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It was an April Fool's Day joke but the mock headline on the Financial Highway website reflected a certain sense of prophetic insight. "Moody's downgrades U.S. debt rating," it proclaimed. "Canada offers bailout loan."

Two weeks earlier, Moody's had warned that the gilt-edged triple-A credit rating of the most heavily indebted nation on Earth had moved "substantially" closer to downgrade, and so advised in foreboding language. (Downgrade or not, Moody's said, the United States needs to enact fiscal restraint of such magnitude "that, in some cases, will test social cohesion" - a prediction that evokes images of mobs and mayhem.) In such circumstances, a Canadian offer of bailout assistance would be a matter of compelling self-interest.

Why doesn't the world's most profligate country - based either on its absolute accumulation of debt or on its prospective accumulation - go broke? Why do so many people still diligently invest in U.S. Treasury bills? After all, the United States needs to sell an enormous stock of debt every year - much more than many people think. Covering the deficit ($1.4-trillion U.S. in 2010) is merely the start of it. In fact, trillions of dollars of debt matures each year, all of which must be sold again as new debt. In 2009, according to the government's annual financial report, the Treasury Department was obliged to sell $8.9-trillion in debt.

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The accumulation of new U.S. debt will be singularly different from the old. Interest payments will, for the first time, exceed the government's annual deficit.


U.S. government debt is often expressed these days as $7.5-trillion. This number significantly understates it. The Treasury Department reports that the actual debt is now more than $12-trillion - which is why Congress raised the legal debt limit last month to $14-trillion. (This $12-trillion does not include the infamous long-term liabilities inherent in the country's Social Security System, which equal - in 2009 dollars - more than $45-trillion between now and 2080.)

The accumulation of new U.S. debt will be singularly different from the old. The difference is this: Directly ahead, interest payments will, for the first time, exceed the government's annual deficit. In the past, interest payments have consumed a tiny percentage - generally 1 per cent or less - of U.S. GDP. In the future, they will increase at progressively faster rates.

Yes, the much-anticipated increases in social security and health care expenditures are expected to double social spending costs from 15 per cent of GDP in 2009 to 30 per cent in 2080. But in these same years, interest payments are projected to increase from 1 per cent of GDP to 35 per cent. The Treasury chart that matter-of-factly plots this increase is distinctly eerie.



The U.S. is such a rich country that the worst economic crisis since the Great Depression has scarcely touched its spend-as-usual assumptions.


As the Treasury Department says, this long-term increase in debt will never actually happen. The entire U.S. military requires only 4 per cent of GDP. The country simply couldn't consume one-third of its annual production of wealth in federal interest payments - financially, politically or socially - without impoverishing its people and instigating a second American Revolution. Some time between now and 2080, the debt crisis will be solved, presumably either by stringent reductions in government entitlement programs or by sovereign default.

You might think that the economic crises of 2008-09 would have provided the U.S. with sufficient incentive to control its accumulation of new debt. Not so. The U.S. is such a rich country that the worst economic crisis since the Great Depression has scarcely touched its spend-as-usual assumptions. Yes, the real unemployment rate hovers around 16 per cent. Yes, millions of homeowners have lost assets. Yet neither of these hardest-hit groups of Americans has taken to the streets.

Current U.S. statistics put the impact of the Great Recession into some perspective. At year's end, 2009:

Real GDP per person stood at $42,189, a 4-per-cent decline from the historic high ($43,926) in 2007 - but still 5 per cent higher than at year's end 2000 ($39,750); Average personal disposable income stood at $32,599, a decrease of a mere $80 from the historic high ($32,679) in 2007; The U.S. poverty rate had increased only marginally, from 12.5 per cent of families to 13.2 per cent;

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Average net wealth (per household) stood at $455,420, down 10 per cent from the bubble-boosted historic high ($500,019) in 2000, but still high by any international standard.

You lose $50,000 in equity here, $50,000 there, and, sooner or later, you reach big numbers.

The $50,000 hit the average U.S. household took in 2008-09 produced a national loss of $24-trillion in household wealth. Yet this loss has already been reduced, by economic recovery thus far, to $17-trillion.

The debt reckoning will presumably arrive when these personal wealth statistics (especially personal disposable income) dip downward more ominously - and taxes tilt upward more aggressively. Without radical reductions in government spending, it's a matter of time - depending, of course, on the real rate of economic growth in the years ahead.

April Fool's Day jokes aside, however, Canada will surely profit from any cross-border flight of nervous capital - and from its growing reputation as a solid triple-A-rated country. Dollar parity is already straight ahead.

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About the Author
Neil Reynolds

Neil Reynolds is an Ottawa writer whose columns on national economic issues appear in Wednesday's and Friday's Globe and Mail. He is the former editor-in-chief of The Vancouver Sun and the Ottawa Citizen. More

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