I’m very worried about my country. The two-political-party system is serving us badly. Don’t get me wrong, I’m a died-in-the-wool Democrat, but what I see happening is ideology trumping common sense.
Yesterday Boehner walked away from negotiations that were scheduled to continue at the White House today. Both Boehner and Obama had been working to find $4-trillion to be applied to reducing U.S. debt over the next 10 years. Both Democrats and Republicans are on board with reducing national debt over the long term, but the voter has little understanding of how U.S. debt actually works.
Most economists are saying that the level of debt as a percentage of GDP is unsustainable in the long term. Most are also saying that during periods of high unemployment, government needs to spend money in order to get people back to work. If consumers aren’t spending because they don’t have an income, the economy needs government spending. We need economic stimulus to get back to “full employment”—which used to be defined as 4% unemployment. We’ve been hovering around 9% unemployment for the past two years.
Then there is the structure of U.S. debt. There is no collateral on debt issued by the U.S. Government. It is “backed” by the full faith and credit of the U.S. Government. Except that if the debt ceiling is not raised the full faith and credit of the U.S. Government becomes worthless. With no collateral as a fall back in the event of default, investors will begin to see U.S. Government bonds as junk bonds. Either they will refuse to buy them, or they will demand extremely high interest rates to compensate for the increased risk.
That might be good news for Social Security, which is one of the largest holders of U.S. Debt. Social Security has no choice in investments for the money paid in by working Americans. Regardless of the risk inherent in Treasuries, Social Security has one option for placement of funds they are accumulating to eventually pay seniors. If the interest rate goes up, they will face cash flow problems later than they would otherwise. (Right now Social Security is predicted to tank in 2036.)
But that’s a really stupid reason to wish for interest rates to go up on the national debt. One of the reasons we aren’t borrowing even more money is because interest rates have been at historic lows for a very long time—actually since before the official start of the recession. Right now the government is paying a coupon rate of between 0% and 4.375% on its debt. Imagine if that rate increased to 20%, or 30%, or 40%. At some point all tax revenue would be going to make interest payments, and there would be zero ability to make any payments on the debt, or to buy military hardware, or to pay seniors.
Another structural piece of U.S. debt that people rarely think about is the timing of U.S. Government cash flow. Unlike working Americans, who get the same paycheck every month, the U.S. Government’s revenue fluctuates with some people only paying annually when tax returns are due. Sure they pay a penalty, but to them it is worth it to keep their money working until the last possible minute.
The Government’s outflows are steady, but their revenues fluctuate. They borrow on a short term basis in order to even out the cash flow. Businesses do the same thing with short term lines of credit. It is good business practice. Some debt is responsible; debt that eats all GDP is irresponsible. Long-term the U.S. is approaching the irresponsible level of debt.
So, we have two problems. One is short term—unemployment. One is long term—an unsustainable level of national debt. We need a short term surge in government spending in order to get Americans back to work. We need a long term fix to reduce annual deficits and the overall level of debt as a percentage of GDP. The two goals need not be mutually exclusive.
The GOP will not talk about any kind of spending to encourage full employment. The GOP will not talk about ending blank checks for military operations. The GOP will not talk about ending the Bush tax cuts, which are the single largest contributor to increases in annual deficits—that and continued spending on war. (What happened to the “peace dividend” when the Cold War ended?)
And the DEMS are too chicken to stand up and tell the truth about debt and deficits and economic stimulants that work and the wasteful spending on war. Howard Dean was right when he said that Democrats needed to grow a spine.
Homework
Time Article About Failure of Debt Ceiling Negotiations
Bloomberg Bond Rates
CliffNotes Definition of Full Employment
Moody's Analysis of the Relationship Between Interest Rates and Credit Risk
Charts Tracking US Debt Relative to GDP
Everything You Never Wanted to Know About the Social Security Trust Fund
Definition of Peace Dividend
Everything You Never Wanted to Know About the Purpose of a Spine
Yesterday Boehner walked away from negotiations that were scheduled to continue at the White House today. Both Boehner and Obama had been working to find $4-trillion to be applied to reducing U.S. debt over the next 10 years. Both Democrats and Republicans are on board with reducing national debt over the long term, but the voter has little understanding of how U.S. debt actually works.
Most economists are saying that the level of debt as a percentage of GDP is unsustainable in the long term. Most are also saying that during periods of high unemployment, government needs to spend money in order to get people back to work. If consumers aren’t spending because they don’t have an income, the economy needs government spending. We need economic stimulus to get back to “full employment”—which used to be defined as 4% unemployment. We’ve been hovering around 9% unemployment for the past two years.
Then there is the structure of U.S. debt. There is no collateral on debt issued by the U.S. Government. It is “backed” by the full faith and credit of the U.S. Government. Except that if the debt ceiling is not raised the full faith and credit of the U.S. Government becomes worthless. With no collateral as a fall back in the event of default, investors will begin to see U.S. Government bonds as junk bonds. Either they will refuse to buy them, or they will demand extremely high interest rates to compensate for the increased risk.
That might be good news for Social Security, which is one of the largest holders of U.S. Debt. Social Security has no choice in investments for the money paid in by working Americans. Regardless of the risk inherent in Treasuries, Social Security has one option for placement of funds they are accumulating to eventually pay seniors. If the interest rate goes up, they will face cash flow problems later than they would otherwise. (Right now Social Security is predicted to tank in 2036.)
But that’s a really stupid reason to wish for interest rates to go up on the national debt. One of the reasons we aren’t borrowing even more money is because interest rates have been at historic lows for a very long time—actually since before the official start of the recession. Right now the government is paying a coupon rate of between 0% and 4.375% on its debt. Imagine if that rate increased to 20%, or 30%, or 40%. At some point all tax revenue would be going to make interest payments, and there would be zero ability to make any payments on the debt, or to buy military hardware, or to pay seniors.
Another structural piece of U.S. debt that people rarely think about is the timing of U.S. Government cash flow. Unlike working Americans, who get the same paycheck every month, the U.S. Government’s revenue fluctuates with some people only paying annually when tax returns are due. Sure they pay a penalty, but to them it is worth it to keep their money working until the last possible minute.
The Government’s outflows are steady, but their revenues fluctuate. They borrow on a short term basis in order to even out the cash flow. Businesses do the same thing with short term lines of credit. It is good business practice. Some debt is responsible; debt that eats all GDP is irresponsible. Long-term the U.S. is approaching the irresponsible level of debt.
So, we have two problems. One is short term—unemployment. One is long term—an unsustainable level of national debt. We need a short term surge in government spending in order to get Americans back to work. We need a long term fix to reduce annual deficits and the overall level of debt as a percentage of GDP. The two goals need not be mutually exclusive.
The GOP will not talk about any kind of spending to encourage full employment. The GOP will not talk about ending blank checks for military operations. The GOP will not talk about ending the Bush tax cuts, which are the single largest contributor to increases in annual deficits—that and continued spending on war. (What happened to the “peace dividend” when the Cold War ended?)
And the DEMS are too chicken to stand up and tell the truth about debt and deficits and economic stimulants that work and the wasteful spending on war. Howard Dean was right when he said that Democrats needed to grow a spine.
Homework
Time Article About Failure of Debt Ceiling Negotiations
Bloomberg Bond Rates
CliffNotes Definition of Full Employment
Moody's Analysis of the Relationship Between Interest Rates and Credit Risk
Charts Tracking US Debt Relative to GDP
Everything You Never Wanted to Know About the Social Security Trust Fund
Definition of Peace Dividend
Everything You Never Wanted to Know About the Purpose of a Spine
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