Niall Ferguson of Harvard University.
How can anyone, even a Harvard academic, say such a thing? Isn’t that just a wee bit ‘too simple’ of a math equation to define the rise and fall of all the great powers that ever existed on Earth?
Perhaps. But he might have a point that is worth considering as we here in the US barrel down the road towards overspending and explosive debt taken by, in order: Spain in the 15th century; France in the 17th century; England from the 18th through the 19th century and then the US in the 20th century.
Rome did the same thing and so did the Qin Dynasty and the Habsburgs but they were so long ago, ‘they don’t have any relevance to today’, the naysayers say. Or do they?
First of all, what does he mean by ‘net interest costs’ on the national debt? And why is it so toxic to republics, democracies, dictatorships and kingdoms of all stripes throughout history?
Interest has to be paid on the amount of money anyone borrows from anyone else. Only in the Old Testament do you see a benevolent ‘forgiveness of debt’ every 7 years during the time of Jubilee for the Israelites.
Or in Detroit, on Wall Street, and for AIG, Fannie Mae and Freddie Mac. it seems.
Interest on the private debt we owe foreign sovereigns and private bondholders exceeds $221 billion per year right now today in 2011. That is hard dollar currency we have to pay each month and send or wire all over the world at the stated interest rate on the bond that was owed at the time of issue.
Interest paid on the national debt is the ONLY ‘mandatory’ payment in the entire federal government when you really think about it. Miss one payment…and US credit is dead. No one will lend to us any more, or at least not without a significant premium added on for good measure.
Forget the so-called ‘interest’ on the Social Security (fake) ‘surplus’. That is not paid every month but rather is only ‘imputed’ or estimated. Even CBO takes special care in every report to say interest on the ‘fake’ SS Trust Fund has 'no economic impact' and implies, but doesn’t shout out loud: ‘….And Will Never Be Paid or Paid Back in Real Money!’
So: ‘Fuggedaboutit! Boomers and X’ers. Just. Forget. About. It!'
Defense expenses per year are now over $712 billion.
Still ahead of net interest costs today….but interest rates have been at their absolute lowest possible levels for the past 3 years. When taking inflation into consideration, we have had darn near negative real interest rates over the same time frame.
But take a look at the CBO projections of what net interest costs (p.54) will be if we continue on the current spending binge trajectory in the next 5-10 years. CBO pairs $792 billion in interest costs against $869 billion in defense costs in FY 2021 with relatively low interest rate projections of only 2% per year….for the next 10 years.
What happens if inflation accelerates even a little outside of the expected range or perhaps escalates rapidly to the ‘crazy’ regions of 7%; 10%....or how about the 'insane' level of 21%, last hit in our lifetimes in the US of A in 1980?
The net interest costs will quickly exceed the defense costs which, according to Professor Ferguson, ‘ain’t good at t’all!’
One of the most consistent warnings we ever heard on the Budget Committee came from Alan Greenspan and, oh, let’s say about 50 other economists, Ph.Ds or Nobel Prize winners who said, in essence:
‘Deficit-spending and higher interest payments on the national debt are not bad things in and of themselves….except when they are. They can become uncontrollable at any point in time; we just don't know when until it is too late. And then….both are proven by history to be terrible!’
Professor Ferguson is not saying that nations just disappear when their interest costs exceed defense spending. He IS saying that their role as the world’s superpower ends at that moment.
England is not such a bad place today; it is just not 'THE BRITISH EMPIRE' that is once was. Same with Spain, same with France. Same with the Roman Empire; same with even the Soviet Union which essentially dissembled in 1989-1990 (thank God!) when The Motherland was unable to keep up with Ronald Reagan’s defense buildup.
At some point in time, they all ran out of money and couldn’t service their debt with interest payments and therefore had to pull back on their other spending to do so.
Are we destined, doomed or ‘fated’ to the same? Or are we going to do something about it, like right now?
It is up to us to insure America's position as the world's acknowledged superpower, not anyone else.