Federal Deficit - Help me out here.

[_EAllusion]

Now, we can pretend that the debt is unimportant.

First off I salute Kevin for at least being consistent on his position that deficits don't matter. Unfortunately I can't be so optimistic. I think we're going to get hit pretty hard by this debt at some point and I certainly don't believe it doesn't matter. But with the way our political system is set up changing the status quo seems impossible. It would take a radical revolution. Just taxing the rich even at 100% (which is impossible because nobody making over $200k/year would keep working for free out of patriotic duty and brotherly love) would not even put a dent in this astronomical national debt.

If the deficit were significantly reduced, the debt would come down naturally as a % of GDP. There's still room to grow ourselves out of the problem. It's quite possible to have federal government spending in relation to taxation come back in line to not explode the deficit. Regardless of how you otherwise feel about it, high-end wealth taxes would significantly reduce the deficit.

The national debt isn't like a credit card debt. Its outstanding treasury bonds issued by an entity that prints its own money. Don't get me wrong. As Kevin points out, I do not think the deficit is inconsequential. I view it as a problem and monetizing the debt, if high enough, will not be without consequences. But it doesn't quite work like you imply.

[_honorentheos]

Republicans in general want loose monetary policy when they are in power and tight monetary policy when they are not. The break-neck flip-flopping on this from Obama to Trump goes way deeper than Trump. They know how this works and don't care if this is sound for the nation's economic health.

While Federal Reserve action has an influence over the potential for a recession, and some claim it's THE cause of most recessions in modern US history as exemplified under Paul Volcker in the transition between Carter and Reagan, its essential to recognize corrections aren't inherently bad in the long term or for the economy overall. Rather, the degree of a correction is what makes them devastating to the economy though it matters to those directed affected that any contraction will hurt individuals through job loses and business failures. We should be able to see both sides of that. At the scale of the overall economy, Trump and those who want to see the current record expansion continue through any means necessary are somewhat akin to a forest manager who does everything possible to prevent naturally occurring fires without recognizing that small, regular debris-clearing fires benefit the forest in the long run as corrections in the overall economy that are allowed to occur in regular, small doses are good as they prevent explosive buildup of issues like we saw in 2008/09. The reason politicians interfere is these regular corrections get in the way of rampant, high percentage growth rates that they can take credit for and use to win elections despite it having little to do with their own actual legislative actions.

With that in mind, it helps to look past the Fed at where there are potential areas where the economy could be susceptible to a dangerous fire compared to a needed small corrective one. Or, in two cases, where the economy can't create a firebreak big enough to prevent damage that comes from outside it. Those two, in my opinion, are the trade war with China which simply can't be predicted other than it's almost certainly bad. And if the Eurozone/Great Britain/China economy/economies go into recession. Trump announcing US companies need to get out of China is the kind of crazy anti-free market rhetoric that lacks teeth but indicates stupidity that markets and businesses hate so who knows with this. I would guess if there is a major recession coming it will be due to both of the above in combination with multiple other internal corrections snapping into place all at the same time. But there is also a possibility any coming recession could come, go and be in the past before economists agree it happened at all. Reality is probably somewhere between those two extremes but who knows where.

Internally, it seems most people recognize the stock market is due for a correction and the current whiplash ups and downs are showing investors see it as overvalued. But that isn't what would bring on a recession.

One indicator from last week that should be talked about more is slowing in US manufacturing. The report came out Thursday at a decade-long low just before Trump did his crazy talk about more tariffs and China being bad, but it's a fundamental that says US manufacturing is slowing down. This graph shows it's been the trend since last January roughly - https://tradingeconomics.com/united-sta ... confidence

New housing starts have flattened out - https://tradingeconomics.com/united-sta ... ing-starts and that indicates weaker demand. Home ownership rates are slightly down, the housing index has been negative, and there are other indicators that this part of the American dream is not rosy. But some of that is considered subject to a changing view of what the average American wants in terms of home ownership as younger generations seem less inclined to start a new household compared to previous generations. Some of that has been blamed on the effects of the recession, some on college debt loads, and some one attitude shifts but it isn't clear what it means long term.

I saw one report earlier this year warning of a bubble on corporate debt, another in the Exchange Traded Funds being overinvested with people seeking safe places to bank their money creating a potentially unmanageable unwinding of those obligations were there to be mass sell offs.

