US public debt projected to reach 181% of economic activity in 30 years
apnews.com
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Here's the one that worries me: Interest payments on the debt are projected to grow to 6.7 percent of GDP in thirty years (right now they're 1.9 percent and Social Security outlays are 4.9 percent).
Deficits are projected to be 10 percent of GDP then, meaning 2/3rds of our borrowing will be done to pay off existing borrowing. That's not good.
If we just ran a larger deficit, say 27% of GDP, that ratio would be (temporarily) much lower at only 25% of new borrowing. But that wouldn’t be obviously “better”.
About half of the debt is to... the US government. And all of it is in US dollars, that the US government can print.
So the US could get out of debt tomorrow if they wanted, forgiving the loans it made to itself, and then printing enough to pay off the rest. Which presumably wouldn't impact its ability to lend money to itself.
The tough part for me to wrap my head around is why the debt is important at all, given the US is more or less fully in control of it.
Government debt is a byproduct of government spending. The primary purpose of government spending is to inject money into the economy, creating demand and stimulating economic activity. When the government spends more than it collects in taxes, it runs a deficit and issues debt as a way to accommodate the excess spending.
Taxes are thus a tool to manage inflation. By reducing the amount of money in circulation, taxes help prevent excessive demand that could lead to inflationary pressures.
(Modern Monetary Theory)
A government can print more money to pay off that debt (causes inflation), it can lower interest rates on that debt (also causes inflation), cut costs (causes deflation but politically unpopular), or it can raise taxes (also causes deflation but politically unpopular). In the first two cases, the value of your savings diminishes.
Another way of thinking about it is the US deficit is high because savings needs are also high. It isn't just a "we need to spend more money", it is also a "we need to borrow more money" (due to lots of savings demand). The problem is that we aren't using those savings needs productively enough, so we are still going to get hit in the future.
China also has a similar problem, but one could argue that they are leveraging savings needs effectively through lots of infrastructure and other capital projects. BUT Japan went that route as well, and it didn't work out too well for them.
Like, imagine you made up "hacker dollars", which you can make more of whenever you want. They're sticky notes with a number written on them.
Then you lent "hacker dollars" to yourself, at a 4% interest. So borrower you creates new "hacker dollars" to pay the lender you interest.
If you wanted, you could just say that you forgive the loan you made to yourself, and pay the "hacker dollars" directly.
If anything, it seems like a complex accounting system more than anything related to credit card debt or mortgages.
Modern Monetary Theory has stated that high public debt loads isn't a problem, and frankly so far it doesn't seem like the markets will ever care. Until it does, and then it will be a disaster but both Japan and the US will never pay off its debts.
You mean beside a lost 30 years, one of the lowest rates of family formation, and a high rate of suicide among young people?
Sure.
Which is comparable with South Korea.
And looks to be tied to poor work-life balance, lack of workplace flexibility, lack of parental leave, high cost of living etc rather that macro-enonomic issues like debt levels.
Anyway lets be real, the reason why sudden think pieces on the debt are coming out is that it's going to be election season soon, and a Democrat is the incumbent.
https://fictitiouscapital.substack.com/p/money-myths-and-deb...
https://fictitiouscapital.substack.com/p/5
https://fictitiouscapital.substack.com/p/8-the-global-reserv...
Instead, everyone pays equally through inflation, and retirees get screwed as their savings get inflated to dust and they have no income to make it up.
Maybe that's what you want.
But if you think you can just magically fund the government on unicorns because the market is dumb, I have some 1000 year T-bills at -10% yield to sell you.
No, its not. MMT proponents tend to support progressive income tax and wealth taxes more than currently exists. The MMT observation that the only real constraint on fiscal policy is the monetary impacts, not fiscal balance, also means that fiscal policy tools are appropriate responses to the traditional triggers for monetary action. Need to suck money out of the economy to kill inflation: instead of raising interest rates, add supplemental high-end income taxes (without added spending.) Need to pump money into the economy because of sluggish activity? Adopt immediate low-end benefits (without additional taxes).
> But if you think you can just magically fund the government on unicorns because the market is dumb
That’s not what MMT believes.
MMT believes that the response of the market (monetary effects) are the only constraint on government tax and spending balance, that the idea of a fixed purse (the “fisc” in “fiscal”) that must be filled by taxes or borrowing is only true with commodity, not fiat, money, and that cosplaying commodity money when you are working with fiat just results in an inaccurate view of the policy landscape.
