Micawber understood the basic rule of finance: if you spend less than you earn, then you are a happy man; if you spend more than you have, then you end up in debtors’ prison. Unfortunately, our Washington politicians disdain Micawber’s advice, appearing more disconnected than ever from the rules of finance. They are expanding our debt, increasing our debt service, unnerving our creditors; they are spending as if the rules of finance for individuals have no relevance for a country; they are borrowing $.46 for every dollar they spend. 

Tony Blankley’s Death by Deficits is typical of the commentary. He summarizes the approaching financial landscape—a potential wreckage of disastrously devastated dreams—if Washington doesn’t make a course correction: federal debt will be more than $15 trillion in 2012, and annual interest probably will be between $1 trillion and $1.7 trillion, and deficits will average about $1 trillion a year -- $22 trillion by 2019 with yearly interest payments more than $2 trillion. And how much is a trillion dollars, you ask? Well, try to visual a trillion dollars this way: “A trillion dollar bills laid end to end would reach the sun or you spend a dollar per second for 32,000 years.”              

A Shawn Tully, June 2009, Fortune article, echoes Blankley’s concern, focusing on the future individual taxpayer share of the debt load at $155,000 in a decade, and discussing how chronic deficits are putting the country on a glide path to fiscal collapse. And Arthur Laffer explains that the unfunded liabilities of federal programs are over the $100 trillion mark; that U.S. GDP and federal tax receipts are at about $14 trillion and $2.4 trillion respectively; that such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

There is incoherence—even otherworldliness— between our undisciplined spending and our ability to pay. A Heritage Foundation chart in March 2009 visually captures (like the teeth of a bear trap embedded into your foot) the current runaway spending, plotting also the almost Scrooge-like budgets of President Bush for comparison.  However, some countries are taking a different path. John Key, for example, the New Zealand Prime Minister is trying to lower taxes, save capital, and make NZ a more business friendly country for the recovery, when it comes. Regrettably our politicians rejected the disciplined approach, the path of fiscal restraint. 

Kevin Hassett focuses on the underlying difference between what is essentially the New Zealand approach and our own:  

There are the so-called Ricardian governments, which wisely plan their taxes and spending so that they balance over time. Then there are the Nonricardian governments, which spend and borrow until they collapse. Ricardian governments borrow in bad times and lend in good. Nonricardian governments look like a Madoff investment pool and borrow themselves into oblivion. 

He explains that the real danger is the Nonricardian governments, like ours, destroy themselves with capital markets getting drier than the Sahara desert, as lenders bail due to their recklessness. And his eye-catching conclusion hits you like a right cross to the solar plexus: “If capital markets lose faith in a government’s long-run commitment to fiscal discipline, it’s the economic equivalent of a meteor strike.”

Speaking of lost faith, an ominous dark cloud of faith lost is the response by Chinese college students at Peking University, when Treasury Secretary Tim Geithner assured them that China’s investments in the U.S. were safe; he drew a reverberating echo of laughter; a level of derision—reported around the world—reminiscent of the Columbia students response to the Iranian President Mahmoud Ahmadinejad’s answer to students that they don’t have homosexuals in Iran.

The Chinese, as a matter of fact, have been raising almost weekly concerns—and they are not alone—about the safety of their U.S. holdings for some time now, even warning the U.S. Fed, not to print money to inflate our way out of debt. The Chinese (and others) have loaned us more money than Croesus, but will they keep lending?   

As Micawber knew, if creditors lose confidence—the federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years; with no change in policy, it could hit 100 per cent of GDP in just another five years—then for each additional cash advance, creditors demand more and debtors commit more. And how much more would they demand to restore their confidence if lenders refuse to accept our dollars, or if our credit worthiness is downgraded and we lose our triple-A rating for sovereign debt?                                                                                                        

And when the inevitable demands are placed on the table, if we are to get the breathtaking piles and piles of money we need to service our debt, to pay retirements, to deliver welfare payments, to fund our various unfunded liabilities, to distribute salaries to more federal employees than the population of a small country, then what will we have to pony up? Perhaps creditors demand the government’s TARP holdings in AIG, General Motors, banks and financial institutions; or they insist upon transfers or pledges of title to federal lands including park lands as security; or they insist we sell oil rights beyond 20 miles of the West coast if we are to receive capital critical for survival.

And so dear reader, will Washington and President Obama step back from the fiscal abyss with a course correction or do they keep spending and borrowing until there is financial collapse?