Your Debt, My Debt, Tralalalala!

In the temporary agreement recently reached by Democrats and Republicans something like $38 billions were cut from the current budget. That’s only about $120 per American, spread over six months. It’s nothing to write home about but it’s good training for what’s to come. That’s the debt ceiling, an issue that will arise in a couple of months. The “debt,” the national debt, all federal, is simply the accumulation of federal budget deficits that is not paid back at a given time.

The federal government cannot by law spend money Congress has not appropriated. Much of the money it spends is borrowed. There is no shame as such for governments to borrow money. It might borrow to build highways, harbors and bridges and such. That contributes often to the productivity of the general economy. Also, traditionally, government bonds (titles to government debt) have provided safe investment for seniors. They are a source of harmless inter-generational loan: The old lend money to the government that uses it to create conditions that will benefit the young. The young pay back at a modest interest rate. Federal government interest rates are traditionally low because people and organizations trust, used to trust, that government would pay back the money it borrowed.

The Federal debt now stands at about $140,000 per American, man, woman, and newborn baby. That’s right, a baby born today already owes $140,000. That’s plus the share of my debt I won’t be able to pay back before the lottery-in-the-sky calls my number.

Unfortunately, government borrowing is mostly not as virtuous or innocuous as the description above implies. Much of it, most of it, I think, is simply debt incurred to pay for current expenses. The federal budget mixes rational debt similar to the debt I incur when I purchase a better tool to make me more productive, or a house I expect to increase in value, on the one hand, and money I spend on my credit cards to drink more expensive wine than I otherwise would, on the other hand.

Note that an individual such as I is severely limited in how much crazy spending he can engage in. All my life, bankers have restricted my borrowing to what I could afford or to debts backed by real collateral such as a house or a car. Credit cards could have been the exception to this rule of enforced wisdom except that I read the fine print and when I see annual interest rates of 12%, 15%, and now, I hear, up to 24%, my own rational self-control comes on-line. I slap myself a couple of times across the head and I go have a couple of beers with a friend (for which I pay cash), and the urge vanishes.

The federal government knows no such restraints. First, the law does not even allow the President to distinguish between the two kinds of expenses, to improve productivity and to live like a whore. That’s called he “line veto.” Many state governors have it, the President does not, an open door to federal fiscal irresponsibility. Second, the federal government is not normally put off by high interest rates it has to pay – until now. The reason is that most people, most organizations and, as we shall see, some foreign governments, believe that the US federal government can always pay its debts by raising taxes. With little perceived risk of default goes low interest rates.

Everyone knows the game has to stop somewhere. No one knows where. It takes political will to say, “The party is over.” There is such political will now, exceptionally, because of the Tea Party movement that is kicking the Republican Party into shape. It’s useful to understand the dimensions of what we as American citizens are facing. $140,000 is about four times the value of what we currently produce per American. If we taxed ourselves one third of what we produce annually just to pay off the debt, it would take more than 12 years. Of course, we would still have to tax ourselves further to support the most necessary federal services (of which, there should be few according to me and according the the Constitution of the United States). This calculation assumes that the rate of growth of our economy and the value of production by Americans remained stationary. If our economy grew at 3%, a modest goal but not a sure one, it would take only about five years. If our economy grew at paltry European rates of 1% to 2 % it would take much longer. So, economic growth rates matters a great deal. Anything that keeps our economy from growing perpetuates our collective indebtedness. That would include high taxation of the “rich,” and high taxation of corporations. And of course, I give these figures only to make our debt more concrete. There is zero chance Americans will want to dedicate one third of their earnings to paying off the national debt.

There are several predictable consequences to government indebtedness I review below. But first, a reminder: I am only talking about the “national” or “federal” debt. The debts incurred by states and local governments are not included. You are responsible for those also. Some states, including California, are proportionately as indebted as the federal government. Finally, keep in mind that the debs accumulated by Americans, individuals and organizations, are yet another, completely separate topic. You will be saddled with your debts, on credit cards, mortgages, etc, irrespective of the policies the federal government ultimately adopts vis-a-vis its debt. Here are the four main consequences;

First, the principal on the debt has to be repaid to some extent. That’s money out of your paycheck and not available for federal government services, including military services. Alternatively, it’s money obtained by raising taxes which undermines in turn our collective ability to pay the debt.

Second, with a high level of debt comes creditors’ unease and potential creditors’ reluctance to lend. The remedy is higher interest rates. The higher the interest the federal government offers creditors to borrow money, the more will have to be taken from you in taxes, just to service the debt. Or, the lower the level of services the federal government can offer. In spite of high interest rates, the greater the federal government’s obligation to all kinds of creditors, the more difficult it is to borrow more. At some point, not precisely defined, it becomes nearly impossible for the government to borrow at any interest rate. This might be a good thing, vigorous medical treatment, if inability to borrow signaled the end of borrowing. This is rarely the case, however because the federal government is in the habit of borrowing to pay off previous debt. Hence, at some point the fear that the government will default on its debt arises. It’s true that the federal government has never defaulted but other national governments have. If the Treasury announced: “ We will give you 10 cents on each dollar the government owes you; take it or leave it,” what would anyone do about it?

Third, instead of being scattered largely among its own citizens, the US federal debt is increasingly owned by other governments. I think that about ¼ of the debt is currently owned by the Chinese (Communist) government. Generally, I don’t worry much about governments holding a share of our debt. It’s a proof of confidence, after all. The Chinese government is different though. It has geo-political goals as well as economic goals. I am not afraid of China sending a fleet to collect but I can imagine circumstances when it would liquidate its American debt holdings suddenly, causing US federal titles value to plunge. In this scenario, I am guessing that many Chinese organizations and individuals would follow suite and also liquidate simply because they are generally ill-informed about the rest of the world.

