Imagine waking up and reading this story: [He] was charged with pulling his nation out of the fiscal death spiral. He did it with deep cuts in federal spending over two years that amounted to 10% of the budget, excluding interest costs. Nothing was spared…What drove the left-of-center Liberals to shoulder the burden of downsizing government in the 1994 and 1995 budgets — [He] takes great pains to point out — was not ideology but “arithmetic.” That is to say that everyone recognized that the magnitude of the debt, and the cost of servicing it, was unsustainable.
If you’re wondering who the story above is about, look to the north. In a Wall Street Journal piece today the facts are laid out about where Canada was, which is where we are, and how they pulled out of the fiscal doldrums.
Here’s more of the story: The problem had been building over many years. In 1965, federal spending had been 15% of GDP. By 1993 it was 23%. Markets didn’t like it. Between February and March of 1994, the three-month Canadian Treasury bill rate went to 5.82% from 3.85%. The Mexican peso crisis in December of that year didn’t help. By February 1995 the interest rate on the Canadian Treasury bill reached 7.8%. In a world of increasing uncertainty and a flight to quality, Canada was paying dearly for its deteriorating risk profile. As the exchange rate sank, Canadians were getting poorer and the government was speeding toward a wall.
We’re in the same position, although we are still the reserve currency of the world. But for how long, with Bernanke implementing quantitative easing for an indefinite period. Some 70% of U.S. debt is now purchased and owned by the Federal Reserve.
Unless we stop spending, we’re going over the fiscal cliff. For some reason, even the liberals in Canada recognized the problem and they did something about it.
When will liberals – and elected conservatives – do the same?
Read the full story from the Wall Street Journal here.