When does federal debt reach unsustainable levels?
budgetmodel.wharton.upenn.edu
budgetmodel.wharton.upenn.edu
Country A ensures they don't run deficits and pay off their debts to prepare.
Country B prepares by incurring a debt to build hospitals and train nurses.
20 years later the demographic crisis hits. Country A cannot build hospitals and train nurses fast enough to meet the need so the price of both skyrocket and the piles of money they "saved" is inflating away to almost nothing.
Meanwhile country B is fine.
The costs Country A incurs are plowed back into Country A's economy during the "building boom".
Don't know which country ends up better off, but there are many more variables than you imply.
https://www.wsj.com/articles/how-much-washington-really-owes...
"That brings us to the alarming milestone. Add the net position of $29.9 trillion to the social insurance net expenditures of $71 trillion, and you find that they topped $100 trillion—the first time they have ever done so."
Our unfunded social security tab is crazy.
Obviously. It could also be in the black if you raised the rate 2x...
> I especially don't like ignoring it like this because it implies the US government simply needs to ignore that obligation to the public, let millions retire with no safety net, and just default on trillions of debt.
The US government might technically default - i.e. miss payments - but the payments will likely be delayed (due to political BS) rather than not paid in full w/ accrued interest.
They've missed payments before. They'll probably miss them again. But they can literally print money. There's zero reason to truly default - and ENORMOUS consequences if they do.
AFAIK, The Treasury at least claimed to be able to pay SS benefits in full even if the US "defaulted" (delayed) Treasury payments.
It's hard for me to imagine a world in which the government just doesn't pay SS Treasuries. With enough political will, anything is possible. But even if political winds change dramatically - there's no way around how enormous the financial consequences would be to everyone in the country.
I guess you can never underestimate how much politicians are willing to destroy this country to get a very small soundbite on TV - but I'm skeptical this is worth worrying about.
Is it possible COLA for SS will be nerfed? That seems within the realm of possibility.
Is it possible the Federal Government just decides to stop paying Treasuries SPECIFICALLY to SS? Super-dooper highly unlikely.
* http://investing.com/rates-bonds/greece-government-bonds
* https://investing.com/rates-bonds/italy-government-bonds
* https://investing.com/rates-bonds/usa-government-bonds
* https://www.investing.com/rates-bonds/world-government-bonds
1) The US has real productivity growth
2) The US has population growth
3) The US Central Bank has no reason not to bail out the US Federal Government if needed.
Greece/Italy would be like the US Central Bank (The Fed) not bailing out California. You can see why that might be politically popular. There's not really a politically popular reason not to bail out the US Government.
A default would mean the end of 30-year fixed rate mortgages. Interest rates would be 18% again. House values would drop by 70% - and if you thought 2008 was bad - you better hold onto your butt.
This would make The Great Depression look like a small recession.
Which is all further reason why it WON'T happen. At pretty much any point, politicians could go back and pay back treasury holders in full w/ accrued interest, and then the problems are massively reduced.
There's no political will to drive everyone in the country into a black hole for no reason.
Which happened in 1979 due to technical (?) issues:
* https://www.reuters.com/article/usa-debt-default-idUSN1E76A0...
Yes - the SS Trust Fund holds $2.9T in Treasuries. They matter as much as the other 80% of Treasuries.
The larger issue with SS is that it's not funded to meet its future obligations.
That's a problem regardless of whether the US government defaults.
I don't think it's particularly important to single out SS in this discussion about US debt.
SS was designed that you'd get $x dollars in the future. It didn't mean that $x would buy you a certain lifestyle.
There was no guarantee that ~95% of adults would still be working when you retire, and that you'd be able to get waited on in restaurants for $10.
If the US government spends into oblivion - it affects everyone. Especially when it spends to pay people not to work. I don't think SS beneficiaries get hit particularly hard.
What I think is problematic is people thinking that SS beneficiaries should be the only people immune to the US government overspending.
As is typical in this country - no one wants to solve hard problems - they just want to make sure no problems affect them.
