(CNSNEws.com) - Sen. Judd Gregg (R-N.H.), along with other members of Congress and leading financial experts, is warning that the United States is in danger of being in the same dire situation as Greece – national bankruptcy -- in seven to 10 years unless the federal government radically curtails spending.
Last month, Gregg, the ranking Republican on the Senate Budget Committee, said the United States will “essentially be where Greece is in about seven years.”
“If we continue to spend much more than we take in," he says. "We'll double our debt in five years and triple it in 10 years and essentially be where Greece is in about seven years,” Gregg told the Fox Business Network in May.
Rep. Paul Ryan (R-Wis.), the ranking Republican member of the House Budget Committee, has also said that the United States has been making decisions similar to that which caused Greece’s debt crisis.
“We’re on this trajectory where we will have more takers than makers in society. We’re going to have more people taking from government than living on their own, paying taxes and contributing into it. That is a dangerous position to be in, that’s the position Greece is in,” Ryan said in a radio interview on News/Talk 1130 WISN in May.
Brian Riedl, lead budget analyst at The Heritage Foundation, agrees that unless the federal government radically curtails spending, a debt crisis as severe as or worse than that now happening in Greece will erupt in the United States in as soon as seven to 10 years.
“We can say that we will be at about the Greek level of debt probably in the next seven to 10 years,” Riedl told CNSNews.com. “There is no reason that with the same economic policies at the same level of debt, that the United States won’t face the same economic and financial crisis as Greece.”
But for Reidl, who recently issued his own report on federal spending, seven to 10 years may be too optimistic.
“It’s very tough to predict when a financial crisis will hit, because much of it depends on bond market psychology,” Reidl said. “As soon as the bond market decides the U.S. may not be able to fully service its debts, they will respond with a flight from our currency. When the bond market makes that decision is really anybody’s guess. It could be two to three years from now, it could be 10 years from now.”
Given the relative economic strength of the United States compared to many other nations, and President Obama’s promises of job creation thanks to the Recovery and Reinvestment Act, it may strike some as unfathomable that the United States could sink to the level of Greece’s economy.
Still, the current numbers are frightening. The U.S. national debt now stands at more than $13 trillion, according to the U.S. Treasury Department. In addition, the estimated U.S. federal deficit in 2009 was $1.5 trillion.
In order to compare the economic situations between countries, economists often look at the figures as a percentage of each country’s Gross Domestic Product (GDP). GDP represents the value of all of the goods and services produced by a country within a given year.
When Greece started to admit its debt problems last November, the government estimated its deficit last year was 12.7 percent of its GDP – a figure that Eurostat, the European Commission’s official statistics agency, said was too low and which it revised to upward 13.6 percent.
Meanwhile, the U.S. deficit is on track to become 10.3 percent of GDP in 2010 under President Obama’s budget.
In his report, “Federal Spending by the Numbers,” Reidl pointed out that the projected 2010 U.S. deficit would represent the biggest percentage of GDP the United States has seen since World War II.
That same report shows that average deficits over the next 10 years will be almost $1 trillion instead of returning to pre-recession levels of $100 billion to $400 billion. The projected deficits, Riedl pointed out, would double the current national debt.
However, spending -- not shrinking revenue -- is the principal cause, according to the report, which said “90 percent of the rising long-term budget deficits are driven by rising spending,” and just 10 percent of the rising deficits are caused by falling revenues.
“This is 100 percent a spending problem in the long term,” Reidl said.
Greece’s debt hovered above 110 percent of the GDP in November. Meanwhile, the estimated U.S. national debt was 52.9 percent of GDP in 2009 -- a significant jump from the 39.7 percent in the previous year, according to data from the CIA World Factbook.
The economic crisis in Greece came to a peak in the past few months as the global recession started to expose the consequences of overspending, which up to that point had been shrouded in fudged budget numbers.
Both Riedl and Rep. Ryan warn that the potential financial disaster would be more devastating for the United States than it has been for Greece.
“(T)here will be nobody to bail us out,” Ryan said in the radio interview. “You’ve got the IMF, Germany and France that are basically bailing out Greece, but we are the world’s reserve currency. If we go down the same path it will not only give us a problem of our own reckoning, but it would turn upside down the global financial system.”
The Greek economy is a fraction of the size of the U.S. economy, Riedl noted.
“Greece’s economy is small,” says Reidl, “and therefore when it borrows 100 percent of its economy, it’s still not a huge amount of money in the context of the broad global economy.”
“But when the U.S. has to borrow 100 percent of its economy, that’s a real lot of money for the global economy to absorb – that’s something like $20 trillion by the end of the decade. Other countries may not be able to absorb $20 trillion in debt once we hit that level,” Reidl warned.
The bond market and U.S. Treasury ratings will be the tell-tale signs that disaster has arrived, according to both Sen. Gregg and Riedl.
“When people stop buying our bonds,” people will know that the United States is in trouble, Gregg said. He continued explaining that this would mean investors are saying “‘we do not believe you can repay the debt or can repay it in a way to make us buy your debt at a reasonable price.’”
“Moody’s has repeatedly threatened to downgrade the U.S. triple-A bond,” which would debase the value of bonds in the eyes of world investors, Riedl said.
Although the United States has been able to skate by as a good investment up until now, Riedl says this is only because we are better off right now than most other economies:
“People are still willing to invest in United States, because, quite frankly, what other country are they going to invest in? There’s nobody in very good shape,” Riedl said.
But this will change, he said, if emerging economies, like China and Brazil, continue to improve and "provide safe and predictable returns for investors.”
If U.S. bonds falter, their interest rates will have to rise to compete with these other investments.
“And that’s when the real problems begin,” said Riedl.