The fourth consequence of high national indebtedness is both the gravest and the most insidious. The high interest bonds the federal government is forced to offer to the market to continue borrowing compete directly with productive investment. If the government offers me miserably low interest rates for my savings, investing in publicly held companies will look more attractive than if it does no. More or less every dollar taken by the federal government as debt does not go to developing American productive capacity, does not go to higher employment, does not go toward economic growth. Perversely, every dollar borrowed by the federal government today thus undermines the federal government’s capability to tax tomorrow. That’s because production and people who are employed can be taxed, whereas non-production and unemployment cannot be, obviously.

The effect of this third consequence is hard to measure and harder to explain but economists do it all the time and there is no doubt at all about the simplification above.

Two last comments: First, if the US economy grew at 4% for five years, we would see the debt problem recede in the background. We have doe it before; we could do it again absent anti-business government intervention. Second, contrary to a downright lie spread daily by the liberal media, in a slow economy, it’s the poor that suffer the most. The rich just go on vacation to the Bahamas instead of Monte-Carlo.

NPR is spreading alarmist rumors about Chernobyl cancers without attribution. The Japanese government has just raised the official seriousness of its nuclear problems to level 7. I am sure it has its own reasons. I don’t know what the move means and none of the usual media heads have bothered to find out either. At this point, and after more than 200 visits to my blog, I see no reason to revise my assessment that no Americans are in danger. (See: “Radiation and Health….” on this blog and also, “Radiation Danger….”)

About Jacques Delacroix

I am a sociologist, a short-story writer, and a blogger (Facts Matter and Notes On Liberty) in Santa Cruz, California.
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4 Responses to Your Debt, My Debt, Tralalalala!

  1. Peter Miller says:

    This is an excellent summary, Jacques. Your point about the opportunity costs of the current federal (and state) debt is especially pertinent, as this is rarely discussed and even more rarely understood. The assumption, even among economists, is that there’s always more where that came from. But now there isn’t. The U.S. is at or near, or perhaps beyond the end-stage of the Payoff Economy. The ability to pay off interest groups such as the banksters, the diversity-extortionists, and numerous other industries and identity-groups, is simply not there anymore. That is the root cause of the last series of economic crises, which will recur unless until the U.S. begins to dismantle that structure of preferences. It is very hard for any society to do that without a cataclysm. For the sake of the rest of the world as well as the U.S., one can only hope the U.S. proves to be as exceptional in this as it has been in past wealth-creation.

    I haven’t checked, but I think China’s share of the U.S. debt is 40 percent or more. Other large shares are held by Taiwan and Japan. (If Taiwan were absorbed into China, then China would have a majority stake. Think about the implications of that one.) Japan will spend $48 billion simply on emergency relief. In order to avoid taking on any additional debt, Japan will instead liquidate pension reserves (my pension!), cut child allowances and foreign aid, and re-institute highway tolls. After the emergency phase, a lot more expenditures will be necessary. Whether Japan will have to liquidate some of its U.S. debt-holdings is not yet clear.

    On the upgrading of the Fukushima accident to a seven, much has been made of this in the media, but it was automatic given the amount of radiation that has been emitted. That amount is still less than ten percent of the amount from Chernobyl. Of greater importance, it did not come in the form of a chain-reaction nuclear explosion as at Chernobyl. That makes a big difference, because sudden acute radiation exposure is truly dangerous, while slow-release exposure is probably not. Most people and media assume that even the smallest measureable amounts of radiation are harmful. That is simply not the case. Loud music, another form of radiation, can damage your hearing, but soft music is actually uplifting. It doesn’t do a little bit of harm, it does no harm whatsoever. This is what is called a ‘non-linear’ effect.

    • jacquesdelacroix says:

      Thanks and thanks for inducing me to check. According to Wikipedia, The Chinese Central Bank holds less than 15% of the US national deb. It’s big enough for mischief but not big enough to support the alarmist demagoguery about this topic on the right of the American political spectrum. I was trying to convey the fact that China is not about to repossess my car.

  2. Peter Miller says:

    Hmm, the Chinese share of U.S. debt is less than I thought. Who holds the rest? The Japanese debt-to-GDP ratio is higher than that of the U.S., but that doesn’t affect the exchange rate. Why? Because all of the Japanese debt is domestic.

    The U.S. has been playing the ‘too-big-to-fail’ game. Meaning, nobody would dare pull the plug, because everyone would drown. Barack ‘Après-moi-le-déluge’ Obama and his sidekick Helicopter-Ben Bernanke take refuge in Lord Keynes, forgetting or never having known that all that deficit spending that Saint Roosevelt did in the 1930s left an unemployment rate of 19 percent as late as 1939. Had WWII not rescued the U.S. economy, it would have been on ‘the road to serfdom’ (Hayek) then instead of now. But, as you also wisely point out, a real economic growth rate of four percent per annum would change that.

    • jacquesdelacroix says:

      “The Chinese” own about 25%, as I said. The figure I gave is only the Chinese central bank. Other Chinese banks probably own some and other Chinese organizations that ought or ought not be considered private organizations. There is a lot of indefiniteness about this issue, obviously. Hence, the vagueness. The Japanese central bank owns a little less American debt than the Chinese central bank.

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