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Rapier
 
Common arguments (and their refutations) on the National Debt

Polls taken last year show that the national debt and our budget deficits are currently the most important governmental issue to Americans. Worries are only going to grow as the national debt grows. Despite being such a huge concern to many Americans, most people don't know much about it. So in the interest of making myself seem smarter, I'm going to clear the air around the subject in the form of a shortish dialogue. Enjoy!

Conservative Strawman: The national debt is the biggest issue facing America today! In fact, after this year, it'll be bigger than the US economy!

This is true. In fact, the CBO predicts that the deficit will be 1.5 trillion dollars this year, which would raise the total debt to approximately 15.5 trillion dollars while our economy will only be about 14.9 trillion dollars.

Conservative Strawman: Don't you see? That means we have to do something about it right now.

Not necessarily. Currently, only 9.4 trillion dollars out of the current 14 trillion dollar debt is considered "public debt" or officially "debt held by the public". This type of debt carries an interest obligation. The rest of it doesn't.

Conservative Strawman: 9.4 trillion dollars is still fucking huge. Paying interest on that will be a bitch.

Actually, it's not as much money as you think it is. In fact, in 2010, the Federal government only paid 188 billion dollars in debt service. That's only 5.3% of the total Federal budget. Chump change.

Conservative Strawman: Yeah? And I bet half of that figure went to China! We're making ourselves weaker and China stronger!

Not nearly. According to the Treasury, China owns about 1.03 trillion dollars worth of debt, or about 11% of the public debt. Since over 90% their holdings are denominated in instruments of 2 years or less, we paid less than 20 billion dollars of interest to them, which is less than a month's worth of our trade balance with China.

Conservative Strawman: Oh.

Liberal Strawman: See? I told you you should stop worrying about the debt. Didn't the devil himself, Dick Cheney, say that deficits don't matter?

Not so fast there, chief. Deficits do matter when it comes to the national debt. Most economists aren't worried when the debt grows, so long as the debt doesn't grow faster than the economy. Unfortunately, this hasn't been the case for over a decade.

Liberal Strawman: Right, but you just said that in 2010, the government only spent 5.3% of the total budget on debt service. That isn't much at all.

True, but even President Obama's own accountants say that we'll spend about 250 billion dollars worth of debt service this year, which is an increase of 33%. And as short term interest rates rise, we could pay up to a trillion dollars in debt service within 5 years.

Liberal Strawman: That's complete , based on cooked numbers.

Not really. As stated before, the deficit this year is projected to be about 1.5 trillion dollars. While most people are counting on revenues rising with an economic recovery, this still won't be enough to reduce annual deficits to a comfortable level. After 2011, the average deficit is projected to be about 800 billion dollars by most independent estimates. That will amount to a public debt of approximately 14.1 trillion dollars. Remember, that's the share of the debt that we have to pay interest on.

Liberal Strawman: But in 2010, our public debt was about 9 trillion dollars and we only paid 190 billion in interest.

Correct, but the reason for that is because short term interest rates were extremely low for the past 2 years due to the financial crisis. In fact, the current Federal Funds rate target of 0-0.25% is the lowest it's ever been. That means any short term debt can be refinanced without paying any interest. Since over 3/4 of the US debt matures in 2 years or less, we were effectively paying zero interest on 7 trillion dollars worth of debt.

Liberal Strawman: So why doesn't the Federal Reserve just keep short term interest rates at near zero?

Because the Federal Reserve has created approximately 2.5 trillion dollars worth of new M0, or "high powered money", in an effort to fight the recession. Once the economy recovers, all of that money can create approximately 25 trillion dollars in M2, which would lead to disastrous inflation. The Federal Reserve will eventually be forced to raise interest rates high to curb inflation. Before the recession, the fund rate was 5.25% when the economy was doing well. Since we pumped so much money into the economy, it wouldn't be a stretch to see short term interest rates push 10%. If interest rates are 8% 5 years from now, the US government will be spending 1 trillion dollars in debt service for that year.

Liberal Strawman: FFFFFFffffffffffffffffffUUUUUUUUUUUUUUUuuuuuuuu


Now that we've gotten that out of the way. Let's identify some basic truths:

1. The national debt isn't a huge problem today. However, it does have the potential into being a crushing problem 10 years from now. But this is due more to astronomical liabilities of Social Security and Medicare than one-off programs like "economic stimulus".

2. Because the Federal government can indefinitely refinance its debt, it is possible to monetize the debt by depreciating the dollar. Although this would boost exports, a hobbyhorse of certain industries, politicians, and economists, this would immediately result in higher prices for just about everything. If you thought 4 dollar gas was tough ****, wait until it reaches 6 or 7 dollars a gallon. And that won't be the only thing that costs more. Anything and everything from (the soon to be sold) Alfa Romeos to zucchini will be more expensive, as raw material inputs will be much more expensive than what we've been accustomed to.

