Ten Trillion and Counting
All of the federal government's efforts to stem the tide of the financial meltdown have added hundreds of billions of dollars to an already staggering national debt, a sum that is expected to double over the next 10 years to more than $23 trillion. In Ten Trillion and Counting, FRONTLINE traces the politics behind this mounting debt and investigates what some say is a looming crisis that makes the current financial situation pale in comparison.
The journey begins as FRONTLINE correspondent Forrest Sawyer takes viewers to a secret location: the Treasury's debt auction room, where the U.S. government sells securities backed by the "full faith and credit of the United States." On this day, the government is auctioning $67 billion of Treasury securities. The money borrowed will be used to fund services and programs that the government cannot pay for through tax revenues alone.
Observers warn that the United States' reliance on borrowing to fund essential programs is a dangerous gamble. For the first time, investors are beginning to question the ability of federal government to meet its growing financial obligations, and fading confidence can have dire consequences. "You might have a situation where there is one day when the government says we need to sell several billion dollars of bonds, and nobody shows," Economist reporter Greg Ip tells FRONTLINE. "No money to pay the Social Security checks, no money to give to the states for their Medicaid programs. Cut, cut, cut, cut, cut."
Yet more borrowing is exactly what the Obama administration plans to do: hundreds of billions to bail out the banks and other financial institutions; tens of billions more for the auto industry; $275 billion for homeowners and mortgage lenders; and a giant $787 billion stimulus package to jump-start an economy spiraling downward. Just like the Bush administration before it, Obama and his team are going to borrow big.
"That's the paradox of the situation that we're in now," observes Matt Miller, author of The Tyranny of Dead Ideas. "Government has got to run big deficits to stimulate the economy, deficits that would have been unthinkable ... because government's the only entity with the wherewithal to prop up a demand in the economy when businesses and consumers are all pulling back."
Paul O'Neill, Secretary of the Treasury, 2001-02
Here's the fundamental problem: How much money can a society borrow before it begins to have negative effects on our ability to borrow any more? ... When you get to the point that people won't loan you any more money as a government, you've got a horrendous problem. And it's happened to governments -- in Argentina, most famously, in recent times. Mexico was kind of in that situation until we gave them a very big loan.
... Now, what happens before that is governments raise the interest rates so that people will loan them money. ... Unfortunately, when interest rates get that high, economic activity slows down, and eventually it will stop. We're not at that level yet with our $11 trillion worth of acknowledged debt, but there's a bigger problem out there, which is $53 trillion worth of unfunded liabilities that we, the American people, have signed up for. Most of the American people don't know that we have these so-called unfunded liabilities. An important part of that is Social Security and Medicare. ...
... This financial crisis in retrospect will look like a child's game compared to what we're headed into when we have to begin raising enormous amounts of money through floating debt, or reneging on the obligations we made to people that they thought were good and clear from Social Security benefits and Medicare benefits. ...
David Wessel, The Wall Street Journal
... In the old days, the U.S. would run a deficit, and it would be rich people in the U.S. lending money to the government. ... One of the big changes over the last 20 years is that we have borrowed heavily from other countries. So we have been a country that spends more than it makes. We consume more than we produce. And we have been able to do that because other countries, particularly in Asia do the opposite. So there are a lot of Chinese people who save a lot of money, give it to the government, and the government uses it to buy U.S. Treasury bonds so we can have low interest rates here.
What risks are posed by having so much money borrowed from foreigners?
One risk is that they decide they don't want to lend you money anymore, and then you have to figure out how to do with less. The other question always is, if you have borrowed so much money, do they then have a say on what your policy is?
So for instance, when the government was looking at Fannie Mae and Freddie Mac, the big mortgage lenders that were kind of quasi-government agencies, one of the considerations in deciding to bail them out was that they had borrowed a lot of money from the Chinese. And the Bush administration was afraid if we stiff the Chinese there, that they wouldn't lend us any more money. So it became a constraint.
Some people say it could be even worse than that; it could lead to issues of foreign policy and national security. Maybe you haven't seen that yet, but [there's] always that risk.
Joseph Stiglitz, Columbia University
There has been, in my mind, a little bit too much emphasis on the deficit and less emphasis on what is being done with the money. So for instance, if we are borrowing money to invest in infrastructure, technology, education, then that is leading our country to be more productive. The increases in income, in principle, should be able to pay the interest and pay back the debt that we borrowed.
On the other hand, if we borrow money to fight a war in Iraq, a war that's just pouring money down a drain, then obviously we're going to be a weaker country, because we borrowed money and there's not going to be anything to show for it. ...
