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January 16, 2011

Deficit-Inspired National Strategy

By Frank Ryan
The sovereign debt issues of Europe will soon pale in comparison to the sovereign debt issues of the United States. 

The European crisis is merely the forerunner to the real crisis percolating in Washington and the fifty state capitals.

The financial irresponsibility of our elected officials has provided a determined enemy a powerful weapon to use against us in an economic attack.

What concerns me is that most lawmakers at the federal, state, and local levels do not understand the absolute severity of the crisis.  The sheer magnitude of our debt makes the United States extremely vulnerable to an economic attack.  We are not too big to fail!

As Secretary Gates and the Pentagon consider cost reductions to reduce the deficit and consider rethinking the future of warfare in the 21st century, our Congress is forgetting the most powerful lesson of all -- history.  Those who do not remember history are doomed to repeat it.

Ronald Reagan understood economic warfare extremely well.  He did it against the USSR and won.  The six-hundred-ship Navy was an economic attack, not a military one!

The failure to understand our vulnerabilities with our debt and the strategic bind we have put ourselves in will lead to tragic consequences.  This is not the time for window dressing in Congress.  We need structural changes in government.

The spiraling deficits, unfunded pension liabilities, and the retirement of baby boomers means that the perfect storm is headed our way. 

My experience as a retired Marine colonel and an expert in economic warfare indicates that the following are the assumptions that an enemy would use in an economic attack.

  • Our national debt of over $14.11 trillion as of January 5, 2011 is being financed with unrealistically low interest rates, which makes us susceptible to greater budget difficulties should short-term interest rates merely go back to 3%.
  • The vast majority of our debt at the federal level is funded with short-term debt maturing in five years or less, making the U.S. strategically vulnerable to refinancing our debt.
  • The recent extension of tax rates was needed, but what was not needed without other budget cuts was an additional reduction of social security taxes for two years that adds another $1 trillion to the $14-trillion in debt.  The reduction in social security rates may have been important to stave off a depression, but it will not have that effect unless Congress reins in other spending.
  • The unfunded state government and teacher pension liabilities means that property taxes will escalate, putting more homeowners and banks in severe jeopardy.  Remember that property taxes are a senior lien to mortgages, so banks are at a real risk.
  • The coming retirement of so many baby boomers with the resultant lower taxes they pay and higher medical costs of an aging population will drain governmental budgets.
  • A bankrupt Social Security system will not fix itself.
  • A costly, broken, and fatal health care bill and medical system will collapse under their own weight.  The mere aging of the health care providers and their coming retirements will make managing health care costs almost impossible.
  • Sovereign debt of the rest of Europe is crushing them, and it will crush us.  Our allies in Europe will not be able to bail us out, forcing us to rely on China or the Far East.
  • Government bureaucracy will crush business growth and development.  The sheer number of new regulations will make the entire nation an airline industry prototype.

The prospects for neutralizing these risks are diminishing.

The Pentagon is considering cost reductions such as canceling the next generation of the Expeditionary Fighting Vehicle, closing the Joint Forces Command, and reducing the numbers of generals and admirals in the military as ways of dealing with unrelenting budget deficits.  Many claim that the warfare of the past will not recur.

I can only assure you of one thing -- a determined enemy will attack you where you have let yourself become vulnerable.

There is only one true solution to this national spending spree.  Go on a diet!  Every American must put self-interests on the back burner and put selfless sacrifice on the front burner.  We must all be willing to contribute to this fight.  President Kennedy was trying to tell us this in his inaugural address.

It is no longer our decision.  Restrain spending on all fronts, or someone else will do it for you.  Just ask the Greeks!

Frank Ryan , CPA specializes in corporate restructuring and lectures on ethics for the state CPA societies.  Frank is a retired colonel in the Marine Corps Reserve and served in Iraq and briefly in Afghanistan.
on "Deficit-Inspired National Strategy"