The government recently announced that the national debt reached $30 trillion. It now stands at 128% of the economy. Yes, our national debt is larger than what we earn each year. Wow. You would think that they would be so ashamed that they would somehow hide that obscene accomplishment. I guess its hard to hide such things. That debt amounts to about $90,000 for each person and $240,000 per tax payer.
Equally troubling is that the $30 trillion announcement had almost no effect. If Biden burps at the dinner table the stock market falls. If the inflation rate rises by a tenth of a point, interest rates skyrocket. But debt reaches $30 trillion. Ho hum, honey pass the mustard please.
I read several articles announcing this new debt number and came away from that experience with a tummy ache. Lots of angles here and its not really an all-good or all-evil story.
Take for example, the idea that the debt is $240,000 per tax payer. My first reaction is wow -- huge. But that reaction stems from the illogic of comparing a stock with a flow. The debt is a stock, an accumulation of what we owe. The flow is what we earn each year. We have a lot of years, if we so chose, to earn income and pay off the debt.
We do that as households every day. We borrow a ton of money for our nice new house or our sleek cool Jaguar and then we spend 30 years paying it off. We might only make $50k per year but in 30 years we can pay off a pretty big chunk of debt. If our national debt is $240,000 per taxpayer, note that we have a lot of years to pay.
Maybe that's good or not good. Take the case of the house purchase. Hoot might buy a really cool house and doesn't mind paying a big chunk of his income every year. Kiltie might buy a less worthy house and feel like he got scammed. It's the same with the national debt. What are we doing with all that debt? Are we throwing it down a hole or are we using it to our great advantage?
Hmm. Answering that question is full of politics. It all depends on what you think the government ought to do with our money. Danny wants us to spend it all on national defense and infrastructure. Jason wants us to make incomes more equal. Nolan wants more spending on Kraft macaroni and cheese.
It also depends on the realities of the impacts. If we spend it on national defense and we lose the next war, then it seems like we could have used that money better. If we spend it on welfare and poverty worsens, then we wonder if we are wasting the people's money.
Government always has the choice as to spend the money on donuts or steel. Donuts are a consumption item. You spend the money, you eat the donut, you get a sugar high, and then that's about it. The government could instead buy steel. Steel is an example of a capital good. The essential characteristic of the steel is that it lasts and it can lead to even more output. The extra steel lets you build a building. The building might house a donut machine and produce donuts for years to come. Steel or donuts? Consumption or investment?
Finally, regardless the above points, there must be a limit to what is prudential to borrow. Even if you use the proceeds for good things -- one can still borrow too much. Recall that you have to pay it back. If I buy a $10 million dollar house and I live off my Social Security benefit, that is not going to work.
Surely the above does not cover the whole waterfront. But it does support what I said at the outset. How much national debt we can tolerate is not any easy question. Some debt is good. Other debt is not. Knowing what is the right amount is complicated. But I will stick my neck out and say that we could live in the USA with a national debt less than $30 trillion.
One thing I never really understood is how the national debt is calculated. If I go to the bank and borrow a hundred bucks my debt to the bank is a hundred bucks plus interest payments that can really add up over the long run if I delay paying the debt. Thing is that the hundred bucks I borrow from the bank is at a 6% interest rate (if I use the classical savings deposits pay 3% and loans are issued at 6%; I know that is silly in this day and age but I am old school). On the other hand the national debt is financed using a smoke and mirrors system that still eludes me. In 2010 the FED's balance sheet showed about two billion. By 2020 it had increased to around four billion, and currently in less than two years it is about eight billion. It took ten years to double from two to four billion and less than two years to double from four to eight billion. In some ways (maybe I am wrong about this) I see the FED balance sheet as a kind proxy for the deferred interest we are paying on the national debt. Don't even get me started about how SS, Medicare, Medicaid, and other retirement and medical programs have promised benefits much greater than current inputs will allow them to pay out. Not to mention possible disruptions to the economy (does COVID ring a bell) that would throw everything on it's ear.
ReplyDeletePoint is I don't think your thirty billion national debt number really reflects just how big it really is or how the FED has been padding the real interest rate by cooking the books. Gotta also say I just had a conversation with my stock broker and had to remind him while my position is currently more cash heavy than most would suggest I still am a fanboy of Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, who is credited with saying that "the time to buy is when there's blood in the streets."
