Do we Really need to Reduce US Debt

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Do we Really need to Reduce US Debt

  1. 1. 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 debt. 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 loans.
  2. 2. 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.
  3. 3. 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.
  4. 4. 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 federal debt.
  5. 5. 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.
  6. 6. 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. Personal recommendations 1. Keep interest rates low, i.e., increase trustworthiness of the US Public Debt.
  7. 7. 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 term.
  8. 8. 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 projects. 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)
  9. 9. 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

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