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What Do We Have to Show for Our Deficit?

Posted by Larry Doyle on October 8, 2012 7:15 AM |

There is nothing inherently wrong with borrowing money. Taking out a loan to fund a business, buy a house, pay for education are all worthwhile endeavors for individuals and a nation alike. This said, there comes a point where imprudent borrowing and lending run the risk of fiscal calamity. That segment of our economic landscape is a distant  memory in our nation’s rear view mirror.

My 8th grade son is mesmerized by the Debt Clock in the left hand sidebar here at Sense on Cents adding ~$5,000/second to our national debt. He asks me how our debt could have gotten so high and so out of control. For his benefit and that of others, I welcome providing another view of our nation’s past and projected fiscal deficit.  

Thanks to the folks at Instapundit.

Deficits projected by the Congressional Budget Office of ~$900 billion over the next 6 years will put our nation into a death spiral. Grand plans put forth by politicians and public policy makers will not be worth the cheap paper on which they are written. Why? The value of our currency will continue to erode and our credit rating will go right along with it. What else will assuredly transpire? Stagflation.

While those perils are right around the corner, I ask now what do we have to show for our massive deficit? What businesses in our nation have been started and are thriving due to the money borrowed by Uncle Sam that could not have been borrowed by private enterprise?

Did somebody say our financial services industry? No doubt plenty of OUR money has been plowed into and through our financial system with questionable payoffs in return.

Did somebody say autos? Did somebody respond that those funds were more a payoff to unions at the expense of creditors and others? Have we made any sort of meaningful progress in our public education? Infrastructure?

Seriously, I am not writing here to make a political point. I am inquiring for my son and your children as to what we really have to show for our nation’s massive fiscal deficit. Remember, 40 cents of every dollar we borrow is directed to funding our nation’s debt. Borrowing money and spending it like a drunken sailor is no way to run a nation.

I thank the reader who brought this bar graph to my attention.

Comments, questions, constructive criticism always encouraged and appreciated.

Navigate accordingly.

Larry Doyle

ISN’T IT TIME to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook?I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • LD

    Why Are U.S. and Japan’s Borrowing Costs Lower Than Spain, Greece?

    At $16.1 trillion, the U.S. debt-to-Gross Domestic Product (GDP) ratio now stands at about 103 percent, an alarming figure reflecting that the national debt is now larger than the entire economy.

    Yet the interest rate on ten-year treasuries is just 1.7 percent as of this writing.

    Across the Pacific, Japan has an even higher debt-to-GDP ratio of 208 percent. Its ten-year borrowing costs come in at 0.7 percent.

    Comparatively, Spain has a debt-GDP ratio of just 72 percent. But its ten-year borrowing costs are 5.6 percent, having risen as high as 7.6 percent this year. It is said to be considering a bailout from the European Stability Mechanism.

    If this seems counterintuitive, that’s because it is. With much higher debt-to-GDP ratios, one would expect the U.S. and Japan to have higher borrowing costs closer to, say, Greece.

    Greece’s debt-to-GDP comes in at 135 percent, with an interest rate of 18.4 percent — more in line with what one might expect a bankrupt government to be charged.
    Instead, it appears the deeper in debt one goes in the U.S. and Japan, the cheaper it becomes for governments to borrow.

    But why?

    While one could examine economic differences between all of these countries, differing demographics, or unemployment rates, they do not offer an adequate explanation.
    The primary reason is simply because we are cheating. Both the U.S. and Japan have accommodative, independent central banks more than willing to monetize their country’s debts regardless of the size of borrowing. This results in an expansive financial system.

    In the eurozone, the European Central Bank (ECB) is prohibited from directly monetizing member debts. The Maastricht Treaty also prohibited member countries from running deficits greater than 3 percent of GDP. As countries have breached that limit, they have been more hard-pressed to secure credit.

    So, in the U.S. and in Japan, there appears to be no limit to how much quantitative easing or government spending and borrowing can take place. Whereas, in Europe, the financial system was designed to limit how much could be borrowed by member states.

    Another reason why the U.S. has lower borrowing costs is because the dollar is the world’s reserve currency. It is stockpiled around the world as if it was as good as gold, and used to price and settle payment of many commodities.
    That makes U.S. treasuries and other dollar-denominated assets a target for investors seeking safe returns. U.S. treasuries and gold have been two of the primary beneficiaries of a flight to safety that has occurred since the financial crisis began in 2007.

    So is there any limit to how much the nation can borrow?

    The answer amounts to “yes, but…”

    There clearly are limits to how much financial institutions and overseas creditors have to lend to the federal government, or else overt quantitative easing would not be necessary. Even with near-zero percent interest rates that allow banks to borrow practically for free from the central bank, and then use it to purchase treasuries.

    But the system’s perpetuation is largely dependent on other countries’ willingness to continue to use the dollar as the world’s reserve currency. As we export our inflation abroad, triggering instability throughout the developing world, that willingness may be beginning to wane.

    Without it, demand overseas for treasuries would drop and a run on dollar-denominated assets would occur. The excess supply of dollars would find its way back home, triggering hyperinflation here.

    Therefore, there is a tipping point down the road where excessive debt in the U.S. will one day trigger a financial crisis — when the economic instability we export becomes too much for other nations like Saudi Arabia or China to bear.

    The only question is when.

    The answer, of course, is to rein in our debt — before it is too late — so we never have to find out when that doomsday might be.

    why-are-u-s-japan-borrowing-costs-lower-than-spain-greece?

  • fred

    LD,

    For the benefit of some of your readers, debt and deficits are not the same. All else being equal, the only way to reduce the debt is to run a surplus. A good place to start is with a balanced budget.

    Another point you made that deserves serious consideration is that not all government spending is the same, for example, spending for infrastructure such as upgrading electric grids, highways,(prudent) military/education spending, etc., benefits all of society and have a useful life beyond a year, whereas other types of government spending such as salary and entitlement programs provide no future economic benefit beyond a “quick adrenaline rush”.

    An economic principle I have applied with some success to my own life, I try not to borrow money to pay for consumable items, items with no “useful life”, or items that depreciate over time.






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