I don’t believe the rosy forecasts for next year that experts are putting out and the media is spreading: “Experts Cite Rising Hopes For Economy,” ran a recent New York Times front page headline. For one thing, they rely on consumers to rescue our ailing economy by spending more. But consumers are properly concerned first for their own financial security. With the enormous load of debt that households overall still carry (115% of personal income), any extra money consumers find in their paychecks should go to reduce their debt.

More troublesome is that in making their forecasts, these experts intentionally hide the awful reality of our national debt. Our Federal government debt stands today at $13.9 trillion, which equals 94% of our gross national product. Yet the various commissions that have been proposing actions to revive the economy, regardless of their political leaning, all start by claiming that the national debt is about 65% of GDP – and thus we can put off dealing with it for a few years more. This subterfuge is directed only at Americans; the rest of the world understands the reality.

The difference between the real and the fake debt ratios, as I’ve explained before, is the money borrowed from (and therefore owed to) Social Security and other trust funds. Washington officials simply don’t count that money as debt, inventing tortuous arguments to justify the exclusion. An editorial in the Wall Street Journal in February was more blunt; to calculate the Federal debt-to-GDP ratio, it said, “We use the debt-held-by-the-public figure because that is the amount the U.S. government has borrowed from others. The total debt is larger [my emphasis], but that includes Social Security IOUs that are promises that politicians have made to taxpayers and can repudiate. You can’t repudiate public debt except at great cost, as Greece is discovering.”

Even with this ugly suggestion that the government needn’t take seriously its debt to Social Security, the Journal still lies about the basic facts. The “IOUs” it refers to as “promises” are actually Treasury bonds in physical form. The Bureau of Public Debt holds the bonds for the Social Security Trust Fund, precisely as custodial banks hold Treasury bonds for individuals, corporations, and pension funds. I suspect that for wealthy political contributors who own Treasury bonds, the Journal would urge the government to take its debt obligations quite seriously.

In any event, the reality will become apparent early next year, when the national debt reaches $14 trillion and closes in on the current statutory debt limit, set last February at $14.29 trillion. Congress will be asked to raise the debt limit again, and it will, albeit with much bluster and shouting. At the same time, it will try to protect the subterfuge. Americans will hear little of what the rest of the world knows: our national debt is approaching 100% of GDP.

There will be even less explanation to the American people of how government debt equal to our GDP will affect our status in the world. For half a century, our dollar and our Treasury bonds have been the benchmark for safe investments, because the world believed that we always pay our debts. To maintain its credit, the government doesn’t actually have to pay off what it owes, but it does have to sustain the belief that the citizenry accepts its taxing power, to the full extent of the debt. During World War II, Americans accepted debt equal to more than 100% of GDP, but they also accepted wage and price controls, rationing of critical commodities, central control of the industrial base, and other extraordinary government measures. For the war effort, Americans were in effect willing to extend the government’s taxing power to the whole economy.

Today, while the rest of the world watches with dismay as our national debt continues to swell, Americans certainly do not appear willing to extend the government’s taxing power to the whole economy. Perhaps that’s why the government tries to hide the truth. The economist Paul Krugman did the same in his May 13 New York Times column, astoundingly titled, “We’re Not Greece.” Can anyone imagine defending U.S. credit 50 years ago with such a comparison? Krugman’s plaintive cry merely re-enforces Walter Bagehot’s dictum from 1873: “Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.” It’s hard to predict how this will all work out for Americans, but for the rest of the world, our dollar and our Treasury bonds will, to say the very least, lose some of their investment appeal. Sauve qui peut.

The linked problems of excessive household and Federal debt, which are at the core of our current economic and financial problems, did not arise in the last decade. They have been building inexorably since the presidency of Ronald Reagan. The Federal Reserve Bank of San Francisco reported last year on household debt: “U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007.” Despite the turmoil of the past two years, during which mortgage debt dropped significantly (due at least in part to foreclosures), household debt still remains above 115% of income. The San Francisco report concluded, “The process of household deleveraging will not be painless.”

