Is US Federal debt sustainable?

Great Debates
21

To summarize the issues that others have touched on in a more piecemeal fashion, and is also addressed in the CBO report, the sustainability of the debt principally resides on three issues:

  1. The future growth of the US economy
  2. The future of interest rates
  3. The ability of the government to limit deficits

There are relationships between each of those factors, of course. If interest rates rise, the economy is stable, but deficits grow, we’re in trouble. If growth is good, and interest rates tend to be low, we’re in better shape even if deficits continue.

One must be careful to distinguish “sustainability” with the concept of shrinking or paying off the debt. Simply put, if the economy grows faster than our deficits, that may be just swell in terms of sustainability, even if the size of the debt continues to grow in terms of dollar amount.

22

Most local and nearly all state governments have requirements to balance their budgets. Some don’t really do so, using smoke and mirrors and accounting tricks to skirt around requirements on a short-term basis. But over any longer period, states balance their budgets, and don’t issue debt the same way that the federal government does.

Certainly, state and local governments issue municipal bonds, but most are either short-term to handle irregular tax revenues or are tied to specific projects or improvements. Debt service represents a small portion of most local and state budgets. It’s really a different thing than the federal government borrowing more year after year because they can’t/won’t control spending and won’t balance the budget.

23

Some people seek security ahead of returns. They plant their capital in treasury bonds because they’re the safest investment.

If there were no treasury bonds for sale then these investors would have to seek some other investment. They would presumably still look for the safest investment they could find - something like an established company looking to expand.

24

Debt-to-GDP is an arbitrary measure. I often wonder when people bring up that comparison what they’re alluding to. Like we’re going to have a New Years Resolution one day that says “alright guys, here’s the year where we do nothing but get rid of all that debt. Our whole economy somehow goes to paying off debt, and we’ll get it all in one year”

If the year happened to be 100 days longer, or shorter, our debt to GDP ratio would be higher or lower. And it’d be just as meaningless.

Good debt management is more about whether the debt you’re taking on is helping you grow the economy enough (by funding things that will eventually lead to economic growth) that you can pay off that debt in the future and have some extra to show for it. The fact that the US can use the faith everyone has in its economy to borrow money for absurdly low interest rates makes this a viable strategy - if we can borrow a dollar, pay back $1.01 in ten years, but in the meantime use that dollar to help create 3% economy growth, we’ve ended up using that dollar to create $1.03 and only have to pay $1.01 back.

Essentially, if your economy can out-grow your debt, it was a worthwhile investment, and there won’t be some grand day of reckoning comes that bankrupts you because you have more money than you would’ve if you hadn’t taken on that debt.

So the ratio of economy growth to interest rates is a bigger ratio than GDP to debt. The US is in pretty much the ideal situation in that they can borrow money for almost no interest, and their economy is strong enough for good growth numbers.

25

The last recession saw the US Federal debt increase by around 7-8 trillion dollars. I think its best to wait until the entire economic cycle is over before saying whether or not the US is growing enough to sustain that sort of debt.

I agree to an extent about the limitation of using debt to GDP ratio. The example of Spain is telling. Spain was producing a surplus before the Euro crisis hit. At face value Spain was being prudent. However, as soon as property prices in Spain collapsed Spain’s finances were shown to be a basket case. Commodity prices were shown to have been artificially high. This produced GDP figures that were nowhere near reality.

26

Good point, but for the last few years and for the next few years, there appears to be lots of money circulating in the economy. And the ECB is planning on creating another trillion euros. Not huge, but a trillion here and a trillion there and soon we are talking about real money…(apologies to Sen. Dirkson :slight_smile: ). Anyway, if there are any companies out there looking to expand, are they being held back by competition for dollars from the US Federal Government? I am not a CFO, but it doesn’t seem likely at the moment. Again, I am not an expert, but it seems to me expansion is being held back, to the extent it is being held back, for the same reason inflation is so low. Manufacturing and Labor are so cheap and easy to obtain there is plenty of goods and plenty of labor in the market. It isn’t a good idea to expand production if existing supplies are abundent.

