Why the U.S. Debt is so Scary II. A Crisis Could be Nearer Than We Think


I am a candidate in the May 15 Nebraska Republican Primary for the U.S. Senate because the incumbent, Deb Fischer, is doing nothing about our enormous and out-of-control national debt. In fact, she has recently voted twice, for the new tax law and budget, to make our debt even worse than it already was. My last post quotes a reader of my blog as saying that deficit hawks need to make our soaring debt sound scary to ordinary citizens who don’t understand how it will affect their own lives.
The analyst Desmond Lachman from the American Enterprise Institute makes it sound even scarier by predicting a new 2008-2009 style crisis within the next year.  According to Mr. Lachman there are two basic reasons to fear another full-blown global economic crisis soon:

  • First, we have in place all the ingredients for such a crisis. The housing price bubble before the 2008-2009 crisis has been replaced by a global asset price bubble, for both stocks and bonds. A second key ingredient is that the global debt-to-GDP level is significantly higher than in 2008.

  • Second, due to major mistakes by the Federal Reserve and the U.S. Administration, the U.S. economy is in danger of soon overheating, which will bring inflation in its wake. With very low unemployment, the Fed has let low interest rates linger for too long. And the U.S. economy has now received a double fiscal stimulus with unfunded tax cuts and a new two-year spending boost.
  • The Federal Reserve now has two unattractive choices. It can raise interest rates quickly and burst the global asset bubble, or it can proceed at a slower pace and ignore the very serious inflation risk.

Conclusion. With a very high and rapidly growing national debt, along with unusually low interest rates which will be pushed up soon one way or another, we should prepare ourselves for another crisis in the near future.