Let's Add More Debt To the National Total

From a story talking about the new housing bill:

From the WSJ:

The package could also come at a significant cost to the U.S. government, which would be authorized to invest billions of dollars in troubled mortgage giants Fannie Mae and Freddie Mac, as well as insure up to $300 billion in refinanced mortgages. As a result of the bill, Congress will raise the national debt ceiling to $10.6 trillion from $9.8 trillion. It will also give Fannie Mae and Freddie Mac a new, tougher regulator.

Let's just add more debt to the total, shall we? After all, we don't have enough debt. And we certainly wouldn't want to do anything that remotely resembles fiscal responsibility. That might send the wrong message to the markets about the US government's intentions.

Let's review. First, here is the yearly total of total US government debt outstanding at the end of each federal fiscal year.

09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

Why are these figures important? Because they indicate there is a systemic problem with the US government's budgeting system. Since the end of fiscal year 2002, the federal government has added at least $500 billion dollars of net new debt per year every year. That indicates the budget has never even come close to being balanced over the last 7 years -- despite rampant claims to the contrary. "But Bonddad -- the national press says the budget deficit is small!" Right -- that's why we're borrowing all that money -- because we're balancing the books of the federal government. Anyone who is reporting the federal government's books are balanced should resign from the financial press right now because they have no idea what they are talking about.

But there are three deeper and far more important reasons why this continual raising of the debt ceiling is so incredibly dangerous.

The first is psychological. At the national level the federal government has continued to abdicate fiscal responsibility. The US went to war and didn't raise taxes to pay for it. The US increased domestic spending and didn't increase taxes to pay for it. Instead, we acted as though the debt didn't matter and that tax cuts pay for themselves. As a result we are left with an ever-increasing mountain of debt which we continue to kick down to road. By not making tough choices now we make it easier to not make tough choices tomorrow.

The second reason is far more practical. As the debt load of the US has increased, the value of the dollar has dropped. Although the US economy was in an expansion from November 2001, the value of the dollar continually dropped. Why? An expanding economy should attract investment which in turn bids up its currency. Yet the dollar dropped. Some of the reason for this is interest rate policy which is an important determinant in currency valuation. However, the US -- which is the world's largest economy -- was seeing the value of its currency continue to decline. This has lead to inflationary pressures because commodities are priced in dollars. A drop in the value of the currency a good is priced in amounts to a de facto price increase in the good. In other words, one of the primary reasons for the spike in oil prices is the dollar's long-term drop in value. And we can thank fiscal irresponsibility as a primary reason for that.

The third reason why this development is important is it continues to push the national economic foundation closer to the edge. At some point all of this debt may cause very serious problems. Suppose that US creditors (bondholders) looked at the US' books and said, "I don't think you're going to be able to repay this loan I'm making to you. I need a higher interest rate as compensation for the risk I'm taking by lending you money." At that point, US interest rates increase. Imagine if that happened right now when the economy is at the beginning of a recession. In other words, we're creating a situation that is rife with possible future problems. And some of these problems are serious -- as in they could lead to the financial system freezing from a random world event.

"But Bonddad. We've been doing business like this for almost 30 years and nothing bad has happened! It must be OK to do things things this way." Fine. Try smoking a pack a day for 30 years. You may not get cancer. But your chances of contracting it are a whole lot higher. That's why doctors will always advise you to quit.

Comments

[olephart]

Let's examine the deficit in more detail. The stated "headline" deficit is 400+ billion dollars after the "Stimulus" pander package. This assumes the rosy economic scenario of modest growth. It also ignores the off balance sheet costs of the Wars of 200 billion dollars. It also consumes the Social Security surplus of 200 billion dollars. So we're at a real deficit of 800 billion for this year without factoring in the costs of bailouts, boondoggles and a shrinking economy. So the reality is that we're looking at a REAL deficit of 1 trillion bucks for the year.


"At some point all of this debt may cause very serious problems."

NOTE: This may be the greatest understatement by Bonddad of all time.


Other aspects of this situation were not addressed. The Fed has run out of bullets to stimulate the economy. Interest rates are negative in real terms, lowering them would send the dollar plummeting and long rates and other rates are going up in response to anticipated inflation anyway. Further, raising rates to fight inflation would exacerbate the recession thus the Fed is now basically impotent. The most serious aspect of piling debt on debt is the DEBT SERVICE required to maintain the debt. These interest payments will grow exponentially as they not only increase from additional debt but also by compounding. We may be past the point where economic growth, revenues and non draconian spending cuts will balance the budget. When this reality strikes, we're bankrupt.

