Will the US deficit ruin us all?

[Riggerjack]

http://www.justfacts.com/nationaldebt.asp


Well, if 19T isn't alarming enough for you, how about 76.2T?

Just facts.org has articles with a libertarian/conservative slant, but they give sources for their data, and use the full range of their source data, rather than cherry picking the years that fit their storyline. (I'm sure they pick the data source that supports their storyline, but that's still better than picking the data that looks best in the graph. I'm thinking of debt to GDP ratios that start in 1941, for instance...)

How someone chooses to look at the numbers is important. A difference between GDP growth of 3% and 4% is either an insignificant 1%, or a significant 33%. As mentioned in Chad's article above, given the right mindset, a debt growing at a greater rate than GDP for 20 years means nothing when for a few months, the trend reverses. At that point, it is responsible and perfectly sustainable...

For decades, the US has had strong economic growth, and that growth has attracted foreign capital, furthering that growth. Debt us an economic headwind, and as that headwind decreases growth, and debt piles up, the smart money leaves, looking for stronger or safer returns. This has a magnifying effect on the slowing economy. This is why I referred to the chart with a shrinking UK share of GDP. Nobody is arguing that the average citizen of the UK isn't better off today than in the 40's or 50's. I'm arguing that excessive debt, and liberal government programs caused enough headwinds in the UK to greatly slow growth, despite US aid, and every economic advantage they had.

And now, we are following the same path. A path that makes me think a 2% or 3% rule will be the new norm, rather than the current 4%. Nothing devastating, just significantly harder.

[jacob]

@Riggerjack - The 4% rule has always been exceptionally high and the US in the 20th century was a bit of an outlier result in terms of international and historical experiences. It is very unfortunate that the 4% rule is so widely promoted so people take it as gospel and don't question its assumptions.

Here's the international perspective: http://retirementresearcher.com/the-sho ... he-4-rule/

Key take-away: The 4% is naive. International diversification and/or flexibility is really smart from a volatility adjusted perspective.

Of course a 3% rule requires 33% more money and a 2% rule requires twice as much.

[Riggerjack]

Full disclosure, I have strong opinions about debt, and government, separately, and together.

I have also been dead wrong on every predicted effect of both debt, and money policy for 7 years straight.

Consistently is quality, of a sort...

[Dragline]

Actually, its a well-known hobgoblin.

[Frosti85]

I'm right now reading the book "Modern Money Theory" and I'm now very confused.

Can someone make a mathematical argument why the debt is not sustainable in the long run ?

if the economy grows at 2%, and the interest rate is <= 2%, the debt should be sustainable and even become smaller ?
(the question now becomes, if infinite 2% growth is sustainable... on a planet with limited resources...)


also the author makes the argument, that public debt is the savings of the private sector... so in order for the private sector to be able to save (in financial assets), the public sector has to run a deficit.

[jacob]

if the economy grows at 2%, and the interest rate is <= 2%, the debt should be sustainable and even become smaller ?
(the question now becomes, if infinite 2% growth is sustainable... on a planet with limited resources...)

Correct. But if the debt grows faster than GDP, the debt will eventually become unsustainable.

See graph of recent times.
https://en.wikipedia.org/wiki/National_ ... States.png

You can multiply the current debt with the current interest rates and compare that to the budget to see what the effect is. Hiking a a low interest rate of 2% to 2.5% is a 0.5% increase in interest rate, but it's a 25% increase in the monthly debt payments! How much of a hike would it take to wipe out the entire budget? This tell you where "times get interesting" ...

also the author makes the argument, that public debt is the savings of the private sector... so in order for the private sector to be able to save (in financial assets), the public sector has to run a deficit.

That's too simplified. In the US case, a majority of the national debt (or close to to) is the savings of China and Japan (private and government) and so currency and trade are also involved. On a similar note, you can't have a surplus on the capital account unless you have a trade deficit.

For the man on the street, the public debt thus influences what things cost at Walmart due to the way these financial "arrangements" have been made.

