I mean, of course, those economic policies he has actually been able to implement, leaving out things like the Social Security privatization. Have the tax cuts, for instance, been good or bad for the economy/society, when you balance economic stimulus against growing federal deficits and class/wealth polarization?
It has started a two tier society . The wealthy are making out like bandits. he has allowed the infrastructure Push to Privatize Public Roads, Airports, Bridges | HuffPost Impact crumble.
It failed miserably in New Orleans but turned it into a boon for Halliburton. Our national debt will eventually have to be faced with possible dire consequences.
What tiers are those?
And this is new?
Are we done with the talking points, or do we have more?
Well, no. Not really. From any kind of reasonable asessment of National Debt we’re actually in really really great shape. In fact, it’s hard to imagine how it could be better from a debt service standpoint.
You see, it’s not the amount of the debt tht’s important. The amount is pretty much always growing just as the the economy is pretty much always growing, nor is it the ratio to GDP that’s important, What’s important is the real cost of carrying that debt and our coverage ratios for that debt, and there even some strong arguments that say that last isn’t really all that important, but they are kind of esoteric. I’ll give you an example.
In 1982 interest rates and inflation were very high. I forget the numbers exactly, but money markets were around 20%, and inflation was around 18%. The government issued long term bonds at high rates. I think the yield curve was inverted at the time, so let’s say the 30 year treasury was around 16%. Those bonds looked like a good deal at the time, an instant 4% tax for the government’s benefit (I’m making these numbers up.)
The problem was that inflation dropped and interest rates and the yield curve normalized and we were forced as a country to carry these 30 year bonds with a 16% coupon.
Right now the 30 year treasury bond is around 4.75% and inflation is just about 3%. That means the US is carrying those bonds at a real rate of about 1.75%. So, those old bonds are maturing at a real rate 14.75% and being issued again 1.75%.
What that means is that if all debt was issued in 30 year bonds at 1982 prices and reissued at current prices and the economy did not grow from a tax receipt standpoint at all, you could still carry 7 times the amount of debt and still save money.
That’s a pretty hyperbolous example I’ve given to illustrate the concept. The concept though is valid. The size of the debt is not really the most significant issue in terms of our ability to carry it. In this extremely favorable environment it makes sense to maximize issuance provided you have the capacity to retire debt should the environment become unfavorable (so that you don’t have to roll it.) We do. Right now the Treasury is forcasting retiring 145 billion in the months of April, May and June in probable anticipation of a normalizing yiel curve and increasing CPI.
So that part is cool.
As for the effects of Bush’s programs, well an informed and honest person will tell you that we really can’t do much more than guess, and probably it will be a bad guess. You are dealing with some very large and complex interractions that are interconnected along parabolic curves. It’s not a simple action/reaction thing and trying to do a regression analysis to seperate out individual actors is notoriously difficult.
If I had to guess I’d probably say the tax cuts helped a bit, specifically the dividend cut.
While I’m pretty confident that Bush has helped the economy overrall during his term, I have a concern that he may have backed us into a corner from a rate/inflation/tax standpoint with his incentives, setting us up for a perfect storm. A normalization in the yield curve is inevitable. 30 year bonds issued with 5% coupons in recent history are gonna lose upwards of 20% of their value on a relatively small long term interest move to the upside. Short term rates would likely increase to and ARMs, LIBOR based loans, and all this 100% financing that seemed so great two years ago will become uncarryable for the consumer. Then we have defaults, a real estate crash, probably higher inflation and all kinds of bad shit.
Or maybe not 
Like I said. Nobody knows.
Scylla:
A few facts, if I may.
Debt, in the history of the US, is a consequence of war.
In 1791, the first year of the debt recorded on the first page of the Bureau of the Public Debt’s Debt to the Penny Page,, the debt was 75.4 million.
After much meandering, by 1812 it was 45 million, give or take.
By 1/1/1816, it was up to 127 million, three times higher, as a result of the War of 1812.
By 7/1/1846, it was down to 15.5 million.
By 7/1/1849, it was up to 63 million, as a result of the Mexican War.
The Civil War was just, I don’t know, outstanding.
On 7/1/1860, we were at 64 million, about the same as after the Mexican War, and still lower than we were, remarkably, in 1791.
We peaked on 7/1/1866 at 2.7 billion. No other war comes close in terms of percentages, appropriately enough.
