Is the Ballooning US Debt a Threat to Our Future Economic Situation?

[WhoWee]

Rhody, this guy seems to be saying the value of the dollar could decline significantly. But he did not say how much. Would a 50% devaluation bring enough manufacturing back from China that we would have a balanced foreign trade? Or would it take a 90% devaluation? I do not know how to calculate this number. Anybody have any references on how much devaluation will be needed to balance trade and make the deficit spending small enough (in real value) that nobody outside the US cares?

At 90% everybody on a pension or social security will have to go back to work.

He's selling gold - correct?

 

[PhilKravitz]

He's selling gold - correct?

He sells advice. He does recommend invests denominated in anything but dollars.

 

[WhoWee]

He sells advice. He does recommend invests denominated in anything but dollars.

Do you have personal knowledge of his position in gold futures?

 

[PhilKravitz]

Do you have personal knowledge of his position in gold futures?

No.

Soros also wants a controlled devaluation of the dollar. I expect if he does not get it he will enjoy the profits he makes selling the dollar short at the right time.

I remember a radio report from about 20 years ago in which a IMF or World Bank employee talked about the need for US wage rate to come in line with global wage rates.

 

[rhody]

WhoWee, Phil,

I am no expert in this matter, I will back and watch this thread develop for awhile, hopefully those posting will back their findings with facts, I don't like reading a bunch of fluff, no offense intended.

I am hoping those knowledgeable will weigh in here, those with advanced degree in economics, for instance.

Rhody...

 

[mheslep]

Is there a tread for US deficit as opposed to debt?

The numbers for the federal 2010 deficit from http://en.wikipedia.org/wiki/2010_United_States_federal_budget are:

total income 2381 billion
total out 3552 billion (including -800 billion of accounting provisions)
deficit 1171 billion

The total deficit for the two years 2009 and 2010 was almost $3100 billion. Items like TARP repayments from the banks complicate the accounting decision placing dollars; the White-house accounting places $1841 billion in 2009, and $1258 billion 2010.

So the federal government sans social security borrows 40.7 cents of every dollar it spends.

My question is, who are we borrowing from?

Still a majority from ourselves, but increasingly from foreign lenders such as the Chinese.

Do deficits matter? If so, why?

Because of, among other factors, interest payment on the debt by deficits:

The above is the business as usual plan. Once the interest alone on the debt reaches ~12% of GDP, here around ~2040, the rule of thumb is the lenders no longer lend, spiking up interest rates and the country defaults ala Greece, game over. At the moment the interest on the national debt is around ~1% of GDP, or ~$200B, in part because of the very low rates, and CBO forecasts it will hit 3% of GDP by 2020 or $500B in todays dollars, which is expensive but far from Greece like.

Big caveat: the above is based on the current interest rate of ~1.5% and a CBO estimate of a return to a ~5% historical average interest rate slowly over the next couple years. However, the Federal Reserve has increased the money supply by lending unprecedented sums out to the banks in hopes of providing monetary stimulus to the economy. The risk of that large money supply is eventual inflation, and the Fed's inflation prevention mechanism is to re-raise interest rates, a pattern the Fed has repeated successfully several times since the 80s. This time, however, if inflation gets ahead of the Fed with this huge amount of money, so that rates of maybe 7-8% are required to stem inflation, the curve for net interest above will rise dramatically faster. So the worst case, still unlikely, scenario the Fed may have a dilemma ahead: force the country into default or allow inflation to impoverish everyone.

 

[mugaliens]

A while back I made a post about our debt. I remain disgusted. It's so totally unnecessary. Why it continues is somewhat unbelievable.

 

[Al68]

A while back I made a post about our debt. I remain disgusted. It's so totally unnecessary. Why it continues is somewhat unbelievable.

This is why I pointed out in another thread that congress absolutely should not raise the debt ceiling without attaching legislation to solve the spending problem.

And yes, it's a spending problem. Even flat out refusing to raise the debt ceiling would merely limit federal government spending to about 17% of GDP. That's still a far too big and powerful government, but it would be a start.

Prediction: Claims of "radical extremism" referring to the idea that 17% of GDP is more than enough for the federal government. Anyone care to make a bet?

 

[mugaliens]

This is why I pointed out in another thread that congress absolutely should not raise the debt ceiling without attaching legislation to solve the spending problem.

Yes. Yet so many folks keep screaming for their share of the pie. I don't know what the solution is, but perhaps a 10% solution would be difficult, but over time, effective.

 

[mheslep]

A while back I made a post about our debt. I remain disgusted. It's so totally unnecessary. Why it continues is somewhat unbelievable.

This is why I pointed out in another thread that congress absolutely should not raise the debt ceiling without attaching legislation to solve the spending problem.

