Too much debt?

[Aunt Sam]

[Lostviking]

US national debt has its good side
DAVID REAUME
ECONOMY

Alaskans should care about the national debt and the deficits that keep it growing because if it is mismanaged, Alaska may catch a cold from lower oil prices, reduced tourism and higher interest rates.

But neither Alaskans nor other Americans need to fear the national debt as if it were some sort of looming catastrophe threatening us, our children and our grandchildren.

Most fear of the national debt is unfounded and more of a threat than the debt itself.

Here is why. The national debt will never be paid off and should never be paid off.

The notion that the national debt places an unfair burden on future generations is largely, not entirely but largely, political hooey! Let me say that again: the U.S. national debt should never be paid off. In fact, a worldwide financial disaster would be triggered if more than a fairly small fraction were ever paid off.

Why should the debt never be paid off? Because businesses and investors all over the world must have a nearly risk-free asset in which to invest in order to counterbalance the more risky assets in which they also invest. U.S. government securities have played that role since 1945. It might happen that some day the world will create a different risk-free asset, but that has not happened yet and is very unlikely to happen for as far out as the eye can see. Without a secure fallback investment to balance portfolios and to turn to when economic conditions deteriorate, the amplitude of cyclical swings in the world economy, the national economy and the Alaska economy would be greatly magnified.

Since 1752 the British government has issued Consols, bonds that are never expected to be paid off. Consols are perpetuities that pay a set rate of interest four times a year. Although they now constitute a very small part of the British government's outstanding debt, they are still around. One can think of the U.S. national debt as made up of Consol-like perpetuities that just happen to be rolled over at set intervals so the interest rate can be recalibrated.

There is, of course, a downside.

The downside to increasing deficits and a rising national debt is that public sector spending "crowds out" more and more private sector investment spending. If you like the idea of Congress and the president playing a growing role in the nation's allocation of resources, then I suppose that should be of little concern. On the other hand, if you think government leaders are far more likely to make bad investment decisions than are private decision-makers, then crowding out is of considerable concern.

But crowding out relates to the size of the national debt and not to the existence of the debt itself. Like almost anything else there is an optimally sized federal deficit and an optimally sized national debt. Given a growing world economy, the optimal size of the U.S. national debt needs to increase because the larger the size of the world's overall asset base, the greater the demand for a secure, nearly risk-free asset.

For my tastes, the multitrillion-dollar deficits projected under the Obama administration for the next eight years are way above optimal. But the fallout will not be in the form of an unfair tax increase on our grandchildren when the associated debt is paid off because, again, it will never be paid off. The fallout will come in an increased drift toward an economy increasingly controlled by the federal government.

Yes, I know, the greater the size of the national debt, the greater the taxes that need to be levied to pay the interest on that debt. So be it. Unless the national economy actually declines for a generation or two, our grandchildren's generation will be richer in the aggregate than we are now, and as long as federal deficits are not too far above optimal, they will be just as able to afford higher taxes as we are to pay those now on the books.

David M. Reaume is a Washington state-based economist who was based for many years in Juneau. His opinion column appears every fourth Sunday.




Copyright © Sat Feb 06 2010 12:02:31 GMT-1000 (HST)1900 The Anchorage Daily News (www.adn.com)

[adampatric]

Yes - but its not looking good.
The economy is 2-3 times more debt-dependent - with at least $36 Trillion DEBT EXCESS - - compared to the 1950-1970s
Today's debt has grown above $57 trillion (the right bar in the chart)- - 81 times higher - - to $186,717 per man, woman and child - or $746,868 per family of 4.
80% ($46 trillion) of today's debt was created since 1990.

[Lostviking]

Originally Posted by adampatric

Yes - but its not looking good.
The economy is 2-3 times more debt-dependent - with at least $36 Trillion DEBT EXCESS - - compared to the 1950-1970s
Today's debt has grown above $57 trillion (the right bar in the chart)- - 81 times higher - - to $186,717 per man, woman and child - or $746,868 per family of 4.
80% ($46 trillion) of today's debt was created since 1990.

It is currently (2008) not as high as you are stating. But, I know I have seen it stated with a wide range of numbers.

The national debt equates to $30,400 per person U.S. population, or $60,100 per member of the U.S. working population, as of February 2008.

