U.S. Debt - Too Much, Too Late?

Discussion about the U.S. debt and perennial budget deficit have been simmering for some time. But the U.S. debt is not simply a crisis of the last few decades. For most of the history of the country, the U.S. has had a public-sector debt. The last time we were debt free? Under the administration of Andrew Jackson, in 1835.

Public sector debt is practically a given of modern economies. Germany, often hailed for its robust domestic industrial sector and exports, has a 72 percent debt/GDP ratio. Japan, once though of as an unstoppable juggernaut producer of modern consumer goods, has a staggering 189.3% debt/GDP ratio. As of 2009, the debt/GDP ratio of the U.S. is 54.6 percent. Although factoring in intra-governmental obligations, the percentage increases to 86.1 percent. Although final figures aren't in yet for 2010, estimates are gross debt will rise to 94 percent, and public debt to 63.1.
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Is it realistic that the U.S. will ever be debt-free again? Perhaps not, given the way modern economies are now structured. But what's not up for debate is that our overall debt level is approaching dangerous levels, made even more ominous by the the fact that the U.S. dollar is still the world's largest reserve currency, although its status and percentage has declined in the last few years, from 70.9 percent in 1999 to 62.2 percent as of 2009. The biggest gainer? The Euro, which has gone from 17.9 percent to 27.3. But considering all the drama and turmoil in Greece and other distressed Euro-zone economies, is the Euro really an attractive and viable alternative to the Dollar?

What needs to happen, as unpopular as it may be, is massive cuts in government expenditures, and increased tax receipts. This is essentially what has been proposed by the debt commissions, Domenici/Rivlin and Simpson/Bowles. The left is unhappy at the prospect of lower taxes on business and cuts to key entitlements like Medicare and Social Security, and the right is incensed at the elimination of popular deductions such as the mortgage interest deduction, and hikes in the capital gains and dividends rates to the same level as regular income.

If we had been more judicious and less entitled over the past few decades, we may have been able to avert the crisis we're now facing. But the fact is, we're here, and we're going to have to deal with the mess we've made for ourselves. Although I'm admittedly not thrilled at the prospect of paying higher taxes, if the government makes good on its promises of drastic, structural spending reductions, it's a small price to pay for the U.S. to retain its overall economic health and future stability.

What do you think? Are we headed toward the inevitable abyss to permanent decline, or can the U.S. turn itself around before it becomes relegated to second-tier status in a world dominated by Asia and Europe?