Interest on the debt will make things interesting

There is a brewing crisis, which, if it develops as seems inevitable, has the potential of reducing all of the drama of the early Obama administration to child’s play beginning next year. Only this time, it will be the government’s crisis, not the nation’s.

The New York Times recently noted that the government has gone on what the Concord Coalition’s Robert Bixby calls a “teaser rate” borrowing binge, at an interest rate approaching … zero. Rates will rise substantially, and soon. (The Treasury already is attempting to lock in rates on longer-term borrowing — already driving its short-term costs up.)

How bad could this be? So glad you asked.

The federal government currently pays, according to the article, $202 billion a year in interest. The White House estimates that interest payments will rise to $700 billion per year in 2019.

That doesn’t count the projected catastrophic increases in entitlement costs in Medicare as baby boomers retire. And you thought the American people were already shell-shocked!

Out of the $3.1 trillion federal budget, $1.89 trillion is considered “mandatory spending.” That includes the current debt service, of course.

Leaving $1.2 trillion. If one subtracts the budget of the Defense Department, which is $515 billion (leaving aside the $145 billion separate appropriation for the Global War on Terror which, presumably, we will have won or, respectfully, Mr. President, lost, by then), the rest of the money the government currently spends is $686 billion a year.

If (!) the economy grows so will tax receipts. Somewhat. But adding in entitlements, the interest on the debt binge will inevitably crowd out all other federal spending.

Bye bye, Health and Human Services! Farewell, Department of Education. Au revoir, Veterans Affairs. So long Housing and Urban Development, State Department, Department of Homeland Security, Energy, Agriculture, Justice, NASA and Treasury. (Wait! We can’t lose Treasury! They collect the taxes and borrow the money! Oh wait. So long Treasury!) And all the rest of the federal government, adieu!

There are limited options, mostly unthinkable.

Raise taxes. It’s politically and economically impossible to raise taxes, certainly not nearly as high as Progressives yearn to do.

Even the smoothiest lefty of them all, Obama himself, got elected on a promise not to raise taxes on the vast majority of Americans. There aren’t enough rich people to tax into penury to stop this runaway spending locomotive.

Cut spending. Really think congress is going to cut out all civilian agencies? What are you putting in your sugar cubes?

Hyperinflate. America, despite all attempts to make it otherwise, remains far from banana republic status. Our creditors (hello, Chinese president Hu Jintao!) are not without leverage and it is highly unlikely that the political process will allow inflation to get to the double digits without a political revolt similar to the casting out of Jimmy Carter.

Default. Hey, this is Washington, D.C. Not Jonestown.

There is one wild card in the deck. The gold standard demonstrably pushes long-term interest rates — for the federal government down to the 1 percent range — without inflation.

President Ronald Reagan was very sympathetic to the gold standard. The supply-side economists of his day couldn’t, when asked, agree among themselves at what price gold convertibility should be set. Getting that right is not a simple issue, but, as economist Paul Romer once said (and Rahm Emanuel reprised): “A crisis is a terrible thing to waste.”

Ralph Benko, a principal of Capital City Partners, of Washington DC, is the author of The Websters’ Dictionary: How to Use the Web to Transform the World, the eBook of which may be downloaded without charge from www.thewebstersdictionary.com.

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