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Roth: Joe Biden learned nothing from overseeing the last US debt downgrade

Ting Shen/Bloomberg/Getty Images

In the summer of 2011, an ugly economic event that had never happened in the United States’ history came to pass: The sovereign debt of the United States received an official credit downgrade. Standard & Poor’s cut the debt rating from the crème-de-la-crème AAA rating down to AA+, due to concerns over growing debts and deficits.

Who was the vice president when this historic credit downgrade came about? None other than our current president, Joe Biden himself.

You would think that stern and unprecedented warning would have been a learning moment. At the time, the U.S. public debt stood at around 95% of GDP and was less than $15 trillion in the aggregate. If the U.S.’s fiscal standing was a concern then, Biden might realize the dire situation the U.S. is in today with public debt sitting at 125% or so of the GDP and rapidly approaching $32 trillion in total.

Deficits at that time, coming out of the great recession financial crisis, were also around $1.3 trillion. Despite having revenue (aka mostly taxes) clocking in at between $4 trillion and $5 trillion over the past couple of years (vs. the $2.3 trillion in fiscal year 2011), the government is still running massive deficits. For fiscal years 2021 and 2022, deficits have been just shy of $2.8 trillion and $1.4 trillion respectively, with the 2022 deficit not including any “emergency” COVID spending (a joke to begin with, but at least that gives an excuse for the explosion in spending).

Now Biden and his administration, as well as the Democrats in Congress, want to spend even more. That has brought about a fight over the debt ceiling, a ridiculous name for something that has never created a ceiling. In fact, the debt limit has been modified more than 100 times since the end of World War II and has allowed for the amassing of nearly $32 trillion in debt.

It is also creating a war over spending, which is completely out of control and, by the government’s own projections, entirely non-sustainable.

The two plans are a bit sad and hardly what one might call “austere.” On the discretionary spending side, there are no plans to meaningfully reduce spending vs. FY 2022 levels. The GOP plan just has a slower rate of expansion than the Democrats’ faster rate of expansion. Under both scenarios, the spending still grows into the future.

Not to mention, this expansion is happening at a time when the Fed is trying to cool the economy to address high inflation, and the robust government spending is working in the opposite direction.

While the uproar is about defaulting on the debt today, which, in practicality, has a very low probability of happening — unless, of course, Yellen, Biden, and company are trying to do so intentionally — the concern should be over the mid- to long-term fiscal health of the United States and the impact on our money, purchasing power, and global financial standing.

Interest on the U.S. debt, per a recent Strategas research report, is at 12.7% of tax revenue, approaching the level of spending on national defense. That is, based on CBO estimates, more than $660 billion and growing of your and other Americans’ money each year that is going to pay the financing costs on things we already bought, not getting anything new for it.

The U.S. Treasury has even bluntly said we are on “an unsustainable fiscal path.” The agency's “Fiscal Year 2021 Financial Report of U.S. Government” has the following “Historical and Current Policy Projections for Debt Held by the Public 1980-2096” chart (chart 7) showing public debt as a percent of GDP.

On top of that, the CBO projects net interest payments over the next 30 years, based on current projections, will total more than $60 trillion, almost three times our current GDP!

This doesn’t even take into account the more than $100 trillion in estimated liabilities and “promises” that the government has made.

This is a runaway fiscal train. If the train keeps barreling down the tracks, either there is a long-term debt default and a global financial reset, or dollars are debased significantly to inflate their nominal value and kill your purchasing power. Or perhaps both.

These outcomes aren’t good for your wealth or for the future of the United States of America. It’s way past time to learn the lesson that President Biden should have learned back in 2011.

If the U.S. spending just went back to pre-COVID levels, it would be a substantial step in the right direction. Spending at 2019 or even 2018 levels would give the United States a surplus and let us start paying down some debt. That $4.1 to $4.4 trillion spending target is still obscene, but it would be a welcome action before our financial foundation is ruined forever. Joe Biden and Congress can start down this path, but much more needs to be done.

Receipts/revenue collection (primarily taxes) versus spending of the U.S. government, and the related yearly deficits over the past ten years, excerpted from the White House Historical Tables (Table 1.1; *2022 actuals from the CBO).

Receipts/revenue collection (primarily taxes) versus spending of the U.S. government, and the related yearly deficits over the past ten years, excerpted from the White House Historical Tables (Table 1.1; *2022 actuals from the CBO).

A new poll shows that the majority of Democrats support deficit reduction. But we don’t need deficit reduction; what we desperately need is deficit elimination.

Biden already oversaw one debt downgrade. Ignoring that and the warnings coming from the Treasury, the CBO, and elsewhere is purely deliberately destructive.

Carol Roth's new book, “You Will Own Nothing,” is available for pre-order now.

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