On the National Debt

Several of the responses that I have seen from the Left in recent days, and, alas, from the Right, compels me to believe that not only does the public and the elite not grasp the true depth of the fiscal Armageddon facing the Republic, their ability to avoid grasping it is the single greatest feat of mental malfeasance, of willful blindness, in history.

I have added the National Debt Clock to my site, so you can see the numbers in all their glory of what you owe our leaders. Mark the numbers marching like the mindless broomsticks in the Sorcerer’s Apprentice, whose endless advance no ax can stop.

I have found a brief and clear explanation of this depth.

Federal debt began the 20th century at less than 10 percent of GDP. It jerked above 30 percent as a result of World War I and then declined in the 1920s to 16.3 percent by 1929. Federal debt started to increase after the Crash of 1929, and rose above 40 percent in the depths of the Great Depression.Federal debt exploded during World War II to over 120 percent of GDP, and then began a decline that bottomed out at 32 percent of GDP in 1974. Federal debt almost doubled in the 1980s, reaching 60 percent of GDP in 1990 and peaking at 66 percent of GDP in 1996, before declining to 56 percent in 2001. Federal debt started increasing again in the 2000s, reaching 70 percent of GDP in 2008. Then it exploded in the aftermath of the Crash of 2008, reaching 102 percent of GDP in 2011.

(Source: http://www.usgovernmentspending.com/federal_debt which is explained in more detail here and ultimately comes from www.gpo.gov.)

Keep in mind what we are discussing. GDP is the gross domestic product, an economic shorthand for the total value of all goods and services produced by the entire American economy. Now, over one hundred percent, or, in other words, all of the economic activity of the National economy for this year is insufficient to pay our bills.

It is insufficient even if the entire economy, all of it, every penny earned by every man, woman, child and talking dog went immediately to service the debt, and not to any other use whatever.

This figure does not include state and local deficit spending, nor unfunded mandates like Medicaid. Nor does it include personal debt.

The money is gone. All of it is spent, and all the nation will ever make.

Raising taxes on the rich will not do anything. Even if all the wealth of everyone worth more than a quarter million a year were confiscated outright, all of it taken, one hundred percent, it would not do anything. For that matter, pulling the plug on PBS, Big Bird and all, will not do anything. These are purely ceremonial gestures, meant as political theater.

We are so far in debt that our children working their whole lives cannot pay back what has already been spent.

And our grandchildren, working all their lives.

If we do not pay back this debt, creditors will lose faith in our ability to pay it back. Since we do not have a gold standard currency, the only value our paper money has is the faith creditors have that the state can through taxes raise revenue enough to pay them back. The moment that faith flags and fails, they will sell off dollars and buy harder and safer assets. The sale drives the value down. Money will correct to its natural market value, which, under these circumstances, is nearly nothing.

If we attempt by various schemes, such as using Treasury bonds to buy  debt from ourselves, to “monetize” the debt, that is, to inflate the currency so as to lessen the value of the debt, this will have the same effect as a transfer of wealth from creditors to debtors, which will again cause creditors to lose faith, sell off dollars and buy harder and safer assets. Again, money will correct to its natural market value, which is nothing.

When you hear about Quantitative Easing, and it seems like the arcane jargon of serious and intelligent experts using their high and hidden knowledge to solve or soothe the problem, keep in mind that “Quantitative Easing” is merely Orwellian gibberish for printing up worthless banknotes to inflate the currency.  It is the way Wiemar Germany sought to escape the burden of their war debts, and what caused the hyperinflation of the Deutschmark.

The debt is an IOU, like the marker of a gambler. Without a gold standard, the creditors loan the state what is basically an unsecured debt. If we welsh out on the debt, the IOU becomes worthless. Since this the same instrument, paper money, that we are using for all exchanges of goods and services in the economy, and underpins the world economy, the rest of the world goes over the brink when we go over.

So we can neither repudiate nor monetize the debt, as this will cause inflation or hyperinflation, and destroy the value of the currency. Nor can we pay it back, not at current astronomical and insane spending rates.

