In the short run, you can cut taxes and spend more. In the long run, as Nobel laureate economist Milton Friedman has potently argued, to spend is to tax.

In that vein, economist V.V. Chari of the University of Minnesota explained at a conference for journalists on Oct. 17, ``The true burden of government is what it spends today and in the future.'' When a politician brags, ``I cut your taxes,'' that's not what really matters, he said.

When a government spends money, it commands resources that are no longer available for use by the private sector. If it chooses to borrow the money rather than levying taxes to finance transfer payments and the purchase of goods and services, the government is only postponing the inevitable taxes, Chari said.

``The political system works very hard to obfuscate this issue,'' he said.


http://www.bloomberg.com/apps/news?p...d=a6adh4M2N50Q

Federal Reserve Chairman Ben S. Bernanke said the U.S. government may face a ``fiscal crisis'' in the coming decades if it fails to deal with the rising costs of retirement and medical benefits for the aging population.

``If early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost,'' Bernanke said today at a Senate Budget Committee hearing.

His comments may help frame a debate leading up to President George W. Bush's Feb. 5 budget, in which he will unveil a plan to balance the budget by 2012. Bernanke, unlike his predecessor Alan Greenspan, refused to endorse a strategy on taxes and spending. The projected budget shortfall results from spending on the Social Security, Medicare and Medicaid programs.

While official forecasts may show a stable or narrower budget deficit over the next few years, ``unfortunately, we are experiencing what seems likely to be the calm before the storm,'' Bernanke said in his first hearing on Capitol Hill since Democrats won control of Congress from the Republicans in November's elections...

http://www.bloomberg.com/apps/news?p...d=a_46QcGbvFZk

If you haven't noticed, the major presidential candidates—Republican and Democratic—are dodging one of the thorniest problems they'd face if elected: the huge budget costs of aging baby boomers. In last week's CNN/YouTube debate, New Mexico Gov. Bill Richardson cleverly deflected the issue. "The best solution," he said, "is a bipartisan effort to fix it." Brilliant. There's already a bipartisan consensus: do nothing. No one plugs cutting retirement benefits or raising taxes, the obvious choices.

End of story? Not exactly. There's also a less-noticed cause for the neglect. Washington's vaunted think tanks—citadels for public intellectuals both liberal and conservative—have tiptoed around the problem. Ideally, think tanks expand the public conversation by saying things too controversial for politicians to say on their own. Here, they've abdicated that role.

The aging of America is not just a population change or, as a budget problem, an accounting exercise. It involves a profound transformation of the nature of government: commitments to the older population are slowly overwhelming other public goals; the national government is becoming mainly an income-transfer mechanism from younger workers to older retirees.

Consider the outlook. From 2005 to 2030, the 65-and-over population will nearly double to 71 million; its share of the population will rise to 20 percent from 12 percent. Social Security, Medicare and Medicaid—programs that serve older people—already exceed 40 percent of the $2.7 trillion federal budget. By 2030, their share could hit 75 percent of the present budget, projects the Congressional Budget Office. The result: a political impasse.....

By Robert J. Samuelson Newsweek http://www.msnbc.msn.com/id/20010728/site/newsweek/

Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day -- or nearly $1 million a minute.
What's that mean to you?

It means almost $30,000 in debt for each man, woman, child and infant in the United States.

Even if you've escaped the recent housing and credit crunches and are coping with rising fuel prices, you may still be headed for economic misery, along with the rest of the country. That's because the government is fast straining resources needed to meet interest payments on the national debt, which stands at a mind-numbing $9.13 trillion.

Like homeowners who took out adjustable-rate mortgages, the government faces the prospect of seeing this debt -- now at relatively low interest rates -- rolling over to higher rates, multiplying the financial pain. It could in time squeeze out most other government spending -- leading to sharply higher taxes or a cut in basic services like Social Security and other government benefit programs. Or all of the above.
A major economic slowdown, as some economists suggest may be looming, could hasten the day of reckoning.

Over the next 25 years, the number of Americans aged 65 and up is expected to almost double. The work population will shrink and more and more baby boomers will be drawing Social Security and Medicare benefits, putting new demands on the government's resources.

Aggravating the debt picture: the wars in Iraq and Afghanistan, which the nonpartisan Congressional Budget Office estimates could cost $2.4 trillion over the next decade.
The overall debt might be next to impossible to chisel down appreciably without major spending cuts, tax increases or both. "The basic facts are a matter of arithmetic, not ideology," said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan group that advocates eliminating federal deficits.

