A Soft Landing for US Debt?

[barrett]

I know the national debt has been kicked around in other threads but I wanted to bring it up here, because it seems to me that a big justification for holding gold in the PP currently is the danger of the US debt spiraling out of control (I know, many will say that it already has and I am not disagreeing).

What I want to ask is does anyone foresee any kind of scenario where we could have a "soft landing" when it comes to our debt?

Here is a graph from 1/1/66 through 1/1/14:

http://research.stlouisfed.org/fred2/series/GFDEGDQ188S

The line only goes down during the historic expansion on the 1990s. How likely is that to happen again? The rosiest scenario would seem to be that the US is able to inflate enough so that the value of our debt goes down in real dollar terms. But for that to really work, it has to happen over a long period of time, right? Slow, steady, say 3%-4% inflation, coupled with an economic expansion that pours tax revenues into our coffers, with us all the while under the stewardship of a government that only spends wisely?

Thoughts?

[dragoncar]

Isn't that exactly what the policy makers are trying to do?  They may not be able to accomplish it, but with that goal in mind it has a fighting chance

[mortalpawn]

What I want to ask is does anyone foresee any kind of scenario where we could have a "soft landing" when it comes to our debt?

There are only a few ways for the government to get out of debt:
1. Default on the debt
2. Raise taxes and lower spending (austerity)
3. Grow your way out of it with a stronger economy
4. Inflate your way out of it

Going the way of (1-default) like Argentina would be a disaster economically and likely result in loss of confidence in the dollar, and widespread economic dislocation and is probably the worst of all possible scenarios.  Read up on Argentina in 2001 - it became a living hell when their currency collapsed and they defaulted.

(2 - Austerity) could be done if we could have a rational political discourse, but due to the huge unfunded liabilities with the 70%+ of the budget tied up in entitlements, and the rate at which these are expected to grow, any real solution would involve huge cuts to existing entitlements and also higher taxes.  You can't even balance today's budget if we cut the entire "government" and left entitlements as they are.  The last President who actually reduced total government spending by a dollar was Eisenhower. Politically its not going to happen.  Neither party has the will.

(3 - growth) is probably the best case solution (that's what happened in the 90's when we briefly balanced the budget), but it would require the economy to get out of the malaise of the last 6 years and start growing 4-6% for several years in a row.  Not likely given the growing burden of regulation on businesses (I'm a small business owner - I can tell you we're getting crushed), and Fed's ZIRP and QE policies that have heavily distorted capital markets (i.e. the stock/bond bubbles) and incentivized a lot of bad investments, stock buybacks, massive derivatives and speculation.

(4 - Inflation) is typically government's favorite way to escape debt.  Its a hidden tax on everyone and everything.  In fact most of the Keynsian policies being pursued both by the administration and the Fed are expressly being done to stimulate "modest" inflation, as it benefits debt holders and spenders at the expense of savers.  Witness that the dollar has lost 97% of its value (or more) since the Fed was founded 100 years ago.  The question is whether government and the fed can keep inflation under control once it starts, or whether it might lead to hyperinflation.  A lot of inflation is needed, but not so much that it spirals out of control.

I think most of us (at least on this forum) can agree that the current situation is unsustainable.  Something in the next few years is likely to trigger a major adjustment.  The key question many of us are asking is whether we'll see the popping of the stock or bond bubbles (i.e. deflation of inflated assets) first, which could be very bad for government debt (much like 2008, we would see deficits skyrocket), and lead to another banking crisis (due to the $220 trillion US derivatives market, which we've done nothing about).  The other scenario is inflation, which would be good for government debt (also bad for savers). but only if they can keep it to a manageable rate and not let it spiral out of control.

Deflation or inflation?  Real Growth someday (I hope)? Who knows?

[barrett]

Sweet lordy, mortalpawn, I didn't realize the derivative market had grown that large. Thanks for laying that all out. Certainly doesn't seem like a soft landing is very likely in your opinion.

[Libertarian666]

If that soft landing happened, it would be a miracle, given the political situation and the dependence of the economy on money-printing.

[Xan]

Not to channel Moda here or anything, but is there any rule somewhere that a "landing" of any kind is imminent or required?

