Dr. Susmit Kumar, Ph.D.

After the 2002 US midterm elections, when the then Vice-President Dick Cheney started proposing tax cuts, Treasury Secretary Paul O’Neill told him, “the government is moving towards a fiscal crisis,” and moved on to explain the ill effects of rising deficits to economic and fiscal soundness. Cheney replied, “Reagan proved deficits don’t matter.” A few weeks later, President Bush asked O’Neill to submit his resignation (Ron Suskind, The Price of Loyalty, New York: Simon & Schuster, 2004, 291) and found a Treasury secretary who would rubber-stamp his tax cuts. It is worth noting that O’Neill, a lifelong Republican (party to which President Bush belonged to), successfully ran Alcoa, the world’s largest aluminum producer, for twelve years as its CEO and chairman. At that time, the US Government debt was about USD 6.2 trillion only whereas it is now more than USD 19 trillion, i.e. the debt has since tripled. Due to the advent of Information Technology and subsequent boost to the US economy, the US was able to eke out a small budget surplus during the last years of the Bill Clinton administration resulting from the subsequent tax collection increase.

As shown in Table 1 and Chart 1 below, the US Treasury Rate has gone down significantly from about 8% in early 1990s to 6.5% in 2000 (start of Bush Jr’s 1st administration), 4.35% in 2008 (near the end of Bush Jr’s 2nd administration), 3% in 2012 (end of Obama’s 1st administration) and till now. There is a gradual reduction in the interest rate. Since 2008, the Fed has been purchasing US debt under QE (Quantitative Easing) program to keep interest rates down.

As shown in Table 2, US government debt was USD 5.76 trillion by Sept 30, 2000 and USD 19 trillion by Sept 30, 2016, i.e. the debt tripled during this period. On the other hand, as shown in Table 3, the US government paid USD 362.9 billion interest on its debt in 2000 and USD 432.6 billion in 2016. Had the US been paying 6.5% interest rate in 2016, i.e. same as in 2000, US would have paid nearly USD 1.1 trillion in interest instead, resulting in an additional $700 billion in budget deficit. Hence the Fed is obliged to keep interest rates low otherwise the US debt would rise exponentially. Even despite record low US Treasury Rate, instead of paying towards the principal the US government is increasing the principal amount every year. This shows that the US will not be able to pay its debt in the foreseeable future without running a double digit inflation.

The prime reason for the increasing US debt is the Bush Jr administration’s tax cuts and also massive loss in jobs and firms with subsequent loss of tax collection. The US lost millions of jobs related to:

(i)        a decrease of nearly 35% (from 14.2% in 2000 to 9.3% in 2008) of world export markets in just eight years (thereafter it has hovered around 9%) as shown in Table 4, and

(ii)      related to goods for its own consumption corresponding to a record increase in trade deficit since the mid-1990s, as shown in Chart 3.

If a person or a firm is not able to pay his or her yearly expenses, increasing their debt year after year, banks will certainly stop providing loans. Then again, the US Treasury Debt has one of the highest ratings from world renowned credit agencies such as S&P, and Fitch and Moody’s. There is more to this story. Under pressure from the US government, these credit rating agencies are being forced to rate the US Treasury Debt high otherwise they would face a barrage of legal cases from the US government.

In 2011, Standard & Poor’s downgraded the US Treasury Bond rating. Two weeks after the S&P downgrade, US SEC (Securities and Exchange Commission) and US DOJ (Department of Justice) announced that S&P was under investigation. Two years later, in 2013, S&P “blasted a $5 billion fraud lawsuit by the U.S. government as retaliation for its 2011 decision to strip the country of its AAA credit rating” ( "S&P calls US lawsuit retaliation for stripping AAA rating". CNBC. 3 September 2013)

Two weeks after the second downgrade by Egan-Jones, another credit rating agency, in April 2012, the SEC voted to bring administrative action against that firm regarding years-old activity. Mr. Egan said at the time, “We are not going to be intimidated by anybody from issuing timely, accurate ratings” (Eaglesham, Jean, 19 April 2012, "Ratings Firm Is in SEC Sights", Wall Street Journal). After Egan-Jones agreed to a settlement in 2013, the SEC director Robert Khuzami said in a press release, “EJR and Egan's misrepresentation of the firm's actual experience rating issuers of asset-backed and government securities is a serious violation that undercuts the integrity of the SEC's NRSRO [Nationally Recognized Statistical Rating Organization] registration process” ("Egan-Jones and Founder Sean Egan Agree to 18-Month Bars from Rating Asset-Backed and Government Securities Issuers as NRSRO" (Press release). Washington, DC: SEC. 2013-01-22). In response, a Fox Business Network editor raised the question of “government retaliation" and an Egan-Jones spokesman issued a non-apology apology stating that the "SEC settlement lets us focus on what we do best—producing the most accurate and independent ratings in the business” (MacDonald, Elizabeth (2013-01-22). "The Curious Case of the SEC vs. Egan-Jones". foxbusiness.com. Fox Business Network.).

In the US, university students are taught virtues of the so-called US capitalism, painting rosy pictures only of the US economy, and not at all discussing the actual dire economic scenario in the US. In an op-ed article, published in New York Times, William Grieder, a bestselling author, wrote (“America's Truth Deficit,” New York Times, July 18, 2005):

 

“DURING the cold war, as the Soviet economic system slowly unraveled, internal reform was impossible because highly placed officials who recognized the systemic disorders could not talk about them honestly. The United States is now in an equivalent predicament. Its weakening position in the global trading system is obvious and ominous, yet leaders in politics, business, finance and the news media are not willing to discuss candidly what is happening and why. Instead, they recycle the usual bromides about the benefits of free trade and assurances that everything will work out for the best.

 

Much like Soviet leaders, the American establishment is enthralled by utopian convictions -- the market orthodoxy of free trade globalization. The United States is heading for yet another record trade deficit in 2005, possibly 25 percent larger than last year's. Our economy's international debt position -- accumulated from many years of tolerating larger and larger trade deficits -- began compounding ferociously in the last five years. Our net foreign indebtedness is now more than 25 percent of gross domestic product and at the current pace will reach 50 percent in four or five years.

 

For years, elite opinion dismissed the buildup of foreign indebtedness as a trivial issue. Now that it is too large to deny, they concede the trend is "unsustainable." That's an economist's euphemism which means: things cannot go on like this, not without ugly consequences for American living standards. But why alarm the public?”

It is worth noting that the US economy blew up three years after (in 2008) Mr. Grieder’s had written his article.

Table 1. Daily US Treasury Rates from 1990-2017

(source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll)

 

 Chart 1. Source: http://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

Chart 2. US Treasury Debt

(source: https://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_1215.pdf)

Table 2. source: https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm

source: https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm

 

Table 3. US Government Interest Expense on the Debt Outstanding

(Source: https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm)

Chart 3. US Monthly Balance of Trade (1975-2017)

Table 4 . (Data source: World Economic Outlook which is published twice a year by IMF)

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