Who is Responsible for the US National Debt and How Can it Be Addressed?

[DrClapeyron]

Is it perpetual? I think it will continue to be very large because the US is top dog. How many nations are likely to ask the US for their money back, and what could they possibly do to warrant the US to pay up?

People seem to like our money, so why not share?

 

[Matterwave]

Debt itself is inevitable, and sometimes preferable; however, the levels as they are now are ridiculous. One of the top U.S. expenditures every year (behind defense, and welfare, and stuff like that) is the repayment of interest on debts owed.

Not many are likely to ask for all the money back since they are earning interest on it. Also, I'm not sure if they could even ask for the money back since the contract probably stipulates the time the U.S. has to repay (i.e. 50 year loans or something).

 

[hamster143]

According to

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

the United States are #18 in the world by external debt per capita, behind most of Europe, and #26 by the ratio of external debt to GDP.

There are many different kinds of debt, and sometimes people are careless when they speak about "debt" in general. Often people talk about "U.S. debt" without being specific, and assume that all of it is money owed by the federal government to foreign countries. In reality, yes, the U.S. government owes a lot of people a lot of money, and much of that is owed to residents like you and me. If you have any money in your 401k - chances are, the U.S. government owes money to you. The country as a whole owes a lot of money to foreigners, but much of that is owed by private companies and not by the government. Et cetera, et cetera.

Also, I'm not sure if they could even ask for the money back since the contract probably stipulates the time the U.S. has to repay (i.e. 50 year loans or something).

It is in the form of bonds of varying maturities. Foreigners can't really ask for the money back, but they can try to sell their existing bonds, and that would raise interest rates that we'd have to offer to get any future debt.

 

[Jimmy Snyder]

If you have any money in your 401k - chances are, the U.S. government owes money to you.

If you have gov't debt in your 401k, then convert it to something else. Gov't debt tends to pay lower interest, in part because of a tax benefit. Since your 401k is tax deferred, you don't get the tax benefit, just the low interest.

 

[russ_watters]

Is it perpetual?

Yes.

I think it will continue to be very large because the US is top dog. How many nations are likely to ask the US for their money back, and what could they possibly do to warrant the US to pay up?

Was that intended to be serious? It isn't like the US is declining to pay her debt - no one has to ask. The US rasises money by doing things like selling bonds, which have a set lifespan and payback. The US always pays them back and they are considered among the safest investments around. Think about it - if they didn't get paid back, people would stop buying them!

People seem to like our money, so why not share?

Huh?

 

[russ_watters]

If you have gov't debt in your 401k, then convert it to something else. Gov't debt tends to pay lower interest, in part because of a tax benefit.

Gov't debt pays lower interest because it is guarnateed. Often there is an equation (such as 110-age) used to calculate the appropriate stock/bond ratio (%) in a portfolio. The older you get, the less risk you can handle, so the more bonds you should hold. Here's some discussion on it: http://www.mymoneyblog.com/archives...step-1-deciding-on-the-stocksbonds-ratio.html

Interesting graph on that page, showing the range of returns by the stock market from 1950-2005. Over that time, you can see that if you bought stocks (meaning a diverse mutual fund like an S&P index fund) and held for 5 years, you could have lost 2.4% or gained 28.6%, depending on which years they were. But if you bought and held for 25 years, the range goes to all gains, of 7.9-17.2%.

Unfortunately, we happen to be experiencing the first deviation from that trend since WWII. If you bought stocks near the height of the tech boom, in 1999, you've seen a negative return these past 10 years.

 

[Jimmy Snyder]

Gov't debt pays lower interest because it is guarnateed.

And because the interest they pay is tax advantaged. I didn't say don't own gov't debt, just not in your 401k.

 

[russ_watters]

...And I was saying that a very large fraction of people do own government debt in their 401k's!

 

[Jimmy Snyder]

...And I was saying that a very large fraction of people do own government debt in their 401k's!

Sorry, I missed that part. I was only saying that they shouldn't.

 

[hamster143]

Sorry, I missed that part. I was only saying that they shouldn't.

That is arguable. Higher-interest commercial bonds have higher interest because they have higher risk of default.

And it is also a moot point, because many people hold bonds indirectly. You may think that your money is invested in stocks, but the asset manager of the mutual fund can decide to move any portion of your money into bonds or money market funds (which are, again, really bonds).

 

[Jimmy Snyder]

That is arguable. Higher-interest commercial bonds have higher interest because they have higher risk of default.

Do you deny that US gov't debt has a tax benefit and this is part of the reason that they pay a lower interest rate than corporate bonds? If you buy this debt, do so outside of your 401k.

 

[russ_watters]

I'm actually not sure what tax benefit you are talking about (the whole point of having a 401k as opposed to another type of investment instrument is in the tax benefit!), but either way, every 401k for an older person needs to have a large guaranteed, fixed-income component. It is right to have that in a 401k, not wrong.