1 - The Risk rate. (How do avoid you simply defaulting on me)
2 - The opportunity cost. (How much more is Person A willing to pay me than Person B)
3 - The time value. (How much do I need to make on this loan to make it worth the payoff time).
While you can argue that an efficient financial system with robust liquidity should drive 1 & 3 to 0. It does not make sense for 2 to be non-zero. When the opportunity cost is zero, it directly implies that capital holders have vastly more dollars than there are viable loans, or that the cost of changing a human beings task from their current task to a different task has gone to zero.
Neither of these statements should be true, capital should be distributed such that capital holders do not have more money than they can lend - and there should always be a non-zero opportunity cost from picking up someone from their current task. The latter point directly ties to the potential for wage growth in the economy.
Modern Monetary Theory basically enshrines the fact that scamming the general public of its wealth is a perfectly fine practice, especially when they don't notice it's happening, boiling frog style.
It also only works if - like in the case of Japan - the debt is held internally to a country, a captive audience if you will, which has no choice but to be ridden roughshod by its rulers.
Is the US sovereign debt held internally? I don't know, but my bet would be that a large chunk isn't.
Although that may no matter as long as they are the planet's hegemon, which sort of makes any debt holder internal.
But that latter status quo may not last very much longer.
2. Will the people who are owed the money have the political power/influence to be able to force the issue?
3. The issue forced, will there be any feasible mechanism of paying it back other than raising taxes rapidly and horrifically?
4. Given that this is a public (United States) that is massively in debt (to the tune of nearly twice our annual GDP), will they be able to absorb that hit on top of everything else?
I'm not sure I subscribe to the school of economics that says money is magical and debt never has to be paid back, but if I'm wrong in that, I'd love to here what part of this I misunderstand.
Well...debt generally has to be paid back, but unlike people countries don't get old and retire.
Countries have an unending supply of new taxpayers being born every year.
There's no hard limit to how much a country can renew and restructure its debts.
Only the market's belief in a country's future economic prospects affect the price of rolling the debts forward, through the issuing of new state-backed bonds.
They actually do. Japan is currently starting to retire now... to the point that there are fewer of them today than there were last year. The demographic implosion.
We're not that far behind them.
> Countries have an unending supply of new taxpayers being born every year.
This seems unlikely. In every western nation on Planet Earth, the fertility rate is going down, quite quickly, with no indication that it will plateau. There is no indication of how circumstances would have to change for it to rebound. There may be none, but if they are, they're likely the sort of circumstances unlikely to be found within the conditions we're discussing (improving economy, higher wages, etc).
There is a finite supply of new taxpayers, a relatively small one, and there is no evidence that it is unending.
> There's no hard limit to how much a country can renew and restructure its debts.
Like when Zimbabwe just prints new money with more zeroes on it? We'll all be starving quadrillionaires?
Sure, games can be played. But eventually people catch on that it's all a game, and they weren't ever going to win it. And then they stop playing... not because they don't want to, but because they can't anymore.
> Only the market's belief
You're using the word "belief". Is this a joke?
Belief is an important part of scams and cons. Is this a big con game?
> through the issuing of new state-backed bonds.
Who would ever buy another treasury in the circumstances we are talking about? I just asked what would happen when the government can't make good on the already extant treasury notes.
Saying "they'll sell more treasuries to pay those back"... am I just too dumb to get the joke and everyone here on Hackernews is laughing at me?
If chartered consumer bank is creating new M0 money supply as debt through loans or other processes it should not be legally allowed to be involved in stock and other market investments. Deposit and investment banks should not legally be allowed to mix. The immense profits and power to create new currency as debt should not have all it's incentives and value siphoned off into non-productive market manipulations and vehicles.
In the USA this is one first step, one we've taken before in recent history, that needs to be taken again to mitigate the centralized (~4k chartered banks in the USA) money supply creation issue of fractional reserve banking.
Presumably this would just look like deposit banks only ever... what? Buying US government debt?
USA started on... very chaotic period. Continental Dollar was a failure in 1780s and the citizenry largely used the Spanish Peso, at least until the next Dollar came out IIRC. Eventually US Banking solidified upon the dual-standard of silver and gold. But... not really? A lot of those banks didn't actually hold that physical silver or gold, it was all virtual notes and paper pretending to be silver or gold. (Is this fractional reserve banking but on the silver standard? Depends on who you ask)
In the 1880s (if I got that right), the Silver standard was eradicated and the USA was largely on the gold standard. We were in a pretty turbulent time regardless, until the big-whammy hit in 1930s.
