IIRC, we are already at the point where a new bond is issued in order to pay off an old one. When regular citizens keep borrowing money to pay old debt, they end up bankrupt fast. How long can we keep up this charade before it catches up with us? What happens when China decides its time to collect, and doesn’t let us play games anymore?
The debt is quite a bit more than GDP, and it is only rising.
I don’t think it is the debt that is unsustainable but rather the deficit spending that adds to it. I asked about the sustainability of deficit spending and most of the people on the borad (even the KeynesNazis) agreed it could not be sustained but no one could agree on when the tipping point would be and I suspect the spendcritters in Congress wouldn’t dare to be the first to stop the deficit considering how little support a BBA gets. I think everyone’s attitude is to let a future generation deal with it.
National economies don’t work like household economies when it comes to debt. What does happen when China decides it’s time to collect? Well, first of all, China owns something like 8% of our debt. That’s not that much. And beyond that, it wouldn’t make any sense for them to call in their debts. It’s far more profitable to use t-bills as bargaining chips - “Look, here’s this commodity that has a fixed return on investment backed by the strongest, most resilient economy on the planet. We’re gonna use this as money.”
Most “common-sense” conceptions of debt on a national scale are phenomenally wrong, and based on a very warped understanding of how it works at that level. What would it take for the US to go bankrupt? People would need to stop buying its debt. But here’s an interesting fact: 66% of that debt is owned by Americans. Treasury bonds (our obligations) are a hot commodity everywhere. Everyone wants a piece of us, because it’s safe. Because we are reliable and consistent and have been for decades, and because there’s no sign indicating that that’s going to change any time soon, especially with how we’re recovering compared to other classically “strong” countries. If that doesn’t change, then it doesn’t matter how far in debt we are. We still won’t go bankrupt, because there will always be new creditors. Households don’t have the advantage of a virtually infinite credit line, a credit line backed by the innovation and work ethic of the United States Of America.
EDIT: “KeynesNazis”? Really?
Perhaps, but nobody seems to mind buying those bonds yet.
Regular citizens don’t have taxing authority over their neighbors.
Nobody knows. The big stink was in late-2012 to mid-2013, with some economists calling it a tipping point and others saying “hogwash”. Since then we’ve had much better growth and unemployment numbers then almost any other developed nation. So I’d say, at least for now, the “hogwash” economists have the better of it.
What games, exactly, are we playing? China can’t just “decide” to collect. If they stop buying US bonds then our rates will likely go up - but that will kill the market value of all the other US bonds they own. Seems rather self-destructive for a country who’s own growth is stalling a bit.
Actually debt/GDP dropped in Q2 and Q3 of 2014 (and likely Q4 as well). I would guess it will be back in the 90% range by mid-2016 - but my crystal ball is as cloudy as anybodies.
When and if we start borrowing to pay the interest, we’re doomed, but we have not reached that point, yet.
China only holds about 8% of our debt (and Japan about 7%). (Cite.) More of it is in the Social Security “trust fund”.
Debt is about 1.5% more than GDP.
(completely true but non-GQ observations snipped)
Regards,
Shodan
The idea that China can “call in” our debt seems to be something people pick up from e-mail forwards, but it’s simply not true (and frankly, quite silly to anyone who understands how loans work.) US debt held by China is in the form of Treasury bills. They’re not like IOUs that China can “call in” whenever it likes. They’re fixed term bonds that are repaid on a date certain. China can’t “call” our loans any more than your mortgage company can demand immediate repayment of your entire home loan.
As mentioned, the problem isn’t if/when China or any other bondholders want to “call in” the debt. They can’t. The bonds were already bought.
The problem will be when interest rates go up and the US has to start paying higher interest rates to attract treasury bond buyers. Paying the interest will start to consume more and more money, which will have to come from programs, departments or (most likely) taxes. Paying 0.02 to 2.00 percent interest is a lot easier than paying 4.0 or 6.0 percent interest.
Despite claims by economists that X or Y will happen no-one knows how the US debt (and its sustainability) will play out. Is the debt sustainable? Yes, as long as the market deems it to be sustainable. If for whatever reason the market starts really worrying about US debt then just watch as the economic shit hits the fan.
As it is right now, the US government can borrow oodles of money at nearly zero interest. As the debt becomes less sustainable, lenders will become less willing to lend money that cheaply. When that happens, the government will be forced to either borrow less, or to increase the interest rate (or more likely, a combination of both). But this won’t happen all at once: The interest rates will creep up gradually, giving us plenty of time to decide what to do about it.
So how do we know when the debt is starting to get to be too much? When the interest rates start climbing higher than we’d like.
Also note that even if a country has a debt equal to or greater than it’s GDP that doesn’t make it “bankrupt”. GDP is annual income, not total wealth. The United States may have a gigantic monetary debt, but it also has even more gigantic non-monetary assets, most important of which is the ability to tax its citizens and the ability to control it’s own money supply.
If you owe lots of money to the bank and don’t feel like paying, the bank can get a judge to order your assets seized. If the US government owes a lot of money to China, and China demands the money, and we don’t feel like paying what happens next? There is no outside authority that can enforce the debt. Lots of countries default on their debt, or inflate their way out of debt, the only problem comes when you refuse to pay your debts but still want to continue to borrow more money.
