A Very Nice Description Of The Government Debt Bomb

Full of simple facts that I wish our Politicians understood or our voters understood enough to pick different politicians… 21 minutes to “get it” about Government Real Debt and why we can’t possibly tax enough to cover it (even before any stupidity like the Green Slime New Deal).

To paraphrase it as bullet points:

1) We owe way more than $20 Trillion, closer to $150 Trillion.
2) Agency and other hidden debt makes that even higher. Call it $165 T.
3) Social Security is not owed to “ourselves” it is owed to retirees.
4) The government can’t go bankrupt, but it can bankrupt the currency.
5) Raising tax rates does not raise tax revenue. It’s stuck at 17% of GDP.
6) If you account for transfers TO people as well as taxes, only the rich pay net.
7) The government could sell all it’s assets and not put a dent in the debt.
8) The government can service the debt but only if 100% of revenue is used.
9) We’re running out of places to borrow more (by the $Trillions…)
10) They present a proposed solution that might work. Cut costs. Hope for growth.

What it presents is how we could, in fact, avoid an implosion. They don’t include “just inflate it away”. The total solution space comes down to 3 things:

1) Grow GDP. This creates more revenue and lets you pay off some debt, or at a minimum take on less. Trump is doing this largely through eliminating regulations, cutting tax rates (remember revenue will be a near constant percentage anyway), and forcing abusive trading partners to clean up their act while also dumping stupid abusive trade “treaties”.

2) Inflate the currency (AFTER you remove inflation escalators…). This lets you pay back the debt in nominal terms while just blowing it off in real terms. This is the favored method across all time, BTW, as paper currency becomes worthless and then a new currency is floated. The $US today is about a nickle in terms of the $US I used in about 1965. They do talk about this as a “tax on savings” but do not point out most of the government debt is bonds, i.e. savings. So essentially you tax the debt…

3) Reduce expenditures. This can be done in an orderly way, by cutting the salaries Government will pay, reducing benefits, buying less stuff, etc. Or it can be done in a disorderly way by collapse of the economy. They propose an across the board 10% cut in government departments. I’d advocate for just eliminating some departments (most departments) wholesale. Just look back at the “legacy” of each President and chop away. Carter? Knock off the Dept. of Education. It’s a State responsibility anyway. Obama? Get us OUT of the Federal Health Care business. Nixon? Dump the EPA (or at a minimum, cut it back to about 5% of present size / duties). You get the idea. Add that to a 5% PER YEAR overall cut in other departments and you are making good progress. Don’t do it, and you don’t fix it.

Beyond those, I’m not seeing much… Take in more, spend less, repudiate the debt in the most acceptable manner; kind of covers the options.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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14 Responses to A Very Nice Description Of The Government Debt Bomb

  1. rhoda klapp says:

    I’ve never understood just why the feds own so much land, especially in the west. I can’t recall (and I am a Brit so I don’t know for sure) that the constitution makes any provision for the federal govt to own land in the states beyond what may be necessary for the military and such. They could have a policy of selling it. Of course the feds real asset is the right to tax the population.

  2. Graeme No.3 says:

    C. Northcote Parkinson in 1959 wrote The Law and the Profits in which he pointed out that increasing taxes led to massive tax evasion and avoidance (not the same thing) and the inevitable increase in regulations and public servants to ‘administer’ them. Meanwhile it was more cost effective to work at reducing the tax paid than increasing the business.
    Cutting the top tax break doesn’t reduce the amount of tax paid despite Green objections. (USA residents see Ronald Reagan – a successful President) and readers elsewhere will know of dynamic economies with low taxes and stagnant ones with high taxes.
    There is a further option available in the USA of taxing “charitable foundations” that apparently believe that the Left side of politics is needy.

  3. H.R. says:

    E.M.: “Dump the EPA (or at a minimum, cut it back to about 5% of present size / duties).”

    Yup. Most, if not all States have their own EPA. Let the States take care of pollution.

    It’s always been true; the lower the level at which societal problems are handled, the more effective and less costly are the solutions. Many things that have a Federal bureaucracy involved could be taken care of on a County or Township or Village level.

    That said, I’m a little mixed on the Department of Transportation. I think we need it, albeit in a much smaller package. Yes, my State pays in more than we get so we can go drive through North Dakota or New Mexico, but I’m willing to pay for that.

    Anyone over the age of about 60 should remember the mishmash of highways that wandered here and there, largely based on getting farm products to market and connecting cities and towns to distribute goods. It used to be that the railroads were the main distribution system, but now we have the Interstate system which has been a major leap in distribution speed and efficiency. We have also been smart enough to blend the old with the new and use rail/container schemes that take advantage of the strengths of both rail and trucking.

