I finally figured it all out and we are all screwed! No way Out

Make no mistake, our country can handle a massive amount of debt because we have our own currency and bank, even as high as 200% GDP without it being an urgent problem, but the point is at the rate we're going now it will easily surpass that. I'm in favor of deficit spending too, temporarily. Recessions, wars, huge projects like major transportation overhauls etc., but the rest of the time we need to have a balanced budget. This can't happen without military and SS reform either so all the morons who keep saying they're gonna cut things from welfare or education or what have you are wasting time. Our two biggest expenses are military and an out of control SS/medicare system spending more than it takes in.

 

I believe there are FICA surpluses each year which means the government takes in more than it pays out.

The military spending is over one-half of all discretionary spending and I agree far too much...reduce it by 20% should be easy.

If military spending is ~$600 billion and SS/Medicare pays for itself, there's a lot of other areas which also need to be reduced...

 

The problem here is when the interest on that loan is above the rate of inflation.

 

right so inflation too a small degree helps people pay off their loans, since obviously the poor have the debt and the wealthy own the debt moderate inflation is a good thing, however rapid inflation or "hyper-inflation" can cause the price of goods too shoot up much faster than wages can respond, so you'll have someone trying too buy a loaf of bread with their entire weekly paycheck, which obviously effects the poor much more negatively. For example in somalia, after their economy collapsed people would bring wheel barrows full of cash to purchase a single meal at restaurant.

 

This is a good assessment. One of the reasons we need to have wars and instability and war in the world is to make it hard for a competitor to the safety of US bonds to get a foothold.

Keep in mind that only a short time ago (2000) the 30 yr Bond yielded over 6% and as you go back in time it was much higher. The debt has doubled since then but the average interest rate on our debt was brought down to roughly 3 %. In this way they kept interest payments from rising.

6% per year on 9 trillion = 540 Billion. 3% per year on 18 Trillion = 540 Billion (roughly how much our interest payments are).

The ratio to keep in mind is interest payments as a function of revenue. Red lights go off at the IMF if a country's interest gets to 30% of revenue. This means the ship is taking on water faster than it can be bailed out and is in danger of sinking.

I remember calculating this after the 2008 crash when revenue dropped from 2.7 Trillion down to 2.1 Trillion. Interest was roughly around 500 Billion so on 2.1 Trillion we were getting close to 25%. Not 30% but a little close for my liking.

Now Revenue is 3 trillion and interest is roughly 540 Billion which is 18%. Fantastic right ?

Here is the rub. We shot every bullet we have trying to keep interest rates low. Interest rates are a function of demand which is a function of safety.

The only reason an investor is willing to accept almost no return on investment (3% minus inflation is f-all) is because they are scared silly and the US is the safest place. Preservation of capital is driving the rats to the ship that burning/sinking the slowest.

Keep in mind that if Ave rates on our debt got back to 6% like in 2000 our interest payments would be almost 1.1 Trillion and (assuming 3 Trillion in Revenue) our ship would be in serious danger. This can happen very quickly because if demand for US debt weakened (which causes interest rates to rise) this would weaken the perceived safety of US debt which further weakens demand.

Part of the way we dealt with lack of demand was through quantitative easing (buying out own debt). This goes on to the Fed balance sheet (think its something like 6 trillion ? don't quote me on that but its a lot). At some point the Fed is supposed to level the books by selling that debt back into the markets.

A second factor in demand is that in order to lower overall interest rates, some of the debt was financed at shorter time frames. ( If a 30 yr bill is paying 3.5% ... a 2 year bill is paying less than 1%. 5 and 10 year are of course somewhere in between.

So every year we auction off enough debt to cover our deficit which is currently around 500 Billion. The problem with short term debt is when the term ends we have to refinance and this goes into the total of how much debt gets floated. God forbid the Fed tried to float some of the debt it has on its books.

Good thing the world is such a mess right now which maintains the demand for debt at ridiculously low rates. (Compare Greek 2 year bill currently yields 35%!! yee haw)http://www.investing.com/rates-bonds/greece-2-year-bond-yield

This is what happens when perceived safety decreases.

The bottom line is that we need to keep interest rates low and reduce the deficit while trying to increase revenue (or at least maintain it).

To keep interest rates low we need world chaos (but not too much financial chaos) so that an relatively safe alternative does not crop up.

The stock market is currently being propped up by low bond yields. Money looking for higher returns. Stocks are somewhat overbought IMO.

