Do we really NEED to be concerned about the debt?

Do we really NEED to be concerned about the debt?

In short, yes. However, there are many aspects that one needs to look at and in the short-term, maybe not.

The total outstanding debt of the United States federal government stands at just around  16 trillion dollars (that’s 16,000,000,000,000.00) according to the US debt clock . That seems like a lot, and in fact, IT IS. The current debt level exceeds our GDP of 15.09 trillion dollars (according to the World Bank), making the total debt-to-GDP ratio (debt/gdp) 106%. 

How does this stack up? Well, good news, we are not alone- and in fact many countries are in much graver positions. Countries such as the U.K., Belgium, Switzerland, Germany, Japan, Sweden, France, Ireland, and Italy… for a complete list check out wikipedia’s page on external debt

But the question is, do we need to be concerned about the debt? 
My answer is three part. 

First: In short, yes. We cannot forget about the debt, spend recklessly, and hope for things to be a dandy. As the deficit continues, our debt increases. It’s simple. At a certain point, countries will stop buying treasury bills (t-bills) and the treasury will be forced to raise interest rates to a level that will force it to borrow more just to cover interest. 

I would also like to note, the current level of debt given our interest rates are completely, 100% sustainable. The problem we have is with unfunded liabilities such as social security, that will inflate the debt multiple times over. 

Second: In the short run, no. Treasury rates, the yield the government pays for its debt, are 0.70% for a 5-year bond, 0.35% for a 3-year and 2.97% for a 30-year. Compare 10-year bond rates to countries who are in real trouble, Spain (5.69%) and Italy (4.92%), the United States rate (1.79%) is tremendously low. 

What we have here is investment 101: If you can borrow at 0.70% per year and can put that money into an activity that makes more than the yield + inflation, you have just made a profit. In fact, this is largely how banks operate.

What the United States should be talking about is increased stimulus centered around encouraging business growth, investment in infrastructure, and expanding R&D. Since we cannot trust the government to do anything that generates us a sound ROI (return on investment), this stimulus could come in the form of expanded SBA (small business) loans, research grants, and educational grants. Anything that the United States thinks will lead to a ROI greater than the yield on their loans. 

So in the short-run, people should be chanting borrow baby borrow! Expanding the economy reduces our debt-to-GDP ratio and the returns will eventually mitigate any cost of stimulus, making our country even more desirable to invest in. And so the world turns.

But it isn’t so simple as you will find out.

Third: In the long-run we should continue worrying about the debt, eventually either the government needs to bring receipts up through raising tax revenues and reduce spending through cuts or improving efficiency. Now here is a nifty accounting trick, if the government continues spending at current levels (nominal), and doesn’t raise taxes, the debt problem vanishes. 

How so? Well, as the economy heats up and we experience growth, tax revenues automatically rise, stabilizers kick as people become gainfully employed and stop relying on welface services, as the economy grows people make more money and therefore pay more taxes. With all of this, the deficit shrinks, turns into a surplus, and gradually the debt diminishes. The effect is seen even faster as the debt-to-GDP ratio falls quickly as they are inversely related.

Great!… But wait. The problem. How do we get government to stop expanding, or not touch tax rates? Here is the dilemma, once programs are funded, they get vested interests and they never shut down. Once you cut taxes for temporary purposes, the people are upset when you let them “expire” (bush-era tax cuts). This problem becomes incredibly evident when we recap our second answer.

Remember, that in the short-run we can invest and spend our way to an optimal growth path (in the long run reducing our deficit/debt problems.) The immediate result is more money in the economy and growth, coupled with a higher deficit and more debt. The idea is when the economy heats up, the government puts on “the brakes” and cuts these counter-cyclical spending measures. As we just explored, they usually don’t… and BAM Debt-problems.   

Please know, the federal reserve does NOT print money.

Finally: I will write more about this shortly, but one should also keep in mind that the United States is in a unique position currently, being the world reserve currency. We own the dollar, we have a federal reserve that right now is thinking about shoving money into the economy (quantitative easing). The overwhelming majority of our debt is held in dollars, and we own the dollars “machine”, through inflation we could tremendously reduce the burden of debt (of course, with its own fallouts). 

Blog’s twitter: Ideafart
Author’s twitter: DanielSethMcKay


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