    I would like some Federal coordination of transportation, but of course there’s the typical administrative bloat and the inevitable bribery and cronyism to get the highways to go through or to a particular place. Maybe we need a DoT consisting of 3 people with a US map, a sharpie, and a straight edge to draw lines of transportation that will do the most good for the nation and let the States work out the details. And, minimal Federal money involved. Keep the corruption at the lowest levels so the taxpayer can slash the tires of the scoundrels and run them out of town.

    Anyhow, Americans have stupidly allowed too much power to be centralized in the Federal government, and that’s the root of the problem. The same can be said of the State level. IMHO, the bulk of power and decision-making should be at the County level where citizens can keep a closer eye on the crooks they elected.

  4. Nancy & John Hultquist says:

    Rhoda,
    Note the subtitle of this book by Timothy Egan:
    “The Big Burn: Teddy Roosevelt and the Fire that Saved America”
    https://www.goodreads.com/book/show/40961561-the-big-burn

    Much of the book is about the fire and the people that fought it, or were just in the way. Much is American history and politics.
    The US acquired land in various ways as it crossed the continent. Some was disposed of via incentives {Land Grants} to RRs to build track, and some was given to settlers {Homestead Act, 1862}.
    Much of what was left was wanted by timber and mining interests. The summary at ‘goodreads’ hints at the conservation movement with this “Pioneering the notion of conservation, Roosevelt and Pinchot did nothing less than create the idea of public land as our national treasure, owned by and preserved for every citizen. The robber barons fought Roosevelt and Pinchot’s rangers, but the Big Burn saved the forests even as it destroyed them …

  5. serioso says:

    @Graeme No.3 It is worth remembering that under Reagan the US debt increased from roughly one-third of GDP to two-thirds. Prior to Reagan, US debt as a percentage of GDP had consistently declined following WWII.

  6. E.M.Smith says:

    @Serioso:

    You touch on one of my sore points with Republicans. They talk a good game on balanced budget, but they love to spend via debt just as much as the Democrats.

    The rub is that the Republicans cut tax rates to stimulate the economy (that does work, and nicely) but don’t touch spending much or at all. Thus a larger deficit than the Democrats, who raise tax rates and also continue spending like crazy.

    A pox on both their houses.

    The one good thing Reagan did was get interest rates way down and suppress inflation (even though that was a bit painful). I made a bundle off of some strips then. Bought when interest rates were about 15% (down from 17%) and let them ride as a ladder of 5, 10, and 15 year maturities. Made something like $40,000 off of $1000 or so. My only regret is I was too timid to sink $5000 into it…

    So of the three choices:

    Neither party actually cuts spending or the size of government. That #3 is essential and nobody does it. (Trump is trying, but I doubt it will work. It certainly won’t stick once he is gone).

    Republicans push growth via regulatory reduction and tax cuts, Democrats push growth via taxing our money away to give it to friends to “invest”. Advantage Republicans, but only partially as some of the Democratic spending programs (until Obama / graft) actually did go to infrastructure builds. So it’s more of a “nice try” but…

    Then EVERYBODY is just fine with ruining the currency. Reagan IIRC redefined the Cost Of Living calculation to slow the COLA adjustments. Clinton did a fairly good job of keeping debt growth under control, but set the stage for the Housing Collapse with the anti-redlining laws forcing banks to loan to anyone with a pulse. In exchange for that the Banks were freed from Glass-Steagall a horrible mistake pushed for by Republicans (but agreed to by the Democrats in a “compromise” made in hell). Another pox on both their houses.

    So generally every country ends up with a ruined currency, a plunder of wealth grafted out to Friends Of Government and big banks, and a debt / obligation burden that can only be repudiated, never honored. Until now the USA has avoided that fate, but it looks like we’re over the edge now. (Total receipts about $3.3 Trillion, Debt Service $3.8 T and no way to make up the difference as we’re on the wrong side of the Laffer Curve so higher tax rates give less revenue).

    But “we’ll see”. Trump may yet get expenditures under control. It’s a certainty that $19 T plus boondoggles like the “Medicare Promised To All / Delivered To None” and the “Green Graft New Dodgy Deal” will never be funded. We are already broke. If ever enacted, they will go to the debt market that is not going to pony up $19 T to a deadbeat. So “nice pipe dream” but otherwise DOA.

    Oh Well.