While "technically" on the Gold standard, FDR then issued Executive Order 6102 making gold illegal. Simultaneously, from the 1910s in this period, the US banking system was transitioning to the modern Federal Reserve system. I'm not sure exactly when fractional reserve banking hit in the Federal Reserve system, but I remember some important laws passing in the 1930s as well. Its all a moving target and difficult to say "X happened" at a particular point of history.
It was all happening at the same time. Different banks, different parts of the country, different states were in a complex web of Silver, Gold, dollars, independent notes, and so forth.
I'd personally say by the 1930s, with Gold becoming literally illegal, was when the USA fully transitioned into fractional reserve banking for the masses. Gold remained illegal until Nixon re-legalized it in the 1970s, but also finally removed gold from officially backing our currency (granted: with Gold being illegal, it didn't practically back our currency anymore for decades, so Nixon just made Gold float to the market rate and match reality, as opposed to pretending that we had a gold-backed system).
But that's just my opinion on the matter. Others can draw lines in the sand and almost arbitrarily argue any of these points we were "doing fractional reserve banking", or "on the gold standard", or whatever.
Through some combination of poorly chosen policies in centuries past, social inertia, and perhaps even a little ignorance even on the part of the experts, we now have a society that has normalized the idea that banks get to authorize people (and companies) to receive resources they don't currently have enough cash to purchase outright. When they authorize this, they pay the seller with imaginary money that they say they have (but don't really have). Thus the seller is (most of the time) made whole.
In return for this authorization, the borrowers pay the bank that principal back, along with interest.
In some more conservative ways of thinking, interest is the idea that when a lender risks his or her money loaning it to you, they should receive compensation for that risk.
But the bank didn't have the money to loan to them either. Whether this means the bank is taking less risk, or more risk, I can't even properly process at this point... but regardless of any hypothetical risk that it might be taking, what the interest really is for is nothing more than the fee for them authorizing that the person/company receive those resources. On that point I'm quite certain, the interest pays that "fee".
I do not believe this is a particularly biased take on the matter. I don't believe I've injected much politics into it. I think this system (such as it is) has arisen organically, and without much in the way of design or any group steering it to this.
It seems quite insane to me. Beyond the bounds of mere lunacy. Lovecraft never spoke of eldritch abominations so horrifying that they might cause a madness as profound as this.
Why are we allowing banks to do this? I get it that society needs someone to do this function. But...
1. Why are banks and their staff the most qualified to undertake the function?
2. How did legislatures and even monarchs ever allow this particular power to slip away from them, without even so much as a debate about why they couldn't be trusted to do it?
3. Even if we need this functionality, how do we know how often it should happen (and for whom), and why would this system both keep it from happening not enough and from happening too much? Especially since banks are incentivized to lend as much as possible in many (maybe even all) circumstances? Isn't this sort of like putting the crackhead in charge of the medicine locker key?
4. Why is no one talking about it in this way? Maybe I'm just fucked in the head, but I've never heard it explained like this, and it makes me wonder if I've got it all wrong. But none of the extant explanations are less crazy-sounding, not that I've ever found.
Yes it is wrong in its almost entirety. I don't even know where to start. The fundamental assumption that "Banks don't have your money" is already wrong on the surface level, as all banks have to prove to the Government (FDIC in particular) that their assets are greater than their liabilities.
That is: if a bank owes $5 Billion to its customers, it needs to prove to the FDIC that it has at least $5 Billion hanging around somewhere.
Does the $5 Billion have to be cash? No. It can be a bond, it could be a mortgage, etc. etc. The risk-on/risk-off of lending that asset to others to make further profits is the entire damn point of a bank.
But banks cannot print money, except for the Fed and Treasury in collaboration with each other.
What assets? Defined as you would define them, the things most of us think about as liabilities (outstanding loans) are the same assets.
It's more than a little circular.
> if a bank owes $5 Billion to its customers, it needs to prove to the FDIC that it has at least $5 Billion hanging around somewhere.
This simply isn't the case. Neither in physical cash deposits, nor in electronic deposits of any sort. It may have some collateral, of the sort that isn't and can't be made liquid, and those values are all inflated into the stratosphere anyway. If they did have to liquidate this collateral, the prices would all collapse, and it'd have a tiny fraction of what they had claimed they were worth just days prior.
