National Debt: Did the question get answered?

Comments on Cecil's Columns/Staff Reports
#1

I read the column because I though that the question was interesting, but I missed the answer. As I read the question, it was: “Who benefits from the national debt?” I read the question as “who benefits financially from the debt process?” Which to me means who gets the interest? (I assume it’s whomever buys U.S. savings bonds, but I’m sure that’s not all, if any, of it) and, who writes the loan? (if that’s a relavent question).

So let me ask the question on my mind: What is the “Fed?” i.e. the Federal Reserve, and, are there a bunch of huge-mahogany-desked, pinstriped fat cats lighting cigars with $100 bills, or is that some right/left wing conspiracy nut’s imagination?

(don’t mind me, I’m an idiot)

#2

Doh!

O.K. I tried to include the link,

http://www.straightdope.com/mailbag/mnationaldebt.html

and failed (and may have just failed again).

#3

I would say partily.

I would have spelled it out like this:

  1. People benefit from the National Debt if they are old. The older you are the less likely you are to pay off the debt for the services you get today. Senior Citizens that are getting services (like medicine ) instead of dying off politely and quitely get a large benefit from the national debt.

  2. People benefit from the National Debt if they never pay taxes and do not have their benefits reduced. If you are poor / crippled and do not pay taxes then you probably will benefit from the increased services and hopefully not see a reduction of benefits later.

#4

O.K. So that answers the question of who benefits from having a National Debt, but who lends the money? Who writes the loan? At what cost?

#5

Anyone who own’s a savings bond or other gov’t securities (T-Bills, etc.) lends the money.

I think that a big misconception in this country is that the US gov’t borrows money like you and I do. That may be true on a very small scale, but the majority of the money comes from people who buy these financial instruments.

So, the question of who benefits from the debt is debatable, but I contend that every American benefits from the debt. There are those who indirectly benefit by taking advantage of the services that would not be possible unless the gov’t “borrowed” the money. This is not just old people. And there are those that directly benefit by being paid interest on the bonds/gov’t securities that they hold. In theory, they then spend this money and the gov’t makes more money from the taxation of that money (and I know interest from gov’t securities is not taxable, but when you spend it is). The theory is not that taxes will have to rise to service future debt, the theory is that when this money is reinvested, tax revenue will rise to a point that taxes will not have to be raised to service the debt. Much like GWB’s tax refund plan to stimulate the economy, or Reagan’s in the 80’s. That is the basic premise anyway.

The largest creditor of the US is it’s own citizens. We could print more money to pay down the debt, but the downside would be inflation (as the article described).

I thought the article did not answer the question at all.

#6

Interest from US government securities is not taxable at the state or local level, but it is definitely subject to federal tax.

The theory I’ve heard is that as long as the federal debt is shrinking as a percentage of the economy, no big deal. If it gets larger relative to the GDP, then interest rates could rise, which could slow the economy further, etc. Not a good scenario.

#7

It is unbelievable that people have no idea what the “national debt” is. The national debt is the amount of money owed to the Federal Reserve Bank. The Federal Reserve Bank is not part of the US government but is an independant, PRIVATELY OWNED BANK called “the Fed”. The Federal Reserve Act of 1913 establishes this. They are the only ones allowed to loan “money” to the government of the USA. Once again, the national debt is the debt owed to a private bank CALLED the Federal Reserve Bank.
The owners of the federal reserve bank are the ones benefitting from the debt because they are paid interest on the debt and therefor make a VERY tidy profit each year. What is odd is they don’t get taxed. It is very cut and dry. When the congress allocates to spend more money than they tax us then they have to borrow the needed extra money from the Federal Reserve Bank which increases the governments national debt to the Federal Reserve Bank.
Wouldn’t you know it but it just so happens that the owners of the “Fed” are all zillionaires. You’ve heard of them, Rockafeller, Carnagie, DuPont, Mellon, and a few more, about a dozen. Nice bunch of guys, always willing to “lend” a hand.

