T Nation

National Debt


#1

It's big and getting bigger, but how does it really effect me? I don't really understand the concept trickled down to the individual.

We accumulated great debt through the 80's as the economy blossomed from the 70's. We paid off great amounts of debt in the 90's and the economy flourished.

Now everyone talks of staggering debt.

I'd be interested in hearing from economists or whomever and finding out the intricacies of actual economic impact. Is it just on paper? How is the trade deficit involved? Is actual money ever really exchanged?


#2

I'm interested in this too. There's always plenty of talk about our tremendous debt, but what does that really mean?

I read somewhere that if the US collected on the money owed to us, we'd have no debt. It really doesn't make sense to look at only one side of the equation (liabilities). Just like in a balance sheet in accounting 101, you have to look at both assets and liabilities to get clear picture. Why do we only focus on debt?

Nick


#3

Nick

You're absolutely correct. This part of the equation has interested me as weel. It seems noone has ever paid us, so what truly is a loan and what 'value' does debt really have?


#4

As much as I understand, which isn't as much as I really wish I did, it is about who we borrow money from.

The government gets the bulk of its money in two ways: taxes and bonds. Contrary to popular belief, we don't buy the most bonds; Asians do, namely Japan. So by cutting taxes during a "war" (which has never, ever been done before), we are spending far, far more money than we are taking in.

The way I see it, it is faith in us to repay the bonds that keeps folks in other counries buying them. If these people either decide to cash them in, or don't trust the US to repay them, they stop buying the bonds. When they stop, the government stops getting money.

This affects us in that you can't borrow money forever if the people you are borrowing from don't trust you, think a guy like me with crappy credit trying to get a loan from a bank. This is how I understand it, and I could be wrong. I'm sure more guys who know more than I do will comment on this, and I want to know about this also.

However, one thing is certain: when the government has no money, social services get cut back. Federal aid to the states depends on money that comes into the government; if there is none of this, there aren't any grants. IF there's none of these it affects a multitude of things, from when highways get repaved to money for state schools. Generally, I think it affects quality of social services and what not, rather than hitting us directly in the pocket. I think....someone help me out.


#5

Fighting

But at some point (like a trillion $) don't you reach a point where you almost have to continue to lend in hopes that if you don't you take the chance on losing it all.


#6

i thought that debt as a % of GDP was pretty low like mabey 5%?


#7

Possible, but how does that explain to me anything. In fact, without perspective, it means little in analyzing data.

What % to gdp was our debt in 1977--stagflation and spiraling debt?
What % when Clinton took office? Bush?

I am really just trying to find out if it is some "mythical" number that adjusts soley on paper, or how it really affects me personally. Is it simply used as a measurement?


#8

I hate for my T-brothers to be in the dark, so:

http://www.publicdebt.treas.gov/opd/opdfaq.htm

Okay, I'm all verklempt. Discuss amongst yourselves... :slight_smile:


#9

I would think that just a $ amount of debt would be meaningless. No matter if it rose or fall it would still be a pretty big #. Using GDP to put it in perspective would be helpful


#10

Well...I dont know. Who loses more? us or them?

Ironically enough, it is the same reasoning as to why people will never be able to truly fight a war with us; our economies are so interconnected, and the US economy is so important to the world, that to seriously damage it is detrimental not only to us anymore, but the world...especially Japan and China. I have to look up more stuff on this.


#11

From my FAQ link above, the last part:

That's right, we can all do our part to wipe out the national debt right now. Dig deep fellas, it's for the homeland, apple pie, and freedom. :slightly_smiling:


#12

I get people asking me this every day in classes, so I ended up devoting a whole week to the issue.

First, to see where we stand, look here:

http://www.taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=199

(do NOT confuse budget deficit with public debt. Read lothario's link if you have questions about it after you read the above link)

I really don't have the time to explain all the details -- PM me if you really, really, really want more info, but there are a couple of bullet points that might help you:

Most responsible Central Banks -- namely, the European Central Bank -- consider maintaining a low public debt absolutely imperative. Why?

