American National Debt

[whyBish]

I'e been thinking about it for a while. Over here in NZ we only get the occasional article, like the following:
http://www.nzherald.co.nz/index.cfm?c_id...ID=8500730

What is the view from the U.S. side?

Is the U.S. dollar backed by a physical commodity, or government guaranteed? (My bad memory tells me that it is no longer gold-backed, and isn't guaranteed). If not, what is to stop the government from deflating the dollar by printing off money to pay off some debt?

If lenders started requiring higher return, what effect would that have on the U.S. economy?

Is the U.S. going to be forced into more free trade deals? (To help the economy and to get on par with where China is heading)
China is welcoming a world first one with New Zealand (Irony: ex-communist China wants free trade deal with NZ whereas Capitalist U.S. doesn't want one at all).

If shareprice measures performance of a company and its management, can the currency (or TWI) be used to measure the performance of a country and its governance?

NZ dollar has almost doubled in value vs the US dollar due in large part to our focus on primary production which China is providing strong demand for. Will this pull resources away from value added industries and/or harm our (NZs) long term economic position if(when?) Chinese demand is "satisfied"/"levels off"/"settles down"/"turns toward value added sectors"?

Is the growth of China increasing the pie, or taking a portion of a fixed pie? (I.E. does increased supply from China trigger increased demand, once export monies filter through the economy)

[kandrathe]

I'e been thinking about it for a while.  Over here in NZ we only get the occasional article, like the following:
http://www.nzherald.co.nz/index.cfm?c_id...ID=8500730

What is the view from the U.S. side?
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Generally, the policy is to borrow in times of need (war or recession) and pay back in times of strength, however during the boon in the 90's the US did not pay down anything and was content with not running up additional deficits. Some here wanted to "spend" the peace dividend, harumpf. Let's pay down the debt first. Some people do not think it is as big a problem, when you compare over time our national debt to our GDP.

"Is the U.S. dollar backed by a physical commodity, or government guaranteed?  (My bad memory tells me that it is no longer gold-backed, and isn't guaranteed).  If not, what is to stop the government from deflating the dollar by printing off money to pay off  some debt?"

No, our debt is not secured. The federal government could print more money and devalue our currency, but that would affect the people in the US most adversely. Pensioners, and anyone with savings would watch that nest egg shrink into nothingness.

NZ dollar has almost doubled in value vs the US dollar due in large part to our focus on primary production which China is providing strong demand for.  Will this pull resources away from value added industries and/or harm our (NZs) long term economic position if(when?) Chinese demand is "satisfied"/"levels off"/"settles down"/"turns toward value added sectors"?Is the growth of China increasing the pie, or taking a portion of a fixed pie?  (I.E. does increased supply from China trigger increased demand, once export monies filter through the economy)

I believe the current US policy, of allowing the dollar to weaken against other currencies, is to break China's policy of holding fixed the value of its currency. At least 1/3 of our current trade deficit is due to China artificially devalueing its currency. China is doing this to create a trade surplus, pumping large amounts of money and investment into their economy and pricing foriegn goods beyond the reach of their own consumers. The US is interested in being able to offer products to the large population of consumers in China, and so far Chinese economic policies have thwarted most of those efforts.

If shareprice measures performance of a company and its management, can the currency (or TWI) be used to measure the performance of a country and its governance?

I don't think so. Governments typically try to control the value of their currency by buying or selling it in the currency markets. Sometimes the market overwhelms the nations ability to control it, then perhaps it indicates that there is something out of economic control. For instance, the Russian penchant for selectivly targeting UKOS for re-nationalization, might signal a return to government control of production.

If lenders started requiring higher return, what effect would that have on the U.S. economy?

The US borrows from banks throughout the world, so the interest rate is set at an internal bank lending rate. Currently the interest on our debt is paid for by... Yup, you guessed it! More borrowing. Like paying your credit card bills, with a credit card.

Is the U.S. going to be forced into more free trade deals?  (To help the economy and to get on par with where China is heading)
China is welcoming a world first one with New Zealand (Irony: ex-communist China wants free trade deal with NZ whereas Capitalist U.S. doesn't want one at all).

You have some commodities and raw materials that China desperately needs, I just hope you are not burned by your trade deal. China is not quite a free market economy. Even as this Chinese gorilla is growing, the US economically is still the biggest one for now. So, currently, the US is not forced into anything.