The other side of this story is [timing] -- when we have a deficit. If the economy is very weak, then deficit spending can help the economy grow. And especially if you take some of that growth and reinvest it, then that means you're stronger in the short run and stronger in the long run.
About 10 years ago, there was a major financial crisis in East Asia. China responded to that by running strong fiscal policy, spending money on its infrastructure, and the result of that was that it was able to maintain growth in the short run -- 7 percent, lower than it had been, but still very robust -- but it prepared the foundations for the growth over the next decade that was running at 9, 10 and 11 percent.
So that's an example of how timing can be very important and deficit spending, at the right time and spent in the right way, can actually build the foundations both of short-run strength and long-run strength.
Gene Sperling Director, National Economic Council, 1996-00
Consider the Asian financial crisis in the late 1990s. ... We were the country with a surplus. We were the country with strong economic growth. That allowed us to play a real leadership role in helping the world not fall into a devastating economic crisis. Now we're facing the same situation, but rather than being in that position of strength, people are looking at us and saying, "Oh, well, you're the place where the real mortgage crisis started; you're the place that's doing the most borrowing." ...
When President Bush came in and had to face 9/11 and a recession, it was tough, but because we were expecting surpluses, the deficit went up, but not so bad. We were still in a relatively strong position. Well, if you are expecting $700, $800, $900 billion deficits, what if something else goes wrong? You don't have as much flexibility, as many bullets in your gun, and that's not the way you want to be. ...
Newt Gingrich, Speaker of the House of Representatives, 1995-99
There are two dramatically different reasons you want fiscal discipline. The first is, it gives you tremendous ability to respond to a crisis. ... If you are in a situation that some countries get into, where you're so deeply in debt the interest you're paying on the debt is such a big part of your budget and you really have no margin, then in fact you have a very, very limited ability to maneuver. Britain, at some points, got into that kind of state.
The other thing is, I think, moral and practical. Politicians who have an open-ended budget can't say no to anybody, and so they take care of every idea, no matter how dumb, and they finance every bureaucracy, no matter how inefficient. If you have the discipline of a balanced budget, you begin to really look for savings, and you begin to really look for priorities, and you begin to really make demands about performance and achievement.
Greg Ip, The Economist
You've heard the deficit hawks. ... Are those scare stories or is that real?
There is a bit of a scare story, and there is a bit of real. I'm not one of those who thinks that we're going to have a crisis, even in the pessimistic scenario where we take too long to deal with these things. I'm not one of those who thinks that foreign lenders will suddenly abandon the dollar and it will crash and interest rates will go through the roof. I think that we have too many built-in advantages.
And by the way, the rest of the world doesn't look that great either. There are countries out there like Japan and Europe that are running up much larger debts than we are, whose currencies are much more vulnerable. ... We look like the best bet in a kind of crummy neighborhood, if you will. ...
How bad might a crisis be if we do nothing? ...
First of all, you might have ... a day when the government says, "We need to sell several billion dollars of bonds," and nobody shows up. So the government says, "Uh-oh, no money to pay the Park Service, no money to pay the Social Security checks, no money to give to the states for their Medicaid programs. Cut, cut, cut, cut, cut."
In the past we've had situations where the government shut down for a few weeks because the politicians couldn't agree. Let's imagine the scenario where the politicians would love to keep the government going, but they can't because there is nobody to lend us the money. It's happened to other countries. Why shouldn't it happen here?
Paul Krugman, Princeton University; The New York Times
What would a crisis in confidence in the U.S. government look like?
Well, we've seen it happen to Iceland. It's an advanced country but a small one. Suddenly people demand very high premiums for U.S. government bonds. Let's say the interest rate on 30-year euro bonds is 3 percent, but people are demanding 9 percent for U.S. bonds -- big spread, which then depresses [demand for U.S. bonds]. Capital is not flowing into the United States, very weak dollar.
Now, we've got a lot of lucky things about America; we're a blessed country in these respects. When Argentina -- which had a level of debt relative to the size of an economy not so different from ours, actually -- when Argentina lost the confidence of the markets in 2002, the Argentine peso plunged. And this was a terrible problem because lots of Argentine companies had borrowed abroad, and they had borrowed in dollars. And so they had assets in pesos but liabilities in dollars, and basically everybody went bankrupt.
