Thread: What is going to happen when the US Treasury's debt burden becomes unsustainable?

Originally Posted by raymondo

Firstly , it is not $16trillion debt . It is at least $100 trillion when you add the " exemptions" which the rigged accounting system currently allows .
Who is going to trade with you when the rest of the world moves to its own reserve currency?
European trade will fall as they get toilet flushed .
China can forget trade with America and simply switch all its efforts to its own developing economy .
50% of your current receipts are used to paying back interest and debt capital .
You are already bankrupt .

Even $100Trillion is not that big of a deal since it is not all due today, but over decades, more like a mortgage than a pay day loan.

Besides, what will the world use for a reserve currency????
There is no other currency that is large enough to facilitate the international oil trade let alone all other trade. The Euro, the only other large currency, is making some inroads but is far from taking the place of the $US, especially lately. There is not enough Yen or pounds or any other currency to take the place of the $US and the EU is just as indebted as the US with about the same size economy. Besides, the US still has a lot that the world wants, everything from soy beans to John Deere tractors and if the $US ever did fall from dominance its value would plummet making US exports even more competitive in world markets.

China is currently building a highway network bigger than the US interstate system and a high speed rail network larger than the entire EU system. It is also building over 100 entirely new cities. This uses a lot of domestic savings. Once these projects are substantially complete China will begin to make this money available for consumer finance. Until then, it is not considered possible. China needs trade with the US more than the US needs trade with China. While China has a huge trade surplus with the US this basically covers the trade deficit China runs with the rest of the world. A big problem for China in moving to a consumer economy is how it can continue to pay for its imports of raw materials and food as manufacturers move from export to domestic consumer market.

Besides, US fiscal problems are due to simple stupidity and the US government debt is just not as big of a catastrophe as you seem to think. The only problem with deficit reduction in the US is that all reasonable solutions have become hostage to venal politicians and their idiotic misrepresentations of how economies actually function. If this situation continues for another decade or so, which is likely due to Republican intransigence on taxes and the wilful ignorance of US voters, the US and its people will be deserving of even your most unlikely scenario. But, as far as any of your predictions happening before the end of this decade, not very likely.

Originally Posted by Anders Hoveland

The American government continues to spend more and more money, authorising the Treasury to issue more promisory notes.
All this debt will have to be paid back with compounding interest, yet the US Treasury continues to pay off old notes by issuing even more new ones. This cannot go on forever. The interest alone on the debt burden is becoming progressively less sustainable, and by some estimates could consume 100% of the nation's GDP within 50 years.

I think we can all agree that the government is not going to solve this problem until it becomes too late.
Spending less money and raising taxes is the simple and obvious solution, but it seems apparent this is not going to happen any time soon.

So what is going to happen?

Some of you seem to think the government can just print all the money it wants to pay off the debt. But America's money is becoming increasingly backed by the Treasury's debt itself. (at this time nearly half of the reserve assets held by the Federal Reserve Bank are US Treasury bonds/notes)

What if outside investors that the Treasury relies on to buy its bonds suddenly become insecure and demand higher interest rates? Then the Treasury will have to issue even more new bonds to get the revenue to pay this interest. But if the market becomes oversaturated with Treasury bonds, that could decrease the value of the dollar, since the dollar is backed by these bonds. This would cause inflation, and potentially lead to investors demanding even higher interest rates. This could initiate a vicious cycle that could spiral out of control within a short period of time, threatening the solvency of the US Treasury.

If the Treasury defaults on its debt, it will ruin the credit rating of the US Treasury for a very long time. Lower credit ratings mean investors demand higher interest rates, so it will become impractically costly for the government to ever borrow money for an emergency again. Keynesian economic "stimulus" simply will not be an option (at least until the government is able to cut costs and save enough money).

Were are approaching the tipping point of no return. Once we go over the edge, the US will not be able to pay its bills. That will happen when the US government taxes person and every business at 100% and still can't get enough cash to pay the debt.

America will have 2 options.

1.) Print dollars like mad. Will it cause hyper inflation? Sure it will. But the US will pay its bills and all of us will be put in the poor house. This is what happened to Germany after World War 1. People should up in the super market with a barrel of money to buy bread.

2.) The US can declare bankruptcy and default on the loans. If that happens the US will have junk bond status. When that happens we will have to pay much higher interest rates for loans.

Originally Posted by unrealist42

Even $100Trillion is not that big of a deal since it is not all due today, but over decades, more like a mortgage than a pay day loan.

