A National Debt Crisis? Think Again

In his book The Science of Fear, Daniel Gardner notes that when asked the question "How many millions are in a billion?" nearly half the population either doesn't know, or answers wrong.

"So how," Gardner asks, "will [people] react when they're told that the arsenic levels in their drinking water are three parts per billion? Those who don't know what a billion is can only ... press the panic button."

Three parts arsenic per billion is actually nothing to worry about -- 10 is the national standard, so anything under that amount is better. But 3 parts per billion just sounds scary if it's not put into appropriate context.

Same goes for economic numbers these days. You don't need to look far before you want to hit the panic button: A trillion-dollar deficit here. A hundred-billion dollar bailout there. Big, scary, numbers everywhere.

Take national debt. The current total is $12.4 trillion, which sounds positively terminal, and has provided fodder for political shouting matches aplenty. But that number in itself isn't important -- until we place it in the proper context.

Bad news ...
You and I will die one day, so all the debt we accumulate now will have to be fully extinguished before long. We'll need to become debt-free.

This isn't the case with countries, or companies for that matter. Companies like General Electric (NYSE: GE  ) , Ford (NYSE: F  ) , and Coca-Cola (NYSE: KO  ) have been in debt for perhaps more than a century, and that's fine -- because they have indefinite lifespans. They'll never become debt-free, nor should they, if only because the proper use of debt can increase their profitability. Same goes for anything with an indefinite lifespan, like countries. The raw amount of debt accumulated isn't important.

What is important is the cost of carrying that debt. Countries can remain perpetually indebted so long as interest payments don't go berserk (which they can, of course). We should really care about our debt's annual carrying cost, especially in relation to the size of our economy.  

To examine that carrying cost, I like to look at the yearly interest expense on our national debt, divided by GDP. Going back to 1940, here's what you get:

Period

Interest payments over GDP (average)

1940s

1.23%

1950s

1.28%

1960s

1.23%

1970s

1.42%

1980s

2.72%

1990s

2.91%

2000s

1.65%

Sources: Bureau of Economic Analysis, Office of Management and Budget.

Now look at these individual years:

Years

Interest payments over GDP

1945

1.40%

1964

1.24%

1984

2.83%

1986

3.05%

1991

3.25%

2000

2.24%

2010

1.29%

2011*

1.67%

2012*

2.18%

2013*

2.61%

2014*

2.90%

*Office of Management and Budget estimate.

You'll notice that 2010 is one of the least costly times for debt over the past half-century. Braving hate mail, I'll also politely point to the irony that the carrying cost of debt in the 1980s, primarily during Ronald Reagan's tenure as president, was exactly twice as costly to taxpayers as Obama's 2010 debt load. Twice. And Reagan didn't have an AIG (NYSE: AIG  ) to deal with.

Or how about this never-mentioned fact: The annual carrying cost of debt in 2000 -- with record surpluses and talk of eliminating the debt for good -- was 75% higher than it is today. See what happens when you put debt into context?

What's going on here?
It's all about interest rates.

We're undoubtedly loading up ridiculous sums of debt today. But interest rates are about as low as they've ever been. So the incremental cost of this debt is minimal, if not negligible. At the start of 2000, the 10-year Treasury note yielded more than 6%; today it yields 3.6%. That's allowed us to carry far more debt than we could in years past.

The problem is what happens if (or when) the tide turns and interest rates surge. Short-term interest rates, now juicing the profits of Goldman Sachs (NYSE: GS  ) , Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC  ) , will someday be magnitudes higher than they are today. That's a near certainty. Moreover, the big debt accumulation period really begins 10, 20, and 30 years down the road, when Medicare's wheels completely fall off.

But is there a debt crisis today, or even over the next several years? The answer is unequivocally "no." Quite the opposite. In fact, the debt's current cost to taxpayers is about as low as it's been in decades. And if the use of deficit spending allows the U.S. to get its economy really moving again, then the tax base will expand, meaning tax revenue will increase, and thus the annual deficit should decline.

Decades down the road, the debt situation gets unimaginably scary. But for now, this is really an arsenic issue.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Coca-Cola is a selection of Motley Fool Inside Value and Motley Fool Income Investor. Ford is a Stock Advisor selection. The Fool's disclosure policy keeps calm and carries on.


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  • Report this Comment On February 26, 2010, at 12:31 PM, Origin97 wrote:

    the MF team never fails to amaze. neither do the American taxpayers. Like children we are.

  • Report this Comment On February 26, 2010, at 12:33 PM, LloydBraun wrote:

    yes, and apoplectic deficit-hawk shills are generally full of crap.

  • Report this Comment On February 26, 2010, at 12:53 PM, damilkman wrote:

    Good article. However, I think you underestimate the short term concern that interests rates could very quickly increase. Is this not the same koolaid that fueled the housing bubble? The % verses GDP will increase much faster if the cost to finace debt increases because of higher interest rates.

    So in summary, knowing the absolute debt verses GDP is also useful as ratio. I think you should add it to your chart. We know that interest rates have a certain norm. Comparing the 80ties and high interest rates and now and no interests rates and concluding we are safer is not neccesarly a good idea. We know that interest rates will increase.

  • Report this Comment On February 26, 2010, at 1:05 PM, TMFHousel wrote:

    damilkman,

    Thanks for your comments. I think I made it pretty clear in the article that short-term rates are certain to spike, and that (along with Medicare's deficits) poses the threat to national debt.

    One comment though:

    "The % verses GDP will increase much faster if the cost to finace debt increases because of higher interest rates."

    Well, maybe. A spike in interest rates would likely come with a spike in inflation. That spike in inflation would increase nominal GDP, so the ratio of interest/gdp wouldn't increase like it would if you're just focused on interest rates.

    Morgan

  • Report this Comment On February 26, 2010, at 1:55 PM, aggie9711 wrote:

    You are completely ignoring the fact that government spending is non-productive, and a drag on the private economy. It takes money out of the private sector, preventing it from being used in productive enterprises, and spends it on non-stimulating, non-productive things (turtle tunnels, income transfers, etc). This represents a real drag on GDP growth, now and in the future.

    Keynesian economics has been disproved over and over again. Look at Japan. They spent themselves into debt greater than 100% of their GDP to get out of their early 1990s recession and still haven't fully recovered. At the rate we are accumulating now, we'll be in the same position by the end of this decade.

    Governments are not profit making enterprises, like Coke and GE, so your comparision there is a non-sequiter. Government debt doesn't increase the profitability or ROE of government, because they have none.

    And your argument that we shouldn't worry now because bigger things are farther on the horizon (Medicare and SS, both of which are closer to insolvency with each day) is just plain silly. That's the equivalent of an individual spending themselves into mountains of credit card debt buying big screen TVs and restaurant dinners, but thinking it's OK, because their balloon payment on their adjusting ARM isn't due for another 10 years. Short sighted thinking is what got us into the mess we're in now.

    Not to mention the national security issues. When large amounts of your debt are owned by unfriendly countries (read: China), you lose strategic advantage. Chinese generals are already advocating dumping US debt in order to raise the interest rates on US debt and harm our economy.

  • Report this Comment On February 26, 2010, at 2:19 PM, TexasWisdom2010 wrote:

    But isn't debt management a combination of both principal and interest, or rather, the amount of payment you must make to keep the creditors happy? I've seen lots of people get into debt trouble with low-interest rate loans because the balance on their loans was simply too high.

  • Report this Comment On February 26, 2010, at 2:28 PM, bigcat1969 wrote:

    Thanks for those numbers. They are interesting and a bit scary. If I read them right then the carrying cost doubles in 3 years? With a ton of short term debt being sold now, won't we be in deep trouble when we have to turn over all those 2 year notes? It seems we have moved the clock up from leaving unplayable debts to our grandchildren to giving them to ourselves in just a few years. Won't we be looking at 20 trillion at say 3.5%?

  • Report this Comment On February 26, 2010, at 2:32 PM, TMFHousel wrote:

    "With a ton of short term debt being sold now, won't we be in deep trouble when we have to turn over all those 2 year notes?"

    It is a ton, but the Treasury started taking advantage of the low rates in September, shifting bond sales more toward the long-dated maturities side.

