The obvious big news last week was the end to the federal government shutdown and the raising of the debt ceiling, thus avoiding a potential default on U.S. debt instruments. Earlier this month, a delegation of Hoosier bankers, traveling to DC on the IBA Annual Washington Trip, urged congressmen to find a solution to the debt ceiling crisis. Our bankers clearly understood that a failure to reach an agreement could trigger default by the U.S. federal government on its debt obligations, leading to irreparable damage to this great nation.
First, a default would mean that the United States would have a difficult time selling its debt in the future; therefore, we would have to entice investors by paying at a higher rate of interest. Higher risk, which would be assumed by a default, always results in a higher return to the investor. These higher interest rates would result in more expense by the government, precipitating either: (1) a reduction of other budget items, (2) a debt increase to an even higher level or (3) increased taxes. None of those options sound appealing to me.
Second, our worldwide role as economic power and leader would be diminished. Other countries already are wary of relying on the dollar as global currency, and China has declared that the world needs to become less Americanized. Should China succeed in its efforts, the United States could no longer print money to solve our problems, because there would be a smaller marketplace worldwide for U.S. dollars. Foreign countries would request payment in another currency or in a new currency that is supported by a basket of sovereign currencies. Oil, now traded worldwide in dollars, might turn to another currency, and our economy would begin to falter. The potential crisis that lies ahead would downgrade the United States from worldwide leader and economic power to third world status. It would make the financial crisis of the last five years seem like the good old days.
President Obama’s statement that there were no winners, only losers, as a result of the shutdown and flirtation with default is not entirely true. Furloughed federal employees had their pay restored, so they ended up with a two-and-a-half week paid vacation. I wonder how the federal employees who did work during the shutdown feel about that. As a taxpayer, I do not feel very happy about it.
Another problem: The agreement is so short-term that Congress needs to begin work today to find a bipartisan solution well ahead of the new deadlines of Jan. 15, 2014, for funding government and Feb. 7 for lifting the debt ceiling. In other words, we will be right back to where we were a couple of weeks ago in about 90 days. This Congress, which cannot agree on anything except being disagreeable, will not change between now and January. How can its members possibly find common ground to settle on a budget? When will they deal with the growing debt crisis?
At IBA’s Annual Convention last month, Gus Whalen, chairman of the Warren Featherbone Foundation in Georgia, gave us perspective on the exponential differences between $1 million, $1 billion and $1 trillion. If each dollar represents a single second, consider this: One million seconds ago takes you back to last week. One billion seconds ago goes to the year 1974. And one trillion second ago would take you back to 30,000 B.C! The United States owes $17 trillion. That staggering debt should concern Congress, whether Democrat or Republican. We simply cannot continue to mortgage the future of our children and grandchildren, so that we can live beyond our means. I fear, though, that Congress lacks the collective will to make the difficult decisions required to address this problem. The continued polarization is not serving us well. The best comment I heard last week was that we need to start a third political party. I have been a long-time advocate for that idea. In theory, at least, two parties would need to come together in order to pass laws which would reduce the power of the caucus leaders and their divisive, politically motivated posturing.
I hope I am wrong. I hope that, instead, lessons have been learned, and that Congress will finally work cohesively to solve some of these important issues.