SS is mostly pay-as-you-go (~93% of income). You don't pay into SS, and they buy treasuries, and hold them for you as some terrible investment portfolio.
The amount of revenue SS gets from Treasury payments (~7%) is tiny compared to how much is paid into it annually.
You're not technically paying for YOUR retirement. You're paying for someone else's retirement, and at any point it can become popular to reduce or increase SS payments.
The Treasury piece is not particularly important to the conversation about total US debt.
If it's insurance, than removing the cap on income charges without removing the cap on benefits is fundamentally unfair.
If it's a social welfare program, having a trust fund doesn't make a whole lot of sense. As well as quite some other things like paying people more benefits when they've had a higher historic income; that's the opposite of what I'd expect from a welfare program.
IMHO, it's a social welfare program that pretends to be an insurance scheme with wacky rules. Maintaining the fiction of an insurance scheme is clearly important to acceptance. There's also lots of features to encourage behaviors... Be sure to stay married for at least ten years to qualify for spousal benefits. Be sure to save up so you can delay claiming, and wink take advantage of our outdated actuarial tables. Don't forget to earn more money now (and pay more taxes now) so you can get higher benefits later.
Do we really want all our company's to be majority owned by the government?
The practical answer from the government's perspective was to just the loan the money to itself. Except the problem now is that the government owes itself a lot of money.
Reality is that there is not trust fund and current payers simply have to pay the benefits for existing retirees. That's the way it has always been and that's the way it's always will be.
There will be economic problems no matter how the government handles such a large amount of money.
I believe that whenever there is a crisis or issue they will simply raise the income limits to correct it, and that's largely been happening as the income limit is going up and up and up every year. Way more than it did 20 years ago.
Not sure I’d want them to have voting shares, but actually—yeah, that sounds pretty good.
It's important to understand that they invested in risk free assets ie government bonds, because it was a social safety net in reaction to problems in the market.
Except it was much smaller then, the problem is that now they've created so many bonds that the bonds are the problem. Anyway you look at it, creating a giant government program like this is. going to be a problem.
Had to stop reading at the point. The curse of dimensionality is, in fact, completely independent from any sense of "quantum" computing problems. Given that their understanding of the CoD is so poor, I can only assume the author has an equally poor understanding of everything else they are writing about.
We're already at the cliff's edge, watching interest rates climb while trillions of US short term debt turns over. It would only take a couple more points of interest to make all of the US Treasury spreadsheets go from the bright red they're already at to flashing red with klaxons.
And they'll do what they all, always do: monetize. Blow out the currency. That's our fate, and it's inexorable at this point. The only question is when.
This is hyperbole: if you increase rates by even 2x debt will still be serviceable.
Ultimately growth will just lead to higher spending. A complete solution is a bit of both. Cutting spending or capping it, and growth. Without cuts or a cap Congress will just see growth as a sign they can spend more money we don't have.
> They are selling our bonds and not buying these days.
Who is "they"?
Massive spending/entitlement cuts aren't popular.
~40% of the country is on either Medicaid, SNAP, Medicare, or Social Security.
That's ~46% of Federal spending. Besides Republicans for SNAP - it's completely untouchable.
~12% of Federal spending is the military. With all the wars going on - good luck cutting that.
After interest - you only have ~16% of spending left to cut. And that's the stuff I think most people are in agreement we actually want!
You can't squeeze blood from a stone.
What's most likely to happen is that instead of ~40% of US adults not working - that number will decrease - and you'll have a larger, more productive tax base and less people on entitlements - strictly due to market forces.
There's definitely a lot of low hanging fruit to be picked here but the special interests are so entrenched that the political will would need to be much higher than it currently is.
The US is ridiculously unhealthy.
I'm not sure how much more you expect to spend compared to France - when the median citizen is morbidly obese, sedentary, and an alcoholic or a smoker or a diabetic.
Considering the health of our citizens - 5% more doesn't sound bad.
