While Congress continues to gush money in Iraq and Afghanistan (and offers to pay for an over $200 million missile system for Israel), U.S. debt is now over $13,000,000,000,000. That is roughly $118,000 per taxpayer.
The White House and Congress show no serious commitment to addressing this problem as they pile on pork projects and spend wildly. We are looking at a disaster of global proportions. Yet, even as states are forced to sell off parks and public properties (here and here), the United States continues to act like a teenager on an unlimited credit card.
For the debt figures, click here
Puzzling,
You’re being disingenuous about that article.
“[Dr. Ihori] agreed with other critics that the 1990s stimulus failed because too much of it went to roads and bridges, overbuilding this already heavily developed nation. Critics also said decisions on how to spend the money were made behind closed doors by bureaucrats, politicians and the construction industry, and often reflected political considerations more than economic. Dr. Ihori said the United States appeared to be striking a better balance by investing in new energy and information-technology infrastructure as well as replacing aging infrastructure.”
The point of the article seems to be: Debt is only as good as what you invest the money in.
I’m not arguing that debt is the answer in and of itself, I’m arguing that saying all debt is bad because if you use it badly it doesn’t work is as ridiculous as saying “chainsaws are bad because if you use them for cutting up vegetables you ruin the vegetables.”
Byron,
Keynesian policies are bankrupting nations, swelling govenments and crushing freedoms. The odd thing is, Keynesian economists often argue that their policies didn’t work because stimulus packages weren’t large enough! If two Tylenol won’t cure the headache then perhaps two hundred will.
I should correct the dollar amounts above. Japan spent $2T in four years after their bubble, but $6T in so-called infrastructure stimulus since the bubble burst to date. To achieve something comparable based on the size of the two economies, the United States would need to spend about $12T. And Geithner and others argue that Japan only failed because they didn’t spend enough! Amazing.
Puzzling:
correct, public spending drives out good money and in the long run doesn’t do anything good for the economy. Roosevelt tried that in 1933 and the depression lasted until 1946-1948. The Japanese experienced almost the exact same result. Keynesian stimulus does not work and John Maynard was a crackpot at best. I think main stream economists are finally starting to figure that out, at least the ones who are honest.
Gyges,
Japan spent $2T on infrastructure spending after their collapsed real estate bubble. They now have public debt about 180% of GDP to show for it, and an economy structured on public works spending in which interests are beholden to government in Tokyo for the next job handout.
The real question to ask is what happens when the stimulus ends?
From the New York Times:
Gyges.
Actually having read Puzzling’s post to which you were replying, I see that he/she also says that one cannot borrow ones way to prosperity, you and puzzling appear to be at cross purposes.
Gyges.
Because it was your reply to Puzzling that sparked the ideas.
Actually I read “can’t” in your post as “can” so thought you were saying the opposite of what you were in fact saying. I had not read Puzzling’s post to which you were replying so probably it would have been more appropriate to reply to him/her.
Sometimes under certain circumstances one can borrow one’s way to prosperity, but those circumstances are not present now. Today under present circumstances I agree with you, you can’t borrow your way to prosperity.
Carlyle,
I guess what I’m wondering is, why are those particular lectures addressed to me?
Gyges.
There is good debt and there is bad debt. Debt is good when what it is spent on actually gives a return to the borrower that is more than he pays in interest until he fully pays off the loan, bad debt is otherwise. The trouble is we don’t know for certain whether a debt is good or bad until the obese woman sings.
Things go in cycles, there is a long cycle which is of the order of a human life time from one great depression to the next. After the great depression of the thirties and the 2nd world war, people became wary of debt, wary of borrowing and wary of lending. There were people who had lost all their money because they had borrowed and could not pay it back and there were people who had lost all their money because they had lent it to people who could not pay them back. So after the war ended, people only borrowed when they were very sure of that what they bought with it was worth it, and people only lent to the most credit worthy borrowers. When people borrowed with mortgages, they only borrowed a small proportion of the value of the property, so had large equity based on the market value when they bought, maybe they borrowed 20% and had 80% equity.