And yes, it's a spending problem. Even flat out refusing to raise the debt ceiling would merely limit federal government spending to about 17% of GDP. That's still a far too big and powerful government, but it would be a start.

Prediction: Claims of "radical extremism" referring to the idea that 17% of GDP is more than enough for the federal government. Anyone care to make a bet?

Agreed.

I see in the latest polling 71% of Americans oppose raising the debt ceiling. Should be an interesting vote. Wouldn't be the worst thing to have the ceiling increase rejected. Better than raising it another ten times.
http://www.newsmax.com/US/debt-ceiling-poll-increase/2011/01/12/id/382654

 

[PhilKravitz]

A while back I made a post about our debt. I remain disgusted. It's so totally unnecessary. Why it continues is somewhat unbelievable.

With social security off budget we are left with two main spending items in the federal budget
1) the military
2) health care

If the federal government did not borrow, borrow, borrow they would need to cut both of these items by at least 40%. It appears the military-industrial complex that president Eisenhower talked about has lots of power and lots of campaign money for politicians. If you de-funded the medical-pharm idustry by 40% you would have a lot of unhappy rich doctors and the government does nothing better than serve the interests of the rich. To quote Supreme Court Chief Justice Oliver Wendel Holmes "The law serves the convenience of the dominate group in society".

There is a "reason" it is politics not good society planning. Not the greatest good for the greatest number. It is the greatest good for the rich, now, short term.

 

[Evo]

If you de-funded the medical-pharm idustry by 40% you would have a lot of unhappy rich doctors and the government does nothing better than serve the interests of the rich.

The money doesn't go to doctors. Do you have any idea why funding for pharmaceutical companies is needed? How do you come to 40% as a reasonable figure? What could be cut without being detrimental to society? Please post the research that backs up your statement that a 40% reduction in federal funds is realistic.

 

[mheslep]

With social security off budget we are left ...

Social Security is not off my budget proposal. Raise the retirement age. Means test. Best of all, privatize it.

 

[PhilKravitz]

The money doesn't go to doctors. Do you have any idea why funding for pharmaceutical companies is needed? How do you come to 40% as a reasonable figure? What could be cut without being detrimental to society? Please post the research that backs up your statement that a 40% reduction in federal funds is realistic.

See post #33 for the 40% number. The source is wikipedia for the numbers as mentioned in #33.

I do not believe society should subsides pharmaceutical companies.

40% is not realistic it is just the number that makes the math work (i.e. balances the budget). It will never be cut by 40% it is not politically doable.

As to what would be good for society it depends on what kind of society one wants. I feel it would be good for society to cut the military by 80%. But that is my desire shared by few.

As to medical cuts it is more the structure of medical care that needs to change to lower cost. That is allow many tiers of competence. A nurse can sew up a cut no need for a doctor. This is simple common sense and lowers the cost from by the ratio of the doctor yearly income versus the nurses yearly income (a number bigger than 2). This is a budget thread the cost of medical care would make a good thread but not here.

 

[Evo]

See post #33 for the 40% number. The source is wikipedia for the numbers as mentioned in #33.

I do not believe society should subsides pharmaceutical companies.

40% is not realistic it is just the number that makes the math work (i.e. balances the budget). It will never be cut by 40% it is not politically doable.

Don't just pull things out of the air. What's 40% of the US budget for pharmaceutical companies?

As to what would be good for society it depends on what kind of society one wants. I feel it would be good for society to cut the military by 80%. But that is my desire shared by few.

And an 80% cut would result in what? Explain. What would the remaining 20% be?

As to medical cuts it is more the structure of medical care that needs to change to lower cost. That is allow many tiers of competence. A nurse can sew up a cut no need for a doctor. This is simple common sense and lowers the cost from by the ratio of the doctor yearly income versus the nurses yearly income (a number bigger than 2). This is a budget thread the cost of medical care would make a good thread but not here.

You said federal funds to pharmaceutical companies, now you've switched to private medical practices. How does the income of a doctor versus a nurse affect US debt levels?

I see all of these numbers being thrown around but I'm not seeing anything posted to back them up. Just needing a reality check.

 

[WhoWee]

As to what would be good for society it depends on what kind of society one wants. I feel it would be good for society to cut the military by 80%. But that is my desire shared by few.

Other than limiting national defense to a "nuclear only" response to ALL situations - how would you accomplish this cut?

 

[PhilKravitz]

I said there are two big items in the federal budget
1) military
2) health

Under health are many items hospitals, life long care of the cronically (sic) mentally ill, doctor visit for medicaid, medicare, prescription drugs. The pharm industry is just one part no they do not get all the health sending money of the federal government just some. But if we used only generic drugs they would get far less money and we society would spend far less money.

With social security off budget because it has its own revenue stream and 2500 billion in the bank (T bills). The only two major spending items are military and health spending.

 

[PhilKravitz]

How does the income of a doctor versus a nurse affect US debt levels?