  • Report this Comment On February 26, 2010, at 2:36 PM, TMFHousel wrote:

    "Governments are not profit making enterprises, like Coke and GE, so your comparision there is a non-sequiter. Government debt doesn't increase the profitability or ROE of government, because they have none."

    Bondholders don't care if you're being productive or increasing your ROE. They care that you can you can write a check, which both GE, Coke, and the government can do.

  • Report this Comment On February 26, 2010, at 2:42 PM, whereaminow wrote:

    TMFHousel,

    Exactly why are those interest rates so low? They are pushed artificially low by the world's global banking cartel.

    Is that necessarily a bad thing? Well I think it is. Artificially low interest rates exacerbate the boom/bust cycle. They disrupt the structure of production by creating an atmosphere of "false savings."

    So who really benefits from these artificially low rates? For starters, the governments of the world (no surprise there.) Second, big business. When they're not getting bailed out during the bust, they are using leverage during the boom that would not be available without the "Free Lunch" the Federal Reserve hands out.

    So in a way, you are correct. The debt itself is not truly significant. However, by carrying a huge debt, enabled by distorting interest rates, it is the private sector that gets punished, slowly but surely.

    Production Precedes Predation

    There is one more thing that is a purely philosophical point. The debt carried by Coca Cola is not the same as the debt carried by governments. Coca Cola's debt was entered into with a private contract. The government's debt was entered into with a public contract. The difference is significant. Do not dismiss it.

    I will not even raise the objection that Coca Cola engages in Production while Government engage in Predation, and thus the debt amassed by the two institutions arises from different factors.

    David in Qatar

  • Report this Comment On February 26, 2010, at 2:45 PM, TMFHousel wrote:

    David,

    I don't think we disagree at all.

  • Report this Comment On February 26, 2010, at 2:46 PM, bigcat1969 wrote:

    Ah thanks for the info and sorry for the double post.

  • Report this Comment On February 26, 2010, at 3:04 PM, Savannahboy wrote:

    The numbers I would like to see are the yearly estimates beyond 2014. I am sure that the % of interest over GDP starts to spiral out of control. If rates rise, which they inevitably will, we won't be able to service the debt in maybe 10-15 years. I understand you are saying we don't have a debt crisis now, but so what? We don't want a crisis. I also don't think the crisis is really decades down the road it may be more like a decade maybe a decade and a half down the road.

  • Report this Comment On February 26, 2010, at 3:13 PM, retintx wrote:

    Perhaps comparing the cost of carrying the debt relative to GDP is putting too rosy a glow on the issue.

    Jugg Gregg is quoted in today's Financial Times as saying the US is heading for a debt-driven financial meltdown in 5 to 7 years. For some reason he is concerned.

    It might be because If you look at the debt as a percent of total Government revenue the story is not so benign. Using the 2.9% number for 2014 and assuming current GDP and revenue, the cost of the debt is $406B or 18% of the total revenue for this year. If by chance the percentage of GDP is say 4% then the yearly bill is $560B which is 25% of total revenue and about equal to yearly social security outlays.

    These are big numbers that represent money totally wasted that provides no benefit and will force even greater borrowing at then higher rates. I guess I have to believe that there is strong potential for a national debt crisis that should not be minimized.

  • Report this Comment On February 26, 2010, at 3:23 PM, dave665 wrote:

    The article rightly points out that the cost of our debt is relatively low right now... but that could change very quickly. Nobody knows when and how fast the interest rate on our debt will rise, but it could be very quickly. Then we are suddenly in big trouble. The other point to make is that there is no evidence that deficit spending gets the economy going again, other than propping up a few short-term jobs. It hurts the economy in the long run by discouraging actual production of goods and creation of real, long-term jobs. Everything we are doing is very short-sighted.

  • Report this Comment On February 26, 2010, at 3:26 PM, Melaschasm wrote:

    It would be much better to look at debt as a % of GDP for a variety of reasons. One of the big reasons is because the interest rates on T-Bills is not fully market based.

    The Fed has been buying large amounts of debt, and there are a variety of other mandatory buyers, who are keeping the rates low. Also consider the foreign policy implications of the debt bought be countries like Japan and China. These two buyers, as well as others, are not buying based upon expectations that the debt is selling at a good price, but rather for some other reasons, such has exchange rate considerations.

  • Report this Comment On February 26, 2010, at 3:41 PM, Varchild2008 wrote:

    This article ignores the fact that interest payments on a smaller debt load versus a smaller percent interest payment rate against a fantastically larger debt load is not equivalent.

    If I had a choice of:

    $10 in debt with 10% interest against the debt...

    Versus

    $100,000,000 with 1% interest against the debt...

    I would be jumping for joy over the paying the $10 with 10% interest...versus the other figure which I may never be able to pay off despite the smaller interest percentage.

  • Report this Comment On February 26, 2010, at 3:46 PM, Varchild2008 wrote:

    Look at it this way.

    Rondald Reagon's interest payment percentage does being larger than this year's interest payment....

    DOES NOT MEAN

    1980s payments are larger than 2010s payment when attempting to pay off just the interest payment.

    A Larger debt load means larger interest payments even if the pecentage is the same....

    This article is completely mind blowingly screwed up.

    A real analysis should have real dollars, inflation considered, as to what the interest payments against the debt actually are.... rather than just saying

    "Hey fellers!!!! Look???? Less Percentage Interest Payments!!!! We are saved!!!!"

  • Report this Comment On February 26, 2010, at 3:51 PM, TMFHousel wrote:

    Varchild2008,

    But does the government ever have to completely pay it off? Or can it just hold it in perpetuity and roll it over as long as the carrying cost is manageable? (and 1% is manageable). That was a main point of the article.

  • Report this Comment On February 26, 2010, at 3:53 PM, TMFHousel wrote:

    "A Larger debt load means larger interest payments even if the pecentage is the same...."

    Yes, but how about when interest rates are not the same? And that's the case when comparing 1980s to today.

    "This article is completely mind blowingly screwed up."

    Have a great weekend, too.

  • Report this Comment On February 26, 2010, at 3:58 PM, TMFHousel wrote:

    ""Hey fellers!!!! Look???? Less Percentage Interest Payments!!!! We are saved!!!!""

    That's exactly what it means, and It be cool if you could explain otherwise without resorting to the "I don't get it and therefore you're an idiot" argument.

    If the percentage of interest payments to GDP isn't what's important, what is? Just raw interest payments, without regard to how inflation has altered their impact on the economy over the years?

  • Report this Comment On February 26, 2010, at 4:02 PM, Varchild2008 wrote:

    "But does the government ever have to completely pay it off? Or can it just hold it in perpetuity and roll it over as long as the carrying cost is manageable?"

    Not when other countries are acting as our BOND holders.... Debt Holders..... and are basically able to control our political futures should they wish to dump their debt.....do us harm financially...

    Countries used to *invade* other countries that couldn't pay their debts and take them over.

    We risk offending CHINA and many other nations if we continue to pretend that we can increase / hold our debt to perpetuity without worry.

  • Report this Comment On February 26, 2010, at 4:04 PM, TMFHousel wrote:

    it'd*

  • Report this Comment On February 26, 2010, at 4:07 PM, TMFHousel wrote:

    Ok, so you're saying it's not sustainable if the carrying cost doesn't become manageable (china gets angry, dumps our bonds, and drives up interest rates). How is that inconsistent with what this article says? I wrote:

    "Countries can remain perpetually indebted so long as interest payments don't go berserk (which they can, of course)"

  • Report this Comment On February 26, 2010, at 4:14 PM, TMFHousel wrote:

    "A real analysis should have real dollars, inflation considered, as to what the interest payments against the debt actually are"

    Funny, because that's exactly what this article does.

    If I had just said, "Interest payments in 1980 were $10 billion, and today they're $170 billion, so therefore we're in a deeper hole today," that'd be faulty, lack-of-inflation-consideration analysis. Instead, I gave interest payments as a percentage of GDP, making them real-dollar comparable.

    Have a great weekend. I'm going to stop commenting on your posts before I smash my head on my desk.

  • Report this Comment On February 26, 2010, at 4:55 PM, SwampBull wrote:

    Morgan,

    Thanks for the article. I get your points, and they're good ones. The Medicare/entitlement asterisk is the only one that worries me. If I had it my way, I'd never pay a dime into social security, and never take one out either. The government can keep their Welfare plans to themselves, if it were up to me. The rest of us can work hard and save our earnings, the old American way.