President George W. Bush is poised to leave the federal government in worse financial shape than he found it, making it harder for whoever succeeds him to deliver on the promises of this year's election campaign.

Bush may end his eight years in office with a larger-than- forecast budget deficit approaching 2004's record $413 billion, as an increasingly likely recession slashes tax receipts and raises spending. He'll also leave behind a host of thorny, longer-term problems -- from the expiration of his big tax cuts in 2010 to spiraling spending on senior citizens -- that will dog his successor's budgets for years.

That means Democratic candidates Hillary Clinton and Barack Obama would find it harder to finance their promised expansion of health-care benefits. Republicans Rudy Giuliani and Mitt Romney would have a tougher time carrying out their pledges to cut taxes.

``We have a big hole to crawl out of,'' says Robert Bixby, head of the Washington-based Concord Coalition, a nonpartisan group that advocates balanced budgets. ``Any sort of major initiative by the next president is going to be very difficult to do.''

The situation is, in some respects, the mirror image of 2001. Bush, 61, was the first president since John F. Kennedy to take office with a budget surplus, to the tune of $236 billion, giving him considerable latitude in formulating policy. He cut taxes by more than $1.5 trillion over 10 years, increased defense spending and created a new Medicare prescription-drug-benefit program.....

WASHINGTON - In the nation's first-ever $3 trillion budget proposal, President Bush seeks to seal his legacy of promoting a strong defense to fight terrorism and tax cuts to spur the economy. Democrats, who control Congress, are pledging fierce opposition to Bush's final spending plan — perhaps even until the next president takes office.

The 2009 spending plan sent to Congress on Monday will project huge budget deficits, around $400 billion for this year and next and more than double the 2007 deficit of $163 billion. But even those estimates could prove too low given the rapidly weakening economy and the total costs of the wars in Iraq and Afghanistan, which Bush does not include in his request for the budget year beginning Oct. 1.

Last year, when Democrats were newly in the majority, there were drawn-out veto struggles. This year's fights could be worse because it is an election year.....

Philadelphia's $4 billion pension deficit is causing the city's retirement-fund manager to shun Treasuries at a time when the Bush administration needs him most.

Yields on 30-year U.S. bonds that fell to a record low of 4.10 percent this year are forcing pension funds to favor equities, corporate debt and commodities in an attempt to cover unfunded liabilities and meet return objectives of about 8 percent. Even the federal government's own Pension Benefit Guaranty Corp. said on Feb. 19 that it plans to shift $15 billion to stocks from debt.

``The reality is there's not a lot we can do'' other than buy high-risk securities to close a pension shortfall in a short period, said Chris McDonough, chief investment officer of the Philadelphia Pensions Department. The sixth-largest U.S. city will probably also issue debt, he said.

Fixed-income holdings at 1,100 funds fell to 23 percent in 2006 from 27 percent in 2003, said Dev Clifford, a consultant at financial market research firm Greenwich Associates in Greenwich, Connecticut. Results of a survey covering 2007 will be released this month and likely show that funds own an even smaller percentage of bonds, he said.

Philadelphia's predicament couldn't come at a worse time for George W. Bush, whose administration forecasts a $410 billion budget deficit for this fiscal year ending Sept. 30, approaching the record of $413 billion set in 2004. The figure may eventually reach as much as $800 billion, according to Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California.....

A growing number of people believe that we could be heading for a recession, if we are not already in one. In response, Congress has passed an economic stimulus plan, the Federal Reserve has cut the discount rate and the Bush administration has moved to try to steady the housing market.

Yet America faces much greater, and largely unaddressed, economic challenges that threaten to erode our economic strength and future standard of living. Key among them are our incredibly expensive and badly broken health care system and the upcoming retirement of the baby boomers. Both will require enormous government outlays in the years ahead.

Difficult and even unpopular choices are needed to turn things around.....

Add another ailment to the U.S. misery index of soaring gasoline and wheat costs and falling home values: a federal deficit that is burgeoning as foreign investors led by the Japanese recoil from the slumping dollar.

The Japanese, who own $586.6 billion, or 12 percent of U.S. government debt, had their worst quarter in Treasuries this decade, losing 7 percent in the first three months of the year as the dollar fell to the lowest since 1995 versus the yen, Merrill Lynch & Co. indexes show. Dai-ichi Mutual Life Insurance Co., Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co., three of the nation's four-biggest insurers, would rather accept the world's lowest bond yields in Japan than buy U.S. debt.

