The U.S. national debt, which now is something like 10 trillion dollars? Counting future entitlement liabilities such as social security payments in the coming years, there is a debt of 56 trillion. The attitude seen in articles about this debt is of course not exactly hopeful.
My question is, what exactly happens with this debt? What are the consequences? How is it repayed – or will it just be defaulted on? What would happen then? And if repayed, who will actually be repaying it? It’s hard to imagine some people in 2070 taxing themselves to pay off the ‘bridge to nowhere’ of 2005, or what-not.
Perhaps, but it does happen. Here is an article in the New York Times about some nineteenth century bonds only now coming to maturity, “Some municipal bonds issued in 1868 to build a road to a long-vanished racetrack are only now coming to maturity; some others in the same offering won’t until 2147.” The article describes some of these bonds as having sold for $35 originally and now paying $1,000 at maturity after having paid 7% interest annually all this time.
Just to be clear: $35 as an original investment in 1868, at 7%/yr would be worth something closer to $450,000 (not $1,000) today had not the interest been paid out regularly through the years. Einstein’s alleged comment about compound interest and all that.
Let us hope for the sake of our collective debt we can keep interest rates low.
Let’s be clear. There is a fundamental difference between the debt, which includes currently outstanding bonds, and future entitlements, such as my SS payments 20 years from now.
The former are real legal debts that must be repaid. If not paid, the creditor has legal recourse.
The latter are politician’s promises (ie current law) that can be modified without the would-be benificiary (ie me) having the right to sue. I can vote da bums out, but that’s about it.
In both cases the numbers represent claims on future tax dollars and it IS valid to consider the size of both of them together to be an unrealistic burden on those future taxpayers, such that something has to give.
But they way in which those two things can change, and the repercussions of those changes, are night and day.
Fundamentally, there are 3 ways the problem can resolve. The real outcome over the next 50 years will doubtless be an unattractive mix of all 3.
Inflate the currency so the debt is the same number, but a small value.
Grow the economy so the debt is a small percentage of the economy.
Renege on the parts you can renege on, predomininantly the entitlements.
In all of these, rule one for problem solving applies: When in a hole, stop digging. That means stop deficit spending period, and also begin indexing any entitlement to something well less than inflation, while driving the retirement age slowly upwards. Meanwhile, do everything appropriate to foster real growth, like largely open borders, sensible regulation, growth-oriented tax policy, etc.
But, as we teeter on the edge of a deep recession / depression casued by lack of confidence, that recipe would be precisely what Herbert Hoover would have recommended. IOW, we need those things every hyear for the next 30 to survive economically 40 years from now, but they will kill us if done this year or next.
Some days I want to to President. Other days, not so much. Today is a not so much day.
And I remember that Great Britain back in the 1800s issued bonds that had no maturity date at all. They would just keep paying interest until the Gov’t bought them back.
As for the US debt-good question. I suspect it will keep growing until some future calamity occurs and the debt becomes a) unsupportable and b) a relatively minor problem. Then the Gov’t will literally buy it all back with cheap dollars and start over with the new US credit or whatever replaces the dollar. Or something like that. No one is going to pay off the debt in any real sense.
To put things in perspective, the US’s GDP has been so strong, that even with all of the rampant run-up in debt, it’s still the second lowest debt as a percentage of GDP in the G7 (Canada 62.3%, France 64.4%, Germany 62.2%, Italy 103.7%, Japan 170.4% and the UK 47.2%) at 60.8%. I suspect, but don’t have any numbers to back it up, that all of the other G7 economies have social benefit commitments equal to or greater than the United States (as a percentage of GDP).
That’s not to say that this isn’t a crisis for the US; as one of the central pillars of the global economy, there’s a lot more at risk if its economy crashes. Even if American policy-makers take only an ego-centric perspective, the fallout from other economic devastation will exacerbate the domestic situation.
I imagine people and companies (the lenders of the money) will show up and try to confiscate government property…but more importantly, nowbody would be willing to lend the us money anymore, causing the government to have little to no capabilities of influencing the economy (or much else).
Consider the payment of social benefits or government salaries, this could only been done if the collected taxes (not expected future taxes) would be enough to cover this amount. Not paying or introducing ‘new’ money - which leads to inflation, and thus a decrease in the value of these salaries - will lead to social unrest and will quickly lead to an untenable situation (I would expect). I don’t think that a state without credit can survive.
I default would be a very bad thing and would likely cause a great depression, but people/countries/etc. will still lend us money (not a lot and probably not through securities or bonds). IMF will be there. World Bank will be around in some fashion. The shake out will be long and will be calamitous. I wouldn’t be surprised if a war would start, or a domino of economic collapse. Some other country would be the next economic super power (I’ll guess Australia). World economic wealth will contract greatly, starting off Great Depression II. Oh, and I’m guessing hyperinflation will result, with a good dose of stagflation. Think late 1970’s, but ten times worse.
Some amount of national debt is actually a GOOD thing. Treasury securities are the definition of a risk-free investment, and are used to some extent in almost all investment portfolios. Some companies will take a week-long cash surplus and invest in a three-day Treasury bond. Money-market accounts are heavily invested in Treasury securities. Without some amount of national debt, banks, insurance companies and retirement funds would have to completely rethink how they do business. The government would also lose one of its tools for managing the cash supply (and thus, economic growth and inflation).
If the government defaults on its debt, it would make our current economic problems look tiny. After all, this whole economic crisis is the result of a tiny percentage of mortgages that were securitized and sold as low-risk bonds. Even if the government defaulted only on debt owned by foreigners, there’s too much interconnection to survive it.
In real life, you’d simply see a period of rising taxes, inflation and interest rates as the government made choices mandated by a high debt. I think Argentina is a good example.