Unfunded tab of government liabilities projected to reach $53 trillion over next 75 years. (flickr)

Think the $700-billion bailout package was expensive? Well, you ain’t seen nothin’ yet.

Over the next few decades, promised federal spending threatens to drown the economy to a degree that would make the recently enacted financial bailout plan seem cheap, David M. Walker, the former comptroller general, said Wednesday. Including Medicare, Social Security, veterans programs and myriad other financial obligations, the tab over the next 75 years is projected to reach $53 trillion — with a “T.” All unfunded.

Yet despite this projected gaping hole in the budget — one that threatens to consume all the economy in just a few decades — Congress has shown little appetite to rein in spending. While party leaders came together with startling urgency to pass the Wall Street bailout, they’ve done almost nothing to confront the much larger problem of the looming budget crisis.

Illustration by: Matt Mahurin

“That’s not just fiscally irresponsible,” said Walker, now president of the Peter G. Peterson Foundation, a group promoting fiscal sobriety. “It’s morally reprehensible.”

His thrashing — delivered during a gathering of leading economists in Washington on Wednesday — comes during a dark time for the nation’s economy. Risky, mortgaged-backed securities have collapsed in value, leading to a freeze in the flow of the cheap credit that fuels businesses. The freeze has destroyed storied investment firms, bankrupted others, sent home prices plummeting further and foreclosure rates leaping. On Wall Street, stock prices are in a tailspin; on Main Street, unemployment is rising, and no one seems to know when it will end.

In a coordinated effort to make that day come quicker, the Federal Reserve, in coordination with central banks around the world, lowered interest rates half a percentage point Wednesday. The Dow Jones Industrial Average responded with an upward blip, but ended the day down 189 points.

Many experts, including Walker, agree that Congress had to do something to re-instill investor confidence in the financial system. But the bailout, the former comptroller general is quick to point out, constitutes less than 1 percent of the country’s long-term spending obligations.

“My question,” he said, “is when are they going to start dealing with the bigger problem?”

There is good reason for Walker’s alarm.

The nation’s mandatory spending commitments — a combination of interest on the debt and entitlement programs that run on autopilot — account for more than 62 percent of the federal budget, up from 33 percent 40 years ago. And they’re climbing.

The oldest baby boomers will become eligible for Medicare in a few years, adding to the burden. More important, medical inflation is a force unto itself: Medicare alone is projected to grow at three times the rate of the rest of the economy over the next 25 years.

To slow that growth, Congress would have to pass legislation. Yet the surest reform options — raising taxes or cutting benefits — are both political landmines. Lawmakers don’t want to be remembered for doing either.

Walker claims there are “disturbing parallels” between the current financial mess and the nation’s looming budget crisis. Many Wall Street decision-makers, for example, who made out handsomely from their high-risk investments have never been held to account, even as thousands of homeowners have suffered from their choices. In Congress, Walker points out, lawmakers are often rewarded with reelection for their overspending, rather than being punished for tipping the nation’s balance sheets off-kilter.

Another example: Wall Street firms used off-the-books accounting to hide many dubious transactions from regulators. In Congress, the annual budget almost always buries real expenses — emergency funding for the wars in Iraq and Afghanistan, for example, and long-term obligations like Medicare — to create the illusion that overspending is less severe than it is.

In fact, Walker claimed, only two major differences distinguish the current financial mess from that facing the nation’s budget. First, the government crisis is far larger. Second, no one can bail out the U.S. government.

The lack of initiative among policymakers has caused some experts to question the quality of leadership on Capitol Hill. Tim Adams, a former Treasury official under the Bush administration who is now managing director of the Lindsey Group, an economic consulting firm, said the current financial crisis should be the country’s “call to arms to get our fiscal house in order.” To do it, though, the country needs strong leadership, “and right now we don’t have it.”

Election-year politics has contributed partly to Congress’s inaction. Without voters pushing for entitlement reform, few lawmakers have stuck their necks out to make it an issue. In this political environment, some experts say, change will come only when the public is better informed about the problems.