If we spend less on medical care we will on net have less debt. Less money out => net money is more positive. Less deficit spending less total debt. If we can substitute cheap labor for expensive labor in appropriate situation we save money we are less poor more rich.

 

[WhoWee]

With social security off budget because it has its own revenue stream and 2500 billion in the bank (T bills).

Do you have a link?

 

[PhilKravitz]

Do you have a link?

Yes for the money in the bank see http://en.wikipedia.org/wiki/Social_Security_Trust_Fund

"It is instructive to note that the $2.5 Trillion Social Security Trust Fund has value, not as a tangible economic asset, but because it is a claim on behalf of beneficiaries on the goods and services produced by the working population. This claim will be enforced by the United States Government although the precise monetary mechanism of enforcement is yet to be determined. In order to repay the Trust Fund, the United States government has three options, which may all be pursued to varying degrees."

So 2.5T of the 13.5(?)T federal debt is ode to social security, people worked, they had their money taken from them and they expect to get it back, seems only fair.

for the tax that is the payroll tax. It was basically keeping even this year with ss payouts until they cut the payroll tax. Now it is short. One might think they are trying to kill social security by cutting is tax revenues.

 

[WhoWee]

Yes for the money in the bank see http://en.wikipedia.org/wiki/Social_Security_Trust_Fund

"It is instructive to note that the $2.5 Trillion Social Security Trust Fund has value, not as a tangible economic asset, but because it is a claim on behalf of beneficiaries on the goods and services produced by the working population. This claim will be enforced by the United States Government although the precise monetary mechanism of enforcement is yet to be determined. In order to repay the Trust Fund, the United States government has three options, which may all be pursued to varying degrees."

So 2.5T of the 13.5(?)T federal debt is owned to social security, people worked, they had their money taken from them and they expect to get it back, seems only fair.

for the tax that is the payroll tax. It was basically keeping even this year with ss payouts until they cut the payroll tax. Now it is short. One might think they are trying to kill social security by cutting is tax revenues.

Your post specifies the "Trust Fund" is empty. Also, the long term projections are that Social Security and Medicare distributions will increase.
http://www.gao.gov/cghome/townhall092905/img18.html

 

[PhilKravitz]

Your post specifies the "Trust Fund" is empty. Also, the long term projections are that Social Security and Medicare distributions will increase.
http://www.gao.gov/cghome/townhall092905/img18.html

The link says social security owns 2.5T of treasury bills. It is free to sell them on the open market to make ends meet. If you are says the federal government can not make good on its obligations well...

 

[WhoWee]

The link says social security owns 2.5T of treasury bills. It is free to sell them on the open market to make ends meet. If you are says the federal government can not make good on its obligations well...

Don't take my word for it:

http://www.ssa.gov/oact/progdata/fundFAQ.html#n7


http://www.washingtonpost.com/wp-dyn/content/article/2011/01/06/AR2011010603244.html
"Treasury Secretary Timothy F. Geithner warned lawmakers Thursday that the national debt could hit the legal limit on borrowing as soon as March 31, and he urged quick action to avoid a government default that would spark "catastrophic economic consequences that would last for decades." "

 

[Jimmy Snyder]

If we can substitute cheap labor for expensive labor in appropriate situation we save money we are less poor more rich.

I easily understand how I can become richer by spending less money. But I can't see how a country can do it. You make it seem that if everyone worked for a dollar an hour we'd all be rich.

 

[PhilKravitz]

Don't take my word for it:

http://www.ssa.gov/oact/progdata/fundFAQ.html#n7

from your link

"As stated above, money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future."

Are you saying the federal government is bankrupt and will not make good on is commitments? It has a AAA credit rating.

 

[WhoWee]

from your link

"As stated above, money flowing into the trust funds is invested in U. S. Government securities. Because the government spends this borrowed cash, some people see the current increase in the trust fund assets as an accumulation of securities that the government will be unable to make good on in the future."

Are you saying the federal government is bankrupt and will not make good on is commitments? It has a AAA credit rating.

Again, don't take my word for it:

http://www.cnsnews.com/news/article/moody-s-sp-warn-us-debt-will-harm-credit#
"Credit rating agencies Moody’s and Standard and Poor’s (S&P) have warned that record levels of federal debt would eventually damage the government’s AAA credit rating, a move that would make further borrowing more difficult.

Moody’s, in its most recent update of borrowing conditions for AAA-rated sovereign debt, said that if the United States does not take action to reform entitlements and control deficit spending, it could lose its coveted AAA rating, which denotes that U.S. debt is the safest type of investment."

 

[PhilKravitz]

I easily understand how I can become richer by spending less money. But I can't see how a country can do it. You make it seem that if everyone worked for a dollar an hour we'd all be rich.

You have a good and interesting point.