[whyBish]

Thanks for the comprehensive response. The only answer that raised more questions for me is the one on repayment of debt. Surely there is a point where the interest rate required on debt reflects the risk of non-payment? The risk of non-payment increases as debt levels increase, and decreases as economic growth increases. With debt levels increasing, and economic growth stagnant to negative, shouldn't this increase the rate required on U.S. government paper?
At what level does default occur (I'm thinking something like (longterm) GDP less than debt servicing costs)? Is the U.S. anywhere close to this? (I'm again guessing that it is far from it, but the occasional and probably highly biased reports that I keep seeing are harking on about the U.S. being close to breaking point)

Est. US National Debt ($USD):7.524T (http://www.brillig.com/debt_clock/ , http://www.publicdebt.treas.gov/opd/opdpenny.htm)

Est. US GDP ($USD):11.803T (http://www.bea.doc.gov/bea/newsrel/gdpnewsrelease.htm)

Not sure what the composition of the U.S. debt looks like (therefore can't calculate duration), but looking at the various rates there was a max of about 4.5% (http://forecasts.org/interest-rate/7-yea...-yield.htm) so at that estimate only 2.9% of GDP is spent on interest. seems very little to be worried about, even if the interest rate doubled... have I messed something up, or am I missing something?

[Nystul]

Your math looks alright. Taking a look at some budget abstracts, I come to similar conclusions. Roughly 3T is listed as being borrowed from government accounts (~2T of which comes from the social security and medicare accounts), so the "net interest" is actually only about 1.5% of GDP. I think we are a long ways from a financial nuclear meltdown.

However, it does take a toll. If we include the interest that is due to those federal accounts, the estimated interest payments for this year are listed at 242 billion (about 2.2% of GDP actually, then?). Total receipts are estimated at 1.8 trillion. So, we are talking about over 13% of all taxes paid wasted on interest. Of course, since we spend more and borrow more, the implications of this are not clear.

[ShadowHM]

So, we are talking about over 13% of all taxes paid wasted on interest.  Of course, since we spend more and borrow more, the implications of this are not clear.
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The most straightforward implication is that the government has less flexibility for program spending i.e. less flexibility to add or alter needed spending.

Since most of the tax revenue is spoken for, in one way or another, on things that the citizens expect from their government, then a growing amount of claimed spending is something to worry about.

We could launch into a lengthy list of places where governments squander money. It is a fact of life that this happens. New brooms are taken out and used on them and then other boondoggles happen. However, most of what the government buys with its money is valuable to its citizens. Restricting flexibility in spending is a worrisome thing.

My federal government actually has a forecasted surplus this year. We have suffered a number of years of cost-cutting and downloading of expenditures to lower levels of government to make this happen. The stated plan was to reduce the debt, and, while this has been happening (to a very limited extent) it is quite amazing how the possible pork barrel has been generating excitement.

Carrying a debt to be able to pay for capital improvements is one thing. Carrying an increasing debt to pay for today's lifestyle is another. People who would never consider carrying such a huge debt load in their own lives are perfectly happy to see their government do it. :huh: And they still consistently vote against anyone who suggests that taxes might have to go up to pay for it all. <_<

[Occhidiangela]

Thanks for the comprehensive response.  The only answer that raised more questions for me is the one on repayment of debt.  Surely there is a point where the interest rate required on debt reflects the risk of non-payment?  The risk of non-payment increases as debt levels increase, and decreases as economic growth increases.  With debt levels increasing, and economic growth stagnant to negative, shouldn't this increase the rate required on U.S. government paper?
At what level does default occur  (I'm thinking something like (longterm) GDP less than debt servicing costs)?  Is the U.S. anywhere close to this?  (I'm again guessing that it is far from it, but the occasional and probably highly biased reports that I keep seeing are harking on about the U.S. being close to breaking point)

Est. US National Debt ($USD):7.524T (http://www.brillig.com/debt_clock/ , http://www.publicdebt.treas.gov/opd/opdpenny.htm)

Est. US GDP ($USD):11.803T (http://www.bea.doc.gov/bea/newsrel/gdpnewsrelease.htm)

Not sure what the composition of the U.S. debt looks like (therefore can't calculate duration), but looking at the various rates there was a max of about 4.5% (http://forecasts.org/interest-rate/7-yea...-yield.htm) so at that estimate only 2.9% of GDP is spent on interest.  seems very little to be worried about, even if the interest rate doubled... have I messed something up, or am I missing something?
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The debt service represents an area of increasing concern to those who demand fiscal responsibility in government. One of the major accomplishments made in the 90's, a REpublican led but fundamentally bipartisan approach to fiscal responsibility, was putting more discipline into the budgeting process in order to get deficit spending under better control. It did not hurt that at the same time there were some economic booms (tech was one of them) that increased revenue.