[nezumi]

Although I agree with Bonddad on keeping a rein on national debt, it is not so much the size of the debt I'd be worried about. The size of the U.S. debt might seem staggering, but it is not exceptional when compared to other debt/GDP ratios internationally.

I agree with olephart, that the main problem is interest payments on this debt, which might already account for the second biggest slice of the national budget (the biggest being social sec, medicare etc.). If the income side of the equation remains unchanged (taxes, that is) the time when both cannot be serviced anymore might come soon. So the Americal ideal of less government meddling = less taxation might go the way of the dodo. And that is a real pity.

[olephart]

Social Security and Medicare are separately funded. They are included only to obfuscate the true magitude of the budget disaster. If they are backed out, Military, CIA, Homeland Security, Blackwater and other "security" programs account for 40% of the remainder. The interest is about 20% and all other programs make up the rest. The Wars are off budget. The true deficit will be about 35% of the Federal Budget. It's like a family earning $100,000 per year and spending $150,000 putting $50,000 a year on the card. It's worse than you think.

[Chavez08]

This despair, slavery and poverty was intended. It was a push for fascism that started with Bush's grandfather:

"Document uncovers details of a planned coup in the USA in 1933 by right-wing American businessmen ......The coup was aimed at toppling President Franklin D Roosevelt with the help of half-a-million war veterans. The plotters, who were alleged to involve some of the most famous families in America, (owners of Heinz, Birds Eye, Goodtea, Maxwell Hse & George Bush's Grandfather, Prescott) believed that their country should adopt the policies of Hitler and Mussolini to beat the great depression"

http://www.bbc.co.uk/radio4/history/document/document_20070723.shtml

This is intentional war on lower classes and Bush did everything he could to make sure any and all prosperity would be concentrated to the top 1% and the damage could not be undone.

When will someone attack back?????

[takenawalk]

So by Jan.09' is it safe to say that the bush administration doubled our debt? Why do people who become millionaires in public office get to have lavish retirements and health care after only serving a hand full of years. How much would we save if we took all their perks away after they leave office ?

[leduck]

we must continue to borrow and spend


until we collapse

[billw8017]

Surely everybody understands that money exists to facilitate commerce. It rewards effort and rations production. We need money enough to get to everybody -- we say, easy money eases investments and makes jobs, but this is about having just money enough. Things start to change with excessive money. Basically, money begins to lose value on its face, prices rise, and there is inflation. What happens is more complex than this. The trade in paper may increase with various hedge funds and derivatives since straight stock doesn't absorb disposable funds. There are various bubbles that look like hoaxes and folly in hindsight but they are just desperate attempts to make reasonable investments. Money has the wish to be spent and turn over.

Looking at the situation this way may draw our attention to production by sweat and intent. Then, we will realize that unemployment among willing workers is a gross inefficiency, a failure of the system, because there are always practical purchases. Also, debt only nominally passes into the future. In the broader picture all debt are paid right now with, perhaps, a short span (about three-four years) for complete absorbtion. It is not possible to eat today bread that is baked tomorrow.

[joebhed]

I am trying to comprehend your comment.

"Money 'exists' to facilitate commerce", for instance.
I am a big free-enterpriser myself. The more, the better.
Free enterprise, that is, not money.

The money system in this country is designed to reward those with money.
Rather than facilitate commerce.
Those with the money are those that create the money - the private banking franchise awarded by the Federal Reserve Act of 1913.

Recent BIS studies find the U.S. financial/money system rewards the money industry, aka financial services, to the detriment of what you and I might call "productive" uses.
Is that your "production by sweat and intent"?

These productive uses would produce national wealth in things like jobs, natural resource utilization, and perhaps most important, more free enterprise, as opposed to more financial service products, that produce more money.

We have developed a money-centric economy, against what my Dad used to call the "proper priority use of the money supply".

Then there is your killer comment:
"All debt are paid right now".
You got me there.

My Dad used to stress a point to me about the Great Depression.
The day before the crash, everyone had a job, a home and a purpose to their life in pursuing their economic dreams. Then, there was no money to pay the workers, everyone lost their jobs and many their homes, we couldn't even buy food. Everyone wondered, what happened?".

The more I learn, the more I think about that.

