There has been a lot of talk lately about a possible U.S. debt crisis in the near future. I've done a lot of research and opinion is somewhat split. Some say that the debt is not sustainable and will lead to default on debt and/or hyperinflation if China stops buying U.S. debt. Others say that debt to gdp was much higher after WWII and is relatively modest when compared with other countries in the world. They say the U.S. can print money and buy it's own debt indefinitely. The most common opinion is that a default on U.S. debt is not likely at least in the near future or ever, but not impossible either. I have a lot of my money in Canadian stocks so I'm somewhat worried about the future.

Household Debt Vs. GDP - Planet Money Blog : NPR (http://www.npr.org/blogs/money/2009/02/household_debt_vs_gdp.html)

And you should be. At the rate that our government is burning through money the ultimate outcome is runaway inflation just like we had in the Carter days of 15% for home loans and 25% car loans.
China has already made comments about not buying any more of our debt. Other countries are trying to get oil off the dollar and onto the Euro. If that were to happen our dollar would be totally worthless. Talk about economic collapse!

I don't think that the USA is likely to default on its own debt.

HOWEVER... and this is important... there are essentially only two ways to make the payments on that level of debt.

1) Print more and more money.

2) Raise taxes.

In the case of the former, printing additional money drives up inflation. Inflation means that prices for goods and services increase. If people are earning the same money but have to pay more money for food, clothing, shelter and basic services, they eventually become unable to afford these items. Eventually, people who cannot afford these basic necessities turn to their government to help them meet their needs.

In the case of the latter, raising taxes means that people who earn the same amount (gross) actually take home less money. People again become unable to afford the necessities and turn to the government for assistance.

Either way, in order for the government to meet the demands of these people who need assistance, they must either raise taxes again or print more money... which just exacerbates the problem.

Eventually the debt GROWS. Taxes INCREASE further. MORE money is PRINTED. And the economy falters under the strain. The people become even more dependent on the government to help them.

And that is the problem of an increasing national debt.

As to the argument that the GDP/Debt ratio is lower than it was in WWII, that is true. But we were also in a war-time economy, with employment at nearly 100%. People were either employed by the military or by companies that were supplying military equipment and goods. People were no longer dependent on the government to help them pay the bills. People who had been unemployed during the Depression were suddenly back at work. The economy was working at nearly 100% efficiency.

We are NOT in the same situation today. We are at a high unemployment rate. Inflation is INCREASING, not decreasing. We are not producing nearly as efficiently as we were back then. People are struggling to make their mortgage payments. Businesses are going bankrupt every day.

This is a very different economic picture than we had in the WWII era, and where WWII was a period of economic UPTURN after the Great Depression, we are currently in an economic DOWNTURN.

Even if the ratio is the same, our ability to sustain the same amount of debt is MUCH LOWER than it was then. And individuals, who have much higher personal debt than they did back then, cannot sustain the inflation and taxes necessary to cover that national debt level.

Plus, please keep in mind that the actual dollar amount of our national debt is so high that it literally dwarfs the national debt of every other President in history COMBINED. There is no way that we, as a nation, can pay off that debt in our lifetimes. Even the INTEREST on that debt is too much for us to sustain for very long without raising taxes.

We are in a very different situation than ever before. So we cannot compare to what happened at other times in history.

Elliot

there are essentially only two ways to make the payments on that level of debt.

1) Print more and more money.

2) Raise taxes. Hello El:

They're BOTH taxes in that the taxpayer/citizen is paying for the deficit one way or the other... One is a hidden tax and the other isn't. Sooo, I'm going to go with inflation because they don't have to actually pass anything to do it...

