by Gary North: Lincoln’s
Gettysburg Address, If He Had Been More Honest
economists and analysts who have warned that we are facing a Federal
debt cataclysm have now received grudging confirmation from a most
unlikely source: the Council on Foreign Relations.
on Foreign Relations is the single most influential discussion forum
in the United States. Its quarterly journal, Foreign Affairs,
is therefore the most influential publication in the country and
therefore the world.
This is not
to say that every article is influential. Most of them are not.
They are often written by academic specialists in narrow fields.
Their opinions are rarely translated into government policy. Equally
rare is any Foreign Affairs article that winds up being quoted
five years later. The journal is a kind of sounding board. The relative
handful of key decision-makers in the organization want access to
what “the best and the brightest” are thinking. This includes lots
of academic busy-bees who are trying to break into the CFR’s inner
circle. The decision-makers are never sure who has the best insight
on the future, so the editor publishes lots of articles that sink
without a trace.
once in a while, one of these articles does become the basis of
long-term government policy. Such was the case with the 1947 article
by George Kennan, who published anonymously as “X.” It set forth
the entire post-War policy of containment of the Soviet Union. So,
it pays for columnists and analysts and investors to be aware of
what the latest issue of Foreign Affairs has to say.
issue features an article that I think will become a turning point.
A decade from now, or a quarter century from now, historians will
return to it and summarize its contents. It will be regarded as
the first official announcement in the highest of high places that
the Federal deficit is out of control, and that this in turn threatens
the survival of America’s position as the world’s most influential
is titled, “American Profligacy and American Power: The Consequences
of Fiscal Irresponsibility.” I have been reading Foreign Affairs
for about four decades, but I do not recall any article with
a title this inflammatory.
It is co-authored
by Richard Haass and Roger Altman. Haass has been the president
of the CFR since 2003. He was trained as a philosopher. He received
his doctorate from Oxford. He was a Rhodes scholar. In short, he
is a true representative of the Anglo-American Establishment, as
described by Georgetown University Professor Carroll Quigley’s book
of the same title. It
is free here.
Haass has been
a high-level policy-maker and advisor for two decades. This is from
his Wikipedia biography.
was Special Assistant to United States President George H. W. Bush
and National Security Council Senior Director for Near East and
South Asian Affairs. In 1991, Haass received the Presidential Citizens
Medal for helping to develop and explain U.S. policy during Operation
Desert Shield and Operation Desert Storm. Previously, he served
in various posts in the Department of State (1981-85) and the Department
of Defense (1979-80) and was a legislative aide in the U.S. Senate.
other postings include Vice President and Director of Foreign
Policy Studies at the Brookings Institution, the Sol M. Linowitz
Visiting Professor of International Studies at Hamilton College,
a senior associate at the Carnegie Endowment for International
I list all
this to indicate that he has the bona fides, or in another context,
he has made his bones. When he writes an article in “Foreign Affairs,”
anyone who wants to get a sense of what the latest thinking is in
high places would be wise to pay very close attention.
comes from the investment-banking/hedge-fund world. Citing his Wikipedia
was a general partner of Lehman Brothers from 1974 to 1977. From
1977 to 1981 he served as the Assistant Secretary of the United
States Department of the Treasury, during which time he helped oversee
the then-troubled financial affairs of Chrysler. In 1981, he returned
to Lehman Brothers, where he became the co-head of investment banking
and served on the board of the company and the management committee.
During the 1980s, he was a lecturer and adjunct professor at the
Yale School of Management. In 1987, Altman joined the newly-formed
Blackstone Group as vice-chairman, head of its mergers and acquisitions
advisory business and a member of the investment committee. . .
served as advisor to two presidential candidates: John Kerry in
2004, and Hillary Clinton in 2008.
two men jointly publish an article on what the United States is
facing, we can be sure that this opinion is well within the boundaries
of acceptable discourse at the top of the American Establishment.
I will go even further. The article was designed to establish the
starting point for discussion. This article, in short, is ground
is the senior academic representative of the Anglo-American Establishment.
He holds an endowed chair in international affairs at the London
School of Economics. He also holds endowed chairs at Harvard University
and the Harvard Business School. I can think of no one else in my
lifetime who matched his simultaneous endowments, in every sense.
he is well known to the American literati for his PBS series on
Ascent of Money, which was much better than PBS deserved.
