Debt leaves no wiggle room for disasters

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney) -- Earthquakes. Tsunamis. Nuclear crises. Disasters are one reason why Washington should get the government's long-term debt under control.

The argument is straightforward, but not often discussed: Already high levels of debt leave the economy even more vulnerable in the wake of unexpected natural and man-made disasters.

"The U.S. has little or no budget to deal with unexpected catastrophic events," said David Walker, the former U.S. comptroller general and now head of the Comeback America Initiative. "Whatever has to be done is done, but it adds to our existing debt problems."

Indeed, the United States traditionally has not had trouble borrowing to help fund disaster relief, said veteran budget expert Stan Collender, who founded the blog Capital Gains and Games.

"The classic example was [President Bush's] response to Katrina when he channeled Lyndon Johnson and said he was going to spend whatever it takes to fix the problem."

In the wake of the catastrophe in Japan, it is likely rates on U.S. Treasurys -- the typical safe-haven investment in times of world crises -- could remain low for awhile.

But while disaster funding is essential, it could also accelerate the journey to a fiscal crisis, which deficits hawks predict will occur at some point if Congress doesn't do anything to reduce the growth in U.S. debt.

Left unchecked, by 2020, 92 cents of every federal tax dollar will be needed just to pay for Medicare, Medicaid, Social Security and interest on the debt.

Broadly speaking, the United States could really be in the soup when interest rates start to rise from the near-historic lows the country has enjoyed in the past few years. And when will rates rise?

First, when the world economy fully recovers because the private-sector will be competing with Uncle Sam for investors' money.

Second, Walker said, "when the market loses confidence in the willingness -- not the ability -- of elected officials to make tough choices."

And since disasters are unpredictable, there's no telling the market's mood in advance.

A disaster destroys a country's assets, making it worth less relative to its liabilities, and that could make the country a less creditworthy borrower in investors' eyes, said Douglas Holtz-Eakin, a former Congressional Budget Office director who now runs a Republican think tank.

That, in turn, could push interest rates higher.

At that point, lawmakers may decide they can't afford to fund disaster relief simply out of borrowed funds given the country's already large borrowing needs. So they might opt for spending cuts and tax increases to cover some of the cost.

But if those changes prove to be too draconian, that could hurt economic growth and tamp down tax receipts, which in turn could increase the government's need to borrow.

Whatever the catalyst, Walker said, rates will rise at some point, whether modestly or drastically. "Under optimistic assumptions, [the debt situation] ugly. Under realistic assumptions, it's horrific."

Markets are looking for some reassurance that the country has a credible plan to reduce U.S. debt over the long run, even if the measures in the plan wouldn't go into effect right away. Until lawmakers produce such a plan, or at least provide a series of stringent budget controls while they work on a plan, Walker said, "we're playing a dangerous game." To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,678.23 -40.31 -0.23%
Nasdaq 4,863.36 -13.16 -0.27%
S&P 500 2,056.15 -4.90 -0.24%
Treasuries 2.01 0.09 4.53%
Data as of 12:08am ET
Company Price Change % Change
Bank of America Corp... 15.42 0.01 0.06%
Cisco Systems Inc 27.09 -0.37 -1.35%
Apple Inc 124.24 0.86 0.70%
Intel Corp 30.08 0.19 0.64%
Micron Technology In... 26.66 0.09 0.34%
Data as of Mar 26
Sponsors

Sections

Lots of attention is paid to college graduation rates of lower-income students, but many middle-class kids don't finish their bachelor's degrees either. More

Oculus chief scientist Michael Abrash uses 'The Matrix' to pitch virtual reality at F8, Facebook developer conference. More

Startup PredictifyMe's groundbreaking technology could help protect against school bombings More

The IRS has paid out more than $191 billion in refunds so far this tax season to 66.1 million filers. More