    Off of my soapbox now...

    Thanks a billion! (or as some other arsenic-drinkers out there may say, 'thanks a million millions!') ;)

    Swamp

  • Report this Comment On February 26, 2010, at 4:56 PM, TangoSukka wrote:

    Your point about the general population not being able to understand or quantify the parts per billion is a fine point. Most people, and perhaps more worrying most politicians do not seem to understand basic economics (it is the dismal science afterall) and these are the people who are trying to fix the economic problems (as long as it gets them elected for another term). The problem now is to balance recovery spending with shoring up ye olde government balance sheet (and income statement yikes!). The key word being balance which means less spending and more taxes... No one likes this, but we (well, our elected officials) made the majority of this debt mess during the economically good years now we gotta clean it up during the economically bad years (not ideal).

    I don't think the overall level of debt is concerning (yet) and we happen to have a good interest rate on it at the moment (yippie). Hopefully the selfish politicians can get in gear and do something about it in the near term. Maybe we can give the politicians a bunch of money to fix the budget problems, I hear that politicians like money almost as much as power, status, and their own reflection in the mirror.

  • Report this Comment On February 26, 2010, at 5:03 PM, whereaminow wrote:

    TMFHousel,

    There's something else I would like to add. It's not just the general public that doesn't understand how large a number 1,000,000,000 is.

    My father spent many years working in the corporate offices of a few Fortune 500 companies. We talk business and economics often. He has lamented to me on more than one occasion that no one seems to understand the size of the numbers we deal with, not just politicians or the public, but business leaders and corporate boards as well.

    I think it would be naive to assume that any human can comprehend $1 billion or $12.4 trillion - not even the Federal Reserve economists that tell us its no big deal

    David in Qatar

  • Report this Comment On February 26, 2010, at 5:07 PM, TMFHousel wrote:

  • Report this Comment On February 26, 2010, at 7:19 PM, CajunRon50 wrote:

    So what you are saying is that the banana of the 1980's was yellow and today's apple is red. Therefore we're better off?

  • Report this Comment On February 26, 2010, at 7:55 PM, TMFTypeoh wrote:

    Great job on this Morgan! A++++++++

    It really should help put many of the Gold bugs in their place, but my guess is they would shrug this article off......

  • Report this Comment On February 26, 2010, at 8:40 PM, TMFHousel wrote:

    I have no idea what that means, cajunron.

  • Report this Comment On February 27, 2010, at 11:02 AM, justaplugger wrote:

    Seems to me we have two basic problems. Too much debt and too many politicians (and media pundits) focused primarily on keeping there jobs rather than serving the country.

    Within every human there is a % of greed, raging in a few, lying dormant in most yet awaiting the opportunity to multiply and conquer. Thus easy money > excessive debt > bubbles > crashes ie great depression, savings & loan, dot com, housing, and expectations of excessive entitlements.

  • Report this Comment On February 27, 2010, at 4:43 PM, altonoch wrote:

    Thank you for the excellent article. I often find myself wondering about the future of all humanity and have periods of concern over stagnation in innovation secondary to widespread poverty.

    It becomes easy to lose optimism. I have weathered the storm well but we are interdependent. No one is a free market capitalist when the food stops moving.

    I will hold for now on my large bunker complex, canned food collections and ammunition. It seems that there may be time for innovation to create an increase in global GDP.

    In addition, the dollar has fared pretty well. CDO's seemed to move around the world like diahrea on a cruise ship. If China sells too many of our bonds, then we will be forced to increase interest rates, slowing a recovery and thus consumption from China.

    Remember, even with 5% of global population our country produces between 20-25% of Global GDP. We have more patents pending in biotechnology and nanotechnology than the next 13 countries combined.

    I cannot see assett bubbles well but it seems that with tighter controls on bank lending, higher unemployment, increasing healthcare costs, record foreclosures and deterioration in net assets for most, we may have several years of less risk tolerant capital use. We obviously need a higher savings rate and this crisis demonstrated a fear gasping, life threatening vulnerability.

    Without the action of Bernainke and Paulson, the vacuum of capital would have led to suffering beyond its current levels. I have not heard a viable evidence based solution which would have been able to sustain capital movement between businesses in order to maintain the flow of commerce. Could have been coupled with better regulation, obviously, but we were in a full scale panic attack.

    Thanks again, great job

  • Report this Comment On February 28, 2010, at 9:57 AM, JackCaps wrote:

    This article divides the current GDP by current debt interest rate payments and declares all is good. Mr. Housel abuses the overly large and government defined GDP number (which grows as the government spends) and the low current debt payments due to the government, via the Federal Reserve, keeping short term interest rates at historical lows.

    Why not stay true to the initial sentiment on numbers over a billion and define the current total debt in terms of debt per person? The U.S. Census currently estimates the population to be a tad under 309M. Divide this into the $12.4T debt amount and you get $40,129 in debt per person.

    But wait, taking on this debt load presumes that we'll stop spending, live within our means and pay off this debt. Is that happening? No, just the opposite is occurring. Entitlement spending is growing and current government initiatives plan to grow this spending even faster. It is this growth trend to accumulate greater debt levels that is truly worrisome yet no mention of this trend is made. This is a perverse omission in an analysis of the national debt.

  • Report this Comment On February 28, 2010, at 10:20 AM, TMFHousel wrote:

    JackCaps,

    "Mr. Housel abuses the overly large and government defined GDP number (which grows as the government spends) and the low current debt payments due to the government"

    What GDP calculation would you use?

    "Divide this into the $12.4T debt amount and you get $40,129 in debt per person."

    Yes. But what's the current annual cost of carrying that debt? It's $170billion over 309 million, or $550.

    "But wait, taking on this debt load presumes that we'll stop spending, live within our means and pay off this debt. Is that happening? "

    No it doesn't. Countries don't need to become debt free like people eventually do (before they die). What's important is the cost of carrying the debt, and as this article showed, that cost is currently quite manageable, but will likely be not so once Medicare erupts.

    "Entitlement spending is growing and current government initiatives plan to grow this spending even faster. It is this growth trend to accumulate greater debt levels that is truly worrisome yet no mention of this trend is made. This is a perverse omission in an analysis of the national debt."

    If it's a perverse omission, can I ask how you interpreted this sentence: "Moreover, the big debt accumulation period really begins 10, 20, and 30 years down the road, when Medicare's wheels completely fall off."

    Morgan

  • Report this Comment On February 28, 2010, at 10:20 AM, TMFHousel wrote:

  • Report this Comment On February 28, 2010, at 11:29 AM, JackCaps wrote:

    Re: TMFHousel's 2 questions:

    Q1) "What GDP calculation would you use?"

    A1) I wouldn't use any GDP calculation in an analysis of appropriate debt levels and growth rates. The GDP is a subjective value whose definition is constantly being tweaked, often for political reasons. Using GDP obfuscates the issue. I prefer the per person debt treatment for its clarity.

    Q2) '...how [did] you interpreted this sentence: 'Moreover, the big debt accumulation period really begins 10, 20, and 30 years down the road, when Medicare's wheels completely fall off."

    A2) I interpreted that sentence as one that I am in total agreement. Which makes the conclusion "there is no current debt crisis" all the more irritating. The author knows that there will eventually be a debt crisis, but seems content to advocate no action to avert it. That makes the debt growth trend omission both perverse and willful.

  • Report this Comment On February 28, 2010, at 11:49 AM, futuretrade wrote:

    You leave out several important issues. This huge debt accumulation and the Fed's monetizing of the debt will either require that interest rates be allowed to move to market rates or that inflation gets out of control. Either of these outcomes will hammer the economy.

    I would agree with you that the debt is not a problem if the carrying costs were at 1.29% and the rates were at market rates. But the rates are being artificially constrained and at some point the real bill is going to come due either in market rates or runaway inflation.

    Also, the current administration plans to increase the debt accumulation at record levels with no sign that there will be any meaningful reduction in the foreseeable future. So, the market correction in interest rates or inflation is just going to be much worse when it finally happens.

    Also, the money spent on running up this debt is not being invested in things that make the country more effiicient or more competetive. The money is being spent on give away programs that have no return.

    I wouldn't be too worried about the debt if the money was being used for something like making the US energy self sufficient, or fixing our horrific transportation infrastructure, or giving us an ultra high speed, universal, broadband network. Or, any of a number of other constructive investments.