``It's too early to say the dollar will stop falling,'' said Masataka Horii, head of the investment team in Tokyo for the $53.1 billion Kokusai Global Sovereign Open, Asia's biggest bond fund. ``The U.S. economy will be slow for a while.''

Japan owns more Treasuries than any other nation. After raising their holdings by $9.2 billion to $620.6 billion between March and July 2007, Japanese investors trimmed that stake by $34 billion through February, the Treasury said April 15.

America relies on foreign investors, who own more than half the U.S. government debt outstanding, to finance a deficit that New York-based Goldman Sachs Group Inc. predicts will expand to a record $500 billion for the year ending Sept. 30, after a $163 billion gap last year. Without their support, long-term interest rates would be 0.9 percentage point higher, a 2006 Federal Reserve study found.....

As if a slowing economy, a falling dollar, faster inflation and a credit crunch weren't enough headaches for U.S. Treasury Secretary Henry Paulson, he now has to worry that the Federal Reserve will undermine the return of the one-year bill.

For the first time since 2001, the government will sell 52- week debt tomorrow, expanding its source of funding as the budget deficit approaches a record. The Fed is selling Treasury bills at the fastest pace since it was founded in 1913 to support bank-lending programs meant to boost confidence in financial markets. The Fed owns $34.3 billion of the securities, down from $267 billion, or 27 percent of the market, in December.

``The Fed took a proportion of Treasury sales so regularly, so often, that we just took it for granted,'' said Stephen Van Order, a debt strategist in Bethesda, Maryland, at Calvert Asset Management, which oversees $10 billion in bonds. ``You do have to find buyers for the Treasuries that the Fed would have taken in the past. Bills, of course, have been torched by this.''

For every dollar the central bank adds to the banking system under the lending facilities, it withdraws a similar amount to maintain its target rate for overnight loans. The Fed bought bills at all but three of the 992 auctions from August 2001 to last December, according to the Treasury. By comparison, it didn't purchase bills at 30 of the 66 sales in the five months through April, and it won't buy any of those sold this week.....

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said a Barack Obama administration may have no other choice than to produce the first $1 trillion U.S. budget deficit.

``You have inherited a mess,'' Gross, co-chief investment officer of Pimco, said in an open letter to Obama, the likely Democratic presidential nominee, published on the Newport Beach, California-based company's Web site today. ``What do I think you should do as the new president to rectify this mess? All I know is that any solution will come with a high price tag.''

Higher taxes for hedge-fund managers and oil companies will not cover the $500 billion stimulus the economy needs, including the anticipated Obama tax cuts for the poor and middle-class, universal health care and aid to the depressed residential real estate market, said Gross, a long-time Republican. The likely expenditures and increased borrowing suggest that ``intermediate and long-term yields on government bonds have already bottomed and will gradually rise'' through the next four years and possibly beyond, Gross said.

Gross domestic investment in machines, houses and inventories has fallen by $200 billion since its 2006 peak, Gross said. Domestic consumption will soon be $300 billion short of what's needed for an economic rejuvenation, he said. With the deficit already pushing $500 billion even before the next president is sworn in, Gross anticipates it will reach $1 trillion deficit by 2011.....

Barack Obama, who says he's going to spend most of his presidential campaign talking about the domestic economy, bills himself as a fiscal disciplinarian.

``My plan is detailed and specific when it comes to cutting spending,'' the Democratic candidate said in a July 7 speech in St. Louis. ``In fact, all my new spending proposals would be more than paid for by spending reductions.''

Budget analysts from across the political spectrum disagree. His spending and tax-cut proposals, they say, would do little to curb runaway federal spending, resulting in more red ink at a time when the White House is already forecasting a record $482 billion budget deficit for next year.

``Clearly, this is not a spending-cut agenda,'' said Robert Bixby, executive director of the Concord Coalition, a Washington-based nonpartisan group that advocates budget restraint. ``You're likely to see continuing large deficits from the Obama plan.''

The shortfalls Obama would produce don't approach the size of the deficits John McCain's budget threatens to bring. The Republican candidate's tax cuts alone would increase the debt by $5 trillion by 2018, compared with $3.4 trillion for Obama, says the Tax Policy Center, another nonpartisan group.....