Well, the talking heads on MSNBC, Bloomberg, et. all are saying a recession (if not a depression) in the near term is inevitable. A hot war in a really volatile part of the world kicked off the other day. Crypto isn't the new kid on the block anymore but it's definitely still hanging around.
Seems all your conditions are close to being met, if they aren't already. Yikes.
>We need not only a balanced budget amendment, but massive spending/entitlement cuts and austerity
So much this. Somehow I imagine that for example, the Pentagon, wouldn't really see its operational readiness hindered if we cut its budget by $100 billion a year or so.
This unit of measure is really unfortunate. It makes it seem like 100% is some maximum limit.
When I become Unit Emperor, it will be "US debt is over 14 months of GDP".
> have relied on other nations to buy our bonds.
This is false. The vast majority of US government debt is held domestically. Foreign holdings have been increasing, but as of 2022, still only represents 30% of debt.
Based on what? What is the "loan payments" here? Are you saying the US budget will be 100% dedicated to servicing the debt by 2028? This is certainly false, the cost to service debt will not go up ~10x in the next five years.
Economically, it seems things will fall apart when interest payments balloon to become by far the dominating expense of the US government. At this point, the runaway cost of interest will force even faster money printing, resulting in a positive hyperinflationary feedback loop. Eventually the printing will outpace economic growth, which means inflation will be cannibalizing the actual economic output of the people. People will either stop working or find other mediums to trade in.
The social endpoint can happen at any point along the way there. It's a fairly well-known historical reality that a failing elite faces the threat of replacement when new elites can obtain the blessing of the populace; otherwise the populace is hopeless. A campaign to permanently stamp down potential new leaders wherever they may arise is feasible for a limited time but eventually becomes too expensive or diverts all attention away from important material realities. Once there is a cycling of the elites, a drastic shift in policy would undoubtedly be the result. In this scenario, it's highly like that violence occurs.
I'd obviously much prefer the first scenario, where people find other ways to trade peacefully before they start a revolution.
* https://en.wikipedia.org/wiki/National_debt_of_Japan
The UK has been over 150% a number of times, as well as over 200% (nearly 250%):
* https://en.wikipedia.org/wiki/File:UK_debt_as_GDP_percent.pn...
With interst-as-GDP getting close to 10%:
* https://en.wikipedia.org/wiki/United_Kingdom_national_debt#/...
* https://en.wikipedia.org/wiki/United_Kingdom_national_debt
For the US (#5, towards bottom):
> Debt service as a share of federal outlays peaked at more than 15% in the mid-1990s, but generally falling interest rates have helped hold down payments even as the dollar amount continues to grow.
* https://www.pewresearch.org/short-reads/2023/02/14/facts-abo...
> As we have discussed elsewhere, government debt reduces economic activity by crowding out private capital formation ...
I stopped reading at that point, because many economists disagree with that assumption. To understand why, consider:
* When the US government borrows to spend on things like, say, battleships, fighter jets, satellites, AI software, etc., every dollar it spends is a dollar of revenues to a private company like Lockheed Martin, Raytheon, Amazon, Microsoft, Palantir, etc., which invests in its business, inducing private capital formation.
* When the US government borrows to spend on healthcare, every dollar it spends is a dollar of revenues to a private hospital, vendor, practice, or doctor, all of whom invest in technology, facilities, training, etc., inducing private capital formation.
* When the US government borrows to spend on anything, every dollar it spends is a dollar of revenues to a private entity or citizen -- who else? What matters is whether that entity or citizen invests a portion of those revenues in endeavors that induce private capital formation in the US.
Things are not as simple and clear-cut as the authors would like them to be!
When the U.S. government borrows one dollar to spend, a small amount goes outside the U.S. economy or disappears in the hundreds of billions of dollars missing from the DoD budget. The remainder is revenue for U.S. entities, some amount of which goes straight into the pockets of wealth-hoarders. Wealth-hoarders want to earn interest on this money, and buy a lot of U.S. government bonds. The government spends that money on things that go back into their pockets, and they additionally earn interest on that same money. It's a great way for the ridiculously wealthy to become the ludicrously-wealthy, but it is not nearly so good for the economy as you imply.