Buy gold.

excon

But Nobama in all of his campaign speaches started at what 500K before he would raise taxes, Then it was 250K and before it was elected it was 200K. Now no matter who he raises taxes on there is still not enough money to service the debt load that government (yes both parties) have run up in the last year. The latest report I heard a few days ago gave it pretty plainly, income to the government is way down. Largely because of the unemployment. Yea officially there is 9.4% for July. But we all know that is a line of excrement. That does not take into account how many people have fallen off the records because their money has run out ( me for example) Nor does it count the self employed who did not pay into the system and now are unemployed. If the GAO were to get an accurate count it would scale a lot of people silly. My guess, more like 14-15% nationwide.

Tim Turbo Tax sent a letter to Congress yesterday asking them to raise the debt ceiling because the $12.1 trillion current limit will be reached by mid-October. This would be the 2nd increase in the ceiling this year.



"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Geithner said in a letter to Senate Majority Leader Harry Reid that was obtained by Reuters.

Geithner asks Congress for higher U.S. debt limit | U.S. | Reuters (http://www.reuters.com/article/newsOne/idUSTRE57706N20090808)

The investors that Geithner is concerned about is the Chinese who have been getting louder about the risks in investing in the USA. To sell debt you need buyers and that means that there has to be a confidence that their investment will pay off.

My guess is that he is not yet prepared to ask Congress to cease it's lavish spending which is easy to do when working with a blank check. Guess it's OK for Pelosi to order those extra private jets for Congressional junkets (maybe they are buying them off the savings from gutting the F-22 Raptor program. )

Hello El:

They're BOTH taxes in that the taxpayer/citizen is paying for the deficit one way or the other... One is a hidden tax and the other isn't. Sooo, I'm gonna go with inflation because they don't have to actually pass anything to do it....

Buy gold.

excon

You are correct in saying that inflation is essentially a de-facto tax. On this we agree.

Keep in mind that Robert Gibbs, Tim "Turbo Tax" Geithner and Larry Sommers all are on record as saying that a tax increase is "on the table" as a possible method of lowering the national debt. So I wouldn't rule out that possibility.

Either way, whichever method they use, it ain't good.

Elliot

But Nobama in all of his campaign speaches started out at what 500K before he would raise taxes, Then it was 250K and before it was elected it was 200K. Now no matter who he raises taxes on there is still not enough money to service the debt load that government (yes both parties) have run up in the last year. The latest report I heard a few days ago gave it pretty plainly, income to the government is way down. Largely because of the unemployment. Yea officially there is 9.4% for July. but we all know that is a line of excrement. That does not take into account how many people have fallen off the records because their money has run out ( me for example) Nor does it count the self employed who did not pay into the system and now are unemployed. If the GAO were to get an accurate count it would scale a lot of people silly. My guess, more like 14-15% nationwide.

It doesn't take into consideration the "underemployed"--- people who are employed either part-time but are looking for full time work, or who had to go to work for lower than their previous salary out of necessity. Estimates during July for a REAL unemployment/underemployment figure were closer to 16%.

As an alternative to inflation or higher taxes, or BOTH, why not revert to supply side economics?

That worked pretty well for us when Reagan did it.

You know, cut taxes, make the USA more competitive on world trade, take in more taxes because we sell more to the rest of the world. That kind of thing.

As an alternative to inflation or higher taxes, or BOTH, why not revert to supply side economics?Hello again, gal:

If only the dufus hadn't broken it sooo badly, Obama might have been able to play offense when he got elected... Instead he had to clean up the mess.

Now, it's true, that when nobody was spending, we COULD have let the banks go into the toilet. It remains to be seen whether we SHOULD have done that or not. I'm a person who thinks we shouldn't have, and I believe that when nobody else is spending, the government is the spender of last resort, and that's what they did.

Had Obama been left with a nice healthy economy, he probably wouldn't have had to play defense.. But, he stepped in to storm of epic proportions...

excon

Hind site is always 20/20
I seriously doubt that Nobama would do anything different if he has inherited a healthy economy. It is not in his nature to do other than spend,spend,spend. But you have to also remember that he has on his hands a very pushy congressional leadership that is also pushing their own agenda of San Francisco socialism on the country. That includes all sorts of liberal plans like free abortion(legalized murder0 to any one who walks in the door to legalized pot to the dumbing down of America, by reducing the education system to the shambles we see before us today. EC It really shocks me that as you profess to be a business man that you don't see this sort of garbage and realize what is happening to our democracy. When is the last time you were actually able to hire an employee that had enough brains to do a decent days work?

