Angry Voters to Obama: Stop the Ticking Debt Bomb
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The Fiscal Times
February 1, 2012

Democrats have had a fun month watching Republicans blow themselves to smithereens. The Oval Office must have erupted in high-fives after Newt Gingrich took South Carolina. For President Obama, facing off against such a loopy, troubled rival would be a dream come true.

Or, possibly not. The Newt surge may be a cautionary tale: voters like Gingrich because they’re angry, and that does not bode well for Mr. Obama. Tea Partiers and rank-and-file Republicans have emailed to say: I’m mad as hell at what is going on in this country, and I want a candidate who’s just as teed off as I am. That man is Newt.

Romney has taken Florida because he put on his combative face – the one that was missing in South Carolina and not needed in New Hampshire. Republicans want to know their candidate is tough, and will “stick it to Obama,” one Newt fan told me.

President Obama knows that Americans are restless and unhappy. His campaign hopes to channel the country’s anger and throw it up against a stubborn Congress, an indifferent wealthy class, the Chinese, polluters – anywhere it will stick.

His problem is this: Americans are not angry with rich people – they’re angry that things are not back to normal. It’s been over four long years since the country’s economy tipped downward, and for three of those years Obama has been in charge. For two years, Democrats ran everything. Even though statistically we are no longer in a recession, jobs remain scarce and growth is sluggish. People want to wake up one morning and find the U.S. back on track. They want to see brighter prospects for their kids and they want our country’s finances secure, so they can count on Medicare and Social Security.

Tea Party Republicans continue to broadcast this nation’s greatest threat: our debt. They are mad that despite their whopping victory in 2010, Washington’s appetites are as unrestrained as ever. As Americans continue to tighten their belts, the Beltway expands without restraint. Ben Bernanke promised recently to keep interest rates at near-zero levels “at least through late 2014.” He listed a variety of reasons: low growth, dwindling inflation. He failed to mention another reason: higher interest rates would poleax our budget.

Federal debt held today by the public totals $10.5 trillion (there is another $4.8 trillion in intra-governmental holdings, which rounds up to $15.2 trillion in total.) A one per cent change in interest rates adds $105 billion to our interest tab, expanding our projected 2012 deficit by nearly 10 percent. A two percent rise adds $210 billion, or about three quarters of total corporate tax receipts. This is big.

God forbid our creditors start demanding increased returns. When Standard & Poor’s downgraded our debt last summer, Treasury officials must have held their breath. Many analysts expected interest rates to rise, as they have for the EU nations that are in trouble. They did not, because international investors have nowhere else to go. The yen is overvalued, and the euro is risky. We have been beyond fortunate that the EU has smashed on its own fiscal shoals. Yes, it has tempered demand for our exports – but it has allowed the dollar to remain the unrivaled currency of choice for global investors. And that has kept interest rates, and interest payments, low.

Not everyone on the Fed Open Market Committee agrees that monetary policy should remain so accommodative. While the majority goes along with the Fed Chairman, some think that rates should drift higher as early as this year, and a number propose to raise rates to 2 percent in 2013 and then nearly three percent in 2014. Interestingly, the committee almost unanimously thinks that the “normal” fed funds target rate in the “longer run” should be 4 percent to 5 percent, in line with expected inflation of 2 percent. Think what a four percent rate hike would mean to our budget.

In last year’s Congressional Budget Office projections, interest rates on t-bills were forecast to rise to 3.7 percent in 2014, and net interest charges were put at $418 billion – nearly $100 billion ahead of the fiscal 2013 figure. Keeping short-term rates near zero will brighten those estimates, even as out debt continues to rise. This monetary looseness, which may well be the right medicine for a still-sickly economy, comes in handy for Mr. Obama.

Approaching the election, Congress will again have to raise the debt ceiling, reminding voters that the president has done little to change the trajectory of our crushing borrowings. The CBO revised upward its estimate of the current year deficit, to $1.08 trillion, making this the fourth year in a row of trillion dollar-plus deficits. The forecasts for fiscal 2013 promise a considerable improvement – to a $585 billion shortfall, but no one should celebrate just yet. For starters, the figures include the demise of the Bush tax cuts, which will not happen. Even Democrats want to keep 80 percent of those reductions in place.

President Obama has made many speeches, commissioned a grown-up and bipartisan group to make tough recommendations, but then spurned the fiscal pathways suggested by Simpson-Bowles. Cutting our defense budget may be needed (and quite popular with his liberal base), but doing so and leaving Medicare and Social Security unchecked looks like campaign-year cowardice.

What China’s official Xinhua news agency calls the U.S. “ticking debt bomb” is not going to disappear. Moreover, Tea Partiers won’t let us forget it. Mr. Obama underestimated the impact of Tea Party wrath once before -- he may do so again.

After more than two decades on Wall Street as a top-ranked research analyst, Liz Peek became a columnist and political analyst. Aside from The Fiscal Times, she writes for FoxNews.com, The New York Sun and Women on the Web.