A question I have been pondering for some time
now .... out of which I came to the conclusion
that under the current global financial
regime, it's patently impossible and provably
undesirable to actually reduce the US national
In fact, anyone who tells you otherwise has very
little understanding of global finance and is
operating under a delusionally gross
mischaracterization of government debt.
The current financial system treats it like a
completely different asset class than traditional
The US national debt would only foreseeably be
reduced if the entire global economic paradigm
underwent a tectonic shift due to new
technology, and it would have to be something
along the lines of universally cheap
energy, energy-matter conversion, interstellar FTL
travel, or teleportation.
Either that, or WWIII causes the downfall of the
US government and reorganization of the global
financial system around the next
superpower, which would likely undergo the
same cycle of debt. I am afraid we are already
moving in this direction.
So any other way of looking at this issue? I guess
one first needs to understand the difference
between real and nominal numbers. $17 trillion
sounds like a scary number, and it makes for some
eye catching headlines, but in real (adjusted for
inflation) terms it is not unprecedented.
The better way to view our debt is not as a
number in a vacuum but rather as a percentage of
GDP. If our debt is growing slower than GDP is
growing then our real debt is shrinking.
The number could theoretically stay at $17 trillion
forever and we would be paying the real balance
down at a clip of a few percentages a year.
So do we really need to reduce our debt?
When the S&P downgraded US debt in 2011 they
specifically said that they were not downgrading
us because of a financial concern but rather
because of political concerns. That means that
they weren't worried about our ability to pay it
back, but rather our willingness to do so.
Currently our debt situation isn't really that bad
when you consider the interest rates involved. A
nice little side effect of the quantitative easing
regimen the Federal Reserve pursued is
significantly lower interest rates on long term
If the federal government was able to borrow at 2%
and our economy is inflating at 3% (most recent
measure was 4%) they are essentially getting a real
gain from every dollar of debt they put out there.
So, if one is asking what is the most effective way to
pay down our debt, I would argue that going with
fiscal policy (reducing spending, raising taxes) is not
particularly effective since Congress can't even
agree on what to name a post office, let alone a
way to balance the budget.
Rather, monetary policy is how we will reduce our
debt which is exactly what we did the last time it
ran up in WWII. We inflated our way out of debt.
The number stayed essentially the same, it just
came to be less and less scary as time went by
because it was denominated in dollars and over
time the dollar was worth less and less.
Think about it this way, with a 3.5% rate of inflation
the dollar loses half its value every twenty years or
so. If we stop adding to our debt today then over
the next 40 years (1945 to 1985 for comparison)
our $17 trillion would turn into an inflation
adjusted $4.25 trillion.
1. Keep interest rates low, i.e., increase
trustworthiness of the US Public Debt.
Avoiding fights in the Congress about the Debt
Ceiling may help a bit. Low interest rate is the
beginning of any debt repayment plan.
2. Go for Economic Growth. Any new debt should be
raised to fund growth and not fund US Entitlement
Programs. Entitlement programs must be fully
funded by US Taxes. Either increase tax revenue or
cut the entitlement spending.
3. More Economic Growth. Any additional debt must
result in an additional economic growth, and the
growth must be sufficiently high to cover the interest
as well as the principal of the debt over the long
As an example:
if a new infrastructure project which costs $1B, it
should result in additional growth of about $150M in
GDP. The additional taxes on additional $150M
would cover the debt repayment of $1B in 30 years.
This is a high bar, but easily met by infrastructure
4. Get healthcare spending under control. The US
spends about 17% of GDP on healthcare, the rest of
the world spends around 10%. (and often have
better healthcare). Imagine the growth that this
would unleash. And you don't need to go Canadian -
why don't you try going Singaporean who only spend
5% of GDP (less than 5% actually)
5. Tolerating some inflation. Inflation actually
decreases the net interest rate (i.e., inflation
adjusted) a bit, which helps the debt repayment.
6. Make the US Dollar fall. The US is in fact the only
country with most of its debt in its own currency.
This privilege is not available to most countries.
Step 5 and 6 actually feed each other.
Share your thoughts.
Thank you, Have a Great Day