Spiraling Federal Debt: It's Likely to Get Worse 21 comments
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The problem is that the federal debt is rising – and will continue to rise – much faster than gross domestic product, which represents America’s ability to service it.
The federal debt was equivalent to 41% of GDP at the end of 2008. The Congressional Budget Office estimates it will rise to 82% of GDP in 10 years.
According to John Taylor in today’s Financial Times, the federal debt could hit 100% of GDP in just another five years. This from Taylor:
I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget.
A 60% tax hike won’t happen. The government will attempt to inflate the problem away instead. As we have discussed in previous issues, this will radically reduce the value of your savings.
To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. This 100% increase in price levels would mean about 10% inflation for ten years.
According to Taylor, “it would not be that smooth.” He reckons it would “probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.”
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This article has 21 comments:
Perish the thought pleeese!!!
If we dont stop congress this problem wont stop. Its a never ending story (nightmare).
We must fix the root of the problem first. Remove the crooks in washington and then we can rebuild our country!!!!
Term limits, spending controls, states rights first, get rid of lobbiests, set VERY specific limits and sources of campain contributions and I could go on all day. I hope I made my point.
There's a lot of over-reaction going on here. If you really want to panic, the time to panic was two years ago, when the housing market hit it's high point, or six years ago, when rates were left at 1% even though the economy was no longer stalling.
On May 28 04:48 PM doubleguns wrote:
> You are assuming that the next recession congress wont spend no money.
>
>
> Perish the thought pleeese!!!
>
> If we dont stop congress this problem wont stop. Its a never ending
> story (nightmare).
>
> We must fix the root of the problem first. Remove the crooks in washington
> and then we can rebuild our country!!!!
>
> Term limits, spending controls, states rights first, get rid of lobbiests,
> set VERY specific limits and sources of campain contributions and
> I could go on all day. I hope I made my point.
How about Congressional Term Limits? It won't solve all of our political problems but it may have our politicians like Waxman read the bill THEY introduce.
The Peterson Foundation calculated the federal government’s total accumulated liabilities using the audited financial statements of the U.S. government. As of September 30, 2008, the Federal Government had $56.4 trillion in total liabilities and unfunded promises for Medicare and Social Security. This works out to $184,000 per capita.
To cover the shortfall, they cant cut benefits without raising a hoot and a holler from the electorate, they can't raise taxes to confiscatory levels without causing rampant tax evasion. So the government will resort to what has always worked in the past: It will borrow massively. Because the US is seen as a safe place for foreigners to park their excess cash, and the Dollar’s reserve currency status, government borrowing costs are comparatively low. Additionally, foreign governments (mostly China and Japan) have been buying US Bonds in order to absorb excess cash caused by the huge trade deficit. They do this in order to keep their currency cheaper and thus the prices of their goods competitive. Due to dollar devaluation, over the past decade, the US Government has had a negative real rate of interest. Given these generous terms, the U.S. government will borrow as much as it can as long as it can.
> At the end of WWII, the debt of this country was over 100% of GDP.
> Yet the dramatic increases in productivity followed for the next
> 25 years, and the level of indebtedness gradually diminished, both
> under Democratic and Republican administrations.
>
Everything you said is true. But THINGS ARE DIFFERENT THESE DAYS:
a. Post WWII The rest of the developed world was in ruins, the U.S. had a vibrant industrial base. Nowadays we have plenty of competition all over the world, especially China
b. Post WWII The rest of the world's economies and currencies were in tatters. The U.S. was seen as a safe, stable place to invest. Nowadays the U.S. is seen as risky.
c. At that time the U.S. was the world's largest creditor, we had plenty of capital to lend and invest. Nowadays we are the world's largest debtor.
d. Back then: We were a net exporter, especially oil, steel, industrial goods and foodstuffs. Were were the Saudi Arabia of the world.
e. Post WWII There was a young population, and alot of pent up demand for homes, consumer goods, cars and credit, This fueled a post war boom as the swords were beaten into plowshares.
Do I need to go on?
Americans Are Becoming Less Willing To Excuse Their Government's Actions.
This Will Not End Well.
Too many people today think they are entitled to another persons money.
On May 28 05:55 PM Living4Dividends wrote:
> On May 28 05:00 PM _richard_ wrote:
Debt will rise much faster than anticipated because this downturn is going to be deeper and more protracted than anticipated. Budget outgoings will therefore actually come in much higher.
The GDP figures are also a complete farce and will not generate the anticipated tax revenues. GDP projections, well don't even go there!
It is also a bit like saying a ship is listing by 1 degree an hour and then saying it is going take a week to turn turtle. Things tend to build a momentum all of their own and go very quickly once you reach a tipping point.
On May 28 04:22 PM Gyoza Mimi wrote:
> Good article, but the math is off. 10% inflation for 10 years will
> raise prices 160%, not 100%.
As with the recently announced proposed 5% pay cuts in California for state employees, expect a growing avalanche of cuts across the whole country, more states, more public colleges, with the federal sector being the last hold-out but inevitable one to follow suit.
I should point out that I am not advocating that everyone rush to buy this at the moment. I actually believe the markets may be in for a near term down movement. If this occurs, TBT will likely move downward to. Usually there is a flight to quality (bonds), when the market moves down demonstrably. Still longer term TBT is a very enticing investment given the likely inflation picture of the near future.
This debt will have to eventually be disavowed thru default (think Argentina) or repaid with dollars that have been extremely devalued thru years of at least double digit inflation. Not a great outlook for future generations.
History has an example. In circa 1215, England's King John was actually an able leader; however, he succummbed to being addictded to raising more and more taxes, with the result that the noblemen ganged up on him and forced him to sign the famous Magna Carter.
Now I suppose the noblemen of today are the bankers. It seems that they aren't of much help either.
current form--in 2019, which may not be the case. The current legacy debt may have to be renegotiated, just as with what's about to occur in California--a constitutional convention is not far off, and CalPERS, its employee pension, is ripe for a huge surprise soon. So, yes the CBO numbers are frightening, but that projected debt level is unsustainable.
that made me choose to halt the game. the goalposts keep moving. i decided that i could retire and reduce income and be just fine. i take nothing from anyone, except what i pull from the market. my peaceful resistance is to help the bloated federal parasite starve by no longer paying the marxist progressive tax. it was with disgust that i chose this. i like to work but no longer wish to fund the destruction of my country.
now my accountant minded pretty half is working on keeping us from paying any tax we can legally avoid.
anybody noticed the swell in rand's sales? two complementary books are "unintended consequences" and "the battle of athens". the 1st is fiction. the 2nd is american history.
On May 29 02:19 PM fireball wrote:
> so what is the breaking point? mine was reached in november, not
> because mccain was a great choice, or any better except for his rhetoric
> was barely more appealing. my breaking point was that the majority
> asked for the socialist welfare state.
> that made me choose to halt the game. the goalposts keep moving.
> i decided that i could retire and reduce income and be just fine.
> i take nothing from anyone, except what i pull from the market. my
> peaceful resistance is to help the bloated federal parasite starve
> by no longer paying the marxist progressive tax. it was with disgust
> that i chose this. i like to work but no longer wish to fund the
> destruction of my country.
> now my accountant minded pretty half is working on keeping us from
> paying any tax we can legally avoid.
> anybody noticed the swell in rand's sales? two complementary books
> are "unintended consequences" and "the battle of athens". the 1st
> is fiction. the 2nd is american history.