Are you sure? If we pay back over 30 years.....
At a 1.5% interest rate, payback is $4.16T per year
With historical interest rates 5%, $6.5T per year

Originally Posted by unrealist42

Besides, what will the world use for a reserve currency????
There is no other currency that is large enough to facilitate the international oil trade let alone all other trade. The Euro, the only other large currency, is making some inroads but is far from taking the place of the $US, especially lately. There is not enough Yen or pounds or any other currency to take the place of the $US and the EU is just as indebted as the US with about the same size economy.

If the US debt gets big enough, or inflation becomes an issue, it doesn't matter how much trouble finding the world has a reserve currency, they will do it. They may even go back to gold.

If that happens, the interest on our international debt is effected by the reserve currency / US$ ratio - no inflating the debt away.

Originally Posted by Not Amused

Are you sure? If we pay back over 30 years.....
At a 1.5% interest rate, payback is $4.16T per year
With historical interest rates 5%, $6.5T per year

If the US debt gets big enough, or inflation becomes an issue, it doesn't matter how much trouble finding the world has a reserve currency, they will do it. They may even go back to gold.

If that happens, the interest on our international debt is effected by the reserve currency / US$ ratio - no inflating the debt away.

That $100trillion figure is nonsense anyway since most of it is far future projections considered on the current fiscal circumstance. It is unlikely things will remain the same for that long. It is more likely that the US GDP will double over the next thirty years. Add in long term inflationary trends and in thirty years annual US GDP could easily reach $40-50Trillion. Most of the debt is back loaded, to be paid back in inflated dollars in a far larger economy.

Anyway, the US does not really need to pay off the debt at all, maintaining market confidence in its ability to pay the interest on it is far more important. That confidence is how the US can maintain a $15Trillion debt with only $200Billion in interest payments.

The world will be hard pressed to go back to gold. One thing to consider is that 40% of the worlds gold is in India, almost all of it in private hands according to The Economist magazine, which knows about this sort of thing.

The most interesting thing about these discussions is that those who are most alarmed about the debt are also those who most seek to undermine confidence in the governments ability to service its debt by being vehemently opposed to any increases in government revenues regardless of the source. If you take that position a fiscal catastrophe will certainly happen but the extreme unlikelyhood of such an occurrence precludes taking them seriously, even if they do make some good, but ultimately self defeating points.

There is a certain cognitive dissonance and deliberate ignorance in adopting a stance that requires massive tax cuts, even larger spending cuts, including reneging on government borrowing from social security, and debt repayment all at once. For one thing, massive spending cuts will retard economic growth, and as some EU nations have recently discovered toss the nation into a serious decline. Massive tax cuts on top of that will reduce government revenues even further than the savings from spending cuts, also experienced by EU nations lately. The reality is that the deficit and the debt will increase, much like it did in the 2000s but in a declining economy rather than a booming one. The deficit and the debt will increase at an accelerating pace, not recede as they think.

The big problem with their thinking is that they believe that their prescription, which is an extremely long term proposition, can be applied immediately and bring about immediate results without problems. This is not a sane position. Just today in the UK off duty police have joined demonstrations against pension cuts in the "shared austerity" program of tax cuts for the wealthy and pension cuts for the workers. It will not be long before the on duty police do so. It is insane to think that tossing workers under the bus to maintain lower taxes on the wealthy will not come without social and political repercussions, or that the national debt can be paid off with tax cuts.

And the young people are suffering high un- and under-employment rates. Will the future generation ever be able to obtain decent jobs? Wages are also lower than they once were. Many young adults cannot afford to leave their parents house, much less start families. Yet these are the people that are going to be expected to pay the future debt.

Even if all these young adults suddenly obtained good jobs, it would still take them several years to catch up saving for a house and mortgage payments, to make up for the unemployment and lower wages during the long recession.

It will be interesting to see what happens when investors are no longer willing to buy US Treasury bonds. Will the Federal Reserve Bank just take over and buy them all for less than the fair market value (the bonds could potentially become worth less than their face value). Because if all the investors suddenly fled US Treasury bonds, it would create an emergency situation for the Treasury, that would not have enough money to pay back all its debt, and no doubt the Federal Reserve would have to step in, in an "emergency" bailout. This of course would greatly dilute the value of the dollar, resulting in drastic inflation.

If the debt bubble suddenly burst, it could result in sudden inflation of 100%, since arounf half the reserve assets in the Federal Reserve are Treasury bonds (and Treasury notes, which are just short-term bonds), not to mention possible further economic fallout.

Originally Posted by unrealist42

That $100trillion figure is nonsense anyway since most of it is far future projections considered on the current fiscal circumstance. It is unlikely things will remain the same for that long.

$20T is in the cards, interest rates rise to 5% (historical), and interest on the debt becomes the biggest line item.