He is all of 46-years-old, which is academic uppitiness on an unprecedented
scale in the humanities.
years, he has been issuing a series of warnings in the form of historical
comparisons and predictions. His most graphic historical comparison
is the Ottoman Empire after 1870. Here
is his assessment.
on closer inspection, we are indeed living through a global shift
in the balance of power very similar to that which occurred in the
1870s. This is the story of how an over-extended empire sought to
cope with an external debt crisis by selling off revenue streams
to foreign investors. The empire that suffered these setbacks in
the 1870s was the Ottoman empire. Today it is the US. In the aftermath
of the Crimean war, both the sultan in Constantinople and his Egyptian
vassal, the khedive, had begun to accumulate huge domestic and foreign
debts. . . .
had been made for both military and economic reasons: to support
the Ottoman military position during and after the Crimean war
and to finance railway and canal construction, including the building
of the Suez canal, which had opened in 1869. . . . In October
1875 the Ottoman government declared bankruptcy. . . .
words are no doubt what caught the attention of the senior members
of the CFR.
remains to be seen how quickly today’s financial shift will be followed
by a comparable geopolitical shift in favour of the new export and
energy empires of the east. Suffice to say that the historical analogy
does not bode well for America’s quasi-imperial network of bases
and allies across the Middle East and Asia. Debtor empires sooner
or later have to do more than just sell shares to satisfy their
begins with a statement that would not have been taken seriously
in academic or policy-making circles as recently as three years
ago. I will be quoting extensively from this article, because there
are readers out there who would otherwise say, “you are exaggerating.
No one at the CFR would say such things publicly.” They did say
them, and I have no need to exaggerate.
U.S. government is incurring debt at a historically unprecedented
and ultimately unsustainable rate. The Congressional Budget Office
projects that within ten years, federal debt could reach 90 percent
of GDP, and even this estimate is probably too optimistic given
the low rates of economic growth that the United States is experiencing
and likely to see for years to come. The latest International Monetary
Fund (IMF) staff paper comes closer to the mark by projecting that
federal debt could equal total GDP as soon as 2015. These levels
approximate the relative indebtedness of Greece and Italy today.
Leaving aside the period during and immediately after World War
II, the United States has not been so indebted since recordkeeping
began, in 1792 (p. 25).
The key word
is “unsustainable.” The authors go on to say that current interest
rates are low, but “this calm will not last.”
U.S. leaders do not act to curb this debt addiction, then the global
capital markets will do so for them, forcing a sharp and punitive
adjustment in fiscal policy.
Here, in the
refined and august pages of “Foreign Affairs,” the head of the CFR
has used the phrase “debt addiction.” This is right out of the hard-money
newsletter camp. So is the conclusion.
result will be an age of American austerity. No category of federal
spending will be spared, including entitlements and defense. Taxes
on individuals and businesses will be raised. Economic growth, both
in the United States and around the world, will suffer. There will
be profound consequences, not just for Americans’ standard of living
but also for U.S. foreign policy and the coming era of international
So far, this
is the soft-core stuff. The next section spells it out in no uncertain
ROAD TO RUIN”
is their section header. They begin by pointing out that, 12 years
ago, the Federal debt was 35% of GDP. The country had no tradition
of massive Federal debt, except during World War II. This ended
with the Presidency of George W. Bush and the bipartisan overturning
of a tradition of fiscal restraint. It was a combination of anti-tax
sentiment and pro-entitlement spending.
spending grew at two and a half times the rate it did during the
1990s. . . . Public debt per capita rose by 50 percent, from $13,000
to more than $19,000 over this period. The eight years of the Bush
administration saw the largest fiscal erosion in American history
This is an
accurate assessment. Austrian School analysts have been crying in
the wilderness for nine years, warning that this would happen. The
CFR and the Establishment media did not give an advanced warning.
Now, what we predicted has happened.
the recession of 2007–9, which Austrians also warned was coming
as early as 2006. We were dismissed as crackpots.
which had averaged 20 percent of GDP during the 1990s, fell to nearly
15 percent, while spending reached 25 percent in 2009. The deficit
for fiscal year 2009 hit a staggering $1.6 trillion, or nearly 12
percent of a GDP of just over $14 trillion. In nominal terms, it
was by far the largest in U.S. history. The deficit for 2010, at
$1.3 trillion and nine percent, was nearly as huge (pp. 26–27).
That is the
story of the deficits. What is the story of the total on-budget
debt is the dollar-for-dollar result of deficits, and it has essentially
tripled over this past decade, from $3.5 trillion in 2000 (35 percent
of GDP) to $9 trillion in 2010 (62 percent of GDP). The Congressional
Budget Office now sees it reaching 90 percent by 2020.
staggering numbers. Of course, the unfunded Medicare and Social
Security obligations dwarf the on-budget debt.
will rise. The authors say that interest expenses will equal the
entire Defense Department budget by 2020. In 2020, the Treasury
will have to borrow $5 trillion a year to roll over the debt. Don’t
forget the Treasury’s obligation to Fannie Mae and Freddie Mac.