“It’s clear that our dysfunctional Congress is not going to act unless pressured by the voters,” said Rudolph Penner, a former director of the Congressional Budget Office who is now a scholar at the Urban Institute.

The entrenched partisanship of recent years hasn’t helped. With Democrats controlling Congress and George W. Bush occupying the White House, the environment in Washington has been one in which “winning is more important than governing,” according to Leon Panetta, former chief of staff for President Bill Clinton and now professor of public policy at Santa Clara University. As a result, entitlement reform has been close to impossible, even as experts have warned of looming trouble.

On Tuesday, that trouble become more pronounced when the Congressional Budget Office announced that the deficit for fiscal year 2008 (which ended Sept. 30) will be $438 billion — up $276 billion from the year before. In July, the CBO projected the 2009 deficit will reach $482 billion. That’s the largest dollar figure on record, though several deficits under President Ronald Reagan were far higher as a percentage of gross domestic product. The 2009 estimate does not consider the $700-billion bailout, so the real figure will likely top $500 billion.

Earlier this month, the federal debt hit the double-digit trillions — a figure large enough that Manhattan’s celebrated “debt clock” could no longer contain it. The mammoth sum has real budget implications: In 2007, the interest on the federal debt was $237 billion, or roughly 9 percent of the total budget.

Washington observers predict Congress will have to take further steps to treat the ailing economy. There remains disagreement, though, over what form another stimulus package should take.

A $56-billion proposal, passed by the House last month, would fund infrastructure projects, expand unemployment benefits and increase spending on such social services as Medicaid and food stamps. Senate Republicans defeated the measure. It’s unclear if Democratic leaders will try again when the Senate returns to Washington after the elections.

The next president will have no easy time inheriting the mess. Despite the claims of Sens. Barack Obama and John McCain, experts contend that many campaign-trail promises will have to be abandoned as a result of the current economic squeeze. “Most of their initiatives will not be able to be accomplished,” Panetta said.

Some economists are less pessimistic. Mark Zandi, chief economist of Moody’s Economy.com, maintained that, despite its troubles, the United States remains attractive in the eyes of foreign investors. As long as those investors continue to buy Treasury bills, he said, there’s reason to believe the recovery will come soon. “We are still the place you go when there’s a problem,” Zandi said, “even when the problem is here.”

Also a source of optimism, some experts predict that rebalancing Social Security will be easier in the middle of the financial crisis than it was previously. That’s because the major sticking point has been Republicans’ insistence that private accounts be included in any reforms — an insistence that seems absurd as the market continues its stunning fall.

“That’s not going to fly in this atmosphere,” said Alice Rivlin, former head of the Congressional Budget Office and now a Brookings Institution scholar. “Nobody’s going to turn their accounts over to Wall Street.”

As the economic debate rages, some observers see the financial trouble as an opportunity for everyone, not only Washington’s politicians, to try a hand at introspection. Adams of the Lindsey Group suggested the crisis has something to do with all Americans — eager consumers who bought things they didn’t need to fill houses they couldn’t afford.

“Maybe,” he said, “this is a period when we reconnect with what’s real in life.”

Right.

Last night, the Senate passed a modified version of the administration’s bailout, but not before they loaded it up with every bit of tinsel they could feasibly toss on.

This includes: billions in renewable fuel tax credits; billions in relief for families who would otherwise have to pay the alternative minimum tax next April; a tax credit for companies that promote bike commuting; a provision expanding insurance coverage for mental health services, and the list goes on. (Indeed, the original bailout bill was three pages long; the latest version is 451.)

Not that these things are necessarily bad policy steps — but of the $150 billion in new tax breaks, only $40 billion are offset (ie, this adds $110 billion to the country’s debt).

Those tax breaks are not a bad ploy for getting reluctant House Republicans on board. They, after all, were largely the reason a similar bill failed the lower chamber on Monday.

