Search This Blog

Monday, September 8, 2014

The Danger of our High Debt

Many think our US debt level is too high and a threat to our future and yet others believe this debt can be managed. The division of opinion appears to be drawn along ideological lines. So, how serious is our debt and is it a threat to our economy and future?

The current national debt as of Sep 5, 2014 is $17.718 trillion dollars. This works out to $55,577 dollars per citizen and $152,009 to the average taxpayer. [numbers come from] But who is liable for this debt? Tax liabilities of the Federal sort are bared by taxpayers and most of the debt must be pushed off on the top ½ of our wage earners and so-called ‘rich.’ The rich are famous for avoiding taxes so there is probably no way that this debt will be paid off by them. The middle class will take the hit as usual if history guides us.
Since 2008, we have been told that we can ‘grow out of debt’ with a strong economy and that assumes a GDP growth greater than 3.5% per year. The problem here is that the CBO, this week, downgraded the US GDP growth to a paltry 1.5% of that metric. That is only $252 billion dollars. But, we spend in deficit and the current deficit is $559 [I shorten this to billions from now on unless otherwise specified] and the interest on the debt is $234. With our growth of $252 billion what fraction of this can we tax and use to pay down some debt? Almost nothing. We could barely cover the $232 of debt service if we taxed nearly all of our apparent and questionable growth increase. Clearly, this is not working and we are going broke. The net debt-to-GDP ratio is now 105.5% and Greece went down at 140% and so did Ireland and Cyprus and soon we may see Italy going down too. We are creeping up slowly to debt ratios that will debase our currency or undermine our credit or both. We face catastrophic inflation or defaults or both.

What is going on? Why are we not addressing this problem? Part of the problem is the liberal political notion that we must ‘redistribute the wealth’ and that means taxing or confiscating the wealth of the rich and giving it to the poor. We are told we need to double the minimum wage. Large corporations own trillions in assets. Corporate assets are $19 trillion and that is larger than the debt, but how much of this can we take and still have employment? Note that there is plenty of money to take from the capitalists if we get too deep into debt. But private debt is $16.483—larger than the total national debt—and we should include Social Security [$15.835] and Prescription Drug [$20.989] and Medicare [$81.233] for a total unfunded liability of $118.047. That puts the unit taxpayer liability of $1.02 million dollars per taxpayer! Nobody can fund this debt since our economy would collapse.

It is a tragedy that GDP [gross domestic product]  is calculated as C + I +G where G is government spending, C is consumption and I is investment. As such, we can tag a certain fraction of government spending as a contribution to GDP but we must realize that this is actually debt funded. This is an outrage. Real growth can only be derived from the taxed salaries and fees upon new jobs and new businesses. We have no real growth so the current 1.5% growth rate for GDP is swamped by our massive deficits. It is only more debt and not real. Our Civilian labor force participation rate has fallen from 66% in 2004 to below 63% now. We are employing a lower fraction of our population that we did even a decade ago.

Why the lax nature of the political left liberals on this issue? Is it that they really believe there is some way to grow out of this mess even though the most optimist mathematical calculations show this is impossible? Is it because they think that if the system crashed like something that happened in 2008, or even worse, they can shout: “Capitalism has Failed” and they will win in the ballots, polls or streets?

The debt is now intractable and there is no way to pay it off or even stop or slow down is cancerous progress. We are letting the progressive left undermine our wealth and certainly that of our children and later offspring. If this is a war then the progressive liberals have already won the final battle.