We Have a "Paying For It Problem"

[Belk]

I agree with you!

I just looked it up because I forgot exactly how much we spend on interest. FY2012 we spent 220 Billion on interest. Why on earth are we giving away 220 Billion dollars a year?

National Debt Interest Payments Dwarf Other Government Spending [CHART] - US News and World Report

 

[conamer]

You borrow at current interest rates. That's how it works.

The government doesn't take out a 30 year ARM on our debt it issues bonds at current interest rates at auction.

Current interest rates are lower than inflation on government bonds. It's incredibly cheap to borrow money right now for them.

Right now.

 

[conamer]

I just looked it up because I forgot exactly how much we spend on interest. FY2012 we spent 220 Billion on interest. Why on earth are we giving away 220 Billion dollars a year?

National Debt Interest Payments Dwarf Other Government Spending [CHART] - US News and World Report

We just end up paying more for less.

 

[EdwinWillers]

I just looked it up because I forgot exactly how much we spend on interest. FY2012 we spent 220 Billion on interest. Why on earth are we giving away 220 Billion dollars a year?

National Debt Interest Payments Dwarf Other Government Spending [CHART] - US News and World Report

Yep

Imagine what "good" could be done with an extra $220,000,000,000 to spend every year. In fact, you really need to double that amount because it also represents lost opportunity.

Our chronic addiction to spending is costing us a LOT of money.

 

[OldWiseGuy]

I just looked it up because I forgot exactly how much we spend on interest. FY2012 we spent 220 Billion on interest. Why on earth are we giving away 220 Billion dollars a year?

National Debt Interest Payments Dwarf Other Government Spending [CHART] - US News and World Report

Actually 80 percent of that interest is paid to domestic investors and goes into the domestic economy (except when it is used to buy imports). It is the 20 percent that is paid to foreigners like China and Japan, that damages the economy.

 

[EdwinWillers]

Actually 80 percent of that interest is paid to domestic investors and goes into the domestic economy (except when it is used to buy imports). It is the 20 percent that is paid to foreigners like China and Japan, that damages the economy.

Ironic, isn't it? That those who vilify "the rich" in order to take their money so they can distribute it to "the not-rich" are actually paying "the rich" for the privilege of borrowing from them.

 

[Belk]

Actually 80 percent of that interest is paid to domestic investors and goes into the domestic economy (except when it is used to buy imports). It is the 20 percent that is paid to foreigners like China and Japan, that damages the economy.

Hmmm... So you have always struck me as a financial kind of guy OWG, do you think our debt is an issue?

 

[OldWiseGuy]

Hmmm... So you have always struck me as a financial kind of guy OWG, do you think our debt is an issue?

I do, but I don't see a way out of it without drastic changes that will impact the whole global economy.

 

[contango]

Are you talking welfare the specific program or are using welfare as a blanket term for social programs? Welfare the program is a very small part of the budget. The monsters are social security and medicare from what I recall.

The rest of your post I agree with. Our interest payments alone are taking bigger and bigger chunks of spending that we could put to better use in other areas.

I mean welfare as a generic term to cover any system of people receiving money from the government other than as a fair payment for services provided.

 

[contango]

Actually 80 percent of that interest is paid to domestic investors and goes into the domestic economy (except when it is used to buy imports). It is the 20 percent that is paid to foreigners like China and Japan, that damages the economy.

I guess the question would then have to be what proportion of the interest paid to domestic investors does end up being used to buy imports.

As someone else said it's rather ironic to hear the rallying call of "tax the rich" when people are being taxed in order to pay the rich (it's probably safe to assume that the poor aren't major holders of US government debt)

 

[OldWiseGuy]

Ironic, isn't it? That those who vilify "the rich" in order to take their money so they can distribute it to "the not-rich" are actually paying "the rich" for the privilege of borrowing from them.

I'm not in favor of raising taxes, but, it may be necessary. We have built a high maintenance society that is aging and breaking down all over the place, materially and humanly. At some point we have to focus on maintenance and away from production. It will be difficult however, as our national mindset is focused mainly on production of yet more stuff that we can't take care of.

 

[OldWiseGuy]

I guess the question would then have to be what proportion of the interest paid to domestic investors does end up being used to buy imports.

