As the swearing-in ceremony on Capitol Hill came to its rousing conclusion, after the magnificent "possibly lip-synched" rendition of Beyonce's "Star-Spangled Banner", people filed away from the dais back into the Rotunda. Leading the pack was US Presiden
Unexpectedly, President Obama turned around and stood at the side of the door, against the tide of exiting guests, lingeringly looking out on the sea of 800,000-1 million people that had gathered at the National Mall, stretching from the foot of the Capitol Building to the Lincoln Memorial, to witness another historical moment. It was as if he wanted to savour the sight, the last time he would see it as president of the United States.
It did not matter that this year’s crowd was almost half the size of that at his first inauguration in 2009. “I want to take a look, one more time,” he wistfully said. “I’m not going to see this again.” For the first black president of the US and the third Democrat to have been re-elected to a second term in the last 90 years, Obama knew he was there against all odds. He has every right to be proud.
His 18-minute inauguration speech was heralded as the best of the past half-century. In it, one saw the real Obama and heard his real beliefs. Income disparity, environmental concerns and issues of equality – that despite being endowed by God and held by Americans to be self-evident but cannot be self-executed – must be addressed by the collective action of all Americans.
It was the first time that that word “gay” was mentioned in an inauguration address. He talked about American ideals and the great balancing act between those ideals and today’s challenges. He contended that those ideals need not be sacrificed by present reality.
In his world, there must be a way to take care of the poor (social security), the sick (Medicare) and the elderly (Medicaid), if Americans use their inherent ingenuity and risk-taking. Not once did the president mention the dreaded four-letter word: debt.
Republican lawmakers quickly branded Obama’s position on these issues “far left”. If Mrs Obama’s “epic eye rolls”, supposedly meant for Republican House Speaker John Boehner, during the Congressional lunch said something about the frosty relations between the two sides of the aisle, it just about summed it all up.
The increasingly searing division in the US government and in the general population has made any compromise, no matter how insignificant, a daunting task. Such disconnectivity has made it virtually unimaginable to see how the US can deal with its intimidating debt crisis.
As of yesterday the US’s outstanding public debt stood at US$ 16.4 trillion, and continues to increase by $3.8 billion per day.
However, unlike all of us mortals who, when drowning in intractable debt, we face the music of default, the US, with Ben Bernanke as chairman of the Federal Reserve, will continue to do what it does best in this situation: print more money. Until, that is, the day when the fat lady sings; the day when all the chickens come home to roost.
The root cause of the US national debt is not that the rich pay too little tax, which is different from saying that they should not pay more. The real cause has been excessive spending. President Obama inherited George Bush’s $10 trillion deficit and he increased it at an annual rate of $ 1.4 trillion.
Over the four years of his first term, the federal deficit increased by 50 per cent. Should he insist on maintaining the status quo of the three pillars of the American “New Deal” – Social Security benefits, Medicare and Medicaid – over the next 30 years, the US’s debt to GDP ratio will be 200 percent.
Unfortunately, unlike Japan, where 95 per cent of government bonds were bought by Japanese themselves, the US Treasury bonds were taken up mostly by foreigners, with China and Japan the two largest holders. This is the case due to the extremely low savings rate among Americans, who themselves badly need deleveraging.
Under Ben Bernanke’s stewardship at the Federal Reserve, the US keeps printing money to buy its own bonds, the “free money” that acquired the popular euphemism “guantitative easing” (QE). This practice is unlikely to stop until the end of Bernanke’s term in the third quarter of 2014. One dangerous ramification of QE is the fact that it stymies the chance for the market to learn to be more disciplined.
The day that QE ends and/or inflation explodes, the US will see its interest rate jump from today’s 1.7 per cent (ten-year Treasury bonds) to over 5 per cent. Based on today’s US public debt of $16 trillion, several years from now such a jump in the interest rate would put the interest amount in the neighbourhood of $500-700 billion. To put it in perspective, that is twice the size of Thailand’s GDP. By then, debt servicing, both private and public, will become exorbitantly expensive and difficult.
Every president thinks about his legacy. On the one hand, Obama is expected to be bolder and more combative in pushing his agenda in the second term. However, history is not on his side. Most second-term presidents before him were perceived as lame ducks. Capable members of their cabinets usually sought exit during the second term to prepare for their life thereafter. If one has to read the tea leaves for Obama’s intended legacy from his inauguration remarks, one comes up with equal rights and equal justice, and increased taxes on the rich.
But simply taxing the wealthy is not going to reduce the colossal US deficit. Over the course of US history, the tax rate has been constant at 18.5 per cent on average. While it is true that the gap between rich and poor in the US has been widening, to have 2 per cent of the population pay for 98 per cent of the population is not going to work for its national debt.
The billionaire philanthropist Warren Buffet announced yesterday that he would donate 15 per cent of his 2011 income to the national deficit if 10 per cent of Congress does the same. It is his way of creating awareness of the most challenging tenet of governing – consensus and the common pursuit of an agenda based on real national interest, not that of Democrats or Republicans.
And consensus will be the mountain that President Obama must climb to tackle the debt issue, and to secure his own presidential legacy.