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How I Learned to Stop Worrying and Love the Debt: FAQs About the National Debt

Benjamin N. Dover III's picture





 

The handwringing over the supposedly disastrous consequences of our growing national debt shows no sign of abating anytime soon. Perhaps most troubling is that the unwarranted alarmism comes not just from rabid ever-grizzlies like ZeroHedge but also from some respectable information sources.

At every turn, the Cassandras remind us that the US has total outstanding national debt of $11.8 trillion and $3 million of new national debt every minute. (They conveniently fail to mention that that's only a 100% increase in the debt since 2001.) They seem to get satisfaction from pointing out that the debt is so large, it doesn't even fit on most calculators.

And they note that even according to the conservative estimates of the Obama Administration, the federal budget deficit in 2009 will be $1.6 trillion, over 11% of the overall economy, the highest on record since the end of WWII. And that in 2019, the national debt will represent over 75% of GDP, the highest proportion since just after WWII. They claim that, in these circumstances, the international reserve status of the dollar will not survive, leading, at best, to a crippling rise in interest rates and the cost of debt service, and at worst, a collapse of the American monetary system. Either way, they claim, the US economy will "teeter on the edge of a black hole." 

Defeatist data like these are causing pundits and ordinary folks alike to start thinking about the issue -- never a good thing. It's clear the debt hysteria won't ebb until either Americans are distracted by a new reality show or the experts debunk the myth that debt is bad.

Fortunately, Congressman Pete Stark has gotten the ball rolling by noting that the national debt is actually an indication of our country's wealth (before politely telling his interviewer to "get the fuck out or I'll throw you out the window").  And Nobel-winning economist Paul Krugman has helped out by suggesting that national debt doesn't really matter

I fear, though, that these lone voices of fiscal sanity won't be enough.  So, in an attempt to break down the facts in a way that a six-year-old -- or even Tyler Durden -- could understand, I've composed clear, straightforward answers to frequently-asked questions on this much-misunderstood topic. Feel free to add any queries not addressed, but I think this pretty much ends the debt debate.

(However, if after reading the FAQs you're still a bit anxious about the debt, you're in luck. The Treasury Department has been kind enough to allow concerned citizens to make a "gift" to the government to reduce the debt.)

FAQs About The National Debt

"Will the growing federal deficits increase the US's borrowing costs, creating a vicious cycle of spiraling debt?"

Once upon a time, people thought so, but recent economic history has proven that theory wrong. In fact, debt and borrowing costs enjoy an inverse relationship. For example, in the past few years, the national debt and deficit have skyrocketed, but interest rates have plummeted to record lows. Ergo, the more debt we assume, the lower our borrowing costs will be, which will allow us to access funds to service the balooning debt at ever-cheaper prices. By my calculation, if the US had the good sense to increase its debt by a few trillion more, we could reach a point where investors pay for the privilege of lending us their hard-earned cash.

"Doesn't a massive federal deficit mean we're spending much more than we produce?"

Absolutely. That's the beauty of it -- you get to spend money like a drunken sailor even though you're on a drunken sailor's salary.

"Won't investors stop lending to us altogether at some point?"

This is America. Governments, corporations and individuals in this country and around the world are lined up around the block waiting patiently to throw money at us. Since the queue's end isn't even visible from here, there's no reason to believe it actually has an end.

"Don't sound principles of personal finance dictate that it's unsustainable for an individual to continue borrowing and spending more than he earns?"

Yes. In short order that person's credit rating will fall, which will require him to pay more to get additional credit. At some point -- and it won't be long -- lenders will refuse to provide any more credit. If he isn't able to increase his income to meet his debt service obligations and other expenses, he'll go bankrupt.

"Wouldn't the same thing happen to a government that borrows and spends more than it produces?"

Yes.

"So, doesn't that mean the same thing will happen to the US Government?"

No. The economic realities applicable to individuals and other governments don't apply to the US. This phenomenon is what's known as the economic component of American Exceptionalism.

"What makes the US exempt from economic reality?"

A surplus of factors. First, the almighty dollar. For decades it has been the international reserve currency, which is a fancy way of saying the rest of the world has eternal blind faith in our money. In God we trust. In the Dollar they trust.

Second, we have the largest economy in the world, which means the rest of the world knows that a hole in our boat would drag the rest of the world's dinghies to the bottom of the ocean with us. That keeps them cooperative.

And third, America is the greatest, freest, richest, most egalitarian country in the history of the world. We're a beacon to the rest of humanity. We're the modern age's greatest national success story. These colors don't run (except, of course, where the red, white and blue at issue are the colors of France.) And, what's more, we're the greatest. How could a country like that go bankrupt?

"But hasn't China hinted at replacing the dollar as the reserve currency?"

China schmina.