So, what happened in the late 90's to early 2000 when it became clear that, for once, the fiscal belt tightening induced a "surplus" rather than a deficit?

Was any of the national debt "retired" to reduce the long term debt service?

Nope.

One wonders if any lawmakers have ever successfully managed a household budget, or if they always bet "the come line." "Next year, we'll sort out the debt issue."

I don't want to leave my kids in debt to the extent that their tax revenues pay bankers rather than for needed public services, such as roads, sewer lines, schools, etc. Sadly, no one in Washington seems to be listening, they just argue over what to spend on, not on getting a grip on the debt service that leaches effectiveness from the tax revenue base. Oh, what was that chanting I heard back there, the "tax cuts solve all problems" mantra?

What mystical Eastern book of wisdom and magic was that from: The I Bling?

Last I checked, local and state taxes are on the increase. <== That tells you that the total tax burden is increasing. How does that stimulate an economy? The same way smoke and mirrors do. :P

Occhi

[Minionman]

Was any of the national debt "retired" to reduce the long term debt service?

Nope.&nbsp;

One wonders if any lawmakers have ever successfully managed a household budget, or if they always bet "the come line."&nbsp; "Next year, we'll sort out the debt issue."
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Excellent question.

[whyBish]

Carrying an increasing debt to pay for today's lifestyle is another.&nbsp; People who would never consider carrying such a huge debt load in their own lives are perfectly happy to see their government do it.

Only one minor point there, from the CPI data it looks like 30-50% (in the various states) is spent towards shelter. I am assuming that most of this is payment of a mortgage (yes, a really big weak assumption, but I couldn't find anything better), so the average US individual is happy paying a higher rate of income towards interest costs than the 13% or so that the government does.

..pause...
OK, found some slightly better info, but older at (http://www.signonsandiego.com/uniontrib/...arney.html)
"Back in the early 1980s, according to Lereah's research, typical household debt ratios exceeded 30 percent. That is, a family's total debt service payments ate up 30 percent or more of household income each month. In the late 1980s and early 1990s, ratios dropped into the 22 percent range. Currently, by contrast, average household debt service ratios are in the 17 percent to 17½ percent range."

So again it looks like the Government spending is within what the average household would do. Also found that the average household debt is at about 115% of income, whereas the governments was considerably less than 100% and they pay lower interest rates than a household.

[jahcs]

Part of the reson why the debt service ratio has fallen may be because interest rates were at record lows for many years which allowed people to refinance and borrow more for the same monthly payments.

Many of the people I know that refinanced to reduce monthly payments spent the savings they could have put away or increased the amount borrowed until their payments were equivalent to what it was before refinancing.
I work at a car dealership (not in sales) and with the low interest rates being offered (even as low as 0%) most customers are buying "more car" instead of not spending the money they could have saved by buying a vehicle more in line with their income. Many consumers live right at the edge (or over it) of their income instead of saving for the future.

edit: As a sidebar, I wonder if the amount of money people placed into long term investments/savings coresponds with the reduction in debt maintenance. Or did they just spend more?

[ShadowHM]

Only one minor point there, from the CPI data it looks like 30-50% (in the various states) is spent towards shelter.&nbsp; I am assuming that most of this is payment of a mortgage (yes, a really big weak assumption, but I couldn't find anything better), so the average US individual is happy paying a higher rate of income towards interest costs than the 13% or so that the government does.

..pause...
OK, found some slightly better info, but older at (http://www.signonsandiego.com/uniontrib/...arney.html)
"Back in the early 1980s, according to Lereah's research, typical household debt ratios exceeded 30 percent. That is, a family's total debt service payments ate up 30 percent or more of household income each month. In the late 1980s and early 1990s, ratios dropped into the 22 percent range. Currently, by contrast, average household debt service ratios are in the 17 percent to 17½ percent range."

