Commentary by Tyrus Cobb: Deficits do matter, but don't blame the Chinese

The national debt is soaring to unprecedented levels. The projected budget deficit this year alone will reach a record $1.6 trillion, due to the weak economy, higher spending, and renewed tax cuts. It took just seven months for our national debt to increase by $1 trillion! As a percentage of the nation's economic output, the deficit at nearly 100 percent of GDP will be worse than it was during World War II (ironically, even during the New Deal, deficits did not exceed 5 percent of GDP).

Interest on the debt currently costs $200 billion annually, but if nothing is done, in just five years the interest will triple to around $640 billion, and to a trillion dollars by 2020. Interest on the debt is the fastest growing segment of the budget.

To put that in context, America will spend more on debt interest than China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey and Israel spend on their militaries combined. If Beijing continues to buy American debt at the rate it has, then within a few years U.S. interest payments alone on that debt will cover the entire cost of the Chinese military.

At the end of World War II we had no foreign debt. Today almost half the debt is held by foreign lenders - Japan, China, and other exporting nations. To date these other countries have been willing to lend us their surpluses at low rates (will that benevolence continue?).

The debt and that portion owned by China became the focus of a controversial Congressional District 2 campaign ad for Republican Mark Amodei. The image of a Chinese Communist Army marching through Washington and a Red flag flying above Congress was offensive to many, albeit the crude ad did bring attention to the debt issue. However, I found Democratic candidate Kate Marshall's response equally concerning, as she charged that Amodei's ad failed to focus "on the real issues for Nevada families." Sorry, Kate, our growing indebtedness is the real issue.

While Amodei is right in bringing attention to the growing debt and that owned by Beijing, what concerns me more is what would happen if the Chinese stopped buying our debt! That would certainly lead to the collapse of our economy, period. Thus the two countries remain locked in a perverse, symbiotic relationship - we keep expanding our debt because we can since the Chinese continue to buy it, and China purchases it since a healthy U.S. is critical to the Chinese export-oriented economy.

The primary culprit in this vast expansion of our national debt is entitlement spending - Social Security and Medicare/Medicaid primarily. The CBO projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion. Defense spending is similarly unsustainable.

The debt is fast approaching the statutory ceiling of $14.29 trillion, which must be raised - or spending cut dramatically - by Aug. 3. The rapid expansion of the national debt (private as well as public) - which began in the Bush administration by heavy tax cuts and two wars and which has been expanded exponentially by Obama - has ratcheted up fears that one day creditors like China and Japan might demand higher interest rates to finance American spending. What happens then when interest rates go up to normal levels and we are strapped with this unsustainable debt to pay off?

While investors still view U.S. Treasury securities as a haven during a crisis, one has to wonder if we are not the next Greece or Ireland. I worry less about a Chinese army marching through Washington, but more about a China finally deciding that buying our debt is financially not a sound investment. That could lead to a real collapse of the American economy.

• Tyrus W. Cobb is former special assistant to President Ronald Reagan.