Also, the private sector can put their savings in corporate bonds and if so, the public sector doesn't have to run a deficit. This may come down to how the author has defined his terms. I would highly recommend adopting a "practical" mindset here and see everything in finance as transaction and/or agreements between two entities. (Maybe I'm being Austrian here ). Those equations in your book are just formalizations of that. They might easily MISS certain aspects of what's actually going on in the real world (like other kinds of transactions).

[fiby41]

http://www.usdebtclock.org

Also has a world debt clock.

[Riggerjack]

also the author makes the argument, that public debt is the savings of the private sector... so in order for the private sector to be able to save (in financial assets), the public sector has to run a deficit.

Yeah. Because savers investing in the private sector isn't possible. And GDP growth "just happens".

That book was full of magical economics. Written by a Bond trader, with real world experience... Bond trading. So you know he knows what he's talking about, just like all those day traders that moonlight as s&p 500 CEOs.

Oh right, there aren't any of those.

Felix brought this joker's work up a few years back. MMT is recycled chartalism.

If you have infinite belief in the power and durability of government, this makes a kind of sense. But, you have to divide the world into owners of debt ( who have options), and payers of debt (who don't), for this to make any sense. History shows that to be... naive.

You may be well served to counter this book with " money mischief " by Milton Friedman. It doesn't have the math most of his books have, and just tells the story of various real world experiences with manipulating currency and debt. Then decide for yourself which is more applicable to today

Above, I admit to being wrong for 8 years. It's been awhile so now I think I've been wrong 9 years. If I can be wrong for 15 years, I think I will be set even if I'm right. At this point, I'm hoping Dragline is, because if I am, it will be very unpleasant.

[Frosti85]

Yeah. Because savers investing in the private sector isn't possible. And GDP growth "just happens".

little misunderstanding here.

In the book the private sector is defined as households + corporations.
(3 sectors = public (government), foreign, private (households & corporations))

So if I invest in a bond of a corporation, the net effect on private sector weatlh is zero (because now the corporation has a debt to me)

I think, as jacob pointed out, what is more interesting than the amount of the debt, is who actually owns the debt.

because, if the debt was equally distributed among all americans, it would be now problem at all.
(interest wold perfectly cancel out the taxes to service them)

in the other extreme case, one person owns all the debt, and the entire nation is working for them, and that system will probably become instable and collapse at some point

[Riggerjack]

And how you set your definitions is how you define your results.

Like I said, we went over this year's ago.

Money is about confidence. The problem with printing your debt away is erosion of trust in your currency. This results in people trying to turn currency into material, as quickly as possible. Buy 6 big screen TV's just so you can sell them as you need to buy food, because the TV's won't devalue as quickly as the currency. Turning TV's and other material goods into alternative currencies. But look at what wonderful things it does to GDP!

If this worked, Argentina would be a superpower.

[Frosti85]

To make it clear, I'm not a fan of government controlled planed economy via central banking money printing at all.
I think the entire world should move to bitcoin or some other decentralized currency in the near future.

But still. If the collapse of the finance system is so inevitable, there should be a very clear mathematical argument and not "ZOMG trillions of debt it will collapse!"

if the interest & inflation is <= GDP growth, there is no problem ?
or if the interest rate is 0%, it could just sit there forever ?
with interest 0% and 1% inflation it would slowly get inflated away without total disruption of the economy ?

Is there anything obvious which I dont see ?

All I see is that it could end bad, but it could also continue forever (or for a very very long time)

[ducknalddon]

If this worked, Argentina would be a superpower.

I'm going to keep a note of that quote.

[Riggerjack]

But still. If the collapse of the finance system is so inevitable, there should be a very clear mathematical argument and not "ZOMG trillions of debt it will collapse!"

There are very clear mathematical arguments. They are in economics books. And then there is the book written to counter that book. Read and enjoy.

If this were simple, we wouldn't still be talking about this here. Those who are still talking, are generally very good about defining their terms.

"Can anyone point to any historical example where the world's reserve currency suffered a bout of hyperinflation (defined as > 10% per month for six months or more)?" I am still waiting for one example. When somebody gives an example I may actually start to pay attention to this meme again

I picked that quote because, 1, dragline is a badass who can defend himself, even if I quote him out of context, years later, and 2, it was from earlier in this thread. 3 it's just such a great example.

