The US Government Interest Expense Was 93% of Military Spending in 2018 | Hacker News Reader

The US Government Interest Expense Was 93% of Military Spending in 2018

thesoundingline.com

25 pointsFour_Star14 comments

Moderate tax cuts to spur growth with a modicum of spending restraint will produce a surplus, as we witnessed with Bill Clinton coupled with a Republican congress (when Republicans still had some interest in spending restraint).

The problem, however, is many fold. Bill Clinton largely benefited from a "peace dividend" in that the US was ramping down military spending post-Cold War. We have since reversed course dramatically to support the "War on Terror."

Second, the debt is now so huge, that even if we managed to regularly run a modest surplus it would take many (perhaps hundreds) of years to to reduce the national debt back to manageable levels.

Massive tax hikes would slow the economy, and the chance that any of the tax revenue would actually go to debt reduction is highly dubious based on historic patterns.

So yeah, we need some new solutions, or just wait for the global finance system to collapse for good and pick up the pieces and start fresh (with likely horrific short term consequences for infrastructure, healthcare, etc.)

When the GDP gets up near 5%, the deficit will melt away.

The dollar value of debt is meaningless without accounting for interest rates. When interest rates rise, the dollar value of debt can be reduced by trading low interest debt for high interest debt.

This sounds like economic witchcraft, can you explain a little further?

A bond paying 2% that matures in 10 years is worth less than a bond paying 4% that matures in 10 years. So you can buy back low interest long term bonds for cheaper.

So... What happens when you run out of people willing to hand you money until you actually pay them back?

What you describe assumes someone is always willing to take the gamble on will you make good.

That's one hell of an assumption.

Well, so far people continue to borrow from all major governments no matter how indebted. Also, your bond is legal tender guaranteed by the US Treasury (or some other sovereign treasury), so you can always sell it to someone else. No one is stuck waiting for their bond to mature.

Finally, and most critically, the Treasury pays back the bond in dollars when it matures. The treasury can also create dollars. Thus, the Treasury will never be unable to pay back a bond.

Ok, but when they print unlimited amounts of money I'm not exactly getting the return on value that I expected because of inflation.

Inflation is pretty low right now. Just printing money does not produce inflation - if it did we would have seen massive inflation during Quantitative Easing, when the Fed put trillions into the economy. In fact there was almost none. This is because inflation is governed by the equation of exchange, MV = PQ. M is the supply of money, V is its velocity (how fast it is being spent), P is prices and Q is aggregate demand. If M goes up, P only goes up if Q and V are constant. In an economy like ours where the productive capacity is much greater than demand, M can rise without much effect on P.

In general the government can continue printing money at the rate that productivity growth supports. Since this is related to the amount of borrowing, debt probably isn't going to cause inflation.

Exactly. The money you lost out on goes to the owners of the central banks.

The debt is at managable levels now. Reducing it is actually not really all that difficult if the political game gets to a point where this is something they want to do.

Once you run a surplus and your bond yields go down while your economy continues to grow you can takle the debt.

We have seen this from other nations who executed such fiscal turn around.

However that requires some amount of political will.

I don't find any reason to believe this is inherently problematic. The federal funds rate is ~2.5%, and inflation is ~2.0%, so the real interest rate is approximately 0.5%.

America's current debt-to-GDP ratio is not unprecedentedly high by any means. What is slightly concerning is that our debt-to-GDP ratio is increasing even though the economy is relatively strong.

This is only the case because investors are willing to buy treasury bonds and loan the money out at those levels. If things get worse(though no one knows where the line is) and they will, at some point those investors will wisen up and demand higher interest.

These rates are abnormal rather, go back 30-40 years and if the rates got anywhere above 5% (which are still incredibly low) it would crush the servicing of debt and cause runs on the system.

https://fred.stlouisfed.org/series/FYOIGDA188S

In other words it is at a historic low. Also debt service comes in the form of maturing bonds. It is literally created from nothing and requires no tax revenue.

Reply on news.ycombinator.com