Just a year ago, the Obama Administration was on the verge of converting America into a European style social-welfare state. The President had pushed up federal, state and local deficit spending to 41% of our gross-domestic-product (GDP), a level not seen since World War II. He passed healthcare legislation nationalizing 1/6 of the American economy and his Congressional majority was on the threshold of enacting labor and environmental regulations that would have collectivized broad swaths of American production and employment.
Then Greece and a number of other European nations suffered credit rating down-grades, soon followed by debt defaults and economic collapse. Today America stands at the precipice of its own collapse; either halt deficit spending or risk the financial collapse of our nation.
Barak Obama, during his Presidential bid, campaigned across Europe to symbolically express his solidarity with their economic social-welfare model by stating: “In America, there’s a failure to appreciate Europe’s leading role in the world.” Once elected, President Obama partnered with European nations on a multi-trillion dollar government spending initiative in hopes of generating a multiple of economic growth.
Unfortunately for America, Greece and the other deficit spenders, the spending was squandered on bureaucratic overhead and crony projects. Now that lenders are demanding repayment, many countries are being forced to default on payment.
When Standard & Poor’s credit rating agency downgraded Greece last year, the interest cost on their debt swiftly rose from 2.5% to 8%, and currently it is at 22%. At 2.5% interest cost, the Greek debt doubled in 28 years; at 8% it doubles in 9 years; and at 22% it doubles every 3.5 years. Once the interest rates rose in Greece, a contagion began spreading to Ireland and across Southern Europe.
To allay any fears last year that the contagion would reach this country, the Obama Administration trotted out Nobel Prize winning economist Paul Krugman to write his now famous New Your Times Op Ed, “We are not Greece.” The professor stated that even though the U.S. and Greece were running the same level of double digit deficits, the U.S. was only leveraged at a moderate 100% debt to GDP, whereas irresponsible Greece was leveraged at 150% debt to GDP.
A year later, Professor Krugman is being proved right; we are not Greece, we are worse! Standard & Poor’s just issued a warning that there is a one in three probability the United States AAA credit rating will be down-graded in the next two years. S&P pointed out that a credit analysis of America should not be limited to only the $14.5 trillion in federal debt; but should also include the $2.7 trillion of state and local debt, plus the $6.5 trillion federal mortgage guarantees to Fannie Mae and Freddie Mac. The combination of these liabilities brings America’s leverage to 160% debt to GDP!
Democrats and Republicans equally dread that a down-grade of the U.S. credit rating from AAA, could spark a rapid increase in interest rates; devastating our nation and crucifying their political careers. Over the week-end this fear was elevated when China announced they intend to sell $2 trillion of their holdings in U.S. Treasury bonds to avoid further credit risk. If China were to sell its holdings quickly, interest rates would soar.
America’s failed romance with the European social-welfare state has taken our nation to the edge of a financial collapse. To achieve a balanced budget Congress will cut spending by 20% and re-embracing our historic individual responsibility and pro-growth economic agenda. As the largest economy in the world we have no alternative, there is no country who could, or who would provide us with a financial bail-out. Either we cut deficit spending, or we fail!