National debt load is a fiscal time bomb

U.S. Treasury Secretary Henry Paulson speaks at an Economic Club of Washington luncheon in Washington March 1, 2007. Paulson said on Thursday the economy was successfully slowing toward moderate and sustained growth, but warned it could be derailed if trade barriers are raised. REUTERS/Jonathan Ernst (UNITED STATES) Ran on: 03-11-2007 Treasury Secretary Henry Paulson says he is &quo;feeling good about the U.S. economy.&quo; less U.S. Treasury Secretary Henry Paulson speaks at an Economic Club of Washington luncheon in Washington March 1, 2007. Paulson said on Thursday the economy was successfully slowing toward moderate and sustained ... more Photo: JONATHAN ERNST Photo: JONATHAN ERNST Image 1 of / 3 Caption Close National debt load is a fiscal time bomb 1 / 3 Back to Gallery

Let's say someone is spending about 11 percent of his or her paycheck to cover interest on outstanding debt. Erica Sandberg, a spokeswoman for Consumer Credit Counseling Service of San Francisco, says she'd immediately advise that person to seek help.

"This is a huge amount of a person's paycheck just to make ends meet," Sandberg said. "That's never smart. If you're borrowing that much, you might feel good for the short term. But over the long haul, you're going to be in real trouble."

Unfortunately, the person she's talking about is you -- and everybody you know.

As the national debt approaches a staggering $9 trillion, roughly $240 billion will be spent this year paying interest on the half that's held by public creditors (of which Japan and China are the largest). That translates to about 11 percent of projected tax revenue.

In other words, we're spending more on interest for our national credit card bill than was spent last year in discretionary funds for the Education, Veterans Affairs and Justice departments combined.

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And at the rate we're borrowing, experts say, the amount of annual interest payments could double within 10 years.

"The danger is not the current level," said Brian Riedl, senior budget analyst at the conservative Heritage Foundation. "The danger is that future trends are very bad. Within the next 10 or 20 years, our debt will spiral out of control.

"That scares the hell out of me," he said.

This is one of those issues that's difficult for many people to get their minds around. Figures in the trillions of dollars, time frames that look decades down the road -- this isn't the way most of us think.

But the plain fact is that, as with the debt that so many people owe on their plastic, the consequences of financially reckless behavior can be severe.

If nothing is done to rein in the national debt, all Americans face the prospect of significantly higher taxes to continue meeting our financial obligations.

We also face the prospect of rising interest rates as our profligate ways represent an increasingly greater risk to creditors. Rising rates, in turn, would drive up our annual interest payments, which would require even higher taxes or, more likely, increased borrowing.

And before you know it, rock star Bono will be making the rounds of other countries asking if they'll offer us some debt relief.

"By 2045, if we stay on our current path, all federal revenue will be used to pay interest on the debt," said Josh Gordon, senior policy analyst at the Concord Coalition, a nonpartisan budget watchdog group in Washington.

"It's insane," he said.

Last week, Treasury Secretary Henry Paulson said during a TV interview that he's "feeling good about the U.S. economy" and isn't particularly worried about the growing amount of IOUs in the hands of other countries.

"As I look at the demand for ... U.S. Treasurys, I'm very pleased to see demand from all around the world -- from governments, from individuals -- it's a positive that foreign investors want to own our Treasurys," he said.

International investors, including central banks, held 51 percent of the $4.3 trillion in publicly offered Treasurys as of December, up from 34 percent of the almost $3 trillion total when President Bush took office in January 2001.

Japan, with $644 billion in American IOUs, is our biggest foreign creditor. China ($350 billion) is second, followed by Britain ($239 billion) and oil-exporting countries ($100 billion).

Democratic Sen. Hillary Clinton, who wants to be president, told CNBC last week that recent volatility in the U.S. stock market, which began with a sell-off of Chinese stocks, "should be a real wake-up call for our country."

"Obviously, the level of our debt that is now held by central banks and foreign governments is a problem," she said. "And I don't want the administration to ignore this wake-up call and just hit the snooze button again."

Critics say Clinton is exaggerating the problem, particularly the danger of so much debt being held by overseas creditors.

But the bottom line is that no matter who holds our debt, the amount we owe as a nation is soaring. And there's no end in sight to our need to borrow.

The national debt now represents about 66 percent of nearly $14 trillion in gross domestic product. It's been worse -- more than 100 percent of GDP during World War II.

But that was a time when Americans willingly sacrificed to rid the globe of tyranny. Today's rising ratio of debt to GDP reflects nothing more noble than a political leadership that's unwilling to tackle an immensely difficult issue.

"Congress has no interest in dealing with long-term debt," said Riedl at the Heritage Foundation. "It doesn't want to make the hard decisions and risk unpopularity."

Remedies will only become more costly in coming years as millions of Baby Boomers place unprecedented strain on government coffers, forcing lawmakers to scramble for billions of dollars in additional funds if they hope to avoid drastic benefit cuts.

What will they do? The experts say they could jack up taxes. More likely, though, they'll just pass the hat again among international lenders.

"By 2040, we could be looking at debt held by the public being 300 percent of GDP," said Gordon at the Concord Coalition. "We won't be much of a superpower if that happens."

At the Consumer Credit Counseling Service of San Francisco, Sandberg, who has been a credit counselor for 10 years, said the best plan is always to act right away if your debt is getting out of control.

"If you keep borrowing," she said, "all you're going to do is dig yourself deeper into the hole."