Inflation is too much money chasing too few goods. We have too much money. We also have more than enough goods. Hence low inflation in spite of Governments trying their best to cause inflation.

27

There’s an assumption in that statement… :slight_smile:
Many many companies have discontinued pension plans as unsustainable.

The problem is that in terms of balance, government debt is very much like household debt. Keynes said that governments could spend money when times were tough to help the economy (roughly). Politicians have taken that to mean that deficit spending is OK - but ignore the proviso “when times are tough”. Times are always tough. Like the household, sometime debt is good - whether the family buys a house, or the government builds a bridge or sets up a university - that is spending intended to improve the overall outlook and so is good debt.

However, when the government has to borrow just to make the operating budget, that’s like the family borrowing to buy groceries. If you can’t afford it, something has to give. It might be justifiable to borrow money to buy groceries while a breadwinner is sick, and once he/she is well again, they have a plan to get out of debt. Meanwhile, there’s enough coming in (sick leave pay, or from other spouse?) to make the minimum payments on the credit cards so nothing is foreclosed.

The government has a plan to get out of debt too, it’s called “the diet starts tomorrow!” The cuts to spending will always start after the current politicians leave office. It’s a moving target.

the short answer to the OP is “you are right, it is not sustainable”. However, at this point, the cost of debt as a percent of budget is quite low and quite sustainable. It just can’t go on forever. Part of the problem is that as the debt grows, or as the economy changes/improves and the feds have to fight other borrowers, interest rates will go up. What’s sustainable debt at 3% may not be at 9%. Plus, each year of additional deficit/debt adds to the total.

The other problem, as alluded to, is that it depends on what currency. The USA could reduce its debt burden by printing money (which bring its own set of consequences, mainly inflation and higher interest rates). States, cities, and Greece (Euro countries, that is) cannot. By printing money, and allowing inflation, a country effectively cuts the cost of its obligations too. If the USA committed to pay all its retirees $1000 a month, but after inflation everyone’s wages doubled, so taxes did too, but retirees on fixed income stayed at $1000 - well, costs have been cut but at whose expense? The people who bought a million-dollar T-bill will be able to buy half as much when it comes due… but if the US wants to sell another million T-Bill, they’ll be paying a much higher interet rate just in case. Or they’d ask for their T-bills to be denominated in something more stable like Euros (ha, ha) or Swiss Francs.

Printing money, like borrowing, can be a slippery slope to disaster.

(the US states and cities, and Greece, for example, can’t print money -so they go bankrupt, pay their bond holders pennies on the dollar, and the banks suffer… and the economy where the banks are grinds to a halt from bank failures… meanwhile, pensioners get nothing, civil servants go unpaid, local shops close because nobody ha money, etc.)

28

Senegoid, while I’ll certainly agree that the rich and super-rich have a lot more investments than the middle class, that doesn’t necessary imply that they have more of every category of investments. The upper and middle classes have different patterns of investment. Investments, in general, will show an inverse relationship between their reliability and their profitability. US treasury bonds are at an extreme end of that spectrum: They’re very low-profit, but they’re also very stable. The middle class must have stability in their investments, because an investment going sour could be catastrophic for a middle-class household. Thus, the middle class will prefer nice safe investments like T-bonds, even though they’re low-profit. The rich, though, can afford to take more risks: Even if Warren Buffet or Bill Gates see a terrible year for their investments, they’ll still be insanely rich. Plus, many rich people got that way through association with some particular company, and so a big chunk of their investments will be in that company’s stock. So the rich will be less inclined to invest in T-bonds.

Now, it’s still possible that a small slice of a big pie is bigger than a big slice of a small pie, so it’s possible that the rich still have a larger share of the nation’s debt than the middle class does. But it’s not a foregone conclusion.