Point is, the markets are always growing and correcting as part of the natural order of things and contractions should be considered healthy market behaviors - when they are minor and allowed to take their course in the same way a small forest fire reduces the probability of uncontrolled massively destructive fires.

[_honorentheos]

...would anyone care to weigh in on the pros and cons of this issue? What would be the optimal scenario for you in regards to federal debt, and how would that impact our standard of living and by extension our republic?

- Doc

Hi Cam -

I'm curious about your thoughts on this?

I will say I think the cons outweigh the pros for a number of reasons. Those being:

1) The old truism, "Those that understand interest earn it, those who don't pay it" isn't as easily applied to nations as it is to individuals but it's still a truism for a reason. And the biggest concern with carrying a huge level of debt is the interest payments represent government spending that could have gone to something else. If you check out page 107 of the White House's budget (here: https://www.whitehouse.gov/wp-content/u ... fy2020.pdf) it shows estimated revenue collection for 2019 to be 3.4 trillion dollars. The vast majority of that comes from individual income tax and payroll taxes with the remainder coming from corporate taxes, tariffs and the like. It estimates GDP for 2019 will be around 21.3 trillion dollars. You have to go to page 109 to get a breakdown of receipts and outlays, and it's here we find that in 2019 we will collectively spend 394 billion dollars just on interest on the national debt. It estimates in 2029 the US government will collect roughly double the 2019 receipt amount while the amount spent on interest will triple. If that holds, we'll be spending more in 2029 just to finance the debt than we spend on the military AT CURRENT MILITARY SPENDING LEVELS which are quite high.

I highly suggest looking through the tables of that document starting on page 105 and getting a sense of where our money is being projected to go, be cut from, and how even an optimistic view of future GDP growth isn't exactly looking rosy for our ability to fund government programs over pay interest on the debt.

2) Interest rates are currently unprecedently low but as our debt load increases they will inevitably increase as bonds have to promise a reward for the greater risk to the purchaser of said bond as the US is carrying more debt making it at least theoretically more likely to default than if it were carrying less. In Japan, where their debt-to-GDP ratio is simply mindboggling high at over 200% debt to GDP, the majority of their debt is held by private Japanese citizens holding bonds with low or even negative interest rates. In other words, private citizens in Japan are apparently willing to buy bonds that will be repaid below the price they were bought for in the future when inflation has also reduced the value of the yen spent. That isn't likely to happen in the US.

3) Uncertainty is a bitch. One of the major downsides of carrying a high debt load is it takes buyers to finance future debt and while it always seems there are people willing to buy US bonds no matter what, that isn't a law of nature. Change happens, and the more extended we are as a nation the less flexibility we have to adapt to change. And there are certainly scenarios that could happen where there aren't buyers to finance the levels of debt we need to take on to fund whatever is going on - all while we are spending more and more on just paying the interest on what we've already borrowed.

The optimal scenario, in my opinion, is one that seeks a balance between debt and GDP as a ratio with the most difficult of all possible guides - human judgement - needed to recognize that during times of war and economic distress this should rise but during other times it should be brought back down. That said, there needs to be more of a refocusing on where we spend our money and how we balance receipts to outlays.

[_Doctor CamNC4Me]

Hi Honor,

If I'm being honest I'd have to say my thoughts and feelings on the matter are all over the place. I will say this with a certainty, though:

1) If you make money cheap, and lend it to people for next to nothing, they'll do stupid things with it. This is a damned fact. Why do I believe this?

2) Most people, and I'm talking around 80% of the population is probably retarded. And by retarded I actually mean retarded. They're so dumb, that getting them to a place of financial literacy is an impossible task. And because people are retarded and financially illiterate...

3) Our federal government and the Financial Reserve, despite being staffed with generally pretty brilliant people (or at least generally not retarded people), are beholden to clever politicians who understand their base and thus we get market manipulation, debt-financing, and an OP like mine wondering where this will eventually lead.

I think Analytics kind of hits on an interesting point, in that commerce is the most important aspect of money markets. However, inflation worries me because nobody wants to see their investment or retirement funds devalued quickly, much less an annuity they're living on lose, say, 5% in purchasing power from one fiscal year to the next.

