Wednesday, November 3, 2010

Bernanke: U.S. Debt Load Unsustainable

At the annual meeting for the Rhode Island Public Expenditure Council, in Providence Rhode Island on October 4, 2010, Ben Bernanke, in a little-reported speech, pointedly indicated that the current trajectory of rapidly growing government debt is unsustainable. In the speech, he said that U.S. national debt in relation to national income “has increased to a level not seen since the aftermath of World War II.”

Congressional Budget Office projections “show future budget deficits and debts rising indefinitely, and at increasing rates,” he said. This means that sooner or later there will be a day of reckoning and the government will have to face painful changes in budgetary practices. And Bernanke acknowledged that. “One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis…”

What do you think will be the way it is done? U.S. fiscal policy is driven by politics more than by realities.
Bernanke made multiple references to the cost of the health care, in one case suggesting that the cost of social security is “considerably smaller than the pressures associated with federal health programs…”

Bernanke was not able to give the “day nor the hour” when the economy would implode, but he was clear about the fact that one day it would likely happen if something isn’t done to stem the tide of fiscal red ink. “It would be difficult to identify a specific threshold at which federal debt begins to pose more substantial costs and risks to the nation’s economy. Perhaps no bright line exists; the costs and risks may grow more or less continuously as the federal debt rises. What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policymakers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term.”

While we hope they will, it isn’t likely. At least the pattern of history does not suggest that the political will to take the necessary steps exists among American leaders.

“There are not many, even among educators and statesmen, who comprehend the causes that underlie the present state of society. Those who hold the reins of government are not able to solve the problem of moral corruption, poverty, pauperism, and increasing crime. They are struggling in vain to place business operations on a more secure basis.“ Testimonies for the Church, vol. 9, 13.

Bernanke is really telling us that there is a looming crisis ahead not only for the United States, but for the rest of the world.