[Henry]

I do think that the solution to this problem, once it was recognized, was this:
A government corporation set up lke the RTC (resolution trust corp) of the savings and loans crisis. This govt corp would buy at "par" value each of the subprime loans that were in respective securitizations. This would cost may one to two trillion. However the holders (Merrill UBS Central Bank China...whomever) would be made whole. The $2 trillion would be temporary "funny money" created by caveat from the Govt Agency with UST guarantee! Then approx 35000 employees would take the constituten loans on a one by one basis (two year time frame) and either foreclose or modify respective loans. And when this process was complete, the $2 trillion in debt would have $1.2 trillion in proceeds to from the efforts (rewrite and sale to fannie or foreclosure and sale as reo) and the government would pick up the $800 billion in shortfall. Case closed. There would also be a "come to jezus" speech to the projenitors of this mishap. Along with a heafty increase in marginal tax rates as punishment to all corporations.
Otherwise this is going to drip...drip... drip... over a prolonged period of ugliness. When you define the problem... clean the problem. Don't mess around with the margin, which is what we are doing. We are going to pay for it one way or the other. And when you look back, the RTC was not that bad.

[Oldtimer]

I disagree. We can't and we shouldn't prop up over-inflated housing prices in New York,
California and other "high end" markets. We must let them fall to where residents of those counties may afford them. Here is Southern California prices tripled in 7 years. TRIPLED!!
So far they have dropped about 20% from the peak. This is not nearly enough.
Let the cookie crumble. It's called creative destruction.

[Henry]

It is too late for that boat to sail. However when it is all said and done it will be same as, same as. The only difference will be an issue of efficiency.
Creative destruction is when capital farm equipment wipes out small farms, "rationalizing" (the economic term) the small farmer into insurance sales, or maybe suicide. We all vote for it. The housing implosion is a valuation issue post speculation. Nothing creative in the Schumpeter sense about this at all.

[Henry]

You know, of course, that nearly all of the newly minted subprime loans were "new money" added to the economy.
There were builders, appraisers, mortgage bankers, speculators, filthy bonus money for invstmnt bankers, insurance companies that all transacted business with this new money. It was economic activity that would not have taken place without this lending in the first place (think of little George stating "My administration wants an ownership society). Think of a baseball player on steroids. Well the steroids are gone and now the health issues of the players is the issue. And what about the credence of the game that has been abused? In a few years it will all be the same again. And people will be wondering how it could have happened. And then... it will happen again in a different variation. Remember when New York City was bailed out? Drexall? Savings and Loans crisis? Enron? And the latest... the speculative manipulation of commodity prices. And we all sit around like a bunch of half drunk morons! You get what you pay for.

[Mogamboguru]

There are exactly TWO reasons, why Ben Bernanke and the Fed don't seriously consider curbing the inflation of the Dollar by substantially raising the interest rates:

1, If Bernanke raised the interest rates, The Treasury would also have to pay increased interest rates for their truly stunning debt;

2. High inflation de facto REDUCES amassed debt massively - simply, because every single Dollar of the debt will be worth less and less, if it's value was expressed in (ever dwindling) purchasing power.

Proof? Easy! Once, the value of a given currency reaches "Zero", even an unlimited, endless, boundless, galactic amount of debt would have the real value "Zero", too - expressed in purchasing power.

Therefore, this administration, as well as the Federal Reserve Bank, DO have a masterplan, to reduce federal debt MASSIVELY- it is: To drive the value of the Dollar down as fast and as far as they positively can, before the deprived american people, as well as the equally deprived foreign investors, will go berzerk

Okay, sure: This way you will shrub all american citicens, because you deprive them of the purchasing power of their currency; and the same goes for those overseas investors, who are heavily invested in Dollar-Treasury-bonds.

But, what the heck: After me, the deluge.

[emerywood]

If you add up the amount of money the Fed's open window is doling out to the investment banks in exchange for their toxic securities and the amount that will be given to Fannie and Freddie in the near future, you have to conclude that this is a socialistic country. Socialism for the rich, that is.

[Sundialsvc4]

Maybe Zimbabwe is on to something.

When they issue $100 billion right out of thin air, at least you get a pretty piece of paper to show for it...

What they are doing and what we are doing is exactly the same thing.

[billw8017]

As the government spends by merely printing money without using taxes to keep the total monies constant, the value of the dollar declines. That is to say, the high prices are how we "pay" our taxes. There are things the government should do -- such as education, crisis management, defense -- and it is better to pay whatever taxes follow than to do without.

The workings out of the process is complex. Controlling prices in one form causes other prices to rise. This has resulted in a huge commerce in debt: the stock market, new financial insturments, various bubbles such as tek stocks, art, commodities, real estate. The bubbles when burst give an appearance of folly and hoax but it is moneys inherent nature to be spent and turn over.