    But none of these things are happening and with the current spending levels we won't have the money to address these issues when they turn critical.

  • Report this Comment On February 28, 2010, at 11:52 AM, TMFHousel wrote:

    "The author knows that there will eventually be a debt crisis, but seems content to advocate no action to avert it."

    Please, do show where in this article I "seem content to advocate no action." As my colleague Ilan Moscovitz would scream, "NON-SEQUITUR ALERT."

  • Report this Comment On February 28, 2010, at 11:52 AM, futuretrade wrote:

    You leave out several important issues. This huge debt accumulation and the Fed's monetizing of the debt will either require that interest rates be allowed to move to market rates or that inflation gets out of control. Either of these outcomes will hammer the economy.

    I would agree with you that the debt is not a problem if the carrying costs were at 1.29% and the rates were at market rates. But the rates are being artificially constrained and at some point the real bill is going to come due either in market rates or runaway inflation.

    Also, the current administration plans to increase the debt accumulation at record levels with no sign that there will be any meaningful reduction in the foreseeable future. So, the market correction in interest rates or inflation is just going to be much worse when it finally happens.

    Also, the money spent on running up this debt is not being invested in things that make the country more effiicient or more competetive. The money is being spent on give away programs that have no return.

    I wouldn't be too worried about the debt if the money was being used for something like making the US energy self sufficient, or fixing our horrific transportation infrastructure, or giving us an ultra high speed, universal, broadband network. Or, any of a number of other constructive investments.

    But none of these things are happening and with the current spending levels we won't have the money to address these issues when they turn critical.

  • Report this Comment On February 28, 2010, at 11:55 AM, TMFHousel wrote:

    "You leave out several important issues.This huge debt accumulation and the Fed's monetizing of the debt will either require that interest rates be allowed to move to market rates or that inflation gets out of control."

    Oh come on! How did you interpret the part where I discuss rising interest rates and Medicare's out of control debt accumulation? That was almost half the article!!

    I'm going to stop responding to these posts. I can't handle anyone else who reads to first eight words and concludes that I'm wrong.

  • Report this Comment On February 28, 2010, at 12:23 PM, JackCaps wrote:

    Re: TMFHousel's inquiry...

    "The author knows that there will eventually be a debt crisis, but seems content to advocate no action to avert it."

    Please, do show where in this article I "seem content to advocate no action."

    ---

    The author asks me to prove a negative. I confess that I could not discern the action(s) that the author advocates to address the future debt crisis in this article. That is all the proof that I can provide.

    I invite the author to reference the applicable text in this article that describes a suggested action to address the future debt crisis. Please feel free to elaborate on any other advocated actions to avert the future debt crisis.

  • Report this Comment On February 28, 2010, at 12:36 PM, TMFHousel wrote:

    "I invite the author to reference the applicable text in this article that describes a suggested action to address the future debt crisis."

    It doesn't, but this article wasn't about suggested actions. You brought that point into discussion.

    Your claim that I "suggest we take no action" only because action wasn't mentioned is akin to saying that I must obviously support socialism because I didn't specicially say that I don't. By that logic, I could conclude that because your comments don't assail drug trade, you must obviously support leaving the Mexican drug cartel alone. Glenn Beck is particularly good at this ridiculous style of argument.

    If you'd like an article where I discuss action (or, why politicians are unable to take the needed action), here's one:

    http://www.fool.com/investing/general/2010/02/17/how-the-gov...

  • Report this Comment On February 28, 2010, at 12:36 PM, TMFHousel wrote:

  • Report this Comment On February 28, 2010, at 1:13 PM, SandmanKy wrote:

    I agree that debt in and of itself is not a bad thing. And the amount of debt you can carry will greatly depend on the individual, the company or the countries bottom line (profits or tax receipts). Even if your loosing money you can still make payments as long as the creditors continue provide funds (an acceptable ponzi scheme really). But at some point the creditors will to start to question the amount of risk they are taking on or question repayment ability.

    "Bondholders don't care if you're being productive or increasing your ROE. They care that you can you can write a check, which both GE, Coke, and the government can do."

    They may not care if they are productive but they have got to care about the likelihood of repayment and what the other creditors are thinking.

    In some ways China reminds me of a drug dealer to the U.S. They would hate to have the U.S. consumer enter rehab because their export economy would suffer. Yet at the same time they would hate to see us overdose and loose their best junky. I believe our creditors are getting to the point where they are watching for signs of an overdose. If that happens lending will be restrained and the ability to make payments to bondholders may suffer.

    Great discussion and thank you to the Motley Fool for providing this type of forum.

  • Report this Comment On February 28, 2010, at 1:27 PM, JackCaps wrote:

    Since neither the author nor I could find the action plan in the article to address the future debt crisis, can we cancel the "NON-SEQUITUR ALERT."?

    I interpreted the "A National Debt Crisis? Think Again" article as being slyly dismissive of a big problem. If that was not the author's intention, then perhaps a different title and most of the text following the title should have been written.

  • Report this Comment On February 28, 2010, at 1:30 PM, TMFHousel wrote:

    No. The non-sequitur alert was because you note that I don't mention any actions to be taken, and conclude it must mean that I'm for no action.

    Enjoy your Sunday.

  • Report this Comment On February 28, 2010, at 3:07 PM, futuretrade wrote:

    "Oh come on! How did you interpret the part where I discuss rising interest rates and Medicare's out of control debt accumulation? That was almost half the article!!"

    I read what you said about Medicare. I'm talking about the debt accumulation of the last two years plus the projected accumulation of the next six. Your Medicare wheels falling off comment indicates that you think the debt accumulation only becomes a problem in 20 to 30 years.

    I read your entire article several times and I still disagree with your preimise that we do not have a debt crisis simply because today's carrying costs are low due to artificially constrained carrying costs. The pain is merely being projected into the future by the manipulation of interest rates.

  • Report this Comment On February 28, 2010, at 3:07 PM, futuretrade wrote:

    "Oh come on! How did you interpret the part where I discuss rising interest rates and Medicare's out of control debt accumulation? That was almost half the article!!"

    I read what you said about Medicare. I'm talking about the debt accumulation of the last two years plus the projected accumulation of the next six. Your Medicare wheels falling off comment indicates that you think the debt accumulation only becomes a problem in 20 to 30 years.

    I read your entire article several times and I still disagree with your preimise that we do not have a debt crisis simply because today's carrying costs are low due to artificially constrained carrying costs. The pain is merely being projected into the future by the manipulation of interest rates.

  • Report this Comment On February 28, 2010, at 3:08 PM, futuretrade wrote:

    Correction:

    I read your entire article several times and I still disagree with your preimise that we do not have a debt crisis simply because today's carrying costs are low due to artificially constrained carrying costs.

    should say

    I read your entire article several times and I still disagree with your preimise that we do not have a debt crisis simply because today's carrying costs are low due to artificially constrained interest rates.

  • Report this Comment On February 28, 2010, at 3:30 PM, TMFHousel wrote:

    "Your Medicare wheels falling off comment indicates that you think the debt accumulation only becomes a problem in 20 to 30 years."

    Well, you conveniently dropped the '10 years' part, but in general, I think that's mostly correct. The big, ruinous accumulation projections that begin to spiral the carrying costs out of control start in 10, 20, and 30 years. Simply declaring otherwise doesn't make it true.

    Here's a good view: http://baselinescenario.files.wordpress.com/2010/01/figure1-...

  • Report this Comment On February 28, 2010, at 4:20 PM, futuretrade wrote:

    I don't want to split hairs over the medicare thing, I was just trying to quote your comment, not trying to argue about it. I think the debt accumulation is a problem now, I don't think we have to wait 10 years.

    But that wasnt' the point I was trying to discuss. Actual carrying costs are only part of the equation and not the most important part.

    There is tremendous risk to our economy with this huge debt sitting on the books, the monetizing of the debt, and the continuing spend and don't tax and then spend some more behavior of our politicians.

    As you said a rise in interest rates would put the carrying costs into the crisis area. Also, the monetizing the debt and the artificially forcing interest rates to remain low poses the potential risk of runaway inflation.

    So, while it might be true that we don't have a crisis today, our politicians are drastically increasing the likelihood that we will have one in the immediate future.

