You may or may not have noticed this story on the front page of The New York Times. Its main point is that the dizzying growth of our national indebtedness poses a threat not just to America’s economic health and future but to its role in the world.
Even if you don’t much follow global economics, keep reading anyway, if for no other reason than this: As America’s role goes on the world stage, so goes Israel. A weak America can’t protect an embattled Israel. If Israel doesn’t find a way to normalize its relations with its neighbors by the end of the decade, it may have to adjust to life without the protection of the world’s sole superpower. As if.
It’s a shocker, all right — that is, unless you remember this Forward editorial from September 2004. We called this one way early. More about that below.
According to today’s Times, President Obama’s new budget shows next year’s federal deficit — the difference between the government’s income and its spending for the year — reaching 11% of the total Gross Domestic Product (all the money earned and spent anywhere in the country during the year). That’s a higher proportion than at any time since World War II. And back then, remember, borrowing ballooned to pay for a world conflict, and settled down again when the emergency was over. Our current imbalance isn’t an emergency response. It’s just our new normal. Obama’s budget, the Times writes, “draws a picture of a nation that like many American homeowners simply cannot get above water.”
The problem is more than just a matter of annual borrowing. Three decades of borrow-and-spend government (the numbers are below) have piled up an accumulated national debt that recently topped a colossal $12 trillion. That’s about 83% of our Gross Domestic Product. If we were any other country, the IMF would have put us in receivership by now. Fortunately, we run the IMF. For now.
Even scarier, the new budget forecast shows the situation continuing to the end of the decade if not beyond, according to the Times (I’m not sure they’re entirely correct on that detail). Absent “miraculous growth, or miraculous political compromises,” the Times reports, America faces a steady decline in clout on the world scene.
Or, as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”
Is this just fear-mongering? No. The screws are already getting set to tighten.
The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade. Mr. Obama himself hinted at his own concern when he announced in early December that he planned to send 30,000 American troops to Afghanistan, but insisted that the United States could not afford to stay for long.
Without a strong economy to pay for it, Obama said in that December speech at West Point, “even a ‘war of necessity,’ as he called Afghanistan last summer, could not last for long.”
So what does this have to do with Israel? Well, here’s what we wrote back in September 2004, just before that year’s election:
Twenty-four years ago, when Ronald Reagan took office, the federal debt — the total of all red ink accumulated since George Washington’s time — was about $930 billion. Eight years later, after two terms of tax cuts and military build-up, the debt had nearly tripled to $2.6 trillion. America had turned from the world’s largest creditor into the world’s largest debtor. Today the debt stands at about $7.4 trillion. Nearly one-fourth, or $1.7 trillion, is owed to foreign lenders. No one but the most starry-eyed administration boosters thinks this level of borrowing can be sustained indefinitely. Sooner or later, our over-mortgaged economy will start to look like a bad bet, and our creditors will start calling in their loans. The question is not if, but when and how. There’s a precedent. Great Britain, the world’s imperial power throughout the 19th century, was a debtor nation by the end of World War I. America had replaced it as the main economic engine, but was reluctant to play empire and so continued financing London’s pretensions into the 1950s. The break came in 1956, when President Eisenhower, infuriated by the British-French-Israeli attack on Sinai, decided to crash the pound. Britain spent the next 30 years clawing its way back to second-class status. How America’s creditors handle our coming insolvency — and it is coming, unless we change course — will depend partly on whether and how well we’ve prepared, and partly on our overall standing in the world community. In the worst case, the lenders might crash the dollar and plunge us into crisis. In the best case, we can enter a lengthy round of negotiations aimed at restructuring our economy or such other concessions as our creditors see fit to demand. What will they seek? It might be more beef in our cheeseburgers, more Seinfeld reruns or a change in the Mets starting lineup. Or it just might be a change in our Middle East policies, which appear more and more to be the main point of contention between us and the rest of the world.
Again, look at the numbers carefully: When Ronald Reagan took office in 1981, the total debt accumulated over two centuries was about $930 billion. In eight years Reagan nearly tripled the debt to $2.6 trillion. When George W. Bush took office 12 years later, in 2001, the debt was $5.4 trillion. By 2004 it was up to $7.4 trillion. the proportion of the debt owed to foreign banks in 2004 was 22% — most of it to the central banks of China, Japan and England (in that order). When Bush left office, he bequeathed Obama a debt of about $10.5 trillion, along with a collapsing economy that required emergency deficit spending just to stay alive. The stimulus bill signed in the final days of the Bush administration added nearly $1 trillion more. And the share of our total debt owed to foreign creditors is now up to about 30%, or $3.5 trillion. The Chinese government alone owns just under $1 trillion of our markers, though they have recently begun diversifying to other currencies and reducing their dollar holdings — which is to say, lacing up their running shoes.
Remember what happened to Britain in October 1956. The British-French-Israeli invasion of Sinai that month touched off a run on the pound. London asked Washington to buy pounds to shore them up, as it had been doing for decades. President Eisenhower, however, was livid over the Sinai campaign – he was said to be storming around the White House that month, shouting to aides that the British and company had handed Egypt to the Soviets (he wasn’t wrong) – and he refused to step in. The pound collapsed, and the rest is history – two decades of rapid British economic and diplomatic decline. History shows that it was in October 1956 that the sun finally set on the British empire.
The question now, of course, is how we dig our way out in time. Or, more precisely, how to get the Democrats and Republicans on Capitol Hill to agree on a plan. As if.
Jonathan Jeremy “J.J.” Goldberg is editor-at-large of the Forward, where he served as editor in chief for seven years (2000-2007).