"Isn't China expected to overtake the US as the world's largest economy?"

That's not going to happen any time soon -- at least not for 3 or 4 years. And if and when it does happen: China schmina.

"Isn't deficit spending by the government contrary to conservative economic principles?"

Not at all. Government debt as a means of centrally planning a nation's economy is what laissez-faire capitalism is all about. For those whose French is rusty, "laissez-faire" generally means "let-do," "leave-alone" or "step-the-fuck-off, Uncle Sam". Except when the economy veers off the anticipated course, in which case it means "government-should-intervene-by-sticking-its-arm-up-the-economy's-ass-and-making-it-dance-like-a-hand-puppet". Worry not -- Adam Smith and Milton Friedman are resting peacefully.

"What about the Fed's policy of monetizing the debt by expanding its balance sheet? Isn't that even more dangerous because it finances deficit spending by, in effect, printing money?"

That's what the press is there for. Printing money devalues a currency, sparks inflation and merely postpones an inevitable day of painful reckoning only when third world countries do it.

"Are you sure we've got nothing to worry about?"

As sure as I am that the Obama Administration's deficit projections are right on the money.

"So, debt is, for lack of a better word, good?"

Precisely. Debt is right; debt works. Debt clarifies, cuts through, and captures the essence of the evolutionary spirit. Debt, in all of its forms -- debt for bank bonuses; debt for shiny new cars; debt for that i-Phone app that makes the farting noises of different ethnic groups around the world -- has marked the upward surge of consumerkind and debt, you mark my words, will not only save Ben Bernanke's job, irresponsible homeowners and Citigroup, but also that country with a mild case of economic performance anxiety called the USA.

Mr. Dover will be on a secret fact-finding tour of Europe for the next few weeks.

**Special thanks to TomJoad for suggesting the brilliant title.

 


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Thu, 11/19/2009 - 14:29 | Link to Comment Anonymous
Wed, 09/09/2009 - 18:52 | Link to Comment Anonymous
Wed, 09/09/2009 - 16:32 | Link to Comment Anonymous
Wed, 09/09/2009 - 06:21 | Link to Comment Anonymous
Tue, 09/08/2009 - 23:04 | Link to Comment ZerOhead
ZerOhead's picture

Ben... your wordsmanship is only exceeded by your brilliant insight!

I am not worthy! You Gekko as only Gekko can!

And when I find that fucker who rated you a 4 I'm going to ream him a new A-hole!!!

Tue, 09/08/2009 - 21:00 | Link to Comment Anonymous
Tue, 09/08/2009 - 19:54 | Link to Comment Anonymous
Tue, 09/08/2009 - 19:53 | Link to Comment Anonymous
Tue, 09/08/2009 - 19:53 | Link to Comment Anonymous
Tue, 09/08/2009 - 19:49 | Link to Comment Anonymous
Tue, 09/08/2009 - 18:43 | Link to Comment Anonymous
Tue, 09/08/2009 - 17:41 | Link to Comment Gabriel Gray
Gabriel Gray's picture

debt shmedt

Tue, 09/08/2009 - 17:40 | Link to Comment Anonymous
Tue, 09/08/2009 - 16:41 | Link to Comment Anonymous
Tue, 09/08/2009 - 21:47 | Link to Comment PenGun
PenGun's picture

 You are such a troll Ben. See what you did.

Tue, 09/08/2009 - 16:11 | Link to Comment JR
JR's picture

Government health care is even more government debt.

A caller to Stephanie Miller’s progressive radio program this morning concludes from the August debates on health care that opposing sides are neither Democrat versus Republican nor liberal versus conservative.  Instead, they are smart versus dumb, meaning that “dumb” people are the ones protesting their loss of freedom and income to the state.  

Explaining to the “smart” progressive fringe on the left what’s wrong with socialism, of course, can be difficult. “Though a fool spend all his life with wise men, he will know the truth no more than a spoon knows the taste of soup.”  (The Dhammapada, c. 100)

Tue, 09/08/2009 - 20:08 | Link to Comment Mr. Mandelbrot
Mr. Mandelbrot's picture

+10!

Tue, 09/08/2009 - 16:03 | Link to Comment Anonymous
Tue, 09/08/2009 - 16:01 | Link to Comment Anonymous
Tue, 09/08/2009 - 15:11 | Link to Comment ShankyS
ShankyS's picture

Wonderful post!

Sadly, in a way this sounds like a CNBS broadcast without the ques of realism.

Tue, 09/08/2009 - 14:39 | Link to Comment TumblingDice
TumblingDice's picture

The article set my mind at ease. Thanks Ben.

Tue, 09/08/2009 - 14:50 | Link to Comment i.knoknot
i.knoknot's picture

me too - for a minute there, I was worried.