Anyway. What kind of kicked off this OP was an exchange I had with a guy over teacher pay raises here in SLC. He claimed to be a CPA, employed people, and really 'understood the true debt our city is in'. After having linked him to the 2018-2019 SLC budget, much like you did with the White House's report (even going as far, as you did, to point out specific pages that underscore your data analysis; thank you for that, by the way), and I discussed SLC's 'true debt picture', which isn't even approximating worrisome, I concluded I was attempting to have a reasonable finance/budget discussion with a damned moron. That being said, I realized this board has above-average posters and thinkers, despite us calling each other idiots half the time, and I wanted some perspective on an issue that was running through my mind.

What I really wonder, is if we followed Res Ipsa's notion that generally debt isn't great, and should only really be used to rev up the economic engine when we're in a recession, if that isn't the best course of action? I get that eliminating our debt and tucking money into a reserve isn't smart because that reserve isn't doing anything to generate commerce and is, in fact, losing a percentage of value every year it just sits there, so that's not going to happen. But I can't believe throwing what will be half a trillion dollars a year at interest on our national credit card is good for our long-term economic healthy, either. I'd prefer to see that money materialize in the form of bridges, ports, or whatever we need to stay viable.

See? I told you I'm all over the place. :/

- Doc

[_honorentheos]

Hi Cam,

That looks like examining multiple aspects of a complex issue more than being all over the place to me.

I didn't dive into the pros I consider for the reason I don't think there are obvious absolute pros for the nation to take on significant debt loads compared to GDP. But I do think there are two broad catagories that could apply.

The first is emergency spending to address major problems. War and economic downturns are the two obvious ones but climate change could be argued as a catastrophy with impacts akin to a war. In principle, a focused government attack on tackling climate change could be defensible in my opinion, and that includes economically. Resilience in infrastructure to handle the impacts of climate change are no where near where they need to be to prevent massive costs for dealing reactively to the consequence of disasters and environmental change that are predicted. I could support a clear-eyed political call to arms to tackle that issue that also acknowledges we need to view it with the mindset of a war, buying climate bonds like war bonds, and marshalling resources to the cause, asking for volunteerism and service hours for local measures and projects aimed at addressing and implementing mitigation projects. But I don't see that level of Civic response as likely or even possible. Not now anyway.

Second to emergency spending is the model of funding investment in future growth. Historic precedents are abundant such as the Louisiana Purchase and Homestead Act, Railroad Land Grants, the Rural Electrification Act and creation of the Tennessee Valley Authority, Kennedy's Moon Shot, the GI Bill...if we decided to invest in some form of innovation enabling program with the funding it seems like a net win even if the initial consequence would be our debt to GDP ratio increasing with the accompanying interest costs and opportunity costs for other spending programs. I think Warren's proposal to invest intongreen tech that we treat like our military tech is an example that is being floated and worth consideration.

I am unsure about healthcare as it doesn't fall under either of the above but certainly impacts people in ways that suggest it should be treated more like a right or service rather than a commodity. It seems the discourse about it is too simple for the problem, though. I am also of two minds when it comes to higher education. Like you say above, cheap money gets misspent. And I can't justify the cost of college going up with the quality of education and student access to tenured professors going down. Something is broken and it's tied to how we fund college with government backed loans but that isn't the only problem. We've talked about it before where it seems like we need more options such as skilled labor tracts for people who aren't college bound but could be very successful in the 21st Century as plumbers, welders, manufacturing specialists and technicians etc. Funding both secondary and high education innovations could have the effect of a moon shot program and possibly be worth increasing the debt. But the devil is in the details.

[_Brackite]

U.S. National Debt Is Growing Rapidly
https://www.forbes.com/sites/niallmccar ... fographic/

Budget agency predicts trillion-dollar deficits for years to come, as red ink explodes
https://www.foxnews.com/politics/govt-a ... ble-future

The Congressional Budget Office (CBO) released a grim update Wednesday to its economic outlook for the next decade, predicting average national deficits of $1.2 trillion every year through 2029, due in large part to recent budget and border security bills.

If a Democrat wins the Presidency next year, will Hannity then go back to pretending to care about the National debt and deficits???

[_ajax18]

I think Analytics kind of hits on an interesting point, in that commerce is the most important aspect of money markets. However, inflation worries me because nobody wants to see their investment or retirement funds devalued quickly, much less an annuity they're living on lose, say, 5% in purchasing power from one fiscal year to the next.

Well most voters aren't savers. Are you surprised that a democracy would choose rules that punish savers? I don't think it's fair or right, but a majority can be as tyrannical as any king.