The real problem with borrowing money isn’t that the bondholders will suddenly demand their money back. The problem is when people don’t feel like lending you even more money. Then you have to offer higher interest rates. Right now the United States can borrow money at extremely low interest. If our economy looks to get worse, then suddenly we won’t be able to borrow money for free and will have to pay a lot more when we borrow. But it turns out that even countries that default on their debts manage to find people willing to lend them more money.
The reason a country like Greece is in trouble is that they borrowed a lot of money, except the borrowing was in Euros, and Euros are controlled by the Germans. If they had borrowed in drachmas they could just print up a lot more drachmas and pay off the face value of those loans, the problem is that it would wipe out the drachma denominated savings of their citizens. And Greece also has the problem that it has trouble actually collecting taxes, the Greek government would double their tax revenues if only they could collect what people actually owe.
This observation isn’t really relevant to whether or not the debt trend is sustainable. Because US debt is issued with fixed terms, and because we expect our debt load to outlast the term of any given instrument, we’re necessarily going to take out new debt as the old debt expires.
The important question is whether the total amount of debt (and our ability to service it) is growing faster than the economy as a whole. I believe the general understanding is that the debt is on a dangerous trend, but it’s a long way before we reach catastrophic results, and there’s still time to fix things. And that the best way to fix things is to cut funding for [program your political opponents support].
Have fun with your poisoned well.
There’s another aspect of the debt problem that seems to be much less discussed, even by staunch liberals like Krugman who ought to be discussing this:
Taking on debt requires paying interest. (Duh.) That amounts to a transfer of wealth from debtors (all of us taxpayers collectively) to the lenders (the bondholders). And who are those bondholders?
Well, poor people don’t buy a whole lot of bonds. Middle-class people (like most of us) manage to have some savings, which might be put into bonds, but not vast amounts.
OTOH, the really rich people, who have far more money than they need for their daily expenses (however extravagant), are the big investors. Rich people (or corporations or countries) have mega-big-bucks to invest, and some substantial part of that goes into government bonds.
So set aside the question of how much of our national wealth is being drained off to foreign investors. Another big problem is that high debt levels produces a flow of wealth (specifically, the interest being paid) from all-of-us-taxpayers-collectively to the rich and especially the uber-rich, whether they are foreign or domestic.
This is one of the big forces that is concentrating more and more of our national wealth into the hands of fewer and fewer people, even though much of that wealth remains stateside. There is much discussion in the “public debate” about the growing concentration of wealth, but it is very rarely noted that high debt levels are a significant contributor to this.
The Director of the Congressional Budget Office testified before Congress in relation to a CBO report from July 2014. The topic was the long term outlook for US debt. The CBO conclusion is that if nothing changes the trend is not sustainable.
I would not call the OP’s statement poisoning the well. It is in line with CBO projections.
I think you are overstating it by saying it is a significant factor. The vast majority of income taxes are also paid by “the rich”, or at least people and households with high incomes. Most people pay no income taxes, or very little. You might be correct to suppose that public debt payments transfer money from those with high incomes to those with wealth invested in treasury bonds, either on a direct basis or through investment accounts. But the impact on the middle class, and especially the poor, is probably minimal.
What I suppose, mostly, is that interest payments on the national debt (and similarly, on state bonds) strongly tends to move money from taxpayers of all wealth levels toward investors of higher wealth levels, creating a net reverse entropy in wealth distribution. I don’t know any specific statistics, but I suppose that it’s rather significant.
To be sure, poor people who pay no taxes aren’t paying for this; quite the contrary, they are significant beneficiaries of public spending that those bonds bought. But I don’t quite agree with “Most people pay no income taxes, or very little.” To the extent that we still have a middle class in this society, we still have a lot of taxpayers paying, collectively, a lot of taxes. We should also include property taxes, sales taxes, and other taxes in this aspect of this discussion, as those also include interest payments on state and local bonds; that interest tends to flow toward the rich too.
It is in line with CBO projections of what will happen if “nothing changes.” Which is like saying that a person will die within seven to 10 days, assuming he never consumes water again.
The national debt is big but the national economy is a lot bigger.
Comparisons between the national debt (which is the amount of debt we’ve accumulated over decades) and the GDP (which is the amount of capital we produce in a year) are pointless. People just throw out the comparison to be alarmist. It’s like saying somebody whose annual income if $60,000 shouldn’t take out a $100,000 mortgage.
Here’s a more reasonable way to see the size of the debt. Let’s say we decided that we really wanted to pay off the debt. So we raised federal taxes by a third above their current level and put all the extra revenue to debt reduction. We’d pay off the entire debt in less than twenty years.
So paying off the debt would be a really big job but not an impossible job.
I think the most important “silent” problem with our huge national debt is the effect it has on investment. There’s a finite pool of investment capital out there. Investment capital that’s buying treasury bonds isn’t being used for more productive investments like starting new businesses and developing new products.
But that middle class surely holds a significant stake in Treasury bonds through their pensions and retirement funds.
If there was a more productive investment opportunity out there, wouldn’t it be offering a real rate of return greater than the “a hair above absolutely nothing” rates paid by U.S. Treasury obligations?