How bad is the developing U.S. government debt crisis? A recent Washington lunchtime conversation with a Reagan-era Treasury Department official suggested that the answer could be much worse than the administration acknowledges or the president understands.
Not long ago the president refused to put his own spending cut plan on the table. House Republicans had asked him to do this. They hoped it would prove a first step in conducting a serious dialogue on the future of the economy and the role of federal finances in shaping that future.
But with the success of Mediscare tactics in the recent upstate New York special congressional election, the White House appears to have decided that addressing the debt crisis in any form would be a political loser. The better course would be to make every GOP probe for a solution a means of energizing pro-administration spending constituencies.
The sub-text of this decision was that the White House and its Treasury secretary do not believe that there is a truly serious government debt crisis. In a Q&A before mutual fund executives several weeks ago, Treasury secretary Timothy Geithner painted a confident view of the economy’s prospects and the eventual working down of the overwhelming debt the government has acquired these last two years. He dismissed talk in China, Brazil, and elsewhere of finding an alternative to the dollar as the global reserve currency. Boiling his answer down a bit, he said that the world had nowhere to go for a global currency except the U.S.
But as the Reagan-era Treasury official suggested, even if Mr. Geithner denies it, the smoke signals from the Treasury headquarters are sending a different message.
The former official started by noting that interest rates are at an all time low. We are not just talking about short-term rates. Corporate 20-30-year money is trading at levels not seen since the 1960s (see: http://tiny.cc/rqk54). Wouldn’t it make sense for the Treasury to lock in these rates now, selling as many 30-year notes as it can? But, he added, it isn’t. It is relying on comparatively short-term money – ten year notes at the outside. Why?
I believe, he said, that Treasury officials are afraid if they go out with a 30-year issue, the issue will in some way fail. They fear that it will either not be fully subscribed or that market discounting will suggest extreme skepticism towards the government, with who knows what impact on the economy.
It is hard to see how anything to do with the economy and U.S. government debt could be worse than it appears. The International Monetary Fund has taken to criticizing the Untied States for not having the political will to control is rising debt, almost as if we were Greece or Portugal. At least one Wall Street house has said it is withdrawing from the government debt market.
Meanwhile, the underlying economy is on wobbly legs, at best. In recent weeks we have seen catastrophically anemic job creation numbers, unemployment rates that the administration once assured us its policies would prevent us ever seeing, a tumbling stock market, a diving dollar (even as Mr. Geithner says he favors a strong dollar), a drop in housing values from their peak that exceeds the drop in the Great Depression, and scarily high inflation in food and energy which together with housing take up most of the average family’s budget. According to celebrated economist Martin Feldstein writing in the Wall Street Journal last week (see: http://tiny.cc/kq79b), GDP growth in the first quarter, after subtracting inventory build ups, was 1.5 tenths of one percent, almost nothing.
How long can this weakness go on? Just this month the McKinsey Global Institute wrote, “For the United States to return to full employment—finding work for the currently unemployed and accommodating new entrants into the labor force this decade—the US economy will need to create 21 million jobs by 2020….” (see: http://tiny.cc/kenr7) The institute added that only its “most optimistic job growth scenario” could offer hope of getting there. One reason they fingered for the languishing numbers, a dearth of new business start-ups, down 23 percent in 2010 from 2007, the lowest level in almost three decades, when the U.S. population was much smaller.
But most of all, the problem with U.S. government debt is not a weak economy generating lower revenues. As many have suggested, it’s the other way around; the economy’s problem is in part the uncertainty created by rising debt. The real source of the debt problem itself is in the explosion of spending and an administration in denial.
How much longer can this game of blind man’s bluff continue? The smoke signals from the Treasury Department may be telling us, not long.