$1.2 trillion deficit projection threatens ruin for U.S.

WASHINGTON, Jan. 8 (UPI) -- The projection for the U.S. annual budget deficit has doubled. This is not good news.

The deficit for Fiscal Year 2008 was a record $455 billion. This was already dangerously high. But following outgoing President George W. Bush's spending spree of bailouts since September in a so far entirely unsuccessful attempt to roll back the economic recession, the Congressional Budget Office revealed Thursday that it predicts an extraordinary deficit for FY 2009 of $1.2 trillion.

In fact, the figure will be vastly higher even than this, and will certainly approach -- and may even exceed -- $2 trillion. That is because the $1.2 trillion projection does not even factor in the exceptionally high costs of the ongoing wars in Iraq and Afghanistan and the proposed stimulus package that President-elect Barack Obama and the ruling Democrats in Congress are determined to enact.

The proposed stimulus package has a current price tag of $775 billion, but it is expected that it could rise to more than $1 trillion once Congress gets its hands on it. Obama wants a package passed rapidly after the inauguration, but noises from the congressional leadership suggest the legislative process might take till mid-February.

It seems the CBO deficit figures are way higher than anyone expected, and the question now arises as to whether support for the stimulus package will now fragment because of the size of the resulting debt.

Obama acknowledged the problem Tuesday. "I'm going to be willing to make some very difficult choices in how we get a handle on this deficit," he said.

If the soaring deficits are not reined in, at some point foreign investors are going to stop holding U.S. Treasury bonds, if they fear these will become worthless. The Chinese government has repeatedly expressed alarm at what it regards as Bush's extreme fiscal irresponsibility. As of September 2008, the State Bank of China held $585 billion in U.S. Treasury bonds. The State Bank of Japan held $573 billion and Britain came in third with $338 billion. Over the past four years 80 percent of all U.S. Treasury bonds have been purchased by foreign sources.

The current Conventional Wisdom among liberals and even many titular conservative pundits alike is that Obama's stimulus package is essential for the United States to spend its way out of the current recession.

This orthodoxy, in part, stems from a widespread misreading of what ended the Great Depression of the 1930s. It was not President Franklin Roosevelt's unprecedented spending during the 1930s, nor the de facto Keynesian deficit spending of U.S. rearmament and World War II. In fact, the U.S. economy only began to really recover domestically in early 1939, well before U.S. rearmament and British and French armaments orders started flooding in at the beginning of World War II.

The key factor was the defeat of Roosevelt's liberal reforming allies in the midterm congressional elections of 1938. This restored business confidence after six years of wild New Deal experimentation and reform.

However, throughout the worst of the Depression under President Herbert Hoover and through all of the New Deal, the credit rating of the U.S. government and the value of the U.S. dollar both remained rock solid. By contrast, federal debt is now 80 percent of gross domestic product and still rising fast.

Many liberals and free-market theorists have argued that putting the United States into massive debt to other nations -- primarily China, Japan and Britain at the moment -- will not affect America's standing in the world or its freedom of action. Holders of U.S. debts, the argument goes, cannot afford to see the United States go under and will not dare to or be able to pull its strings.

This, however, denies an accumulated experience as old as the Bible: The debtor is servant to the lender. Americans, who have not known the specter of any kind of national indebtedness to other nations being seriously exerted on them at least since before the Civil War, are blind to this danger. But Thomas Jefferson and Andrew Jackson, among early U.S. presidents, recognized it well.

In 1931 and 1947 the British government's indebtedness to American banks forced Labor Party governments to either fall or dramatically amend their policies. The U.S. refusal to bankroll Britain's imperial policies was an important background factor in the rapid liquidation of the British Empire in the late 1940s.

The Republican-dominated Congresses led by Speaker of the House Dennis Hastert, R-Ill., and House Majority Leader Tom DeLay, R-Texas, from 2001 through 2006 happily ran up the biggest deficits in U.S. history. It was Democratic President Bill Clinton, in cooperation with previous Republican Speaker Newt Gingrich of Georgia, who pushed through the policies that eliminated the annual federal government debt in the 1990s. But now the situation is far worse. And instead of bipartisan cooperation to eliminate the deficit, as there was under Clinton and Gingrich, there has been a tacit bipartisan consensus that still exists to allow it to soar out of control.

Many serious experts warn that this bipartisan fiscal illiteracy will have to end if financial ruin is to be averted. But there is no sign that the now dominant Democrats will listen to the warnings any more than the Bush-Hastert-DeLay Republicans did before them.