Younger Americans Should Repudiate US Debt

Nobody is going to pay off the debt, and here is why:

Currently, the government is putting $1 trillion on the credit card per year, and the private sector is adding at least another $0.5 trillion. That's 7% of GDP. Imagine what would happen if you'd take that 7% of GDP out of the economy. Say goodbye to economic growth and say hello to a steep recession. Which politician in their right mind would do this? And that's just thinking about breaking even, not paying down the debt, which would be highly deflationary.

Every dollar is loaned into existence. Therefore, debt HAS to grow for the economy to expand. That's courtesy to our fractional reserve monetary system.

 

We are still running a budget deficit and adding to the debt with younger voters on the scene

What are you willing to do to stop adding to the debt?

 

There is only one pragmatic solution to this problem: More people working and paying taxes into the US Treasury, and far less people on the federal teat sucking taxes out of the US treasury.

The philosophy must be adopted that if you don't work, you don't get much to eat or have much, just enough to barely stay alive. Got to start pulling the wagon.

First take everyone off of supplemental social security and make them reapply under stringent conditions (you can't get it because your kid is ADD or you're an alcoholic or drug addict or fat).

 

Ill send my bill directly to the man who generated it... Mr Obama. He has real money these days you know...

 

Total US debt, public and private combined, are at over $75 trillion.

One can also see from the graph who the perpetrators were: The slope is highest under Reagan and GWB. while Obama had to deal with years of deleveraging. Roughly $30 trillion were added under GWB alone.

Now, Trump is repeating the same mistakes, blowing up the private debt bubble through reckless tax cuts, making people THINK that they are prosperous when they are really not. Thus, they spend money they don't have. The resulting crash is predictable.

 

God, it's funny how people are trying to turn your post into partisan bullshit, @Ethereal .

 

The thing about the spike in the 40's is that this was due to a spending on a world war. The spending was not systemic within the system itself. What is the excuse this time ? There is no world war - but we are at the same place.

 

The FICO number might be down a bit.

Got to get more people working, paying taxes, not sucking the teat skin and all completely off the US Treasury.

 

The FICO score has little to do with the issue. Morgage backed securities full of garbage were given Triple AAA ratings. To be honest the Debt to GDP - while this is often used as indicator - and has some validity - it is not as good as looking at interest as a ratio of income.

When the interest payments on a nations debt hit 30% of income - red lights and alarm bells go off at the IMF - the ship is taking in water faster than it can be bailed out and if something is not done soon the ship will sink.

This ratio is something that can be rather easily understood - consider a person who earns 1000 dollars per month but has 300/month in interest payments on credit card debt. Obviously this is getting crazy - making min payments would be what ... 450 or something - leaving the person with only 550 to live on. Something is going to break.

Fortunately we only have to make the interest payments to remain in good standing and there are other differences between a nation and an individual but the analogy is still valid - and something people can understand.

The fiscal irresponsibility under Reagan - and continued under Bush Sr. got us into a mess - the interest as a ratio of income exceeded 25%.

Right now we are only half that. The reason for this is that although we have far more debt - the ave interest rate on that debt has gone from over 7% down to 2.25% so the payments have remained relatively constant since the Clinton era. Since revenue has increased the ratio is much better.

Before twirling around and cheering - and going and spending like crazy on this basis as Trump is doing - one should bear in mind that there is a big Elephant in the room.

To get ave interest rates on our debt this low involved considerable messing with the invisible hand. The fed is now out of bullets and we are vulnerable to rising interest rates and can do little about it without severe consequences. Already the low interest rate environment is causing pain. Short and long term interest rates have either inverted (in the case of the 3 month vs the 10 year) or close to inversion. Banks make money off the spread - borrowing short and lending long. When the spread no longer exists - or is negative - the banks lend less and make less money.

There is huge upward pressure on interest rates - and this pressure is not going away until interest rates on our debt rise. When they do - then the pain comes.

A 1% increase in the ave interest rate on our debt = 220 Billion/year increase in interest payments. We are currently at around 500 Billion/year so this is a 50% increase.

Should we hit the historical average of around 6% .. our annual interest payments would be 1.3 Trillion/year = which is greater than 30% of income.

 

Translation: "Pay for my college and healthcare. P.S **** your SS".

 

You must have missed the part where we're already spending more than that on welfare programs.

 

I'm not arguing that being debt free wouldn't be great, only that repudiating that debt would collapse the US economy and probably the world economy. Sorry that's a no go.

 

Russia and Argentina didn't have either of their currencies as the world reserve currency, nor did much of the world have massive investments in either country. The US is quite different. If you are saying that we are definitely going to default than I would say we are also definitely going to have a world economic collapse.

 

This is all very true. Part of what is prolonging our default is the fact that we have the world reserve currency. This has allowed us to borrow scads and scads of money on the cheap due to pretty much unlimited demand due to the safety of the US dollar because it is the world reserve currency.

The idea that we can finance our lifestyle through credit on a never ending basis is false. (not that you have promoted this idea) It is not funny money that we are borrowing. We have creditors - just like everyone else - and they want to get paid.

The question is where is the tipping point. At what point is our debt so big that eventually it will crush us. I maintain that if we got serious right now that we could still avoid default but, as you and I both know that is not going to happen. The reverse has happened - rather than decreasing the deficit we have increased it - a lot - and it is projected to increase further going forward.

We got close to the tipping point after 12 years of reckless spending by Reagan and Bush. When Clinton came in the interest on our debt as a ratio of income was greater than 25% At 30% alarm bells and sirens go off at the IMF and they start issuing warnings - the ship is taking on water faster than it can be bailed out.

