US$12 trillion of opportunities

US$12 trillion of opportunities

A large number attracts attention.

Only this number, 16 thousand billion, is so large as to be beyond comprehension

16,000,000,000,000,000

Put a dollar sign in front of it and you get the United States national debt.

As of December 31, 2018, debt held by the public was $16.1 trillion and intragovernmental holdings were $5.87 trillion, for a total of $21.97 trillion.

Don’t you just love credit?

The ‘buy now pay later’ attitude that generates a number so large that there is no end to it other than for the invention of another economic system so it can be written off under a giant bankruptcy proceeding, is classic ostrich behaviour.

Here is the history of that debt as a proportion of GDP noting of course that during this timeline GDP has grown to over 40x its 1960 value.

100% of GDP in 2019 was 40 times bigger in dollars than 100% of GDP in 1960.

Source: https://images.app.goo.gl/itFbk1Aqe4sSvJi36

And another slightly different presentation of the same data that shows this absolute dollar increase more clearly, the debt adjusted for inflation divided by the number of housholds

Source: https://www.darrinqualman.com/us-national-debt-per-family-1816-2016/

Just for comparison the national entry-level average house price in the US for the last quarter of 2019 was $200,000 meaning a huge chunk of US households were up to their eyeballs in their own debt as well as copping an equivalent amount borrowed by Uncle Sam.

The pattern of when debt increased and fell is interesting too.

After both world wars debt was paid down, rapidly in the case of WWII on the back of a newly minted industrial base. Reagan and Bush spent a few dollars that Clinton tried to pay down only for Bush Jr and his successors to take on a couple more expensive wars.

Obama spent big and, not to be outdone, so has Trump.

Alright, so without getting all political about it, the curve is going up… exponentially.

Here is a neat explanation from Investopedia of how the US government pays for spending more money than it earns from taxes

To operate in this manner of spending more than it earns, the U.S. Treasury Department has to issue Treasury bills, notes, and bonds. These Treasury products finance the deficit by borrowing from the investors—both domestic and foreign. These Treasury securities also sell to corporations, financial institutions, and other governments around the world.

By issuing these types of securities, the federal government can acquire the cash that it needs to provide governmental services. The national debt is simply the net accumulation of the federal government’s annual budget deficits. It is the total amount of money that the U.S. federal government owes to its creditors.

So in simple terms, the government borrowed the money.

It is said that really this is printing money and that would be the case if in the future the government foreclosed. It reneged on its obligation to pay bond interests and the house of cards fell over. But for now, it is claimed to be a debt system and not a printing system where there is some notion of future returns and recovery of the principle.

The investors do not seem to mind.

They buy and trade government bonds making a clip in the process so they have no qualms about how big the debt is or the risk of default. They will be on their yachts when it all goes belly up.

And so the debt number that just gets bigger each day is owed to creditors.

Governments who are in control of the central bank could just print the money instead of borrowing it, but history tells everyone that this risks a crazy level of inflation that can cripple economies. Ask the Zimbabweans about that one.


Hyperinflation

Hyperinflation has two main causes

  1. an increase in the money supply
  2. demand-pull inflation

When a government has a spending bill and decides to print money it increases the money on the economy. When there is more money around people have it to spend and goods and services can raise prices without losing custom generating regular inflation. A little of this is seen as a good thing because most people feel like they are growing financially.

Demand-pull inflation is when demand for goods and services outstrips supply so scarcity pushes prices higher. This can happen as a result of increased consumer spending due to a growing economy, a sudden rise in exports, or more government spending.

If inflation gets going through an increase in the money supply but the government continues to print money it generates more of cause one and prices can rise very rapidly. When consumers start to realise that continued inflation is likely they buy more now to avoid paying a higher price later. This increase in demand further aggravates the inflation through cause two.

A nasty spiral results.


Is national debt a bad thing?

Well, I am a ‘money in the bank’ kind of guy.

I struggle to have credit card debt without freaking out so much that I burry the bills in the cupboard.

Economists are not such wimps; it’s other people’s money after all. Only they don’t seem to agree on the issue of debt.

They do agree that governments that run fiscal deficits have to make up the difference by borrowing money. This they know eats up a fair chunk of capital investment in private markets. They also agree that debt securities issued by governments to service their debts affect interest rates, although this can, until recently be manipulated to some extent through monetary policy tools.

After this, it gets a bit ‘cake and eat it’

The Keynesians believe that it can be beneficial to run a current account deficit

in order to boost aggregate demand in the economy.

However, the neo-Keynesians tend to support government deficit spending only after the monetary policy has proven ineffective and nominal interest rates have hit zero.

On the other hand macroeconomists from the Chicago and Austrian school argue that

government deficits and debt hurt private investment, manipulate interest rates and the capital structure, suppress exports, and unfairly harm future generations either through higher taxes or inflation.

Some economists on the fringes are still ok with central banks printing fiat money, despite the historical evidence for inflation.

The fear of inflation appears to keep policymakers from monetizing debt entirely. Instead, overspending governments either have to continue to borrow, sell assets, raise taxes, renegotiate terms, or default to resolve debt issues.

As the federal debt number in the US reaches the outer reaches of our solar system there has to be a limit to what can be fiddled to soak it up with selling down and borrowing. The most likely end result is to default.

Oh, terribly sorry, but we can’t make those repayments.

So is all this debt good or bad?

Inject money into an economy and it will prosper so long as that money of made from something. Print it and it sends values into a spin.

Currently, the world is compromised in the middle, through the third option. Spend but pay for it with debt. Under the current rules, sooner or later that debt is either paid back or not.


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