A tidal wave of new spending by Washington also means a tidal wave of new borrowing.
More debt is more than the "generational theft" that Sen. John McCain (R, AZ) has correctly decried. As President Obama's agenda raises the deficit to an estimated $1.7-trillion this year, the likely consequences include:
- Inflation (and possibly, hyperinflation);
- Choking off private sector borrowing (because government soaks up so much available credit); and
- Excessive dependence on foreign money. As a condition of lending money, other nations will believe they can insist on changes to America's foreign policy.
Not even enormous tax hikes can cover the new spending. When spending exceeds tax revenues, government must borrow or crank up the printing presses. Or both. Secretary of State Hillary Clinton publicly urged the Chinese to continue lending money to the U.S. government--a message being sent to other nations also. As Michael Goodwin wrote in the New York Daily News, "Clinton practically begged China to let us get even deeper into hock."
America owes foreign nations over $3 trillion, $696 billion of it to China. Our dependence on foreign oil is nothing compared to our dependence on foreign money.
The Heritage Foundation's J.D. Foster says, "The China ATM has dispensed over a trillion dollars to the United States in this decade. But now Beijing faces serious troubles at home. How long will it be willing to keep shipping hundreds of billions of dollars a year to an increasingly suspect customer?"
Because most of our debt is short-term, it must be re-borrowed constantly; we issued or renewed over $10 trillion in debt during fiscal 2008. This constant need for roll-over loans must be fed constantly, making us susceptible to sudden swings in interest rates.
As with any overextended debtor, we are finding it harder to convince other nations to keep lending to us and therefore must pay higher interest. International credit is drying up as other nations have their own financial problems--just at the moment that America must borrow more to pay for the stimulus bill and the latest round of government bailouts. In recent weeks, Treasury has been forced to pay increasing interest rates as our new borrowing climbs faster than ever before. Foreign investors are growing wary of our ability to keep making payments, which last year included $454 billion in interest alone.
Sky-high borrowing by the U.S. Treasury dries up the pool of credit available for homes and businesses. Alex Adrianson of the Heritage Foundation writes, "A tidal wave of deficit spending by the U.S. government is already increasing the costs of borrowing, retarding economic recovery.
. . . The more government borrows to finance its spending, the less capital is available to be invested in the private economy."
President Obama's latest national speech noted the credit crunch, but failed to acknowledge that excessive government spending has been a prime cause of this dwindling of private credit.
When taxing and borrowing aren't enough, governments routinely shift to printing more money to pay their bills, and this unleashes inflation. The Wall Street Journal's George Melloan predicts:
"The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. . . . And what will be the result? Well, the product of this sort of thing is called inflation. . . . We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15 percent. . . . As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package."
Government jobs may increase from stimulus spending, but private-sector jobs would shrink if interest rates climb to the high double-digits of the 1970s.
Some will see a silver lining because inflation will push back up the nominal value of houses and stocks. But as buying power diminishes, mortgages with adjustable rates will re-set to reflect higher interest.
Most media speak of more spending as though it's good news. But when it creates negative consequences, it's not.
Ernest Istook, now recovering after 14 years in Congress, is a distinguished fellow at The Heritage Foundation, an occasional talk radio host, and a practicing attorney.
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