The United States has borrowed a lot of money abroad in dollars, and America borrowing dollars is not the same as Argentina borrowing dollars. If the dollar plunges, the capital losses are going to fall on the Reserve Bank of China and Japanese pension funds, not on the United States. In fact, because we actually also have a lot of assets overseas, if you think of America just as a single entity, our balance sheet actually gets better when the dollar folds. ... So I don't think we're that vulnerable to a crisis of confidence, although if you stretch it far enough, then you can start to get into trouble. But we have a lot of running room. ...
Judd Gregg Ranking Member, Senate Budget Committee (R-N.H.)
The way I describe it is this: Except for a terrorist getting its hands on a nuclear weapon and exploding it somewhere in the United States, [debt] is the biggest issue we have. We are facing a financial catastrophe of inordinate proportions, because we have on the books obligations which exceed the net worth of the American public. In other words, there is $66 trillion of debt out there, and we don't know how we're going to pay for it. ... The net worth of the United States is $44 trillion, so ... we're essentially bankrupt as a country even though we don't admit to it.
... You are literally saying that this problem is so big the whole country could go bankrupt.
... The country goes bankrupt, and our children have a future that is less than the future which we were given by our parents.
I think you are saying a lot less.
Potentially a lot less, because basically they are going to have to curtail their lifestyle so significantly in order to pay the cost of this burden which has been put onto the books already in the area of entitlement spending: Social Security and Medicare. ... Unless you make changes in Social Security, Medicare and probably our tax structure, you are going to have a significant fiscal disaster.
James Galbraith, University of Texas at Austin
Can you imagine a scenario in which the United States government actually goes bankrupt?
No. The United States government cannot go bankrupt because it can always pay debts issued in United States dollars. There is no operational risk of bankruptcy in any meaningful sense of that term. To use the term in the context of the United States government is, in my view, profoundly misleading. It's a scare tactic. It is not a metaphor which fits the government which can issue its own currency and which can pay its own debts in that currency. That's the government we have. ...
... The National Debt Clock is running really fast. Have you noticed?
I heard that it actually ran out of digits. ... And my suggestion was that they should try just turning it off.
Because it's not the problem that we should be focusing on right now. Why don't we have a clock there that tells you how many jobs are being created and how many jobs are being destroyed? Why don't we have a clock that tells you how many states and cities are cutting their budgets and how many are able to go forward with the services that they have presently been running? Those are the priorities that we have to face. ...
The national debt clock doesn't tell us anything?
No, it doesn't, and in particular this $11 trillion number, when many trillions of that actually are held by the government itself, which is basically just an accounting offset.
The total share of debt, [as a share of] U.S. GDP, our national output, held by the public before this crisis was on the order of 40 percent. It is not a big number either by the historical standards of the United States, nor compared to our major industrial democratic partners in Europe and elsewhere, where debt-to-GDP is 60 percent to 100 percent and higher. And those countries are as solid as we are. So we are not in a situation where this number tells you anything meaningful about the economy.
Maya MacGuineas President, Committee for a Responsible Federal Budget
We know that, right now, if you look forward, the U.S. is on an unsustainable path. What you don't know is when our creditors ... will say, "No more." And that could come at any moment, just like the bursting of the housing bubble almost seemed to come out of thin air. Nothing really seemed to trigger it. ...
... Is there a chance that our standard of living would decline if this problem were to continue to grow?
The Congressional Budget Office recently came out with a report that says if we stay on the path that we're on right now, our economy will start to shrink. That was almost inconceivable a few years ago. ... The main problem is that we've promised away so much of our economy. We've made all these promises through future programs that we will put our resources here or here or here. That means we've taken away the flexibility from our budget, and we've precommitted resources in ways that will not help grow the economy. And younger generations of workers are really going to pay the price on that.
David Walker, U.S. Comptroller General, 1998-08; President and CEO, Peter J. Peterson Foundation
Could you see the United States lose its AAA credit rating?
I absolutely can see the United States losing its AAA credit rating in the future if it doesn't get its own financial house in order. In fact, both Standard & Poor's and Moody's have already issued a shot across the bow, saying that that AAA credit rating is at risk.
There are four key factors that led to the current subprime crisis that exist for the federal government's finances: a disconnect between who benefited from policies and practices and who paid the price and suffered the losses; inadequate transparency as to the nature and extent of the real risk; overleverage, over-reliance on credit ratings, and not enough attention on cash flow; and a failure ... of both private-sector and government risk-management oversight mechanisms to act until there was a crisis.
So those are four common denominators. There are three big differences. Number one, the American government's financial problem is not as immediate, which is good news; we have time to act. Secondly, it's much bigger. And thirdly, nobody is going to bail out America. We need to solve our own problems, and the time to start is now.