But it makes ridiculous those claims that the $56 billion House stimulus bill (think: Medicaid, food stamps, infrastructure and unemployment insurance) was a non-starter because, as the White House said in threatening a veto, it was too expensive.

Who said trickle-down economics died with Ronald Reagan?

The list of major subprime lenders for 2006 and 2007 resembles the casualty roster from the Battle of Verdun in World War I. Only difference: way fewer walking wounded this time.

Of the 30 biggest subprime home lenders in 2006, measured by dollar volume, 22 have gone bankrupt, shut down, been sold or been seized by Uncle Sam. Most of the survivors have scaled back.

I guess the warnings all those years from the housing and consumer groups who regularly testified before the Federal Reserve were right on the mark after all. Too bad no one ever listened. The only bright spot here: It’s not like we’ll miss any of these lenders.

RIP, subprime.

And remember about the door on your way out.

It was then that Walter Cronkite, the CBS news anchor who narrated the daily events for millions of people each night, called Vietnam “unwinnable.” In the White House, President Lyndon B. Johnson said, “If I’ve lost Cronkite, I’ve lost middle America.”

Now, we are in a different kind of war, one where U.S. financial insolvency seems at risk. Looking at this crisis, Sen. John McCain has said he would suspend his campaign. This included canceling an interview with CBS “Late Show” host David Letterman last night. Letterman said McCain was preparing to head to Washington in an effort to save the country.

The reaction was something the likes of which we’ve never seen.

A furious Letterman called out McCain and, without using the word “liar,” ran live feed of McCain preparing to do an interview with CBS News anchor Katie Couric at the precise moment he was taping.

In addition, Letterman lashed out at McCain’s decision not to have his running mate, Alaska Gov. Sarah Palin, take up the campaign slack while McCain was in Washington.

Letterman even suggested this was all linked to McCain’s recent fall in national polls. “When you call up at the last minute and cancel, that’s not the John McCain I know,” Letterman said. More than once he suggested that “something smells right now.”

Now, Letterman is no Cronkite. He’s not even Ed Sullivan.

But he is the face that millions of Americans see before turning in for the night. For years, McCain has appeared on his show, even announcing his intention to run for president on the program. And to have the affable Letterman visibly boil and go on the offensive showed that, perhaps, McCain, whose campaign has stumbled since the beginning of this economic crisis, is in bigger trouble than one would think.

Perhaps McCain won’t say, “If I’ve lost Letterman, I’ve lost middle America.” Does Letterman even say his audience is “middle America?”

But one wouldn’t be surprised if the Republican candidate began to smell a strong odor seeping into the vents of the Straight Talk Express.

Reason provides a summary:

You could ask the questions another way, and the second question doesn’t really apply to either candidate — they were talking about the crisis today, for example.

But the first read is that about one in 10 people agree with McCain. It simply doesn’t seem like presidential debates fit into the category of unreasonable political activity during a crisis.

It doesn’t look like the American people are with Sen. John McCain on this one.

U.S. Department of Treasury (U.S. Department of Treasury)

Part 1: U.S. Failing to Defend Dollar

The U.S. national debt is rapidly rising. If Congress signs off on the Bush administration’s $700-billion rescue plan for Wall Street’s troubled financial markets, the debt ceiling will have to be raised to $11.3 trillion. The debt was $9.4 trillion in March. An immediate response to the bailout plan was a falling dollar, which so far has lost half its summer gains in trading this week.

A big chunk of U.S. debt is owned by foreign investors whose currencies’ values are rising relative to the dollar. Already, many have sustained investment losses because of the dollar’s fall in value. With the dollar now losing ground because of the financial crisis on Wall Street, at what point will foreign investors stop buying U.S. Treasuries entirely and throw the country into a debt crisis? Indeed, why hasn’t Washington experienced a sovereign debt crisis before?

The real reason the United States has avoided such a fate is that it finances its debt in dollars. That means Washington can literally print dollars to service and repay its obligations.

