Congressman Jim Moran

It is time, once again, for the Congress to increase the debt ceiling due to the House and Senate leadership's fiscal mismanagement. In a few weeks, the current debt ceiling will be reached. It is forcing Congress to increase by $800 billion, the debt ceiling to an all-time high of $8.2 trillion.

By ignoring signs of impending crisis in the hope that market forces will fix everything, we are facing a looming fiscal crisis. Examples illustrating how the current leadership has mismanaged our nation's fiscal state of affairs abound. The pay-as-you-go rule, a legislative tool devised to reign in deficits, worked very well in the 1990's. Throughout this decade, deficits decreased and ultimately were replaced with surpluses. But since 2002, the current 108th Congress has thrown these budget enforcement rules to the curb with regards to their use for offsetting tax cuts. And therefore, Congress is now backed into a corner and forced to take action to raise the debt ceiling for the third time in this Congress, another record.

The Bush administration and leadership in the House say deficits don't matter, but in truth they do matter and a mounting crisis stares us in the face. There is near unanimity among economists that our nation's fiscal imbalance could put us in real economic peril. In a recent study published just two weeks ago, well-known economists Maurice Obstfeld and Kenneth Rogoff warned of what they called “current account collapse” sparked by withdrawal of funds from international investors. They said that this issue should be “problem number one on the president's international financial agenda.”

Already there are signs that the dollar's value is declining and other currencies, primarily the Euro, are slowly replacing the dollar as the favored currency among international investors. This week the dollar reached an all time low against the Euro, one Euro is now worth $1.30.

If foreign governments, such as China, decide to divest its US currency holdings; the consequences would be serious, especially considering the massive purchases by the Chinese Central Bank over the last few years. In 2003, dollar purchases by foreign central banks were $617 billion, compared to $352 billion the year before. Total reserves of the emerging Asia countries rose by more than $350 billion between March 2003 and March 2004.

Considering the fact that our nation needs to borrow around $2 billion a day to function, we are more than happy to sell treasury notes to foreign countries. But what happens when those countries abandon the dollar for another currency? Foreign governments are now our largest creditors. We may be the most powerful nation in the world, but China, as the largest investor, has a great deal of leverage. This poses a real threat to our sovereignty.

Unlike in the past, we can no longer assume other currencies won't be able to rival the dollar's strength. The advent of the Euro substantially changes the international currency market. So the largest holders of foreign currencies in Asia could change their preference purely on the basis of financial, not political considerations.

This scenario is playing itself out right now. Asian countries are beginning to believe that our exceedingly high deficits are untenable and threaten the American economy. They are deciding not to finance our spending because they believe it may not be in their financial interest. Consequently, we are placed in a weak negotiating position. We have to convince these foreign governments that the dollar is relatively strong and they should continue their purchases.

The upcoming increase in the debt ceiling is another mark on the signpost that we are on the wrong fiscal track. Our lack of tough choices in the short term is burdening our children with a debt that has never been seen before. It will hamper any efforts for long term reform of our entitlement programs, something future generations are going to want to tackle.