What about working honestly to pay it back, like a man should who is a man?

Politically, we do not, as a nation, even have the will to slow the rate of the increase of the spending, nor to live within our budget, nor, if the last decade is any measure, to pass a formal budget, nor, if the last three years are any measure, pass an informal budget.

Politically, we do not, as a nation, have the will even to make token gestures toward cutting spending and raising revenue.  We cannot even give the pink slip to Big Bird.

When you hear the great public debate about the so called ‘fiscal cliff” in January, or raising the debt ceiling, or taxing the rich or cutting some minor expense like Public Television, keep in mind it all means nothing.

Imagine if you bought your house and your car and then two more houses on your credit card, and a Zeppelin made of solid gold and a unicorn zoo, and then bought a candy bar, and you were debating with your accountant and the bill collector over whether you would pay for half the candy bar with the change in your pocket now or not.

Imagine if the half a candy bar debate filled all the time and energy of all parties, and the rest of the debt, gold Zeppelin and unicorn zoo all, was not mentioned.

The magnitude of difference between what the problem is and what we are discussing is astonishing.

That allegedly sober and sane men of the Left would greet the bad news that the whole world has gone broke not merely with shrugs of indifference, but with scorn and eye-rolling, sneering at the warnings as if at the false alarm of Chicken Little is beyond astonishment, beyond disgust, beyond words.

I do not understand what is so hard to understand. All the money is gone. It has all been spent.

We spent our future, and our children’s future. That is the problem.

I will say it again, just to be clear: We are so far in debt that our children working their whole lives cannot pay back what has already been spent.

And our grandchildren, working all their lives.

You ate them, dear voters, dear public, dear representatives, Dear Leader.

You ate our children. You ate their lives.

50 Comments

  1. Comment by False_Keraptis:

    >So we can neither repudiate nor monetize the debt, as this will cause inflation or hyperinflation, and destroy the value of the currency. Nor can we pay it back, not at current astronomical and insane spending rates.

    One of those three options must happen, so which is it? Monetization is the sneakiest and most dishonest, so that’s what I’d bet on.

    Dismissing the dangers of national debt is seductive and successful because it’s counter-intuitive. Any idiot can say that national debt is a bad thing; those who say otherwise must have some special knowledge or insight that puts them above the rest of us. These “experts” then tell us we can have something for nothing, and the debt-skeptics don’t stand a chance.

    I expect debt concerns to be treated as quaint, outdated, unscientific “folk-economics” right up until the whole mess explodes in our face. Then I expect an about-face from the economists, who will tell us that they warned us again and again, and we were just too ignorant and short-sighted to listen to them. Sadly, I expect us to believe them.

    • Comment by John C Wright:

      Monetization is the sneakiest and most dishonest, so that’s what I’d bet on.

      There is no need to bet. That is what QE3 “quantitative easing” has been. One department of the government is printing up money to buy debt instruments from another department of government, so as to make it appear that the debt is being paid down. It is like borrowing money from one credit card to pay your other credit card bill.

  2. Comment by Nicholas D. Rosen:

    I wish I could show you where you’re wrong. Unfortunately, you have a real talent for penetrating nonsense and showing what lies beneath it.

  3. Comment by David Meyer:

    The ballooning of public debt during President Obama’s first term and his failure to even propose serious measures to deal with it in his second term were the major factors I thought would disqualify Obama for reelection in the minds of all but the most rabid partisans. As John writes, this year’s fiscal “cliff” and everything else that is likely to get deadlocked between the House and the Senate is peanuts compared to the public debt abyss over the precipice of which we are now blithely flying. Wheeeeeeeeee ………!

    At least we will be witnesses to History. Never has so large an national economy fallen so far from so high.

  4. Comment by Sean Michael:

    I agree with Mr. Wright’s comments. I do not expect our nation to do anything real and serious about our national debt before everything CRASHES.

    Sean M. Brooks

    • Comment by The OFloinn:

      But the CRASH will be the fault of George W. Bush. So, party on!

      • Comment by Sean Michael:

        Hi, OFloinn!

