National Debt Question

[vetmedpoke]

At what point does or debt get so large we cannot afford to even make interest payments? This will happen at some point in my lifetime so I was curious by those who probably have more financial insight than myself.

After we reach that point, then what happens to the good ole USA?

 

[Medic007]

Liberals will insist that you give 100% of your income to the cause. See North Korea and the old USSR for examples. Give all you make and the Government will provide as they see fit. It's in the best interest of all.

 

[07pilt]

At what point does or debt get so large we cannot afford to even make interest payments? This will happen at some point in my lifetime so I was curious by those who probably have more financial insight than myself.

After we reach that point, then what happens to the good ole USA?

At the current rate of interest and taxation, about 140 trillion. Of course that point can never be reached due to the way our monetary system functions. Instead inflation due to the anticipation of a debt monetization will always keep our debts payable, if not the dollar strong.

 

[vetmedpoke]

At the current rate of interest and taxation, about 140 trillion. Of course that point can never be reached due to the way our monetary system functions. Instead inflation due to the anticipation of a debt monetization will always keep our debts payable, if not the dollar strong.

Well, what is the current rate of interest on the Federal Debt? And what is the current rate of taxation? As fast as the debt has grown since 2001, I could see us hitting 140 trillion. It doubled under Bush, then it will more than double again under Obama. At that rate (each president doubling the previous), we are around 22 years away from 140 trillion.

 

[07pilt]

Well, what is the current rate of interest on the Federal Debt? And what is the current rate of taxation? As fast as the debt has grown since 2001, I could see us hitting 140 trillion. It doubled under Bush, then it will more than double again under Obama. At that rate (each president doubling the previous), we are around 22 years away from 140 trillion.

Rate of interest is can be approximated at 2.5%. Taxation can be approximated at 20% of GDP.

in 22 years GDP will be about triple what is today (assuming 2% inflation and 3% growth) which means 140 becomes 420.

 

[davidallen]

Sovereign nations who control their own currency really won't ever fail to make debt payments - they may be constrained on what they can borrow from outsiders, but when you own the equipment that mints the money you won't ever run out...

 

[ThorOdinson13]

They'll just keep devaluing the dollar via inflation to keep it from happening. The much bigger concern is all the discussion of moving away from the dollar as the reserve currency and moving toward a gold standard or something else. If that happens the dollar will be crap.

 

[vetmedpoke]

So is this like a Ponzi scheme? All kidding aside, you are saying our government is really too big to fail. Regardless of how much debt we occur we will always be able to make interest payments. Even if interest is 5 trillion a year?

 

[ctrawick]

Rate of interest is can be approximated at 2.5%. Taxation can be approximated at 20% of GDP.

in 22 years GDP will be about triple what is today (assuming 2% inflation and 3% growth) which means 140 becomes 420.

What happens when our bond status keeps going down and interest rates start to rise..

 

[ThorOdinson13]

So is this like a Ponzi scheme? All kidding aside, you are saying our government is really too big to fail. Regardless of how much debt we occur we will always be able to make interest payments. Even if interest is 5 trillion a year?

No, it's not too big to fail. Inflation helps those at the top and the government while hurting the poor, middle class, and retirees on fixed incomes though. I do believe that ultimately it is a scheme. Have you ever noticed that even though you don't pick up additional expenses every year the budget gets a hair tighter?

Eventually the currency will either collapse or interest rates will have to go up. I'm sure there are other options.

According to some we've committed ourselves to quantitative easing to infinity and the latter is not possible without a major global economic contraction. I have no clue what is right. I'm not real savvy economically. But being the reserve currency of the world is a key cog in the wheel as I understand it. 07 or glove know more than I do about economics.

 

[07pilt]

What happens when our bond status keeps going down and interest rates start to rise..

Interest rates on our bonds are more or less controlled by the central bank. Since the money can be printed there is no credit risk on treasury bonds. The central bank raises rates to slow the economy. Such a situation would correspond with higher nominal GDP growth and lower government deficits.

