|Current||Debt Held by the Public|| |
|Total Public Debt Outstanding|
This is as of today.
Ok. Let's put some perspective on this.
Total tax revenues for the Federal Government last year were about $2.1 trillion dollars. This means the Federal Government has seven times their revenue outstanding in debt. Reasonable?
Total budgeted spending for this year is about $3.8 trillion dollars. This means the Federal Government has about four times the entire budget outstanding in debt. Reasonable?
The Federal Government borrows about 43 cents of every dollar it spends. This is, approximately, what you would be doing if you made $100,000 a year but spent about $175,000, each and every year for the last three years. Would you be able to get away with that?
Oh, I know there are people who argue that the government cannot actually "go broke" in the traditional sense, since it can "print money" through the Fed. Ok.
But if it does, then the value of every dollar goes down as the divisor changes. If there are twice as many of something all other things being equal each is worth half as much, right? Hmmmm... how's that working out with gas prices, among other things? Somehow that doesn't seem to be something we can actually do.
The real problem is the debt coverage ratio, or how much interest the government must pay compared to the tax revenue it takes in. See, when you stop the deficit spending (going from $175,000 in spending to $100,000) that car, bigscreen TV, cruise and other things you bought don't get bought any more. This means that people lose their jobs, because nobody is needed to make those things. And that in turn means the government's tax revenue goes down, which means the debt coverage ratio, or the amount of interest paid as a percentage of tax revenue, goes the wrong way - up.
Now this is a problem, because obviously the debt coverage cannot go over 100%. But as in your household, you can't pay all of your income in interest. You need to pay the rent, you need to buy food, you need to buy electricity and water. And, of course, you need to pay taxes. "Or else" (you live in a box under the nearest freeway overpass.) So the maximum debt coverage ratio you can sustain is a lot less than 100%.
Such it is with government. Government must pay something for defense, it must pay the light bill in the Capitol, and then there are all these political promises we made to people. The amount of political pain in not fulfilling those promises varies, but this much is certain: Some amount of government spending cannot be avoided. We can, however, argue over what that amount is.
So here we are, with about 20% of tax revenues going to pay interest at the present time. That doesn't sound all that bad when you compare against people's mortgages, but in fact it is a far more serious problem for a government that is deficit spending than it is a household.
The reason is that when you stop the deficit spending in a household you simply go without. Your singular cessation probably doesn't cost people jobs. But when you do it as a government due to the scale involved some people lose their jobs, as I noted earlier. The bad news is that those people stop paying taxes, since the unemployed don't generate taxable income. This means that tax revenues fall, and the percentage of revenue (taxes) that goes to interest payments goes up, even if there are no more deficits added to the debt!
In addition those newly-laid off scream for more government benefits, twisting the handle of the vise on the other side of the equation and demanding that deficits increase!
If from this you deduce that there's a "coffin corner" problem that can easily develop, you're right. There is. The problem is that nobody knows exactly where it is, and anyone who says they do is lying. The exact amount of follow-through effect from eliminating or reducing deficit spending (beyond the direct impact on demand and thus jobs and output) cannot be determined in advance. The "multiplier", however, is something that economists write big masters theses on and fight over the validity of complex equations, all of which are, in fact, nothing more than a raw guess.
If we dance too close to the edge then as the layoffs and short-term job dislocation happen from withdrawing the false 12% of GDP that the government is generating as "economic demand" (that really does not exist but for their deficit spending) the interest coverage ratio against tax revenues rises enough that the people who buy Treasuries believe there is actual credit or currency devaluation risk and price that into the new auctions for debt.
This, in turn, changes the equation instantly as what used to be a "pay the interest only" situation changes to a demand for full principal payment instead as you cannot afford to pay the demanded coupon for the rolled-over bonds! But the principal payment, in the case of a blended 3% interest rate you were formerly paying, is suddenly a full thirty times larger!
Needless to say the government doesn't have it.
The only alternative for a nation that runs into this and has its own currency is to print it - literally. But if you do that the same outcome immediately occurs as bondholders adjust their demanded coupon (interest) to account for the currency devaluation - which incidentally happens to be almost identical in impact to the above.
In other words you are instantly shut out of the market, and now you have a very, very big problem. Continued "printing" via QEx or whatever other sort of game you try to play can, under such a circumstance, technically avert default but it doesn't matter. Wages will not rise in a system with "open borders" and "free trade" (with nations that pay their employees $2/day) and as a consequence the lower and middle class get destroyed as commodities and essential imports (energy anyone?) skyrocket in price. As they lose the ability to buy discretionary items and then essentials they lose their jobs too, tightening the spiral. Down this road lies certain monetary ruin and probable political collapse.
This, my friends, is why we must stop the deficit spending now. I know doing so will suck. But it was going to suck in 2003, but we refused to stop. It was going to suck worse in 2007, and we were told this was a "short term" thing to "help the economy." We're now almost four years into this and there has been no cessation or slowdown in the deficits.
The problem is that all this "charging it" hasn't actually helped the economy, and if we don't stop it now we're taking the very real risk that we will lose the ability to control the outcome as the market will call "BS!"
Once it happens it's too late to change course.
Are you willing to risk that? Because if you're not, then you cannot let either the Democrat or Republican "path forward" that is being debated on this issue come to pass.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.
Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.