Written by Carlos T Mock, MD   

America’s debt is piling up at a rate not seen, outside of the Second World War, since record keeping began in 1792. Federal debt has nearly tripled in the past 10 years, from $3,500bn to more than $9,000bn. The ratio of debt to gross domestic product has doubled. Federal debt, of course, is the dollar-for-dollar product of deficits. Each of the past three years has seen trillion-dollar deficits, each larger in both absolute and proportionate terms than ever recorded before 2008.

Unfortunately, this picture gets worse. The Congressional Budget Office projects that the debt to GDP ratio will hit 90 per cent by 2020; the International Monetary Fund projects that it will reach 115 per cent. These are levels usually associated with Italy or Greece. The US will reach them within nine years.

The Solution: a negotiated agreement between the president and congressional leadership. The scale of deficit reduction needed to stabilize the US debt to GDP ratio, however, is large – between $200bn and $300bn annually. That means reducing entitlements and discretionary spending (anathema to congressional Democrats) as well as defense cuts and higher taxes (seen as toxic by Republicans). Bridging those differences promises to be a Himalayan task and is unlikely today. Only Mr. Obama can begin to change this dynamic.

This is the right moment because, for all the commentary on deficits and debt, the danger is greater than most Americans understand. Not even the US can indefinitely run up debt at the current, astronomical rate. If our leaders do not rein it in, global financial markets will ultimately force a solution. In other words, adjustment will either be done by the US or to it. The latter scenario would mean The American economy will be changed; by larger than necessary changes, indiscriminate, and imposed virtually overnight. No one can predict when markets might move on America, but it is a question of when, not if.

The result would be an age of American austerity. No category of federal spending, from defense to Medicare, would be spared. Taxes on most or all individuals and businesses would rise. Economic growth would slow. The consequences for America’s international role, and for world stability, would be profoundly negative.

Those who claim the debt crises that have struck Greece and Ireland recently and so many others cannot hit America should study the events of 1979. That was the period of stagflation, the Iranian oil embargo and President Jimmy Carter. The US dollar had been weakening for months but, when Mr. Carter proposed a larger than expected budget deficit, markets revolted. The dollar plunged, global markets fell and an international rescue of the dollar was required. Within days, the US was forced to halve its budget deficit and the Federal Reserve had to raise rates sharply. America was not immune from global financial rejection then, and it is not now.