Tue, 09/08/2009 - 14:32 | Link to Comment Anonymous
Tue, 09/08/2009 - 14:07 | Link to Comment Ruth
Ruth's picture

I got the part that Tyler's brain can think like a 6 yr old but the other stuff I didn't understand...  Thank God my brother gave me this translation of principles of economics

http://www.youtube.com/watch?v=VVp8UGjECt4

 

Tue, 09/08/2009 - 13:57 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

A friend of mine was actually stupid enough to make a "gift" the reduce America's debt. He felt wonderful afterward and so did America. Unfortunately my friend doesn't smoke.

Tue, 09/08/2009 - 13:44 | Link to Comment TomJoad
TomJoad's picture

I had missed that one by Max. I do prefer Ben's style, more classically Swiftian in my modestly proposed opinion.

Tue, 09/08/2009 - 13:18 | Link to Comment eroc66
eroc66's picture

Totally hot commentary.  Now all we need is sexy Obama Girl or Ron Paul Girl cheerleaders to make the topic sexy! ROFL

Tue, 09/08/2009 - 13:06 | Link to Comment JR
JR's picture

Vin Suprynowicz in a review of Henry Hazlitt’s The Failure of the “New Economics” writes that Hazlitt, way back in 1959, demonstrated that not only did the Keynesian "remedies" of deficit spending and artificially low interest rates not work to reduce high unemployment, business failure and other symptoms of economic maladjustment, but that they often had precisely the OPPOSITE effect of that intended!

Suprynowicz cites some succinct Hazlitt conclusions:

“In Keynesian policy, unemployment is never to be corrected by any reduction of money-wage-rates...  Keynes recommends two main remedies. One is deficit spending (sometimes euphemistically called government ‘investment’). How good is this remedy? It was tried in the United States (partly because of Keynes’ recommendations) for a full decade. What were the results? Here are the deficit in the Federal budget, the numbers of unemployed, and the percentage of unemployed to the total labor force, year by year in that decade. All the figures are from official sources:” (Chart follows.) …

“The central and decisive fact is that heavy deficits were accompanied by mass unemployment. …

“The other main Keynesian remedy for unemployment is low interest rates, artificially produced by ‘the Monetary Authority.’ Keynes incidentally admits … that such artificially low interest rates can only be produced by printing more money, i.e. by deliberate inflation. But we may let this pass for a moment. The question immediately before us is: Did low interest rates prevent mass unemployment? …” (Another chart, measuring the commercial paper rate against the unemployment rate for the years 1920 through 1940, follows.)

“In sum, over this period of a dozen years low interest rates did NOT eliminate unemployment. On the contrary, unemployment actually INCREASED as interest rates went down. In the seven-year period from 1934 to 1940, when the cheap money policy was pushed to an average infra-low rate below 1 percent (.77 of 1 per cent) an average of more than 17 in every 100 persons in the labor force were unemployed.”  (end Hazlitt)

Continues Suprynowicz:

Hazlitt proceeds to demonstrate that from 1949 to 1958, when the same policy of artificially pushing down interest rates was tried, “the relationship of unemployment to interest rates is almost the exact opposite of that suggested by Keynesian theory.”

How could Keynes have gotten it so wrong?

Easy. Hazlitt shows again and again that Keynes pronounced his theories “ex cathedra,” without substantial statistics to back them up. Then, if actual statistics were produced that seemed to show results opposite to what his theories had predicted, he simply challenged the statistics!

(originally posted in part on Contributor J.D. Swampfox’s What makes us invest more?)

Tue, 09/08/2009 - 12:40 | Link to Comment JR
JR's picture


Keynes, Krugman and Bernanke are working for the financial establishment.  Their idea is to keep the money on the table, in play, so that they can take it, steal it.  The financial establishment deals in handling money: credit and debt.  And it can’t make money if it doesn’t have the money in circulation. 

Every time Joe Sixpack spends, buys product, all these assorted characters take a clip of it.  The state takes a cut that it redistributes in part to its supporters. The banks will be dealing with that money, taking their commissions and cuts with all the rest of the financial middlemen along the line. Money and credit to these people is not about production and sales, but the movement of the money.

It’s like a giant poker game.  If Joe Sixpack keeps his money in his pocket, by the time he goes home, he has his money.  But if he puts his money on the table or borrows, all these money dealers have a crack at it.  And all the while that Keynes in absentia has been pushing his theories, the government and the bankers are at work.

