Problems with Paying Down the Debt

Inquiring minds are reading “America: Paydown problems“. For the people who thought that last November’s election bantering was just rhetoric from the right…think again. It is not dying down or out, but increasing:

It was the most startling of warnings. If the US does not get its finances in order “we will have a European situation on our hands, and possibly worse”, claimed Paul Ryan, the new Republican chairman of the House of Representatives budget committee.

The consequences of not tackling the country’s mounting debt burden would be dire, he last week told an audience of leading budget experts and economists at a gathering in Washington. “We will have the riots in the streets, we will have the defaults, we will have all of those ugliness problems,” he said, referring to “French kids lobbing Molotov cocktails at cars, burning down schools because the retirement age will be moved from 60 to 62”.

This is a huge change in the way Republicans have positioned themselves in the past. Today with
the US borrowing about 40 cents of every dollar it spends, curbing the budget deficit became the stated mission of Mr Ryan several years ago. But such calls for action have multiplied in Washington in recent months, igniting what some say is the fiercest debate over fiscal and budgetary policy in decades.

But these risks are big. If the government rushes into austerity, cutting too much and too quickly, it could stunt economic recovery.

“It’s a weak period for the economy, so I don’t think you want to do serious deficit reduction anyway, but we are playing a dangerous game and we will start to pay a price for fiscal irresponsibility,” says Ethan Harris at Bank of America Merrill Lynch.

The fear is that if no action is taken, investors might will punish the US which would raise borrowing costs for businesses and consumers alike. It would then force severe austerity measures and risking social unrest anyway. This would not only most likely threaten America’s triple-A credit rating, it would also eventually bring consequences in foreign affairs and defense as well.

The entire article is highly recommended reading.


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