As someone else said it's rather ironic to hear the rallying call of "tax the rich" when people are being taxed in order to pay the rich (it's probably safe to assume that the poor aren't major holders of US government debt)

Large amounts of gov't debt can be found in managed pension funds, private bond funds, and directly purchased bills, notes, and bonds; held by millions of middle-class folks. I myself held a mixed bond fund heavily weighted with gov't securities. Large corporations might buy gov't securities for short periods until they can find better investments, but they don't generally hold them long term.

(I'll have to do some more reading on exactly how treasury's are bought and sold in order to stimulate the economy. It's not as simple as it sounds.)

 

[contango]

I'm not in favor of raising taxes, but, it may be necessary. We have built a high maintenance society that is aging and breaking down all over the place, materially and humanly. At some point we have to focus on maintenance and away from production. It will be difficult however, as our national mindset is focused mainly on production of yet more stuff that we can't take care of.

In principle I can accept that raising taxes may be necessary but before I give a government any more money I want to see that it is using what it has wisely. At present it seems giving more money to the government would be only marginally more productive than giving it to a drunken sailor on shore leave.

Part of the problem is that nations are living so far beyond their means the only way to rebalance the system is to impose a reduction in the standard of living for the overwhelming majority that the most likely outcome would be civil unrest.

To balance the books the US would need to cut something like $1.5 trillion ($1,500,000,000,000) from its budget and even that wouldn't reduce the debt by a single cent. If the debt were to be repaid over the course of, say, 50 years then another ~$300bn would need to be lost from the annual budget. (That's using simplistic, back-of-an-envelope calculations rather than detailed loan amortisation but it's close enough to make the point). The fundamental point is that if the national debt were to be repaid within 50 years the cost would be cutting ~$1.8trn from the budget, every year for those 50 years. I forget the exact figures for the government budget but from what I recall that would represent cutting public spending by 40-50% or so.

Large amounts of gov't debt can be found in managed pension funds, private bond funds, and directly purchased bills, notes, and bonds; held by millions of middle-class folks. I myself held a mixed bond fund heavily weighted with gov't securities. Large corporations might buy gov't securities for short periods until they can find better investments, but they don't generally hold them long term.

(I'll have to do some more reading on exactly how treasury's are bought and sold in order to stimulate the economy. It's not as simple as it sounds.)

Sure, a lot of government debt is held by pension funds but sooner or later that hits the wall as well. When the baby boomers start to retire en masse (which should be roundabout now) they will be cashing in their pension funds to provide a retirement income. Since each generation is now smaller than the one before it that means people will be leaving pension schemes faster than new members join them, so the holding of government bonds by the pension funds will inevitably decline.

Either way the poorest among society probably aren't holding much in the way of government debt. For the middle class who own it, it does seem rather ironic to have interest paid which is presumably taxable, only for part of that tax to end up paying interest back to the bondholder.

 

[OldWiseGuy]

In principle I can accept that raising taxes may be necessary but before I give a government any more money I want to see that it is using what it has wisely. At present it seems giving more money to the government would be only marginally more productive than giving it to a drunken sailor on shore leave.

Part of the problem is that nations are living so far beyond their means the only way to rebalance the system is to impose a reduction in the standard of living for the overwhelming majority that the most likely outcome would be civil unrest.

To balance the books the US would need to cut something like $1.5 trillion ($1,500,000,000,000) from its budget and even that wouldn't reduce the debt by a single cent. If the debt were to be repaid over the course of, say, 50 years then another ~$300bn would need to be lost from the annual budget. (That's using simplistic, back-of-an-envelope calculations rather than detailed loan amortisation but it's close enough to make the point). The fundamental point is that if the national debt were to be repaid within 50 years the cost would be cutting ~$1.8trn from the budget, every year for those 50 years. I forget the exact figures for the government budget but from what I recall that would represent cutting public spending by 40-50% or so.



Sure, a lot of government debt is held by pension funds but sooner or later that hits the wall as well. When the baby boomers start to retire en masse (which should be roundabout now) they will be cashing in their pension funds to provide a retirement income. Since each generation is now smaller than the one before it that means people will be leaving pension schemes faster than new members join them, so the holding of government bonds by the pension funds will inevitably decline.

Either way the poorest among society probably aren't holding much in the way of government debt. For the middle class who own it, it does seem rather ironic to have interest paid which is presumably taxable, only for part of that tax to end up paying interest back to the bondholder.

