Washington Isn’t Greece … Yet

The United States won’t go broke overnight, but it does have a serious debt problem, and its role as the locomotive for the global economy will probably soon be history.

First, the good news: America won’t go into bankruptcy — at least, not very soon. Hopefully no one in a nation that is home to the global reserve currency would be crazy enough to plunge the world into an enormous recession just for the sake of partisan electoral politics. But then again, one never really knows when it comes to ideologically motivated politicians.

Now, the bad news: Even if Democrats and Republicans come to a quick agreement on raising the statutory debt ceiling, the nation still has a serious problem. Namely, it is unable to get control of its finances. The USA is currently deeper in debt than the eurozone as a whole, and its debt is now rising nearly as quickly as the debt in Greece. The United States, which, with its deficit spending, is the driving force behind the global economy, will eventually have to slam on the brakes one way or another, despite all the cackling about debt limits.

A sure sign of that is the rising anxiety of its creditors. A few months ago, the Chinese rating agency Dagong talked of downgrading U.S. creditworthiness. Now they have taken a more critical tone. One Chinese government economist said pointedly that his country was keeping a close eye on whether the U.S. would embark on a course that would be detrimental to China. It was a rather unusual, almost semi-official interference in U.S. financial policy.

But the Chinese have real reason for concern. They sit on U.S. dollar reserves considerably in excess of $1 trillion, making it America’s largest foreign creditor, financing the debt orgies of the George W. Bush and Barack Obama administrations that have managed to more than double American debt in less than 10 years.

With that, we arrive at an essential point: The current ideologically fed battle between Republicans and Democrats that has the potential to plunge the world into a truly serious crisis may be understandable from an electoral-strategy point of view, but it has no factual basis. Debt vs. saving has never been the province of any single political party. The conservative saint Ronald Reagan, for example, was the undisputed king of post-war indebtedness. During the course of his administration, he nearly tripled the national debt, taking it from $1 trillion to $2.8 trillion, averaging a 13 percent annual increase, a record that still stands to this day. The thriftiest president was Bill Clinton, under whom the debt rose only 3.44 percent, making him the most frugal president since 1970. But Reagan is in danger of being knocked from his pedestal by President Barack Obama, who managed to achieve a spectacular debt growth rate of 18 percent in 2009, the first year of his administration.

It wouldn’t be a bad idea for Washington’s top guns to come up with a way out of this bipartisan debt trap. America is currently only threatened with a technical knockout. It’s not that it is unable to pay its debts because no one will loan it any more money but because the law forbids it from taking on more debt. That’s a decisive difference between the United States and Greece. It also has the option to print more money to repay its debts, but that’s the equivalent of lowering its debt via inflation.

But the path into actual bankruptcy is a short one by today’s deficit rates. Moody’s is already threatening to lower America’s credit score, something that will make servicing the U.S. debt more difficult and more expensive. Thus, we’ve arrived at a turning point in time one way or the other: The times when U.S. consumption was done on credit are coming to an end. Whether that happens in an orderly fashion or ends in a global explosion is a matter that only those currently negotiating in Washington can control.