    Perhaps you are also saying that.

  • Report this Comment On February 28, 2010, at 6:04 PM, georcole wrote:

    @ TMFHousel,

    I am always pleased to read your articles. You tend to take on some topics that people have not thought of in the light in which you describe them. I thank you very much for that. I did read the article all the way through and thought it was very informative and well written.

    My comment is actually a small group of questions. According to Investing Wiki GDP is "GDP or Gross Domestic Product is the total value of all finished goods and services produced within the U.S on annual basis. Also includes foreign-made goods and services." I was wondering if maybe we should be comparing our debt payments to the taxes and such that the government takes in instead of GDP. After all, I cannot pay my bills with the value of all of the products I make, I actually have to get my profits and that is what I pay my bills with. So for example let's assume that the government's "profit" is the taxes and such that it takes in. If we assume that 15% of the government's "profit" is used to pay debt payments, would it not make sense to keep that at a reasonable level? Isn't the current situation similar to a variable rate mortgage? When the interest rates do go up, will we still be able to make the payments? Shouldn't we be trying to pay down the debt so that it doesn't explode like an ARM adjusting? I will tentatively agree for now that paying OFF the debt is not necessarily the best plan, but paying it DOWN so that there isn't so much to have explode upward and cost us that much more later on sure sounds like a good plan.

    Thank you for your thoughts and input.

    George

  • Report this Comment On February 28, 2010, at 6:12 PM, georcole wrote:

    @ TMFHousel

    Clarification - my bills = my personal bills, not the bills of my business. The government did not make all the products and provide all the services that make up GDP. It only keeps a portion of that, just like I personally only get to keep a portion of my businesses income. So my personal portion = the government's "profit".

    Sorry for the possible confusion.

  • Report this Comment On February 28, 2010, at 6:32 PM, Glycomix wrote:

    What matters is whether we the US government may STILL be able to pay for defence, medicare and infrastructure: roads, bridges, and schools.

    If the US government continue to expand entitlements and borrow, it will run out of money.

    During the healthcare debate, a middle-of-the-road Democrat revealed that 50% of medicare is currently unfunded. That hole has caused a debt of $249,000 per taxfiler. We need to pay for medicare before you add on more entitlements.

    THIS year, OBama increased the debt by $1.25 Trillion. Divided by 135 million taxfilers, that means that each taxpay owes an additional $9,260 this year. According to the IRS, these 135 M taxpayers have paid at most approximately $5,000/each. This number includes teens and welfare mothers. Twenty-two million of these taxfilers don't pay tax. They file so that they may receive welfare.

    What's the effect of not paying for entitlements with taxes? National bankruptcy. It happened to Brazin in the 1980s. Like Brazil, No one will lend to us. The rule of 67 will double our debt every eight years until no-one will buy our debt or we'll have run-away inflation as occurred in Germany in 1923.

    Some say, "so What? Inflation will drive out our national debt.

    WHAT DOES INFLATION DO? It wipes out savings, destroys the middle class, and prevents investment into the economic engine. This destroys employers, increases unemployment, and turns economically developed countries into third world nations who have no military might to prevent terrorism and no money to pay for a decaying infrastructure..

    Acutal Examples of the effect of Inflation:

    1) In Germany in 1923, within a week 147% inflation destroyed the middle class and ALL monitary savings. They had food riots. It made EVERYone poor or starving. The German population turned to either the Nazi party or to Communism.

    2) Governmental lack of self-control in the past 10 years has destroyed the nation of Zimbabwe, whose national resources could make it one of the richest countries in Africa per capita.

  • Report this Comment On March 01, 2010, at 1:08 AM, TMFBreakerMage wrote:

    Great article. The comments were great too. My favorite so far was the "bang the head on desk".

    Seriously though, great discussion.

  • Report this Comment On March 01, 2010, at 9:11 AM, altonoch wrote:

    I believe the point of the article is to demonstrate how the debt is likely to affect short term spending on debt to help evaluate its role in a financial recovery. In other words , "is this debt problem an immediate harbinger of another collapse of a great empire from spreading itself too thin?

    My interpretation is that we have weathered times where spending on debt was much higher, even with a significant interest rate hike. We must begin to curb debt as soon as possible without contracting the money supply. This would create a possible reversal in recovery creating increased deficits.

    You gave no false assurance, it is difficult to assess deficits and debt into a proper place in our evaluation of potential outcome for the country.

    Your article helped me to relax a bit. We have time to work. Thanks again

  • Report this Comment On March 01, 2010, at 11:30 AM, RegLeCrisp wrote:

    Great job following up with the comments. Unfortunately reading comprehension likely surpasses (sp?) math as a problem area in this country.

  • Report this Comment On March 01, 2010, at 4:43 PM, doncoyoteok wrote:

    Isn't this rather like the guy who falls from a 30 story building and shouts out to the guy looking from the 15th story window, "No problem so far!!".

  • Report this Comment On March 01, 2010, at 6:19 PM, futuretrade wrote:

    @altonoch

    "is this debt problem an immediate harbinger of another collapse of a great empire from spreading itself too thin"

    I wouldn't be worried about the debt IF our fiscal policies were being handled by competent leaders who put the long term well being of the country first.

    They aren't - competent

    and, they don't - put the long term well being of our country first.

    Since our so-called leaders give every indication that they are going to continously increase the rate of the increase of the debt burden the current debt burden worries me very much.

  • Report this Comment On March 01, 2010, at 6:22 PM, futuretrade wrote:

    @altonoch

    "is this debt problem an immediate harbinger of another collapse of a great empire from spreading itself too thin"

    I wouldn't be worried about the debt IF our fiscal policies were being handled by competent leaders who put the long term well being of the country first.

    They aren't - competent

    and, they don't - put the long term well being of our country first.

    Since our so-called leaders give every indication that they are going to continously increase the rate of the increase of the debt burden the current debt burden worries me very much.

  • Report this Comment On March 01, 2010, at 6:25 PM, gsgreen wrote:

    What seems to be missing from many of the comments here, and from the article, is that all the tax revenues used to pay the interest and pay back the principle on the National Debt is money that is not available to do anything useful, like rebuild roads, provide healthcare, improve education. That is the crisis we are in. It is a long term crisis and it feels to me that it is being ignored by just about everyone.

  • Report this Comment On March 01, 2010, at 7:11 PM, stan8331 wrote:

    Excellent article. Even though I agree that the debt is not currently a serious problem, saying so makes me cringe because baby boomer retirement is looming ever closer and my fear is that neither the public or our politicians will have the courage to seriously address the issue before it's too late to prevent massive damage to our economy and considerable human misery.

    Republicans try to tell us the healthcare system is in fine shape and only needs a few minor tweaks around the edges even though our current healthcare spending (as a percentage of GDP) approximates that of a drunken sailor; Democrats try to tell us that adding massive new spending with no concrete plan for cost reduction will magically save us a ton of money.

    The problem is that any real solution will be painful - healthcare providers will necessarily be paid less while consumers will face higher costs and/or reduced coverage and choices. Even in a best-case scenario, nobody is going to come out of this smelling like a rose.

    We do still have time to develop a serious plan to mitigate the effects of the coming baby boomer tsunami. Draconian measures could be avoided if we begin taking sooner rather than later - the question is whether we'll wait too long to get started. Given the tenor of the current debate in Washington, it's difficult to be optimistic...

  • Report this Comment On March 01, 2010, at 7:46 PM, zgriner wrote:

    KEEP YOUR HANDS OFF THE GDP!! COMPARE THE DEBT TO THE US BUDGET.

    The GDP belongs to the American people. The US budget is the money being spent by Congress and Yobama. Debt service keeps rising as a percentage of the budget. Any talk about reducing the debt is impossible until we eliminate the deficit, which is impossible if the budget keeps rising faster than the GDP. This forces the taxes to increase just to pay the debt. If taxes stay relatively stable, the deficit must keep rising, increasing our interest payment even more.

  • Report this Comment On March 01, 2010, at 7:55 PM, zgriner wrote:

    DEBT VS GDP? THAT'S MY MONEY!

    Compare the debt to the US BUDGET! That's the money Congress and Yobama spend to create the debt, not GDP. As long as we keep running deficits, we will never reduce our debt, which has not stopped growing, even during Clinton. Our interest payments are growing, making it harder to use our tax money wisely, because we must pay the interest.