        To me, that CRASH will be like the people who danced and sang as the TITANIC had that ufortunate encounter with an iceberg! By refusing to elect Mitt Romney as president, too many Americans decided they don’t want Captain Barry shoved aside and a sensible man spinning the wheel hard over in a desperate attempt to save the ship. Bah!!!

        Sean M. Brooks

  5. Comment by GeekLady:

    For some added perspective, if Apple gave all its cash in hand (estimated at 100 billion) towards paying back the national debt (rounded down to 16 trillion), it would cover 0.625% of that debt. The entire net worth of Apple (estimated at 500 billion) would cover 3.125%.

    • Comment by jollyroger:

      Except that Apple’s Net worth is also based on the inflated value of the dollar, and the inflated value of what a stock certificate of Apple is worth. Furthermore the majority of Apple’s value is in what we would call intellectual property- the knowledge of how to make certain things. The people we owe the most money to, China, do not have the best reputation on paying for intellectual property.

      If you could get 200 billion of todays dollars worth of gold for Apple today I would be shocked (and that includes the $100 billion that you mentioned). After hyper inflation you would be lucky to get $50 billion 0f todays dollars in gold.

      • Comment by Rolf Andreassen:

        Oh, I don’t know. Consider the Confederate dollars, the Continental, and the Mark of 1923, just before the collapse: They each have some sort of value as collectors’ curios. So you can probably convert them into gold at a much greater rate than when they were actively trading as money. Admittedly if you had 50 billion in paper, there would not be much scarcity value; you’d be rather better off burning most of that and auctioning off, say, ten of each denomination. Or perhaps you could market it as a decorative wallpaper? With a little stiffening, old dollar bills might make admirable bookmarks and conversation pieces. Lampshades? Really, there’s no end to the possible uses of that much paper!

  6. Comment by David Meyer:

    Total federal revenues were $2.3 trillion in 2011. Run a 100% budget surplus for eight years and we can pay down the national debt. Deep, permanent cuts in federal expenditures are the only way to bring the debt under control.

    • Comment by Tom Simon:

      Of course, running a 100% budget surplus would require paying no money out for any program. Abolish defence, abolish Social Security, abolish Medicare, abolish the courts, abolish every last dollar worth of federal programs — including the IRS, without which you would have a damned difficult time collecting that $2.3 trillion every year. And even then it would still take eight years to pay off the debt — assuming that a miracle occurred and revenues did not go down. (Some government programs are actually necessary, and the economy would suffer without them.)

      • Comment by David Meyer:

        It makes me think that there is a theoretical maximum amount of national debt that can be payed down in a controlled way. For example, if we assume:

        10% is the maximum budget surplus that can be run for multiple years while maintaining economic and social order, and allow for the reelection of an incumbent President;

        20% of GDP is the maximum federal revenue at optimal tax rates; and

        2 Presidential terms is the maximum length of time such a dept pay-down policy could be pursued as political pressure would require the next administration to either reduce taxes, increase spending, or both;

        Then the maximum possible debt reduction that can be expected is:

        0.20 x 0.10 x 8 = 0.16

        16% of GDP

        If we further assume there is some amount of debt that is safe to carry permanently, say WWI level of 30% GDP, then

        46% of GDP

        … would be the maximum total national debt we should carry in a crisis situation.

        So we need four two-term Presidents plus one more term dedicated to paying down the debt in order to reach the above safe peace time level (assuming all intervening administrations maintain balanced budgets).

        • Comment by Rolf Andreassen:

          I observe that your math does not take economic growth into account. Suppose the debt is 100% of GDP; then if budgets merely balance, making no effort to actually pay down the principal, 2.5% growth over 30 ears will reduce the debt to 50% of GDP.

          • Comment by David Meyer:

            Yes, I ignored growth in order to keep the calculations simple. Any net economic growth that occurs will reduce the time I projected for paying down the debt to a manageable level. On the other hand, long term economic contraction, and therefore declining GDP, would increase the time needed to reduce the debt since 20% of GDP in taxes would bring in less and less total revenue.

