U.S. Debt: The Biggest Trouble Is Yet To Come

Eleven reasons why there needs to be a debt ceiling. Can you think of any others?

Rodger Malcolm Mitchell

typo: lots of people would lose their jobs

“I continue to find it close to inconceivable that elected policymakers would allow the risk of default.” So do we all.

These elected officials have long demonstrated their ability to be a little dense. They may actually prefer “crisis mode”.

If an elected official is being forced to change their stance by “market forces” (i.e.: change in interest rates), then it may be easier to justify to their constituents. But to prove this, they need “the market” to tip their hand and forcibly raise rates.

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Sovereign nations can: make their own laws, levy their own taxes and issue their own currency.

The United States is a sovereign nation.

Therefore, the United States can issue its own currency.

Borrowing Federal reserve money is expensive; issuing American money is free.

“How expensive,” you ask? In the twenty years between 1991 and 2010 the government borrowed $9.9 trillion while paying $7.4 trillion in interest. Seventy-five percent of the increase in the national debt went to pay the interest on that debt. This year the interest on the nation’s debt will be around $500 billion – more than $5 trillion in the next decade.

These interest payments benefits only the banks, bankers and Wall Street bond traders. What logic can justify such a large expense for the benefit of such a small number of our citizens? Never have so many paid so much to so few for so little.

The U.S. government can issue all the money we need or want debt and interest free.

The government is our only hope of stability. It is the only institution that has the authority, power, and flexibility to create a stable currency necessary to generate a sustainable economy. It can create money by fiat, lend money like commercial banks, pass laws to regulate the value of our currency, and it can fine-tune the money supply with taxes. No privately owned institution can do that job.

Mr. Rodger Malcolm Mitchell, first of all you have to learn what deficits are before anything else. If you have the basics wrong, then all your assumptions and ideas are also wrong, because they are based on false perceptions and lies. You simply cannot run before you learn how to walk, and this is exactly what you are doing, trying to run before you learn how to walk.

In your most preposterous most devious most twisted way of thinking, you say that federal deficits are a good thing, a way for the federal government to pump money into the economy and creat prosperity. You are totally wrong. In fact, quite on the contrary, federal deficits are bad for the economy and very bad for the nation in general.

The first thing you have to learn is what a federal deficit – or state, county or municipal deficit – is. A federal deficit is simply the end result of the federal government spending way more money in a fiscal year than what it brings in revenue for that same fiscal year. So for example, when Uncle Obama spends $ 1.6 trillion dollars in a fiscal year but only receives 500 billion dollars in general revenue, that means that the government spent $1.1 trillion dollars more than what has brought in. This $1.1 trillion is then added to the accumulated debt, therefore, if the accumulated debt was for example $13 trillion dollars, now is $14.1 trillion dollars after this latest deficit being added.

Now as a sovereign monetary nation, the USA has the option to monetize these federal deficts, that is, create money out of thin air and paper over these deficits with freshly printed fiat dollars, in other words, pay for the deficits with new created money. It is only in that sense if the federal government chose this easy cowardly option that new money is pumped into the economy, but not with positive goods benefits like you think, but instead this decifit/debt monetising brings with it with very nefarious negative consequences. For that reason, governments prefer to add the deficits to the accumulated debt instead of creating new money to pay for them, as this way the currency remains relatively stable and doesn’t create inflation. When a monetary sovereign like the US Federal Reserve strays off this path and chooses to create money wantonly to monetize the deficits, disastrous consequences follows.

Unfortunatly Helicopter Ben Bernanke has strayed from the proven path and recklessly and most irresponsibly more than doubled the nations money supply in the last two years, something that is totally unprecedented in the entire history of the USA.

So why are federal deficits really bad for the nation and for the USA economy? Because:

1) > In order to facilitate the deficts monetizing, the Fed drops interest rates to zero. With such easy free money, the speculators buy natural resources and other equities stocks like crazy, thus bringing their prices up, creating a very dangerous speculative bubble in the stock market. This zero interest rates and excessive money creation devaluate the dollar, thus further raising the price of natural resources and other stocks, because these are all priced in US dollars and as the dollar loses value, the prices of this commodities, like oil and food go way up. Inflation sets in big time, rendering every american poorer, including you, Mr. Rodger Malcolm Mitchell.