Printing money is not a great idea, look at Germany after WWI, or Argentina more recently and even Zimbabwe.

What america needs to do is get its snout out of the trough. Which trough? Well we could start with the oil trough, but in reality it's the trade trough. The world does not owe you a living and China has begun to realise that supporting the US is unsustainable. Fortunately China has massive internal market growth and so they can be choosy for thre time being. America has exported its industries and now it has exported its crisis. As they say; America sneezes and the rest of the world catches cold. What happens when America gets the flu. The last round of hyper inflation in Europe gave us WWII. What will hyper inflation in the US give us? Free trade isn't free after all and the price just might be too high. All those cheap imports from China are going to cost you dearly, better you go back to buying quality from Japan or better still yourselves.

I wouldn't bet on the Chinese economy. It isn't that great;much of it isn't market controlled ,but government manipulation ,and their production base is essentially slave labor.

Right now they are desperately manipulating their economy to keep a lid on a population that is growing ever more restive . And Clete ;if you are going to talk about energy imports and consumption... watch what they are doing .

Even worse for the world than the US currency situation has been the Chinese manipulation of their currency. If it had been allowed to go to it's real level I think in the long run everyone would've been better off ;although adjusting it now would create a ripple effect around the world .

As for the US dollar and US long term debt. There has to be reductions in spending and that means entitlement spending ;and that means rethinking making a government entitlement program that replaces almost 20 percent of the GDP .

As an alternative to inflation or higher taxes, or BOTH, why not revert to supply side economics?

That worked pretty well for us when Reagan did it.

You know, cut taxes, make the USA more competitive on world trade, take in more taxes because we sell more to the rest of the world. That kind of thing.

That would indeed work. It would take both cutting taxes AND cutting spending. But it has worked before. It worked TWICE under Bush, twice under Reagan and once under Kennedy. We've seen the results... economic growth, lower unemployment, and higher government revenues.

Problem is, we're dealing with a government that has, in just 7 months, spent more money than any other administration in history, quadrupled the deficit and increased the national debt by $3 trillion. They aren't thinking in terms of cutting spending, they're thinking in terms of more spending increases. They aren't thinking in terms of tax cuts, they're thinking in terms of tax increases to punish "the rich"... which really means the Middle Class and small businesses.

So it ain't going to happen. The only two other solutions are the ones listed above... printing more paper or raising taxes.

I wouldn't bet on the Chinese economy. It aint that great;much of it isn't market controlled ,but government manipulation ,and their production base is essentially slave labor.

Right now they are desperately manipulating their economy to keep a lid on a population that is growing ever more restive . And Clete ;if you are going to talk about energy imports and consumption ...watch what they are doing .

Even worse for the world than the US currency situation has been the Chinese manipulation of their currency. If it had been allowed to go to it's real level I think in the long run everyone would've been better off ;although adjusting it now would create a ripple effect around the world .

As for the US dollar and US long term debt. there has to be reductions in spending and that means entitlement spending ;and that means rethinking making a government entitlement program that replaces almost 20 percent of the GDP .

Tom's right about China's economy. Most of China's businesses (something like 80% of them) are actually in the red in terms of net operating income and cash flow. They are being propped up by the Chinese government. If that government support fails to continue, for whatever reason, about 80% of China's economy is going to go bankrupt overnight.

Elliot

The most cost effective answer would be to send Congress home for two years. No congress no more stupid laws or out of control spending bills!

Every day Congress meets is a day that you give up a little more of your freedom, a little more of your wealth and a little more control of your own destiny. I agree with 450donn.