For the first time since 1960, when it created the network of securities firms obligated to buy and sell Treasury bonds, the U.S. government has the fewest bond traders making markets in its debt and a bigger burden for American taxpayers financing record federal deficits.

The number of so-called primary government securities dealers declined to 19 last month when Bank of America Corp., based in Charlotte, North Carolina, acquired the troubled Countrywide Financial Corp. The sale was the climax of dozens of bank failures, triggered by the biggest decline in residential real estate since the Great Depression and the seizing up of credit markets from New York to London. The Federal Reserve Bank of New York, the agent of the U.S. Treasury, plans to shrink the dealers again when JPMorgan Chase & Co. completes its takeover of Bear Stearns Cos.

Fewer firms bidding for U.S. bonds means ``you're going to have sloppier auctions,'' said Mark MacQueen, a money manager in Austin, Texas, at Sage Advisory Services, who traded Treasuries at dealer Merrill Lynch & Co. in the 1980s. ``The taxpayer and the government are paying more no matter what happens.''

The paucity of primary dealers coincides with the largest borrowing requirement in American history and the acknowledgment by the administration of President George W. Bush that the U.S. will finance a budget deficit totaling a record $482 billion next year. When the dealer system began 48 years ago with 18 firms, the U.S. had a $300 million surplus. The group has shrunk from a peak of 46 in 1988.....

John McCain said that if elected president he would tap former U.S. Comptroller David Walker to help balance the federal budget, calling the deficit hawk someone who could help convey the ``truth'' to the public.

``He is the most articulate person on this issue of the debt that we've laid on future generations of Americans,'' McCain, the presumptive Republican nominee, said last night. ``We've got to communicate more directly to the American people and tell them the truth.''

According to Walker, who has been traveling the country this year on a ``fiscal wake-up tour'' to sound the alarm about runaway federal spending, neither McCain nor Democratic rival Barack Obama has made deficit reduction a priority.

``Neither one of them has really addressed the issue of fiscal discipline,'' Walker said in a phone interview last night. He said he has talked with both candidates' fiscal advisers and is politically neutral.....

The bond vigilantes who've been missing in action under George W. Bush may be preparing for a return engagement once Barack Obama or John McCain takes office next year.

Investors and former policy makers predict that the same market forces that torpedoed President Bill Clinton's ``putting people first'' spending initiatives at the start of his presidency are gathering again at the prospect of McCain's tax cuts and Obama's health-care and education programs.

``Though times are different and a lot of the government spending is necessary, we're going to see rates rise in a saw- tooth pattern over the next few years,'' says E. Craig Coats Jr., the head of Salomon Brothers' government securities desk when it was the world's biggest bond trader. Coats considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates, persuading Clinton to place deficit-reduction above fulfilling his spending promises.

That course-reversal prompted Clinton political adviser James Carville to observe at the time: ``I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.''

Economists and traders say the prospects for increased government borrowing needed for either McCain or Obama to enact their proposals will again lead investors to shun Treasuries and push up interest rates. Ten-year yields are forecast to reach 4.63 percent by the end of 2009, according to a Bloomberg survey of 68 economists.....

Imagine if campaigning U.S. politicians talked about the huge debts facing Americans and their institutions, instead of offering the usual platitudes about national unity and security.

How would the conversation begin?

``We want to make it easier for you to pay your bills and mortgages. Instead of onerous layered credit-card charges that are buried in incomprehensible, fine-print documents, we will mandate full disclosure and outlaw junk fees that make full repayment expensive and difficult.

``On mortgages, we will put clear and understandable information on the front page of every good-faith estimate for loans that will display all of the fees; how much your payment would be if the loan readjusts under a number of scenarios; total tax and other home expenses. It will be as clear as a fuel- efficiency sticker for a car.

``Most importantly, we will propose and act on plans to pay for Social Security, Medicare and the medically uninsured, and to balance the federal budget. We acknowledge the tab for public obligations is some $53 trillion. We will pay it down and reduce or eliminate the burden on you and future generations and no longer expect foreign governments to finance our debts.''

I know, dream on. Get your head out of the clouds. You will never hear that speech from presidential candidates John McCain and Barack Obama. Talking about the ``D'' word is like extolling the virtues of cleaning sinks. In this iPhone age, it's an instant tune-out to discuss debt.....

Treasury Secretary Henry Paulson's $700 billion proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.

