Goldman Sachs guru warns of war-debt failure
Is America becoming a global credit risk? How to get back on track
By Paul B. Farrell,
MarketWatch
Last Update: 7:02 PM ET Jul 23, 2007
ARROYO GRANDE, Calif. (MarketWatch) -- Subprimes downgraded. Will Moody's downgrade America's debt next?
Actually, that's already happening; our credit rating is collapsing with the dollar.
Foreign banks are dumping dollar reserves, while we gorge on cheap toys and bad pet food. Actually, our biggest "terrorist" threat is internal: Distorted values are downgrading our nation's "creditworthiness." We're like out-of-control kids with stolen credit cards, spending our future with no plans to repay.
Recently Robert Hormats, vice chairman of Goldman Sachs (International), appeared before the U.S. House Budget Committee to "discuss an issue of great economic, financial and national security importance to our country -- the growing dependence of the United States on foreign capital." Currently we import $1 trillion new debt annually, with no repayment plans. That's a historic break from over two centuries of American policy.
Hormats was in Washington with warnings from his brilliant new book, "The Price of Liberty: Paying for America's Wars." He traces the history of American wartime financing from the Revolution through the War of 1812, the Civil War, the two World Wars and the
Cold War to the present.
Conclusion: "One central, constant theme emerges: sound national finances have proved to be indispensable to the country's military strength" and long-term national security.
1776 to Iraq, national security demands fiscal responsibility.
America's long tradition of war financing began with Alexander Hamilton: "In January 1790, Hamilton, by then the country's Treasury secretary, confronted the American people with a stark fact: the nation had run up a huge debt fighting the Revolutionary War. This debt, he wrote, was the 'price of liberty,' and the new government had to repay it. The future creditworthiness of the United States, and ultimately the security and ability to finance future wars, would depend on how successfully and faithfully this was done."
Hamilton's principles have kept America's credit strong through every war since the Revolution ... until the Iraq War. Since then,
"although U.S. leaders have warned that the war against terrorism could last for decades, the country lacks a multidecade financial strategy to address the challenge."
Iraq tossed the lessons of history out the window. Hormats says that despite the oft-repeated remark that 9/11 "changed everything, in the area of fiscal policy, however, it changed nothing. The country is pursuing a pre-9/11 fiscal policy in a post-9/11 world." That assessment comes from someone who worked inside Washington for over a decade before joining Goldman Sachs in the 1980s.
Unsustainable debt is weakening national security
America's new faith-based guns-and-butter policy is hurting both guns and butter. The war is costing us $12 billion a month. Hormats examined the Congressional Budget Office's projections for domestic costs: "In 2006, spending on Social Security, Medicare, Medicaid and interest on the federal debt amounted to just under 60% of government revenues" and "if they continue on their current path, they will account for two-thirds by 2015."
Social security from $550 billion to $960 billion
Medicare from $372 billion to over $900 billion
Medicaid from $181 billion to $390 billion
Worse yet, these commitments will continue skyrocketing in later decades.
The CBO projects the federal debt rising from 40% of GDP to 100% in the next 25 years: "Continuing on this unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security."
Hormats warns of the risks of this gross departure from Hamilton's principles: "Of late, the precedents and experiences of past generations have been cast aside. The 9/11 attacks were seen by many legislators as a license to spend more money on nonsecurity programs, and Americans have not been called to make sacrifices. Tax cuts and spending increased on politically popular security-irrelevant domestic programs have been enacted as if there were no expensive defense programs to be funded."
etc.
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