June 15, 2019

US Traveling the Debt Express: A Fools Journey?

by Hal Gershowitz

Comments Below

So, our national debt is now about 110% of the entire GDP (Gross Domestic Product) of the nation. In other words, what America owes, which is now well over $22 trillion and growing, exceeds the value of everything we produce as a nation.

Does that really matter?

We think so, but it really depends on who you ask. Some economists contend that it is really not that big of a deal because our debt is denominated in US dollars, and we can print US dollars as necessary—especially when our economy is growing at a healthy pace, and interest rates are so low. In other words, if push comes to shove, we can always monetize our debt. Some people find that comforting. We don’t. But many economic pontificators believe that the people, institutions and countries that lend us money will always be content to just let us print money to repay what they have loaned to us. We’re not so sure.

Other economists contend that living way beyond our means is as foolish and dangerous as it has ever been. They argue, for instance, that an unforeseen spike in interest rates could trigger a massive sell off of US treasuries which, in turn, could ignite a global financial crisis. Could something that unforeseen really happen? We’re joking, of course. It has happened in the recent past, and it will most certainly happen sometime in the future.

So, whether unbridled deficits and the debt that results from those deficits matters really does depend on who you ask. We guess that’s why economics is often referred to as the dark science. Actually, we don’t think economics is a science at all. It is simply an understanding of, or an attempt to understand, the ramifications of allocating finite or scarce resources. When we embrace the notion that money is infinite because we can print it at will, and we can, therefore, spend with relative abandon, we are probably skating on ice that’s thinner than we think. Some degree of uncertainty is always lurking beyond the horizon. After all, it was barely a decade ago that low interest, easy money and sheer recklessness caused by that same low interest and easy money came within hours of crippling the world’s economy.

Today, President Trump all but demands that the Fed keep interest rates low making access to money easy and cheap. After all, he has to face a presidential election in a mere year-and-a-half and he wants, as would any president, a robust economy as the next election nears. Candidate Trump, the reader might recall, promised that if elected, his policies would eliminate the nation’s debt in eight years. When asked how he was going to do that, he said he would do that by making better trade deals. That’s when he thought our trade deficit equaled the net dollars the United States was out by making bad trade deals. He talks as though he still thinks that.

We now know that contrary to his campaign boast that he was going to eliminate the national debt in eight years, the country will actually add $9.1 trillion to the national debt over that eight-year period, ($12.2 over the next decade) according to the non-partisan Congressional Budget Office (CBO). Actually, that’s not too bad. Recent Presidents have done much worse.

One way to look at our national debt is simply to remember that it is the accumulation of our chronic annual budget deficits. So, deficits really do matter. And that’s a huge problem because a number of realities are conspiring to rile our deficits. Every day 10,000 Americans retire into Medicare and Social Security. Yet, the number of workers entering the work force, and whose payroll taxes will be needed to fund Medicare and Social Security is declining rather than growing.

And to make matters worse, we have a declining birth rate in the United States. These realities build a very serious discontinuity between what our future revenue needs will be compared to the number of future taxpayers who will be there to fund those needs.

Politicians can blather on about having the wealthy pay their fair share so that those same politicians can spend with abandon, but we know we can tax those who are doing well into oblivion and still not raise the revenue the profligate spenders will impose on the country. Well, there’s always the printing presses to run off the dollars we’ll need to pay our creditors. That’s really what the big spenders think (but never say).

On March 11, 2019, President Trump released his budget request for fiscal year 2020. President Trump’s, budget calls for a record $4.746 trillion in spending. We will raise an estimated $3.645 trillion in revenue. That creates a whopping $1.101 trillion deficit for October 1, 2019, through September 30, 2020. We’ve had trillion-dollar deficits before caused by either world war or hail Mary rescues such as TARP 1 and TARP 2 (troubled asset relief programs) which we experienced at the end of the Bush 43 and the beginning of the Obama administrations.

We are not debt scolds who believe all debt should be eliminated. Sound debt policy can, of course, stimulate economic growth and provide vital services and underwrite the defense of the nation. But since 1971, when we abandoned the gold standard, the only thing backing the US dollar has been (and really is) the confidence people have in the stewardship of the United States.

The value of the full faith and credit of the United States is totally dependent on the confidence people have that our word is as good as, well, gold.

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4 responses to “US Traveling the Debt Express: A Fools Journey?”

  1. Perry says:

    It certainly is not President Trump’s fault of the spiraling debt
    as you seem to imply. With dedicated programs of entitlement
    77% of the budget annually one can see the problem.

    One of the reasons we have such a debt is because lifetime
    politicians over the years exploding programs of little benefit
    or substance.
    Today we have probably hundreds of local and state taxes
    along with other unseen taxes never envisioned. The insatiable appetite of spending is fueled by too many years of
    Democratic spending along with some Republican votes as well.

    Yes, there is a problem and sadly there is not a person in
    elected position capable of ending our downward spiral as
    they want to re-elected and re-elected.

    The new crop of Democrat hopefuls want “Free College”,
    Free Health and more and more promises. I will vote for
    anyone who say’s I want more accountability in spending
    the trillions they receive every year. Failure to reign in
    spending will certainly doom this economy and this country.

    • No, actually, we do not imply that the spiraling debt is President Trump’s fault. In fact, we state that his contribution to our national debt “is not too bad” and that “recent Presidents have done much worse.” Candidate Trump did, however, boast that he would eliminate the nation’s debt within eight years by making better trade deals, an absurd campaign claim.

  2. Robert borns says:

    Your article was well done and on target. We are digging a hole that gets deeper and deeper. If we can’t eliminate the annual deficit in great times imagine what will happen in bad times. And if democrats get the power it’s fasten your seatbelt time. But I don’t worry because my wife got me a maga hat for Father’s Day. Life is good.

  3. Mike says:

    Great column and follow up comments

    That said, the issue of entitlements has been and will continue to be the source of the problem. And the real problem with entitlements is that no politician will put the good of the country above getting re-elected.

    Take a look at Social Security. It was designed when the average life expectantcy was much lower than it is today. Yet no politician will seriously raise the age from 65 to 66-68. It is necessary and completely off the table. Fortunately for people who are at least 65, Gen X’ers and millennials are oblivious to the consequences of politicians who are obsessed with remaining in power.

    We really are living on borrowed time. The only question is: when does payment come due?

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