By Phil Hardwick
Dolan Media Newswires
Jackson, Miss. — A borrower can go into debt as far as a lender will allow him to go.
It does not matter if the borrower has a bad credit rating or if the security for the debt is worthless or if the borrower has no intent to repay. The limit to debt is determined by the lender. And it is becoming obvious that the government of the United States of America just might continue to borrow until its lender will not loan it any more money.
I recall a conference during the high interest era in the 1980s when the subject of housing demand in the Jackson, Miss., area was the topic. Several academic types, consultants and researchers presented analyses and forecasts. The last person was Bill Underwood, a prominent real estate developer who had built hundreds of houses in the area. His forecast was vague and specific at the same time: “As long as there is a lender to finance it, there is a builder who will build it.” His point is that the traditional market forces of supply and demand are not the only factors when considering whether something will be done.
Discussion of debt, deficits and monetary policy is boring and almost certain to turn off some people. But the subject must be receive constant attention.
The conventional wisdom is that the United States would never default on its debt. But for that to happen, something must give. Most economists agree that it is impossible to stay on the current course. The current national debt stands at nearly $8 trillion, and Obama administration officials have estimated that there will be $1-trillion-plus shortfalls through 2011, followed by $700-billion-plus shortfalls through 2019. For lenders to keep lending to a questionably creditworthy borrower, the first thing that would happen is interest rates would go up. The government would find itself paying a greater percentage of the nation’s gross domestic product. Then the cutting would have to start.
To be fair, some economists maintain that the country can stand more debt.
Some have said that the massive debt and concomitant interest rates are the only way to stop federal spending on federal programs. If the federal budget has so much interest to pay, then it will be forced to eliminate programs. Now there is some financial discipline for you.
So the question is: How long can the U.S. government keep borrowing money? To paraphrase Bill Underwood, “As long as there is a lender to finance, the government will borrow.” The follow-up question is the one that is now being asked more frequently: What happens if there is not a lender to lend it?
Phil Hardwick is coordinator of capacity development at the John C. Stennis Institute of Government.