 

[Al68]

I easily understand how I can become richer by spending less money. But I can't see how a country can do it.

I think the point was for government, not the country, to spend less.

 

[rhody]

Headlines from Reuter's picked up and re-transcribed this morning:

http://www.reuters.com/article/idUSTRE7096FE20110111"

The U.S. Federal Reserve's journey to the outer limits of monetary policy is raising concerns about how hard it will be to withdraw trillions of dollars in stimulus from the banking system when the time is right.

My question in my original post #34 above has not been addressed:

This could all start by a group of foreign governments deciding to not accept dollars at the prevailing rates, imposing discounted rates. We would have to deal with the fallout, and it will not bode well for the average American, people on fixed incomes, etc... etc...

What events could trigger this ?

Thanks...

Rhody...

 

[PhilKravitz]

What events could trigger this ?

In a sane and well managed world the central bankers (of Japan, China, Russia, France) and world bankers (IMF, World Bank) would get together and design a slow and gradual decline that would make thing less painful for all involved. They in effect would create a new Brenton Woods. In fact the name Bancor is from Brenton Woods. It was proposed by John Keynes. The more things change the more they stay the same! His proposal included a penalty tax on your Bancors if you ran a trade surplus! The funds to be used to help the backward countries that run a trade deficit. Picture that tax China to pay to develop the US LOL LOL LOL. Of course Kenyes never had experience with a nation that had out of control military spending that was bankrupting the nation. I guess that would be tax China to fund the US military what the heck?

 

[Evo]

If we spend less on medical care we will on net have less debt. Less money out => net money is more positive. Less deficit spending less total debt. If we can substitute cheap labor for expensive labor in appropriate situation we save money we are less poor more rich.

Sorry, but again, you're doing nothing but making unsupported random claims. A doctor's income doesn't really matter when it comes to managing costs of overall healthcare. Please stop posting unsupported opinions. Do some research before posting.

 

[PhilKravitz]

making unsupported random claims. A doctor's income doesn't really matter when it comes to managing costs of overall healthcare. Please stop posting unsupported opinions. Do some research before posting.

What does matter in managing the overall cost of healthcare?

 

[WhoWee]

In a sane and well managed world the central bankers (of Japan, China, Russia, France) and world bankers (IMF, World Bank) would get together and design a slow and gradual decline that would make thing less painful for all involved. They in effect would create a new Brenton Woods. In fact the name Bancor is from Brenton Woods. It was proposed by John Keynes. The more things change the more they stay the same! His proposal included a penalty tax on your Bancors if you ran a trade surplus! The funds to be used to help the backward countries that run a trade deficit. Picture that tax China to pay to develop the US LOL LOL LOL. Of course Kenyes never had experience with a nation that had out of control military spending that was bankrupting the nation. I guess that would be tax China to fund the US military what the heck?

I think you'll find this site pro-Keynes (full disclosure - I am not pro-Keynes). Please read the entire works - including his analysis of Liquidationism. Excerpted are a few of his thoughts regarding short term policy.
http://www.j-bradford-delong.net/Economists/keynes.html

""Burke ever held, and held rightly, that it can seldom be right… sacrifice a present benefit for a doubtful advantage in the future…. It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear…. We can never know enough to make the chance worth taking. There is this further consideration that is often in need of emphasis: it is not sufficient that the state of affairs which we seek to promote should be better than the state of affairs which preceded it; it must be sufficiently better to make up for the evils of the transition…"

"In our present confusion of aims is there enough clear-sighted public spirit left to preserve the balanced and complicated organization by which we live? Communism is discredited by events; socialism, in its old-fashioned interpretation, no longer interests the world; capitalism has lost its self-confidence. Unless men are united by a common aim or moved by objective principles, each one’s hand will be against the rest and the unregulated pursuit of individual advantage may soon destroy the whole. There has been no common purpose lately between nations or between classes, except for war…"


Germany's Hyperinflation:

"If I felt confident I could control the budgetary position, I should not doubt my capacity in Germany’s present situation to control the exchange. As soon as the supply of currency is limited, I do not see how it is possible that the balance of trade should be adverse. I believe that the point of view which looks first to the balance of trade, and seeks for an improvement in that first of all, or alternatively to the support of a foreign loan, is deeply erroneous and has not penetrated to the true process of causation…""

 

[PhilKravitz]

I think you'll find this site pro-Keynes (full disclosure - I am not pro-Keynes).

Whowee I am not pro-Kenyes either. But I do like his idea of balanced trade that he brought to Brenton Woods and that was totally ignored.

 

[rhody]

Phil,

I think your meant to say, http://en.wikipedia.org/wiki/Bretton_Woods_system" , versus Brenton Woods... I have been there, the hotel that is and toured where the world financial leaders met, quite impressive, they have the room blocked off sort of as a shrine.

Rhody...