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Federal debt rantings - Phil's Rambling Rants — LiveJournal
November 19th, 2004
12:29 pm


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Federal debt rantings
So today Bush has cheerfully signed the authorization for the federal debt to rise to $8.1 trillion.

Eight trillion dollars that neither political party appears to actually intend to ever pay off; 8 trillion dollars being financed in short term revolving loans.

If interest rates go up 1%, that means $80 billion more in yearly interest.  Which will be tacked onto the deficit, and paid for by borrowing yet more money.  That additional borrowing pressures interest rates to go up still more.  At what point does the push of borrowing another 1% of the total debt push the interest rate up by more than 1%?  This, of course, is the point where a positive feedback loop causes the United States to flare up and die in a supernova of hyperinflation.  It will certainly happen sometime if we don't get leaders who understand basic economic realities and value the long term future of the country more highly than paying off their fat cat friends for the last election and staying in office to do it again after the next one.

I don't think I could survive in a "Black Powder and Alcohol" future.  Without the drugs for my asthma, I'm a basket case, and even with them, I doubt I could earn my keep in such a future, and it won't have room for people who don't earn their keep.

So, is there reason to hope that an epidemic of sanity will sweep Washington, D.C.?  Or is it really only a question of how long we have before the end?  In the latter case, how long do we have?  Is it time to eat, drink, and be merry?

On the other hand, if I am overreacting, if we can expect to see some tough years ahead with an economy squashed by high inflation and interest rates, but life will sort of go on, how should I be preparing?

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[User Picture]
Date:November 19th, 2004 10:46 am (UTC)

Untax And Spend

The conservatives often accuse the liberals of being "tax and spend". And this social liberal accuses the neocons in power of being "untax and spend". They give us tax breaks, but at what cost?

The word "conservative" has been hijacked by the neocons to represent "socio-religious conservative", chucking "fiscal conservative" out the door.

I wholly agree with what you said. As long as the Big Two keep slugging it out and conveniently ignoring the ballooning deficit, it will continue to grow until it chokes us all.

One suggestion: Vote Libertarian.
[User Picture]
Date:November 22nd, 2004 08:22 am (UTC)
Before reading, note that I am an opponent of a national debt and in fact would like to see it retired. However, in the interest of my economics minor and presenting another side of the story, here are a few points.

- the US debt as a percentage of GDP is not really much different than it has been in most other years we have had debt. US GDP is (approximately) 40 Trillion dollars, so a debt of 8 Trillion is 20%. In general, if an individual or corporation had this debt ratio it wouldn't make a bank worry at all about ability to repay

- it used to be true that the national debt was internally owed rather than externally owed - i.e. almost all T-bills and other federal debt instruments were owned by US citizens or organizations. While foreign investors own a higher percentage now, the rating on this debt is still very high, and is considered a good investment (unlike, say, New York City bonds a number of years ago). We're not likely to see a default.

- Keynesian economics postulates an inverse relationship between inflation and interest rates - the higher the interest rates, the lower the inflation and vice versa. While this proved to be extremely simplistic (due mostly to lag and to the uneven effects of price changes in different areas of the economy), I don't think we're going to see both double-digit inflation and double-digit interest rates again barring a disaster of nation-destroying proportions.

- As in any other area in this world of ours, what seems bad on one side is seen as good on the other. Democrats believe in Keynesian principles as long as government deficits are going to social programs. Republicans now seem to have embraced the same principles with an idea that money going back to those in most position to invest it will have a better effect than the government investing it directly. It's the same economic principles.

All of this said, the sight of Republicans cheerfully accepting deficit budgets makes this fiscal conservative shudder.
[User Picture]
Date:November 22nd, 2004 09:50 am (UTC)
US GDP is (approximately) 40 Trillion dollars, so a debt of 8 Trillion is 20%.

That didn't sound right, and a quick googling gives 2003 GDP as 11 Trillion (according to the US Bureau of Economic Affairs), not 40.

However, the more significant problem is with comparing the federal government's debt to the total GDB of the nation. Even if we believed it was appropriate for the federal government to direct 100% of the resources of the country, it can't use all of those resources for paying debts; most of GDP has to go to internal economic activity or we don't have an economy. The debt the federal government amasses needs to be compared to the income the federal government actually brings in, or in extremis, the income it could conceivably bring in. Total government revenues are somewhere between 1.5 and 2 trillion, which is pretty tiny compared to 8 trillion in debt. The real effects of tax rates on overall economic activity are more complicated than ideologues on either side want to admit, but I'm willing to go out on a limb and say that raising taxes by more than $500B a year, no matter what taxes they were, would certainly cause enormous economic disruption and a significant drop in GDP. So the debt is at least 320% of the income available for servicing it. Appalling and irresponsible but perhaps survivable, if we treated it as a genuine national crisis and actually started fixing it. What's indisputably not survivable is the intention of our leaders to keep adding to the debt forever.
[User Picture]
Date:November 22nd, 2004 12:39 pm (UTC)
You're right, I somehow read that as quarterly, not as the annual. Color my face really, really red. I apologize for the poor research.

The point should have more been about the historical perspective rather than the actual "the % of GDP is OK" argument, since I don't personally buy that one myself though it tends to be a staple of deficit spenders. A table of historical percentages can be found here, which seems to be a pretty conservative organization but I have no reason to doubt the numbers themselves.

Unfortunately, since I really hate the % of GDP argument, I don't tend to remember all the details of it. In general, I agree with your statements, in that GDP might be able to be treated as an asset but it is an asset unavailable to the government as such. I think the argument in favor says that GDP is the asset of all the public, and government debt is an obligation of the public, so they can be compared. I am viscerally opposed to this myself, and prefer the "income vs. outgo" perspective.

I stick by the other three statements, though, regarding the effects of interest rates v. inflation and the idea of keeping money in circulation in order to keep the economy up even at the cost of a high deficit/debt.
[User Picture]
Date:November 22nd, 2004 02:44 pm (UTC)
Assuming a perfectly spherical, frictionless world, higher interest rates mean lower inflation, but when oil prices in dollars go high enough to start significantly driving up the price of everything else in the economy, there will be inflation, and if there is inflation, nominal interest rates have to go even higher for real interest rates to be high enough to finance the deficit.

We had bad inflation in the 70's driven by oil prices, and high interest rates with it, though the interest rates were at least partly high because the government was trying to dampen the inflation. We're heading for the same situation again, but this time interest rates will be forced up by the market in spite of the government trying its best to stop it. I don't know if we can tolerate $50/barrel oil for the long term, but I'm pretty sure $100/barrel oil will sink us, and I see that as moderately likely in the medium term.
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