The Democratic Disasters to Come

The defunding wars are over. The accusations are fading. We are back to reality. Of course, America’s long-term prospects, at least in comparison with other countries’ futures -- whether in terms of demography, military power, food-production, constitutional stability, energy sources, or higher education -- are bright.

But short term, we are walking over landmines that threaten to blow up the normal way of doing business, and pose far more harm for Democrats than for Republicans.

Zero Interest

The real story about the debt is that by the end of Obama’s eight years, he will have matched the borrowing of all previous presidents combined.  Yet incredibly, the present huge sum of $17 trillion in debt is serviced at the same cost that we paid over 15 years ago. Such free use of money without raging inflation is almost historically unprecedented -- and it won’t last.

Indeed, we are paying today about the same amount in aggregate annual interest payments, in non-inflation-adjusted dollars no less, as in 1997 -- even though the 2012 figure of $17 trillion in debt is about three times larger than it was a decade-and-a-half ago. That anomaly is possible only because today’s interest rate of about 2.2% is only a third of what it was back then.

If interest ever returned to 1997 levels, at say 6.6%, we'd be paying over a trillion dollars a year in debt service. In crude terms, the winners of this Ponzi scheme are the very wealthy connected to Wall Street, which is flooded with foreign and domestic capital. It need not do much of anything more than outperform a pathetic 1% return on savings accounts.

The poor benefit from the vast increase in federal spending and exemption from federal income taxes. In contrast, the middle class still pays high interest on its student loans, credit card, and, to a lesser extent, car debt, receives almost no interest on its meager savings accounts, and is not so ready, after 2008, to dabble in real estate and the stock market.

In some sense, holders of U.S. Treasury debt and passbook savers are giving up hundreds of billions of dollars in interest returns (cf. the difference, say, between 1% and a more normal 5%) to subsidize the redistributive policies of the federal government.

The lack of interest, or de facto negative interest, keeps the near-retired working and hampers job prospects of the young; discourages thrift, savings and investment; and plays an underappreciated role in the slow economic recovery. The Democrats must deal with the contradiction of needing zero interest rates to service their recent extra $6 trillion in debt, and higher interest to encourage savings, investment, and job growth.