I give us about 5 years max. 5 years in order to get our ship in better shape as there will be a relatively solid competitor or two that will show up in this time. There will be a relatively safe alternative to the US dollar as well.

At any time there could be some external shock which could knock us out of this delicate position we are trying to maintain so I do not have "high" hopes but I do have some hope.

We need to get our act together quick though. The world is changing fast fast fast.

We need to stop spending/wasting 1 Trillion dollars a year on Military but neither can we just cut it by half in one year. That would cause economic calamity.

 

inflation does help if one has a fixed interest rate. hyperinflation is generally due to economic instability and collapse which is not good for anyone.

 

In bold above, I don't really see how inflation and wages need to track? Inflation is generally defined as rising prices, however, wages are determined by the supply and demand of labor. As long as the US has more lower and middle class workers than there are jobs, no matter what inflation is doing, the wages are going to remain static and perhaps lower....

 

All of your comments point to how complex the fiscal management of the nation might be. Interest rates are kept low but this also effects savings accounts and bond rates so those with cash run to equities hoping for higher return rates. So the stock market becomes somewhat bloated but it's spooky right now so lots of cash still remains on the sidelines. Meanwhile low interest rates boost the economy which equals inflation but wages for lower and middle class remain static. Higher consumer prices and static wages equals downward pressure on consumption except for the reckless use of credit purchases. So we buy like we're on steroids but our wages are on valium and this just keeps the same old crap rolling along.

I agree there will be a correction, and it will clean some people's house, but we're quite short-sighted so give us a few down months and we'll start the process all over again marching steadfastly to the next recession. Too many recessions too often gives no time to get healthy...

 

yes but theyre also tracked by the prices of the products they produce, if you produce a product, thats price of production is too high, then people wont buy it, for example if a car costs 1 million dollars too produce, and even more when it gets too the retail market, not many people would buy them, and not many people would work for a car manufacturer, and most likely people wouldn't buy cars.

long story short the minimum wage needs too atleast track inflation, but it should also track (too some degree) productivity, if it had then minimum wage in america would be over $20 per hour, and then the collapse of the recent bubbles, housing, credit, tech, etc etc wouldnt have any effect on peoples daily lives. demand would still be through roof on many of our basic supplies, and defensive markets like pharma, tobacco, and food.

It's not a permanent fix but it is a step in the right direction, wouldn't you agree?

 

There is definitely something rotten in the state of global credit.

You can not spend more than you earn for an eternity. There is no money tree out there that forever spits out money as some seem to think.

For an individual it is simple to understand. As interest on one's debt increases (given a fixed income) the amount of interest increases and eventually one will run out of money and have to default on payments.

For a country it is the same in relation to interest as a function of revenue. The difference with a country like the US is that they can influence those interest rates to some degree by having the Fed purchase debt to maintain demand which keeps interest rates low.

Indeed it seems like the Fed does have a money tree but this is simply not true. The Fed can not create an unlimited amount of money without running the risk of inflation which put huge upward pressure on interest rates. This would the make further bond purchases counter productive as the whole point is to keep interest rates low.

So far the fed has managed to ride that dangerous wave fairly successfully. It has managed to keep interest rates low and we have not seen massive inflation.

What keeps demand for US debt robust the high degree of uncertainty of alternative investments such as the Eurozone, Russia, China and so on.

In this respect we got really lucky. I think that some of this external uncertainty has been helped along by US foreign policy but that is another story. If there were global peace, everyone was getting along and free trade was generating economic prosperity the demand for US debt would be in deep do doo.

Even with high external uncertainty the Fed has to be careful because increasing its balance sheet increases the uncertainty of US debt which these other markets more attractive even if they have a high degree of uncertainty.

At the end of the day there is a limit to how much debt we can accumulate without tipping the uncertainty scale and we do not know what that limit is. It is a bit like that game where you build a structure and then start removing blocks out of the structure one by one.

You can pull out quite a few blocks while the structure remains intact. At some point though, the removal of just one more block collapses the entire structure. The proverbial straw that breaks the camels back.

I do not see a valid alternative to US debt on the horizon. That does not mean that one will not show up.

What we have been witnessing over the last couple of decades is enormous change in the dynamics of the geo-political and geo-economic structure of the global chessboard. China's economy for example now exceeds that of the US.

One thing that is a certainty is that eventually we will see that ship, or a number of them, faintly in the distance on the horizon.

I do not know when that day will be but, when that day comes we better have our fiscal act together.