> No. It can be a bond,
That's another word for "outstanding loan" as I understand it. They gave (imaginary?) cash to some company or municipality somewhere, got a fancy piece of paper saying they can "cash it in 20 years later". That's called a loan.
> it could be a mortgage, e
I thought you were claiming these were liabilities not two sentences higher? If they're not liabilities, what the hell are they? You make it sound as if all banks ever have is assets.
> But banks cannot print money, except for the Fed and Treasury in collaboration with each other.
Who needs printed paper, when you can just modify a few bits in a few flipflops somewhere that amount to an electronic ledger?
They can't print money, but they can certainly let me use the credit card they mailed to me, and they aren't digging around in the couch cushions for some coins so that they have that covered with "assets" as you contend above.
Hell, if I understand you correctly, they could offer someone another mortgage, and then use that as the "asset" that covers my credit card loan (and my credit card loan is also an asset that covers the mortgage!).
Liabilities are money you owe someone else. Assets are money (and things) people owe you.
You're playing word games with extremely precise words and trying to pretend that these words... don't mean what they mean.
Its perfectly fine to owe $5 Billion to other people, if you yourself have $5 Billion owed to you. Assets and liabilities cancel each other out in all forms of modern accounting.
> They can't print money, but they can certainly let me use the credit card they mailed to me, and they aren't digging around in the couch cushions for some coins so that they have that covered with "assets" as you contend above.
Are you seriously trying to say that Costco doesn't get their money when you swipe a credit card and pay for your groceries?
The banks that fund credit cards have huge amounts of cash on hand. They pay Costco _BEFORE_ you pay the credit card companies (especially if you keep the balance beyond the payment period), and that's only possible because they have huge reserves of cash. Beyond "just" an asset, like true cold-hard cash that they're transferring.
Now the timing is a bit weird. Maybe credit cards pay in net 30. That's somewhat common. But if they have an asset (ex: a 30-day bond) with enough money coming in by day#30, then that's fine. The bond matures, the credit card gets the money on Day#30, the credit card company transfers it to Costco.
Super-short bonds, such as 7-day, 30-day, or even 90-day bonds, are treated as near-cash for good reason. With industry pseudo-standard net30 deliveries of cash, a 30-day bond basically is as good as cash.
How would that even work? Why would you ever repay debt if you could just wait for it to be forgiven?
It could be that it's older cultures that operated this way. The idea is that a loan turns into slavery at some point and that is unacceptable. There is also the aspect that if you could go this long without the loan being repaid you have enough already.
There were also ideas that the corner of the ones crop fields couldn't be harvested. These corners should be for people with nothing and the bests of the land.
I reckon cancelling debt would be great for the rich who are probably leveraged to the hilt to avoid selling anything, to avoid taxes. It would be decent for the middle class who keep their houses debt free. And bad for poor people, who just get this months payday loan wiped out, so they can afford that car repair, and still need to pay rent. House prices would double, due to serviceability increases, so they have less chance of owning!
How exactly is this a stable system? Who the fuck thought this would last?
Not that I’m a doomer, just saying it is normal for people to project what will happen if nothing changes, even while we all know things will change.
So it wasn't actually the norm when Clinton tried to make a dent in the foreign debts of the US.
Modern economic theory says that there's a big difference between normal household finances and national economics.
Countries don't reach retirement age, they get new taxpayers every year. (Either through births or immigration).
So there's essentially no limit to how many times they can roll the debts over via issuing new state-backed bonds, except for how the market views the country's future prospects.
That's the theory, at least.
It's subjective if you think our borrowed spending is causing more harm than good.
There's also probably substantial savings to be had by moving to a single payer healthcare system which I think we should expect in the coming decades - support creeps up every single year.
Essentially the auto companies need relief from the retirement plans to compete with countries with civilized policies.
The way congress works against the populous on this issue puts the individuals and the businesses at a disadvantage globally.
You're correct. It's very likely to be far worse than that.
And it's increasingly likely that it won't be available to the US for much longer.
The fact that the US weaponized their currency during the Ukraine / Russia war has not gone unnoticed by most non-western economies.
The first couple of chinks in the US armor are:
- BRICS countries setting up an alternative payment system to SWIFT
- China offering to buy oil directly in yuan and guaranteeing that any excessive yuan balance would be settle in actual gold - a deal that has been accepted by Saudi Arabia.