By 7/1/1898, it was down to 1.79 billion.
By 7/1/1900, it was up to 2.1 billion, and continued to go higher after that, curiously, pretty steadily. Why? Simple: the War of 1898 gave the U.S. overseas colonial possessions, not really big enough to be imperial, but it would seem, big enough to cause the debt to continue to rise.
By the dawn of WWI, the debt was 2.9 billion. At the end it was 27 billion. Not quite a tenfold rise, the pikers.
It was 48.9 billion on 6/30/1941, just before Pearl Harbor, and peaked at 269 billion in 1946.
The rise was slow, but steady after that, accelerated somewhat by Vietnam, but mostly it was the rise of the postwar military-industrial complex in response to the Cold War that did it. By the time the USSR fell in 1989, the republic that once thought standing armies were a pestilence was long gone, having been replaced by one that equates supporting the troops with sending them to certain defeat in far-off lands, and calls that patriotism. It also calls foreign-funded debt patriotism. Our current debt stands at a pretty much inconceivable 8.5 trillion, which is a lot of dough relative to 1791 even after inflation. But the current account deficit that measures how it’s funded is now running at 200 billion, more or less, per quarter. This is a direct result of looking for fights like some schoolyard bully instead of merely keeping it on ice for when it’s needed, as we did before 1898.
Gentlemen’s bet (I’ve won every bet I’ve made here, but never collected, so I’m giving up and just offering this one as one that will have no set payoff): 10 years from now, gold will be at least double where it is now, and higher in real terms vs the dollar regardless. In the immortal words of George Tenet, it’s a “slam dunk”. Unlike him, I’m quite sure I won’t get a multimillion dollar advance to eat my words if I’m wrong.
I would say “excerbated” rather than “started”.
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Wouldn’t the US be far better off if it didn’t need any debt? From here and specificly here (pdf), it seems that the budgetted deficit is over a quarter of a trillion. To my mind, that’s no way to run a country. You wouldn’t run your home budget like that, would you?
Federal America has an income of $2.3T and a debt of $8T. Superficially that’s much the same ratio as a mortgage. But with a mortgage, you’re paying it off, whereas America’s national debt just keeps increasing. I’d like to see America turn that budgetted deficit to a budgetted surplus. And use it to pay off its debts rather than for federal pork. Of course a $0.5T change on a $2.7T budget is non-trivial.
You tax the national economy you have, not the national economy you wish you had. 
Helped the economy. How? The unemployment rate was small and the national debt was zero. How have tax breaks to the wealthy helped anything but making the rich richer?
I was watching a German economist talking about the unemployment problem in Germany. He said that 9 million out of work sounded bad but if you count them like they do in the USS there are only 3 million.
The war does not account for the larget portion of the increase in the national debt. Its the tax cuts.
For example, the average household earning 100K/year earns about 1% of its income from dividends and capital gains (most of their investment income is sheltered in 401Ks and IRAs), about average household earning over 10 million/year earns about half of its income from dividends and capital gains. The cut in the capital gains and dividends rate from 28% to 15% was huge tax cut for the poor, don’t let anyone fool you into thinking otherwise. It is not sound tax policy or sound economic policy (to cut taxes on dividends and capital gains rather than the taxes on earned income). It is really bad fiscal policy to create a tax system that has almost no hope of ever paying the expenses of the government (we can’t grow our way out of this problem).
Conservatives these days are changing the way we characterize debt. First it was, debt as a percentage of the tax base, then it was debt as a percentage of the GDP, now Scylla tells is it is the interest payments as a percentage of GDP (have they just given up on paying off the national debt?). What happens as those bonds mature in a rising interst rate environment? Are we to throw the fiscal fortunes of the nation to the fluctuations of interest rates? Debt as a percentage of GDP is still the operative ratio and it has done poorly under this president mainly due to tax cuts and to a slightly smaller degree this frivolous war in Iraq. Military spending (past and present) accounts for over half of our national budget (between current spending, veterans benefits, servicing war debt).
Speaking realistically, and perhaps cynically, about the National Debt, it doesn’t matter. It is not unreasonable to assume that the debt will continue to grow, perhaps even at an astronomical rate, and it is not unreasonable to assume that this state of affairs will continue on indefinitely.