I am an old man, and one thing I have learned in a long life is that if something seems unclear, then wait a few years for more data.
As another person, there is still the infrastructure (military and civilian), capital (trucks, heavy equipment, electric), domain knowledge, work & work best practices (read OSHA), culture, etc.
Putting all of your money into Bitcoin/gold right now is a terrible idea for an event predicted to occur in 20 years. So what do you do now? Next year?
How is it a worse idea than, say, putting all of your money into your 401k fund for 20 years?
[0] Buffett said "hunk of yellow metal", which unlike Bitcoin, has some intrinsic and widely recognized value
It’s usually good to own productive things like a home, long lasting efficient cars, labor saving appliances, solar panels, batteries, fruit trees, etc
> Physical things tend to depreciate, and quicker than one might imagine.
First part is true, but I think it actually takes quite awhile. Many people in the US live in 50 - 100 year old homes, and well engineered cars are going 30 years and 300k miles these days.
Either way appreciation tends to be pretty close to inflation on average, so you are generally not making 8.75% on top of inflation. That does happen in very specific markets but definitely not in most areas.
I own a home for the lifestyle. But I could do far better as a financial investment is concerned.
If you are moving into a new house every few years that is particularly terrible, because you are throwing away a ton of money in closing costs and selling fees.
Real vs. nominal is important but it also applies to the largest cost which is interest. Interest at 7%, but inflation at 7%, means that loan is effectively free in real terms.
I agree there are better investments overall, but when you need to live somewhere, and in the case of looking to secure purchasing power in anticipation of extreme inflation... Better to rely on real goods. Otherwise, you're hoping the high volatility of gold and stocks coincides with your highly increased rent from other owners.
There is no spoon.
It isn't a free money printing game forever.
(1) https://www.bloomberg.com/news/articles/2023-07-24/russia-s-...
(2) https://www.belfercenter.org/publication/new-russian-law-nor...
(3) https://thebarentsobserver.com/en/arctic/2023/10/uscg-healy-...
To understand what this actually looks like, read Hank Paulson's Dealing with China where he describes speaking with Chinese leaders during the 2008 crisis. The Chinese are massive holders of US dollars and did not find TARP or quantitative easing amusing.
https://www.amazon.com/Dealing-China-Insider-Economic-Superp...
What is better? The Yuan? The Ruble? The Peso? The Euro?
So far, not many viable candidates frankly.
Reference is to the Matrix, the young monk in the waiting room who is bending a spoon with his intent.
https://screenrant.com/matrix-movie-no-spoon-phrase-meaning-...
edit: why the downvotes? I saw the original movie in theaters, I still didn't get the reference. Some of us are old.
Hiroshima and Nagasaki.
The world uses EUR, JPY, CAD, etc much less than USD, and plenty of countries (CA, NL, FR, DE, Greece(!), Italy(!), Thailand(!)) have lower borrowing costs than the US:
* https://www.investing.com/rates-bonds/world-government-bonds
If anything, today's environment negates the reality of "crowding out."
That said, the debt will be at an "unsustainable level" when people stop buying it.
I would gladly pay more taxes for better schools, parks, cities, humane crime reduction, etc.
It's a novel set of parliamentary procedure shenanigans, starting about a decade ago, that it's up for debate.
That's why people talk about stuff like the platinum coin.
And that won't happen until the rest of the world gets their house in order.
That's not even wrong.
I don't know where to start without coming off as aggressive, lecturing, talking down, or putting words in your mouth. Tough place to be in.
Instead, I'll volunteer a general pattern that helps avoid this intellectual trap.
I'm old enough now to have seen it wax and wane and take different forms, from Ron Paul to BRICS, and there might be one key fallacy uniting all those.
It's not dissimilar to what I've seen from independent large, unorganized, groups discovering Tether every 18 months.
It's that _you and the people you are learning new info from are not uniquely blessed, and not everyone is on your timeline_. It's likely there's a sizable # of people have had the idea before.
