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Last week, the United States of America surpassed $17 trillion in its accumulated national debt. Can our system handle that amount of money?

I am not referring to the financial system, but rather the democratic system. Despite what you may have heard, America is not bankrupt. We can still easily and cheaply borrow money from Japan, Germany and the Federal Reserve. It is not the financial system that is weakening under the $17 trillion. But perhaps America’s ability to take on debt is actually weakening its willingness to pay it back. And perhaps that is the reason why our reputation as a near-immaculate borrower is now crumbling in this new episode of America’s 223-year love affair with government debt.

The reputation of a borrower is based on two characteristics: ability to pay and willingness to pay. America undoubtedly has the ability to pay back its debt, but when we begin to discuss its willingness, politics come into play.

The Federal Reserve of San Francisco recently conducted a study that analyzed over 170 various government defaults from around the world dating back to the Napoleonic Era. The conclusion was shocking – over 40% of the defaults occurred during periods of economic growth. This obviously implies that these defaults were not caused by economics, but by politics.

“Many of these seemingly inexcusable defaults occurred when political upheavals brought new coalitions to power that favored default for opportunistic or ideological reasons,” observed Michael Tomz of Stanford University and Mark L. J. Wright of UCLA, the authors of the study.

This month’s government shutdown was not due to America’s inability to pay back its debt. It was due to the political showdown between the hardline Tea-Party Republicans and the rabid healthcare-extremist Democrats.

Back in 2011 when the first debt showdown between the Republicans and Democrats ensued, Standard and Poor’s immediately stripped the U.S. of its coveted AAA rating. Two weeks ago, Fitch threatened to follow suit, which prompted the Tea Partiers to surrender their hold on Obamacare and raise the debt ceiling.

The relentless brinkmanship regarding the debt ceiling is causing countries around the world to lose confidence in U.S. political institutions and its economic credibility.

So, whom do we blame for this crisis? The Dutch.

One of the foundations of a liberal democracy is its ability to assume long-term public debt. This provides an opportunity to gain positive credit and receive loans from other countries in times of need (i.e. war, natural disasters, etc.).

In the 1600s, the Dutch Republic of 1.2 million people overthrew the powerful Spanish Monarchy in the 80 Years’ War. How did they accomplish such an incredible feat? Good credit.

King Philip II of Spain declared bankruptcy three times during his reign. He rarely paid back any debt that was incurred, and his successors followed in his footsteps. As a result, foreign creditors were only willing to lend money to Spain with a price tag of extremely high interest rates.

In contrast, the Dutch city-states began buying municipal debt as investments and shortly thereafter adopted this system on a national level. A public assembly would approve the borrowing, and in effect, the same public assembly would be willing to raise taxes to ensure repayment. Because of their financial integrity and reliability, the Dutch were granted very low interest rates from foreign creditors.

The ability of a country to borrow cheaply to fight wars is a question of national life and death. When a country is united and the people trust their government, strong credit ratings typically follow and borrowing becomes easier.

George Washington’s right hand man, Alexander Hamilton, committed this history to heart. In 1790, Hamilton realized that if the United States was going to succeed as a new and free country, it needed to have the necessary means to protect itself, especially during such a vulnerable stage. In order to acquire these means, America needed to establish itself as a trustworthy borrower.
As the first Treasury Secretary of the United States, Hamilton strongly encouraged the federal government to assume the debts of the states incurred during the Revolutionary War. Once this resolution was passed in 1790, the federal debt was born – the same federal debt we are fighting over today.

The irony is beautiful; America’s reputation as a safe haven for investments only encourages it to issue more debt. After Standard and Poor’s downgraded the U.S., the global markets were shaking, and investors hastily searched for financial refuge. This meant that investors actually bought even more U.S. Treasury Bonds because those were (and still are) the safest and most reliable investments.

With more bonds being purchased, the U.S. can now borrow more money. No incentive exists to cut down the debt.

The bottom line is that America’s ability to pay and its willingness to pay are moving in opposite directions. As the ability to borrow money continues to become easier, the incentive to pay back that debt diminishes. Eventually, this will result in the erosion of trusted democratic institutions – the soldier doesn’t receive his pay, and the elderly don’t receive their social security checks. If we aren’t willing to curb spending now and reign in the national debt, a process of unplanned consequences will initiate and interest payments and entitlements will consume the budget.

America just might have too much debt.

Rod’s 5 Stocks to Watch:

The Cheesecake Factory Inc.

(NASDAQ: CAKE)

Anheuser Busch Inbev

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Dynamic Materials Corporation

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Natus Medical Inc

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The Asia Tigers Fund Inc

(NYSE: GRR)