Tag Archives: deficits

Harsh truths about the Federal debt, showing how Left & Right lie to us

Summary: Each presidential campaign season the federal debt becomes an issue, with the debate consisting largely of bogus soundbites. Each election sees that the federal debt has not only grown, but has grown faster than the US economy — with little to show for it (e.g., our public infrastructure rots). This will not end well for us.

The big picture: the ratio of federal debt to GDP

Gross Federal Debt to GDP

First insight: massive debts can be paid down with steady growth and moderate inflation (especially easy with long-maturity fixed rate debt), proving that conservatives forecast of certain debt doom are false. Second insight: this trend will cause problems if not stopped (left-wing economists will deny this until the crisis begins).

Focus on events since 1980.
See how the government’s debt to GDP ratio rose under Reagan & Obama.
See America’s steady bipartisan leadership!

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Stratfor: Italy’s Shaky Financial Future

Summary: The debt supercycle is a global phenomenon, with Italy one of the most afflicted nations. High levels of debt plus slow growth makes a toxic combination. Here Stratfor examines the numbers and their implications.

“If something cannot go on forever, it will stop.”
— Herbert Stein’s Law (US economist, 1916-1999).

Stratfor

Italy’s Shaky Financial Future

Stratfor, 18 December 2015

Summary

As with many aspects of modern banking, the word “bankrupt” has its roots in Renaissance Italy. The original banks were Florentine merchants who would sit in the open street behind benches (bancas in Italian) upon which their money would be stacked. If trading went against them and their capital was reduced to nothing, their bench would be said to be broken, or banca rotta. It is fitting then that, 500 years later, the European country with the most worrying debt problem is Italy.

Analysis

This may be surprising to some, since Italy does not top the tables as worst offender by any of the usual metrics. It does not have the highest levels of debt to gross domestic product in Europe: That dubious honor belongs to Greece, whose debt to GDP ratio rests more than 40 points higher than Italy’s 132%. Nor are Italian banks afflicted with the highest quantities of nonperforming loans as a percentage of GDP. Cyprus wins that contest easily; at a staggering 137%, it relegates Ireland (23%) to a distant second place and far exceeds Italy at 17%.

But though Italy is not the worst offender, its size still makes it the most potentially problematic. Italy has the third largest economy in the eurozone after Germany and France, and it is 1.5 times bigger than fourth-ranked Spain. So even without having the highest ratios, in actual numbers Italy has the biggest debt mountain: 2.3 trillion euros (roughly $2.4 trillion) of government debt compared with Greece’s 392 billion euros. Thus the three recent Greek bailouts, though giant in relation to the Greek economy, were just a sliver of the European economy as a whole, and in their wake the eurozone carried on more or less unaffected. The same would not be true of Italy. A bailout would be a massive undertaking that would greatly stretch the union’s finances.

Of course, this is not an altogether new phenomenon. Italy’s debt to GDP ratio has been over 100% since the early 1990s, and GDP growth since then has been fairly stagnant. But the fact that Italy’s debt has been large for a long time does not mean it is not dangerous. It was the threat of Italy defaulting that drove much of the market panic during the sovereign debt crisis in 2011 and 2012, when weakness in Europe’s banks had prompted bailouts from their national governments, calling into question the solvency of the governments themselves.

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Cacophony about Social Security shows our real political dysfunctionality

Summary: Here we have a wonderful example of the cacophony that takes the place of political debate in the New America, in this case about Social Security. It’s one of the simpler issues facing us: a moderately predictable and fully controllable stream of benefits vs. government revenue — mostly income taxes; some graduated (“income taxes”) and some flat (FICA tax on wage income). Our difficulty understanding it provides a dark omen of our ability to handle our larger problems.  This post complements yesterday’s post about our difficulty seeing how the jobs picture has changed.

Cacophony, from Necromancer

Cacophony, from Necromancer

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Contents

  1. Cacophony on ABC about SS
  2. Senator Johnson was quite right
  3. Paul Krugman explains
  4. Simple Facts about SS
  5. For More Information

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(1)  Typical cacophony on ABC about Social Security

Excerpt from transcript of This Week With George Stephanopoulos, ABC, 10 March 2013

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PAUL KRUGMAN: Is it a condition of any Republican support that you have to go for really terrible policies? Because raising the Medicare age is a terrible policy. It raises medical costs, it does very little to improve the budget. It introduces a lot of hardship. Means testing in Medicare is a better policy. I don’t particularly like it, but it’s a better policy. There are other things you can do, other ways you can cut. Even I don’t like the business about changing the price index for Social Security, but that’s not as bad …  (CROSSTALK)