- China negotiating with ASEAN countries to trade goods directly for yuan, with the same excessive balance guaranteed to be paid in gold.
- Many countries are starting to diversify they foreign exchange reserve away from the USD, incorporating Yuans, Euros, and - yes - rubles (which can be used to purchase all kinds of useful raw materials from Russia, the largest landmass country on earth)At 58.4%, the US dollar's share of global currency reserves is comparable to that in 1995 and 1985. It has declined from its 21st-century high, but so has the Euro. The renminbi has more than doubled ... from 1.1 to 2.7%.<https://en.wikipedia.org/wiki/Reserve_currency#Global_curren...>
I have an easy solution for bringing it down to any number you want: more government spending, the more wasteful the better.
You see, government spending is part of that ‘economic activity’ number. In fact, certain types of especially wasteful spending require purchases that guarantee it will count for double in that number. Of course this creates more debt, so every year you have to create enough money to increase your spending by a huge factor, but it works in the formula used here.
This is not a new idea; it was most recently popularized by an Obama economic plan to introduce stimulus on the same premise. And he’s right; spending does bring down the number temporarily. Is it insanity to believe that this represents an economic benefit? Well, you may recognize this response from Rick Santelli:
“You can’t buy your way into prosperity. And if the multiplier that all of these Washington economists are selling us is over one, then we never have to worry about the economy again. The government should spend a trillion dollars an hour because we’ll get $1.5 trillion back.”
Now as a historical exercise, I would like just one example of a long-term financially-responsible central government that had full control of the issuance of their own legal tender. I’m not suggesting a different system; I’m merely pointing out the possible futility of our expectations.
There is no intended steady state. (Also, projections of government debt to size of the economy into the future fluctuate wildly based on current circumstances, because they almost never have a reasonable basis for predicting the combination of future economic conditions and future fiscal decisions.)
https://tradingeconomics.com/united-states/government-debt-t...
This has been growing faster than CBO projections, though obviously the last few years were unique (hopefully). Found a graph from the 2015 CBO report that is still in a wikipedia article that projected we'd be at about 75% debt/GDP now[1]. Another article from 2020 as pandemic aid spending was going out warned we could hit 106% by this year.
IIUC there's not a line that we must not cross, but the level, the rate, and the can-kicking on all this debt spending, and debt in general, worries me (even as someone who leans to the left and supports big government projects).
[1] https://commons.wikimedia.org/wiki/File:FederalDebt1940to201...
The US has managed to do that in the long term.
Governments don't need to tax anymore, they simply generate the money they need by borrowing from the reserve. There is no longer any expectation that this will ever be paid back. The debt is really nothing more than a graph showing the expansion of the money supply, and the interest rate is nothing more than the vector of where the debt is going.
USA spends a huge portion of the money that it borrows on its military. If those countries ever want to "call" their money back then they will face USA's military if the negotiations deteriorate to that level.
That isn't true. US treasuring notes are in demand because they are incredibly reliable. The US doesn't default on them, so they are safe places to stash billions of dollars that you might not want floating around in your economy (which is why China is such an enthusiastic customer for US Treasuries).
> USA spends a huge portion of the money that it borrows on its military.
US spending on military is 3.1% of GDP, expected to go to 2.3% by 2033. The US is not borrowing from other economies to fund its military, they don't have to. If that number starts creeping up (like to say 10% of GDP), bad things will happen. But if other countries stop lending us money, we aren't really going to be in trouble at all (we just stop selling treasuries, our military is funded as a part of American production, it isn't using much production from China).
In comparison, China spends 2.7% of its GDP on its military, so not far off from the USA, although the PLA is sort of entangled in the private economy, so it isn't so clear.
Whoa whoa whoa -- let's not get carried away there, Mr. Optimistic-pants.
This is, of course, occurring currently we’re just talking about a sliding scale now.
A debt for our children’s children’s children to worry over. Nothing to see here. Move along citizen.
No obviously this isn’t a realistic policy - but if we can have “war-time” economies as proven in the past it reasons that we can have an economy solely focused on the repayment of debt (idk, high taxes for a decade?). Am I tripping?
In these terms it seems quite manageable. My guess is that if it was an actual problem we would solve it. My guess is that it is mostly a talking point.
Almost half of households have less than $1000 in savings. How are they making it through the whole year without income?
How are all the old people who live off social security making it without 5% of GDP set aside to finance their lives?