            You are also correct in observing that economic growth will eventually reduce the size of debt relative to the total economy to a manageable level. However, this scenario requires sustained economic growth AND balanced federal budgets for a very long time, 7.5 presidential terms. I would say neither of those conditions are likely in the current political climate, though to be fair I would say that the assumptions behind the program I outlined are more likely only because they have to be sustained for a shorter period of time.

            I want to underline that even your do-nothing-and-outgrow-the-debt approach starts with a balanced federal budget.

            Also, the do-nothing-and-outgrow-the-debt strategy will result in greater debt relative to GDP in a period of economic contraction.

            Finally, as others have pointed out, neither of our approaches does anything for unfunded entitlement liabilities or non-federal public debt.

          • Comment by The OFloinn:

            I think there may be some confusion between the debt and the annual deficit.

  7. Comment by Stephen J.:

    “If we welsh out on the debt, the IOU becomes worthless. Since this [is] the same instrument, paper money, that we are using for all exchanges of goods and services in the economy, and underpins the world economy, the rest of the world goes over the brink when we go over.”

    As a total non-economist, I’ll ask the probably stupid question, then: If the U.S. doesn’t want to admit the debt cannot be repaid and the IOU is worthless, and the entities to whom the debt is owed don’t want to admit that debt can never be repaid and the IOU is worthless, isn’t this just encouragement for everyone to keep the charade going?

    An unpayable debt only becomes a catastrophe once your creditors are prepared to call it all in, and it doesn’t seem like anyone has any interest in doing that; rather the opposite, in fact, I should think — a U.S.A. in permanent indebtedness for the foreseeable future seems like it would be much more valuable to China than a bankrupt U.S.A. unable to buy Chinese manufacturing. It’s never smart to kill the goose that’s laying the golden eggs due to you, even if its owner promised you more eggs and faster than you knew he could ever deliver; fewer eggs than you’re owed still beats no eggs.

    This is not to say that an indefinitely extended future of effective debt-slavery on a national level is any kind of a good thing (to ridiculously understate the point). But it may be somewhat likelier than, and just marginally preferable to, complete social breakdown. And any kind of Black Swan event big enough and catastrophic enough to kill that golden-egg goose would likely ruin anyone’s ability to enforce that debt as well. So there may yet be time to teach this particular horse to talk — or at least make preparations to flee the kingdom.

    • Comment by Tom Simon:

      The problem isn’t that creditors will call in the existing debt. The problem is that the U.S. government is still running up new debt — $120 billion last month alone, as I have read — and there is nobody in the world with the capacity, let alone the willingness, to buy it. So it is being covered by printing money instead.

      In a matter of months the economy will be awash with this printed money, without any increase in the quantity of goods and services available to buy. In fact, goods and services will be withdrawn from private use, because the government alone has control of the new money and can bid the prices up as high as necessary to make sure that it gets everything it wants.

      At that point, a huge increase in inflation becomes mathematically certain. The government will no doubt impose wage and price controls; this will only create a black market, whilst inflicting untold suffering on those who are compelled to remain within the legal market. The government will denounce profiteers; but nobody is making a profit. The government will probably confiscate businesses and other assets, as it did a few years ago with General Motors; this will only remove them from the productive economy and put them under the control of bureaucrats who have no idea how to run them. None of these reactions will do anything to solve the problem; indeed, they will only make it worse. Meanwhile, the rapid devaluation of the dollar will make it certain that no foreign investor will be stupid enough to buy debts denominated in U.S. dollars — not only government debts, but personal and business debts as well.

      Already the inflation rate, if honestly calculated, is up to 10 percent. The official rate excludes food and energy costs, but it is precisely those costs that have been rising fastest, while housing — which is included in the official rate — has been depressed in price since the subprime mortgage crash.

      When I say ‘honestly calculated’, I mean that every single person and household has to pay for food and energy, and it is ridiculous to leave such large items out of calculation; furthermore, food and energy were included in the inflation rate until the 1980s, so when you compare today’s figures with the 1970s and earlier, you need to calculate the figures in the same way to have a valid comparison. Unemployment figures have been fudged in a similar way. When you remove the statistical fudge factors, the ‘stagflation’ of the Carter administration — simultaneous 10-percent inflation and 10-percent unemployment — is happening now. It is bound to get much worse.

