Fast forward to China and U.S. trade deficits. Chinese investors had lots of money and were looking for secure returns. A combination of large sums of cash looking for a home and the invention of mortgage-backed securities created an almost unlimited demand for these financial products. A demand for securities to fill up tranches of collateralized debt obligations (derivatives) contributed to the further decrease in lending standards. When the supply of mortgages began to dry, the industry created a non-traded security based not on actual mortgages, but on the insurance against default of the securities (synthetic collateralized debt obligations).

This house of cards began to fall when only about 15 percent of mortgage holders began to default.

The sad story of the financial system was occurring as U.S. debt obligations were soaring. The current federal budget is about $3.7 trillion. The cost of running the government is approximately $1.3 trillion. With a deficit of more than a trillion dollars, the cost of government is now totally borrowed. Tax revenues cover only the mandatory spending — Medicare, Medicaid, interest on the debt. All discretionary spending is borrowed.

It is evident that mandatory spending is unsustainable. Discretionary spending, while in need of reform, can’t solve the problem. The solution is in the entitlements portion of mandatory spending, as well as in tax expenditures — carve-outs in the tax code such as mortgage deductions. Though important, the promises of mandatory spending are too excessive. Revenues have failed to keep pace as commitments have multiplied. And some benefits tend toward being counterproductive. New York Times columnist Nicholas Kristof reported recently that some children in Appalachian Kentucky are being pulled from literacy classes because the family might lose a $698 monthly check. The Supplemental Security Income Program provides the money to children who are deemed intellectually disabled.

Both political parties have contributed to the problem. Promises have piled up and must be addressed. Taken as a whole, they are no longer sustainable, and probably never were from the beginning.

The final consideration is U.S. interests and commitments around the world. The United States carries the financial burdens of providing global security. The nation was engaged in Iraq for eight years. And yet, the Iraqi government is not helping U.S. interests by giving free rein to Iran to resupply the Syrian government as it fights its own citizens. The war in Afghanistan has now continued for 11 years with scant hope for stability after the projected U.S. departure in 2014.

In the midst of all this turmoil, the all-volunteer military has been stretched beyond any reasonable expectation. Troops have performed magnificently, and suffered much without complaint. The soldiers, sailors, airmen, marines and coastguardsmen of today are the best we have ever had. Leadership at the officer and enlisted level is superb. The nation has obligations to them that must be honored. The coming debate will certainly target them and their earned benefits. Whatever happens must balance their service against what not only has been promised, but what they have earned.

Against this backdrop, the current debate over deficit reduction falls short. The target of $4 trillion is far too little. With a debt of $16 trillion — over $10 trillion of it public — and an annual deficit that exceeds $1 trillion, the target reduction for 10 years ought to be in the neighborhood of $9 trillion to $10 trillion.

The nation is playing small ball here. One way or the other, we will get around this immediate cliff, but it is only a short-term victory. Eventually there will be another cliff, because we will not have addressed the full extent of the problem: We have promised too much, tried too much, spent too much and cast too little.