Alarmism From Bair

Sheila C. Bair, the head of the FDIC, believes there is a brew of US debt which will cause the global capital markets to lose faith in American paper. The case has been made before, but her argument in The Washington Post is particularly sloppy.

Her thesis starts with a look at what the US debt will look like in two decades from now, which is a number which is impossible to guess. Her first supposition is based on CBO figures for entitlement expenditures in 2035.” The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars.” That assumes that voters and Congress will refuse to attack the issues of high Social Security, Medicare, and Medicaid costs.

“Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035. Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations.” Should borrowing costs begin to move higher for what the Treasury must pay to gain access to capital, Congress may simply vote for a cap on national debt. That would cause an interruption in federal services temporarily but is much more likely than a rise of US Treasury yields to 6% or 7%.

“Fixing these problems will require a bipartisan national commitment to a comprehensive package of spending cuts and tax increases over many years. Most of the needed changes will be unpopular, and they are likely to affect every interest group in some way. We will want to phase in these changes as the economy continues to recover from the effects of the financial crisis.” That has been said many times before, said much better, and is a description of the what will become inevitable as the US faces its own debt crisis.

The brakes will be put on national expenditures because US citizens are not idiots.

Douglas A. McIntyre