I know the national debt is increasing and stuff, but i dont even understand why the government has to pay down the national debt..

Inflation is at least 2.5% a year on average, and the govt pays like 2.5% interest on the money they borrowed. And even if interest rates are higher, inflation is higher sometimes too. Wouldnt it seem to be that the govt is not paying any REAL interest since the principle + interest with inflation is the same as the previous year's principle...

So the govt can just borrow for ever and ever cant they?

http://www.brillig.com/debt_clock/

The best part about our National debt is that we owe over half of it to ourselves. Reminds me of the vase scene with the Oracle in The Matrix when I think about it.

Jimbo

You know, everytime I read things about the debt and deficit and derivatives and leverage it makes the outlook on the economy look so dark and bleak....

One day it will either all collapse (everything, world economy, the reset to zero), or it will never end. Don't think there is an inbetween.

That number is accounting for it on a cash basis, if you actually calculate it including the PV unfunded liabilities (medicare, medicaid, Social Security), basically how a public company is legally required to do, the number is about 6x as big at roughly $53 TRILLION.

Curious as to how you computed the $53 trillion. The main reason I ask is that the social security trust fund is issued special issue treasury bonds both for the principal and the interest. This amount is accounted for in the national debt since it includes any T bonds issued.

Jimbo

"So the govt can just borrow for ever and ever cant they?"

Well they have been for the last 95 years, what makes you think they're going to quit now? Cause people can't pay their mortgages? Yeah, sure.

Once foreign investors who have been loaning their money to the US government realize that it is not a safe investment anymore they will stop doing so. This is because the newly issued bonds are certain to lose their value to inflation. Note how the government is issuing shorter and shorter term T-bills because people don't trust long term gov bonds to hold value at this point. Some investors will realize the sticky financial situation the US gov is in and the bond bubble will burst. This is the last bubble before a hyperinflationary period begins... a point where the fed creates new money in order to meet the treasury's financial obligations.

I didn't calculate the number, the number was from the 2007 US Government Financial Statements prepared by the Gov't Accountability Office (GAO). I also misremebered, its $50 TRILLION at 9/30/07 but growing at $2-3 Trillion a year.

Excerpt:
"While the federal government’s unified budget deficit has declined in recent years, its liabilities, contingencies and commitments, and social insurance responsibilities have increased. As of September 30, 2007, the U.S. government reported in the 2007 Financial Report that it owed (i.e., liabilities) more than it owned (i.e., assets) by more than $9 trillion. Further, the Statement of Social Insurance in the Financial Report disclosed $41 trillion in social insurance responsibilities, including Medicare and Social Security, up more than $2 trillion from September 30, 2006."

As for what the $41 trillion means:
"Stated differently, one would need approximately $41 trillion invested today to deliver on the currently promised benefits not covered by earmarked revenues for the next 75 years."

Another excerpt:
"While some progress has been made in recent years in addressing the federal government’s short-term fiscal condition, the nation has not made progress on its long-term fiscal challenge. However, even this short-term deficit is understated: It masks the fact that the federal government has been using the Social Security surplus to offset spending in the rest of government for many years."

Imagine reading any of this in the the financial statements of a public company, how quick would you be on the phone shorting the stock?

Spot on.

HEY GUYS THE US GOVERNMENT IS GOING TO COLLAPSE BECAUSE WE HAVE A LOT OF DEBT AND WE OWE IT TO FOREIGNERS THIS IS BAD AND WILL LEAD TO HYPERINFLATION.

Ah, BFI, the home of "i heard this off a blog and now im reposting it as my own thoughts".

But don't nearly all first-world countries have similar levels of public debt?

I mean Japan has a debt of like 175% of GDP ...I don't think they've gone bankrupt

% of GDP isn't all you need to consider. You need to look where the money is coming from. Also, with the trade deficit Americans are selling a little bit of the country every day.

I'd like to see a study of some real experts stating what the effects are on the economy and compare that with different countries. I'm getting sick of all those bloggers telling stories like they know anything about the stuff.

1) Which US government issued bonds will default or have face value fall right now? The fact that the dollar is weak makes these more attractive to foreigners. US inflation has little effect on foreign bond holders. If anything, the inflation will force the fed to raise rates, pushing up the value of the bonds they already hold.

2) Seems to me and the rest of the world that the 10year has been doing well.

3) The fed has been creating new money for along time. This isn't the first time it will happen.

4) The time period at which they issue the bonds has little do with buyers, it is to fit a strategic capital raising plan. I assure you, there are foreign buyers.

