America’s public debt

Down to the wire

Jul 18th 2011, 16:04 by The Economist online

Lawmakers in America are running out of time to raise the debt limit

WHILE Congressmen trade over concessions and budget cuts, the clock continues to tick on America’s debt. Barack Obama has set a deadline of July 22nd for Congress to agree on a deal. On August 2nd, the $14.294 trillion threshold at which by law America can no longer borrow money, will be reached. If that happens, America will default on its debt, triggering “a huge financial calamity” according to Ben Bernanke, the Federal Reserve chairman. On June 30th, there remained just $25m left in the kitty. Congress has acted a total of 91 times since June 1940 to either raise, extend or alter the definition of the debt limit—36 times under Democratic presidents. And they have done so with some 300 days to spare on average.  

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the right scale should be in logarit

 

Note that the 1945 national debt was paid by progressive taxation of up to 92% income tax rate on the wealthiest Americans under the Eisenhower and Kennedy administrations.

The current rise in national debt shows up when progressive taxation is weakened and largely eliminated in the period from 1980 to 2011.

Since a large part of today’s debt is due to two unfunded wars, it is worth considering paying off this debt in the same way that the WWII debt was paid—by progressive taxation. Evidently, progressive taxation did not curtail the prosperity of the 1950’s.

 

The entire planet, including emerging markets, is currently on an obscene borrowing and lending spree. Taking money from tomorrow so they can seemingly outperform rivals today. It is crazy and it will end in tears. Global debt is almost out of control.

 

Since those of us that are mere mortals have difficulty actually understanding just how massive America’s $14.343 trillion debt is, here’s an article that puts the number into terms that are more understandable:

This chart makes it clear for all to see that America’s government has allowed itself a level of debt/GDP similar to that America had when it was last engaged in a World War, which war was a threat to its very existence.

Perhaps Washington correctly recognizes that America is truly enmeshed in an incestuous private interest war zone running from Manhattan to Washington DC, and with complex other tenacles emanating from there. In this war, America’s subversive and greed-driven banking industry combine with other greed-imbued and power-seeking special interest groups into a writhing and poisonous snake-ball, enveloping Washington’s elected and appointed members of government.

A very curious situation.

Civilization has advanced to the point that its major wars are not hot wars, but instead played out like video games, with the point score denominated in money terms among the warring nations, and many of the “nations” not being nations at all but rather private companies with agendas which clearly outrank America’s national interests.

Impressive that America’s banks and other self-interest-seekers, could so successfully combine in such a ruinous alliance with its legislatures, the latter dominated by members of that highly privileged, never-had-a-real-job profession called “lawyers”, and thereby cause such chaos as to drive America into taking world-wartime economic measures.

 

Did you even look at the chart before you wrote your comment? The two “unfunded” wars were hardly a bump in the chart. The last time that the public debt (as a percent of GDP) decreased was the result of a Republican Congress.

There is plenty of bipartisan blame to go around, but you all need to quit your tired, incorrect dogma trying to blame this all on Bush, his tax cuts, and the last two wars. After several years of a Democratic Congress passing no budget, the current House is at least trying to impose some financial discipline.

 

I’ll say it again, let it blow.

The Republicans are demanding drastic cuts in investment in infrastructure, and old age benefits — but only for those under age 55. And they want this agreed before they will accept additional borrowing.

Stop the borrowing and cut senior benefits right now, unless they agree to increase taxes to pay for it. This 30 year something for nothing binge by Generation Greed needs to stop.

 

From about 1945 to 2010 the Democrats ended their reign with LESS debt as a percentage of GDP than they began with EVER SINGLE TIME. At the present end of the graph you can also see a point of inflection indicating the same will happen again.

Hmm, the so-called careless spenders have historically been more responsible.

 

Empire is expensive, as Great Britain found out at the end of the 19th Century and America is finding out at the end of the 20th Century.

Keeping an Empire is in the long term unsustainable. There will be a successor. The key is to manage a transition, build partnerships and forge peaceful alliances to the Next.

America is now managing its debt only by the grace of China. The two economies are linked closer than teeth and lips. I would hope these two powers grow closer and more integrated for the sake of the world. Any type of peaceful transition is better than war.

From about 1945 to 2010 the Democrats ended their reign with LESS debt as a percentage of GDP than they began with EVER SINGLE TIME. At the present end of the graph you can also see a point of inflection indicating the same will happen again.

Yes, Jimmy Carter was a great success.

Every president before 1980 had less debt as GDP%. Obama might be lucky enough to get a Republican Congress to save him from himself like Clinton did.

Graph should delete the $ line and add GDP line for Govt spending and Tax Reciepts as percentage of GDP.