[mortalpawn]

Sweet lordy, mortalpawn, I didn't realize the derivative market had grown that large. Thanks for laying that all out. Certainly doesn't seem like a soft landing is very likely in your opinion.

Actually I mis-spoke - the up to date number is $230 trillion and that is only the US derivatives market.  The four US largest banks hold 92% of that number ($210 trillion).  The worldwide derivative market is somewhere north of $630 trillion (and that's an early 2013 number).

Compare this to a worldwide GDP of a bit north of $72 trillion, stock market size in the $70 trillion dollar range and worldwide government debt at roughly $54 trillion (http://www.economist.com/content/global_debt_clock) or global debt (public and private) which is slightly north of $100 trillion, and you can see why I might be a bit concerned about derivatives.

Also, if you really want to get depressed, a little known provision in the 2005 revision to US bankruptcy law gives "safe harbor" status to derivatives, which means in the case of investment bank failure, the derivatives get paid first from liquidating remaining assets and actual account holders get paid much later (if ever):
  http://www.stanfordlawreview.org/print/ ... ccelerator

That's one reason the investment banks had to be bailed out in 2008, otherwise it would have been a major-league collapse.  Unfortunately very little has been done to scale back or regulate the derivatives market, which is very profitable and insanely large.

I'm not a tin-foil hat guy, don't believe in conspiracy theories, and strongly support the idea of capitalism and free markets, but this shadow banking system (derivatives, rehypothification) really does make me sick.

[Kshartle]

I'm not a tin-foil hat guy, don't believe in conspiracy theories, and strongly support the idea of capitalism and free markets, but this shadow banking system (derivatives, rehypothification) really does make me sick.

The banking sector is a creation of the government. It has nothing to do with the free market. It exists purely due to the violent threat of the government.

Conspiracy theories make a lot more sense than coincidence theories.

[Kshartle]

If that soft landing happened, it would be a miracle, given the political situation and the dependence of the economy on money-printing.

It's impossible. The government can't cut spending in nominal terms because we live in the People's Democratic Republic of Socialist States of Amerika.

The nominal growth of the debt will continue to exceed the nominal growth of tax revenue. Even if growth picked up in the face of regulation and socialist theft, rising interest rates will sink the government. It has to roll over trillions each year. I think it has to roll over nearly 10 trillion every 3-4 years. That means if short term rates went to at least break even with inflation after a couple years there's an extra TRILLION in interest alone added to the deficit, every year. The government is sunk.

All they can do is print. This only delays the inevitable default though, because it raises the price of everything the government has to buy the next year and puts more pressure on rates while it makes the population poorer and hurts the economy.

You are playing with fire loaning the US government money. It can never repay you. It's been a good trade so far this year. If you buy a 30 year bond right now, you'll be lucky to get 50% of that purchasing power back in the next 30 years. 

[barrett]

K, I thought we might hear from you on this. I do have a problem with holding so much USG debt in the form of savings bonds and LTTs. I just don't know how long the unsustainable can be sustained.

Incidentally, I find when I bring up the national debt or deficits to friends, they don't seem to really grasp how huge the numbers are. A well-read, mathematically-literate friend of mine told me that cutting back the military was sufficient to eliminate our debt problems. Yeah, right. It barely makes a dent even if the military is eliminated completely.

[Kshartle]

K, I thought we might hear from you on this. I do have a problem with holding so much USG debt in the form of savings bonds and LTTs. I just don't know how long the unsustainable can be sustained.

Incidentally, I find when I bring up the national debt or deficits to friends, they don't seem to really grasp how huge the numbers are. A well-read, mathematically-literate friend of mine told me that cutting back the military was sufficient to eliminate our debt problems. Yeah, right. It barely makes a dent even if the military is eliminated completely.

The medicare and SS promises alone sink the government. It has made more promises than it can keep. It's impossible.

No idea how long it can be sustained. I'm sure LTBs will have very good patches like it has this year. Anything volatile will. The question is whether or not the top is in. If it is, the down swings will exceed the up-swings. I think when you subtract real inflation, you'll see negative returns in US debt for years even if it doesn't crash hard.

[Kshartle]

Incidentally, I find when I bring up the national debt or deficits to friends, they don't seem to really grasp how huge the numbers are. A well-read, mathematically-literate friend of mine told me that cutting back the military was sufficient to eliminate our debt problems.