To elaborate: The United States is the best investment on the planet. Treasury notes are backed by the full faith and credit of the US Government, further backed by the government’s ability to tax its citizens. But more to the point, we are the world’s best customers. No country will ever call in their markers. To bankrupt the US Government would be to intentionally destroy the world market for goods and services. China holds most of our debt instruments, and they have the most rapidly expanding economy in the world right now, mainly due to their trade surplus with us. Do you really think that China will bring their economy to a screeching halt and, not coincidentally, precipitate a global economic depression by making us default or by causing us to tax our citizens so severely that we cannot spend money on goods and services?
Admittedly, as I said before, that’s quite cynical, but it’s also the reality of the situation. Everybody has signed on to the same suicide pact, and the first country to drink the Kool-Aid will kill the rest. So, why would we not assume that others will continue to subsidize us?
Sure, it’s arrogance. Sure, it’s because we got there first and shut the door. But it’s the reality of the world we live in.
Scylla, my mortgage and credit card debt don’t matter as long as I can service my payments, right? I mean, who cares if I ever pay down the debt, as long as my coverage ratio is good? And all that money that goes to paying interest is “good” and “productive.”
Economics 1: in economic good times, the government should be building a surplus and eliminating debt, so that in bad times the government can use fiscal spending to help stimulate the economy.
I remember when conservatives stood for fiscal conservatism, and a smaller government. Please 'splain to me how a lack of fiscal conservatism and a growing government (as witnessed by growing debt) is a good fiscally conservative thing? I’m seeing an implied logical leap that conservatives believe government does a better job of investing money than Adam Smith, and that a fiscally responsible government is for the democrats. Is the new conservative motto: Cut taxes and increase spending?
The debt grows without war, too. You’re oversimplifying. I have no problem with the idea that war tends to make the debt grow faster.
I’m taking the other side of that bet, IRL. Don’t think it will take ten years, either.
Not picking on you, though it seems like I am lately, buddy. But I just have a vision of someone in France, or England, or the Ottoman Empire saying just these words about 1912 or so. You’re counting on people to act rationally in a situation where the stress of maintaining the status quo grows fractionally every year. Sooner or later it’ll slip.
No they don’t. Japan is the largest foreign holder of US debt, and I’m fairly certain (but no cite) that domestically held debt is considerably larger then that held by all foreign entities combined.
No. The US would not necessarily be better without debt. In fact, it would be worse in most circumstances.
The problem I think you’re having is that you’re thinking debt works the same for the government as it does for a household, which it does, superficially. From a macroecenomic standpoint, the similarities break down. The key difference is that the government’s debt is an instrument of fiscal policy through which it is able to influence the money supply, control inflation and bolster the currency.
Arguably the most important thing the US government does is provide a stable currency. Chances are you don’t think about it much because you are used to it being this way that you can’t imagine it otherwise.
You do realize that in one sense the National debt is nothing more than monopoly money, right? The government simply pay off the bonds as they come due by “printing” more dollars. In a real sense currency is simply nothing more than another form of debt with the government simply offering fungibility of value. Long term government bonds at low interest rates can be thought of more as a tax than a debt from a money supply standpoint.
For complex reasons that we don’t need to get into, a certain amount of inflation is necessary (of course somebody is going to ask why, but we’ll see.) Treasury debt is partially taxable to US holders, but all Treasury debt is subject to inflation. In some cases the real after tax return on 4.75% 30 year Treasury may be 0, less than 0, or close to it. In any case the cost of the carrying such debt is de minimus. For the sake of argument let’s do a quick calculation: 3.1% is a historic rate of inflation, and we’ll assume a Federal tax bracket of 28% (foreign holders don’t pay this, and we need another calculation for them.) That gives a .32% carrying cost of a current 30 year treasury.
Given an average inflation rate of 3.1% a $10,000 30 year bond will mature with a present value of about $4,000. That is it will be worth 4k in today’s dollars. Carrying cost in real terms will be (guestimate) about $600 (guesstimate is founded on real cost minus inflation, scribbled quickly.
In this example the Federal government receives $10,000 in present value when issuing a 30 year Treasury at 4.75% to a U.S. Holder in a 28 tax bracket. Assuming a constant 3.1% inflation rate the government only pays back about $4,600 over the life of the bond.