  • Report this Comment On March 01, 2010, at 7:56 PM, mavena wrote:

    Debt is debt. It is all this kind of complex intellectual economic verbage that twists and turns it into something else, ie something good. Look up debt in the dictionary..not the keynesian dictionary nor the

    obama compendium. It is simple logic that will get us out of the problems we are in and intricate economic b.s. that will distort the problem and

    further confuse and disempower the electorate = ie the taxpayers who pay for this non-constructive "debt."

  • Report this Comment On March 02, 2010, at 12:12 AM, kyddfool wrote:

    Sorry, sir. You are absolutely wrong and in six months I want you to revisit your article ......There are only a ( few ) economists who not only see the danger lurking on the horizon but predict it. History does repeat itself .

  • Report this Comment On March 02, 2010, at 3:45 PM, clayman14 wrote:

    Interest rates are low now so the debt is cheap. What happens when interest rates rise as they will have to eventually? The debt that was sold cheap suddenly is worth the interest it pays (next to nothing). While all we've done is expand our appetite for debt. In other words we're messing over others (the one's purchasing treasuries today) for short term binge spending. How many years has the government contracted in size? Not many so once everybody get's handed bad yields who is going to continue to buy up our debt? Particularly as the unfunded liabilities of Medicare and Social Security come due.

    Secondly, why interest to GDP? A more realistic comparison is interest to income as GDP is the total market value. The government could never tax the full market value because everybody would just quit working (i.e. USSR). Are you implying that the federal government owns the whole economy?

    Obama's budget estimates $2.3 trillion in receipts with $163 billion in interest payments. This is an interest expense of 7% on NET INCOME not an individual loan. That's a huge number especially when we're taking out another trillion this year to add to our debt granted it won't increase the interest expense by that much but that's just a temporary solution.

  • Report this Comment On March 02, 2010, at 11:18 PM, sugarlu wrote:

    Apparently Mr. Housel thinks playing with fire is OK until the curtains and the sofa are in flames. I would prefer to be better safe than sorry. Us deficit and debt levels would already have driven the US dollar into the toilet were it not for marginally worse fiscal behaviour of the PIIGS and the lack of an alternative to our currency with any breadth or depth. Yuk it up at the gold bugs if you wish. They may be paranoid, but they also may be right.

  • Report this Comment On March 03, 2010, at 12:28 AM, heavyoiler wrote:

    It is misguided how a few posters try to blame Obama for the national debt. When Obama took office the United State's economy was basically in a free fall. The last time the government allowed an economic free fall to take its course we had the Great Depression and about 25% unemployment. This "great recession" has, hopefully, been brought under control and unemployment stopped at 10%. Unfortunately national debt has had to be increased during the Bush administration and the Obama administration to accomplish this task. Economists, by an overwhelming majority, believed this was the only viable course of action to take in order to avoid a catastrophic economic disaster. Just as soon as it is clear this "great recession" has been turned around and we are on the road to recovery, we then must go to work in earnest to get the national debt under control. Also, safeguards, in whatever form are nessessary, must be put in place to prevent these economy destroying financial crisis from occuring in the future.

  • Report this Comment On March 03, 2010, at 1:59 AM, jennifergmd wrote:

    The problem is not the debt that is on the books already. It is the debt that the Fed is on the hook for that has not shown up yet. When you look at the entitlements going forward 10 years, it gets very ugly. The wiggle room decreases with each crisis. We shot our wad with this crisis and now we have to wait while the titanic slowly sinks....The Fed has large buckets to bail the water with. But we are still sinking none-the-less. I am riding the euro short now and then will jump off in time to then ride the dollar down.

  • Report this Comment On March 03, 2010, at 10:11 AM, XMFSinchiruna wrote:

    "But is there a debt crisis today, or even over the next several years? The answer is unequivocally "no.""

    'Unequivocally' is quite a word. Perhaps a better way to phrase it might have been: "when viewed exclusively through the lens of my current carrying-cost analysis". Carrying cost is but one parameter among many for analyzing the scale, significance, and potential destructive potential of a given debt burden.

    "Three parts arsenic per billion is actually nothing to worry about" ...

    I have said before that perception of such matters often comes down to one's overarching philosophical paradigm. Given the destructive chemical properties of arsenic, I happen to think it's similarly advisable to avoid water with 3ppb as it is at 10ppb, and I don't necessarily trust the EPA to infallibly determine those "safe allowable limits" on our behalf.

    Similarly, a more holistic approach to assessing the dangers inherent in our present debt predicament yields a conclusion far removed from the one presented above. I propose that our economic fate hinges upon much more than mere interest rates.

    Far from unequivocal, these are my opinions.

  • Report this Comment On March 03, 2010, at 10:41 AM, TMFHousel wrote:

    Thanks for your thoughts Chris.

    I have similarly strong feelings for comments such as, "any notion of gold being a bubble is patently false under the circumstances."

    Perhaps a better way to phrase it might have been: "I'm eyeballs-deep in commodities. Those disagreeing are thus clearly wrong and most likely have an inferior IQ"

    But, I guess strong stances make markets. And that's why we're all here.

    My opinions,

    Morgan

  • Report this Comment On March 03, 2010, at 10:44 AM, silverminer wrote:

    touche :)

  • Report this Comment On March 03, 2010, at 10:56 AM, ElCid16 wrote:

    "...I don't necessarily trust the EPA to infallibly determine those 'safe allowable limits' on our behalf."

    'Infallibly' is quite a word. Perhaps a better way to phrase it might have been: "subjectively based on exposure limit research."

    At 3 ppb, the EPA assumes that about 1 in 1,700 people will develop cancer at some point of their lives when drinking 2 liters of water with these levels of arsenic per day. At 10 ppb its about 1 in 500. I can assure you that there is nothing infallible about the EPA's choice to select 10 ppb as their target - its just the risk they're willing to take. There are probably many drinking water researchers who work for the EPA who aren't fans of the 10 ppb limit.

    At some point on the probability chart, you've got to realize that the cost of reducing As from X ppb down to 3 ppb is just too expensive to prevent one in 1,700 from developing cancer. This might sound ruthless, but being the free market capitalists that many of you are, I imagine you won't have trouble accepting this policy.

    Just ten years ago, by the way, the arsenic limit was at 50 ppb.

  • Report this Comment On March 03, 2010, at 10:57 AM, ElCid16 wrote:

    "As" is arsenic...

  • Report this Comment On March 03, 2010, at 10:58 AM, silverminer wrote:

    http://www.fool.com/investing/general/2010/02/23/charlie-mun...

    "I believe that any notion of gold being a bubble is patently false under the circumstances."

  • Report this Comment On March 03, 2010, at 11:02 AM, silverminer wrote:

    silverminer = TMFSinchiruna

  • Report this Comment On March 03, 2010, at 11:05 AM, TMFDiogenes wrote:

    Woah! At 10 ppb 1 in 500 people will develop cancer as a result of arsenic in their water? That's uncomfortably high.

  • Report this Comment On March 03, 2010, at 11:18 AM, TMFDiogenes wrote:

    Thanks, dkilgour. I'm done drinking water. Forever.

    http://www.nrdc.org/water/drinking/qarsenic.asp

    Hilarious exchange, Morgan and Chris, btw.

  • Report this Comment On March 03, 2010, at 11:58 PM, realtygroup wrote:

    I would like to congratulate the author on the sticking his neck out and making a comment on the debt issue. I disagree that the debt interest payments are not a problem but I like the commentary anyway.

    My reasoning is bellow if anyone cares at this point.

    1. Fishers equation basically states the expectations of future interest rates matter a great deal to future interest rates.

    2. The ability of the government (in this case the Fed) to control interest rates is also effected by expectations of interest rates.

    3. Friedman found effective expansion of credit, in the form of low interest rates, lessons the effects of recessions.

    If our national government projects we are willing to borrow at massive levels expectations for inflation may rise to levels seen in other unstable economies. The Fed would loose the ability to control inflation and our economy would spiral out of control. It would become more volatile.

    It is my understanding controlling inflation should be the primary concern for a government.

  • Report this Comment On March 04, 2010, at 8:13 PM, Ozcutty wrote:

    Lets face it cutting debt is easy, just cut spending and raise taxes. The problem is the political short-termism. The only way the pollies reckon they can safely increase the tax take these days are the good old alcohol and tobacco taxes. Greece started with those, now they are cutting public servant pay and getting riots.