Clinton and congress did not want to reign in spending - they had no choice. Fortunately there was a white swan event = the computer/internet/ tech revolution which increased revenue. This along with the fiscal restraint got us out of trouble.

Our interest payments on our debt were roughly the same a few years ago as they were back in 2000 .. roughly 420 Billion/year. "How is this possible you should be saying - the Debt is near 4 times what it was back then". The difference is that back then the ave interest rate on our debt was 7%+. Now it is 2.25% and the ratio of interest to income is about half of what it was 13% as opposed to 25.

The problem is that we had to mess with the invisible hand in order to get the ave rate that low. The fed is now out of bullets and the upward pressure on interest rates is really high - The yield curve has inverted = short term rates are higher than long term. The banks make money of the spread by borrowing short and lending long. When there is no spread banks do not lend as much and their profits suffer.

That is just one problem - the Fed accumulated 4 Trillion in paper which now has to be sold back into the market - they started doing some of this in 2018 but when the markets reacted negatively they stopped. This increases the supply. Short term rates are normally much lower than long term rates - for example in 2014 the 2 year was 0.4% .. the problem is that this has to be refinanced again in 2016 and in 2018. This increases supply. The interest rate in 2018 on the 2 year was not 0.4% but 2.8% = we have to pay 800% more in interest on that money. The annual interest on our debt is now rising rapidly .. .was over 500 Billion per year last time I checked.

The last increase in supply is of course running higher deficits ... now 1 Trillion/year.

On the demand side - we still have demand but there are negative factors happening .. nations such as China already are awash in US debt.

In any case - a 1% rise in interest the ave interest rate increases our payments by 220 Billion. Were we to return to historical norm - around 6% - that would be 1.3 Trillion/year in interest payments - more than 30% of our income.

The economy is doing fairly well right now but that can change .. God forbid we have a recession and income drops. We no longer have a safety net is what I am saying .. and the more we borrow the closer we get to the point of no return - and we are not far off from that.

 

A very good, and serious, comment on the problems we face.

I've been on the interest rate alarm bandwagon for years. As you pointed out, "a 1% rise in interest the ave interest rate increases our payments by 220 Billion." That doesn't mean as much now in an era in which interest rates are at historic lows. However our current interest rate situation is aberration; a result of FED actions after the 2008 crisis, and the fact that the US dollar (and Treasury bonds of course) ended up, and are still, the best place to hold money, and has been consistently attracting foreign investment for years.

However the average interest rates over time are around 6%, higher than our current interest rates. That would be over a trillion dollar a year increase in the deficit just for interest on the debt. Eventually our interest rates are going to rise again to it's historic average even if there is no crisis to exacerbate our debt situation. And if circumstances remove the dollar as the world reserve currency, international demand for the dollar (and T bonds) will drop like a rock, causing interest rates to skyrocket.

I of course support a balanced budget amendment because I don't believe the Congress will ever do anything to deal with the debt until forced to. I would rather they be forced to by constitutional dictat rather than international finance crisis but it will happen one way or another.

 

Allow me to add some further meat to the equation.

Look at this chart of the 2 year bond yield. As you can see the latte part of 2011 to 2015 you could float debt at below 0.5% .. and that is exactly what we did. As the old 30 year debt came due - with a yield of well over 7% - we refinanced at cheap cheap cheap.

This is a long term chart of the 30 year .. have a look at the 80s .. how nasty is that ?



As we can see during the part of the 70's and much of the 80's the 30 year yield was 10% and above !

So imagine a half a trillion dollars in 30 treasuries (at 12 %) from 1982 comes due in 2012. Interest being paid on this would be 60 Billion/year. We refinance at 0.3% in the 2 year. Interest payments on this debt are now 1.5 Billion/year.

!!!!!! Holy Carp - we just saved 58.5 Billion in interest payments - lets go borrow some more money

Then 2018 comes - and we have to refinance that half a trillion for 2.8% ... ouch. That 1.5 Billion dollar payment just turned into a 14 Billion dollar payment .. in the span of a few years.

After the crash Europe and much of the rest of the worlds credit markets were burning .. remember concerns of default in Greece, Spain, Italy and and other EU nations ? The US was also burning but demand for US dollars increased. This was a case of the rats running to the slowest sinking ship. Then the Fed started QE - purchasing our own debt which takes supply off the market. This is what caused interest rates to drop like a stone .. decreased supply and increased demand.

In the years following the crash of 2008 - and at anytime prior to 2008 - if a money manager would have suggested Chinese debt they would have been taken out back to the woodshed. Guess what - times change - such thoughts are being taken seriously these days and even acted on. Jim Rogers - the dude who founded the Quantum fund with Soros - and one of the few who predicted the crash before it happened - was recommending Russia not to long ago .. imagine that ?!

India is quickly becoming a viable option as are other nations. Point being - there is competition for US debt = potential decrease in demand .. at a time when supply is increasing and the Fed is out of bullets. We are in an environment where the upward pressure on interest rates is high - and the only way to release that pressure is for interest rates to rise - so long as we keep running high deficits.

 

Cut government in half. That would pay off the debt fast.

 

How would it collapse the economy? Be specific.

 

Incorrect. The US spends about $2.4 trillion per year on various social welfare programs. The rest goes towards "national security" and servicing the debt.

 

Cut "national security" spending by 5% per year over the next five years, as a start.

Naturally, you will be opposed to that, but since we have more votes than you, it shouldn't be a problem.

 

If we don't continue making big banks rich with interest payments, then the economy will collapse, said big banks.

Very believable.

 

Without a national debt the Fed couldn't control the money supply.

 

Every spending program must take the same hit or you are not serious about balancing the budget

You just want more wampum for your tribe at the expense of someone else

 

Amen. Brother.