 

I don't believe in the minimum wage. I don't see why any wages need to track inflation? If the so-called minimum wage was $20/hour we would still have the identical problems we have today.

What exactly is employment? It's a bunch of people competing for jobs. When you have excess people competing for similar jobs those wages are going to be suppressed and in the USA today we have far more unskilled and lower skilled workers competing for fewer jobs which equals lower wages. If more jobs would be available this will change as wages begin to increase. Business can only watch this from the sidelines and whatever the labor costs might be determines the viability of the business model.

And, human workers are not only competing with other humans, but they are also competing with robots, automation, outsourcing, etc. all of which determine wages...

 

It's really simple, the higher the debt interest payment each year, the more taxes that are required, and/or more debt is created, and/or government programs are cancelled to funnel cash to the interest payment, and...we get absolutely nothing in return for the billion$ in interest payments! How long can this process go on is anyone's guess? Everything I read says government costs are increasing, deficit spending is increasing, debt is increasing which IMO is a truly horrible fiscal picture that will have it's day of reckoning!

 

Agreed. The number the IMF uses is 30%. If interest payments as a ration of income gets to that level the ship is taking on water faster than can be bailed out and is in danger of sinking.

It is the question of "interest rates" that is more complicated. Geopolitical factors could arise at any time that could drive up interest rates. If the average interest rate on our 18 Trillion dollar debt was 6% (where it was just a short time ago in 2000) instead of 3% our ship would already be underwater.

The deficit has been reduced from 1.4 Trillion in 2009 to roughly 500 Billion. This is good but it not as much due to reduced spending as it was an increase in revenue. The 2008 Crash caused revenues to drop from 2.7 Trillion down to 2.1 Trillion. The 600 Billion dollar shortfall and the 400 Billion in TARP and other stimulus was responsible for 1 Trillion of the that deficit.

Revenues have come back but we are still spending way too much. 500 Billion/year deficit is huge and given our already high debt levels it is unsustainable for any significant length of time.

 

yes but more jobs cannot just simply be made "available" there has too be demand and if people are simply complacent with their way of life there will be less and less work that needs to be done, and therefore less jobs "available". eventually robots and automation are going replace most, if not, all labor. What are we going too do with the billions of unemployed workers then? should the world then just be a few rich people and their robots?

now why wouldn't you "believe" in a minimum wage do you think that wages couldn't get so deflated that they would reduce overall demand and lead too widespread poverty? if one business owner cuts his staffs wages, then he is taking advantage of all the other companies that pay a decent wage, so that their employees can afford his product. leading too a death spiral forcing wages to constantly decrease despite high increases in productivity. the reason social programs like the minimum wage exist is because laissez faire capitalism failed

 

I don't see any geopolitical factors affecting investment in the US so probably no need to worry about debt interest rates moving up. No matter how we complain about the US and it's economy, the US remains the most stable place in the world to park cash. Further, most all other nations need the US to be healthy since many are heavily invested in the US via military, exports, or US facilities.

Regarding debt interest payments there is the issue of the portion we pay others versus the portion we pay to ourselves (publicly held debt). If your IMF considers only the debt interest paid to others, which might be around $250 billion, this is only about 7% of US income.

How long can the US continue $500 billion/year deficit spending can be many years although not the wisest thing to do...debt interest payments increase each year and future generations have a boat load of debt to deal with while we are self-serving and greedy...

 

If you're thinking automation and/or robotics are going to put all workers out of a job in the next 50 years then you probably need a chill-pill. One of the good things about lower cost labor is it puts off the need for automation or other alternatives.

I don't like a minimum wage because I don't like government meddling in the private sector, and, I prefer to let people decide for themselves where they work and how much they earn. Some people have situations which are conducive with working part time, flexible hours, unskilled to lower skilled, and the pay is $5/hour so why should government tell them 'no' they can't have this type of work?

An employer cannot simply reduce wages. An employer is BOUND by the labor rates determined by supply and demand. If an employer offers $5/hour and no one shows up...what happens? They raise the wage to $6/hour and so on until the employer can hire and sustain the employees required to satisfy product demand.

 

Don't lose hope (and don't become too hopefull when the bubble didn't burst in the end)
In other words all bad is on the rise, while it all need to stall to let it end well, because the rise in bad can't end well. Rise and fall, or to rapidly changing systems, is when things start to get worse and worse, so a process need to stall before a point of no return is reached. Is the point of no return already reached or is there still a way to stall these processes? If there is, there is still a way out of an inflating or deflating process.