  8. Comment by Rolf Andreassen:

    Typo:

    loose faith

    You have this at least twice.

    On the substance of your post, I don’t quite understand why you say that USG cannot pay down its debt. To analogise to a household, is it not as though income from wages were, let’s say, a hundred thousand, and the mortgage a bit above half a million? (That is, tax revenue is around 20% of GDP, and the debt around the same as GDP.) And a mortgage with an interest rate of a laughable single percent, at that. True, it cannot be paid off in five years, since that money has to cover food and whatnot as well. But a family would hardly consider this a desperate and impossible situation. Drop the music tutor for the kids and redirect that money to the mortgage payment, and you’ll be fine in thirty years.

    Are you making some firm prediction about what is or isn’t politically possible?

    • Comment by John C Wright:

      Thank you. Correction made.

      Question: In your analogy, what would be the outcome if, instead of dropping the music tutor for the kids, the household held a vote, and the majority decided to hire a 100-man orchestra?

      Your prediction for the fate of such a house would be about as “fixed” as any other prediction about humans, who, so it happens, have free will. An unexpected miracle might occur, but if not, the fate of such a heedless household will come as no surprise.

      Predicting a canoe going over the falls is not the same simple mathematical calculation as predicting a barrel going over the falls, because the canoe might strike for shore, and the paddlers row furiously. There will come a time, however, when they are too close to the edge.

      • Comment by Rolf Andreassen:

        They would go bankrupt. But you did not couch your prediction as “Unless we do X, Y will happen”, as you were so careful to insist on with hyperinflation. You asserted flatly that the debt cannot be paid:

        I will say it again, just to be clear: We are so far in debt that our children working their whole lives cannot pay back what has already been spent.

        That is very different from “We won’t be able to pay this down unless we do thus-and-so”.

        In addition, it seemed to me that the debate in Washington has not been on whether to pay down the debt, but on how; broadly, the Republicans want spending reductions and the Democrats want tax increases. Or, in the analogy, one side wants the kids to get summer jobs to pay for their tutor, while the other side wants to drop the tutor entirely. (Whether it might be a good idea to drop the tutor and make the kids pay rent is another question.) Taking a vote on that subject does not strike me as obviously irresponsible. I observe in passing that the tax increases currently on the table are returns to the sky-high, oppressive levels of, horror of horrors, the nineties; we are not speaking of Pomperipossa.

        In short, I think you are flapping your lips in addictive outrage, rather than thinking seriously about the problem. I’d offer you another bet, but you’ve already demonstrated that you won’t put any money where your mouth is.

        • Comment by John C Wright:

          Are you trying to make some sort of point? You keep talking as if people are robots, and you are trying to discover what exact nuance of predictive power I have to deduce their programming. It is a waste of time. I am speaking in the ordinary way people speak when they are not playing the Socratic game of pretending to be stupid, and not understanding the ordinary meaning of words. All predictions of human behavior are conditional. You know this.

          • Comment by Nate Winchester:

            Isn’t Rolf the one always lobbying for fundamentalist materialism?

            So… why wouldn’t he talk as if people are robots? IIRC it is consistent with his worldview. ;)

          • Comment by Rolf Andreassen:

            My point is merely that you are writing for the pleasure of outrage, not to give a reasoned analysis or even a coolly judged warning.

            • Comment by John C Wright:

              For better or worse, I had already answered this in the text. This is the description of you, sir:

              … not only does the public and the elite not grasp the true depth of the fiscal Armageddon facing the Republic, their ability to avoid grasping it is the single greatest feat of mental malfeasance, of willful blindness, in history.

              Let me remind you of the salient argument:

              If we have spent all the money and borrowed nearly all the credit, then we are out of money and nearly out of credit. Additional income, if we are both expending beyond our means, and expanding the rate of expenditures, is insignificant. This goes double if new growth, as in the energy industry or the medical appliance industry, is being and shall be taxed and regulated into sluggish growth or none.

