Thursday, February 11, 2010

Obama’s Deficit: Threat To National Security

This one is important. A little bit of national debt is a good thing, believe it not. Millions of people depend on government borrowing as a safe investment. . . lots of little old ladies hold treasury bonds. But too much of a good thing is a bad thing, and we are way beyond bad. In fact, Obama’s deficit has gotten so large that it’s become a serious national security threat. Here’s why. . .

The Scope of the Problem
In May of 2007, Paul Weinstein of the Progressive Policy Institute wrote this about the Bush deficits:
“The current administration’s fiscal irresponsibility will compromise our nation’s prosperity and security for years to come unless the next president shows a commitment to restoring budgetary sanity.”
Weinstein had a point. By May 2007, Bush had turned a supposed surplus into a deficit of around $200 billion a year (the Democratic Congress would jack this up to $400 billion in 2008). Because of Bush’s spending, he would add nearly $2.5 trillion to the national debt during his eight years. But compared to Obama, Bush was a tightwad (see chart right).

In the first budget that was truly his, Obama proposes a deficit of $1.75 trillion!! Eight times Bush’s deficits! His long term projections show him adding nearly $7.5 trillion to the national debt if he lasts eight year -- and that “low” number relies on laughably phony projections of growth. Where is Mr. Weinstein now?

Obama’s deficits are so large that they’ve become a national security threat. They make us vulnerable to our enemies, they threaten our ability to recover from disaster, and they threaten our economy.
At The Mercy Of Our Enemies
Debt is not as big of a concern as the deficit. Once we borrow the money, the power really belong to us, because we have the ability to either default or to inflate our way out of the debt. Neither idea is a good one, but they do afford us a good deal of power over the lenders. Deficits are different.

Because we are running a deficit, we need to keep borrowing money to afford our government. That means that every couple of weeks, the Treasury goes into the market and sells bonds. Most of these bonds are bought by foreign governments, particularly China. If they decided to stop buying our debt, our government would suddenly find itself without the money it needs.

How bad is this problem? Under Bush, we were borrowing $200 billion a year. If we assumed that every foreign government stopped buying our debt because they saw an advantage in it, the government would have come up $200 billion short. . . about the yearly cost of the Afghan war. In other words, by working together, foreign governments could have cut off our funding for the Afghan war. To make that up, we would need to raise taxes or cut spending out of the budget. This would have been a problem, but not a disaster.

But Obama’s deficit is $1.75 trillion. This is a disaster waiting to happen. That deficit represents 45% of the budget! That means that if China et al. stopped buying our debt, we would need to cut 45% from our budget!

Only 57% of our budget is discretionary, meaning the rest consists of entitlements like Medicare and Social Security and mandatory payments like interest on the debt. To cut 45% from our budget would mean that we would need to cut all discretionary spending by 79%!! In other words, we would need to cut 79% out of the defense budget, 79% out of the FBI budget, 79% out of the INS budget, 79% out of the budget for education, roads, homeland security, transportation, medicine, environmental enforcement, parks, etc.

The chaos would likely cause our government to collapse. Thank you Mr. Obama and Madame Pelosi.

And for those of you who think this can’t happen, China sat out one auction last year in response to Obama Administration criticism and caused a near panic. Recently, the Chinese Army argued publicly that China should not only stopping their purchases of US bonds, but should also dump the bonds they already hold . . . right after Obama announced an arms sale to Taiwan.

But even if this didn’t happen, the mere threat that it could happen is enough to let China dictate our foreign policy behavior. Suddenly, because of the Democrats, our threats have become empty threats, our ability to defend our friends worthless, and our independence suspect.
At The Mercy of Mother Nature
But even without our enemies trying to choke off our government, Obama’s deficits have created another significant vulnerability. This was exposed by the Haiti disaster. Haiti is a worthless pit. If the whole country was destroyed, it could probably be rebuilt with the spare change found in all of the couches in the Congressional office building. An American city could not.

If another Katrina happened today, particularly to a larger or more important city, or a larger 9/11, it is no longer clear that the United States government has the financial ability to rebuild. Indeed, as you witnessed from the health care debate, the Democrats went into a panic over finding an extra $100 billion dollars to spread over ten years. . . that’s $10 billion a year. The estimated cost of Katrina to the federal government (at the time) was $200 billion. Afghanistan costs $180 billion a year. The total economic harm of 9/11 was estimated at $2 trillion.

If we are worried about $10 billion a year for health care, how confident are we that our nearly bankrupt government could respond to another disaster?
At The Mercy of Creditors
Finally, we come to the hidden disaster waiting to happen. This one is extreme, but people don’t pay attention to it because it sounds esoteric. When Obama announced his deficit, the credit rating agencies immediately announced that these deficit would destroy the United States’ AAA rating if the deficits continued (as Obama projects them to do). They then promptly shaded our rating below that of Canada and France.

So what you ask? Ok, here goes:
Step 1. If the credit rating falls, our cost of borrowing skyrockets. Right now the United States spends $255 billion a year in interest (that’s 1.5 Afghanistan wars). That’s based on borrowing costs of 1-2% for short term loans and 7% on long term loans. If our credit rating falls, the cost of borrowing increases. Suddenly, we could be paying 7-10% on short term debt and 20% on long terms debt. Suppose our short term rate goes up to 4%. That means our interest costs suddenly increase to $500 billion a year -- or the amount we spend on Medicare. If our interest rate increase to 6%, that will cost us $750 billion a year, or what we spend on defense. If our interest rate increases to 8%, that will cost us $1 trillion a year, or 26% of our entire budget. . . or 46% of our non-borrowed budget. Think about that.