Originally Posted by unrealist42

It is more likely that the US GDP will double over the next thirty years. Add in long term inflationary trends and in thirty years annual US GDP could easily reach $40-50Trillion. Most of the debt is back loaded, to be paid back in inflated dollars in a far larger economy.

2.5% growth is required to doluble the GDP in 30 years. A 2.3% deficit is $56B, about 5% of what our deficit is today.

Do you see any way we balance the budget in 30 years without singificant cuts in spending?

Originally Posted by unrealist42

Anyway, the US does not really need to pay off the debt at all, maintaining market confidence in its ability to pay the interest on it is far more important. That confidence is how the US can maintain a $15Trillion debt with only $200Billion in interest payments.

$200B is at our artificially low interest rate. What ahppens when it goes back to historic levels of 5%, or raises to stem the hyper inflation that occurs when the banks, with $1T+ in reserves, start lending at a 30:1 reserve rate?

Originally Posted by unrealist42

The most interesting thing about these discussions is that those who are most alarmed about the debt are also those who most seek to undermine confidence in the governments ability to service its debt by being vehemently opposed to any increases in government revenues regardless of the source. If you take that position a fiscal catastrophe will certainly happen but the extreme unlikelyhood of such an occurrence precludes taking them seriously, even if they do make some good, but ultimately self defeating points.

Like taxing the rich, or corporations? A 100% tax on them won't balance the budget of today. And, the deficit will get larger as more of the baby boomers leave the workplace (less tax income) and drawing benefits (more expenditures). The only option is cutting spending.

Originally Posted by unrealist42

There is a certain cognitive dissonance and deliberate ignorance in adopting a stance that requires massive tax cuts, even larger spending cuts, including reneging on government borrowing from social security, and debt repayment all at once. For one thing, massive spending cuts will retard economic growth, and as some EU nations have recently discovered toss the nation into a serious decline. Massive tax cuts on top of that will reduce government revenues even further than the savings from spending cuts, also experienced by EU nations lately. The reality is that the deficit and the debt will increase, much like it did in the 2000s but in a declining economy rather than a booming one. The deficit and the debt will increase at an accelerating pace, not recede as they think.

We can avoid cuts, and fall off the cliff like Greece is primed to do.

Today, SSI, Medicare, Medicaid, interest on the debt and Military spending make up a little less than what is taken in. Cut everything else. Put every extra dollar into paying off the debt.

What is holding back the economy today are three things, uncertainty what the gooberment will do, the critical mass of regulation, and how Europe (the canary in the same coal mine the US is in).

I also want to mention that increasing national debt can often increase inequality, by taxing the middle class to pay interest to wealthy investors that finance the debt. No doubt that the very wealthy are the largest holders of US debt, besides the Federal Reserve Bank itself (China and Japan together hold 2 trillion in US debt). Interest rates are relatively low now, but when they go up, which is inevitable, it will transfer more taxpayer money to the wealthy.

The USA is now paying 10% of its tax revenue ($205 billion each year) just to pay the interest payments on its debt. And this is just at the federal level. State governments are also in plenty of debt. The state of California alone is in $265 billion debt. And what about Americans personal debt? The average American owes $5000 in credit card debt, and makes $16,800 in mortgage payments on their house each year. American individuals are already in plenty of debt as individuals. How are they going to be able to finance government debt on top of that?
http://www.cepr.net/index.php/blogs/...en-of-the-debt

The USA has tried to bring in more immigrants to help it pay off its debt, but these immigrants (because of their low incomes) seem to be costing more (emergency medical treatment, education for their children) than they are paying in taxes. There simply are not enough good paying jobs available in the economy. More immigration will mean higher unemployment. However you feel about immigration, immigration is not a real answer to paying down the debt.

Originally Posted by Anders Hoveland

The American government continues to spend more and more money, authorising the Treasury to issue more promisory notes.
All this debt will have to be paid back with compounding interest, yet the US Treasury continues to pay off old notes by issuing even more new ones. This cannot go on forever. The interest alone on the debt burden is becoming progressively less sustainable, and by some estimates could consume 100% of the nation's GDP within 50 years.

I think we can all agree that the government is not going to solve this problem until it becomes too late.
Spending less money and raising taxes is the simple and obvious solution, but it seems apparent this is not going to happen any time soon.

So what is going to happen?