The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.

``This is sobering, absolutely sobering, even to someone who doesn't drink,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.

At risk for the world's largest economy: a jump in interest rates prompted by the glut of additional Treasuries needed to finance the plan, and a diminished desire among international investors to add to their holdings. The dollar yesterday slid the most against the euro since the European currency's 1999 introduction.

During a five-hour hearing of the Senate Banking Committee today, Paulson said it is ``difficult to determine'' what the ultimate cost of the plan would be, though he said the objective is to minimize the cost to taxpayers. He's asking lawmakers to lift the legal ceiling on the federal debt to a record $11.3 trillion from the current $10.6 trillion.....

Investors outside the U.S., who own more than half of all Treasuries outstanding, say the government's $700 billion plan to revive the banking system will diminish the appeal of the nation's bonds.

Treasury Secretary Henry Paulson's proposal, which seeks funds to rescue banks by purchasing devalued securities, would drive the country's debt to more than 70 percent of gross domestic product. The last time taxpayers owed as much was in 1954, when the U.S. was paying down costs from World War II.

``The image of U.S. Treasuries as a safe haven has been tainted by the ongoing financial debacle,'' said Kwag Dae Hwan, head of global investment in Seoul with South Korea's $220 billion National Pension Fund, which holds about $14 billion of U.S. government debt. ``A big question mark hangs over whether the U.S. can deal with an unprecedented amount of debt. That is unnerving all the investors, including me.''

The government depends on foreign money to finance the budget deficit, which UBS AG estimates will increase to $1 trillion next year from $407 billion if the bailout is approved. Investors outside the U.S. own 56 percent of the $4.8 trillion in marketable Treasuries outstanding, up from 42 percent of the $3.4 trillion outstanding five years ago, according to data compiled by the government.....

Even as Ben S. Bernanke cuts borrowing costs to 50-year lows, taxpayers will likely be paying ever increasing interest rates on U.S. debt.

The next president may find foreign investors, the biggest creditors to the U.S., unable to absorb a growing supply of Treasury bonds as the financial crisis prompts nations to invest in their own banks and currencies. That would drive up yields just as a widening budget deficit pushes borrowing needs to a record $2 trillion, according to estimates by Goldman Sachs Group Inc. and Wrightson ICAP LLC.

``It's hard to see how demand for Treasuries is going to keep up with supply once the risk aversion trade subsides,'' said Tony Norris, who oversees $10 billion in international strategies as chief investment officer and senior portfolio manager at Evergreen International Advisers in London. ``There's going to be pressure on yields to rise.''

President-elect Barack Obama said the U.S. government will do ``whatever it takes'' to revive the economy, and that means ``we shouldn't worry about the deficit next year or even the year after.''

In the short term, ``the most important thing is that we avoid a deepening recession,'' Obama said in an interview broadcast last evening on CBS News's ``60 Minutes,,,,.''

WASHINGTON — President-elect Barack Obama on Tuesday braced Americans for the unparalleled prospect of “trillion-dollar deficits for years to come,” a stark assessment of the economic condition facing the country that he said would force his administration to impose tighter fiscal discipline on the government.

Mr. Obama sought to draw a distinction between the need to run what would likely be record deficits by any measure for the next several years and the necessity to begin bringing them down substantially in following years. Even as he prepares a stimulus package that is likely to total in the range of $800 billion in new spending and tax cuts over the next two years, he said he would seek to make sure that money is used wisely and that he would work with Congress to implement spending controls and efficiency measures throughout the federal budget.

“I’m going to be willing to make some very difficult choices in how we get a handle on his deficit,” Mr. Obama said, speaking about the dire fiscal outlook as he met with his top economic advisers for a second straight day. “That’s what the American people are looking for and, you know, what we intended to do this year.”

Mr. Obama sought to reassure lawmakers, as well as the financial markets, that he is aware of the long-term dangers of running huge deficits. Big deficits force the government to borrow more money, saddling future generations with large financial burdens. The problem is especially acute now because credit markets, which at times in recent months have been all but frozen as the financial system has been buffeted, could be further strained by the need to finance the huge deficit.....

As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.

The total U.S. obligations, including Social Security and Medicare benefits to be paid in the future, effectively have placed the U.S. government in bankruptcy, even before new continuing social welfare obligation embedded in the massive spending plan are taken into account.

