U.S debt to rise to $19.6 trillion by 2015
Tue Jun 8, 2010 6:19pm EDT
WASHINGTON June 8 (Reuters) - The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress.
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The report that was sent to lawmakers Friday night with no fanfare said the ratio of debt to the gross domestic product would rise to 102 percent by 2015 from 93 percent this year.
"The president's economic experts say a 1 percent increase in GDP can create almost 1 million jobs, and that 1 percent is what experts think we are losing because of the debt's massive drag on our economy," said Republican Representative Dave Camp, who publicized the report.
He was referring to recent testimony by University of Maryland Professor Carmen Reinhart to the bipartisan fiscal commission, which was created by President Barack Obama to recommend ways to reduce the deficit, which said debt topping 90 percent of GDP could slow economic growth.
The U.S. debt has grown rapidly with the economic downturn and government spending for the Wall Street bailout, the wars in Afghanistan and Iraq and the economic stimulus. The rising debt is contributing to voter unrest ahead of the November congressional elections in which Republicans hope to regain control of Congress.
The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds. The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year.
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Indeed bad news sells papers and that is what Reuters is all about. If you read to the end of the article you will find a hint of the real truth.
For example, the “debt” created by the stimulus bill passed last year is included in the “estimate”, however the high number also counts the money theoretically owed by Congress to the Highway Trust Fund. Since a fairly large portion of the stimulus bill was to fund highway and bridge construction and repairs that were supposed to be funded by the Highway Trust Fund it is merely the shuffling of debt from the Fund to the stimulus bill. Still, in the higher estimates because of the way the bill was written, the debt is now in two places. More, the larger debt number includes the commitment by Congress to the TARP program. Factually, the TARP is pretty much fully paid for with collateral and or repayments and interest. It looks like it will be a net gain for the federal government, however in the larger $19.6 trillion one underlying assumption is that all of the money committed to TARP is gone. Back when we had the Resolution Trust Corporation, all the funding for that was counted as debt too. When RTC shut down and returned more money to the Treasury than was appropriated by Congress that debt vanished and was replaced with a gain. That was part of why we ran a surplus in the late 1990s.
That “90%” number is an opinion. In fact during our history we have seen employment and GDP surge as our debt shot past 100% of GDP. Many economists, and perhaps a majority of them disagree with the assumption that there is some magic number for the assumed debt beyond which we will have difficulties. Some nations in Europe are experiencing excellent economic growth with a debt to GDP ratio that is double that of Greece. Greece, on the other hand, will have to find some way to write down its debt or it is going to experience a social disaster. The difference is the ability to grow the economy. Our debt service load is about 10% of federal revenues. That equates to about 2.5% of GDP. There is the critical number.
The real danger is that we decide to cut back on federal spending right now. If that were to happen we would immediately see a surge in unemployment and a wave of companies closing their doors. Those events would lead to a very significant decline in tax revenues and an equally impressive increase in government expenditures as the banks failing across the country were taken over by the FDIC, pension funds were taken over and replenished by the PBGC, and a host of people started drawing Social Security and became eligible for Medicaid. At the same time we would see the housing market grow even worse as the people who no longer had jobs were unable to make the house payments on their houses which are now worth a lot less than they owe. Since a lot of those houses are VA and FHA insured, that too would increase the federal expenditures.
If the federal government then reduced other expenditures even further because of the tsunami of bank, pension, and other liabilities it had to cover, that would lead to an even greater wave of unemployment, bank failures, and foreclosures. Taken together it would then create a deflationary spiral. When stability was reached we would probably have around 40% unemployment (or more) and be in a prolonged depression that would make the 1930s look tame. Worse, we would effectively plunge the rest of the world into the same pit.
We would emerge, but we would do so only as we expended the federal debt to levels that make today’s numbers look like chump change. Why would we do that? Because we would find ourselves facing a world war. History has been repeating that pattern for about a thousand years. Each depression was created by just the event and reaction set that I described above. In each case the world emerged from the depression by borrowing to the hilt to finance a major war. The likely opponent would be Russia and the war would be mostly fought over Europe and the Middle East. If that sounds like WWII, it is because it is. The propensity to fight a worldwide war has not gone away. All that is needed is a sufficiently severe economic crisis that people give up hope, as the Germans did in the 1930s. There is commonly a dictator in the wings who truly believes that he can solve the problems of his people by conquering a few nations around him. Putin is frothing at the bit for just such an opportunity.
There is another consistency in history and that is that the number of people killed in the world war that brings us back to prosperity has been rising exponentially. Actually there were a large number of good papers and books published on this subject following WWII. The next war was predicted to be capable of causing such a huge devastation and mortality rate that civilization would collapse. That is why the United Nations was formed.
Jorge Santayana famously wrote, “Those who do not remember history are condemned to repeat it.”
In short the subject, “We need to shoot John Maynard Keynes.” is appropriate to the content and assumptions. John Maynard Keynes is dead and has been for a very long time. Shooting his bones seems to me to be an absurdity. I have read some of his work and factually it beats the heck out of many of the alternatives. He focused on a theory of how to break the cycle of depression and war that has plagued humanity for over a thousand years. Ronald Regan adopted Keynes’ theory in 1982 and headed off a depression. He increased the deficit massively and expanded the number of people directly and indirectly employed by the federal government by a factor of about three. In doing so he set us up for a huge economic boom instead of the depression that was looming in front of him. His prime adviser was Paul Volker. Dr. Volker is once again the prime adviser to the President and is once again giving the same advice. It worked before and appears to be working again.
As I wrote you earlier, our public federal debt is about 58% of GDP. Based on the growth we have seen this year so far in GDP even if the debt rises to $9 trillion the percentage of GDP will only move up to about 60%. That will put us very nearly at the bottom of developed nations in term of percentage of GDP as national public debt.
As a closing note, I have had several people approach me about investing who are eligible to be drawing Social Security but are not. They have accepted employment in various positions relating to the upcoming expansion of I-35. That expansion through Central Texas came from the stimulus bill. More, the proposals I have seen for reducing the federal debt have a powerful consensus to them. All of them demand a massive reduction in defense spending. After all that is currently the biggest part of the budget not mandated by law.
In the specifics of the proposals there is another consistency. They advocate moving all Army installations nearer to the coasts and cutting the size of the Army in half. Fort Hood would then become a place that units came to train once a year rather than the largest military installation in the world. Do you want that?
There are some hard choices that must be made, and we will need to slow down the growth of our debt and perhaps even stop it for a while, but we absolutely need to reject the hype and absurd numbers and proposals that are being thrown about. We need to dig deep and think carefully about the ripple effect of any move we make. The logic behind the “bailout” of General Motors was simple. Allowing GM to go into regular bankruptcy would have cost the federal government about four times what they loaned to GM to keep it alive. The failure of banks, companies, and large scale unemployment and house foreclosures combined with the loss of tax revenue would have been astonishing. GM is now back to profitability and the federal government is probably going to turn a profit on the “bailout” rather than face a combination of outflows and absence of taxes that would cost it about a trillion dollars!