The United States today is headed for a financial and economic crisis. What appeared to be only a possibility five or six years ago became a probability more recently, and has now become a virtual certainty. The only real questions are when and how. In addition, when the crisis occurs, it will entail, quite possibly, a worldwide recession. How can such a statement be made when the Dow Jones index is at 2300 and unemployment has edged further and further down?
The facts are that the US has been guilty of the most irresponsible fiscal behavior in its history during the last seven years. American fiscal folly, coupled with the inability to coordinate economic policies with Europe and Japan, has created an ever-increasing worldwide pyramid of debt that cannot withstand a major recession. The US is on its way to becoming the world’s largest international borrower, and since the worldwide financial markets are interconnected, a serious US economic downturn automatically has worldwide repercussions.
The United States, and the rest of the world, will pay a heavy price for the fact that we have committed $2 trillion for a defense program of dubious value; that we have been unwilling to limit the growth of entitlement programs like Social Security and Medicare regardless of the need of the recipient or of his ability to shoulder some of the costs; and that, in an act of the ultimate financial cowardice, we have attempted to pass on to our children the cost of this behavior by borrowing from tomorrow instead of taxing today.
There are several results of this behavior, many of which are not always visible. The first, and perhaps least noticed, is that when it comes to our economy we are no longer an independent country. For the first time in our history, we depend on foreign capital to finance day-to-day operations of our government. In 1986, almost half of our budget deficit of about $180 billion was financed by foreign purchases of treasury securities, mainly by the Japanese. From a financial point of view, we are being colonized.
Second, in order to provide Japan and Germany with the funds that we need to borrow, we have allowed our domestic markets to absorb an ever-increasing amount of foreign goods, largely as a result of a gross overevaluation of the dollar during the years between 1980 and 1984. Even though we have dramatically changed course since 1985, collapsing the value of the dollar with other dangerous consequences, our trade deficit reached $160 billion last year and seems to be locked in for years to come. It is worth noting that, even if we were able to reduce our trade deficit by $20 billion per year, by 1995 our external debt would be about $1.5 trillion and the interest on that debt about $120 billion annually.
Third, our domestic national debt has doubled over the last five years and is well over $2 trillion. Interest on the debt alone will be about $125…
This is exclusive content for subscribers only.
Try two months of unlimited access to The New York Review for just $1 a month.
Continue reading this article, and thousands more from our complete 55+ year archive, for the low introductory rate of just $1 a month.