So again it looks like the Government spending is within what the average household would do.&nbsp; Also found that the average household debt is at about 115% of income, whereas the governments was considerably less than 100% and they pay lower interest rates than a household.
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Serendipity strikes. :)

The latest copy of Macleans magazine had this article on household debt in Canada. I would be rather surprised if it is too much different than the case in the U.S. of A.

Significant statistics (all numbers in current dollars, i.e. adjusted for inflation, sources Statistics Canada and the Bank of Canada):

1970's Household savings rate 14%
Mortgages $147 billion
Credit Cards N/A
Lines of Credit N/A

1980's Household savings rate 15.8%
Mortgages $197 billion
Credit Cards $8 billion
Lines of Credit $4 billion

1990's Household savings rate 9.2%
Mortgages $408 billion
Credit Cards $19 billion
Lines of Credit $57 billion

2000's Household savings rate 1.4%
Mortgages $531 billion
Credit Cards $32 billion
Lines of Credit $66 billion

Additionally, from 1993 to 2003 the rate of personal bankruptcies rose by 52%.

It seems that households in Canada are spending with the same merry abandon that governments are. :( They are not just taking out loans for homes (shelter). They are taking out loans for lifestyle costs.

However, it is still a concern that governments are running deficits and failing to pay off their outstanding loans. The only security that any government can offer for a loan taken is their ability to tax their citizens. I would argue that, in general, there is no such thing as 'capital spending' for a government beyond making sure they have citizens who can pay taxes. And, oddly enough, education is not a federal jurisdiction in this country, but a provincial one. Ensuring a robust economy, while not entirely within the ability of a federal government, is certainly the kind of thing they do try to promote. Certainly that is some of the excuse offered for excess spending - they are 'stimulating' the economy. ;)

As I said in the first post, any form of fixed payment that the government has no ability to alter is a threat to their ability to respond to the needs of their citizens. Reduced flexibility in the face of changing times (and we do live in interesting times, do we not?) is a long term threat to the citizens of the country. And that is why it remains a concern to see the American government (and my government) choose to run a deficit every year.

A couple of other points:

Only one minor point there, from the CPI data it looks like 30-50% (in the various states) is spent towards shelter.&nbsp; I am assuming that most of this is payment of a mortgage (yes, a really big weak assumption, but I couldn't find anything better)

In many cases, 'shelter costs' means rent for your apartment/house, not a mortgage payment.

Also found that the average household debt is at about 115% of income

Does this figure include mortgages? I find it surprisingly low, given the average cost of a house compared to average income here.

[whyBish]

The following link gives some comparisons between the US and other OECD countries in terms of Central Government Debt
http://cs4hq.oecd.org/oecd/eng/TableViewer...ReportOnly=True

On the issue of flexibility I would have thought that the decision to take on more debt would be the standard profit analysis, will this X amount of debt be used towards something with a rate of return higher than the interest rate on the debt? Toomuch debt would not only hamper flexibility, but result in higher average cost, but the flipside is that too low a debt means profitable opportunities may be going missing. Of course, it is all just poking fingers in pies, since I guess many programs are not weighed up by governments on profit basis, but on political ones.

[Minionman]

The following link gives some comparisons between the US and other OECD countries in terms of Central Government Debt
http://cs4hq.oecd.org/oecd/eng/TableViewer...ReportOnly=True

On the issue of flexibility I would have thought that the decision to take on more debt would be the standard profit analysis, will this X amount of debt be used towards something with a rate of return higher than the interest rate on the debt?&nbsp; Toomuch debt would not only hamper flexibility, but result in higher average cost, but the flipside is that too low a debt means profitable opportunities may be going missing.&nbsp; Of course, it is all just poking fingers in pies, since I guess many programs are not weighed up by governments on profit basis, but on political ones.
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The missing question seems to be "can this debt be paid back?". For home mortgages and al that, I don't think smarter people on this take out loans without thinking of how they will get paid back.

[jahcs]

The trouble with Government Spending is that they base their spending on what they think they will bring in in taxes over a period of time. If you are a glass half full (or even a my cup runneth over) type...


And a person can be smart. People on the other hand...