$14,293,975,000 is the largest debt in the history of the world.
It is an astounding number that few can comprehend.
Interest payments alone exceeds the annual GDP of all but a handful of countries.

How do you make a fortune today? Have a gold mine(dirty), control an oil field(contend with world’s hotspots) , be a dominant industrial power(hard work) or the easiest of all, service the largest debt in the world.

If America defaults what will financial mathematicians use for their “risk free rate” parameter when they value all kinds of instruments?
 

First it doesn’t matter which president is in power it is congress that has to negotiate and sign off on a budget. To balance the budget with no spending cuts and no spending increases either, all taxes would have to increase 161%, or slightly less than double. To account for the 50% of US taxpayers that don’t effectively pay income taxes, the real taxpayers in this country would have to pay a tax rate which is 3X larger than current. Keep in mind that is just to balance the budget and would not reduce the deficit. Also remember that many “rich” households have two incomes not just one anymore. When the tax rate becomes too onerous you will likely see one of the household incomes quit their job. In my case that would be my wife who is a surgeon. Think about that the next time you need an emergency appendectomy and your new green surgeon has only seen an appendix in his text books. Good luck with that.

The mathematicians will use as basis the other sovereingn debts whose rating is AAA.
However, I think that the idea of a “zero risk” bond should be eliminated.
 

@mike – did you look at the chart before you commented to @qwerty? The amount of public debt clearly went up from $6 trn to almost $12 trn under #43. The debt to GDP ratio increased slightly simply because we were in the middle of housing and consumption bubbles. One cannot cut taxes, wage two wars and spend like a drunken sailor without increasing the overall public debt (which it very obviously did).

Thus, to begin to turn this ship around, there needs to be a grown-up who understands it will take both tax hikes and spending cuts. We didn’t get in this mess purely because of spending or solely because of tax cuts. The children in Congress need to put on their big-kid pants, quit kicking the ball down the road, and act like responsible grown ups and stop posturing for sound bites for 2012

will we need to consider foreign exchange risks?

“I think that the idea of a “zero risk” bond should be eliminated.”

I tend to agree with that. I’ve had problems with that idea since the first day of class in finance 101.

 

Hmm..It looks like the GOP contributed more than their fair share to the national debt. Why do the Republicans make this out to be a problem of Democrats and Obama spending too much when Bush and other Republican Presidents have increased the debt more than the Democrats have? Why do the American voters keep believing the GOP rhetoric that Democrats caused this deficit? It is as if the Republicans set this up – raise the public debt and destroy the economy then blame it on the next elected President who would surely be a Democrat.

The debt ceiling needs to be raised so we can move on. Taxes need to be increased for corporations and people making $250K or more a year, and spending needs to be cut, but we need to start but cutting military spending before social security and medicaid.

 Politicians beholden to him are simpletons who like to make public policies with sound-byte sized ideas.

Less tax is probably stimulative up to a point. But when debt creeps up on you, you need every tool in the shed to deal with it. Cutting spending is one. Raising revenues is another. Closing tax loopholes and not extending temporary tax cuts isn’t raising taxes. Those weren’t meant to be permanent. They were meant to give politicians election boosts. Besides there is soemthing very wrong about people who find spending trillions in Iraq a good thing and cannot find cents to spend on schools or healthcare at home. Where do they get off saying things like “throwing money” at education? And they find it necessary to remind everyone again and again of how patriotic they are. Somethng tells me that they are very insecure about their positions.

 
Jul 18th 2011 8:22 GMT

@Mike The Red – I couldn’t disagree with you more. How do you explain the huge increase in public debt that coincides perfectly with the Iraq and Afghnanistan wars? There is factual evidence that a huge portion of the public debt was caused by Bush’s tax breaks for the wealthy and their recent extension.

The current House is not trying to impose fiscal discipline at all. They are putting on a political show to try to regain the White House and trying to blame the deficit on pensioners, poor children and the disable while refusing to admit that most of the debt was caused by the last two wars and bad policies of the Bush administration.

I would strongly support true responsible fiscal discipline which begins with cutting military spending and eliminating tax breaks and loop holes for corporations and the wealthy. I do not buy the GOP propaganda and hope most Americans will see through it too before the GOP House destroys the US with its bad policies.

Jul 18th 2011 8:22 GMT

The number does not matter. It is the underlying value of the dollar that matters. As a printer of its own currency the USA can print 15 Trillion dollars to pay everyone owed. Of course the dollars will have no value in the world market but everyone can be paid without raising taxes or cutting spending.

See how a little truth (we can pay everyone without…) gets misinterpreted by the lame politicians that keep getting elected. Everyone remember that Congress, not the President, controls the purse, read the Constitution. So, if your elected ol’ boy or ol’ girl congressman runs the country into the dirt, good for you, it is what you voted for.

This is not a financial issue it is a voter

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