    Basically its the people that don't want to pay the bills they owe. If Obama did what he had to do, he would get kicked out at the next election as being a "high taxing" president.

  • Report this Comment On March 05, 2010, at 4:05 AM, buyhold2 wrote:

    Why can't we focus on paying down our debt as in principal instead creating more entitlement programs that require debt. If we truly care about our kids then we pay down the national debt as much as possible and let them enjoy economic prosperity!

    Oh wait I forgot that politicians have to get reelected therefore we must create entitlement programs and issue debt to pay for it! I mean it is "for the children". Seriously if the politicians truly cared about the children then they work on paying down debt!

  • Report this Comment On March 05, 2010, at 4:05 AM, buyhold2 wrote:

    Why can't we focus on paying down our debt as in principal instead creating more entitlement programs that require debt. If we truly care about our kids then we pay down the national debt as much as possible and let them enjoy economic prosperity!

    Oh wait I forgot that politicians have to get reelected therefore we must create entitlement programs and issue debt to pay for it! I mean it is "for the children". Seriously if the politicians truly cared about the children then they work on paying down debt!

  • Report this Comment On March 05, 2010, at 12:05 PM, clydejazz wrote:

    Some excellent information in Morgan Housel's TMF article on the deficit (click the Medicare's wheels link above). Health care reform is an absolute must:

    "Keep these facts in mind, because they're important when digesting today's acidic rhetoric. Current deficit explosions aren't due to earmarks, death panels, or bailouts. Overwhelmingly, they're due to cliff-diving drops in tax receipts, which came from a combination of tax cuts and (more importantly) income stolen by the Great Recession.

    But that's just short-term. As I showed in a previous article, the long-term battle almost entirely surrounds entitlements -- Social Security, Medicaid, and Medicare. Medicare is the real biggie (a $37 trillion shortfall over 75 years). And since health-care reform now looks like it'll be symbolic at best, this problem isn't going away -- great news for UnitedHealth (NYSE: UNH) and WellPoint (NYSE: WLP), but potential suicide for long-term budget deficits. As economist James Kwak from Baseline Scenario put it, 'If politicians were actually serious about deficits, they would vote for health care reform 100-0 in the Senate.' That's far more factual than it is opinionated."

  • Report this Comment On March 05, 2010, at 12:05 PM, tylee100 wrote:

    I think your denominator is the problem. What is the relationship between debt payments and GDP? Why is this magic number not used by the majority of economists? I don't think that this comparison has any meaning at all. I think the real calculation should be interest payouts on US government debt versus total government expenditures.

    On a different note, you are saying America is just paying the minimum monthly balance on our credit card. Using this scenario, we will never pay off our debt (nor should we according to you). The only trouble is the credit card balance will be paid by future generations at who knows what interest rate.

  • Report this Comment On March 05, 2010, at 12:06 PM, mcgamble wrote:

    I agree with other posters, a review of interest rate to GDP ratio is also a factor of GDP, meaning our recent reduction and slower growth in GDP has also worked to increase the ratio that he discusses. A study of GDP growth as relates to total debt would be an enhancement to this analysis. Just checked, during the 90's GDP grew at just under 40% for the decade, even with higher cost of debt service as relates to GDP. Seems like we have (by design?) borrowed while rates are low and paid back (surplus under in 90's) at high rates. Isn't this what GS does to make money?

    I think I am getting it. Just as a business borrows to fuel growth in a low interest rate environment, a country should likewise view their borrowing. What greatly concerns me is that ratio GDP in services to goods and how much of our debt has been to fuel consumption (in a company to pay bonuses or in govn't Medicare payments) rather than expansion of our growth capacity. Aren't we eating our seed corn?

  • Report this Comment On March 05, 2010, at 12:21 PM, AvianFlu wrote:

    Hey Clydejazz:

    During Margaret Thatchers reign she cut the top tax rate from 90% to 30%. Tax receipts went up.

    Source: a former member of parliament

  • Report this Comment On March 05, 2010, at 12:49 PM, FleaBagger wrote:

    You're right: no problems, nothing to see here, pay no attention to the man behind the curtain, move along.

  • Report this Comment On March 05, 2010, at 1:22 PM, clydejazz wrote:

    I think we can all agree that a top tax rate of 90% is ridiculous, but one thing economists do agree on is that in general, cutting taxes does not increase tax revenue. It certainly didn't during the Reagan and Bush administrations. In the words of Dick Cheney,"Reagan proved that deficits don't matter." They certainly didn't matter to Reagan, but they did cause major problems for the guy who succeeded him.

  • Report this Comment On March 05, 2010, at 2:03 PM, JoyRide144 wrote:

    Must be a great article as it evoked a considerable response.

    I jumped to conclusions along with a number of others and read your responses. There is no problem today and there is and should be great fear about tomorrow when the wheels fall off medicare.

    My solution would be to change the Federal budget. It is the only government budget that equates capital funding for highways and aircraft carriers with stimulus payments and reverse tax payments. Coca Cola and other enterprises invest via borrowing for capital equipment olften with borrowed money. Our government does as well and many capital projects actually have built in payoff mechanisms such as Bureau of Reclamation projects and some other projects remotely similar to toll highways and bridges.

    Maybe if we differentiated between investment in capital projects wioth a return and entitlement programs with inadequate funding sources, some of us could get a better handle on what is really going on.

    Shutting down the economy by stopping all government spending is not a good idea. Allowing the Federal government to carry a huge debt rather than forcing individuals and local governments who cannot manage even "small" debts to assume enormous debt is a really bad idea in these economic times.

    Federal mandates for local government spending with no Federal funding, a.k.a. medicare and medicaid, is a poor idea in the best of times and really bad right now.

    There is really no question that matters will get really, really bad a few years down the road if the basic problems are not addressed. The wheels will fall off as you have written.

    Joyride

  • Report this Comment On March 05, 2010, at 4:19 PM, jfrankh57 wrote:

    Wow...your justification for carrying the amount of debt that is on the books is mind boggling! Just because the interest rate is low right now doesn't give us license to borrow to such a degree where we find ourselves in trouble when interest rates climb again. Yes, it does make a bit of sense to borrow on the cheap, but no one, even governments should be reckless in their fundatmental fiduciary behavior. Long term debt of such magnitude, especially with the increase in debt that loom on the horizon, is clearly reckless! Heck, the average Joe Consumer would be in real trouble with his bank with the debt to income ratio that the government currently enjoys.

  • Report this Comment On March 05, 2010, at 4:36 PM, grantrobertb wrote:

    So I understand the point we should not get too worried about the debt. But why are we not being educated on this? These astro numbers that the press constantly sites has an effect on consumer psychology. People "feel" the debt. Perhaps if someone were to do a better job communicating where we are at, that would help consumer confidence? Having said that, should we be concerned with consumer buying power and wages? Will that increase in the short-run/ long-run? Until people feel they are making forward progress again, I don't see how consumer confidence can increase to a healthy level?

  • Report this Comment On March 05, 2010, at 6:36 PM, JFMann wrote:

    In response to the question by grantrobertb......"why are we not being educated on this?"......with "this" referring to the effect of national debt.......I offer the following article by myself;

    http://www.helium.com/items/1586094-national-debt-federal-de...

    Mr. Housel is correct of course that it is debt service which is key. However, like all such commentary, the bedrock assumption is that the value of GDP will always increase. This may not be true.......just as the bedrock assumption that house prices would always increase was flawed............and just like assumptions that New Orleans would never really flood like the "doomsdayers" were warning for years.

    Although Mr. Housel may be technically correct that.....as of this moment.........national debt is not an imminent "crisis", it should be painfully evident to observers with a sense of history that we may be on the verge of a major financial setback the likes of which the US of A has not seen since the early 1930s.

    The effect of debt is similar to demographics........though the analogy is not perfect. However, when grossly excessive debt occurs........as it has for the US government and the US private economy.......someone must eventually pay the price. Although governments throughout the world have learned how to delay the end of the music.........there will be no escape at some point, even if each government, including the US, attempts to "finesse" value of the debt by resorting to massive inflation of the money supply........which is precisely what the US has been trying since September 2008.