The best thing to happen to New York State in years was when our State Senate had their little power struggle and didn't pass any laws for a month.

Elliot

That would indeed work. It would take both cutting taxes AND cutting spending. Hello silly righty's:

The presidency is NOT like a poker tournament, where everybody starts with the same amount of chips... Noooo, it's not like that at all. You take over that last guys chip stack... If that guy LOST most of his stack, as the dufus surly did, then you start way in the hole... That's what happened here...

It's not like a gin game where you start even... Silly righty's. I don't know how you guys missed that part... But, you miss MOST of what's going on around you, so it's not surprising that you missed this. You talk like the dufus handed over a nice healthy economy... But, he didn't... Really!

excon

Hello silly righty's:

The presidency is NOT like a poker tournament, where everybody starts out with the same amount of chips....... Noooo, it's not like that at all. You take over that last guys chip stack.... If that guy LOST most of his stack, as the dufus surly did, then you start off way in the hole.... That's what happened here....

It's not like a gin game where you start off even.... Silly righty's. I dunno how you guys missed that part.... But, you miss MOST of what's going on around you, so it's not surprising that you missed this. You talk like the dufus handed over a nice healthy economy... But, he didn't... Really!

excon

There are several facts that you seem to miss.

1) That "unhealthy economy" you speak of was created by the Dems over a 60 year period, beginning with FDRs New Deal (Raw Deal?), continuing with Carter's economic idiocy and culminating in Clinton's doubling down on Carter's idiocy. Bush signed the TARP program into effect, but it was a bill created by a DEMOCRAT CONTROLLED CONGRESS. The out of control spending of the Reps was an important factor, to be sure... but the Dems from 2006 on spent MUCH MORE than the Reps did in the prior 6 years.

2) Bush signed the $780 Billion TARP program into office and created a $478 Billion budget deficit. Obama then spent $3 TRILLION on a stimulus bill that EVERY EXPERT has said has been a failure (including those who supported it) and quadrupled the budget deficit to $1.7 trillion. He then increased that Budget Deficit to over $2 Trillion, and it is expected to reach $3 Trillion by year end. There is NOTHING that justifies that kind of 5-fold increase in spending, no matter what kind of economic troubles Bush left Obama. Even if you are one of those Keynesian fools who believe that government spending is what fixes recessions (despite 200 years of history that proves otherwise), there is no way to justify a deficit that large. That is OBAMA'S DOING and nobody else's.

3) Bush inheritted a recession from Clinton. Reagan inherited a recession from Carter. NEITHER of them spent money like the Obama admin has. Your argument that "he didn't start off with the same number of chips" is a BS argument, because neither did lots of other Presidents, and NONE of them took the actions that Obama is taking. Even FDR, who inherrited the Great Depression, which was MUCH worse than our current recession, didn't spend like this.

So stop blaming Bush for Obama's actions. He had other options. He chose not to take those other options. Ergo, his choices are HIS and his alone.

And one more thing: Blaming Bush is getting old at this point. With so many people waking up to the reality of Obama, they are no longer going to buy the argument "it's Bush's fault". They're pissed at Cap & Trade. They're pissed at the health reform bill. They're pissed at government spending. And they're pissed at a Congress that has the hubris to buy 4 more airplanes for their fleet and vote themselves raises while we're in a recession. Blaming Bush is not an argument calculated to get them back on Obama's side right now.

Nobody likes a President who whines about stuff being other people's fault. They elected Obama, they expect Obama to take responsibility.

Elliot

There are several facts that you seem to miss.
Nobody likes a President who whines about stuff being other people's fault. They elected Obama, they expect Obama to take responsibility.Hello again, El:

Again, you want to pretend that the little teeny chip stack that the dufus left Obama doesn't count. But it does... And, it takes more than 6 months to fix a real broken economy. As a banker, you should KNOW this...

