Debt Bomb

Thanks to alert blog-buddy Johnny H the General, I saw this article that quoted our Federal Reserve Chairman Powell warning that government deficits are not a good thing: https://www.cnbc.com/2019/01/10/fed-chairman-powell-says-he-is-very-worried-about-growing-amount-of-us-debt.html

In reading that article and trying to keep up with this ongoing saga called government, I decided that I should try to provide some background. Like making a perfect Old Fashioned, this discussion of government debt and deficits can be daunting. I was taking a poll in a Sanibel haunt last night and learned from a gentle person teetering on his stool that a perfect Old Fashioned had to have sugar in it. So, of course, that sent me into professor mode, and I almost finished my lecture by midnight.

Let’s begin at the beginning. A government deficit occurs whenever the government spends more than it takes in taxes. Like you, the government might spend more than it earns in a given month. The government has a deficit. You have an unpaid charge on your Visa bill. Assuming you never did such things in the past, that deficit now means you have a debt. You owe the credit card company. The government facilitates its debt by selling a government bond to you, me, or Young Jin. 

Next month, if you don’t have as many JDs and manage to keep your spending below your income, you might have a surplus that you can use to payoff your debt. The debt went up and then the debt went down.

The trouble comes when you do not have a surplus. That is, every month you spend more than you earn. The debt increases every month by the amount of the deficit. This is easily solved when the mafia sends a well-dressed representative to your house and removes your collection of authentic German nutcrackers.

In the case of the government, the solution is a bit more complicated. Our national debt in the USA is about $20-something trillion. Yes, Tuna, trillion is a very big number. We are a large and wealthy country, so we seem to be able to handle that debt. No sweat. That debt is held by people both inside and outside the USA. So long as they get their monthly interest payments, they are cool.

What our Fed Chair was saying in his article is that two contingencies worry him. First, his own Federal Reserve buddies are engaged in a project of raising interest rates. This means that the club we call government (I refuse to capitalize that word) is going to have to pay even more dollars every month to bondholders. The second worry is that the USA economy might go into a recession. Just like shining our shoes, recessions tend to come now and then. When a recession comes, it reduces our national income, and we are less rich and less able to pay off our debts.

But you say, Balderdash! We are a rich and powerful country. So what if we have a little bitty recession and interest rates go up a smidge? Well, keep saying that. Ask your Greek friends or maybe your Venezuelan friends what happens when the world decides that you might not pay your lenders. You say, Balderdash again! Those are foreign places, not the USA.

Mr. Powell says he is not convinced it makes a difference. Once we look vulnerable, people will sell US bonds like hotcakes at Denny’s on a Tuesday night. Once the door is opened a crack, all hell will break loose. You don't want to be the last person holding a worthless US government bond! US interest rates will soar, the stock market will crumble, and the value of the dollar will be lower than scum on a snail’s belly.

The Fed will eventually raise interest rates to a normal level. A recession will eventually hit. In the meantime, our government is whistling Dixie. What a bunch of morons. Reduce the deficit dudes. You don’t have a lot of time. Reduce it.