    At least we can agree on something. The Republicans spend just as wildly as the Democrats, just on different stuff.

  7. philjourdan says:

    The rub is that the Republicans cut tax rates to stimulate the economy (that does work, and nicely) but don’t touch spending much or at all. Thus a larger deficit than the Democrats, who raise tax rates and also continue spending like crazy.

    More often than not, Democrats promise to cut taxes or spending, then do the opposite. Why we have good old Biden promising to cut spending and then raising it. And good old Clinton promising to cut taxes, then raising them.

  8. Steve C says:

    It’s rather worrying how all our countries seem to be threatened by these debt bombs. Couldn’t we all just repay the lot with our supplies of the good fresh air all our currencies seem to be backed by?

  9. cdquarles says:

    Forgotten about Reagan: 1. Congress post Watergate changed the budget rules and 2. the House was still Democrat, even though some of the time the Senate wasn’t, if I am remembering correctly.
    The House sets the spending, with some ‘negotiation’.

    @ Steve C, well that’s not totally true. US Dollar is still gold (doesn’t circulate) and oil (helps that we are still one of the largest oil and gas producers, if not *the* largest at this time. IMF Special drawing rights are part gold, part currency. As much as GEBs in the US don’t like our Constitution, that document puts first dibs on taxes to pay/service the Federal government’s debts, second on courts, Congress and the Presidency, third on defense, then the rest. On the other hand, governments *like* inflation. They benefit from it first and for a long time; just not forever.

  10. E.M.Smith says:

    @Steve C:

    That’s the plan. Just Very Very Slowly…. the “30 year bonds” from about 1980 were “repaid” with about 10 ¢ real on the $ Nominal…

  11. Larry Ledwick says:

    As long as the majority in the world see the US dollar as the “least bad” currency and most likely to be stable and readily exchangeable for goods, the music will continue to play while we all prance around the chairs.

    The music stops when some event happens that breaks that confidence in the US as being the least likely to default of all the worlds currencies, and also being widely accepted in most countries as a default legal tender for most any product as a semi-official reserve currency.

    It is all a big confidence game, like the resale ability of cars until a huge safety recall is released causes the resale value of that brand to plummet the same applies to currencies.

    The bad news is if that confidence breaks during your life time, it wipes out all your savings and investments, if not, your savings account acts like a slowly leaking rain barrel. As long as you keep making deposits it appears to grow but the real buying power of your “savings” constantly declines at the inflation rate +/- changes in the real cost of commodities you need to buy.

    If food gets much cheaper to produce due to new farming methods and that is your key expense your wealth increases in direct proportion to the drop in cost of production and sale of those commodities you actually buy.

    In the late 1970’s early 1980’s when energy costs went through the roof, it really burned people and businesses that were highly dependant. Farmers who needed to fill 100 gallon propane tanks to heat their homes found their heating costs jumped up to actually exceed their mortgage costs, where people who did not pay much in the way of energy (ie renters in fixed cost leases with heat and electricity provided,) and little or no fuel purchases due to walk to work locations hardly noticed the change outside of its impact on food prices.

    Every single fiat currency has eventually imploded the only question is will it take 10 years or 150 years. There are so many incentives for the currency to be inflated that eventually the rate goes ballistic in exponential inflation and the only way out is to repudiate the currency, discount all debts and start over.

    It is sort of like letting your winnings ride on a roulette table, you are guaranteed to eventually lose it all, (the house/government always wins) but will in some cases have a long run of winnings before you get cleaned out. If you are lucky, the winning streak will run longer than your life time, and someone else will lose it all.

  12. E.M.Smith says:

    It is also worth while to note that, absent a social collapse, real hard assets retain value even in a currency collapse. Real Estate (provided deeds respected and society is not in full on collapse), metals, wood & woods, gems (though subject to technical erosion as synthetics keep improving), “collectibles”, etc.

    So my cars, guns, tools, house, metal coins are my real long term “store of value”. My “cash deposits” not so much… (At this point, about 1/20 th of the total, maybe less).

    In times of currency distress, “real stuff” rockets up in price…

  13. Larry Ledwick says:

    Meanwhile China screws the pooch on handling the protests and triggers bank runs.

  14. Larry Ledwick says:

    Interesting thought, I wonder if President Trump realizes there is no way he could actually get a 10% across the board budget cut (real cut) and he is using tariffs to raise the money so he basically shifts the tax burden on to the countries that have been taking advantage of the US laws for so long?

    In the early days of our country before the income tax, excise tax revenues, fees and tariffs etc. was how the Federal government was funded.

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