If the US was so heavily indebted it was in a worse place financially than other "IMF country", Argentina, Egypt, Ecuador, Tunisia...we'd see at least some of the same problems. There isn't a mass delusion, psychosis, or enough dumb people in the world to have the US in that category of country but still treated the way it actually is.
To some extent, I wonder if this short-sightedness is due to polarization. We spend 4 years being told everything is falling part and fundamental values are broken whenever the other party holds the presidency. In reality, US was _by far_ the most economically successful country during COVID, the last decade. It's earned it place and will continue to for a very long time. I highly, highly suggest reading information from a foreign perspective, Economist is great, if anything, they have a slight antipathy toward the US. And they don't swing for home runs via takes, ever.
The U.S. is in the IMF and has used it to borrow.
Treasury auctions can’t fail. I don’t mean failure is highly unlikely. I mean as the system is structured it’s operationally impossible for them to fail. There is no case where the primary dealers in aggregate can ever lack the reserves to make a market.
Of course, nothing lasts forever. The US government’s currency issuance (a much clearer way to think of it than “debt”) depends on demand for that currency. Sure, oil is a part of it, but a much larger part is tax burden. It’s not an accident that the USA claims and has the authority to tax its citizens worldwide. That and there is a large highly diversified economy that does business in dollars, so you can get pretty much anything from computer chips to F-35s with USD so they’re generally useful to have.
In fact, it would be operationally impossible for any other fiat currency to effectively replace the USD unless its issuer were willing to run sufficient deficits (“print money”/“issue debt”) in amounts sufficient to meet global demand for both payment clearing and holding financial reserves.
I’ve never heard a compelling argument to explain just how a monetary system in which all monetized debt becomes privately held wealth, can be framed as debt being a “scary, unsustainable thing” as if it’s household debt. At least this article frames it as a relationship with investors, but it still doesn’t cut to the meat of the issue, to me at least.
Writing debt in an out of existence seems way more conceptually scary than it is dangerous in reality, at least for an economy where households spend on average about 5,000 dollars a month.
It seems a much more important topic is monetary hegemony, than some certain debt to GDP ratio, but I never seem to see those concepts mentioned.
As common wisdom states, federal debt is public surplus. It's the set of things that the federal government has invested funding in that haven't been liquidated. This includes roads, streetlights, parks, power substations, etc.
The relevant question for our economy is how quickly is the federal government spending, and what is the value created from that spending?
Jagadeesh Gokhale and Kent Smetters, Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities, American Enterprise Institute, AEI Press: 2003.
* https://www.aei.org/research-products/book/fiscal-and-genera...
Also from 2005, on Social Security:
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=649204
Smetters previously (1999) on models to privatize Social Security:
* https://www.sciencedirect.com/science/article/pii/S109420259...
By definition the debt exists because people want to save. If they didn't want to save they'd spend and if they spend it is taxed which closes the deficit.
It's a simple geometric series.
Japan has debt to GDP ratios of 268% with both interest rates and inflation near the floor.
The mental model people are using is simply wrong.
The fed is in a bind. Print and inflate or QT/rate hike and recession. They've been putting a thread through the eye of the needle. The eye is getting smaller and the thread bigger everyday. One day they won't be able to sew.
Anyone who has no income, and relies on savings, is acutely aware that printing money risks inflation, and that inflation will destroy their savings.
My savings are mainly real estate, which inflates too; so I have some protection. But if inflation gets wild, the property bubble bursts. There's no fail-safe way to inflation-proof savings; when governments implement policies that they know will increase inflation, they are deliberately robbing pensioners, who can't protect themselves.
Most whom I talk to think the president causes inflation, seemingly out of thin air. They are not able to articulate how inflation actually happens via money printing. They support the majority of the spending items, but cannot connect the dots.
Now something more controversial, in my fairytale ending I'd have expected proof-of-work type crypto currencies to have provided at least some counter balance to the fed money printer but in really bitcoin/crypto because more correlated with liquidity. I doubt that going to change ever.