But, when you wear your right wing hat, it covers your bankers eyes... Don't you worry, though. I'll be here to bring you back to reality.

excon

Hello again, El:

Again, you wanna pretend that the little teeny chip stack that the dufus left Obama doesn't count. But it does.... And, it takes more than 6 months to fix a real broken economy. As a banker, you should KNOW this...

But, when you wear your right wing hat, it covers your bankers eyes.... Don't you worry, though. I'll be here to bring you back to reality.

excon

If it takes more than 6 months to fix a $480 billion budget gap, how long is it going to take a $3 trillion budget gap?

If it takes more than 6 months to fix a $480 billion budget gap...Hello again, El:

So, the only problem was a $480 billion budget gap, huh?? That's your story and you're sticking with it? Jeez, El, as a banker, I would have thought that you understood the problem... But, I guess you don't. What is the name of your bank? I want to make sure to avoid it.

excon

Hello again, El:

So, the only problem was a $480 billion budget gap, huh??? That's your story and you're sticking with it? Jeez, El, as a banker, I would have thought that you understood the problem... But, I guess you don't. What is the name of your bank? I wanna make sure to avoid it.

excon

No, the problem is the $3 TRILLION budget deficit.

The recession, however, was caused by the existence of CRA and FANNIE MAE and FREDDIE MAC.

But I don't see how increasing the national deficit 8-fold in a year and then raising taxes and printing more money fixes that problem. Do you?

It's all Bush's fault, right? He didn't create Fannie, Freddie or CRA. He didn't create the $3 trillion deficit. But it's all his fault.

Right. And I'm sure that people are going to continue buying that one at the same time that they are buying the health care bill.

Keep pushing that excuse, though. I'm sure you're winning lots of support for Obama that way.

Elliot

What you need over there is a good old painting rocks white program, it fixes unemployment, it is cheaper than the current stimulus and you get to tidy the place up. You could extend it to a painting over the graffiti program and get some civic improvement. Only problem is you would probably run out of rocks and buildings to paint so you could convert it to a demolish old buildings program, I know you have lots of those in the right places. What do you do with the rocks when you have painted them white, you build boundary walls with them, very pretty. The demolish old buildings program supplies bricks to the paint rocks white program and the wall building program. See, a little lateral thinking and your unemployment and budget problems are solved

You joke about that but all you are doing is repeating the parable of the broken windows by Frederic Bastiat. It is a fallacy of course that it brings any economic advantage.
And of course this cash for clunkers program is a 21st century example of that . It give temporary boost to new car dealers while the unintended consequences hurts others.

If we were to extend your example to the construction business we could pay homeowners to bulldoze their old homes with the provision that they use the money to help pay for a new home.

I'm not a banker, but I don't see how the US can start printing monopoly money.

Wouldn't that just drive the rest of the world to drop the dollar and go to something else, the Euro maybe?

What would the effect of that be?

You joke about that but all you are doing is repeating the parable of the broken windows by Frederic Bastiat. It is a fallacy of course that it brings any economic advantage.
And of course this cash for clunkers program is a 21st century example of that . It give temporary boost to new car dealers while the unintended consequences hurts others.

If we were to extend your example to the construction business we could pay homeowners to bulldoze their old homes with the provision that they use the money to help pay for a new home.

Of course Tom that's why the cash for clunkers program provides a bit of a laugh, it's very much clutching at straws. You see it's hard to see why your legislators would do this yet baulk at providing health care packages.

Our politicians took a different view on the car industry and made sure finance was available to keep things turning over. They didn't actually part with any money which I thought very innovative of them

I'm not a banker, but I don't see how the US can start printing monopoly money.

Wouldn't that just drive the rest of the world to drop the dollar and go to something else, the Euro maybe?