              Additional credit will last until the creditors lose faith in the ability of the credit instrument to recoup its value relative to other investments with greater safety or greater return. The moment that happens, demand will drop, leading to a depression of the market value of the instruments, which will create an additional incentive to divest. Either repudiating the debt or monetizing the debt will inflate the currency dramatically, leading to a depression of its value. Absent a gold standard, there is no natural price floor for this value, or, in other words, no dollar value to which the dollar can fall where a further fall is for some reason impossible. (Under a gold standard, an inflated currency could only fall to the metal value of the coin or instrument.)

              At this point, you ask if I am willing to wager that this point will happen within four years.

              I reply that no one can tell when it will happen, only that there is a strong incentive for it to happen which daily grows stronger, and that the results when it does happen are predictable.

              On this basis, you deduce (if it can be called that) that my argument need not be addressed, because my motives for uttering the argument are the joy of anger.

              In other words, I make a statement that if creditors lose faith in the power of the currency to hold value, they will divest, causing something like a run on the banks. You pick an arbitrary date and ask me if I will make a meaningless ceremonial gesture to show my emotional investment in that date.

              I decline, because, first, because economics cannot deduce dates, only outcomes, and second, I don’t trust you, and third, I regard attempting to convince a rational man by means of the ceremonial gesture of a wager rather than by an argument to be despicable.

              I asked you once if you make your deductions in science based on wagers and fashions and frivolities, and you answered me with yet another irrelevance, again betraying your fundamental lack of intellectual honesty.

              I regret that I took you seriously enough to waste a word on you. You’ve tricked me yet again. Yet again, no matter how frivolously you talk on other topics, I keep thinking that on this topic, this once, you actually have a sober point to make. More fool I.

              If your only point was a childish ad hominem attack, then you have wasted my time and yours.

              • Comment by Rolf Andreassen:

                The amount of adrenaline you are expending on this cannot possibly be good for you. Take a deep breath and consider that someone might honestly disagree with you without being wilfully blind, and might object to being vilified in your posts. Then write something with the cool and reasoned judgement that suits a self-described Vulcan.

                If we have spent all the money and borrowed nearly all the credit, then we are out of money and nearly out of credit.

                Yes; ‘if’.

                single greatest feat of mental malfeasance

                And then you accuse me of ad homs? It is precisely this hyperbolic vitriol that drips from your pen that I am denouncing as unserious. It appears that you and I disagree on the extent to which USG has exhausted its financial resources. You say that my disagreement is an enormous feat of wilful mental blindness. I object that this attack on my honesty is not a reasoned argument, but an unserious piece of angry rhetoric. And then you accuse me of making an ad hom attack.

                Be serious, sir.

                economics cannot deduce dates, only outcomes

                No deduction is required. Wagers are possible wherever there is disagreement over probabilities. Clearly you believe that the probability of a bankruptcy in the period 2012-2016 is higher than my estimate of the same number. This being so, it is necessarily possible to find a wager which correctly reflects our differing uncertain beliefs; that is, it will, given a sufficient number of similar bets (similar bets rather than repeated trials since it’s hard to reroll politics), move money towards the one whose estimate is closer to correct.

                • Comment by John C Wright:

                  Take a deep breath and consider that someone might honestly disagree with you without being willfully blind

                  That person is not you, sir. I have given you the benefit of the doubt before.

                  • Comment by Rolf Andreassen:

                    With such benefits, who needs indictments? Your ability to mistake disagreement for frivolity, to mis-read into nonsense, and to construe absurdities into others’ words is a continual source of amazement to me.

                    That aside, what have I to do with it? You seem to have the same disagreement with roughly half the population of the US, and 99% of its political establishment; so, presumably, they are all willfully blind fools. This is hyperbole and outrage-mongering, not argument.

                    Be serious.

