Can they pay it back?

Many scoff at the idea that China will suddenly say “no more” to the U.S. After all, the two countries have had a mutually beneficial relationship for years. China lends money to the U.S. and the U.S. buys masses of consumer goods from China. What’s more, it’s a long-standing relationship and many doubt that China would want to upset the status quo. Schiff sees no logic in that argument. “That they’ll keep lending indefinitely makes about as much sense as the argument that real estate prices have been rising, so they’ll rise forever,” he says. “Nothing that is unsustainable will go on forever.”

But the thing is, China doesn’t have to entirely cut off the U.S. to cause problems. Even if China decided to pull back slightly there would be consequences. The U.S. would still find itself short of the cash it needs to pay its bills, and like a homeowner who misses a mortgage payment, it would have to find that money somehow.

Regardless of precisely how and when this all unfolds, the dollar will inevitably become less valuable and interest rates will rise as the U.S. scrambles to attract new lenders. That will translate into inflation and higher interest rates for the average person, too. The cost of living will go up and the value of people’s savings will decline. Canada would likely get dragged into the mess too, just as it was affected by the current downturn in the U.S. The question is how severely this will all hit. “We could have another economic crisis or we could simply have a termites-in-the-woodwork scenario where we gradually have an erosion of our standard of living and become a nation in decline,” says Sawhill. At the very least, from here on in, the debt will act as a giant anchor, slowing whatever modest economic growth the U.S. can muster.

For the past five years or so, a small group of economists, researchers and former government officials have put on what they call the Fiscal Wake-Up Tour. It’s a kind of travelling road show aimed at raising awareness among citizens about America’s looming debt crisis. “We’ve been frustrated that there hasn’t been more attention paid to [the debt] and that steps weren’t taken earlier,” says the Brookings Institution’s Sawhill, who’s taken part in the tour.

Lately, however, the issue has been getting more attention, say some of the tour’s participants. The trouble is, nobody has any faith that this new-found interest will translate into any timely reaction from lawmakers. There really is no politically feasible solution to America’s debt crisis at the moment. For starters, no amount of economic growth can erase the deficits the U.S. is now facing, says Susan Irving, the director of federal budget analysis at the U.S. Government Accountability Office, a congressional body that oversees how the government spends tax dollars. No matter what numbers they enter in their simulations, she says, they can’t fix the problem.

That means any solution boils down to highly unpopular tax hikes and big spending cuts. To maintain the current debt-to-GDP ratio and prevent a debt explosion from happening over the next 75 years, the government would have to either raise revenues by 44 per cent or cut spending by 31 per cent, says Irving. It’s clear that there’s no appetite whatsoever for either of those options. Tax hikes are especially daunting when you consider that health care costs in the U.S. have been growing about two per cent faster than the economy. “You can’t raise taxes fast enough to catch up,” adds Irving.

Canadians know first-hand how hard and painful it can be to wrestle down a growing national debt. In the 1990s Canada embarked on an effort to slay its much more modest annual deficits. It worked, but not without sacrifice. We ended up with higher taxes and deep cuts to services like health care.

For the Americans, the first step is to at least “stop digging,” says the Heritage Foundation’s Riedl. “Take a step back and think twice before enacting [Obama’s] very expensive proposals.” Then, somehow, lawmakers need to get together and put some spending caps in the budget, he adds. Eventually, taxes will have to go up—on that point everyone can agree. The question now is whether this happens in the midst of a crisis, or in a more measured way, with some foresight and planning. “It’s just tragic that we’re not dealing with this now,” says Auerbach. “If we do it under time pressure because suddenly U.S. interest rates are going up, it’s not going to be nice.”

But all of this is much easier said than done. What’s happened in Washington so far is minor, says Sawhill, “a drop in the bucket . . . or in the sea,” she says. There are some signs that political pressure to curb deficit spending is growing (mostly from the opposition Republicans), but no agreement on how to proceed. Democrats generally fear the looming spending cuts while Republicans fear the taxes. “Those fears are understandable—but they should be outweighed by the fear of what will happen if we fail, if our debts overwhelm us, and if the fiscal meltdown comes,” said House majority leader Steny Hoyer, in a speech last month.

Riedl finds some cause for optimism in the fact that at least Americans, both inside and outside of Washington, are finally talking about the debt problem after ignoring it for all these years. That may be one of the few positive outcomes of the economic downturn: it has led Americans to slowly begin to acknowledge the elephant in the room. “The financial crisis has shown a lot of people that dire economic calamities can happen,” he says.

Schiff, the broker-turned-celebrity-prognosticator, is concerned enough about such a calamity that he says he’s now considering taking his message straight to Washington and running for a seat in the U.S. Senate. His threat to enter politics, which he first made last week on The Daily Show with Jon Stewart, has caused some buzz in Washington. But much as he seems to crave the spotlight, he says there’s another reason for his bid. “I’d do it because somebody has got to do something to stop this. It’s going to end in misery.”