As time went on some people found that borrowing and lending was not as risky as most thought, and made money by borrowing a higher proportion than average and lenders found that these loans were not risky. There were the usual cycles of boom and recession and in each recession some risky borrowers fell by the wayside, in the boom phase the proportion of the asset values held by borrowed money went up and in each recession it was wound back, but if one looks at successive boom recession cycles one finds that the proportion of borrowings against asset values ratcheted upwards. While in the fifties people were borrowing only 20% of the value of an asset, in the nineties they were borrowing 95%. In the fifties the nominal asset values were low compared with the real values, in the nineties the asset prices were high compared with realistic values, the prices were supported by the belief that asset values only ever go up, but that was no longer true. In the fifties borrowing and lending was much less risky than the people of that time thought, in the nineties borrowing and lending much more risky than people thought. The long cycle of a human lifetime is driven by the different experiences that lead to different conventional wisdoms about debt. The people who lived through the great depression became cautious and frugal, people who only read about the great depression in history books lacked the gut fear of debt. i cal it the hand burnt on the stove effect. If you burn your own hand on a hot stove, you learn emotionally not to put your hand on a stove you learn it in your gut and actually become nervous near stoves, if you see someone else burn his hand on a stove you learn in an intellectual way but the learning does not affect your behavior as strongly. There are not now many people alive who remember the depression, my parents for example born in 1910 and 1912 died in 2007. People these days have a conventional wisdom that those who don’t gear up to buy appreciating assets are fools, but it is these people who are foolish. We are due for another Great Depression and it has already started. Actually it will be called The Great Recession. Economic slowdowns of this order were once termed crises or panics until the one of the eighteen nineties then “crisis” became an unpleasant word and the term “depression” was coined. After the great depression of the nineteen thirties the term depression became too loaded with bad connotations and it was replaced by “recession”. No doubt a new euphemism will be needed soon, contraction or negative growth or something.
Carlyle,
I was calling Puzzling out on an oversimplification, not advocating debt as a cure all. You’ll even notice that the only debt I even implicitly endorsed was debt for the improvement of infrastructure.
But hey, feel free to keep fighting that straw man.
Gyges.
Borrowing money at interest rate x% works as long as the things that you spend it on gives a return of y% where y > x. However sometimes people think they are getting y% but it is an illusion.
Borrowing for consumption or for futile wars does not give a return y% that is greater than the borrowing cost x%. Note that I said futile wars, when people in the 19th century were borrowing to start businesses in the West in the land taken in wars from the UnAmerican Natives y% was greater than x% because the war against the Indians was not futile, it was cheap and returned value in terms of resources that the Indians lost. But the wars in Iraq and Afghanistan are futile. It is obvious that the US is not winning and the oil resources of Iraq are not going to end up owned by American business and all the US is harvesting in Afghanistan is the undying hatred of the world’s Muslims.
Consumption and speculation in asset bubbles does not give a return greater than the borrowing cost. Asset speculation may appear to do so for a while until the point is reached where speculators decide that they need to sell and they find that there is no one to whom to sell as all the demand pushing up values was coming from other speculators.
Sometimes people borrow to put off the evil day when they admit that their activities are not making a profit, this stops when the lenders reassess their credit worthiness and decide not to lend more good money after bad.
One problem in the US is that most of the money has migrated to the richest 1%. The continued functioning of the economy requires that the other 99% spend to buy things, but they can only do so if they borrow from the 1% kleparch class. The point at which the borrowings of the nonrich can not be repaid and can not be services has already passed. There is a massive overhang of nonrepayable debt, both by the government and by consumers.
Excuse me:
“…who would argue with the statement that you can’t borrow your way to prosperity.”
Puzzling,
First off, for someone oversimplifying you’re being awfully condescending. I know several people who took out college or business loans, that would argue that you can’t borrow your way to prosperity. It depends on what you’re borrowing for. Hell, that’s what our current system of capitalism is based on.
Now, I say that borrowing money to improve infrastructure, not only provides jobs to the workers who do the building (the money from which spreads through-out the economy), it provides an return on the investment: you get a road, or sewer system, or _____. All of which help contribute to the productivity of the society.
