the Recovery Act, which added to the deficit in the short term but is not the cause of our long term, massive deficits.
Democrats continue to stay focused on getting out of the deep economic hole that we were left in by President Bush, but at the same time, we are working to set a long-term path to reduce the deficit. We hope that Republicans will engage in a real conversation with us about what are the root causes of our deficits, which, for example, is not spending on earmarks or education.”
Senator Orrin Hatch (R-UT) warns this congressional spending problem is threatening our future.
"When Democrats took over Congress, our national debt stood 36 percent of GDP and today it’s roughly 61 percent. Over the same time period, federal spending has gone from 19.6 percent of GDP to 25.1 percent of GDP. We owe it to American taxpayers to stop the spending and stop giving foreign governments control over our future by borrowing so much money from them," Hatch said.
Senator Judd Gregg (R-NH) sounds the alarm on spending warning the United States faces a “bleak fiscal future” if aggressive action isn’t taken.
“As we pile on debt, our country continues to borrow not just from Americans, but also from global competitors such as China and governments in the Middle East. Our children and grandchildren will be required to pay this debt back. Their inheritance will be a government they cannot afford and, for the first time in our nation’s history, a lower standard of living than the generation before them," Gregg said.
Senator Bob Casey (D-PA) is also concerned with the deficit and defends his party's actions in trying to stimulate the economy.
"The federal debt has more than doubled in the last ten years. Our trade deficit with China during that same time has tripled. Neither policy is sustainable," Casey said.
"There is a short-term imperative to put America back to work. The recovery bill has done that and we need to end China's unfair trade practices to stop putting American workers and American companies at a disadvantage. According to the CBO, the recovery bill is on track to create or preserve 3.5 million jobs. For the families affected who can still put food on the table, that is more than just a statistic."
Senator Bob Corker (R-TN) gave me a call Tuesday afternoon as he was traveling between presentations to constituents on the deficit when he heard about that roadside sign.
BC: I have made over 50 presentations in our state on our nation's indebtedness this past year. For every dollar we spend, we borrow 40 cents. And of that 40 cents, 47% of the money being lent to us is being lent to us by foreign holders so the terrain is changing. Back in 1960, when the government borrowed money, it was lent to the government by Americans. Only five percent of the money the US borrowed was foreign holders. Today, its 47 percent and just under 10 percent of that is held by China.
When you borrow money from someone, it changes the relationship you have with them. And obviously we owe China a lot of money, Japan as well as a lot of other countries. Bottom line, when you owe someone a lot of money and you try and sit down with them to talk about issues of concern you're debtor has the advantage. Over this year as I have traveled around my state to talk to talk to my constituents' and I have seen their concerns over policy have changed. In the past it was about health care, and now they are concerned with our debt. Americans understand this crisis is building because of our lack of ability to have any kind of fiscal discipline and responsibility in Washington, and the huge amount of indebtedness that we have as a country.
To date, our debt to GDP, is sitting at 62 percent. Greece was bailed out by its neighbors at 120 percent. And if we continue on the course we are on for the next two decades, our country will have a debt to GDP ratio of 143 percent and my guess is if we stay on this path, more and more of that debt will be owned by foreign holders because Americans are not saving.
I think this puts us in an incredibly precarious position. I'm doing everything I can to inform citizens of the dilemma we are putting ourselves into and I'm thankful more and more citizens are paying attention — just like the person who painted the signed you passed on your work.
LL: I have been hearing from numerous contacts that they are afraid there will come a point where China tells the U.S. to stop spending and make spending decisions for us. Who is in charge of our destiny? Is it the U.S. or China?
BC: Today we are probably still in control of our destiny but very soon we won't be. During the financial crisis I spent a lot of time on the phone with Hank Paulson. I'm kind of a seven day a week person and during the crisis so was he, and he kept telling me, "Corker I'm concerned about China. Corker, I'm concerned about China."
There is no question if a big player were to become very concerned about where we were as a country and would withdraw, that would immediately make interest rates rise because then you have to seek other people to go buy your bonds and they need to seek a premium there.