    The fact remains......some one (or many) must pay the eventual price of the excessive promises which debt represents. The result is not going to be pleasant for the vast majority of ordinary citizens.

  • Report this Comment On March 05, 2010, at 7:09 PM, dc46and2 wrote:

    If you divided the interest payments by the global GDP you could make it appear even smaller.

  • Report this Comment On March 05, 2010, at 9:29 PM, Bloefeld wrote:

    This analysis is interesting but pointless. One needs only to look at the CPI and calculate it the same way we did in the 1980's. Then you would see inflation running at over 10%. In the end we will yet again understand that Dr. Friedman had it right, its the increase in the money supply that is the true measure of inflation. When it increases at a rate faster than the increase in GDP, inflation is inevitable.

    Because we have hid the massive increase in M1 in various bubbles, we have caused ourselves to believe that inflation is low, and therefore interest rates are low.

    This has caught up to us and now we pay the price of giant interest rates Alla the Carter and Reagan years.

    So the table displayed will show both an increase in the ratio to debt service and GDP, but there is also the potential of the U.S. losing its status of reserve currency (talk about disaster). Not to mention the crossover point when the ratio becomes unsustainable.

    Cheers,

    Bloefeld

  • Report this Comment On March 06, 2010, at 12:06 AM, DommyDog wrote:

    Perhaps the greatest economic and political lie ever told (primarily by Republicans) is that tax cuts magically pay for themselves. Reducing tax rates from a high level (like 90%) to a much lower level (like 35%) will produce a brief tax revenue bubble when people take advantage of a good deal that may not last. But this just moves taxes that would be collected in future years to the current year and there is no net increase in taxes.

    If tax cuts paid for themselves, we would be rolling in money today instead of being buried in debt. Economists estimate that less than 30% of a tax cut is returned over a ten-year period and some analysts put the return at 10%.

    No economists believe tax cuts pay for themselves and there is no data that substantiates the Tax Fairy theory.

    If the tax money not collected from citizens was invested or spent on things that would produce an economic return (like education), tax cuts could pay for themselves. But that doesn't happen. What happens is that nearly all of the increase in disposable personal income is spent on consumer goods and services that produce no return.

    This is why the stimulus spending we did in the past didn't make our economy fundamentally stronger and why the current stimulus spending is only going to provide temporary relief for the most part.

    It is a very simple principle: there is a big difference between consumption and investment.

  • Report this Comment On March 06, 2010, at 4:35 AM, happybeachbum wrote:

    Interesting discussion, but it seems to skip over all the interesting parts. I assume that many of you have run businesses. You realize that our if our federal government were run on the same accounting principles that your company had to follow; our debt would be in the neighborhood of $100 trillion dollars. The government is in charge of over 50% of the healthcare in this country, and they employ over 50% of the people working in this county who they pay well over 50% of the wages paid in this country. If you ran your company the way the government is run, you would end up where our friends from Enron ended up.

    It has not been talked about much, but if you are a geek like me and watch all the congressional and other hearings on C Span, you would be aware that the country's income has dropped below the level required to pay social security and medicare. We are now paying entitlements partially with borrowed money. Each year this will get worse and the debt will get higher which is not included in the numbers quoted for debt. All we have heard so far is that the debt will be 14 trillion next year and over 20 trillion by 2020 (CBO numbers). Both Bernake and Timmie have agreed publicly that we will have to raise taxes a minimum of 60% to pay this debt. That means either a tax rate over 100% for anyone making over $250,000 or a slightly lower number for all wage earners. They did not make it clear, but it sounded like they were just talking about the little 20 trillion debt.

    There are several ways out of this situation in lieu of the 60% tax increase. As mentioned many times above we can inflate our way out with a very dramatic decrease in our standard of living.

    We can import some smart people who can come up with the technology to increase productivity and develop something the rest of the world wants so we can export our way out of it. (I say import smart people, because we can't seem to get our education system to function well enough to do this even though we spend about twice what most other countries spend and their students can speak English when they graduate from high school.)

    Other approaches include stopping the importation of oil and providing jobs for US citizens producing oil, gas and coal in the US. Nawh, that would be too dirty, let the Saudis keep working and making money supplying our oil.

    We could work our entitlement problems. Since I live on social security, I am not real happy letting congress mess with that seeing what they have been able to do over the past 9 years. I am not sure we have the political will to do anything like that anyway.

    We don't have an easy problem, but I am convinced that if we can get some people in Washington that understand the problem; they can work with the American people and we can all solve it together. I have spent my life working problems, and the most important thing I have learned is that a person, a company or a country cannot work a problem unless they understand what their problem is, Then they have to be completely dedicated to working it. We don't have that now, and I think that is why most Americans are so pissed off.

    Thanks of letting me express my humble opinion.

  • Report this Comment On March 06, 2010, at 10:41 AM, DommyDog wrote:

    Happybeachbum is right. Our politicians have no desire, and apparently no capability, to identify where our economy is broken and then to take a rational approach to solving the problems.

    They are also not capable of thinking beyond the next election and the desire to get elected or re-elected trumps everything. How else can you explain the fact that something like 85-95% of the votes cast on bills are along party lines?

    The fundamental problem with our economy is that we have been consuming more than we were producing for over thirty years and we filled this gap with government borrowing (tax cuts we couldn't afford and budget deficits) and a tremendous expansion of private debt that has blown up in our face on two occasions: the savings and loan crisis in the late '80s and the current Great Recession, which is far from over.

    The only way we can avoid the economic iceberg we are approaching is by producing more and/or consuming less, because borrowing more only postpones the day of reckoning (assuming someone will lend us the money).

    Fools should read the following articles at http://www.rstu.org/economy_and_You/archive:

    "What Obama Should Have Said About the State of Our Economy" and

    "What’s Fundamentally Wrong with Our Economy?"

    A debt crisis may not be in our immediate future, but in terms of how long it will take to rebuild our economy, it is right around the corner.

  • Report this Comment On March 06, 2010, at 12:06 PM, MontanaEM7 wrote:

    Mr. Housel:

    I have no problem with your analysis. It is your subjective conclusions and some of the objective consequences you brush off with which I am concerned.

    "Decades down the road, the debt situation gets unimaginably scary. But for now, this is really an arsenic issue."

    Not a problem unless the source of the arsenic increases over time; but I basically agree with the analogy.

    Unfortunately, it is also unimaginably selfish and foolish (small "f") not to start taking significant steps NOW to avoid the future scary. See the trenchant comments by aggie9711, whereaminow, and retintx for some idea of what needs to be addressed very soon, and what the current crowd in D.C. is ignoring.

    Also ...

    "... the big debt accumulation period really begins 10, 20, and 30 years down the road, when Medicare's(*) wheels completely fall off."

    (*) and Social Security, and Medicaid, and whatever other foolish (again, small "f") entitlements get added this year.

    Your larger estimates (20 & 30 years) of the coming day of financial reckoning are incredibly optimistic, ... unless, of course, the government decides that the boomers have just been living too darned long and gives them pills rather than medical tests and operations.

    The boomers have been selfish (and at times glaringly hypocritical), but they also vote -- in large numbers and very reliably for their own benefit.

    You are compounding a growing and extraordinarily serious problem by trivializing (no matter how lightly) what amounts to the government's mishandling of the national debt and its unreasonable and unnecessary chronic deficits and waste.

    Action is required now. As a nation, we are in trouble. And we will pay a price, in treasure and suffering. The only question is how much treasure and how deep the suffering.

    With articles like this, you are not helping.

  • Report this Comment On March 07, 2010, at 10:34 PM, happybeachbum wrote:

    "Action is required now. As a nation, we are in trouble. And we will pay a price, in treasure and suffering. The only question is how much treasure and how deep the suffering."

    I agree, MontanaEM7. Fed Chairman Paul V. said in 1985, "we are living on borrowed time and on borrowed money". We have added 25 years to that and continue to add debt at an exponential rate. Unfortunately, our economy is not growing at the same rate. The growth of emerging countries has helped us by supplying cheap labor which has allowed us to have low interest rates without the resultant inflation, but we have been paying a serious price in our standard of living, and it is getting worse.

    We are fast running out of our allotment of mistakes and need to get something right. So far I have seen no indication that any of the people we have chosen to lead us are interested in being right so our price keeps going up and up both in treasury and suffering.

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