#8

So is your sarcasm trying to imply that people should have to loan money to the federal government with no interest? Or just rich people? If you happen to own a bond written by the federal government, (and even if you dont, im sure you aren’t opposed to the idea of it) then you are doing nothing different than the owners of the federal reserve bank are.

#9

I don’t think Kev Dog is correct, or at least not completely so:

the US (most all governments, for that matter) incur debt by issuing bonds, which everyone can buy - including the country’s citizens, or even other countries. (This is a simplified version - but the public debt is the larger portion of the national debt anyway, so i’ll focus on it.)

In fact, the biggest two foreign owners of US debt is Japan and (surprise) China, amongst many other foreign government bodies as well as citizens.

This complicates things, of course - some have argued that government bodies that has no debt but is financing the US debt (like China) is stagnating its own economy while lending money to the US for its prosperity. However Japan, for example, is running its own debt at 150% GDP or so - not healthy. The idea is that Japan may think it would have some say over US policies by holding a significant portion of the US debt; it’s not really working though.

Beneficiaries of the national debt can be simplified - it’s exactly the same as a PERSON running a debt with a few modifications. Just like a person, having a debt can be a way to get the country out of a pinch, build a big infrastructure for the future, etc; but similarly, keeping a debt that just keeps going eventually hurts by having to pay the interest. Of course, a fundamental difference is that

  1. a country lives on indefinitely, and keeping a debt indefinitely isn’t as bad as the case of a person
  2. being able to set its own interest rates on a debt is a nice thing.

Nontheless though - it’s only a tool (though an important one) and should not be abused, like it is right now.

#10

Say we payed off the debt when we had the chance what would happen to the economy?

#11

Kev Dog – the Fed is NOT a privately owned bank and the interest does NOT go to a few zillionaires. The interest goes to the people who lend the US government money by buying bonds (savings bond, T-Bills, T-Notes, T-Bonds). Those who own US government debt range from little kids who get savings bonds for presents, to large banks trade trade bonds, to other countries.

It is separated from the US government so that it can make decisions that are less politically motivated – a sitting president who controlled the central bank could cause them to stimulate the economy in the short term (lower rates, boost inflation), at the expense of the country in the medium or longer term. Since the president has no direct oversight of the Fed, the Fed can make politically unpopular decisions that (hopefully) do good things in the longer run. For example, Paul Volcker raised short term borrowing rates in the early levels to combat inflation, but at the expense of unemployment which increased substantially. No president or senator would increase unemployment like that, but Volcker was able to do it and the result was lower inflation and better employment in the long run.

Jsonitsac – that’s a tough question. Government bond traders would have to switch to some other benchmark (say, Agency debt), and other countries might have a harder time manipulating their currency. It would give us a lot more flexibility in a downturn to start borrowing again without affecting rates. Hypothetically, having other countries own our debt makes our success in their best interest – if we go under, the debt they own takes a dive. You should check with a real economist.

#12

If the national debt were to magically disappear, out taxes would go down around 35%. Needless to say, this would have a tremendous stimulating effect on the economy that makes recent tax “cuts” a drop in the bucket.

You do not need to increase the national debt to finance most capital improvement projects in an economy the size of the US. It’s like claiming that you need a loan to buy groceries. All out wars need bonds, not rebuilding interstates and buying the occassional carrier.

Most of the excess spending of the Reagan era didn’t go into capital improvements. It was spent on now mothballed ships, etc. Much of the debt also arose in order to give tax cuts to the rich, which is hardly capital spending.

#13

ftg, are you arguing that letting people keep more of what they earn is an ineffecient way to stimulate the economy? In other words, the government knows how to spend your money better than you do?:dubious:

#14

pawnking – there are many ways to stimulate the economy. Lowering taxes may stimulate the economy in the short run, but if it is not followed by lower spending, the increasing deficit will push up interest rates and become a drag on the economy. Further, the government isn’t spending “your” money, it’s spending your grandchildren’s (or your great-grandchildren’s) money by borrowing so much when it is known today that social security and medicare are not even remotely sufficiently funded (i.e. the present value of the liabilities for those programs far outweighs the amount of present value of the assets).