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

The difference between the $455 billion "official" budget deficit numbers and the $5.1 trillion budget deficit cited by "2008 Financial Report of the United States Government" is that the official budget deficit is calculated on a cash basis, where all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur.....

NEW YORK (Fortune) -- Financial wheeling and dealing is out of fashion these days. So is the idea of suffering short-term pain in return for the prospect of long-term gain. But in honor of Tax Day, when we all ante up to Uncle Sam, here's a modest proposal: The U.S. Treasury should do some fancy financial dancing that would hurt taxpayers today but would save tons of money for taxpayers in the future.

How could the government do that? By borrowing as much money as it can by selling long-term Treasury securities before the financial world comes to its senses and rates rise, rather than continuing to sell shorter-term securities that save us interest today but are likely to cost us much more in the future.

Here's the deal. Borrowing money for 30 years at today's rates costs the Treasury about 3.6% in annual interest, while borrowing it for 30 days costs only 0.2%, and for six months, 0.4%. So if you're thinking about near-term federal budget deficits, you save $30 billion-plus a year for each $1 trillion you borrow at short rates rather than long rates. (Yes, we're talking trillions now - it shows how public finance has deteriorated in the decade since Alan Greenspan worried about the prospect of excessive federal surpluses.)

But the problem with short-term borrowings is that you have to keep rolling them over - that's bizspeak for refinancing them. By contrast, when you borrow for 30 years, you are rollover-free for decades.....

Millions of lost jobs mean billions in lost tax revenue for the U.S. government, and billions in additional Treasury debt to fund a federal budget deficit that may soar to more than four times last year’s record $454.7 billion.

Employers cut 3.7 million positions from their payrolls in the six months since the fiscal year began Oct. 1, and the unemployment rate reached a 25-year high of 8.5 percent in March. That suggests receipts for April -- the biggest month for tax collection -- are likely to come in well below April 2008, analysts said.

With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.....

Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows.

The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security.

That's the biggest leap in the long-term burden on taxpayers since a Medicare prescription drug benefit was added in 2003.

The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That's quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined.....

Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending.....

WASHINGTON (CNNMoney.com) -- When George Bush took office at the beginning of 2001, the federal government was running a substantial budget surplus and projected rising surpluses "as far as the eye could see." Now, the United States is facing massive current deficits -- as a share of the economy, the largest since World War II -- and an increasingly dire and unsustainable outlook over the next 10 years and beyond.

How did we get into this fiscal mess? To quote a character in Ernest Hemingway's classic novel, "The Sun Also Rises," when asked by another how he lost his wealth, "Two ways. Gradually and then suddenly."

The gradual part was a series of policy actions adopted during the Bush administration. In 2001, the Congressional Budget Office projected that the 2008 budget would show a surplus equal to 4.5% of gross domestic product. The actual 2008 budget ran a deficit of 3.2% of GDP. Almost all of the reversal was the result of policy changes -- tax cuts and spending increases.

Then, in 2009, the bottom fell out.....

The last time the nation's debt was this big compared with gross domestic product — 70.4% of GDP — was immediately following World War II.

How did the Greatest Generation pare it down? It didn't.

It grew the economy faster than the debt, pushing down the debt-to-GDP ratio and making debt payments easier to manage. But that generation also did some things that U.S. citizens and politicians don't seem willing to do today. It paid higher taxes, and it had a smaller government — and, at least until the 1980s, it kept annual budget deficits small.

The citizens of the U.S. owe $12.3 trillion in Treasury debt to banks, individuals and foreigners. That's about $40,000 per person living in the U.S., and it's not counting the amount our states owe — or, for that matter, what we owe to our individual creditors.

Although the U.S. is currently handling its debt comfortably and pays remarkably low interest rates on it, there's mounting recognition that sooner or later, we must move the debt-to-GDP ratio in the other direction. And that will involve hard decisions on taxes, spending and sacrifice — something the World War II generation knew much about.....

Erskine Bowles realized how tough his task will be leading President Obama's war on the federal budget deficit when he told his 90-year-old mother of his appointment.
She was proud of him. Then she said, "Don't mess with my Medicare."

It won't be the last threat Bowles gets this year as he directs an 18-member, bipartisan commission through an ocean of red ink that has never been deeper or more foreboding.

Under Obama's budget plan, the USA's debt in 2020 would be nearly the size of the entire economy then. Interest costs would be $900 billion, five times today's level.....