Image: Electrical plug © Jupiterimages, Getty Images

Related topics: politics, economy, Federal Reserve, jobs, Anthony Mirhaydari

We've reached a milestone. Since returning to growth in the summer of 2009, the U.S. economy has pushed to a new high. After expanding by a 3.2% annual rate in the fourth quarter -- thanks to the strongest final sales result in 26 years -- the U.S. recovery has matured into an expansion. The Great Recession, the worst downturn in more than 70 years, is dead and buried.

But while the economy has never been larger, there is still healing to be done. The unemployment rate remains above 9%, and the long-term unemployed are legion. Home values flounder near levels last seen in 2003.

The recovery has also come at a price. Uncle Sam went on a borrowing-and-spending binge even as businesses hoarded cash and consumers reduced their credit obligations. This was all enabled by the Federal Reserve's massive money-printing operation, which is helping fuel inflationary pressures at home and abroad.

The binge has awakened millions to the problem of growing deficits and rising public debt, fueled the Tea Party political movement and set the stage for a Washington showdown in the coming months over a new federal budget and the need to raise the government's $14.3 trillion debt limit.

Image: Anthony Mirhaydari

Anthony Mirhaydari

Clearly, this current pace of borrowing and spending can't continue, and the Fed's stimulus efforts can't go on forever. But is the economy strong enough to keep going without the support of low taxes and government largesse?

If we pull the plug on deficit spending now, will the patient survive?

Economic threats still loom

Certainly, the global economy isn't exactly thriving now. Inflation is resurgent. The emerging market economies are slowing. Europe looks ever-more decrepit. Turmoil is churning up the Middle East near the critical Suez Canal and Arabian oil fields.

In the U.S., as in Europe, there is too much debt -- far too much debt. And it's growing every day, with the fiscal budget deficit expected to hit 9.8% of GDP this year, or $1.5 trillion, according to the Congressional Budget Office.

We've funded two wars, the bailouts, the stimulus packages, infrastructure investments and unemployment benefits, all on credit. And just last month, President Barack Obama and congressional Republicans passed an additional $858 billion bill to extend the Bush-era tax cuts, extend emergency unemployment benefits and cut payroll taxes, without any hit to spending.

Image: Gross Federal Deby © MSN Money

As a result, the U.S. government's total outstanding debt has swelled to $14.1 trillion, or 84% of gross domestic product -- a level that hasn't been reached since just after World War II.

The problem is that many of the steps politicians would have to take to put the country back on the path of fiscal sustainability risk throwing the economy back into recession. Think higher taxes, reduced spending and the type of austerity that caused the British economy to shrink by 0.5% last quarter -- its first decline since late 2009.

Among the questions Wall Street strategists and investors are beginning to ask: Is the economy strong enough to handle the fiscal austerity that's needed to prevent a loss of faith in U.S. Treasury securities? Can we cut the debt and create new jobs at the same time?

Yet the alternative -- doing nothing -- isn't an option. Researchers at the Bank for International Settlements project that on our current path, U.S. debt will grow to more than 400% of GDP by 2040. If something isn't done, the bond market will force interest rates higher and the U.S. could lose its vaunted "AAA" credit rating on fears of default or debt restructuring.

Japan, the world's most heavily indebted rich country, had its credit rating downgraded by Standard & Poor's in January. The change was made because of the nation's lack of a "coherent strategy" to address its fiscal position, hampered as it is by a slow-growing economy and aging workforce. The same could be said about the U.S.

The U.S. endgame isn't pretty, either. As I said in a column in spring, this debt burden threatens the prosperity of our children and our grandchildren even as it crowds out private borrowing and increases the interest rates that businesses and consumers pay. It could also leave the economy vulnerable to the next big economic downturn, because governments would have limited ability to engage in stimulus or rescue efforts the next time the system threatened to melt down.

So, what is to be done?

Big problem, painful solutions

Unlike other AAA-rated economies, such as the U.K. or Germany, the United States has no medium-term plan to deal with its finances. In fact, the passage of the recent $858 billion tax cut legislation in December means the United States will be the only major advanced economy in 2011 that is currently loosening fiscal policy and encouraging more borrowing.

The International Monetary Fund isn't pleased, noting in its latest Fiscal Monitor Update that the "package's composition means that its simulative impact will be small, relative to its fiscal cost." In short, despite all the fretting about debt, the one thing Republicans and Democrats have agreed on is a plan that cuts taxes, increases spending and raises the national debt.