So let's break it down.

"Can anyone point to any historical example where the world's reserve currency suffered a bout of hyperinflation (defined as > 10% per month for six months or more)?"

Historical examples, rather than theoretical. Limits the set.

World's reserve currency. There have only been a few of those. So we can throw out 99% of the restricted set.

That have gone through a hyperinflation. Again, most currencies don't go through hyper inflation. Rare times rare, in this case equals zero.

From this, you might conclude that since the USD is currently the world's reserve currency, we are safe from hyperinflation.

I look at it and think he has simply excluded all relevant examples. Because EVERY world's reserve currency up to 1971, including the USD has been backed by precious metals. And the USD has been the world's reserve currency since before then. So, first he restricts the set, then excludes the outliers that may be relevant.

It makes a solid argument. It has never in all of recorded history been a problem. But there is only 1 example left in the set, and the experiment has only gone on from 1971.

Still, it has worked for 46 years, 100% of the time.

So maybe, there's something magical about the US economy, and USD that makes them indestructible.

That seems to be the test we are currently running.

[Riggerjack]

Oh, and BTW, the British pound inflated to 27% in 1975. If anyone cares. Oh, and over 30% in 1949. But those were managed by the bank of England.

In1979 The British pound started at $2.40, dropped to $1.03 in March of 1985, and eventually climbed back to $1.70 in 1989.

But by then it had lost it's world reserve currency status. For reference USD from 1971-2015 is a devaluation of about 5/6. GBP is down 92%. And the USD inflation was over 10% in the late 70's and early 80's while it was the world's reserve currency...

And we went from 71% of world's reserve to 61% from 1999-2013. So we can lose reserve status far faster than we can pay off a debt larger than GDP.

How's that for a dollar short, and a year late?

[Michael_00005]

What will happen to the deficit and when rates get raised?

Agreed, rising rates are big! It's a cycle that cannot go on forever, we will see a painful balancing in the years to come. But easier for someone following the ERE lifestyle, as compared to the materialistic. Ideally i'd like to be off the grid, or living in a smaller, like minded community before it hits.

But the whole world is in a major transition right now, not just US debt, it's very clear things cannot continue on like this much longer. Scientifically we know chronic diseases (via lifestyle choices), and thus medical costs can be reduced by around 90%; look what happens to the graph when medicare, medicaid are reduced by 90%.

So a few items could get things back on track rather quickly: start with an ERE type president/Govt., honest education in nutrition, removal of food subsidies, and then end govt/employer sponsored insurance for diseases that are avoidable or treatable via diet and lifestyle. Expect to see major changes coming for insurance, the knowledge that is out there will eventually hit the "tipping point" and then who will want to pay for someone else's poor eating/lifestyle choices?

https://www.google.com/search?q=critica ... Yxj-GYRpM: We are still in the "innovators" stage, but it changing rather quickly with the internet.

[ether]

It's important to realize that total debt is much higher because we have Federal, State, County, and City and government sponsored corporations(Fannie Mae and Freddie Mac) that barrow and the tax payers are the collateral. Things to consider:

*There is tons of debt and spending at the state and local level. NYC has a yearly budget of $90B!
*Government owned corporations have about $8 Trillion in debt obligations in the form of mortgage backed securities and the federal reserve owns most of that debt
*All government debt (ignoring government corporation debt) stands at $23.3 Trillion
*All level of governments spend $410B on interest a year, so debt has an effective interest rate of only 1.76%.
*As long as investors are willing to buy new debt issues as our current debt matures, interest should remain cheap.

Here's how the total $7 Trillion government budget is spent in the USA:



SOURCE

[fiby41]

[Farm_or]

It is easy, at this time, to get an annuity with guaranteed 4.2% payment. I think this is due to all of the optimism? Just an alternative to consider...

Entitlement: to furnish with a right (buying a ticket entitles free admission). It's a pet peeves that our media has warped the definition of entitlement. You have to buy in to something BEFORE you are entitled to it. That is where this has gone wrong.