Please update your browser

You're using a version of Internet Explorer that isn't supported by Questia.
To get a better experience, go to one of these sites and get the latest
version of your preferred browser:

Default Lines

By Smith, Charles Hugh | The American Conservative, April 2011 | Go to article overview

Default Lines


Smith, Charles Hugh, The American Conservative


Inflation, austerity, or debt repudiation awaits America.

COULD THE U.S. default on its national debt? That the question is even being asked should give us pause. A few years ago, the idea of the federal government failing to repay what it owed investors seemed like a prospect so farfetched as not to be worth discussing. But as the national debt has rocketed above 90 percent of gross domestic product - the "line in the sand" identified by Carmen Reinhart and Kenneth Rogoff as the default danger zone - the possibility is no longer remote.

A few numbers put the question in perspective. Since 2001, the debt "held by the public," which includes the debt held by non-U.S. central banks and investors, has nearly tripled, from $3.3 trillion to over $9.5 trillion. The total national debt that most media accounts cite - which includes the "intragovernmental holdings" of the Social Security Trust Fund and other agencies - has more than doubled, from $5.7 trillion to over $14 trillion, roughly 97 percent of GDP

This is comparable to the levels of debt that burden the much smaller economies that triggered the Eurozone's recent crisis, including Greece (130 percent), Ireland (93 percent), and Portugal (97 percent). Skeptics of default are quick to note, though, that the sheer size of America's economy and dollar's role the world's primary reserve currency put the U.S. in a category of its own. Yet the debt's fearsome growth has brought the specter of default to Uncle Sam's doorstep. The Government Accountability Office recently declared the trajectory of federal deficits exceeding $1.5 trillion a year "fiscally unsustainable."

Deficits of this magnitude, fully 11 percent of annual GDP, far outpace economic growth, which typically meanders between 2 percent and 3 percent annually. And these numbers are related: Reinhart and Rogoff found that nations with debts exceeding 90 percent of GDP saw their growth rates cut in half. Nations rarely grow their way out of rapidly rising debt

These once astounding but now routine federal deficits have added $5 trillion in debt just since 2008. Official projections for radically reduced deficits in 2012 and beyond are a fantasy. If anything, rising spending on demographically driven entitlement programs such as Social Security and Medicare will drive up spending even as recently passed tax cuts lower federal revenues. Perhaps nothing screams unsustainable quite as loudly as the imbalance of tax receipts and spending. Tax revenues are around $2.3 trillion; spending is about $3.8 trillion. The $1.5 trillion gap is borrowed, adding to the national debt.

As if the official debt weren't worrisome enough, there are other "off-balance sheet" obligations that could end up adding to the debt: the many federal guarantees issued during the financial crisis, for instance, and federal obligations to the ailing mortgage giants Fannie Mae and Freddie Mac.

The Dynamics of Default

How do crushing national debts trigger default? As investors see debts climbing to unsustainable levels, they demand higher yields on bonds to offset a rising risk of default. The subsequent spike in interest rates adds to the government's interest payments. This crimps other spending, forcing the government to borrow more, increasing both the debt and investors' fear of default.

This is a positive feedback loop: rising debt triggers higher interest rates which lead to more borrowing which pushes rates even higher. At some point, the government can no longer issue new debt, or roll over old debt, because investors refuse to buy its bonds or soaring interest payments are consuming most of the state's tax revenues.

Since servicing debt detracts from economic growth, the indebted nation suffers from another positive feedback dynamic. As interest payments skyrocket, either taxes rise or the government provides fewer services. As the economy slows, tax revenues decline and the government has to borrow even more to meet its interest and entitlement obligations, increasing the drag on growth.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Default Lines
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.