You’re speaking in absolutes. It’s not as simple as you say for lots and lots of reasons. You make no mention of the relative relationship of the two, dependant upon which such action may or may not be appropriate. You make no mention of the incentives inherent in such a change versus an alternative, nor of any other effects.
Actually, the opposite is true. In a perfectly managed economy taxes would be nothing more than an instrument of fiscal policy. The government can theoretically extract all the money it needs without taxes.
This isn’t a political thing, it’s an economic thing. Paying off the national debt isn’t necessarily desirable.
All kinds of possibilities. They could just roll it over. It’s only $4,000 in today’s dollars in the example I gave. Or, maybe they put out more money and ease rates down, or any of a dozen other things depending upon circumstances. It’s not necessarily a problem.
This is kind of a backwards question. Interest rates are to a large extent the consequences of fiscal policy not vice-versa.
Can you define “poorly” in a fashion more accurate than “it increased.” That’s not necessarily poorly.
Scylla: Short term, maybe, especially now that gold producer dehedging is more or less finished. But no way you win over a long time horizon, which is why I figure ten years will show the real story. The supply of dollar assets held in central bank reserves is too large of an overhang by now not to cause a problem.
Gold needed the Washington agreement in 1999 to stabilize it, the pound needed an agreement among the members of the Commonwealth to sell it only slowly to prevent an unstoppable downward spiral back in 1968. The dollar is no different than either of these two once mighty bastions of the currency markets. It’s as subject to the law of supply and demand as they are. While shorter term private money may surge into the dollar from time to time, over the long term it’s taken government buying to keep it propped up. Heavy government buying in the face of a long-term decline in value is an unmistakeable sign of an asset that the private market doesn’t like and will not purchase.
OTOH, gold by now makes up a much smaller portion of government reserves than it once did, limiting the overhang, and private interest in it keeps going up as new ways of investing in it conveniently come to the market. It exhibits strong if wildly fluctuating private interest in the face of what by now qualifies as a long-term uptrend in the price; it’s now more than double where it was in 2000. In the meantime, governments continue to sell it under the Washington agreement framework. This is the exact opposite profile of the dollar.
Personally, I’ll trust the judgment of the private market.
In many cases, yes. It doesn’t matter. In some other cases it does. You are not like a government. You will stop working, retire and die. You are on the losing side of inflationary forces, the government is, too a large extent, not.
In actuality, the analogy doesn’t hold comparing your debt to the governments. They don’t work the same.
I didn’t say that. Please don’t put words in my mouth. I wouldn’t say that.
Good and bad in what way? Can you be more specific. If by “good” you mean stage 1 of the economic cycle, than generally speaking, no.
We are talking about a very complex series of interractions that make up an economy and it’s rarely “good” or “bad.” If you wish me make a meaningful statement on this you are going to have to more specific than “good” or “bad.”
It’s not a conservative or a liberal thing, here. What I’m saying is largely agreed upon in theory by monetarists regardless of their politics. Where we stand in a given economy, the desired endpoints, and the levers used to get to these, and how we measure is where things break down into political factions.
A growing debt doesn’t mean a growing government, though it can and often does. But, I’ll certainly agree that this government isn’t fiscally conservative.
Since Adam Smith is dead that’ hardly a daunting bogey you’ve presented. I’m not talking as a conservative here. I’m trying to reveal the underlying nature of the role of currency within an economy, and from their outline the role of debt both from a macroeconomic standpoint and as a tool of fiscal policy.
You misunderstood me (probably because I wasn’t clear) When I said I was taking the other side of the bet, I meant not the side you were offering. Which is still confusing. Sorry.
Anyway. I think gold is going up, too.
So it would seem. At the same time, it is in huge demand as can be demonstrated by the incredibly low long term Treasury rates and inverted yield curve.
Because I largely agree with you, I think the long term debt the government has in no problemo. Let’s say three years from now inflation doubles, the dollar drops and interest rates shoot up. By the time the thiry year matures they’ll be paying it back with the present value of a gumball.
Being at the cusp of a bubble in bond prices. Government issuance should be through the roof. It is, but this which would make it a smart move if it wasn’t largely a consequence of happenstance.
Me too. Sorry about the confusion. I largely agree with what you said.
Sure, I can imagine those countries saying that in 1912. I can also imagine the looks on their faces in 1930. Nobody wants to see that happen again.