If Washington had grown fuzzy about the razor’s edge the U.S. economy is currently balanced on, it got a bracing reminder Thursday.
Federal Reserve Chairman Ben Bernanke warned that the nation’s projected deficit and debt levels “cannot actually happen” because creditors would refuse, at some future point, to finance the government’s spending.
“By definition, the unsustainable trajectories of deficits and debt that the [Congressional Budget Office] outlines cannot actually happen, because creditors would never be willing to lend to a government whose debt, relative to national income, is rising without limit,” Bernanke said at the National Press Club.
The national debt is currently about 60 percent of the economy, or Gross Domestic Product, he said, adding that it is projected to reach 90 percent of GDP by 2020 and 150 percent of GDP by 2030.
But Bernanke’s citation of $9.5 trillion in national debt didn’t include the $4.6 trillion owed by the government to trust funds for things such as Social Security and Medicare, which have paid out cash to the Treasury in exchange for promisory notes. The full national debt – when both forms of debt are included – is already just under 100 percent of GDP, which is currently around $14.6 trillion.
Bernanke quoted economist Herbert Stein as saying, “If something can’t go on forever, it will stop.”
The audience at the Press Club laughed. But Bernanke’s point echoed mainly because of its absurdity.
The Fed chairman once again warned that if Congress does not act soon to cut spending or increase revenues, or some mix of the two, the U.S. economy will be forced by crisis to correct.
“One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point,” he said.
Bernanke did not give a prediction of when he thought the U.S. could experience a debt crisis similar to the ones that have shaken Europe over the past year. Republicans and some Democrats fear a crisis could come at any point given the right mix of circumstances, and will happen for sure in the next few years. President Obama has shown far less concern about the near term and has said he is focused on the mid- to long-term future.
As for the looming fight between Obama and Republicans over whether to raise the government debt ceiling from its current $14.3 trillion mark, Bernanke warned lawmakers against playing a game of chicken with the issue.
“I would very much urge Congress not to focus on the debt limit as being the bargaining chip in this discussion, but rather to address directly the spending and tax issues that we all have to deal with if we’re going to make progress on this fiscal situation,” he said.
But Bernanke also appeared to give some credence to the argument put forward by Republicans such as Sen. Pat Toomey of Pennsylvania, who say that hitting the debt ceiling will not mean immediate default on the government’s debts.
“Under current law, if the debt limit is not extended, for a time, the Treasury has various resources that it can use to make payments on our national debt,” he said.
But Bernanke’s emphasis was clearly on the need to handle the debt ceiling with extreme caution.
“Beyond a certain point, [the government] would not have those resources and the United States could conceivably — I think this is very remote, but it’s not something you want to play around with — the United States would be forced into a position of defaulting on its debt,” he said. “And the implications of that for our financial system, for our fiscal policy, for our economy would be catastrophic.”