An interesting and little noticed feature is the disappearance of small coins. When I was a kid, we could search our pockets, gather (maybe) 75 cents and buy enough gas to drive out to a lake (the country was closer then, of course) and back. When gas goes to $10 a gallon, how much gas can you get for 75c? Now coins are losing value but as prices increase they will altogether vanish. (This was the experience of the later Ming dynasty.)

[hchriste]

The National Debt is the number one threat to the security of the U.S. It is more dangerous than all the terrorists in the world. Do you hear of any candidate talking about reducing the National debt or balancing the budget? No. Why not I wonder? The biggest holder of the National Debt is Social Security, go figure, SS is only allowed to invest in the US Treasury. That is why SS will never be reformed. A easy way to reform SS and help the general economy is to let SS invest the money in the stock market, bank notes, oil or what ever produced the greater intrest rate and allow SS to keep it. However, the Government budget would be cut by 33%. Every single dollar going to SS on your pay check is financing government spending and becoming part of the National Debt with no guarantee of pay back. Even if SS was stopped today the withholding for it would not because it is needed to pay the debt and finance government spending. When they talk about balling out Fannie Mae they are talking about using your SS contribution to do so.

[themodernleader]

Bondad: The growth of our economy over the past Bush-Clinton-Reagan years appeared to expand, inspite of the consistent, continual decline in manufacturing. So what grew? It was superfluous creation of jobs of degreed and almost degreed employees who were managing money that was flooding the country. And easy, abundant lending created one bubble after another. The real estate bubble has finally brought us down. Housing brings survival but does not contribute to value or weath.The real, that is. actual, reported empirical growth did not happen. Just drive through once great regions that have brought real wealth and a strong dollar. You see only abandoned and ravaged buildings and ignored citizens who, among other things, are declining in knowledge and skill.
The economic growth reported was actually inflation of existing assets and services.
As our debt has doubled, our real net worth has declined precariously. Manipulated govenment numbers mask the feebleness and weakness of our economic, technological system. Now, we are perilously close to total financial and economic collapse, as you accurately warn. My conclusion is that we are in much more danger than the formal data reveals. We are makng assumptions based upon faulty numbers. The true numbers would bring panic and collapse now instead of within the unknown future.

[Henry]

As an example, say you are a farmer who produced 100000 bushels of corn that you sold for $4 a year ago, your contribution to the GDP was $400000. This year you produce 100000 again but the price is $12. Now your contribution to the GDP is $1,200000! Same production but triple the bang. Now this gets the GDP implicit price deflator so that the current year real addition is $1,165,000. The point is that each year sees 100000 bushels of wheat put into the "pie", yet the second year show (incorrectly) phenomenal growth. (the gdp is a hoax.... often cited but never correct from a meaningul sense)

[PuppaX]

Want to know what the Iraq war was really about? Saddam had a note that said:

"I.O.U. 3 billiam dollers. Signed, Dubya

[avraamjack]

.
What is $10,000,000,000,000 between friends ?
.

[avraamjack]

.
If you look at the bright side, if net real ( not fake core )inflation was 50% over the last 8 years, the 10 trillion dollar national debt is only worth 5 trillion year 2000 dollars - when the national debt was 6 trillion.
.
So the real national debt went down.
.
Now if we can just keep the rubes buying US Government paper ....
.

[JBS]

With friends like that who needs enemies?

[PADDYWHACK]

This post is too full of dire facts for the public.Your persistence in the world of reality is near treasonous.If we don't open our eyes it may not happen and we can go on happily in ignorance..It doesn't matter who is elected the spending will go on.The Republicans really let us down by supporting a spendthrift president,their claims to financial probity were destroyed.The Dems are salivating to start new programs,we're screwed there's no one to protect us now,the enemy is in front and behind,the taxpayer has been flanked,fire at will.

[billw8017]

The spendthrift president who the Republicans supported was Nixon (who ran peacetime record debts), Ford (his re election budget 1976 was particularly unbalanced), Reagan, Bush Sr, and the current fellow. Admittedly, Johnson combined Social Security into the overall budget so its surpluses would conceal his debt; Carter's balanced budget of 1980 was a joke, dead in the water even as it went to Congress. Clinton needed two terms to bring the budget into balance.

The debt is an investment. Wealthy people much prefer to loan their money and collect interest than to pay taxes. This is what happens with a "conservative" government.