It requires emotional strength to accept a reality you don't favor, not just intelligence.

Also I think Americans by and large are very optomistic.

I've been studying Russian for a couple weeks and it's been fascinating. For instance, in the US we ask "How are you doing?" as a greeting. Here it's considered good form to say "great, fantastic, wonderful, ok, etc". It's not really considered too polite to use that as a chance to launch into your problems. Part of that is the American optomisim. Even if things are bad right now people are almost always envisioning them getting better.

In Russia if you ask "How are things" you are supposed to be prepared for the real answer. This will include health problems, work problems, family problems. The advice is to never ask a russian how things are going unless you are prepared for a naturally pessamistic answer.

My guess is if the Russian government had the same debt to GDP/Income as the US government and you asked a Russian what was going to happen they would say either Default or massive Inflation of the Ruble.

[barrett]

K,

Brief tangent from the debt thing... I studied Russian for about six months. You are in for a pain in the butt unless you love grammar. I stopped studying Russian when I met my Chinese wife because I had another language fish to fry. The Chinese are brutally honest with one another, especially within families. They have no problem telling you that you are old, fat, smelly or otherwise.

In Indonesia, I experienced sort of the opposite of what you are talking about with the Russians. A standard question there if you are traveling around is "Sudah mandi?" Literally, "Have you bathed yet?" But they don't really want details about your latest shower.

No effort to stay on topic here. I just love languages. It's fascinating how diverse they are. Anyway, hope your day isn't too crappy.

[mortalpawn]

A well-read, mathematically-literate friend of mine told me that cutting back the military was sufficient to eliminate our debt problems. Yeah, right. It barely makes a dent even if the military is eliminated completely.

The military and everything else we think of as "federal government" (discretionary spending) totals only $1.16 trillion while entitlement (non-discretionary) spending is $2.56 trillion. This is roughly a 29% to 71% split.  (https://www.nationalpriorities.org/budg ... /spending/ for 2015)  However if you look at the details you will see that a bunch of "discretionary" stuff are things people think of as entitlement too like VA benefits, housing, unemployment, retiree pay, etc...which realistically could not be cut.

The military is only 16% of the total budget.  If we cut the entire military (completely) we would save $640 billion, which would get us close to a balanced budget for 2014.  It would only require a 100% cut to the military (all services, all branches and the reserves, all military retiree pay, plus a large cut to the intelligence community). 

So your friend is not far off - just cut 100% of military spending next year and the budget would nearly be balanced (for a year or two, until entitlement growth throws us into deficits again).

I'm assuming your friend will be first in line to join the local (unpaid) militia after we eliminate the military?

[barrett]

Mortalpawn,

He actually made that argument about cutting the military and balancing the budget when our annual deficits were well over a trillion each year. Sorry I wasn't more specific. And he was only talking about cutting back.

My main point was that he really had no idea just how serious the debt problem is.

[mortalpawn]

My main point was that he really had no idea just how serious the debt problem is.

I agree - just included the numbers to point out how silly the whole idea is.  If you go back to 2012 when deficits were over 1 trillion/year, cutting all discretionary spending (100% of the non-entitlement spending) would not have balanced the budget.

[doodle]

It seems to me that we are getting worked up about conceptual representations of wealth. We have created an artificial boogeyman called "debt" that reall only exists in our heads. This is much different from actual problems such as a shortage of water, energy, food etc.

Civilization, comprising all the achievements of art and science, technology and industry, is the result of man's invention and manipulation of symbols of words, letters, numbers, formulas and concepts, and of such social institutions as universally accepted clocks and rulers, scales and timetables, schedules and laws. By these means, we measure, predict, and control the behavior of the human and natural worlds and with such startling apparent success that the trick goes to our heads. All too easily, we confuse the world as we symbolize it with the world as it is. As semanticist Alfred Korzybski used to say, it is an urgent necessity to distinguish between the map and the territory and, I've might have added, between the flag and the country.



"Sorry, baby, but we can't build today. No inches."


Let me illustrate this point and, at the same time, explain the major obstacle to sane technological progress, by dwelling on the fundamental confusion between money and wealth, Remember the Great Depression of the Thirties? One day there was a flourishing consumer economy, with everyone on the up-and-up; and the next, unemployment, poverty, and bread lines, What happened? The physical resources of the country the brain, brawn, and raw materials were in no way depleted, but there was a sudden absence of money, a so-called financial slump.

