What is the government doing to pay off the national debt? How is it being paid

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   crazymom3posted 10 years ago

   What is the government doing to pay off the national debt? How is it being paid off?

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   LandmarkWealthposted 10 years ago

   The National Debt will never be totally be paid off.  The country has not been totally debt free since the Andrew Jackson Administration.  Having a national debt itself is not a concern.  The issue is the debt to GDP ratio, as well as the annual deficit to GDP ratio.  There are numerous unintended consequences that go along with a debt and deficit to GDP ratio that is higher than the historical standard.  This can impact purchasing power, economic growth and job creation.  But don't assume that we should ever be totally debt free.  A good analogy would be to think about a home purchase.  A mortgage of 100k would be enormous if the value of the underlying home was 120k.  Yet if it was a 1 million dollar home, it would be fairly nominal presuming you had sufficient income to make the monthly payment.  What's important in the discussion of debt in all forms is the ratio of debt, and not the aggregate amount of debt. 
   
   Unfortunately, the Gross debt to GDP ratio has increased dramatically in recent years to about 107% from about 71% just 5 years ago.    This is because while tax revenues have gone up by about 200 billion annually, Federal spending had gone from 2.8 trillion to 3.5 trillion in just 5 years.  That leaves us with an annual deficit being added to the national debt of 775 billion from what was 300 billion annually just 5 years ago.   Although it should be noted, that in the last couple of years that deficit has been reduced from over 1 trillion annually.  Much of that is a function of political gridlock.  The lack of agreement in DC has prevented the DC political elite from increasing the rate of spending in the last couple of years, and helped bring down the deficit.  In fact the CBO has recently stated that the sequester, which was supposed to be catastrophic had more of an impact in reducing the deficit than anything in the last 2 decades.

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      JohnfrmClevelandposted 10 years agoin reply to this

      Debt follows GDP, not the other way around.  Reinhart and Rogoff's paper is terribly flawed, and I'm not just talking about the spreadsheet errors that were found.
      http://pragcap.com/debunking-reinhart-r … me-of-debt

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      LandmarkWealthposted 10 years agoin reply to this

      Not the critique is flawed.  The cost to service debt must be extracted from the economy annually. Otherwise the SA nations like Brazil would have prospered in the late 70's rather than been blown up by destroyed currencies. 1920-21 proved it as well

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      JohnfrmClevelandposted 10 years agoin reply to this

      There is no cost to service the debt.  Dollars cost nothing to produce.
      This is not the only critique of R&R's paper.  The only people still buying into the debt-to-GDP ratio nonsense are the conservatives who want it to be true.

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      LandmarkWealthposted 10 years agoin reply to this

      That is totally false. The cost is the taxation that must be extracted and diverted from more productive distribution. Otherwise we could run endless deficits with ZERO tax revenue to the treasury. And 1920-21 policy responses destroy the critique.

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      JohnfrmClevelandposted 10 years agoin reply to this

      The extra taxation is not necessary.  The govt. does not need tax revenue - or borrowing - in order to spend.  They risk inflation, but they won't run out of dollars.  (And inflation is not a given, either.)

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      LandmarkWealthposted 10 years agoin reply to this

      I am not suggesting the gov't would run out of dollars. Then why have any taxation at all.  Why not print money at infinitum and eliminate all taxes.  Then we could all be trillionaire's. Inflation is a given and is already in various forms.

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      JohnfrmClevelandposted 10 years agoin reply to this

      In a hot economy, taxation is needed to allow the government a cut of the nation's production without causing inflation.  In a down economy, there is enough unused productive capacity to meet the increased demand without inflation.

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      LandmarkWealthposted 10 years agoin reply to this

      Taxation is required because bond market determines the cost of borrowing. Borrowing is and never will be free. And as the Fed learned in June...They answer to the Bond Market, as they were quickly taken to the wood shed.

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      JohnfrmClevelandposted 10 years agoin reply to this

      The Fed was taken to the wood shed in June?  It must have been a quiet beating, because nobody heard about it.  The Fed still controls interest rates, and they will always be able to - by controlling the U.S. bond market.

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       LandmarkWealthposted 10 years agoin reply to this

       A 100% jump in the ten year in less than two months was dramatic and forced the Fed to alter their policy statements very quickly. That's why there was no taper of QE.  Because they started to lose control of the yield curve and had to capitulate.