 

[Jimmy Snyder]

I'm actually not sure what tax benefit you are talking about (the whole point of having a 401k as opposed to another type of investment instrument is in the tax benefit!), but either way, every 401k for an older person needs to have a large guaranteed, fixed-income component. It is right to have that in a 401k, not wrong.

You don't pay federal income tax on the interest paid by tbonds, tbills, etc. The gov't can sell them at a lower interest rate that way. It's ok to buy bonds for your 401k, just not gov't bonds. It's ok to buy gov't bonds, just not in your 401k.

 

[hamster143]

You don't pay federal income tax on the interest paid by tbonds, tbills, etc. The gov't can sell them at a lower interest rate that way. It's ok to buy bonds for your 401k, just not gov't bonds. It's ok to buy gov't bonds, just not in your 401k.

That's state income tax. And it only applies to private citizens holding treasure bonds directly, not to foreigners or tax-sheltered accounts or corporations or residents of states with no state income tax, such as Texas and Florida. I suspect that effective interest reduction due to this effect is very low.

To give an example, ten-year yields are currently 3.45%, and you can pick up some Microsoft corporate bonds maturing in 2019 (not exempt from anything) with current effective yield to maturity of 3.8%. And some of the 0.35% represents risk that Microsoft might be having financial troubles in 2019, with the potential downside of up to -100%.

 

[Jimmy Snyder]

And some of the 0.35% represents risk that Microsoft might be having financial troubles in 2019, with the potential downside of up to -100%.

I took the liberty of emphasizing the word some.
Sorry, you are right, it's state income tax, not federal that represents the rest of the 0.35%. And it's a double whammy since not only will you get a lower interest rate, you will pay the state tax on the interest when the money comes out.

 

[SW VandeCarr]

According to

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

the United States are #18 in the world by external debt per capita, behind most of Europe, and #26 by the ratio of external debt to GDP.

That World Bank data is from Sept, 2008 according to the footnote. Since then, the US national debt has increased from 8 or 9 trillion $ to over 14 trillion. The US debt to GDP ratio is now about 100%.

 

[russ_watters]

$12.1 B currently, but the point is valid. A lot has changed since Sept of '08, with a drop in tax revenue combined with a vast increase in government spending via the two bailouts. It's a very big problem.

http://www.brillig.com/debt_clock/

 

[Astronuc]

Simpson, Bowles Take Aim At Deficit Cuts
http://www.npr.org/templates/story/story.php?storyId=123848421

A new federal commission will consider raising Americans' retirement age and increasing taxes to attack a record U.S. budget deficit, the co-chairmen of the panel said Thursday.

"The great thing the president has told us [is that] everything's on the table," said Erskine Bowles, President Clinton's former chief of staff. "If we don't do something about it [the deficit], it will gobble this budget up."

Bowles and former Sen. Alan Simpson told NPR's Melissa Block that they will consider cutting beloved entitlement programs — including Medicaid, Medicare and Social Security — and all other measures as they take over the leadership of the National Commission on Fiscal Responsibility and Reform, a bipartisan panel charged with finding ways to lower the deficit.

Simpson, a Republican from Wyoming, had a blunt message for anyone who would stand in the way of the commission's work: "Get onboard, or forget your own grandchildren."

. . . .

Simpson, 78, represented Wyoming in the U.S. Senate from 1979 to 1997. His stellar reputation propelled him into the post of Republican whip, but he is known for being independent and working on a bipartisan level. In recent years, he has taught at the Harvard Kennedy School of Government and served on the bipartisan Iraq Study Group.

Bowles, 64, president of the University of North Carolina system, announced several days ago that he would be leaving. He was appointed by President Clinton to serve as director of the Small Business Administration in 1993. Later, as White House chief of staff, he helped broker a deal with Republican leaders that led to budget surpluses in the late 1990s.

The 18-member deficit panel, called the National Commission on Fiscal Responsibility and Reform, will consist of 12 members of Congress who are selected by the leadership of each party. The other six members will be appointed by Obama, with no more than four from a single party.
. . . .

Alan Simpson is one of my favorite Washington personalities. I would have like to see him as president. Simpson has a wonderful sense of humor.

http://www.pbs.org/newshour/rundown/2010/02/president-obama-creates-national-commission-on-debt-reduction.html

 

[WhoWee]

Raising the retirement age is on the table and yet an expansion of Medicaid is also on the table in another debate.

So basically, working people will have to work longer and non-working people will be able to retire sooner?

 

[calculusrocks]

According to

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

the United States are #18 in the world by external debt per capita, behind most of Europe, and #26 by the ratio of external debt to GDP.

That is sadly out of date. http://www.bloomberg.com/apps/news?pid=20601087&sid=aVDEHvI9WH_Q" has a piece with figures according to the CBO, Congressional Budget Office.