        • Comment by David Meyer:

          Continuing the analogy, the current situation of the US national debt is as though the family would have to go into even greater debt in order to pay for even the one tutor, and even the best summer job will only pay for a small portion of the tutor’s fees. The fact is that keeping the one tutor is already living beyond the family’s means. A fool can see that sending the tutor packing is the first step if such a family has an ounce of financial responsibility.

          There is no evidence that restoring income tax rates to ’90s levels will increase actual revenue much more than the 20% of GDP I used in my debt pay-down calculations above (actual current revenue is less than that). But even if we squeeze a few percent of GDP more revenue per year, we will won’t begin to fill the debt pit until we stop digging it deeper.

          Anyone serious about the national debt has to start with a balanced budget (actually, they have to start with passing a budget), and then scrape out a surplus somehow.

    • Comment by False_Keraptis:

      When you put it that way, it doesn’t sound too bad. There are a few issues with that analogy, though.

      First, a mortgage is collateralized debt: if the family doesn’t pay, the creditor takes the house. What would you say about a $500K unsecured loan to a household making $100K/year? I would advise the family to default immediately and chide the creditor for making such a foolish loan.

      Second, the 100% GDP figure only includes formal debt. The US government has obligations like Social Security, Medicare, Medicaid, and veterans’ and employees’ benefits which are not included in that figure, are many times larger than that figure, and which must be paid. If you think these things don’t have equal or greater priority than formal government debt, then you don’t understand US politics.

      • Comment by Rolf Andreassen:

        The US government has obligations like Social Security, Medicare, Medicaid, and veterans’ and employees’ benefits which are not included in that figure, are many times larger than that figure, and which must be paid.

        If you add up all the obligations of the US over many years, and then compare to a single year’s GDP, you can certainly get some frightening ratios, yes. But if you’re going to talk about all the outgo, then you should compare to all the income. This year the obligations of the US are not too far off being covered by the income of the US, and the same will be true next year. You don’t need as much reform as the comparison of three decades of obligations to one year of revenue might suggest.

        I would advise the family to default immediately and chide the creditor for making such a foolish loan.

        It’s been done, although not by the US. I do note that a lot of Treasuries are held by US citizens, who would presumably be ruined or at least be made much poorer by such a bankruptcy. Many of them are presumably older people nearing retirement. I suspect that any party that did such a thing would be instantly destroyed at the polls; not a formal collateral, but something the creditors can take away, all the same.

        I observe that most families’ incomes do not grow at a steady clip of a few percent a year. Thirty years of balanced budgets would put quite a dent in that debt/GDP ratio even without any actual principal payments.

  9. Comment by rlbell:

    The Chinese have already grumbled about the US federal debt problem. It will become worse when the stagnating Chinese economy forces them to spend their holdings. It is not that they will be calling it in, but that they will be selling it off to fund their spending. Unless the world has the money to bail out China, the US federal debt instrument bubble will burst.

  10. Comment by John Hutchins:

    “This Time Is Different: Eight Centuries of Financial Folly” – A great book that talks about such things.

    The debt figure as impressive as it is is actually something like 1/6th of what it would be were it reported based on GAAP figures, as much as GAAP figures have meaning. Social Security and Medicare both have huge unreported obligations that are beginning to come due.

    Of course, Rolf’s statement as to the interest rate is that we have essentially refinanced a large portion of the debt into ARM’s as a larger share of the debt is being held as short term debt. As interest rates rise so too will the amount of the budget going towards servicing the debt.

  11. Comment by False_Keraptis:

    >It’s been done

    Indeed it has, and it might be done again. The consequences, as you say, are not so nice. Are we agreed then that the US national debt is a serious problem?

    >Thirty years of balanced budgets would put quite a dent in that debt/GDP ratio

    So would a solid gold meteor crashing into the Washington Monument’s reflecting pool, and looking at the last 50 years, that sounds about as likely.

    • Comment by Rolf Andreassen:

      Are we agreed then that the US national debt is a serious problem?

