The Insane American Debt

America will hit its head, or rather its debt on the ceiling. For, at the heart of this true parliamentary democracy that is the United States, the elect of the people, in their great wisdom have set since 1917 a limit to public debt. For ten years they has raised it each year. The last movement goes back to Feb. 12, 2010. The limit was raised to $14,294 billion. But, on Feb. 28, the debt was less than $100 billion below this limit. On Feb. 29, members of Congress voted in double quick-time a law driving back a shock that could occur on March 4. On Feb. 30, the senators followed. The problem was temporarily pushed back until March 18. Even if the Obama administration could pull strings, it would not be able to continue for very long in these conditions. From now until May 31, according to the Treasury’s meticulous calculations, Congress will have voted a new ceiling.

If not, it will be a financial apocalypse in a country where the reason of state can not prevail on the power of the law: Bureaucrats in the street, the poor and the retired denied services, and America’s first default on the debt in more than two centuries of history. The battle promises to be fierce between Republicans who understand how to cut down public spending and Democrats who want to preserve the welfare state.

This ceiling could be raised again from the only American political ritual, such as the “oom pah-pahs” of the primaries or the State of the Union talks. But, there is a real problem with the American public debt: It is exploding. Of course, its level is not very different from Europe’s — it should exceed 100 percent of the GDP next year, against 88 percent in the Euro zone (previsions of the European Commission). Apparently, it increased faster in the small countries hit hard by the crisis, such as Greece and Ireland. But, when one looks at sets of equivalent size, the difference jumps out. In five years, the weight of public debt in the GDP will have progressed 40 points in the United States, two times more than in the Euro zone. It was not the fault of the crisis. It was the fault of the reaction to the crisis. In the Euro countries, the deficit towered for two years barely above 6 percent of the GDP. Even in France, which is not a paragon of budgetary virtue, the deficit stayed at less than 8 percent last year. In America, on the other hand, the deficit exceeded 11 percent of the GDP in 2009 and in 2010. It should have, again, approached this level in 2011. President Barack Obama proposed a deficit reduction plan for the ten years to come, posting a total savings amount of $400 billion. He was not convincing.

This prodigality could be explained by a “policy mix,”* which implies a tuning of the political economy that is different on either sides of the Atlantic: A contained budget in Europe in order to keep interest rates very low, thus allowing banks to recover their health as they have less shiny accounts than their American counterparts; a generous budgetary policy in the United States, accompanied by a more solid monetary policy. But this is not the case. Ben Bernanke, president of the U.S. Federal Reserve, lends money at an interest rate lower than his colleague Jean-Claude Trichet, from the Central European Bank. And, in particular, at the end of 2010 he restarted the bill machine to buy hundreds of billions of bonds issued by the American Treasury. In other words, 30 months after the height of the crisis marked by the fall of Lehman Brothers, Europe released the tension while the United States keeps its foot to the accelerator, at the risk of leaving the road, as the rating agencies have signaled, for the first time in history.

Where, therefore, does this unprecedented divergence between the two coasts of the Atlantic come from? There are at least seven explanations, not exclusive from one another. One: The difference in the diagnostics. The leaders of the United States consider that there needs to be a third year of great deficit in order to solder the crisis with the comeback; European leaders assume that it is useless. Two: America, younger than the old continent, puts more emphasis on growth. This is obvious when one compares the policies implemented during the last two decades. This time around, the American accelerator seems jammed nonetheless. America responded faster than Europe after the financial shock, with an increase that could, this year, overtake all previsions. But the recovery was bought on credit. And the performance is poor. For the public indebtedness gap with Europe, from 20 points from 2007 to 2012, already evoked, America will have had a cumulative gap growth for the same period limited to 4 percent or 5 percent. Three: Europe lacks audacity. But, when one sees the investor’s doubts about the debt of certain countries, this point of view could seem rash. Four: Everyone does the best they can according to their constraints. America uses and abuses the “exorbitant power” to print a global currency; the Euro zone can not do as much. Five: The United States economy is, in reality, doing worse than what we are told, and it needs drastic remedies. Six: American leaders are unaware of the perils. Seven: They don’t have the same memory as Europeans, who knew painful hyperinflation (Germany in the 1920s) or the embarrassing stagnation into budgetary powerlessness (France in the 1950s).

It is too early to know whether America or Europe made the right choice. But it is clear that America is on an unsustainable trajectory. It must change, and if possible, before it hits its head against the wall.

* In English in the original article.