2) > With this Federal Reserve excessive money creation out of thin air and zero interest rates to boot, international investors dump US Treasury Securities by the billions ( just look at PIMPCO recently) thus further devaluating the US dollar in the International money markets. Treasury Securities lose value big time forcing real market driven interest rates – not the Fed interest rate – to rise.

3) > As real market driven interest rates rise, bank lending becomes very tight and mortgages and other loans cost more money, further putting a choke hold on the economy. The zero interest fed rates backfires big time and it creates exactly the opposite desired effect, killing the economy, not stimulating it.

4) > Not all deficits can be monetized because if they were international investors woul become really weary of all this excessive money creation with absolutely nothing to back it up and would dump ALL their holdings in US dollars rendering it valueless. Therefore, deficits are still added to the accumulated national debt, making the national debt higher every year. As the national debt becomes unsustainable, investors lose confidence in the US government’s ability to pay their Treasury Securities obligations and dump all their Treasury Securities in US dollars, collapsing the currency. PIMPCO recently dumped 258 billion dollars in US debt. Others will follow pretty soon.

Look, the rapid devaluation of the US dollar has already begun, right now despite all the debt problems in Porkugal and the other three Porkys, the euro is rising steadily against the US dollar, right now trading at $ 1.45 US. The Canadian and the Australian dollar are now worth 5 cents more than the US dollar….These signs are all around you Mr. Rodger Malcolm Mitchell, if you cared to wake up from your make believe Snow White & Seven Dwarfs Pollyanna fantasy dream world, give your thick head a good shake, wake up, smell the coffee and get on the ball.

Real Solution: > The US government must get serious about deficit/accumulated debt reduction by cutting back on Medicare, Medicaid and Social Security entitlements by 35%, reduce military spending by another 30%, stop policing the world and stop getting involved in unecessary wars in distant lands, and raising taxes another 30%.

Mr. Rodger Malcolm Mitchell, unfortunately your dream world magic solution of printing unlimited money until the cows come home and pay all the US debts with it just doesn’t work in the real world.

One always can depend on josephmateus for a comment filled with insults, and no facts. Thanks for not disappointing.

The facts are:

1. Federal deficit spending adds money to the economy.

2. A growing economy requires a growing supply of money.

3. Every depression and most recessions have begun with reduced federal deficit growth, and have been cured with increased deficit growth — including the most recent one.

By the way, the “deficit” is the difference between taxes and spending. The “debt” is the total of outstanding T-securities.

Contrary to popular myth, there is no functional connection between the federal deficit and the federal debt, though there is a legal connection. We could have federal debt without deficits; we could have federal deficits without debt.

The only reason we have federal debt is because, by old law, the Treasury is required to issue T-securities in the amount of the deficit. That law no longer is necessary, as the federal government, being Monetarily Sovereign does not need to borrow.

Rodger Malcolm Mitchell

Printing money is sometimes good, sometimes bad. Our baby-sitting circle did the equivalent of printing money when each new joiner was allocated a reserve of baby-sitting points. Printing money pro rata to growth does not distort any ratios. Not printing it does. Whether to print it or not depends on your view of how appropriate the ratios are at the time. Feeding such new money into the system is a skilled process; unfortunately those skills are rarely available without conflict of interest issues, and the inevitability of suspicion makes it a politically dangerous process.

Printing money in other circumstances can be good or bad depending on what it is being printed for. Printing it to buy yourself out of an imbalance between production and consumption is clearly an unsustainable policy, since the money is irrelevant. You cannot continue to consume more than you produce, period. Using money to make it look as if you can merely makes the money irrelevant – and the mechanism by which that happens is devaluation.

Printing it to provide stimulus is the sign of beneficient pro-active economic management. But saying it is to provide stimulus is not enough; telling recipients how to spend it is not enough – if the instructions given do not result in genuine stimulus either because they are unclear or just plain wrong, or because they are not enforced. And buying your way out of trouble is not stimulus.

To be stimulus the money must be paid to use idle labor to build a productive and profitable tangible asset.