There is a way out, but it would involve bypassing the Fed, which only creates more debt, and infusing the economy with equity. This can be done by paying selected gov't contracts directly from the Treasury.

The other thing that should be done is to tighten up on trade policy. We can't continue hemorraging $400+Billion per year out of the economy.

 

[contango]

There is a way out, but it would involve bypassing the Fed, which only creates more debt, and infusing the economy with equity. This can be done by paying selected gov't contracts directly from the Treasury.

Interesting idea, do you have any more thoughts on just how that would work?

The other thing that should be done is to tighten up on trade policy. We can't continue hemorraging $400+Billion per year out of the economy.

That makes sense, although if that causes prices to rise (and it's hard to see how it wouldn't) the end result could easily be that people just don't buy new stuff with all the corresponding economic contraction that would entail.

Personally I'd like to see a move to an economy that isn't based on endless debt-fuelled consumption but fear such a transition would cause a lot of economic pain to a lot of people.

 

[OldWiseGuy]

That makes sense, although if that causes prices to rise (and it's hard to see how it wouldn't) the end result could easily be that people just don't buy new stuff with all the corresponding economic contraction that would entail

Higher prices translate to higher paychecks, which are needed to maintain a high standard of living. Using cheap foreign labor is destroying our standard of living. It's the competitive race-to-the-bottom pricing, i.e. Walmart that is dragging wages down while at the same time living costs are rising.

Personally I'd like to see a move to an economy that isn't based on endless debt-fuelled consumption but fear such a transition would cause a lot of economic pain to a lot of people.

Our ecomony is like a giant Monopoly game that keeps adding players but insists that no new money is added. Economists believe that the 'velocity' of money will make up for lack of volume. In a perfect world this might work but the velocity virtually stops when money enters the banking system.

But the real problem is the trade deficit, which actually goes back to the end of WW1 when we loaned Europe money to rebuild their economies. Instead of buying American products and services they traded amongst themselves using our dollars to support their weak currencies (that was the beginning of our dollar becoming the global 'reserve' currency) and the beginning of the drain on our dollars (we loaned them yet more during and after WW2), and a succession of presidents kicked that can down the road never insisting that those loans be repaid.

Because those dollars are still in circulation they must be kept 'on the books' as if they were still in our domestic economy. And because there are so many of them out there we must uphold their value. We are victims of our own success in this regard.

Here's a humorous comparison. A friend of mine complained that his tenants steal the lightbulbs from the basement and halls of his apartment building. I asked him what he was doing about it. He said that he was going to just keep replacing them until everyone in the building had all the lightbulbs they needed.

In a way that's what we are doing. It seems that we are going to hemmorage dollars to the global economy until they have American dollars coming out of their ears.

 

[GarfieldJL]

People have no problem with wasteful spending when they are spending other people's money and not their own.

 

[variant]

I DON'T CARE HOW "CHEAP" INTEREST RATES ARE Variant. Yes, they ARE "cheap" - cheaper perhaps than they've ever been.

That's NOT the point.

The point is we are spending, and have spent WAY BEYOND OUR MEANS. It's irrelevant how cheaply we can borrow more money to take ourselves even into deeper debt. The point is the more we spend and the more we borrow to sustain a level of spending that is far beyond our means to EVER repay is not only foolish, it's downright wicked.

Borrowing money, going into temporary debt, has a place in an economy, personal or public. No one disputes that.

You should care, how cheap the rates are will give us more flexibility and maneuverability in how we can put the country on the right track.

I agree the current state of the spending deficit shouldn't be chronic and it should be addressed as the economy improves.

Slowly.

But that doesn't mean we currently shouldn't be borrowing money.

Massive austerity cuts are just as likely to plunge us back into recession.

Frankly I always think we should be running surpluses when the economy is working properly but that would require the kind of non ideological discipline and balance from our elected officials that I don't think were entirely capable of supporting as a citizenry right at the moment.

 

[variant]

Right now.

Yeah well, the best way to maintain good credit is to pay your bills and not give your creditors a heart attack every few months with political chicanery.

 

[GarfieldJL]

Yeah well, the best way to maintain good credit is to pay your bills and not give your creditors a heart attack every few months with political chicanery.

I would rather not owe anybody any money in the first place, which is why I have a $0 balance on my credit card. I don't spend money that I don't have.