Sunday, May 13, 2012

On Runaway Spending and the US Debt

Perhaps Elmo should be put in charge of the national debt. He seems to have a better grasp of what we and our children owe as individuals, and seems more concerned about it.            (Chart:

 This is the fifth  post in a series in which I examine the potential for a United States Financial Collapse.

     I don't much like writing about finance and discussing what serious shape our beloved country is in.  However, to understand why I think we are in really serious shape here, I have to at least examine some of the reasons I think the US painted itself into a corner. I am nor an economist, and I don't even play one, on television or on the radio. I don't even like economics when things are going well. When I was in college, and I took an economics course, I wrote a detailed paper on why I thought economics was a pseudo science. Economics attempts to explain and predict what is largely human behavior interspersed with some actual scientific principles. Like sociology, it attempts to explain what the masses do. Oddly, I got an "A" on the paper, not because the professor agreed with me, but because I must have argued my perspective well.  I don't feel the need to dazzle anyone with my knowledge of financial principles.  It has been my experience in life that any complex system can be brought down to an understandable model through the use of analogy.  I still believe that a governments finances can still be compared to the finances of a very large household, except that our government has something I don't have, a guaranteed income ensured with taxes.........yes, money from you and I, and everything we do.
            Looking at federal government revenue since 1902, the income of the federal government has risen sharply through taxes. In 1902 the total tax revenue of the federal government was only 7% of the GDP (gross domestic product) and now comprises 35% of the GDP.  Income is apparently not the problem.   The Federal debt was set up initially by Alexander Hamilton, an experienced banker.  A federal debt allows the government to do things it needs to do, immediately and worry about funding and paying back this loan, later.  This is indeed useful especially when funding wars.  Until recently, the federal debt only rose during wars, and then was gradually paid off afterward.  During the Great Depression, President Roosevelt decided to spend his way out of it.  Federal and State governments borrowed until the total US dept totalled 70% of the GDP.   After the Depression, it slowly came down.  Again in World War II, the GDP rose again, this time to 122% of the GDP by 1946.  Then, with the baby boomer generation, a steady process of paying down our national debt began.  In recent history, President Reagan brought the national debt to 50% of the GDP in order to win the Cold War. President Bush continued, in order to win the "War on Terror".  President Obama is increasing our debt in order to revive the economy, but also it appears to make fundamental changes in America which may not be good ones, and all of this costs money.  As of March, 2012, we have total debts as a nation which total about 100% of our GDP.  Obamacare and other changes made during the Obama administration put us on a course in which the federal debt is slated to sharply rise in the years to come, in large part due to social programs.
            The risk from a nation's high debtload, such as this, is that just like a family, we make payments to service the debt which are interest payments. They do not pay down the debt itself, just service the interest, like a massive set of credit cards.  Simply put, the US sent for a Discover card from China, and asked for other credit cards from many other nations, and has just been making the minimum interest payments, and not attacking the principle.  Most economists believe that when interest payments to service a nations debt, come to 12% of their GDP, that this is the tipping point for a government, and that they risk default on their debt.

   This is the National Debt Clock:

      Because we owe so much, and are in a fragile financial situation as a nation, our treasury bills can only pay .14%, the lowest treasury rate in 70 years.  What happens when our nation can no longer afford to continue to service our debt, and our "card doesn't work" and we are "overdrawn as a nation ?"  Will this cause a financial collapse ?  As Americans make less money, and fewer of us work, more of us age, less cash is being sent to our Federal Government.  With each moment that passes, our National Debt rises. There ARE things that can be done to begin to address our debt, but they are not being done.  We are heading for a cliff in a runaway coal fired train going very fast, and the engineers on the train aren't looking for the break, they are still stoking the coal !     The runaway spending with a blank check has got to stop.

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