America's Great Debts Are a Bunch of Baloney

The threat of American bankruptcy that was averted last Wednesday elicited widespread wailing about how the world’s greatest power borrows with abandon and statements to the effect that “all this will collapse someday.” It was repeated with horror that America’s public debt has risen to $16.7 trillion. Among the group of doomsayers is my colleague Tomasz Prusek, who wrote that America and its successive presidents have been behaving just like Scarlett O’Hara in “Gone With the Wind, “who reacted to every adverse circumstance with the statement “I won’t think of it now. […] I’ll think of it later.”

Prusek did not stop with this insult, but went on to warn that the Soviet Union collapsed like a house of cards, even though no one expected it.

As the Gazeta Wyborcza correspondent in Washington, I can’t let such affronts stand and must rise in defense of America. Actually, dear doomsayers, America is not in the least indebted up to its ears and would be crazy to stop borrowing!

Let’s see at what interest America borrows for five years, i.e., what the interest is on its five-year bonds. The nominal interest is 1.35 percent, but if inflation is factored in, the real interest will be -0.43 percent.

America, therefore, is making the world’s investors the following offer: Lend me $100, and in five years I will give you back $97.85 (in other words, $100 – $0.43 x 5).

Who in his right mind rejects offers like this? Suppose Prusak’s bank were to make him the following offer: We will lend you a million zloty, if in five years you pay us back 978,000 zloty. Would he turn it down?

My colleague is a private person and he can do as he pleases, but if Obama didn’t accept such loans he should be castigated for mismanagement.

I should add that just a year ago, U.S. five-year bonds could be had at a real interest rate of -1.43 percent. It is no accident that I mention this type of security. I do so because the average repayment period for U.S. debt is a little over 60 months (in other words, most bonds in circulation are ones that will have to be redeemed with debt drawn from the issue of new bonds).

Of the horrifying debt of $16.7 trillion, as much as $4.8 trillion is domestic debt, i.e., money the U.S. government owes to itself.

This strange phenomenon is due primarily to the fact that, for as far back as anyone can remember, the U.S. retirement fund has had a surplus — each year more has flowed in from retirement contributions than has had to be paid out to retirees. The federal government didn’t hoard this money, but used it for day-to-day expenditures and gave the retirement fund IOUs in exchange. The sum total of those IOUs amounts to $4.8 trillion.

If “normal” public debt is considered, i.e. bonds sold on the free market, America’s liabilities today amount to $11.9 trillion, which is 74 percent of national income. In comparison, in Germany the relevant figure is 82 percent; in the United Kingdom, 89 percent; and in France, 90 percent. But somehow no one is saying that those three European draught horses are on the verge of bankruptcy.

What’s more, the U.S. public debt, measured as a percentage of national income, is beginning to fall because budget deficits are falling. Insofar as during the height of the crisis (2009-2011) they were frighteningly high, around 10 percent, in 2013 the deficit will amount to about 4.5 percent; next year, 3.5 percent and in 2015, 2 percent (such are the estimates of the Congressional Budget Office on the assumption that present trends will continue).

Where, then, is the Great Power drowning in debt, behaving like Scarlett O’Hara and facing an end similar to the Soviet Union? Personally, I see an America that is not doing all that badly financially; its problem is its senseless laws and representatives who use it for their political games. Just to spite Obama, they refused to raise the public debt limit until the last moment. Yet they should have had no say in the matter, given that they had already, in the budget vote, accepted state expenditures at a level that — they knew it! — called for borrowing.

Only for this reason did the specter of bankruptcy — entirely artificial and created by politicians — arise.