Take a look at the spoils for the Fed cartel from its money rackets, at the losses for its victims—1) the dot com wipeout 2) the home equity wipeout 3) the usurious mortgage-payment wipeout 4) the savings wipeout 5) the taxpayer wipeout  [bailouts for banks, investment bankers, insurance companies, Fannie, Freddie, GM, Chrysler…] 6) the 08-09 investor wipeout 7) the short seller wipeout 8) the American dream wipeout [lost jobs, an off shored manufacturing base, a debased currency, futureless college graduates…].   And on top of it all, Iraq and Afghanistan. Wars of aggression do not happen without the printing facilities of a central bank

 

Tue, 09/08/2009 - 15:35 | Link to Comment aldousd
aldousd's picture

Krugman just has it in for those 'richies' who somehow managed to make a boatload more money than he did, when he's so obviously smarter than they are.  He was probably pretty jealous that he didn't get laid any more being a 'world class economist' and the entrepreneurs are certainly not getting treated as 'fairly' as he has been his whole life.

 

Sorry it sucks to be you Mr. Krugman. And worst of all, sorry that you're smart enough to know just how bad it sucks. Sucks doesn't it? Mwahaha!

Tue, 09/08/2009 - 12:32 | Link to Comment Anonymous
Tue, 09/08/2009 - 11:05 | Link to Comment TomJoad
TomJoad's picture

You are truly the Dr. Strangelove of Economics: How I Learned to Stop Worrying and Love the Debt.

Tue, 09/08/2009 - 12:16 | Link to Comment Benjamin N. Dov...
Benjamin N. Dover III's picture

Damn it, that's the perfect title I was searching for but didn't find.

Tue, 09/08/2009 - 12:58 | Link to Comment TomJoad
TomJoad's picture

My pleasure. 

Tue, 09/08/2009 - 11:02 | Link to Comment Anonymous
Tue, 09/08/2009 - 10:27 | Link to Comment FreddyInBangkok
FreddyInBangkok's picture

anyone got stark's fax# i'd like to send the git a message

Tue, 09/08/2009 - 10:24 | Link to Comment deadhead
deadhead's picture

As usual, pure brilliance from you Ben.  Thank you for your excellent humor.

by the way, will this article be one of the handouts for Obama's school speech?  Shouldn't our kids know this stuff asap?

Tue, 09/08/2009 - 10:22 | Link to Comment FreddyInBangkok
FreddyInBangkok's picture

would some kind soul please advise how to post an IMAGE here. these 4 are the only choices & none of em work. Cheers.

[URL=http://img6.imageshack.us/i/snag0113.png/][IMG]http://img6.imageshack.us/img6/2928/snag0113.png[/IMG][/URL]

 

[url=http://img6.imageshack.us/i/snag0113.png/][img=http://img6.imageshack.us/img6/2928/snag0113.png][/url]

 

<a href='http://img6.imageshack.us/i/snag0113.png/'><img src='http://img6.imageshack.us/img6/2928/snag0113.png' border='0' alt='Image Hosted by ImageShack.us'/></a><br/>

 

http://img6.imageshack.us/i/snag0113.png/

 

Tue, 09/08/2009 - 11:52 | Link to Comment CD
CD's picture

Submit original content, become a contributor on ZH. 'Til then, links only.

Tue, 09/08/2009 - 10:01 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

Ben, I must say that I admire how you took on the impossible task of understanding the national debt problem, and made it simple enough for even a person of my limited intellect to understand.

You are an upstanding good citizen.

Tue, 09/08/2009 - 09:59 | Link to Comment Anonymous
Tue, 09/08/2009 - 09:44 | Link to Comment Anonymous
Tue, 09/08/2009 - 09:10 | Link to Comment aldousd
aldousd's picture

I can hardly wait.  They should give us our million dollars a piece now, so we can all hurry up and be rich millionaires. I love this country.

 

By the way, and I mean this in the most sincere way, whomever writes as Benjamin Dover is one sharp motherfucker. Keep it coming. It's so funny it's sobering. Stephen Colbert, you're officially on notice.

Tue, 09/08/2009 - 09:00 | Link to Comment spanish inquisition
spanish inquisition's picture

Thank you for the perspective Ben, I was starting to get nervous about the economy. But now that I see I am "exempt", I feel much better. Well gotta go, brown banana's get dumped at 9am and there is a line if you don't get there early.

Tue, 09/08/2009 - 12:41 | Link to Comment Anonymous
Tue, 09/08/2009 - 08:59 | Link to Comment flaxpin
flaxpin's picture

Get the fuck outta here!

Tue, 09/08/2009 - 08:42 | Link to Comment SpartanTnT
SpartanTnT's picture

Ben, you forgot to mention Roubini changing tone as well.

Tue, 09/08/2009 - 23:07 | Link to Comment Anonymous
Tue, 09/08/2009 - 09:58 | Link to Comment Benjamin N. Dov...
Benjamin N. Dover III's picture

Normally, I wouldn't advocate cutting Dr. Doom any slack, but the poor man has been distracted since he became a celebrity academic.

Do NOT follow this link or you will be banned from the site!