Complex reasons for this kind of disaster can be elaborated at length by experts on banking and high finance who cannot see the forest for the trees, But it was just as if someone had come to work on building a house and, on the morning of the Depression, the boss had said, "Sorry, baby, but we can't build today. No inches." "Whaddya mean, no inches? We got wood, We got metal. We even got tape measures.' "Yeah, but you don't understand business. We been using too many inches and there's just no more to go around."

A few years later, people were saying that Germany couldn't possibly equip a vast army and wage a war, because it didn't have enough gold. What wasn't understood then, and still isn't really understood today, is that the reality of money is of the same type as the reality of centimeters, grams, hours, or lines of longitude. Money is a way of measuring wealth but is not wealth in itself. A chest of gold coins or a fat wallet of bills is of no use whatsoever to a wrecked sailor alone on a raft He needs real wealth, in the form of a fishing rod, a compass, an outboard motor with gas, and a female companion.

[dualstow]

In Russia if you ask "How are things" you are supposed to be prepared for the real answer. This will include health problems, work problems, family problems. The advice is to never ask a russian how things are going unless you are prepared for a naturally pessamistic answer.

I lived in Russia for 3-4 months after Communism fell apart. They don't do small talk. They do physics, poetry, and the longwinded answers you mentioned.

Did you ever hear of the Russian novelist who committed suicide by jumping off his written memoirs?
--old joke

[Bean]

It seems to me that we are getting worked up about conceptual representations of wealth. We have created an artificial boogeyman called "debt" that reall only exists in our heads. This is much different from actual problems such as a shortage of water, energy, food etc.

That boogeyman can result in the loss of food and shelter.  Sounds pretty real to me.

[doodle]

It seems to me that we are getting worked up about conceptual representations of wealth. We have created an artificial boogeyman called "debt" that reall only exists in our heads. This is much different from actual problems such as a shortage of water, energy, food etc.

That boogeyman can result in the loss of food and shelter.  Sounds pretty real to me.

In the same way that psychosomatic illness can cause real pain even when no physical disease exists. Again, what tangible physical reality caused society to go from material abundance to starvation during the Great Depression? Was there a sudden loss of productive ability? A natural disaster which halted our ability to produce food and electricity? No and no. It was a psychosomatic illness where we allowed a concept or idea impact the creation of real wealth. We allowed the  monetary tail to wag the dog

[l82start]

It seems to me that we are getting worked up about conceptual representations of wealth. We have created an artificial boogeyman called "debt" that reall only exists in our heads. This is much different from actual problems such as a shortage of water, energy, food etc.

That boogeyman can result in the loss of food and shelter.  Sounds pretty real to me.

In the same way that psychosomatic illness can cause real pain even when no physical disease exists. Again, what tangible physical reality caused society to go from material abundance to starvation during the Great Depression? Was there a sudden loss of productive ability? A natural disaster which halted our ability to produce food and electricity? No and no. It was a psychosomatic illness where we allowed a concept or idea impact the creation of real wealth. We allowed the  monetary tail to wag the dog

the dust bowl and drought?

[l82start]

i don't think it caused the depression, but it may be a possible answer to the question quoted in bold "what tangible physical reality caused society to go from material abundance to starvation during the Great Depression? Was there a sudden loss of productive ability? A natural disaster which halted our ability to produce food" and the dust bowl/drought was large enough to effect food production and the value (monetary and productivity) of Midwest farm land. Is it enough to account for all the starvation deprivation during the depression? i have no idea.. but i bet it accounts for a good chunk..

[barrett]

Here's the first hit I got:

http://drought.unl.edu/DroughtBasics/Du ... Years.aspx

The resulting agricultural depression contributed to the Great Depression’s bank closures, business losses, increased unemployment, and other physical and emotional hardships

Certainly a contributing factor to the bad economy.

[doodle]

What year did depression start? 1929

What year did dustbowl start? 1934

What happened during those five years?

[doodle]

I'm showing unemployment peak prior to dustbowl:

http://socialdemocracy21stcentury.blogs ... 1930s.html