America’s special status derives in part from the fact that the dollar is the world’s major reserve and trading currency. The dollar was also once pegged to the gold standard, though that peg, of course, is long gone. But the aura of stability created by the strength of U.S. economic and military power has continued to support the dollar.

But the dollar’s dominance in world markets may be coming to an end. Even when the dollar was rising this year, there was talk of re-denominating trade flows and pricing commodities like oil and agricultural produce in other currencies. Now, with the greenback reversing course, such talk is likely to return.

Illustration by: Matt Mahurin

They is no shortage of signs that the dollar has fallen out of global favor. In the early 1970s, Japanese exports were invoiced almost exclusively in dollars; today only 50 percent are. The Taj Mahal does not accept payment in dollars for its admission fee — only rupees, India’s currency. Some supermodels, even drug dealers, want to be paid in euros, not dollars.

Foreign investors, including central banks, have reduced their dollar-based investments. The percentage of dollars in total world reserves has fallen from a high of 72 percent to around 60 percent. Dollars held outside the U.S. have declined from 1.83 percent of world trade in 2002 to 1.22 percent in 2006.

Foreign investor demand for U.S. Treasury bonds has also softened. Low nominal (negative real) interest rates and the weakness of the dollar are to blame. So is the declining credibility of the Federal Reserve and U.S. Treasury.

For example, foreign investors in Fannie Mae and Freddie Mac debt had long regarded it as “implicitly” backed by the U.S. government. They, as well as more than 60 central banks, hold more than $1,400 billion in debt securities issued by of U.S. agencies, including Fannie Mae and Freddie Mac.

But the travails brought on by the housing meltdown in the United States raised questions about the two mortgage giants’ ability to met their debt obligations. On July 23, the Financial Times reported that the U.S. embassy, after Kuwait’s minister of finance announced that the fund was no longer planning to invest in the agencies’ debt, called the Kuwait Investment Authority, the world’s sixth-largest sovereign wealth fund, to reassure it that bonds issued by Fannie Mae and Freddie Mac were sound. As it turned out, foreign-investor concerns that the mortgage companies would default on their debt in part triggered the U.S. government’s takeover of Freddie and Fannie.

That was in early September. As October nears, Washington needs an estimated $1 trillion to complete its rescue of troubled financial institutions weighed down by toxic mortgages and mortgaged-backed securities. Will foreign investors continue to step up and buy U.S. debt at a time when the creditworthiness of the world’s biggest borrower is under a cloud?

Scrooge’s nightmare, described by Charles Dickens, in which “solid” British assets are changed into “a mere United States security” may become a reality.

At a minimum, Washington will probably have to pay higher interest rates to finance its insatiable borrowing. Ultimately, it may even be forced to finance its debt in a foreign currency. This would expose Washington to currency fluctuations. But, most important, it would not be able to service its debt by printing money. Like all borrowers, Washington would face the discipline of its creditors.

For the moment, however, the dollar is hanging on -– barely. To a degree, this reflects weakness in the euro and yen because of Europe’s and Japan’s economic slowdowns.

The dollar is also a beneficiary of the “too big to fail” syndrome. Foreign investors — especially central banks and sovereign wealth fund investors in East and South Asia, Russia and the Persian Gulf — hold substantial dollar investments that would sustain catastrophic losses if the U.S. were to default on its debt.

The International Monetary Fund estimates that the Gulf Cooperation Council — Saudi Arabia, the United Arab Emirates, Qatar and other Gulf States — could lose $400 billion if they stopped pegging their currencies to the dollar.

So what must the U.S. do?

In 1989, economist John Williamson described a set of economic prescriptions, which he coined as the Washington consensus, that became the “standard” reform package that the International Monetary Fund imposed on countries wracked by economic crisis. The controversial–and highly criticized–package included calls for more fiscal policy discipline; less public spending on subsidies; tax reform; market-determined interest rates; competitive currency exchange rates; trade liberalization; reducing barriers to foreign direct investment; privatization of state enterprises; and deregulation. While many regard this formula as discredited, others still attest to it.

