A scary outlook on US debt

Opinion: May 3, 2011 at 12:00a.m.

By Peter Goldmark

Newsday

Standard & Poor’s credit warning on U.S. government securities recently is a noisy shot across our collective bow.

Wake up, America. We’ve been given a serious warning.

This was a gutsy move on the part of the rating agency. As a group, the rating agencies were asleep, lazy, greedy — or worse — in the face of all the flawed securities that were flying around before the financial crisis of 2008. Standard & Poor’s seems to have learned something, and it has just stepped up to the plate.

Why was the warning of a “negative outlook” on U.S. securities warranted? Because U.S. debt is increasing, and there are only the barest beginnings of a serious discussion on how to bring it under control. S&P judged, logically, that there is some reason to doubt that our political system will address the problem successfully. One party to that discussion — the House Republican majority — has just been caught in a glaring inconsistency: The Republicans yell about the national debt and say it shouldn’t go up, but their recently adopted financial plan for the country, strangely, would add trillions to that same national debt.

Dysfunctional system

The U.S. political system shows signs today of being utterly dysfunctional on financial matters. With the budget seriously out of balance and the deficit growing, the Republicans want to continue big, deficit-producing tax breaks for the wealthiest among us. President Barack Obama’s long-range plan is better, but it’s too slow to get started on leveling off government debt. Neither approaches factors in the state and local governments that are lurching toward the equivalent of bankruptcy, and neither sets the nation on a course of capital investment to offset the inevitable drop in consumer spending and be competitive in the future.

Europe has given the world a sharp lesson on how fast confidence can erode once a supposedly solid currency begins to hit bumps in the road — especially if the governmental response is indecisive. And as 2008 and subsequent events teach us, the American economy and financial system are not as solid as they could once claim to be.

So let’s imagine you worked for an agency that rated government securities, and your assignment was to make a list of factors that could potentially affect the United States’ ability to make regular and full payments to its creditors. That list might look something like this:

A 40-year trend of skyrocketing debt of almost all kinds, including federal, state and local government, and individual family debt. Over the past 30 years, federal debt has soared from about 30 percent of gross domestic product to 95 percent.

The U.S. balance of payments internationally has remained negative over three decades, and the country ships the staggering sum of $300 billion to $400 billion a year overseas to pay for the oil it imports.

The U.S. government pays so much interest on its roughly $14 trillion of debt that if interest rates were to jump back up to more “normal” rates from their present low, the government might be caught in an “interest spiral” where soaring interest payments gobble up bigger and bigger portions of the federal budget each year.

There is no realistic way the country can work its way out of this severe financial predicament without some tax increases, and the present political atmosphere has produced only paralysis and posturing on that front.

The political machinery that is called upon to “fix” this mess is more polarized and less “fact-based” than we have seen in a long, long time.

You look at these points and frown. You walk the list over to your boss and share it with her. She frowns.

And then she turns to you and says: “How can we do anything but downgrade U.S. government bonds?”

Peter Goldmark, a former publisher of the International Herald Tribune, headed the climate program at the Environmental Defense Fund. He wrote this for Newsday. Distributed by McClatchy-Tribune Information Services.