O’Neill On U.S. Debt

From former Treasury Secretary Paul O’Neill’s interview with Frontline:

[The national debt] is going up every day. …

Here’s the fundamental problem: How much money can a society borrow before it begins to have negative effects on our ability to borrow any more? … When you get to the point that people won’t loan you any more money as a government, you’ve got a horrendous problem. And it’s happened to governments — in Argentina, most famously, in recent times. Mexico was kind of in that situation until we gave them a very big loan.

… Now, what happens before that is governments raise the interest rates so that people will loan them money. … Unfortunately, when interest rates get that high, economic activity slows down, and eventually it will stop. We’re not at that level yet with our $11 trillion worth of acknowledged debt, but there’s a bigger problem out there, which is $53 trillion worth of unfunded liabilities that we, the American people, have signed up for. Most of the American people don’t know that we have these so-called unfunded liabilities. An important part of that is Social Security and Medicare. …

… This financial crisis in retrospect will look like a child’s game compared to what we’re headed into when we have to begin raising enormous amounts of money through floating debt, or reneging on the obligations we made to people that they thought were good and clear from Social Security benefits and Medicare benefits. …

I would invite people who think you can wish this away simply by denying it — they need to spend enough time to investigate the facts for themselves. And if they can still believe that, I’d say they need remedial education in arithmetic. This is not a problem of quantum physics; this is about simple arithmetic, and the American people need to be educated about the simple arithmetic that’s going to kick our teeth in not too far down the road. …

Right now we’ve got this financial crisis, and one day we’re spending $700 billion, and the next day that gets trumped by “That’s not enough; we need another $300 billion.” And then we have people saying, “That’s not enough; we need $500 to $700 billion more.” And so if that’s all right and there are no limitations, why don’t we make it $4 trillion, or $10 [trillion]?

… Why don’t we just give every American a million dollars a year if it’s really in our power to endlessly borrow money? And this is what I mean by education. People need to understand why if $1 trillion is good, $10 trillion isn’t better.

… We could get ourselves into a position where people won’t take our paper anymore. And that’s a really desperate position to be in when we’ve killed the idea of good faith and credit of the United States. That could destroy our society as we’ve known it.

… You’re asking a very radical question: Could the federal government lose its AAA rating? And the answer is yes. We dare not let that happen, but the answer is yes.

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