Traditionally this has meant major civil engineering assets – dams for irrigation and/or power generation or storage; geothermal, tidal and other gravity driven energy sources; wind, wave, solar and other sun-derived energy sources. All these are undeniably true investments in that the sum expended results in a profitable future enterprise. An undoubtedly useful good is produced for no ongoing material input cost. To satisfy committed monetarists, the the printed money can be redeemed by the future sale of the asset – a transaction of itself irrelevant to the economic health of the nation as a whole except for its effect on liquidity.

New infrastructure projects are also valid stimulus projects, but since it is easier to dress invalid projects in this guise, they are rightly viewed with considerable suspicion. Such is the nature of our ‘entrepreneurial’ society that it is deemed fair game to get away with any such deception if it succeeds.

Intangible assets could also be valid stimulus, but when the chickens roost, they are even more likely to prove not to have been.

International markets are not naive. The spending of billions of printed dollars to secure terrawatts of free energy for the next half century or so will not devalue our currency. Rather it will be seen as a nation using its spare labor to productive purpose – and worth investing in.

International markets are not naive. Any “stimulus” provision susceptible to suspicion will be viewed with suspicion – and will most likely devalue the currency.

Absolutely spot-on!

*Lots of people would LOSE their jobs. Not loose their jobs.

“You cannot continue to consume more than you produce, period.”

Of course you can. That’s called a negative balance of trade, which the U.S. has had for a long while and could continue to have, forever. Actually, “negative” balance of trade is a misnomer. Since we receive more goods than we export, so it just as easily could be called a positive balance of trade.

The difference is, exporting goods requires that we use valuable human and physical resources to create and export the goods, while importing goods requires only that we push a button to create dollars. Which is more sustainable?

Example: One day the Saudis will run out of oil, but the U.S. never will run out of dollars.

Rodger Malcolm Mitchell

Since the D’s have control of the senate, couldn’t they just produce and vote on a bill that will raise the debt ceiling with no other amendments to it? a cut and dry bare bones bill that only does what is necessary. basically getting out in front of the conservatives in the house who are going to insist on cutting more spending or slipping in the policy riders again to get what they want. Every economist and business leader worth a salt is saying that playing chicken with the debt ceiling is crazy and could be catastrophic. By doing this it would put the pressure on Bohner and the R’s to agree to it or risk america going into default.

They only thing i would include in bare bones debt ceiling bill would be a promise to make some real changes for the 2012 budget that include all of the following: modifications to medicare and medicade, cuts to defense spending, a tweak of social security, reform of the tax code and raising of taxes (talking to the 300K+ people). everyone knows spending and tax levels cant remain where they are, everything must be on the table.

i just dont want to see the tea party hold the rest of america hostage over the debt ceiling vote, which is whats probably going to happen….

Rodger –

We can’t all consume more than we produce on an ongoing basis – we will run out. Period.

If you are skeptical, perhaps because ‘it has never happened before’ just watch what happens over the next couple of decades – if you have the patience.

But I was wrong – you can indeed continue to consume more than you produce, but only if the rest of us produce more than we consume and give you the surplus.

But now that you have revealed your cunning selfish plan to steal our surplus by printing dollars to give us in return, without yourself producing a surplus of goods to back those dollars, we will steal some of your goods – goods you need – as recompense, printing our own paper money, backed by our surplus goods, to buy them with. So your domestic prices will go up. Say hello to inflation, erosion of your capital base, another run on savings, shortages and eventual civil discontent.

And when relationships between us become confrontational, and heated, and you run crying to Mummy because nobody likes you, we will stop trade with you all together.

And we will still be producing all we need, and more.

And you will need more than you can produce.

So yes – you can indeed consume more than you produce; but only for a limited time.

