AEIdeas

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Discussion: (8 comments)

  1. Imagine yourself dealing with a problem with the local bureaucracy of anywhere USA. Those same knuckleheads are running the country and you voted them in. This ship is going down like the Titanic, slowly with no help in site.

  2. Richmond

    You forgot that this is not a new issue, and the previous administration left this country in ruins.

  3. The portion of U.S. debt that is actually “debt” has not exceeded 100% of GDP. As of yesterday, it is $9,907,654,619,535.26 – which is too high and which is a lot of money but which is nowhere near the size of the GDP.

    You get “100% of GDP” by including the $4,666,953,320,526.99 in “intragovernmental holdings” for a total of $14,574,607,940,062.25 – the latter of which is 100% of GDP.

    But what are “intragovernmental holdings”? They are not debt owed to the public. They are accountings (evidenced by non-marketable government account series securities) of the accumulated surpluses in various governmental accounts. They are barely handy even as accountings.

    If Congress canceled all the $4.7 trillion in “intragovernmental” holdings – thereby making the entire “debt” equal to “debt owed to the public” – there would be no impact on anything. No impact on what we spent each year, no impact on what we took in each year, no impact on the willingness of lenders to buy our actual debt – no impact on anything.

    Under the current system, when for example Social Security runs a $100 billiion deficit, it turns in $100 billion in intragovernmental bonds to the rest of the Government. The Government then has the following five choices: (1) redeem the bonds by cutting and diverting general appropriations; (2) redeem the bonds by raising general taxes; (3) redeem the bonds by borrowing from the public (issuing “real” debt); (4) obviate the need for redemption of the bonds by decreasing Social Security benefits; and (5) obviate the need for redemption of the bonds by increasing Social Security (FICA) taxes. Using (1)-(5), Congress has to come up with or obviate the need for $100 billion.

    Now, suppose Congress cancels all the intragovernmental debt or Social Security “goes broke” (i.e., runs out of intragovernmental bonds). What then? Exactly the same five choices and in the same amounts – even though there are no bonds. Now S.S. has a “deficit” and Congress can choose to bridge the deficit by cutting and diverting general spending, raising general taxes or borrowing from the public or can get rid of the deficit by decreasing Social Security benefits or raising Social Security taxes.

    Same five choices: Same $100 billion.

    So while the $4.7 trillion in intragovernmental debt is interesting and the $14.6 trillion in “debt” is a scary number, neither is real. The only number that matters, debt-wise, is the already ridiculous $9.9 trillion. The real Social Security / Medicare crises will not come about as a result of either program suddenly going “broke” when the “trust fund” runs out of intragovernmental bonds, but rather will come in a yearly parade when each program runs a deficit. In each such year, Congress is faced with five choices on how to deal with that program’s deficit – and neither the existence nor the amount of the crisis has anything to do with the various trust funds’ holdings of intragovernmental bonds. Congress can fix the problem each year, or can come up with long-term solutions (e.g., abolishment, changing them in fundamental ways, raising taxes, changing the benefit structure, etc.)

  4. On the other hand, 40% of the US government debt is owned by the US government or the Fed.

    See: http://innovation.cq.com/media/debt_components/

    So it appears that our true debt/GDP ratio of closer to 60%. For once, one of the government’s accounting gimmicks actually works in our favor.

  5. Bill Long

    I don’t disagree that the debt level is critical and that the injury to the dollar and economy may be mortal. But I don’t think your “house mortgage underwater” provides a useful or valid comparison. I thought that GDP is more analogous to one year’s worth of the nation’s income or value produced. So isn’t hitting debt levels at 100% of GDP more analogous to a homeowner who has borrowed a house worth one year of salary? Putting it that way doesn’t sound so scary. More compelling is the historical evidence about what has happened to other countries when their debt exceeded the 100% level.

  6. The situation is not analogous to that of a homeowner whose house is worth less than his mortgage. The worth of the U.S. economy, the value of its total assets, is a lot more than its GDP, i.e., its income for one year. You’re confusing national income (a flow) with national worth (a stock). So the nation is like a homeowner whose mortgage is greater than his annual salary and income from other sources, not an unusual scenario. This is not to downplay the seriousness of our debt problem, but misrepresenting the situation isn’t helpful.

  7. The federal government does not get 100% of the national income, so the analogy of a mortgage at 100% of a homeowner’s annual income is not valid. If federal tax receipts are around 18 to 20% of GDP, then the federal debt is like a homeowner with a mortgage of 5 times his annual income.

  8. If you want to make analogies of the US govt being a household, then it is one with a variable rate loan from which they are aloud to borrow more from every year. In this case you have a household who currently owes $15,000. They earn $2,500 a year and spend $4,000. The mortgage company determines the interest rate based on how likely the household is to pay back the debt. In how many years does the money owed hit a level where the mortgage company decides they will never be paid back? That is the point where the dollar is devalued, the fed miscalculates on how far to devalue the currency, we get hyper inflation, and the dollar completely collapses. Fortunately, the Euro will go first, so you will have a nice big crap sandwich for a snack before the shit storm.

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