I was in Greece not long ago. I sat down with their Prime Minister, I sat down with their central bankers and there's no question their lenders who bailed them out had a great deal to do with the austerity measures Greece put in place. Well, that's exactly the situation we'll find ourselves in if we continue on this path.
Again, we are above where we need today, but we're quickly moving into a place that puts us into that kind of situation where people and countries will tell us what to do. That's what lenders do right now with borrowers. Lenders begin telling borrowers how to run their operations. That's exactly what could very well happen to our country if we continue on this path. We are putting ourselves in a very perilous situation.
LL: What kind of timeline to give our country for this? A decade? Or even shorter?
BC: I would say the timeline is much sooner than that . I have a nine page I plan to offer right after the election that's going to look at capping spending as a percentage of GDP. And the reason why I like looking at our debt that way is we look at our indebtedness compared to our GDP. That's how the IMF looks at the health of countries and when I put my slides together it dawns on people (doesn't matter if your Democrats or Republicans), they realize, wait a minute we are way off base here.
We've gone from an average of spending 20.3 percent of our GDP over the last 50 years to today being at 25 percent to 26 percent and there's no tax policy that you can put in place that can even catch this out of control spending. By the way that does not mean I want to see any taxes being raised.
But let me go back to this time frame. I'm on the banking committee and I talk to lots of people. I talk to hedge fund managers. And many of them are investing in U.S. bonds and they think for the next two to three years there is money to be made there because people are going to continue to invest over the short term. But they continually tell me and I'm repeating them— I'm certainly not an economist — that after that two to three year time frame they think there's going to be a flight and they think the market is going to demand a premium from the United States to loan us money because of our lack of fiscal discipline.
I don't think its ten years, I think we've got three to five years to deal with this effectively. We've got to take steps and send signals to our lenders that we have the courage to deal with these issues. A good first step and I hope it comes out of the deficit reduction commission, would be to deal with the program that's the easiest mathematically to address and that's Social Security. We've got to begin to show as a country we have the courage to take the necessary steps to get our spending under control. I think if we don't do that, I think very, very, quickly you are going to see a premium.
LL: Have you tried to speak with any of President Obama's economic advisers about this and if so what have they told you?
BC: I recently spoke with the President on the STAR Treaty and of course financial reform and it was of course a very terse conversation and then I have also talked to him about health care. I talk to people like Geithner, who I just have more contact with. I think their feeling is that they have to spend in the short term but over the long haul they feel like that there is no question they have to constrain spending.
I met with Bernanke last week and I talked to a couple of folks who are members in the deficit reduction commission the week before, and I'm not quoting anybody and I don't want these comments to be eluded to anybody, OK? But I'm beginning to feel people think we have baked in federal spending at higher levels and there is nothing we can do about that. I'm very concerned about that mentality.
Our country has prospered in 50 years of spending at 20.3 percent of our GDP, I'm beginning to feel people are thinking well, there is a new paradigm and that spending needs to be now at 24 percent or 25 percent, so what I'm trying to do is lead the charge in the other direction and make some tough decisions.
The other problem is a lot of Americans look at this issue as an academic issue. I try and show them that's not the case. I have an 18 slide presentation which is all based on CBO numbers and the Presidential numbers and I present it in a way to create "shock and awe" if you will about our deficit issue because a lot of Americans don't get it. The person who wrote on that sign was an astute person.
Unfortunately, a lot of Americans still look at this issue and think it's not going to affect them, it might affect their neighbor or another generation of people but you know what? This problem is right here upon us. I'm hopeful that Americans are going to wake up and demand politicians to take the tough steps instead of allowing the politicians tell them you can have all these things and we'll just spend the money.
I feel a sea change but I need to see more of this. I see people realizing we need Draconian changes that need to occur. And what I don't want to see is the Washington mentality that this is a new realism and we just have to be spending a lot more money in the future to sustain our country. I want us to get back to the norm if you will and again I think it will take a lot of gnashing of teeth to get there.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."