 

yes but the employer is subsidized by the government when he does that, if i work $6 per hour and have too support a family of four, i would still need help from welfare that money comes from other employers and there employees, so those business' are subsidizing your business for the mere purpose of giving someone a job they don't need, especially since it could be any business' imaginable, right now somebody works in porno shop for minimum wage while getting welfare just support that porno store staying in business? so it can provide what jobs? a job that nobody needs? to support a business nobody needs? if the goal behind social welfare is too prevent people from starving too death or dying from easily curable disease then why not just give them the money? why falsely promote all these sectors of commerce that we simply don't need? it wastes far more resources, and costs far more money propping up these small business, then it would if we just gave people the money. whether they found work or not, then if they eventually do find work they buy nicer things, like a new house or a new car etc etc etc, but they wouldn't be forced to work in a place the economy does not need , simply so we can say proudly that we have low unemployement. its' ridiculous

 

No, there are not surpluses in SS/Medicare. They are running hundreds of billions in deficits every year. Go read the trustees reports. Additionally, the reports are not honest about the true deficits. They consider borrowed general fund payments as income.

 

Because "unemployment" does not mean un•employed. That's the short answer.
The word mistakenly gives people the impression that everyone who is not "unemployed" either has work or does not want a job.

To be counted as "unemployed" in the statistics, the survey respondents had to have actively looked for work in the last 4 weeks at the time of the survey.

The "real" unemployment rate (if we use a definition closer to what you would consider to be unemployment) would probably be closer to 11 percent, from the most current information I have seen.

Some people believe it is even higher:
Real unemployment rate is at least 18 percent

And of course it depends which region of the country you are in. There are big unemployment problems in the Southwest, Michigan, and in several of the metropolis regions in the Northeast.

 

Some interesting points. I did not realize that the IMF only considered the foreign interest payments in their (30% interest/revenue) number.

I could not readily find confirmation of this but what I did find was:

http://sanmun.ibnesbru.org/resources/Research-paper-topic-201.pdf

250% of 3 Trillion in revenue is 7.5 Trillion. I am not sure what percentage is but if we use your figure of 1/2 (18 Trillion) =9 Trillion, then we are above the "Critical barrier" for long term debt sustainability.

 

Increasing debt across the board (probably more than $50 trillion total for corporate, household, and public debt) plus $200 trillion in unfunded liabilities and exposure to unregulated derivatives with a notional value of over $300 trillion. And "only" around $1 trillion in subprime lending was enough to bring the economy to its knees in 2007-2008, followed by years of "recovery." And with QE unwinding, fears of another global financial crash.

 

The 'employer' is not subsidized by the government...this is political nonsense. A company is something that produces stuff and when needing human labor contracts with them for an agreed wage...the company has a need and humans agree to do the work...period.

Now if government feels that it must 'subsidize' certain people that is a government decision having nothing to do with employers. This is the part I hate when government meddles in the private sector forcing stuff which is not part of the process to produce product and services!

If government thinks people should be given shelter, food, health care, transportation, wages, etc. then let government provide this equally for everyone and fund it with taxpayer revenues. I 100% support the things I just mentioned but fund them through general government revenues instead of forcing crap on industry. BTW it is industry who most people beg to provide good paying jobs so why not let industry do their job without government meddling?

What people 'can' earn, how they spend their money, how they invest, etc. etc. is something that cannot be solved...these are individual issues...

 

According to the Social Security Trustees, who oversee the program and report on its financial condition, program costs are expected to exceed non-interest income from 2011 onward. However, due to interest (earned at a 4.4% rate in 2011) the program will run an overall surplus that adds to the fund through the end of 2021. Under current law, the securities in the fund represent a legal obligation the government must honor when program revenues are no longer sufficient to fully fund benefit payments. However, when the trust fund is used to cover program deficits in a given year, the Trust Fund balance is reduced. By 2033, the fund is expected to be exhausted. Thereafter, payroll taxes are projected to only cover approximately 75% of program obligations.

Trust Fund Operations

Even though there is presently more FICA taxes coming in each year than benefits paid out, this has not always been the case. Since 1937, there have been 11 years in which benefits paid out exceeded income and so the assets of the Trust Funds had to be spent to make up the difference. This cashing-in of the Trust Fund bonds amounted to about $26 billion in those 11 years.


http://www.ssa.gov/oact/STATS/table4a1.html

 

You still haven't figured it out. Come back in another 48 years.