These prescriptions were intended for emerging markets. But, certain aspects of the package could be seen as appropriate for the world’s leading economic power — and premiere borrower.

Some of these elements–fiscal discipline, for example–will be politically difficult to achieve in Congress. Moves to cut farm subsidies face deep-seated opposition. Tax reform seems unattainable. And welcoming more foreign investment is politically dicey. Surveys show that most Americans want U.S. companies to remain in U.S. hands.

But the weak dollar has triggered the “closing down sale” of U.S. assets. On Sept. 29, shareholders of InBev, a Belgian-based brewer, will vote on the company’s $52 million bid for U.S rival Anheuser-Busch, the brewer of Budweiser, the quintessential American beer. Abertis Infraestructuras, a Spanish company teamed with Citigroup, bid $12.8 billion to lease and operate the Pennsylvania Turnpike, America’s oldest major toll road, for the next 75 years. And sovereign wealth funds have provided much of the capital needed to re-capitalise the U.S. financial system buffeted by the housing meltdown. In return, they have acquired major stakes in U.S. companies.

Stephen Schwarzman, head of Blackstone, a private equity firm, put it this way in an opinion piece in the Financial Times in June: “The U.S. is the world’s largest debtor nation and we are now in an uneasy relationship with our creditors. … If we were forced to rely mostly on domestic borrowing, we would have to pay very high interest rates. The consequences would be increased inflation, a dollar falling even faster and very slow [or negative] economic growth. If the investment climate for [sovereign wealth funds]is poor in the U.S., the countries with large dollar reserves (which are the owners of most of the sovereign wealth funds) could … look for alternatives.”

The “adjustment” may be under way. The dry, measured economic prose of the Washington consensus does not capture its human elements. It would require reductions in U.S. real wages and living standards on a scale unfathomable to most Americans.

If you doubt this, just ask the average citizen of any country that has taken the IMF’s “cure.”

Despite its gargantuan appetite for borrowing, there is much to admire about the United States. It remains far wealthier than the new economic titans China and India. It is peerless as a science and technology powerhouse, accounting for 40 percent of total world spending on research and development. Between 1993-2003, America’s growth rate in patents averaged 6.6 percent a year, compared to 5.1 percent for the European Union and 4.1 percent for Japan. America’s economy, with its growing population, secure legal and property rights and well-developed financial markets, remains highly attractive to investors.

But as Warren Buffett 2006 letter to shareholders observed, “Foreigners now earn more on their U.S. investments than we do on our investments abroad … In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience ‘reverse compounding’ as we pay ever-increasing amounts of interest on interest. …. no matter how rich you are, borrowing on top of borrowing is not a great long-term financial plan. I believe that at some point in the future, U.S. workers and voters will find this annual ‘tribute’ (of interest payment on the debt) so onerous that there will be a severe political backlash … How that will play out in markets is impossible to predict– but to expect a ’soft landing’ seems like wishful thinking.”

And here’s what Economist magazine said: “[P]ublic credit depends on public confidence…The financial crisis in America is really a moral crisis, caused by the series of proofs …that the leading financiers who control banks, trust companies and industrial corporations are often imprudent, and not seldom dishonest. They have mismanaged…funds and used them freely for speculative purposes. Hence the alarm of depositors and a general collapse of credit…”

Those words appeared in the Nov. 2, 1907, issue of the magazine in response to the Panic of 1907, when a crashing stock market led to a run on banks and trust companies.

The U.S. faces a challenge to reestablish its economic credentials. Without drastic and radical action, America’s ability to continue to borrow from foreign investors to finance its escalating debt is likely to become ever more difficult.

Satyajit Das is a risk consultant and author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.”

At the time of publication the author or his firm did not own any direct investments in securities mentioned in this article though he may be an owner indirectly as an investor in a fund.