5) Money is held in US bonds sometimes because of currency exchange issues.

Edited above and made a bad statement worse...disregard 1)...it is really really wrong.

"If anything, the inflation will force the fed to raise rates, pushing up the value of the bonds they already hold."

This statement may have more truth to it than you realize.

Its so simple to understand.

Imagine the US as a household.

When your expenditure exceeds your income, you have to sell assets to meet interest payments on debt and pay bills. The US is selling the family jewels as we speak. I read somewhere that the UN has just recently taken over a few National Parks...quietly. Right now, the US is taking on debt for everything and the liabilities just keep growing. Who knows how much Fannie and Freddie will eventually cost.

US assets are also being snapped up by the foreign holders of US currency right now...Russian purchases are causing some concern in sensitive industries. This can only go on so long and its hard to see whats on the horizon to lower debt or increase income for the US....especially when your credit rating is going down the tubes and your traditional industries have been decimated for many years forcing jobs to go to Mexico etc. Productivity gains wont get the US out of this hole.

The only long term hope is the repatriation of jobs from abroad...and that means competing with Asian/S American countries whose wages are low, but rising fast. This could happen, but its not great news for Joe Punchclock.

They haven't shown much appetite to push rates up so far even with CPI at >5% reports, probably double this in reality.

For starters the only people who believe what you are claiming to be true are conspiracy theorists.

'The UN and its elitist masters don't want you on their property! And in case you do "trespass" and enter forbidden areas of these pristine UN lands, you might just be shot. U.S. Fish and Wildlife Service agents and park personnel are now taught to love nature's Mother Earth and to despise and loathe human beings. They are being given firearms and instructed to use them. Meanwhile, foreign immigrants from India, China, Pakistan, Bulgaria, Russia and other nations are being recruited for this national park service police duty because, unlike U.S. nationals, non-English speaking foreigners will not hesitate to carry out orders and shoot American citizen= "intruders."'

Sounds totally legit, imo

I think you're confused. I didn't claim it to be true and I don't know if its true...I said I read it somewhere.
.

really...so it either continues (never ends) or it doesn't continue (collapses)??



Barron

But theres no in between!

I didn't read it in a blog. I deduced it myself using my own extensive knowledge of economics. I am an advocate of the Austrian school. We all know what kooks they are though.

1) As interest rates rise (which they will eventually no matter what Bernake does) so will the yields forcing the US gov to pay higher and higher rates. In order to do this they will need to borrow more and more to stay afloat. Foreign investors will catch on and cease their lending to the US gov because of expected depreciated returns. This is when the helicopter starts chopping.

Note that Moody's actually considered rating US treasuries less than AAA last month which is laughable for obvious reasons.


2) The housing market was doing "well" in the in the middle of 2006, as were tech stocks in the late 90s. This lends no creedence to your argument. Do you understand anything about bubble economies?


3) Sure it has been creating money for a long time but not at the rate that you are bound to see in the next 5 years. The difference between now and then is 1) the debt is a lot bigger and 2) the US will no longer be able to finance the debt with more debt. At this point very, very little of the actual debt has been monetized and look at the inflation we already have!


4) I agree the time period has to do with their immediate need for capital but it is fairly obvious that the shortening time periods are due to the fact that they can't raise that capital with long term bonds due to lack of demand. Why wouldn't an institution that is so deep in debt want to push back their maturity obligations as far as possible?

http://www.telegraph.co.uk/money/mai...cusdebt116.xml


5) Relevance?

1) The fact that the US gov will have to issue more bonds is irrelevant to the pricing of currently owned US bonds. The bonds are sold at a discount, they have no coupon. The rise in rates will devalue the bonds currently held at lower rates, reducing returns.

2) I was stating the 10year treasury note has revalued significantly since the beginning of '08. Your bubble statement has no "creedence."

3) You are failing to seperate the US treasury and FRB. Inflation in the core isn't horrific, more to energy and food pricing. The remainder of the inflation is to blame on the way too low overnight rate.

4) Since interest rates are at such a low, they would have to sell the bonds at a ridiculous discount if they were long term. No foreign investor would want to buy a long term bond at very low rates if they were not sold at a large discount.

5) Showing that their is liquidity and demand in the treasury bond markets.

The US government is sorta like an elderly couple doing a reverse mortgage. The folks in charge figure they will be dead and gone before the money is gone. Corporate leaders are all about getting the stock price up and cashing in the options.

If these people had to live forever they would certainly take a different view, but they won't, and so they are simply exploiting.

The inevitable is the inevitable.