As for government debt, it stood at barely $1 trillion when Ronald Reagan became President in 1981, equal to 30% of GNP. Except for World War II, this was the lowest ratio of government debt to GDP since the 1930s. (After the war, the ratio declined steadily for thirty years.) Between 1981 and 1993, Reagan and his successor George Bush borrowed and spent an additional $3.2 trillion. Whatever they claimed about making government smaller, they in fact left the American people with a national debt that had grown in twelve years to $4.2 trillion, which was 65% of GDP. Under President Clinton, although total debt continued to rise every year (see my “Bill Clinton’s Phantom Surpluses”), the government debt-to-GDP ratio actually declined to 55%. From George W. Bush’s inauguration until today, the ratio has continuously risen, to today’s 94%. In brief, since 1981, the Federal government has borrowed, and spent, close to $13 trillion, driving the debt-to-GDP ratio from 30% to 94%. The full impact – social, economic, financial – of that government intrusion into what is supposed to be the nation’s “private” economy has been, as we now understand, devastating.

It was no accident that both household and government debt began to rise rapidly in the 1980s. A culture of debt was being consciously fomented. Twenty years before this decade’s bundling of “sub-prime mortgages,” Michael Milken was bundling “high-yield bonds” (that is, debt issued by financially shaky corporations) and selling them to Savings & Loan banks. He was able to do so only because Congress passed a law in 1982 that for the first time allowed such banks to buy the bundles. The law had been enthusiastically proposed by President Reagan and his Treasury Secretary, the former Merrill Lynch CEO Donald Regan. That law, by the way, was also the first step in dismantling the 1933 Glass-Steagall Act, which had separated banking and investment activities for 50 years.

Over the past three decades, the culture of debt has been not merely unchallenged. It has been aggressively promoted, by the government’s own borrow and spend policies, by Wall Street rewarding corporate sales growth (ever-more outlets, built on debt) rather than earnings per share, by unfettered expansion of credit card use, by “hedge funds” (which succeed brilliantly through excessive borrowing, until, like LTCM, they don’t), and in many other ways. The culture also had its ideological supporters, none more eager than Alan Greenspan, who was appointed by President Reagan in 1987 as Chairman of the Federal Reserve Board.

Ironically, Greenspan published one of his strongest defenses of debt at the very moment when the economy was collapsing under its weight. With exquisite timing – reminiscent of another famous economist who, a few days before the stock market collapsed in 1929, ushering in the Great Depression, announced that “Stock prices have reached what looks like a permanently high plateau” – Greenspan published his memoirs in 2007. He not only maintained his vigorous defense of deregulation (“Regulation, by its nature, inhibits freedom of market action, and that freedom to act expeditiously is what rebalances markets”), but he also brushed aside fears of rising household debt. On the very eve of our national mortgage debacle, he mocked a 1956 Fortune magazine article that had warned, “the nation’s capacity for going in hock is not limitless.” Greenspan wrote: “Today, nearly fifty years later, the ratio of household debt to income is still rising, and critics are still wringing their hands. In fact, I do not recall a decade free of surges in angst about the mounting debt of households and businesses. Such fears ignore a fundamental fact of modern life: in a market economy, rising debt goes hand in hand with progress.”

He went even further, proposing what sounds like a Greenspan Principle: “A rising ratio of debt to income for households, or of total nonfinancial debt to GDP [my emphasis], is not in itself a measure of stress.” I emphasize those words because Greenspan explains “nonfinancial debt” as “the debt of households, businesses, and government” [my emphasis again] but not banks and financial institutions. Does he really mean that our Federal debt-to-GDP ratio is not a problem? He did refer earlier in the memoir to “the emergence of a federal budget surplus” in 1998 as a “wondrous happening.” Does he also believe our national debt today is 65% of GDP?

The turmoil of the past three years seems to have taught our leaders nothing. The culture of debt continues to grip official Washington, as well as the economists who advise them, and the media who report their doings. Every action proposed to revive our economy is based on increasing debt, which means essentially further government borrowing to stimulate business borrowing and to encourage consumer borrowing (a dollar spent is a dollar that doesn’t reduce household debt). An economist writing in the Boston Globe went so far as to maintain it is only “our foul national mood [that] threatens a fragile economic recovery.” All we need to do, apparently, is think positive, that is, borrow and spend more, and we can revive the economy. “No, really – we can,” she pleaded.

This may be silly stuff, but it is no sillier than what emanates from our paid servants in Washington, or from their paid advisors. There are ways forward that could succeed in reviving our economy, based on an honest appraisal of where we are now and how we got here. But such honesty is missing from the halls of government. I fear we are in for a rocky ride.

A healthy and prosperous New Year to all! Remember the Watchword.