(Now, true, the federal debt was unsustainable under the Bretton Woods arrangement.)
Also, that kind of loan is usually seen as predatory by finance regulators (for good reason). So people are usually required to jump through some hoops to get one.
That said, as a sibling already pointed, some times it happens. And companies have a much easier time getting them.
Disclaimer: I'm not an economist and just made up this measure, happy to stand corrected by experts.
[1] https://fred.stlouisfed.org/series/A091RC1Q027SBEA
[2] https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?location...
The problem though, is that the US seems to be behaving like it may not be good for its debts lately. Not that it can't outgrow them, but just that things are getting more worrisome payment-wise.
You remember we used to have budget crises and shutdowns every once in a while (every few years), decades ago. But now it happens like every 2 years, and it seems like it's getting worse. And you never think that disaster will strike until it does. One of these days we're going to miss a bond payment, because some leader will want to "show everyone", and people will be shook, I think, when everyone realizes that the US is not some special country that can never default on its debt. That will be a sad day.
And it's all the more likely when everything is 50:50 paralyzed -- very easy for one bad step to take us over the brink while everyone is unable to do anything. I'm no fan of the ridiculous right wing "republicans" who are playing games in Congress, but they do (by accident) have one thing right. We are really far from balancing the budget[0], and both the spending and the debt are getting worse over time with demographic pressure. Not that "balancing the budget" is a requirement in the simplistic household way that they or the public generally think. Incurring debt has its purposes for a growing sovereign nation. But the way we're doing it / reasons we're doing it for is sleepwalking our way into a big hole.
Unless we're willing to behave as a country like it's not a problem, it is a problem, and growing.
[0] https://www.nytimes.com/interactive/2023/03/06/upshot/balanc...
We never made any moves to recover from that and have had no cushion for the two big crises since then (housing in ‘08, Covid in 2020). It’s not even clear trying to recover was realistic after the two Bush terms, the budget and debt was so far gone already. Just a recipe for getting thrown out of power and having someone else who’d ignore the nigh-unsolvable problem take over.
Through out the entire history of the US federal tax collections are almost flat hovering around 18% of GDP no matter the make up of tax rates, changing the tax rates changes who pays the taxes, but ultimately it is clear total revenues are pretty flat.
if the government wants more revenue it has to increase GDP not simply "raise tax rates" . At the end of the day any government spending in excess of 18% of GDP is unsustainable
The top of the top investor class is pretty much dying off with their estates structured like a CDO inside of a CDS hidden in a tranche pinned to both LIBOR and the Japanese birth rate, divided by the number of penguins in the San Diego Zoo.
After the disaster of higher education in the US getting unsustainable bloat thanks to Federal backing for debt but not ways to earn income (sorry Boomers vote their own interests and have Gen Y n Z pay for it)…it would be a great sign of financial integrity and creditworthiness as a nation to hurry up and treat that debt like prohibition - didn’t work, change it.
Can’t over inflate something that is impossible to over inflate.
That said, historically this ‘problem’ would be solved by conquering a neighbor or new land and stealing all their gold/silver, or debasing the currency bit by bit through slicing bits of metal off coins or melting impurities into them.
There is no reason for a dynamically expanding money supply to exist (or even an expanding money supply at all).
Ultimately what actually matter is the goods and services being bought and sold, their price in whatever currency you use is irrelevant because the actual value remains the same.
This has been known since at least Sumer. The consistency of weights of measure is vital for a fair, durable, sustainable economy. Adjusting the ruler of trade only benefits the adjuster.
With my accelerationist viewpoint, the continued debt explosion could neuter American military intervention thousands of miles off its coasts in the endgame; but that would require some sort of collapse where I probably, an unwilling funder of the American military, would also suffer - but that is ok if it means stopping the killings abroad.
I think the debt explosion, assuming infinite and stable growth, is on purpose: it creates forever wars that we citizens have no say in. And as a result, the debt will continue to balloon forever.
I doubt it would lead to significant military cuts. Entitlements seem much more likely.