If you lower taxes to the point where the debt explodes and pushes up interest rates, then it is not an efficient way to stimulate the economy. Or, if you cut spending so that the infrastructure crumbles, or education suffers, or we can no longer defend ourselves, etc., that is also not a good way to stimulate the economy.

The marginal rates were higher throughout the 90’s and that was a time of economic prosperity.

#15

Rittersport, you have some good points, however there are a few counter-arguements to them:

  1. if lowering taxes stimulates the economy, then even at the lower marginal rates more total taxes might be gathered. The drastic tax reductions of the 80’s, and the corresponding rise in total tax revenues due to the stimulus they, in part, provided, proves that beyond any reasonable doubt. Are these stimulants temporary or permanent? I disagree with your “temporary” contention, although I would be glad if you could cite any evidence to the contrary. Again, the stimulus in the 80’s were of a rather permanent nature, I think.

  2. Social security is indeed the 800 pound gorilla that nobody wants to talk about, and the recent massive medicare benefit just passed will only hurt that. But the real problem is that people are living longer and longer, and with the mentality that nobody wants to work past 65, they are not contributing anything to the economy. No matter what the state of the current debt load and tax basis, it is going to be hard to support the boomers as they stop producing and start drawing their entitlements. The best way I know of to aleivate this potential time bomb is to continue to grow the ecenomy, with the hopes that a greater GDP in 10 years will, in part, help offset this massive drain on the economy as a whole.

  3. I agree that too much debt would be a drain on the economy, but how much debt is too much? As a percentage of the GDP, debt is about where it has been for the last 30 years, and we haven’t crumbled yet. in fact, the economy is stronger today than it has ever been in this nations history, and people are benefiting as a result.

  4. The arguement about the prosperity of the 90s ignores correlary effects on the economy. The capital gains tax cuts massivly increased investment, which caused individuals to increase the overall economic infrastructure and lead to more income, more investment, etc., etc. Also, even though the rates were higher in the 90’s, they were not anywhere near historical highs. The tax cuts of the last few years were not very significant in terms of percentage of the overall GDP, or even the overall expected tax collections over the lives of the cuts, and even at this miniscule rate opponents of the cuts have conceeded they did indeed stimulate the economy. Time will tell if these are permanent stimulants.

My main point is that the more money that remains in the hands of the consumer, the better off the economy is as a whole. This is the whole point of our capitalistic system, that individuals and markets are a lot smarter than governments when it comes to spending money. ftg’s assertion that the tax cuts just went “to the rich” pretty much ignores the lessons of the 70’s and 80’s.

#16

pawnking – I don’t want to drag this whole thing into a debate about trickledown (or starve-the-beast) economics. You make some good points and we could argue back and forth forever.

I mainly wanted to point out that when you said:

“ftg, are you arguing that letting people keep more of what they earn is an ineffecient way to stimulate the economy? In other words, the government knows how to spend your money better than you do?”

it is not as simple as that and that borrowing to give a tax break is not really letting you keep more of “your” money. It is not all that clear that the tax breaks of the 80s were really sustainable (the economy was starting to drag down and then Bush the Elder broke his promise and raised taxes, then Clinton raised them again, and we had the longest expansion in recent history).

#17

I’ll agree with the not going to a few zillionaires part (although they were the ones who started it), but how can you say it’s not private? (of course, I am taking the opposite of private to mean public, I certainly don’t have the ability to own any shares or exercise any control over it) You’re right in saying that the member banks have ownership of it, but when was the last time that any of the member banks did anything except issue reports on the economy? Who do the member banks answer to?