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       JohnfrmClevelandposted 10 years agoin reply to this

       I'm looking at the 2013 bond yields, and it just doesn't look like a country that has lost control to the market.  10-yr. yields never reached 3%.  Considering all of the consternation over the debt ceiling, the markets look pretty stable.

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       crazymom3posted 10 years agoin reply to this

       I Am politically and economically ignorant and have a hard time understanding these things but from what i could gather from your statement in laymen terms is that the government is spending more than it gathers from taxes and it is being reduced

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       LandmarkWealthposted 10 years agoin reply to this

       Check again we went from about 1.6 in May when Bernanke started the taper discussion to 2.97 on Sept 5th.  About a week later they delayed the taper out of panic.  The bond market told the Fed not to taper. They are calling the shots now.

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       JohnfrmClevelandposted 10 years agoin reply to this

       Still not 100%, and still just a blip in the larger scheme of things.  10-yr bonds are not based on risk, but on speculation of what the Fed might do next re short-term bonds; more proof that the Fed controls interest rates in the way I described.

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       LandmarkWealthposted 10 years agoin reply to this

       It is nearly double aka 100%. And it is proof that the Fed is doing what it is told. The 10 year is a benchmark for economic projections. And the Fed is stuck in the liquidity trap, and doing a lot of long term damage and causing numerous distortions

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       JohnfrmClevelandposted 10 years agoin reply to this

       LW - Should we move this to a Hub comments section, where we aren't limited to 250 characters?

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       LandmarkWealthposted 10 years agoin reply to this

       Why don't you post a link for one of your hubs, and I will comment there.  I am headed out take the kids trick or treating. I will read it this evening.

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       JohnfrmClevelandposted 10 years agoin reply to this

       Thanks. 
       http://johnfrmcleveland.hubpages.com/hu … d-Standard

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       rumblemacroposted 10 years agoin reply to this

       Inflation really isn't a problem right now. Consumer prices climbed 1.1 percent in the 12 months through April, according to a measure watched by the Fed that excludes food and fuel -- matching the smallest increase since records began in 1960. That’

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       LandmarkWealthposted 10 years agoin reply to this

       Core CPI is not even remotely reflective of the true cost of living. We simply just altered the way in which we calculate inflation to hide the true cost.
       
       http://www.shadowstats.com/article/no-4 … easurement

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       crazymom3posted 10 years agoin reply to this

       So the problem is the gross debt to GDP ratio. I' m not sure what that means. Is it like the debt to income ratio? I can see it causes inflation and yes jobs and incomes have shrunk but how does the government gridlock help?

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       JohnfrmClevelandposted 10 years agoin reply to this

       No, the problem is that the government won't spend enough.  Deficit spending is where dollars come from, even in good times.  Fear of debt keeps them from spending more, but the fear is misplaced.

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       LandmarkWealthposted 10 years agoin reply to this

       Unfortunately, John theory is just a theory which has never actually worked in reality.  Because Gov't spending without regard for productivity in advance creates distorted prices and reducing purchasing power. AKA Japan.

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   JohnfrmClevelandposted 10 years ago

   The "national debt" is simply a measure of U.S. bonds outstanding.  When someone amasses a large pile of dollars, they often choose to exchange those dollars for U.S. bonds, which are risk-free (in terms of being redeemable).  China, for example, amasses trillions of U.S. dollars in trade.  Since they don't wish to spend those dollars anytime soon, they exchange them for bonds, which are safe, interest-bearing vehicles in which to park dollars. 
   
   Thinking of bonds as "debt" is misleading.  Creating dollars does not cost the government a thing, so interest is not a burden, and the risk of the govt. being unable to meet their bond obligations (absent political stupidity, like the debt ceiling crisis) is zero.  If they changed a few laws from the gold standard days, the government could simply issue dollars without issuing bonds at all, and the "national debt" would disappear as bonds outstanding were redeemed.  Issuing bonds is now a choice, not a necessity for creating new dollars.

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      LandmarkWealthposted 10 years agoin reply to this

      Yet that didn't work in the Weimar Republic, numerous South American nations of the 70's, and the laundry list of failed fiat currencies throughout history
      http://globaleconomicanalysis.blogspot. … -work.html

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      JohnfrmClevelandposted 10 years agoin reply to this

      Are there any surviving gold-backed currencies?  Or is their failure rate 100%?
      
