Posted on: Monday, November 22, 2004

EDITORIAL
U.S. bleeds red ink: Why you should care

Question: You've maxed out your credit card and you haven't a clue how to pay it off. You've noticed that your minimum payment isn't even keeping up with the interest, so your balance keeps growing. What's the absolute worst thing that can happen next?

Answer: They raise your credit limit.

It's the worst thing that can happen because, if you're like too many Americans, you'll promptly go out and buy more stuff, max the card out again and find yourself in the same hole, only deeper.

A consumer in this predicament is a pitiful sight, but surely, you ask, aren't the people running our government in Washington more sensible, more responsible when it comes to the nation's finances?

They're not.

So on Thursday night, with the federal government warning that it was on the verge of defaulting on its debts, Congress raised the federal debt limit by $800 billion, to $8.18 trillion.

That debt, in President Bush's first term, was driven up by a recession, a sluggish economy set back by the events of 9/11, five tax cuts in four years, soaring defense spending as wars rage in Iraq and Afghanistan, a Congress that can't say no to new spending and a president who has never said no to congressional spending.

Inflation threat

As the deficit continues to grow, the dollar will lose value relative to foreign currencies, driving up inflation and putting a squeeze on today's working families.

Indeed, the deficit is growing. That's why the government's borrowing limit has climbed by $2.23 trillion since President Bush took office: by $450 billion in 2002, by a record $984 billion in 2003 and by $800 billion this year.

And the dollar is losing value — plunging might be a better word, as it fell at week's end to 1.30 euros and 103 yen.

Who, you might ask, is financing this new American spending spree — which, by the way, costs us an estimated $3 billion a day?

We're increasingly dependent on foreign creditors — with whom we have a balance-of-payments deficit of $600 billion, or roughly 6 percent of gross domestic product. They put money in American stocks and bonds because our economy keeps growing and our checks are always on time.

But they're looking at economic management in Washington with enough alarm that they're beginning to unload dollars and dollar-denominated investments.

This sell-off, says the Financial Times, is due to "fears that Bush's victory will bring four more years of widening U.S. budget and current account deficits" amid "heightened geopolitical risks." J.P. Morgan advised clients that the dollar's slide "threatens economic stability worldwide."

A rapid selloff, in turn, would drive up inflation and interest rates "as the Treasury is forced to increase the return on investment in U.S. securities," writes Clay Risen in The New Republic. "This, in turn, would squeeze business investment and drive up mortgage costs. Overnight, the deficit could go from an abstract issue for most voters into a major pocketbook crisis."

Greenspan weighs in

Alan Greenspan, chairman of the Federal Reserve, warned Europeans Friday to expect the dollar to continue its slide. "It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said in a speech to European bankers.

How can Washington turn this negative situation around? The model was established during the Clinton years. Ironically, it was the Gingrich Republicans who then were deficit hawks and insisted on setting statutory restraints — "pay as you go" rules — on deficit spending.

Those rules lapsed entirely two years ago, so Congress has effectively given the Bush administration a blank check to continue running large deficits.

"An open-ended license for this kind of fiscal irresponsibility," said Stephen Roach, chief economist at Morgan Stanley, "is a recipe for disaster."

Voters worried

Nationwide polls show that voters worry a lot about deficit spending, and about leaving debt to future generations. What smart members of Congress must do is pay attention to this worry and reach across the aisle to like-minded members of the opposite party.

Just like a consumer working his way out from under his maxed-out credit cards, restoring fiscal sanity in Washington won't be easy.

But it's the right thing to do — very soon.