29

(1) General remarks
The debt/GDP ratio is a useful yardstick – obviously a country with thrice the GDP can sustain thrice the debt. But there’s nothing particularly magic about a 1:1 ratio; a 95% debt/GDP isn’t much different than 105%. Still, 100% is a good ballpark worry figure – if interest rates were 5%, that level would mean 5% of the economy diverted to service government debt interest.

Debt owed by a government to its own taxpayers or to its own institutions (much U.S. debt is owned by FRB or SSA) is less worrisome than debt owed to foreigners. Moreover, government borrowing is just part of the problem U.S. has with assets going into foreign hands. The U.S. trade deficit has been higher than the government deficit in almost all recent years; this is why ownership of U.S. assets, whether bonds or stock, is passing into foreign hands.

Let’s rebut the right-wing myth that government growth is responsible for recent deficits. The huge deficits in the early Obama years were the result of combatting the greatest financial crisis since the Great Depression. That crisis seems almost forgotten now, but that’s because of the prompt and expensive government action, which had strong support from the rational lawmakers on both sides of the aisle. Even with that supreme crisis, the net debt increase was only comparable to that of the Reagan era and much MUCH less than that of W.W. II.

Moreover, when one actually studies the data (gasp :eek: ) one sees that government spending has NOT generally risen; the highish structural deficits (after 2008 crisis spending is subtracted) are mainly due to the tax cuts of the early 2000’s and a few trillion wasted in Iraqistan.

(2) Liberals disillusioned about deficit reduction
During the 1980’s and early 90’s there were continual large deficits, and deficit reduction became a big political theme of the Clinton era. Huge progress was made toward deficit reduction during the 1990’s – so much that some commentators complained that lack of government borrowing would pose a problem – many contracts were tied to the interest rate on government bonds. :smack:

The huge progress made under Clinton toward deficit reduction was squandered almost immediately when Bush-43 was put in charge. Some say the right-wing agenda known as “Starve the Beast” prefers deficits as a means to increase fear of government and to force spending cuts. This leads liberals such as Paul Krugman to de-emphasize deficit reduction as a policy goal, the assumption being that the GOP will squander any gains when it gets control.

(3) Path forward

[QUOTE=rbroome]
Inflation is too much money chasing too few goods. We have too much money. We also have more than enough goods. Hence low inflation in spite of Governments trying their best to cause inflation.
[/QUOTE]

Yes, increased investment, increased employment, and higher (but modest) levels of inflation all would work together to increase prosperity, but central banks’ programs to increase money supply have had only modest success. Deliberately increasing inflation might be a net plus. I’m far too inexpert to comment; even experts seem uncertain.

But the U.S. economy has recovered nicely; those wishing for more may get another unpleasant boom/bust cycle if they get their wish. Technology may have moved the developed world into a configuration where full employment is harder to achieve. This increases the need for a “social safety net.”

Increased money supply and low interest rates have failed to spur high growth; deliberate inflation might be dangerous with incompetents running Congress; so I still think public investment is a good way forward.

We don’t want government dollars wasted on “bridges to nowhere,” but there are many dozens of billions of dollars of possible government investment which would be clearly advisable. And, whether as household or as government, borrowing to upgrade or invest is sound in a way that borrowing to consume is not. It’s a travesty that political gridlock prevents even the simplest and best government investments.

30

Bingo. Except the argument doesn’t really apply during recession or when the Fed is keeping interest rates low. Indeed, if we had larger budget deficits and greater borrowing in, say 2011, the added spending would actually encourage higher spending on plant and equipment, as businesses purchased machines to handle the extra demand.

I just described what happens in an economy with lots of extra capacity and unused labor. After a certain point though greater output becomes more expensive to produce on a per unit basis and inflation picks up. So the fed raises interest rates, cutting down on investment. It’s at that point that a lower budget deficit would help – by not competing for the pool of savings, lower budget deficits let the fed tighten less than it otherwise would have to. That’s when Little Nemo’s scenario applies. We’re not at that point yet, but we will be soon.