Well, when you're talking about powerful countries, which, theoretically, can't default on their debts, there are three main reasons for it being a bad thing (tm):

  1. It's expensive, and gets more expensive with time. Although we're not talking 21% interest rates, even 2-3% of our public debt is a lotta money

  2. It drives up inflation. If you flood the economy with money, prices are bound to go up, for two reasons: one, because people will be able to afford spending more money -- which doesn't really exist, i.e., is not backed by an increase in GDP -- two, because the rich people (who get most of that money in a right-wing country like the US) will send it abroad and hence devalue the US currency. The proof is that indeed inflation has been higher than the increase in GDP (and much higher than the increase in median salary, since most of the increase in GDP is going into the hands of the very rich), which basically means that the cost of living is going up, and quality of life is going down.

  3. It opens up enormous potential for an economic catastrophe. At the current level of debt (which is actually VERY high and getting worse), we're open for a foreign economic attack that can cause a dramatic recession -- through the massive sale of bonds and/or exchange of USDs into Euros, for example. Fortunately it is not in the best interest of any powerful nation to see the USD and US' economy go down the drain, but I don't feel particularly comfortable about having the economy in the hands of non-Americans.

There's also a scenario that would be interesting, which would be if everybody switched to trading oil in Euros. But let's not get into that, since it is a touchy subject...

What I fail to understand in the middle of all this is the attitude of the Republican Party -- and Greenspan. When Carter presented a budget with a deficit that dwarfed the current one, everybody called him every possible name and he had to withdraw it. When it's a Republican to create a ridiculous public debt, nobody seems to care.

Actually, if you notice, in the last few decades Republican Presidents seemed to have done a ?wonderful? job at increasing the public debt. Which is no surprise, since it seems to be a Republican trend to reduce taxes without reducing expenses.

Looks like a very strange double standard to me -- and a show of extreme bias by the Federal Reserve, which should be doing something about this really quick -- and it's not slowly raising interest rates, which is simply dumb and just makes things worse.

But we all know Greenspan and the Federal Reserve don't really give a damn about doing anything remotely reasonable -- that would require them to actually have a brain...


#13

If you don't want to bother to read the link above, it's currently projected to be -- gross -- 66% of the GDP at the end of this year. If you discount ALL our Federal reserves, i.e., all the money we could "come up with" overnight if we defaulted on the debt, it's "reduced" to 39% at the current value of the dollar. That means that if we defaulted, we would have NO way to pay it off unless the USD lost an enourmous amount of value, of course, before we sold our reserves. Which is exactly what would happen.

(that would mean seeing something like 200% inflation of the price of all imported products, including oil, overnight)


#14

hspder got me thinking about some funny stuff. Are we self-reliant as a nation? What I mean by that, global-ness fuzzy warm international feelings aside, would it be possible for our nation to survive if we cut all economic ties to the international community, said "fuck you, try and come get it from me" to our creditors, and basically turned into an ivory tower?

What's to stop us from, say, getting our imported oil the old fashioned way? Ya know -- at the end of an M-16?

Two words: nuclear fuckin' weapons. If it wasn't for our moral fiber and the stockpiles of nukes sitting in Europe, this could be the United States of Earth before the next century.


#15

This sounds like my area. I've been writing a novel that revolves around the Federal Reserve so have done plenty of research. It's important to understand that the national debt is what we owe the Reserve. It's a common misconception that they are a government agency (given the 'Federal' in their name) but they are in fact a private corporation.

The government has no money and makes no money. The last president who created national money was assassinated soon after. His successor immediately recalled the money and returned to the Federal Reserve notes.

The national debt is created with nothing more than a big credit card (metaphorically), and the government slides the bastard of a card all too often. Simple economics dictate that the Reserve cannot make money unless there is a balance on the card. The larger the debt, the more money they make.

How does it affect us individually? More than 20% of the taxes you pay every year are put aside to pay some of the interest on this debt.


#16

Debt is never good, yet with relation to GDP, it isn't as bad as it could be. There are plenty of countries with a worse debt to GDP then we have.