 

[calculusrocks]

From Bloomberg:

The nonpartisan agency said yesterday the deficit will remain above 4 percent of the nation’s gross domestic product for the foreseeable future while the publicly held debt will zoom to $20.3 trillion, amounting to 90 percent of GDP by 2020. By then, interest payments on the debt will have quadrupled to more than $900 billion annually, the report said.

GDP is gross-domestic product. It measures the output of the US. The problem is more than just debt. The problem is spending.

 

[edward]

Perhaps it is more than coincidence that as public debt grows the assets of the big banks grow. The combined assets of the six biggest banks is now up to 63% of GDP.

http://georgewashington2.blogspot.com/2010/03/15-years-ago-combined-assets-of-6.html

 

[edward]

From Bloomberg:

GDP is gross-domestic product. It measures the output of the US. The problem is more than just debt. The problem is spending.

Ironically government spending is added to the GDP. Debt % to GDP wold look really bad if government spending wasn't considered.

 

[calculusrocks]

Ironically government spending is added to the GDP. Debt % to GDP wold look really bad if government spending wasn't considered.

Yes, I agree completely.

 

[mheslep]

Ironically government spending is added to the GDP. Debt % to GDP wold look really bad if government spending wasn't considered.

Hmm not all of it. Only spending where the govt actually buys something - road, fighter jet - is added to GDP. If the govt just cuts you a check (welfare, SS, unemployment) then no it doesn't add to GDP, not unless or until you in turn spend the govt check it.

 

[Astronuc]

Social Security to start cashing Uncle Sam's IOUs
http://news.yahoo.com/s/ap/us_social_security_ious

I wonder if anyone in Washington DC saw this coming.

PARKERSBURG, W.Va. – The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration.

It's time to start cashing them in.

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.
. . .
Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

Social Security's shortfall will not affect current benefits. As long as the IOUs last, benefits will keep flowing. But experts say it is a warning sign that the program's finances are deteriorating. Social Security is projected to drain its trust funds by 2037 unless Congress acts, and there's concern that the looming crisis will lead to reduced benefits.
. . .

Don't forget - the fundamentals of the economy are strong.

 

[CRGreathouse]

I wonder if anyone in Washington DC saw this coming.

Oh, they saw it coming. They just didn't care.

 

[Astronuc]

Oh, they saw it coming.

Perhaps that's giving them too much credit. It presupposes competence.

They just didn't care.

Either way, that appears to be the case.

I'm reminded of comments by Bush and Cheney that 'no one saw this [the crash/recession] coming.' Well, they certainly didn't see it coming, or they were just in denial - like so many others, including most if not all of congress.

 

[WhoWee]

Oh, they saw it coming. They just didn't care.

And their response now is to pretend "health insurance reform" legislation is the answer - in spite of this:

http://www.ncpa.org/pub/ba662

 

[mheslep]

Oh, they saw it coming. They just didn't care.

President Bush spent a great deal of time and effort attempting to fix the Social Security problem.

 

[Nebula815]

President Bush knew there was risk of a real-estate crash, that was one reason he tried to reign in Fannie and Freddie multiple times, but the Congress killed it every attempt; it was one of the things Barack Obama voted against even as a Senator.

As for Social Security, SS was projected to remain solvent far longer, but because of this recession, tax revenues have plummeted, which thus blew a hole into the projections (yet again why it is ludicrous to claim they can project how to pay for this healthcare bill).

Don't forget - the fundamentals of the economy are strong.

They are, but our captain is doing the equivalent of turning the ship towards the storm and then gunning it to full-throttle.

 

[calculusrocks]

President Bush knew there was risk of a real-estate crash, that was one reason he tried to reign in Fannie and Freddie multiple times, but the Democrats killed it every attempt; it was one of the things Barack Obama voted against even as a Senator.

As for Social Security, SS was projected to remain solvent far longer, but because of this recession, tax revenues have plummeted, which thus blew a hole into the projections (yet again why it is ludicrous to claim they can project how to pay for this healthcare bill).
They are, but our captain is doing the equivalent of turning the ship towards the storm and then gunning it to full-throttle.

It was difficult for Bush to make inroads here, because so many from both parties received http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html" , two of the main culprits of the housing collapse

 

[Nebula815]

It was difficult for Bush to make inroads here, because so many from both parties received http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html" , two of the main culprits of the housing collapse

You are correct, it was both parties, I have modified my post.

 

[CRGreathouse]

President Bush spent a great deal of time and effort attempting to fix the Social Security problem.

The President doesn't matter. Congress matters -- it's the one that gets to decide how SS funding is handled.

 

[mheslep]

The President doesn't matter. Congress matters -- it's the one that gets to decide how SS funding is handled.

Well Congress writes the laws, but big ideas matter, especially when they come from the executive.