I grew up hearing a saying, “you missed the forest for the trees” and for the longest time, I wondered exactly what that meant. It wasn’t until a funny, skinny and chain-smoking reporter at the defunct The San Juan Star gave me a definition. He said, “It’s simple, the saying means that sometimes we focus on something so much that we lose perspective of everything else.”
To me, this whole debate about raising the debt ceiling reminds me of that “missing the forest” bit.
In case you are wondering why we should care about this whole DEM-REP feud on the debt ceiling and possible default on August 2nd, here are some possible effects: If the U.S. starts defaulting on its debt, everybody who owns U.S. stocks and bonds will take a big hit. This will affect the big banks, corporations and even countries, pushing some toward bankruptcy.
Your 401(k) and/or pension will suffer big losses. It could take a long time to rebuild those funds, delaying retirement or making it impossible. It will also have an impact on our currency valuation and future interest rates. The mere possibility of defaulting has already impacted the dollar, which is furiously losing ground against the Brazilian real, Australian dollar and Swiss franc, which are fast becoming the currency of choice.
Go-to strategic move
Just as a point of reference, raising the debt ceiling is not new and is a strategic move that has been used to ensure continuity of government programs and operations; it has been raised 74 times since 1962 and 10 times since 2001. In nominal dollars, the net public debt rose and then fell between 1992 and 2000, from $3 trillion in 1992 to $3.4 trillion in 2000. Thank you Mr. Clinton!
During President George W. Bush’s administration, the public debt increased from $5.7 trillion in January 2001 to $10.7 trillion by December 2008, an 88 percent increase, driven mostly by our wars in Iraq and Afghanistan. So far, under President Barack Obama, the debt had increased from $10.7 trillion to $14.2 trillion by February 2011 — 33 percent in a two-year period, which trended, may reach close to 70 percent growth.
Today, our public debt is estimated at close to $14.5 trillion, or approximately 98 percent of the estimated $14.7 trillion GDP. The biggest challenge for the U.S. government is two-fold: avoid payment default on August 2nd and then avoid downgrade by the credit rating agencies whose perspective is that the debt-GDP ratio should be around 70 percent, either by a reduction of the public debt by $4 trillion to $5 trillion, an increase in GDP by that same amount, or a combination of the two.
Given the global economic reality, the debt reduction is the most likely option that will have a huge and immediate impact on everybody, but especially on the lower socio-economic strata, where most government program beneficiaries reside.
The complexity of the task at hand is significant, and some argue worst than the challenge faced during the Great Depression. The economies of the developed countries are in shambles and can do very little to assist the U.S., while the major U.S. creditors — China, the U.K., Japan and Brazil — have already stated that they are in no position to assume more risk. In this western, the cavalry is not coming to the rescue.
Why should we care? This debt is not mine! Well yes it is! The $14.5 trillion debt owed by the U.S. government will be paid by us, be it in higher interests, higher taxes, less and more expensive public services, higher inflation and so on.
In a related story and to add insult to injury, Mr. Donald Trump recently urged Republicans to a no-deal scenario on this critical issue. Reason being that the resulting default would ensure Obama is not re-elected. He goes on to say, “unless the Republicans get 100 percent of what they want, and that may include getting rid of ‘Obamacare,’ which is a total disaster, then they should not make a deal other than a minor extension that would take you before the election, which would ensure Obama doesn’t get elected, which would be a great thing.” Can anybody say to Mr. Trump, “You’re fired!?”
Besides the fact that Mr. Trump clearly does not care for the average American, his comments are as irresponsible as they come and show a total disregard for the future of the U.S. He acts as if the U.S. economy was another gambling chip at a Taj Mahal Casino table.
Mr. Trump also stated, “When it comes time to default, they’re not going to remember any of the Republicans’ names. They are going to remember in history books one name, and that’s Obama.”
Going back to the “old saying,” it would seem that Mr. Trump is focusing on a political benefit (the famous tree), while missing the dire consequences and global impact of a debt default (the famous forest.)
In my opinion, banging his head on the tree and staying away from the forest would better serve Mr. Trump.
In the end, we all are hoping, and it’s unlikely that the U.S. will default on its upcoming public debt payments. Doing so will not yield winners at the table, but I guess we will be glued to the TV until the last minute.
It’s time for the elected officials to stop being politicians and assume their roles as caretakers of the country’s future.
Let’s focus on what’s important!