3. Any serious depreciation of the dollar now would lead the rest of the world to evaluate the long term viability of the dollar and the US economy, which would make it more expensive to borrow in the future. Currently, foreigners hold about half of the interest bearing portion of the debt. Although it might be counter intuitive, we want foreigners to buy our debt, as it cheapens borrowing costs. Nobody is lining up to buy Zimbabwean debt, for example.
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Old 01-26-2011, 09:34 PM Rapier is offline  
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tanner9072
 
the united states should secede from the united states to solve this problem
Old 01-27-2011, 06:06 AM tanner9072 is offline  
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Forever Domon
 
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well written and unbiased it would appear.
Old 01-27-2011, 06:16 AM Forever Domon is offline  
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religated
 
Don't fix the debt until the economy is back on track.

When the economy is back on track don't run a deficit (IE don't do what the Bush admin and the supposedly fiscally conservative Republicans did).


= Problem fixed
Old 02-22-2011, 10:29 AM religated is offline  
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AbortTheFetus
 
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Quote:
Originally Posted by Rapier View Post
1. The national debt isn't a huge problem today. However, it does have the potential into being a crushing problem 10 years from now. But this is due more to astronomical liabilities of Social Security and Medicare than one-off programs like "economic stimulus".

2. Because the Federal government can indefinitely refinance its debt, it is possible to monetize the debt by depreciating the dollar. Although this would boost exports, a hobbyhorse of certain industries, politicians, and economists, this would immediately result in higher prices for just about everything. If you thought 4 dollar gas was tough ****, wait until it reaches 6 or 7 dollars a gallon. And that won't be the only thing that costs more. Anything and everything from (the soon to be sold) Alfa Romeos to zucchini will be more expensive, as raw material inputs will be much more expensive than what we've been accustomed to.

3. Any serious depreciation of the dollar now would lead the rest of the world to evaluate the long term viability of the dollar and the US economy, which would make it more expensive to borrow in the future. Currently, foreigners hold about half of the interest bearing portion of the debt. Although it might be counter intuitive, we want foreigners to buy our debt, as it cheapens borrowing costs. Nobody is lining up to buy Zimbabwean debt, for example.

Given that social security has begun running a deficit and is projected to continue to do so(and with increasingly greater deficits), isn't America headed in the wrong direction especially given the medicare D? I agree that it isn't a problem now however it seems like we keep running faster and faster towards this doomsday scenario and while there's some big nuts talk on turning things around, it's all shine and no substance.

Even without monetizing the debt, and just from other monetary injections we're already seeing prices go up, not just with gasoline/fuels but also food prices have gone up quite a bit this year. At the same time said social security benefits did not increase(as they traditional do with COLA's). Eventually the US either has to increase those benefits(which increases those entitlements) or reduce the effective amount we're giving to everyone on social security.

Also, the rest of the world is already evaluating the long term viability of the dollar(the biggest issue is what to replace it with). And already we've seen vs numerous currencies the US Dollar has taken a complete shit(Canada, Australia, etc). A reserve currency would best be served by one with a stable value, which is definitely not the dollar.
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Old 02-27-2011, 10:08 AM AbortTheFetus is offline  
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Rapier
 
Quote:
Originally Posted by AbortTheFetus View Post
Given that social security has begun running a deficit and is projected to continue to do so(and with increasingly greater deficits), isn't America headed in the wrong direction especially given the medicare D? I agree that it isn't a problem now however it seems like we keep running faster and faster towards this doomsday scenario and while there's some big nuts talk on turning things around, it's all shine and no substance.
We're not headed in the wrong direction. We are already pointed towards the wrong direction. The problem is that Social Security will run a deficit for the first time this year. Medicare has always run a deficit, and Medicare's costs rise at 4x the general rate of inflation, while Social Security's costs are a bit more stable because COLAs are limited to the rate of core inflation. Absent any meaningful reform, the Federal fiscal balance sheet has huge liabilities that will grow exponentially in the long run.

Quote:
Even without monetizing the debt, and just from other monetary injections we're already seeing prices go up, not just with gasoline/fuels but also food prices have gone up quite a bit this year. At the same time said social security benefits did not increase(as they traditional do with COLA's). Eventually the US either has to increase those benefits(which increases those entitlements) or reduce the effective amount we're giving to everyone on social security.
Technically we've already started monetizing the debt. The Federal Reserve's QE2 was designed to shore up the Treasury market. The Fed created 600 billion dollars to buying primary and secondary Treasury debt. That is the very definition of debt monetization.

Also, Social Security's COLAs are pegged to core inflation, which was essentially flat the last two years. This year it looks like core inflation will rise above the Fed's 2% target, and that means the Federal government will have to adjust (increase) payments to meet the new normal.
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Old 04-23-2011, 06:50 PM Rapier is offline  
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