Americans are forever grumbling about government gridlock. But the whole
game changes when a credit-rating agency begins to echo them. On April 18,
Standard & Poor’s, one of those mysteriously powerful firms that grade the
financial strength of bond issuers, announced that it was starting to wonder
whether the mighty U.S. government could be counted on to repay its
creditors. It was a big moment: the first time in seven decades of
monitoring Uncle Sam that S&P had sounded such a warning. “The sign of
political gridlock was a key determinant in our outlook change,” explained
an S&P executive. “Twilight in Washington,” read a Financial Times
caption.
While there were certainly analysts who regarded the timing of the downgrade
as somewhat political , few questioned its
fundamental merit. The Congressional Budget Office projects that within 12
years, federal debt could reach 100% of GDP, putting the U.S. deeper in the
hole than bankrupt Ireland or Portugal; the bond raters from S&P have good
reason to be worried. America’s largest creditor, China, which has been
wagging its finger about the state of U.S. finances for the past three
years, took the opportunity recently to urge the U.S. to adopt more
“responsible measures” to protect investors. This came on the back of a hand
slap from the International Monetary Fund just a few weeks prior. The
IMF had rebuked the U.S. for its lack of a “credible strategy” to stabilize
its debt — an indignity once reserved for poor countries.
Having survived the melodrama of the threatened government shutdown,
Americans are waking up to the fact that the real budget battles lie ahead.
The shutdown derby produced a budget that will supposedly cut $38 billion
from this year’s federal spending. But the real cuts will be far smaller and
will scarcely dent the national debt of $14.2 trillion. Republican budget
hawks in Congress, championed by the House Budget Committee chairman,
Representative Paul Ryan of Wisconsin, are now demanding cuts measured in
the trillions — and threatening to not raise the permitted federal-debt
ceiling unless they get them. That would force the Treasury to cease
borrowing once the ceiling is reached this summer, causing chaos in
government programs and a renewed recession.
Even assuming that Ryan and his followers don’t resort to this nuclear
option, the questions that worry the credit raters at S&P will remain
ominously unanswered. How will the U.S. get a grip on its vast debt, which
makes it the world’s largest debtor after Japan? Do the nation’s leaders
have the courage to cut health entitlements or Social Security? Will they
close popular tax loopholes like the mortgage-interest deduction? Relative
to the grand issues of statecraft — war and peace, the battles against
AIDS and climate change — these bean-counting problems may sound mundane.
But they nonetheless present a defining challenge for today’s generation,
with far-reaching consequences for the U.S.’s standing in the world. Indeed,
history speaks unnervingly on this matter: power that is built on debt is
often power that will crumble.
Consider a pair of cautionary tales from Egypt. A century and a half ago,
Egypt was a New World wonder. The U.S. Civil War had destroyed cotton
exports from the American South, causing an eightfold jump in prices that
greatly enriched Egyptian growers. The country’s ruler, the khedive Ismail
Pasha, splurged so enthusiastically on railways that Egypt, which then
encompassed modern Sudan as well as parts of Libya and Eritrea, boasted more
miles of track per habitable acre than any other country. In 1869, Egyptians
celebrated the opening of the Suez Canal, an engineering marvel that sliced
through the right shoulder of Africa. Notables from as far afield as London
and St. Petersburg flocked to witness a ceremonial procession of ships down
the canal led by Empress Eugnie in the French imperial yacht. The
festivities stretched over three weeks, in a sort of 19th century cross
between the schmooze fests of Davos and the bacchanalia of the Rio Carnaval.
But even before the French Empress sailed through the canal, the Confederate
surrender at Appomattox was bursting Egypt’s bubble. With the end of the
Civil War, cotton prices began to fall, and the khedive’s ostentation could
be sustained only by promiscuous borrowing. From 1867 to 1875, Egypt’s
national debt skyrocketed from 3 million to 100 million; meanwhile, cotton prices kept falling to pre–Civil War levels. The debt became unrepayable. What followed was a lesson in how quickly debt can compromise a nation’s sovereignty. In 1875 the cash-strapped khedive sold Egypt’s stake in the Suez company to the British, who acquired the financial and geopolitical crown jewel at the distressed price of 4 million. The following year, Egypt defaulted on its debt, and in 1878 it was forced to accept a government whose main function was to keep foreign creditors happy — the Finance Minister himself was British. In 1882 a British military intervention sealed Egypt’s fate as a colony in all but name. In the language of imperial statecraft, it became a “veiled protectorate.”
Thus ended the first installment of the lesson taught by Suez. To nervous
Americans today, the second installment is more subtle but also more
chilling. By the middle of the 20th century, Britain, the superpower that
had seized the advantage in Egypt’s debt crisis, was suffering one of its
own, brought on by unsustainable borrowing to fight two world wars. Its
leaders still believed they bestrode the world. But their power was
illusory. After World War II, Britain was deeply in debt to the U.S., an
advantage President Eisenhower used to exact various political concessions,
including the surrender of the Suez Canal back to Egypt.