When the government spends more than its revenue for a time period, it has to borrow the difference. That is called the deficit and the deficit is covered when the government sells government bonds. Those bonds have a coupon rate written on the face and the government must pay that rate of interest to the holders. Often the very fact of the government selling those bonds causes market interest rates to rise. But that does not change the government's interest payments....until a future period when the coupon rate might get higher. Second point. If the government sells bonds, it often causes markets to rise. That is when the Fed might get involved. The Fed does not like it when market rates rise so they might buy some of those government bonds. The more the Fed buys the less is the increase in market rates. That does not change the coupon rate and does not change the government's interest liability. Later, the coupon rate might rise if it is low relative to market rates. The $30 trillion, I think, is a decent measure of the government's indebtedness. Like you, I would like to see the government finding a way to reduce deficits and the debt. But it doesn't look like anyone in government agrees with us.
DeleteRiddle me this Batman where does the FED get money to buy Treasury paper to keep interest rates low? If you bid on paper paying a low interest rate knowing inflation will eat away at the face value of the paper it seems like a money loser to me. No worry for the FED though they just get a typist to hit a few keys on a computer and poof not only is the loss erased but most likely more zeroes and ones dollars are created. Currently Treasury Bills, Notes, Bonds, and other Treasury securities are not even close to covering the at least 7.5% inflation rate (and likely getting worse).
DeleteNot trying to shift the subject but the sad fact is that as bad as this seems for the US it is still better than any of the other big boy economies.
Rage,
DeleteThe Fed creates money. It is true. The Fed creates money, poof. They are legally empowered to do that. You and I can't. But the Fed can. If you have the power to create money, you don't worry about losses on portfolio. What the Fed should worry about is the harm they do to the economy when too much money creates too much inflation. Right now they should be spanked for creating inflation. No, its not greedy commercial banks. It is the FED!
One of the more troubling issues, I believe, with the size of the debt, is the cost of servicing the debt. Interest payments on the debt come out of tax revenue as they well should. Borrowing money to make interest payments on the debt is a one way ticket to financial hell. As interest payments on the debt grow we either need to raise more in tax revenue, thus taking more from the private sector that is used to buy the goods people want, or we must divert current tax revenue from whatever we are currently financing by government in order to pay the interest on the debt. That is a decision that will have to be made, increase taxes or decrease spending elsewhere, but that day is coming. Two things influence the amount of interest payments on the debt - the size of the debt (especially relative to our GDP as our perspicacious blogger has already noted), but also, what interest rates are we paying on the debt. We have financed the debt at historically low interest rates for the last 6-8 years. Now, even Jerome Powell admits that we will not be able to continue to pay such low interest rates on treasury instruments. Those bonds and bills that currently pay a low interest rate will eventually roll over to bonds and bills that pay a higher interest rate and then we will have what economists technically call a double whammy. Very high debt to GDP ratio, and higher interest rates on that debt. Look for either tax increases or lower spending on the important things we NEED to have like substantial pensions for retired college profs or other less important items.
ReplyDeleteSee my post above about how the FED can create money out of thin air to buy treasury paper offered at a low interest rate. The FED balance sheet has been increasing at an increasing rate. This is what allows the government to spend like it does. The real question is not how much the FED raises the official interest rate but how long it will keep buying treasury paper.
DeleteJerro, you raise a good point. The larger the debt and the larger the interest expense in the government budget, the harder it is to turn things around. And the more of the budget goes to interest rather than actually doing something productive.
DeleteRage,
DeleteThe Fed is buying an unprecedented amount of government bonds. They seem to have no interest in returning to normalcy. Don't rock the boat seems to be there motto. Even now that the economy seems stronger they have not reversed engines. They will wait too long and we will pay for it.
Dear LSD, as you probably know, about two-thirds of the debt is mandatory—entitlements, Medicare/Aide, debt service, and Social Security. The remainder goes to funding govomit activities such as DOJ, DOD, DOE, and oddur cabinet programs/functions, and is subject to the appropriations process . . . e.g. Congress must vote on how much and who gitz the moola. Given the kerrent political climate I doubt we’ll see any reduction of the debt in our remaining lifetimes. The two basic means to debt reduction—reduced spending and/or tax increases—are not practicable given the kerrent political climate. The “non-partisan” CBO’s Alternative Fiscal Scenario for debt as a percent of GDP will be 219% by 2049. Yer long rubber red neck is stick’n out way-y-y-y-y to far . . . . we’ll never see a debt less than $30T.
ReplyDeleteNeedless to say, c-nay ‘appy ‘our is only two short ‘ours away. By then, the debt will have increased only a mere $10 billion. Cheerz!
You got it Tuna! It is hard to see any of those yahoos in government doing anything to resolve deficits and debt. Rome is burning and we don't even have a cup of water to help.
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