      Weimar Germany had to pay reparations in other currencies, plus gold.  Plus their productive capacity was damaged in the war.  Zimbabwe - destroyed their ag sector.

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      LandmarkWealthposted 10 years agoin reply to this

      The failure of gold standards is rooted in the welfare state. If politicians taxed what was necessary to support them, they'd see rebellion.  Yet Gold itself has always maintained it's value, while fiat dominant systems average about 40 years.

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      JohnfrmClevelandposted 10 years agoin reply to this

      The failure of gold is that it makes money a proxy for a single commodity.  Plus it ties money creation to a variable that has nothing whatsoever to do with the economy and its demands for currency.

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      LandmarkWealthposted 10 years agoin reply to this

      I'm not advocating the inflexible Gold standard.  But fiat currencies are all doomed to destroy the wealth of citizens through gov't profligacy. I'd personally prefer a basket of commodities based system to impose fiscal discipline and real value.

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      JohnfrmClevelandposted 10 years agoin reply to this

      Governments can screw up under a gold standard, too.  That's no reason to discard fiat money.  Right now we are in more danger of deflation than inflation, because of everybody's irrational fear of the national debt.

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      LandmarkWealthposted 10 years agoin reply to this

      The problem with fiat money is that the notion that the gov't can effectively control the supply of money has historically worked something like trying to take just a little heroin...and not more than you need.  Yes... excessive debt can cause panics

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      JohnfrmClevelandposted 10 years agoin reply to this

      But the panics are based on misinformation. 
      Take a look at the history of hyperinflation.  Governments don't spend themselves into hyperinflation, there is always another reason, like war, loss of production, or foreign debt.

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      crazymom3posted 10 years agoin reply to this

      Landmark wealth says we are adding 775 billion in annual deficit to the national debt but its being paid off. You say there is no real debt, so what is the problem then? A little more confused I'm afraid.

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       LandmarkWealthposted 10 years agoin reply to this

       The misinformation is the hubris of gov't to believe they can create value out of thin air without creating anything. Which has never worked. South America was a classic example of spending your way to prosperity. And yes, there is national debt.

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       JohnfrmClevelandposted 10 years agoin reply to this

       CrazyMom - bonds used to represent real debt, when dollars were convertible to gold (I have a Hub explaining that).  It used to cost the govt. something (gold) to redeem those bonds.  Now, it costs them nothing.  You can call that "debt" if you like.

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       LandmarkWealthposted 10 years agoin reply to this

       Crazy Mom...It costs you in inflation.  Except every time prices go up, the gov't alters the way we calculate inflation to hide it.  But anyone who has been to the grocery store over the last few decades knows the data doesn't represent their exp.

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       rumblemacroposted 10 years agoin reply to this

       Kinda hard to have high inflation while most workers are seeing their wages shrink isn't it?

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       LandmarkWealthposted 10 years agoin reply to this

       That not true at all...Inflation comes from profligate gov't expansion.  Not too many jobs were created in the Weimar Republic. Inflation does not require economic expansion.

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       crazymom3posted 10 years agoin reply to this

       The answer sounds simple---issue dollars so why doesn't the government do this?

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       JohnfrmClevelandposted 10 years agoin reply to this

       Because the government doesn't know what it is doing.  Monetarists thinking still rules Washington.  Both parties still think the national debt is real, and the country is $17 trillion in the hole.  And voters are no smarter.

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       LandmarkWealthposted 10 years agoin reply to this

       Monetarist are a small minority...And the Debt quite real.  Your thinking is precisely what has destroyed currencies since the beginning of time.  John Law to 1930s Germany...It always ends the same.

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       stanfrommariettaposted 9 years agoin reply to this

       Not all nations with fiat money experience hyperinflations. Those that do usually have debts to foreigners in foreign currencies and try to pay the debts by selling their own currencies for the lender's to repay the debt. The US debt is in dollars.

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       LandmarkWealthposted 9 years agoin reply to this

       Defintely not, since virtually the whole world is now Fiat.  But not all inflation is hyperinflation.  There can be a slow erosion to purchasing power that alters the standard of living.

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