Ballooning debt could ‘come to a head’: Hockey
London | The United States’ ballooning government debt harbours a “risk of default” that could eventually “come to a head”, Australia’s former treasurer and ambassador to Washington, Joe Hockey, has warned.
Mr Hockey lamented that Western governments of both the left and right had lapsed into an “abyss of populism”, one in which politicians readily racked up debt instead of making difficult decisions. He said this was a trend that could “come to an end” through a debt default.
Former Australian ambassador to the US, Joe Hockey, speaking in London Hans van Leeuwen
His comments – from an ambassador who was close to the former Trump administration, and who now runs a trans-Atlantic consultancy called Bondi Partners – painted a picture of a Latin American-style future for the US and Europe, if the markets ever lose confidence in those spendthrift nations’ ability to service their ever-expanding debt.
“Western democracies have fallen into the deep abyss of populism that makes hard decisions between regular elections almost impossible,” Mr Hockey told the Institute of Economic Affairs in London on Tuesday (AEDT).
“Political leaders are afraid of hard decisions, when everything can be bought with borrowed money. That sense of entitlement, that you can give people everything they want, is a cancer in our community.”
Mr Hockey said the last White House administration to live within its means was that of Democratic president Bill Clinton, which ran a budget surplus in 2001.
“The Republican Party has been screaming about rising debt levels of the US government. When they were in control the White House, the House of Representatives and the Senate, the US deficits grew larger and the US government debt grew bigger,” he said.
“It’s too hard, politically, to stop borrowing money. They all run the political charades of implementing a debt ceiling or closing down the government because it has run out of money. That’s base political opportunism.”
As a result, even though the US capital market was the world’s most important, and the country’s markets were still the go-to safe haven, “the risk of default has unquestionably increased”.
“The US keeps going because the US dollar is the default currency of the world. Until it’s not. And you can see other countries starting to gather around alternative currencies. I think markets are more liquid and wider and broader than ever before. So it can come to an end,” he said.
He said the disastrous, 49-day UK premiership of Liz Truss last year showed what could happen when markets lost confidence in a Western government, and “I think that’s coming”.
“It comes to a head. I don’t want to be scaring people, but it will come to a head in one form or another. And the question is how people respond at that time,” he said.
He acknowledged that the US dollar offered liquidity, certainty and stability that was unavailable from other currencies such as China’s yuan, but “there is a risk element”.
A “glimmer of hope” in the US was that President Joe Biden’s Inflation Reduction Act, which committed an additional $US433 billion ($684 billion) in new spending on pharmaceuticals and climate change initiatives, also included tax measures to pay for it.
“I can’t get excited about increased taxes … tax increases are a handbrake on economic growth,” he said. But “the only alternative to increasing tax is to either postpone the burden by borrowing more money today, or to spend less, and spending less is clearly not happening”.
He said the cost of servicing US government debt in two years’ time would exceed the size of the country’s defence budget; and in three years’ time the interest repayments would exceed spending on Medicare. “America is strangling itself with debt,” he said.
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