The debt of government-sponsored enterprises is already $8 trillion.
State and local debt totals $3 trillion. They say that Washington
indirectly stands behind all of this. (They mean politically, not
legally.) Add to this unfunded state and municipal pension obligations
of $1 trillion. All this will get much worse after 2020.
post-2020 fiscal outlook is downright apocalyptic, for two reasons.
First, the aging of the U.S. population will drive sharp increases
in health care costs (and at the same time, more Americans will
be retired). Second, federal interest expense will rise exponentially,
as the Treasury’s borrowing costs grow with the debt.
What is the
threat? The Austrian School’s famous – and always previously
denied – crowding-out effect.
is this scenario so dangerous? One reason is that a large amount
of federal borrowing would eat up the stock of private capital that
is available to finance investment. A higher and higher percentage
of personal savings would be diverted to purchasing government debt
and away from productivity-enhancing investments in equipment and
technology. This would shrink the base of productive capital and
flatten gdp and family incomes. As more and more debt piled up,
growth would slow and Americans’ standard of living would fall.
do not say that the standard of living will cease to increase as
fast. They say that it will fall.
foreign central banks will not continue to support this increase
of debt. Interest rates will rise. The present safe-haven status
of T-bonds will disappear, they say.
come the spending cuts. Everything will be cut: defense, social
spending, and even Medicare and Social Security.
They see what
will happen to defense spending. The war in Afghanistan is now twice
as expensive as the war in Iraq (p. 31). They do not think that
the promised troop draw-downs will be anything more than token.
This is costing $100 billion a year. This will not be repeated.
building is a time-consuming, labor-intensive, and expensive exercise,
and for these and other reasons, it is unlikely to be repeated on
a scale approximating that of Iraq or Afghanistan for the foreseeable
future. This does not mean that there will not be wars of choice
– a conflict with Iran is a possibility given its nuclear ambitions
– but rather that such wars will be both less common and more
limited in their aims (p. 33).
Why do they imagine that a war with Iran would not result in expenses
rivaling those of the Iraq war? It would not be nation-building,
but it would be very expensive. Inciting the Shia paramilitary forces
in Iraq would not be nation-building. Sadr City would extend its
for a balanced budget, other than interest expenses, by 2015.
however, will require reducing Washington’s budget deficits by approximately
$300 billion a year – a large amount by any standard (p. 33).
Wait a minute.
They call for a piddly deficit reduction of $300 billion a year,
when the CBO projects deficits of $1 trillion a year out to 2020.
The CBO prudently refuses to say what will happen after 2020. There
is a serious statistical disconnect here.
“But the politics are difficult.” Difficult as in “running the hundred-meter
dash in six seconds flat.”
What is to
be done? Those old favorites: cut spending and raise taxes. What
is the chance of that?
bottom line is that it will be extraordinarily difficult to pass
a deficit-reduction program of the required magnitude (pp. 33–34).
That is the
bottom line politically. It is not going to happen. So, what is
the bottom line economically when the required reforms are not passed?
They refuse to say. I can hardly blame them. They do comment on
what will happen to the American Empire.
over two decades ago, the historian Paul Kennedy published his influential
study of the rise and fall of great powers. His thesis of “imperial
overstretch” was simple but important: the costs of carrying out
an ambitious and expensive overseas policy can undermine the economic
foundations of a state (p. 34).
To which I respond:
“Every dark cloud has a silver lining.”
They end their
article with this – a plea for fiscal restraint on the welfare
side, so that the nation can still pursue the course of empire.
is fiscal, economic, and political failures at home that are threatening
the ability of the United States to exert the global influence that
it could and should. In other words, it is not reckless American
activity in the world that jeopardizes American solvency but American
profligacy at home that threatens American power and security. The
American people and their elected representatives postpone solving
the country’s debt addiction at their great peril.
Establishment spokesmen see what is coming. The American empire
is about to sink in a sea of red ink. The debt-driven economic cataclysm
is going to hit. The empire will be crowded out, along with economic
state is going to become the welfare state. Then it will go bust.
Long before it goes bust, the voters will decide not to fund the
military-industrial complex’s lucrative game plan. When push comes
to shove, the voters will shove the American empire away from the
trough. This will end the dreams and schemes of the faceless experts
who have quietly directed the ship of state ever since 1921. Their
gravy train will come to an end.
not happen to a more deserving bunch of people.