The global financial system is again transfixed by sovereign debt risks. This evokes bad memories of defaults and near-defaults among emerging nations such as Argentina Cheap Christian Louboutin Flats, Russia and Mexico. But the real issue is not whether Greece or another small country might fail. Instead, it is whether the credit standing and currency stability of the world’s biggest borrower, the US Links of London Earrings, will be jeopardised by its disastrous outlook on deficits and debt.

America’s fiscal picture is even worse than it looks. The non-partisan Congressional Budget Office just projected that over 10 years, cumulative deficits will reach $9,700bn and federal debt 90 per cent of gross domestic product – nearly equal to Italy’s. Global capital markets are unlikely to accept that credit erosion. If they revolt, as in 1979, ugly changes in fiscal and monetary policy will be imposed on Washington. More than Afghanistan or unemployment, this is President Barack Obama’s greatest vulnerability.

How bad is the outlook? The size of the federal debt will increase by nearly 250 per cent over 10 years, from $7,500bn to $20 Wholesale Links of London Bracelet,000bn. Other than during the second world war, such a rise in indebtedness has not occurred since recordkeeping began in 1792. It is so rapid that, by 2020, the Treasury may borrow about $5 Buy Links of London,000bn per year to refinance maturing debt and raise new money; annual interest payments on those borrowings will exceed all domestic discretionary spending and rival the defence budget. Unfortunately, the healthcare bill has little positive budget impact in this period.

Why is this outlook dangerous? Because dollar interest rates would be so high as to choke private investment and global growth.

It is Mr Obama’s misfortune to preside over this. The severe 2009-10 fiscal decline reflects a continuation of the Bush deficits and the lower revenue and countercyclical spending triggered by the recession. His own initiatives are responsible for only 15 per cent of the deterioration. Nonetheless, it is the Obama crisis now.

Now, the economy is too weak to withstand the contractionary impact of deficit reduction. Even the deficit hawks agree on that. In addition, Mr Obama has appointed a budget commission with a December deadline. Expectations for it are low and no moves can be made before 2011.

Yet Charm Bracelets Wholesale, everyone already knows the big elements of a solution. The deficit/GDP ratio must be reduced by at least 2 per cent, or about $300bn in annual spending. It must include spending cuts, such as to entitlements Discount Yves Saint Laurent Boots, and new revenue. The revenues must come from higher taxes on income, capital gains and dividends or a new tax Louboutin Outlet, such as a progressive value added tax.

It will be political and financial factors that determine which of three budget paths America now follows. The first is the ideal. Next year links of london Jewellery, leaders adopt the necessary spending and tax changes Cheap Louboutin Mary Janes, together with budget rules to enforce them Wholesale Yves Saint Laurent Shoes, to reach, for example, a truly balanced budget by 2020. President Bill Clinton achieved a comparable legislative outcome in his first term. But America is more polarised today, especially over taxes.

The second possible course is the opposite: government paralysis and 10 years of fiscal erosion. Debt reaches 90 per cent of GDP. Interest rates go much higher, but the world’s capital markets finance these needs without serious instability.

History suggests a third outcome is the likely one: one imposed by global markets. Yes Buy Links Rings, there may be calm in currency and credit markets over the next year or two. But the chances that they would accept such a long-term fiscal slide are low. Here, the 1979 dollar crash is instructive. The Iranian oil embargo, stagflation and a weakening dollar were roiling markets. Amid this nervousness Wholesale Louboutin Flats, President Jimmy Carter submitted his budget Wholesale Yves Saint Laurent Sandals, incorporating a larger than expected deficit. This triggered a further Links Jewellery Wholesale, panicky fall in the dollar that destabilised markets. This forced Mr Carter to resubmit a tighter budget and the Fed to raise interest rates. Both actions harmed the economy and severely injured his presidency.

America’s addiction to debt poses a similar threat now. To avoid an imposed and ugly solution Links of London Watches Wholesale, Mr Obama will have to invest all his political capital in a budget agreement next year. He will be advised that cutting spending and raising taxes is too risky for his 2012 re-election. But the alternative could be much worse.

(The writer is chairman of Evercore Partners and was deputy US Treasury secretary under President Clinton.)