This is NOT as "doomy and gloomy" as some might think at first glance.
It is nothing more than an explanation of how the real world of U.S. government borrowing works.
The national debt is NOT like a fixed term mortgage for a household. With a mortgage, it is paid off after 20 or 30 years. Yes it can be refinanced but I'm trying to keep this simple so that even I can understand it lol.
The national debt consists of a mix of Treasury bills , notes and bonds with terms as short as 30 days all the way to 30 year bonds.
The national debt is much more like a line of credit for a business in an overall sense. There is nothing wrong with a business having a line of credit so long as the size of the overall debt remains in sensible proportion to business income and asset values. With the national debt it is measured against annual GDP. Just as a business can renew or roll over a line of credit, so does the Federal government by redeeming old debt as it comes due and issuing new debt. So long as the business keeps paying interest on time and its bank doesn't get nervous, all is well and can stay well unless and until things change. As profits go up and asset values increase, the business can even increase its credit limit. Optimally, they can roll it over from time to time paying off a higher interest LOC with one at a lower rate. During W.W.II our national debt exceeded GDP and the country did not collapse.
Why will it never be paid back ? Because it is too big. It is currently $16 trillion and counting. If we stopped borrowing further tomorrow and taxed ourselves enough so that revenues exceeded outlays for a couple of decades, then it could conceivably be brought down to zero. That is neither necessary nor desirable.It will also NEVER happen except under some sort of dictatorship i.e. so long as we have a Congress and a POTUS. What is necessary imho is to lower the trajectory so that the rate of future borrowing declines in relative terms. Spending restraint coupled with economic growth of at least 3.5% would enable us to pay the interest on existing debt and to maintain our credit rating so that we will be able to keep borrowing in the future at afforable rates. That is the best that anybody can expect or hope for.
If we ran surpluses a la Clinton's second term we could reduce the gross sum owed. Reduce it, not eliminate it unless we have a major oil strike plus have another major gold rush. Who wants to count on THAT happening ?
Why are some of us so worried ? Because for one thing the very nature of our national borrowing has changed. Starting under Bush The Dumber we borrowed NOT to "invest" in things like roads, airports, research or even things like aircraft carriers that last a long time; like 50 years. We borrowed and have kept borrowing to keep up a level of transfer payments that any actuary will tell you is unaffordable. Things like Social Security, Medicare, Medicaid , SNAP ( Food Stamps ) etc. etc. That kind of borrowing accelerated under Obama and, so far, there is no sign of anything other than an ever increasing rate of borrowing well into the future.
We've been OK, so far, because there has only been one slight downgrade of our credit rating by just one major credit rating agency. That has kept interest rates relatively low, e.g. the 10 Year Note is still paying less than 2 %. BUT every tenth of a point on the yield on that and all other new debt issued adds billions and billions to the cost of borrowing. The more we borrow as a government, the less that businesses can borrow. Just as a lender can only lend so much to any one business and what they do lend reduces the money available to lend to other businesses.What you hope for is that you can issue new debt at the same or lower interest rates as the old debt paid. Who thinks that is going to happen ?
We certainly have soft money "doves" at the Fed keeping rates artificially low but for how much longer ? There are rumblings, even from a couple of the "doves" that rates must go up albeit in the mid to long range future. Then what ?
There is another kicker - the Fed has been buying Federal government debt. Not a new thing for them to do but not to the extent that THIS Fed has been doing it. What are they using to buy it with ? Money printed for the occasion by the Fed. For how much longer ? Who knows .
If anybody out there seriously thinks ( like Krugie has written in a number of columns, God bless him for providing the comic relief ) that the national debt will ever be "paid back", please explain how.
"What is the point of this latest ' ideological ' rant Eric ? What is the practical value to the average Dollar Den reader ? " Very simple - plan to borrow to buy a house or car any time in your forseeable future ? Thinking of taking a student loan ? Care about the overall health of the economy and things like inflation ? Plan on having children ? Want them to have the same or better opportunities than you did ? Then this stuff matters. And there is nothing "ideological" about it. It's just the plain truth. Anyone with some serious cause or basis for a more optimistic explanation and/or forecast is free to contribute same.
"Come on Eric, the U.S. is not Greece ." Not yet. Unlike Greece we can print our own money and our debt to GDP ratio and overall credit rating are much , much better than theirs. For now.



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