Friday, November 26, 2010

Will the next fiscal crisis start in Washington?

In the debate over economic policy, there are those like Paul Krugman and Nancy Pelosi who think the "bond monsters" are a myth. Then there are people like me and the Tea Partiers and the head of the FDIC who believe debt is a cause for real concern:

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.
America's long-term debt obligations have been known for decades:

Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today's dollars.
As I've noted before, this level of entitlement spending means that there will be virtually no money remaining to pay for all the other things we call "the government." To maintain the current proportions of government spending, the federal government would have to borrow more and more money at increasingly higher rates, since lenders are going to be skittish about any person/corporation/country already owing 100% of total earning power.

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