Step 2. A drop in credit rating would be the end for the dollar as a reserve currency. That means other countries would stop hedging their currencies in dollars. This means a further depression of the dollar. Thus, that BMW that might cost you $72,000 today could cost you $172,000 tomorrow.

Step 3. The loss of reserve currency status also means that we lose the discount we’ve been getting from our creditors -- they pay us less than they should to buy our debt because of the supposed safety that the dollar provides. This means our cost of borrowing could go up another couple percentage point. Suddenly, we’re looking at $1.5 trillion in borrowing costs. . . that’s 68% of our non-borrowed budget!

Step 4. As the government’s spending costs increase so do yours because all loans are based on the government’s cost of borrowing plus some risk premium. That house you wanted to buy? Your next mortgage could cost you 17%.

Step 5. As interest rates shoot up, a downward spiral begins. The cost of borrowing causes a vast number of businesses to stop borrowing or to fail outright. The economic effect is disastrous. Moreover, the crashing economy means a tax revenue shortfall, which means more borrowing, which means higher interest rates. It’s a vicious circle. Welcome inflation, welcome Great Depression redux, welcome Germany 1930 or South America 1970.
Thank you Mr. Obama and Madame Pelosi.

This is why Obama’s deficit has become a national security emergency. This is why we need to stop spending immediately. Obama, Pelosi and the Democrats have literally put our country on the brink of disaster.


MegaTroll said...

Wow! This is scary. I've heard several times that this has become a national security problem, but no one has really explained why. Thank you!

patti said...

the chinese are on my mind daily. the debt they carry for us is precisely why the tea party movement may save this country. we must stop the spending insanity now. well done, andrew.

captcha: pyrodeal (hmmm, now there's a possibility i hadn't considered!)

AndrewPrice said...

Thanks Mega, tell your friends.

It is scary, and it's scary that Obama doesn't seem to see the danger. He seems to think that so long as he pays the deficit lip service, he can just keep spending.

AndrewPrice said...

Thanks Patti! Everything I've seen says that people are getting concerned. Let's hope the people can finally force the government to clean up its mess before things go to far. . . since we're standing on the border of too far already.

LawHawkSF said...

Andrew: Obama couldn't care less about our national security, and is certainly not economically savvy enough to be able to see that our deficits could inevitably lead to a genuine security crisis (one of the few that actually is a full-blown crisis). He is simply incapable of seeing the connection between fiscal health and national security health.

AndrewPrice said...

Lawhawk, This goes well beyond the connection between fiscal health and national security. This reaches into the realm of danger to the country.

LawHawkSF said...

Andrew: I thought that danger to national security is the essence of danger to to the country. In any event, Obama's fiscal policies endanger both. Perhaps we're using slightly different terms.

AndrewPrice said...

Lawhawk, It's a matter of degree. I'm not talking about weakening our ability to spend and thereby either not getting all of the equipment that we need or not being able to buy the most modern/best equipment or having to fight wars on the cheap.

I'm talking about our country being at the point where (1) we can be blackmailed into inaction -- no matter how strong our military is, and (2) facing the very real possibly of total economic collapse. Right now, China has the ability to do so much economic harm to our country that we really can't stand up to them if they choose to push us. That's why this has become a true national security threat.

LawHawkSF said...

My instinct was right. We are agreeing. You are using the term "national security" to mean the apparatus and physical elements of "security forces." I use the term to mean that plus anything else that affects the ability of the nation to survive. I distinguish between the terms "national security" as a broad concept and "national security forces" which I consider to be only one major element of national security.

Writer X said...

If there ever was a reason to get rid of Obama, Pelosi, et al., this is certainly one of them. How they can even talk about a Jobs Bill (which really isn't a jobs bill) and re-energizing their failed health care bill is a mystery. In the real world, these two would be in jail for continuing to orchestrate their ponzi schemes.

Great post, Andrew. I haven't seen an analysis like this anywhere else.

StanH said...

We have much to fear in three years of this big government fool (Barry). We must flip the congress in no uncertain terms in 11/10 to save this country from the fiscal doom that we’re being led. Good analysis Andrew!

AndrewPrice said...

Thanks Writer X -- I haven't either, that's why I wrote it. I've seen a lot of people say "it's a national security threat" but they've never really explained why.

In all honesty, when I got into this, I was stunned at the numbers that I found. This is truly scary stuff!

As for Pelosi/Obama, the words "criminal negligence" seem to be the only ones that fit!

AndrewPrice said...

Thanks Stan! I think this truly highlights the danger that we face and the primary reason that the Republicans need to stop this fool. This isn't just about ideology anymore, this is about protecting the country!

AndrewPrice said...

Lawhawk, I figured we probably were saying the same things, but it's more fun the argue! LOL!

LawHawkSF said...

Andrew: I know what you mean. I think there really is such a thing as the "lawyer gene."

AndrewPrice said...

Lawhawk, I wouldn't surprise me! ;-)

CrispyRice said...

This is truly frightening, Andrew. Thanks for the straight-forward summary. Now how to do we get the rest of the world to listen?


AndrewPrice said...

Crispy, I agree. I don't know how to get people to listen to this. All I can do is write the article and hope that people take it to heart?

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