Eric Hovde, a candidate for the Republican nomination for US senator in the August 14 primary, claims that "the country is headed for an economic collapse" and called for a Balanced-Budget Amendment to the US Constitution. (1) Is he right?
1. No US Debt Crisis
The day Hovde made his prediction 10-year US treasury notes were selling for an annual yield of 1.66%.(2) This means that investors are willing to buy American sovereign debt for minuscule interest, probably because these notes are about the safest investment in the world. Unlike Greece, Italy and Spain, whose sovereign debts are denominated in euros, ours is denominated in dollars, which our treasury can print at will. Thus, the US will never default on its treasury obligations. If we deliberately inflate the dollar (to pay off the debts), the main effect will be to make imports more expensive and our exports cheaper, which will not lead to an economic collapse. The facts that corporate earnings have never been higher and the Dow Jones Industrial Average (12,574) is nearly 90% of its all-time high do not support Hovde's prediction of imminent doom.
2. Debt to China Undesirable
China holds nearly a trillion dollars of US treasury debt, and that rises every year. Even though there is no risk of US default on this debt, the Chinese could stop buying our treasury bills at any time. Since we rely on China to roll-over existing debt besides buying new debt, the effect on the US Treasury would be catastrophic. No nation, especially a dictatorship with ambitions to dominate Asia, should have such power over our government. Unless we wean ourselves off this funding source, we are not a truly independent sovereign nation.
3. Fiscal Flexibility Needed
Prominent British economist John Maynard Keynes (1883-1946) recommended that governments could stabilize their economies by running fiscal deficits in times of recession and surpluses in times of prosperity. President Richard Nixon declared that "We are all Keynesians now!" But a Balanced-Budget Amendment to the Constitution would make it impossible to employ this strategy in recessionary periods. Recessions would deepen into depressions, and there would be no way out. Congress needs the flexibility to raise and lower taxes and spending in accordance with prevailing economic conditions, just as businesses sometimes find it advantageous to borrow money to expand, even though it means that in some years spending will exceed revenues.
Given the current unemployment rate of about 8.2%, it would be unwise to even try to eliminate the deficit right now. Instead, we should gradually eliminate unnecessary spending while raising some tax rates to narrow the deficit each year. We had a budget surplus as recently as Fiscal Year 2000, and we can again. But not if we follow Mr Hovde.
Gerald S Glazer
(1) Milwaukee Journal Sentinel, June 13, 2012, page 3B.
(2) Same issue, page 1D.