Source: http://www.bls.gov/cps/cps_over.htm#overview

However - if you add in all the entitlements over the next 10 years (medicare and social security) you very well might get close to your number in about 10 or 15 years.

[sdunn96]

Our debt per citizen is over $300k

This is a bad state to be in for us.

Watch China, they are doing exactly what we started doing in the early 1900s, buying up other countries debt and loaning them money to fight their wars.
Then we took over as the economic power house that we are now.

http://www.reuters.com/article/idUSTRE6183KG20100209
This Chinese officer has the right idea, luckily he is not making the decisions in the government.

The minute that China can shed us and use their own population to prop up their economic engine, they will.
It will not take much for them to do so either....seeing as how they have over 1 billion people compared to our 308 million people.


Plus our entitlement programs are going to start crushing us hard.

[Lostviking]

Originally Posted by sdunn96

Our debt per citizen is over $300k

.

where did you get that number from?

The Outstanding Public Debt as of 17 Feb 2010 at 03:44:00 PM GMT is:


The estimated population of the United States is 307,856,496
so each citizen's share of this debt is $40,180.67.


Now thats high, but a far cry from 300,000 per person or even 185,000 per person.

Then we took over as the economic power house that we are now.

We took over as an economic powerhouse only after world war 2, when the rest of the world was wrecked. We had everything everyone wanted. And we could sell it at prices they could afford. We were china, but not because of us owning other countries debt. Because like China, we had a labor force that could compete with the rest of the world.

[sdunn96]

Ok, I looked at the numbers wrong, you are right.
For current debt you are correct.
I wonder what it would look like if you factored in the entitlement programs.
http://www.usdebtclock.org/

I would say that we started buying up debt around WWI
And supplying the European nations with military support to fight Germany.

Here is one report talking about the debt
http://news.bbc.co.uk/2/hi/uk_news/magazine/4757181.stm

In 1934, Britain owed the US $4.4bn of World War I debt (about £866m at 1934 exchange rates).

[sdunn96]

Ok, looks like the debt clock does include the entitlement number.

Bottom Line of numbers shows the liabilities.
That makes it $300K per person.

[Lostviking]

Originally Posted by sdunn96

Ok, looks like the debt clock does include the entitlement number.

Bottom Line of numbers shows the liabilities.
That makes it $300K per person.

Well, don't forget those are projected future entitlements. There is no guarantee that number will hold and the money is not spent yet. Sdunn, I am not disagreeing with your feelings about this, just your numbers.

I think its quite scary that we went from 30,000 per american to 40,000 per person in just an 18 month period. But that will not continue. Not because anyone sitting in office will be responsible, but more because our debt holders will speak up and demand more fiscal responsibility. Don't forget - this debt will never ever ever be paid back. It will be inflated away. One day in the distant future (20 years or so) we will look at the figure of 40,000 per person and say, "I wish it would go back to that level."

The US bond is still the only riskless debt in the world. And the world so desperately needs such an investment. As long as our borrowing produces some real growth, I am all for us using it in this way. We are on the cusp of the end of the industrial revolution. High tech and biotech are the future - and the gains in productivity from these industries will slowly give way to which country truly dominates this next century. We will not be number one by having the most cheep labor. We will become the best by have the best ideas. To constantly measure our trade deficit and our lack of industry is simply old school.

Our president needs to lead us toward innovation and invention. Unfortunately, that has so far not happened. But the nuclear thing is the right step.

[sdunn96]

While some of what you say may be true and gives me some hope.

The inflated away premise you hold is very bad.
Because while yes it will allow to repay our debt back easier, it will make the citizens of our country poorer.

So regardless if me and my wife have worked our @$$es off all our lives and saved for our retirement and did the smart stuff.....we will be poorer at a time when we need the money the most, because we are older and not able to go and work like we were able to when younger.

When countries do stop buying our debt (seems to be happening right now), I don't think that will stop Washington.....doesn't seem to right now.
I think they will rely on the FED to purchase the debt and continue w/ a huge Ponzi scheme.

This is a road to ruin.
Don't think for a minute the U.S. is economically untouchable.

Let China sell off all their holdings in America and watch the US tumble over the cliff.