31

“Soon”? Cite?

Corporate debt is at an all-time high. Corporate profit is at an all-time high. Interest rates on corporate debt are at all-time lows. Whatever the cause may be of any lingering economic malaise, diverting investment dollars from rich individuals or corporations isn’t it. Nor is it likely to be “soon.”

Diversion of investment dollars overseas (partly due to cheaper labor) is one of the problems.

Again, it’s often simplest and most fruitful to view government activity as transfers. With Quantitative Easing, the effect of recent government activity has been, in effect, to print new money and put it in the hands of rich corporations and individuals who would otherwise be taxed. Judging by high corporate profits, this is working well! Whether purchasing foreign labor at the expense of American labor is good or bad is a complex issue.

The QE program is being reduced. Interest rates may rise but, since they’re now at historic low levels, I wonder if Measure for Measure’s fears are misplaced, and would like to see cites to credible economists.

32

Aren’t China’s holdings of Treasury Bonds and other government bonds used to perform a “sterilized” manipulation of the price of the Yuan? That is, if they were somehow able to “call in” all their US Government Debt then the Yuan would appreciate against the Dollar and other currencies, making Chinese exports much less competitive and therefore severely affecting China’s economy (and making US exports much more competitive at the same time).

Further, I read that there’s an argument that the US maintaining a sizeable debt is actually good for the world economy, as it provides a safe harbour during times of economic uncertainty that other economies simply cannot provide either due to instability or because there aren’t enough bonds issued by the government in question for everybody to buy. How true is this?

33

AIUI, China depresses yuan prices by buying currency rather than debt.

34

Yes. Like FemiNazis except it refers to government spending and those that refuse to consider reduced spending under any circumstances whatsoever.

35

More specifically, Keynes said that governments should save money during good time to have money to spend during bad times which as you point out has evolved to spend a ton of money during good times and spend an assload more during bad times. It was really Marriner Eccles that started the whole idea of spend spend spend then spend some more to get out of the Depression.

36

Let’s not. The federal government has grown enormously over the past six decades. Other than the Civil War and WWI, federal government spending amounted to less than 10 percent of GDP until (surprise) FDR increased the scope, scale and cost of the federal government. It is now about 24 percent, or nearly 2.5 times larger using this yardstick.

http://elimcmakin.com/wp-content/uploads/2013/09/outlays_GDP.png

Again, not true. I won’t argue that we spent a bundle on wars we arguably shouldn’t have gotten in, but there is little argument that both BushII and Obama were/are big-government spenders who just disagree on where the government should grow. Spending grew under W, and then skyrocketed under Obama.

And the Great Recession seems forgotten now? Hardly. And the spending increase was much larger than during the Reagan years.

http://blogs-images.forbes.com/realspin/files/2012/09/Federal-outlays-as-a-percentage-of-GDP.jpg

37

Remember 2008???

It just gets exonerated and the banks get bailed out. That is what a “CORRECTION” is.

There aren’t enough US dollars in the world to pay off the debt.

I.E… try to follow along.

There is no money.

The Fed Creates 1 (one) dollar and loans it to the US government.

The interest is 0.5%.

Where does the half cent come from to pay the interest?

Welcome to Central Banking.

38

These earlier threads might be of interest:

39

There is a wealth transfer from poor to rich when we take on debt, but the fact that bondholders are richer isn’t the main component.

The main transfer when we take on debt is a transfer from future taxpayers to current recipients of government services. So, primarily, government debt is a wealth transfer from the young (who will be around to pay those taxes) to the old (who will not). And, of course, young people are much poorer than old people on average.

Note that this is a common theme in government programs, particularly expensive ones. Social security is a transfer from the young to the old. Medicare is a transfer from the young to the old. The ACA is a transfer from the young to the old. But why not. Young people don’t vote.

40

You left out “which I don’t understand.”