Some of you seem to think the government can just print all the money it wants to pay off the debt. But America's money is becoming increasingly backed by the Treasury's debt itself. (at this time nearly half of the reserve assets held by the Federal Reserve Bank are US Treasury bonds/notes)

What if outside investors that the Treasury relies on to buy its bonds suddenly become insecure and demand higher interest rates? Then the Treasury will have to issue even more new bonds to get the revenue to pay this interest. But if the market becomes oversaturated with Treasury bonds, that could decrease the value of the dollar, since the dollar is backed by these bonds. This would cause inflation, and potentially lead to investors demanding even higher interest rates. This could initiate a vicious cycle that could spiral out of control within a short period of time, threatening the solvency of the US Treasury.

If the Treasury defaults on its debt, it will ruin the credit rating of the US Treasury for a very long time. Lower credit ratings mean investors demand higher interest rates, so it will become impractically costly for the government to ever borrow money for an emergency again. Keynesian economic "stimulus" simply will not be an option (at least until the government is able to cut costs and save enough money).

A 3% rate of inflation effectively devalues the amount of debt by half in 24.5 years. A 6% rate of nominal GDP growth effectively devalues the debt, proporation to GDP, by half in 12 years.

If we just balanced the budget and did nothing else, the relative size of the debt would drop by half in 12 years.

The "greatest generation" paid tax rates up to 91% to pay down (proportionately) a WWII that was proportionately even larger than the one we have today.

But today's "Pass the Buck" generation is more interested in their personal enrichment over what is good for the nation.

That either changes, as we put in representatives who will compromise, or we all go down together.

Originally Posted by Iriemon

A 3% rate of inflation effectively devalues the amount of debt by half in 24.5 years. A 6% rate of nominal GDP growth effectively devalues the debt, proporation to GDP, by half in 12 years.

As I said above, that only works if our deficit was significant less than GDP growth. We are currently at 50%, do you see it dropping below 6% any time in the near future?

Originally Posted by Iriemon

If we just balanced the budget and did nothing else, the relative size of the debt would drop by half in 12 years.

If we only pay interest on the debt, it will remain the same size. If the GDP grows, interest rates will rise, growing the interest on the debt, reducing money available for the rest of spending.

Originally Posted by Iriemon

The "greatest generation" paid tax rates up to 91% to pay down (proportionately) a WWII that was proportionately even larger than the one we have today.

Not quite apples to apples.

Government spending fell hugely immediatly after the war, the debt didn't continue to build.

We also grew GDP by selling a lot of products to a destroyed Europe and Asia, and caught up with spending from the start of the war, and before. Growth in productivity provided a real increase in value, not just inflation.

Originally Posted by Iriemon

But today's "Pass the Buck" generation is more interested in their personal enrichment over what is good for the nation.

That either changes, as we put in representatives who will compromise, or we all go down together.

The Democrats had total control - and did nothing. They voted to extedn the tax cuts after they lost in 2010 - WHY?

The Democrats have not compromized with the Republican's / Tea Party. If they were so sure the world would end, why not prove it?

Raising taxes to 100% on the rich will not balance the budget, even if they were to maintain the current income - which they won't. Some, like one of the Facebook founders, will leave the country. Others will just maximize income by taking it in other forms.

Originally Posted by Iriemon

A 3% rate of inflation effectively devalues the amount of debt by half in 24.5 years. A 6% rate of nominal GDP growth effectively devalues the debt, proporation to GDP, by half in 12 years.

As I said above, that only works if our deficit was significant less than GDP growth. We are currently at 50%, do you see it dropping below 6% any time in the near future?

Originally Posted by Iriemon

If we just balanced the budget and did nothing else, the relative size of the debt would drop by half in 12 years.

If we only pay interest on the debt, it will remain the same size. If the GDP grows, interest rates will rise, growing the interest on the debt, reducing money available for the rest of spending.

Originally Posted by Iriemon

The "greatest generation" paid tax rates up to 91% to pay down (proportionately) a WWII that was proportionately even larger than the one we have today.

Not quite apples to apples.

Government spending fell hugely immediatly after the war, the debt didn't continue to build.

We also grew GDP by selling a lot of products to a destroyed Europe and Asia, and caught up with spending from the start of the war, and before. Growth in productivity provided a real increase in value, not just inflation.

Originally Posted by Iriemon

But today's "Pass the Buck" generation is more interested in their personal enrichment over what is good for the nation.

That either changes, as we put in representatives who will compromise, or we all go down together.

The Democrats had total control - and did nothing. They voted to extedn the tax cuts after they lost in 2010 - WHY?

The Democrats have not compromized with the Republican's / Tea Party. If they were so sure the world would end, why not prove it?

Raising taxes to 100% on the rich will not balance the budget, even if they were to maintain the current income - which they won't. Some, like one of the Facebook founders, will leave the country. Others will just maximize income by taking it in other forms.