Debt is a tool, it’s neither good nor bad, but it’s uses can be.
Mespo.
“Most of the federal debt is money we owe ourselves. Are we going to foreclose on us?
But some of it is owed to foreigners and a lot of what the US does depends on it borrowing still more. When the foreigners refuse to lend more because they realize that the US has passed the point where it can never pay off what it already owes they will stop lending, and the US economy will suffer a credit squeeze by a grizzly bear.
Tootie
I doubt the general public wants to eliminate Social Security and Medicare, though I would be willing to look at any reputable poll that indicates that trend. Most people don’t want their parents moving in with them – they have enough trouble getting their grown children out of the house.
I think the elderly (and their chidren) really wanted these programs and were not “scared into them”. During the Depression the elderly and the children, as usual, suffered inordinately. Social Security was introduced to help alleviate these problems. People are now living longer, on average. Most low-wage earners receive all they have contributed within 4-5 years.
Medicare was introduced because the elderly could not afford the high costs of health insurance and many had no health insurance at all. Much as is now the case for about 10% of the population until the new health insurance plan kicks in.
In both cases, a worker and their employer contribute for many years into these funds. The problem is that the cost of living and, especially, the cost of health procedures have risen faster than the contributions.
As far as the Constitution, the General Welfare clause gives the permission to tax and spend on the general welfare of our citizens. I suspect you disagree, but we are bound by Supreme Court decisions. Only an amendment can change that. Go for it.
Carlyle:
Most of the federal debt is money we owe ourselves. Are we going to foreclose on us?
Sooner or later the US will reach the point at which repayment of the debt is impossible or the point at which creditors believe that repayment is impossible. It is not clear which point will be reached first, but when creditors stop lending the US will no longer be able to afford necessary things such as wars in Iraq, Afghanistan and Iran.
Whether the Global economy will survive is another question.
What’s the big deal?? It is only 13 Trillion! I won’t get worried until it reaches 20 Trillion.
Buck: Great charts. TY
Though I wish the solutions about handling the growing mandatory expenditures included a clear means of eliminating some of these programs (e.g. Medicare) slowly over time through attrition.
If the people really wanted these programs their states would have done them and since they have not, I assume the people really don’t want them or the feds made it difficult to provide them.
Or, of course, the Federal Constitution could be changed to match the powers illegally seized by government. I don’t like that option since it requires an amendment and it is still immoral. And I think it is clear that it is impossible for the federal government to handle this much power, this much money, and this large of a system. The programs are not viable because government can never meet these kinds of needs. This is what families do and this is why families are so important.
Everyone is willing to talk about these programs without mentioning that they are unlawful and began mainly as a political ploy to bribe old folks for their votes. The programs were merely tools to acquire political power and take advantage of old folks. Democrats continually frightened old people into voting for them by claiming that republicans were going to pull the rug from under them.
The people need to be taught (in our public schools) that it is wrong to expect the government to provide these services. While at the same time we need to fulfill the promises to the oldest participants in the system who have paid their taxes for longer and have every right to expect the government live up to its part of the bargain.
It is disingenuous of democrats to complain about the expense of these programs when it was democrats who insisted on starting the programs in the first place. Then they come along and complain about the expense and demand we spend even more money because the program is so expensive.
It’s like having a wife spending too much money on the credit cards offering to spend more on them as the solution to the problem.
Puzzling:
good post.
Deborah,
You are saying that the government must tax people to create jobs since the private sector is not creating them. Among other things, isn’t that a pro-war argument? If you bring the military home they will add hundreds of thousands of people to the unemployment rolls.
You cannot borrow your way into prosperity. It may look that way when you’re 22 with a new credit card, but thinking adults recognize that this idea is an illusion.
It makes more sense to cut taxes so that people have more money to spend.
It is also immoral and dangerous to debase the currency by creating new money. This uses inflation to rob those who are older and have saved, all while empowering the government to wage illegal, illegitimate wars without the need for today’s citizens to pay for them. Would a fraudulent war in Iraq have lasted so long if people actually had to pay the bill each year? Very doubtful.