      I would make the following fine distinction: Continual budget deficits are a serious problem. The debt is merely a symptom of that underlying difficulty.

      solid gold meteor

      I opine that making the budget balance ought really not to be very difficult. Households do it all the time; and let’s note that 50% of households are run by people of below-median intellect, foresight, time orientation, and conscientousness. And even so the budgets needn’t even balance, if the metric we are to use is the debt/GDP ratio; they just have to grow the debt slower than the economy.

      • Comment by Nate Winchester:

        I opine that making the budget balance ought really not to be very difficult. Households do it all the time; and let’s note that 50% of households are run by people of below-median intellect, foresight, time orientation, and conscientousness. And even so the budgets needn’t even balance, if the metric we are to use is the debt/GDP ratio; they just have to grow the debt slower than the economy.

        Most households have 2 distinctions that cause your premise to fail.

        1) They only have to reach an agreement between 2 people. (99% of the time) You’re talking about a government that has to get agreement between 300 million people.

        2) At the very least, most decision making members of the households have easy rights of secession. (you don’t like your partner’s choices? walk out) Need I extend the explanation?

  12. Comment by False_Keraptis:

    >I opine that making the budget balance ought really not to be very difficult.

    In one of your games of Europa Universalis, sure. In the United States of America, look at the record.

  13. Comment by Nostreculsus:

    The ratio of governmental debt to GDP is a reasonable measure a nation’s leverage and there are good reasons to be apprehensive when the measure tops 100%. But US federal debt exceeds this conventional measure, which counts only bonds issued either to investors or to the Social Security Trust Fund. For example, Social Security, Medicare and Medicaid obligations exceed the amounts budgeted in the Trust Fund.

    Similarly, government obligations to keep banking liquid and obligations to the mortgage guarantors, Fannie Mae and Freddie Mac are not included in the conventional measure. US ratios are also not directly comparable to foreign ratios, because the states’ indebtedness is not counted. California, for example, is tacitly understood to be bankrupt in all but name. One expects an eventual federal bailout by the regime, probably concealed by accounting dishonesty.

    Nevertheless, we have been here before. After WWII, US debt to GDP stood at about 121%. It took about two or three decades to correct this. The government ran overall deficits in this time, but economic growth and inflation served to reduce the ratio. By the 70s, inflation had become a structural expectation, so that Paul Volker had to raise interest rates and induce a recession to stabilize the economy. The burden of inflation is mainly felt by the poor and by the retired. Wage and pension increases tend to lag inflation.

    This time around is likely to be far worse. Then, the debt was due to expenditures for a war that was won. This time, the budget imbalance is a fixed feature of the entitlement state. As in Venezuela, the regime stays in power through lavish but unproductive spending on cronies and on supportive voting blocs. The US in the 50s could grow its economy without much competition from a world recuperating from the war. Although bondholders did worse than stock investors, they continued to hold US treasuries, which remained a safe haven compared to other options available. This time, a point will come when China becomes very reluctant to hold bonds whose yields do not reflect US dollar inflation. A dangerous feedback occurs. The interest on existing federal debt will rise sharply, fueling greater debt, further inflation, and further accounting gimmicks.

    In short, even with fairly good management, we require about two decades of frugality and stable growth. What are the odds of that?

    • Comment by John C Wright:

      Nevertheless, we have been here before. After WWII, US debt to GDP stood at about 121%. It took about two or three decades to correct this. The government ran overall deficits in this time, but economic growth and inflation served to reduce the ratio …. This time around is likely to be far worse. Then, the debt was due to expenditures for a war that was won. This time, the budget imbalance is a fixed feature of the entitlement state. As in Venezuela, the regime stays in power through lavish but unproductive spending on cronies and on supportive voting blocs. The US in the 50s could grow its economy without much competition from a world recuperating from the war.

      Your comment shows wisdom and insight, and I fully agree. I also think things will be worse this time around, because the ability to recover is less. The regulatory state, the regulatory mindset, metastasized in the meanwhile and turned malignant.

      If ‘fracking’ had been discovered in the 1970’s, the then-nascent environmentalist movement would have been powerless to stop the growth of a new and cheap source of energy. Now it is nearly all powerful, and energy independence will elude us.

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