Here’s Cecil’s coumn on the Fed: http://www.straightdope.com/classics/a951124b.html

** pawnking ** Lowering interest rates didn’t help Japan.

#18

I think interest rates, inflation, fixed incomes, liquidity, stock prices, currency markets, and more must be understood to get a handle on the question. Not to say that you would arrive at a right answer.

A larger US debt, for example, tends to require hikes in interest rates, depress the dollar (not all bad), and stimulate the economy (not all good). See, inflation. Better yet, read about it. Those on fixed incomes tend to be hurt. Those in equity markets tend to be helped. I’m painting with a broad brush.

Disasters, weather, domestic politics, taxes, economics, international politics, war, and more are very important also. Those things all factor into the necessity, or not, of running a large debt.

IMO, if the money being borrowed is not essential to the economic health, general welfare, or survival of the nation the debt probably benefits nobody. In the long run, money wasted is money wasted. All the new debt just gets stacked on the old debt. That increases inflation without increasing growth, hurts the dollar without helping manufacturing, and so on. Inflation without growth (stagflation) is a possibility if the government overspends on credit.

The keys to paying off any government debt are economic growth, the resulting increase in the tax base, and fiscal responsibility. It is always possible to spend more. Cutting spending always offends some interested constituency, beneficial or not.

If new spending does not lead to economic growth the problem is apparent – the spending cannot pay for itself without increasing taxes and putting another drag on the economy. Economic laws are not usually engraved in stone or litigated in court, but they are never violated.

#19

From what I understand, the government doesn’t “borrow” the money from people who buy savings bonds, the government borrows money and either the government or “other” sells the savings bonds to (at least partially) cover the debt.

It stands to reason that no one has to give the government money to cover the debt, especially in the age of money that only exists in cyberspace. Theoritically, the federal reserve could create the money by a computer transaction, wire the money to the government, and charge interest. As long as the government doesn’t create too much money, it isn’t inflationary. As most transfers don’t require “real” (read “paper”) the only limit to how much money is allowed to be created is policy.

I seem to recall that banks can lend much more money than they actually have, so the “apparent” money is many times greater than real money>>so that if/when everyone gets spooked and tries to withdraw their moeny at the same time, the bank collapses.

If I’m not too far out of touch with reality, it makes sense that someone is going to get paid for writing a loan that may be secured by some sort of collateral (maybe not), but in this senario, the lenders don’t tie up any capital and reap the proceeds of the loan interest. The lenders may then resell the debt in the form of savings bonds, but I don’t get the impression that the interest rate on the national debt is anywhere near the interest rates paid on savings bonds.

All of this comes from the fog of information swirling around my brain; it could be from a periodical, book, conspiracy website, or any combination of the above. I was hoping that one of the “teeming millions” would know enough about the economics to shed some light. Thanks for all the answers.

#20

Your understanding is wrong. There is not a stockpile of “savings bonds” that the government owns and “sells”. They are just pieces of paper representing debt that the government owes you.

Selling a bond IS THE EXACT SAME THING AS BORROWING THE MONEY.
I “sell” you the bond, you give me cash, I pay you interest, then at a set time period, I “buy” the bond back by giving you back the exact same amount of money you originally gave me. Think about it.

Yes government can “create” cash, but doing that in the amounts neccesary to cover all government debt WOULD be inflationary.
>>I seem to recall that banks can lend much more money than they actually have, so the “apparent” money is many times greater than real money>>so that if/when everyone gets spooked and tries to withdraw their moeny at the same time, the bank collapses.

I am not absolutely certain, but I am pretty sure that they can NOT lend much more money then they actually have. That would be illegal. What they can do is lend much more money then they actually have ON HAND. As in, the bank can accept deposits from you equalling 5 million dollars, lend out 3 million dollars, keep 1 million in the banks, and then buy 1 million of US treasuries. But they can not allowed to lend out more than the 5 million dollars taken in.
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Interest rate on National Debt is a tiny bit more than the average intereste being paid by the bonds (weighted for dollar amounts). The extra amount is cost to sell the bonds.