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Current Obama spending make the debt high and financial collapse inevitable
[Carolyn Lochhead, Chronicle Washington Bureau SFGate “National debt seen heading for crisis level” 4/5/10, http://articles.sfgate.com/2010-04-05/news/20835562_1_national-debt-deficit-spending-cuts]
Health care may have been the last big bang of the Obama presidency. With ferocious speed, the financial crisis, recession and efforts to combat the recession have swung the U.S. debt from worrisome to ruinous, promising to handcuff the administration. Lost amid last month's passage of the new health care law, the Congressional Budget Office issued a report showing that within this decade, President Obama's own budget sends the U.S. government to a potential tipping point where the debt reaches 90 percent of gross domestic product. Economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University have recently shown that a 90 percent debt-to-GDP ratio usually touches off a crisis. This year, the debt will reach 63 percent of GDP, a ratio that has ignited crises in smaller wealthy nations. Fiscal crises gripped Canada, Denmark, Sweden, Finland and Ireland when their debts were below where the United States is shortly headed. Japan's debt is much higher, but most of it is held domestically, and Japan's economy has been weak for 20 years. "I really don't think we want to be like Japan," said UC Berkeley economist Alan Auerbach.
We are on the verge of a super debt cycle- NOW is key to solving national debt
Reynolds and Goodman 10
[Garfield Reynolds and Wes Goodman, Bloomberg Financial Analysts, “U.S.'s $13 Trillion Debt Poised to Overtake GDP: Chart of Day” 6/4/10, http://www.bloomberg.com/news/2010-06-04/u-s-s-13-trillion-debt-poised-to-overtake-weigh-down-gdp-chart-of-day.html]
President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.” The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades. “Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.” Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co. in Newport Beach, California, said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.” Dan Fuss, who manages the Loomis Sayles Bond Fund, which beat 94 percent of competitors the past year, said last week that he sold all of his Treasury bonds because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. Obama is borrowing record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s. “The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury,” Boston-based Fuss said. “Do you really want to buy the debt of the biggest issuer?”
Failure to reduce debt causes U.S.-China leadership switch
[Gerald F. Seib, assistant managing editor and the executive Washington editor of The Wall Street Journal, “US status, security weakened by deficit” 2/3/10, lexis]
THE US federal budget deficit has graduated from pressing national concern into a fully fledged national security threat, as the US government this year will borrow one of every three dollars it spends, with many of those funds coming from China. The budget plan released yesterday by the White House shows a $US1.6 trillion ($1.8 trillion) deficit this year, $US1.3 trillion next year, $US8.5 trillion for the next 10 years combined -- assuming congress enacts US President Barack Obama's proposals to start bringing it down, and that the proposals work. The numbers are seen as an economic and domestic problem but they have ramifications for the US's ability to continue playing its traditional global role. Experts warn the US government's heavy borrowing from foreign countries will weaken the US's standing and its freedom to act, while it strengthens China and other world powers including cash-rich oil producers. It puts long-term defence spending at risk and undermines the US system as a model for developing countries -- it reduces the aura of power that has been a great intangible asset for presidents for more than a century. ``We've reached a point now where there's an intimate link between our solvency and our national security,'' said Richard Haass, president of the Council on Foreign Relations and a senior national security adviser in both the first and second Bush presidencies. ``What's so discouraging is that our domestic politics don't seem to be up to the challenge. And the whole world is watching.'' The classic, narrow definition of national security threats already has expanded in ways that make traditional foreign policy thinking antiquated, with the list of US security concerns now including dependence on foreign oil and global warming, for example. But the budget deficits also threaten Americans' national security as they make the US vulnerable to foreign pressures. The US has about $US7.5 trillion in accumulated debt held by the public, about half of that in the hands of investors abroad. Each American next year will chip in more than $US800 just to pay interest on this debt and the situation means the US government is dependent on the largesse of foreign creditors and subject to the whims of international financial markets. A foreign government, through the actions of its central bank, could put pressure on the US in a way its military never could. Even under a more benign scenario, a debt-ridden US is vulnerable to a run on the US dollar that begins abroad. Either way, Mr Haass says, ``it reduces our independence''. Chinese power is growing as a result. A lot of the deficit is being financed by China, which is selling the US many billions of dollars of manufactured goods, then lending the accumulated dollars back to the US. The IOUs are stacking up in Beijing. So far this has been a mutually beneficial arrangement, but it is slowly increasing Chinese leverage over American consumers and the US government. At some point, the US may have to bend its policies before either an implicit or explicit Chinese threat to stop the merry-go-round. Just last weekend, for example, the US angered China by agreeing to sell Taiwan $US6.4 billion in arms. At some point, will the US face economic servitude to China that would make such a policy decision impossible? This year, thanks in some measure to continuing high costs from wars in Iraq and Afghanistan, the US will spend a once-unthinkable $US688bn on defence. Staggering as the defence outlays are, the deficit is twice as large. The much smaller budgets for the the US's other international operations -- diplomacy, assistance for friendly nations -- are dwarfed even more dramatically by the deficit. These national security budgets have been largely sacrosanct in the era of terrorism. But unless the deficit arc changes, at some point they will come under pressure for cuts. The US model is being undermined before the rest of the world. This is the great intangible impact of yawning budget deficits. The image of an invincible US had two large effects over the last century or so. First, it made other countries listen when Washington talked. And second, it often made other peoples and leaders yearn to be like the US. Sometimes that produced jealousy and resentment among leaders, but often it drew to the top of foreign lands leaders who admired the US and wanted their countries to emulate it. Such leaders are good allies. The Obama administration has pledged to create a bipartisan commission charged with balancing the budget, except for interest payments, by 2015. The damage deficits can do to the US's world standing is a good reason to hope the commission works.
The Switch leads to a massive power war
David, Zweig, Director of the Center on China’s Transnational Relations at Hong Kong University of Science and Technology, and Bi Jianhai, post-doc at the Center, 05, Foreign Affairs, “China’s Global Hunt for Energy”, September/October, proquest
Although China's new energy demands need not be a source of serious conflict with the West in the long term, at the moment, Beijing and Washington feel especially uneasy about the situation. While China struggles to manage its growing pains, the United States, as the world's hegemon, must somehow make room for the rising giant; otherwise, war will become a serious possibility. According to the power transition theory, to maintain its dominance, a hegemon will be tempted to declare war on its challengers while it still has a power advantage. Thus, easing the way for the United States and China--and other states to find a new equilibrium will require careful management, especially of their mutual perceptions.