If you’ve been following media accounts of the U.S. budget negotiations, you might have the impression that a victory has been won. According to the CBC, for example, the U.S. Congress just approved a deal that “sealed a hard-won political triumph” for President Barack Obama.
Other news stories assured us that a “fiscal cliff” had been avoided, and with it, punishing cuts in government spending that would have destroyed safety-net programs. The BBC put the value of these cuts at $1.2 trillion.
Leni Riefenstahl would have killed for headlines like these. However, not one word of them is true. Let’s start with some history.
Between 1776 and 2008 (the election of Obama), the U.S. government amassed roughly $8 trillion in debt. That period covered a civil war, two world wars, numerous armed conflicts and much else besides.
But look what has been happening. In Obama’s first term of office (2008 to 2012) his administration borrowed an additional $4 trillion. The money wasn’t used to liberate Europe or land men on the moon. Most of it went for political pork like the New Jersey Alpaca lobby and the Montana Sheep Institute.
In his second term, the budget deal just concluded will add a further $4 trillion to the national debt. So there you have it. By the time he leaves office, the president and his party will have matched the entire debt load of the previous 232 years. Some “triumph.”
But what about the “fiscal cliff?” Please. The whole routine was a joke.
Part of it was built around vague threats, like reductions in physician payments, that Congress annually hints at and never enacts — the modern equivalent of medieval sorcery used to scare peasants.
More important, there were no real cuts, as normal people would understand the concept. The so-called reductions were really limits on the amount Congress was allowed to increase spending.
Here are the numbers. Without the fiscal cliff savings (now torched), the U.S. budget would have increased by around $5 trillion over the next 10 years. Had the savings been made, spending would have grown by $3.8 trillion.
That’s right. There were no cuts. There were only smaller rates of growth. By any standard, this is magical thinking.
And now that the fiscal cliff is gone? President Obama wants to increase spending still more.
All of this may sound foreign and fanciful. So what if none of these people can count?
But it matters to us in a very direct and ominous manner. Seventy per cent of our trade flows to the U.S. Most Canadian pension funds hold significant investments in American securities.
If the mathematical illiterates in charge down south borrow their brains out, we will all pay for the wreckage. And the truly scary part is, no one really knows where the trip-line lies.
American credit is elastic, but it is not infinite.
The point will eventually be reached where the world financial markets call in their markers.
We’ve already seen that happen to Greece, and in a less dramatic way, to Spain, Portugal and Ireland. But those countries enjoyed the backing of the European Union.
There is no overarching power large enough to rescue the U.S. when the money finally runs out.
So where do we go from here? Basically, there are two possible scenarios.
Either the Congress will get serious and impose financial management, or the country will arrive at a real fiscal cliff and the bailiffs will take over.
I wouldn’t bet on the first of these happening.
Lawrie McFarlane is a former treasury board secretary in the B.C. government.
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