Our debt is in the form of bonds, sold in America and abroad. The reason so much of our debt is held by foreign investors is because of the stability of our economy, and government. If we had no federal debt, there would be no federal bonds. There are a lot of people who only invest in government bonds. Often these people are scared of the stock market.

Regardless it would be best if we were to cut spending to pay down this debt. It may not be necessary to pay it off, but I dislike it being so high myself. Emergencies, war, or attempts to slow or stop a recession are the only reasons there should be a deficit.

Interestingly there has been research showing a correlation between increases in taxes, and increases in Federal spending. If taxes are raised, Federal spending is increased at a greater rate.

In the 90's, Congress made a rule, not law, but a rule that they could not increase the budget by more then 3% a year. Interestingly this is when we had surpluses. (Also influenced by the capitol gains tax cut which produced a temporary large revenue increase, and a more permanent smaller revenue increase.)

The big problem is that the government is allowed to spend money they do not have. Tons of pork spending, government waste, and lining pockets.

Another problem is how short sighted the government is. They work mostly with a short term thought process, not thinking about what will happen in the long run. Basically the band aid approach. Fix it today, and don't worry about tomorrow.

This is the big problem with Social Security. Every time someone tries to fix it, it is only delaying the inevitable. The proper way to fix it is ridiculed by the ignorant who put out advertisements saying not to tear down the house when the house doesn't even exist. Currently it props up the budget, and buffers the actual effects. That really adds something like 1.22 trillion to the debt because that is what is supposed to be there, but conveniently does not exist because it was spent.

This problem really is inherent in our culture. How much debt do you have in relation to your annual income? Are you really better off then our government? Can you complain of your debt to income ratio is greater then the governments debt to GDP? The best way to change the government is to change ourselves. (As hokey as this sounds.)

There is a small, but growing group of people who are opposed to debt, or at least excessive debt. The idea of buying a car with cash is foreign to most people, and almost heresy. It is perfectly normal to go out to eat, put it on a credit card, and spend the next 5 years paying off that one meal. Why does anyone expect the government to act any differently?


#17

Our world is interdependent right now. There is no reason to shut us off, and that would actually be detrimental to us.

Many do not understand the idea of trade. It is not for us to sell our stuff, but for us to get stuff. There are also situations where one country is in a position to produce something cheaper then the other, and the opposite is true for another item. By working together, both countries can actually benefit more then if they did not work together.

And if the countries actually learn this it can become a much better world.


#18

Mage, I agree. Trade and being "involved" in the world is not only good for everybody, it is our obligation as the most powerful nation in the world to keep the human race cool with itself. We are all one human family, right?

Still... I think that if we were motivated to somehow, we could conquer this planet by 2099. I'm not saying we should, I'm just saying we could. Big difference there.

If you buy into that line of thinking though, you can develop a perspective on things which is kinda weird. For example, all of a sudden our economy numbers like GDP, debt, etc., become fake... in a way. That's because you realize that this world economy is little more than a game which we humor the other nations to play. If we wanted to end it, we could.

He who can destroy a thing, controls a thing. Kooky, huh? :slight_smile:


#19

The debt can not be paid off through taxation because it is too large. What will happen is the debt will be moneterized. This happens when the Federal reserve CREATES "MONEY" OUT OF THIN AIR and buys treasury debt. They then destroy this treasury debt (maybe on a big bonnfire?).

Good deal right?

But now you have all this extra money floating around. It needs to find a home. It does this by bidding up the price of everything. So when you are paying $1,000 for a cup of coffee circa 2015 this is the result of the national debt. Of course your wealth and income will have been destroyed by inflation so you probablly can't aford the coffee anyway.

Exactly the same thing happened in German after WW1. There people turned to any hard asset to protect their wealth from inflation. Gold and silver turned out to be the most useful. History rhymes remember.


#20

I made this statement before, mostly in an attempt to point out that we don?t do this even though we could, and was called an arrogant American, and a bigot. (Notice the hypocrisy in those two statements?) But this was only a statement about capability, and how we use it.

So be careful in your statement, because it will be twisted into something you didn't say.