RON JOHNSON (R-WI): To say that the Republicans haven’t done anything is just false. The House has actually passed budgets. With bipartisan proposals to try and save Medicare. The Senate hasn’t passed a budget in over 4 years. Listen, unless we do something, these programs are going broke. It drives me nuts. When I hear people say that Social Security is solvent to the year 2035, it’s not.  (CROSSTALK) In the next 20 years we’ll be $5.1 trillion more in debt than …  (CROSSTALK)

STEPHANOPOULOS: Let me put a version to George Will’s question to you then. If the president went along with either means testing of Medicare beneficiaries, more far reaching, he’s done a little bit already, and also adjusting consumer pricing index for Social Security recipients, would you as a Senator be open to more revenues?

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Another way to look at the national debt. More comforting, less scary.

Summary:   Today we have one example from the flow of comforting words about the government’s deficits. While pleasant reading, written by a knowledgeable expert, it does not withstand close scrutiny.

Government expert at work!

Government expert at work, keeping us warm.

One of the great oddities of history is why nations adopt policies that were so obviously doomed to failure, or even disaster. It’s a long list, from 17th C economist John Law’s managing the debt of France with the Mississippi Company (latter known as the Mississippi Bubble), to Japan declaring war on almost everybody.  For good reason Barbara Tuchman named her greatest history book The March of Folly.

There are two constant elements of these stories.  First, warnings from experts. Second, assurances that these obviously crazy policies this time would end well.

So it is with the US government debt. We have all heard the warnings. As the debt grows, so do the volume of those saying not to worry. The economists of the Keynesian mainstream provide one form of comfort (fix the deficit later).  The economists of the Modern Monetary Theory school provide another form (debts don’t matter, until they cause inflation or a currency collapse).  A third group provides a vague form of comfort. An example of this is “Another way to look at the national debt” by Zachary Karabell (President of River Twice Research), special to the Washington Post, 8 February 2013 — Opening:

Welcome to the next chapter of the endless debt debate. The release of a Congressional Budget Office report on the next 10 years of the U.S. economy ends a brief lull in Washington. As we return once again to our regularly scheduled program of “Crisis and Impasse,” let’s take a moment to consider the following heretical idea: We have no debt problem.

We have spent years demonizing debt, and now have an entire political movement dedicated to the proposition that government debt will destroy America as we know it unless something is done now!

Stand by for a debunking of fears about the debt! I feel better already. The next line starts the analysis:

Yet debt is simply a new form of currency that is issued, bought, priced and sold like any other currency …

This is false. First, government debt (eg, 30 year Treasury bonds) are not currency in any meaningful sense. They vary in price (currency is the standard of measurement for asset prices, like bonds).  More important, although the government can convert debt into currency by printing money (ie, monetization) the process is not automatic.  It is a political decision to inflate away the value of the nation’s loans.

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Let’s watch a great nation’s wealth burn away

Summary:   Part of our year-end national festivities should be looking at the deterioration of the Federal government’s finances. Especially since the resolution of the fiscal cliff follies shows that neither party in fact cares.  There are few deficit fighters, mostly arsonists.  As for spending our money, it’s burnt for political profit and private gain. Here we review the damage, put it in context, and consider an alternative.

20121130-debt-man

Contents

  1. Deficit = our love of spending + reluctance to pay
  2. The alternative
  3. More details: the debt, and our liabilities
  4. Comparing us to our peers
  5. For More Information

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(1)  Deficit = our love of spending + reluctance to pay

One measure of the Federal deficit is the increase in the government’s public debt (ie, net debt — that not held by the social security trust funds).  In 2012 the debt grew $1.1 trillion to $11.6 trillion (that’s our gross debt).

That’s a large number, but tells us little.  More useful is to compare it to our national income: the deficit is aprox 7.2% of 2012’s GDP, the debt is 73% of GDP.  Also important is the rate of growth: it grew by 11% in 2012.

See the numbers for yourself: the US Treasury website shows the Federal debt for everyday from 1993.

What did we get in return? Prosperity, one of the strongest economies among our peers. But like last winter’s snow, only an ephemeral gain. The failed hypersonic cruise missile, the insanely expensive F-22 and F-35 fighters, the massive domestic surveillance apparatus reading everybody’s email, the legions of domestic securities agencies busy entrapping dumb Arab-Americans, the vast flow of public funds into the maws of large corporations — and the wars. All these things comprise Federal spending beyond the baseline, funded by borrowing.

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