What would the effect of that be?

you caught on, great pity that those in charge of your treasury have not. This is why China expressed its concern recently, they are virtually underwriting your position at the moment

The effect of the USD no longer being the base currency of international exchange would mean an immediate drop in value as countries switched their holdings. It's unlikely that your treasury could sustain a buying program to keep the value up so immediately a whole lot of things you import become much more expensive and inflation starts to run up the bill for wages and internally produced goods. Of course it could start a revival of your industries as your product is now cheaper for overseas buyers, but wait a minute, you sent those offshore didn't you. Bummer!

if you want to understand take a look at Argentina a few years ago

That is it! We have turned from a producing economy to a consuming economy. And it is unsustainable! We are headed for double digit inflation, and double digit interest on everything we purchase from now on. It has already started with local car dealers touting 9.99% APR car loans. Credit cards are already pushing 25% in many cases. If China stops buying dollars or if the world finally decides that our government is totally bonkers and gets off the dollar as a world currency, it would spell the end of the USA as we know it. That push is already on to change oil to the Euro. That one step alone would spell doom.

450donn is right.

Once again, in its attempts to be "socially conscious" and do its social engineering, the government has again created a situation wherein their actions have unintended consequences.

They created Fannie Mae and Freddie Mac in order to induce banks to make loans that would make it easier for people to buy homes. They created the Community Reinvestment Act in order to force banks to make loans that they would not normally make in order to make it easier for people to buy homes. These resulted in the economic collapse we saw last year and are still feeling today.

Now, with this cash-for-clunkers law, they have again created an environment in which they are making it easier for people who would not otherwise do so able to buy a new car and gert rid of their gas guzzler. But in doing so, they are inducing the creation of car loans that these people can't really afford, which is the same recipe for disaster that caused the mortgage meltdown.

Once again, social engineering has its unintended consequences.

Elliot

Hello again, earl:

I want to correct a little bit of history here. Republicans had total control of the government for 6 of the last 8 years, but when things went wrong, it was the Democrats fault...

Only a fringe right winger would say something that outlandish, and observably WRONG!

excon

Dems have been in control of Congress for the past 3 years. They've had both houses of Congress and the Presidency for the past 8 months.

The Dem Congress passed TARP 1, TARP 2, the Stimulus Bill, the Omnibus Spending Bill. They took over 10 of the top 12 banks in the country, 2 of the top 3 auto makers, the largest insurance company, bailed out their buddies and Goldman Sachs, allowed Lehman to fail, have spent the country into a $3 trillion budget deficit (which was only $480 billion when Bush left office), increased the national debt by 9% this year alone, and are trying to take over your health care system.

But everything going wrong is the fault of George Bush.

Only a partisan hack would make a demonstrably idiotic comment like that.

Elliot

Hello again, e:

Let me see, you got the NEW group in charge for 6 MONTHS... and the other group was in charge for 6 YEARS.... But, when things go wrong, it's the NEW guys fault...

Yup. That's right wing logic, OK... Ain't nobody buying it, though.

excon

Hello again, e:

Lemme see, you got the NEW group in charge for 6 MONTHS... and the other group was in charge for 6 YEARS.... But, when things go wrong, it's the NEW guys fault...

Yup. That's right wing logic, ok.... Ain't nobody buying it, though.

excon

Excon, see my edited post above.

You're wrong. Deal with it.

I want to correct a little bit of history here. Republicans had total control of the government for 6 of the last 8 years, but when things went wrong, it was the Democrats fault...



I want to correct the history further .

Although the Republicans controlled the Presidency for 8 years and the House of Representatives for 6 years until 2006 . In fact; the Democrats controlled the Senate the 1st 2 years of the Bush Administration until 2003(because the Jeffords defection gave the Dems a majority ) .

The Republicans total control of the government was for a 4 year span between 2003-2006 . They never retained enough of a majority to impose their will on the Senate .

No one has disagreed with my assumption that we can't print fiat money, so that leaves just two other things.

Cut spending and/or raise taxes across the board.

There are no signs that Obama has any intentiion of cutting spending. Quite the contrary.

So everyone's taxes will go up seriously.

After all, Obama said it himself. "Words, just words".