Gamesmith94134: U.S. Debt: The Biggest Trouble Is Yet To Come

Thank you! Mr. Atmospheric. You did your best in explaining to Rodger that his idea to consume more than he produce; but only for a limited time. It is true what Rodger saying that “there is no functional connection between the federal deficit and the federal debt, though there is a legal connection. We could have federal debt without deficits; we could have federal deficits without debt.” But, once a federal debt or deficit occurs; it means the so-called fiat money is out of bound of the sovereignty that the money is acquired a proof of equity that the debtor must prove to have its credits. Perhaps, you would think of the money chips in the casino, you can gamble or purchase within the boundary and limits of the casino because your credit is good in the casino and once you are outside, your platinum card and its chips from the casino will not served elsewhere. It is why Treasury bond is issued for credit in service or purchase; we may call equity on value if the transaction takes place within the limits of its sovereignty. Once, you are stepping out of the casino, you must use the currencies or credit cards you carry. Likewise, any purchase is out of the sovereignty of US that acquired service fee like taxes or interests for its services.
US dollar is servicing over the world and it has its throw-weight about 60% in trades and transaction in the world economy. It was acceptable by most nations because we were the creditor; but we are the debtor now with trillions in deficits.
So, US dollar printing in the Treasury and facilitate in US does not create deficit or debt; but once values of import is over the value of export, or expenditure exceeded budget; then the credit is acquired from foreigner like China or Japan; and the servicing of credit demands the proof of equity which payment plus interest to pay its balances on the equivalence on the value of the credit at the moment of time.
So, it was not the money was printed; it was the allowance on the credit by its creditor and it is not US but others now. This is their desires of equity of values on US that the growth and development on the trading and political and financial stability can repay them. In the matter of trade, all of the dollars has the equity on our business, homes and labor forces and all goods we produce.
For Now, we had both trade deficit and debt; so we owe both internally and externally. We are now financially impaired, but we do not take it seriously. Soon, we will be isolated from our trading partners who cannot afford to give us more credits and demand repayment on our debts in their currencies or trade in theirs. We could lose our inflow of cash and technology from our partner nations and trade for their pricy currencies at their term. If the BRIC trade their gold at $1500, can JP Morgan repay them in 30 billion dollars in Chinese Renminbi or Mexican Peso? Then, Chinese want theirs 5 to a dollar and Mexican wants its 7 to a dollar; how are we trading then? Sovereignty nations prints and may not trade.
Is it funny if you ask how many chips can you buy a BMW or a cup of coffee? HA…HA…
May the Buddha bless you?

Larry Summers said, “not meeting our debt obligations is like allowing a child with matches to sit in a room full of dynamite.”

In my opinion, it’s not just the debt; it’s the interest on the debt as well.

Currently, the US outlay for net interest on the debt is $206 billion; however, by 2016, Congress reports it will be $634 billion — that’s an increase of 308%. Moreover, by 2021, it will be $852 billion — 414%.

That would eclipse all other federal functions save social security. Currently, net interest ranks fifth of all federal functional categories, yet it will rank second by 2021.

As a result, the strain placed on the other federal functions will cause our social systems to collapse.

Bottom line, the US can hardly keep pace making interest payments let alone paying on the principle, which there isn’t much evidence of effort to do.

We cannot sustain this level of spending unless we want a Greece level event in the very near future!

Sources:
- OMB’s FY2012 Budget Table 3.1
- 112th Congress’ FY2012 Budget Resolution H.CON.RES.34

It is interesting that the reduced interest on the date means that the cost is less than the cost of Clinton erro 1998 debt. I agree with learning to live within the countries revenue collections, however I disagree with cutting social security as this is system that many workers paid a LOT into all their working lives and pulling the plug on them now will surely spell disaster, not only for the individuals who were planning on it, but on the entire economy as a whole generation of retirees wont be able to afford housing, food, or medical care. A LOT of people depend on social security supplementing their retirement living and for a whole LOT more it may be their only income as they age since they spent a lifetime in low paid jobs, still paying 8.5% into Social Securty.
I do agree however, that we have no business policing the world with our armies and our war machines. I would think that it is time to tell the world to grow up and manage their own households without US intervention. Often it is unwanted anyway.

Even though politicians can be selfish and short-sighted at times, I think the recent S&P warning and government shutdown fiasco are sending a message to policymakers in Washington that they need to grow up.

Our national debt will certainly continue to influence fluctuation in the economy, but I don’t think there’s any reason to believe Congress will let the US default. What’s more important is figuring out a way to overcome the long-term debt issue, even with a higher ceiling.

Specifically, Democrats are unwilling to compromise on entitlements like Medicare and Social Security, which are becoming unsustainable as more and more people retire. Additionally, Republicans are unwilling to compromise on repealing Bush era tax cuts, which would pay for government spending for a few more years.