 

[07pilt]

They'll just keep devaluing the dollar via inflation to keep it from happening. The much bigger concern is all the discussion of moving away from the dollar as the reserve currency and moving toward a gold standard or something else. If that happens the dollar will be crap.

The dollar will always have value as long as it is the currency used to pay our taxes. A devaluing of the dollar would be good for our manufactur

Running the printing press doesn't always result in inflation. Since 2008 the fed has run the printing press at record levels, while inflation has remained at historically low levels.

 

[07pilt]

So is this like a Ponzi scheme? All kidding aside, you are saying our government is really too big to fail. Regardless of how much debt we occur we will always be able to make interest payments. Even if interest is 5 trillion a year?

Yes. The government isn't too big to fail, it is just that entity that creates dollars from thin air can never run out of dollars.

The banker in Monopoly never runs out of money (assuming that when the paper money runs out that it is replaced by digital money).
The score board at the Boone never runs out of points either.

 

[ThorOdinson13]

The dollar will always have value as long as it is the currency used to pay our taxes. A devaluing of the dollar would be good for our manufactur

Running the printing press doesn't always result in inflation. Since 2008 the fed has run the printing press at record levels, while inflation has remained at historically low levels.

Yeah, even the German Mark had some value between 1921 and 1924. Not much, but it had value. Let's not act like the dollar being dropped as the reserve currency wouldn't have a negative impact. Your post comes off as acting like it wouldn't be a big deal.

 

[07pilt]

No, it's not too big to fail. Inflation helps those at the top and the government while hurting the poor, middle class, and retirees on fixed incomes though. I do believe that ultimately it is a scheme. Have you ever noticed that even though you don't pick up additional expenses every year the budget gets a hair tighter?

Inflation hurts the rich and those on fixed income (who are generally, but not always rich) and helps the poor and middle class. If you have debt, inflation helps you. If you are a creditor inflation hurts you. People often forget that inflation also means that wages rise. If inflation is up and your wage isn't, it isn't inflation that is screwing you, it is your job.

Eventually the currency will either collapse or interest rates will have to go up. I'm sure there are other options.

According to some we've committed ourselves to quantitative easing to infinity and the latter is not possible without a major global economic contraction. I have no clue what is right. I'm not real savvy economically. But being the reserve currency of the world is a key cog in the wheel as I understand it. 07 or glove know more than I do about economics.

The reserve currency thing really doesn't matter as much as people (especially on YouTube) say. It affects exchange rates in a way that hurts our exporters and helps our importers, and that's about it.

We have reduced quantitative easing and it had little or no effect on the economy. QE is like shooting pool with a rope. Some have argued that QE is actually deflationary rather than inflationary. Basically, all QE will stop and interest rates will rise once the economy gets to the point that such a change won't hurt it.

The way the system works is quite elegant. The point where the FED has to explicitly monetize government debt never comes. They simply set reserve requirements and target short term interest rates and the end result is all the treasury bonds at auction get bough up (mostly by banks, not the FED).

 

[07pilt]

Yeah, even the German Mark had some value between 1921 and 1924. Not much, but it had value. Let's not act like the dollar being dropped as the reserve currency wouldn't have a negative impact. Your post comes off as acting like it wouldn't be a big deal.

It wouldn't. It happened to the British Pound. It would actually be a welcome thing by our manufacturing industry.

 

[NeekReevers]

I don't believe the government's inflation calculations as they don't include food and fuel. I get the reasoning behind it but how can you exclude categories where consumers spend massive amounts of their income and then say the calculation is a true reflection. I also don't get how you devalue the dollar by 80% yet it's still got the same purchasing power. They can give their BS statistics all day long but that's what they are, BS. According to what they're saying we should multiply QE tenfold as there are no consequences. Then everyone can be a millionaire.

 

[07pilt]

I don't believe the government's inflation calculations as they don't include food and fuel. I get the reasoning behind it but how can you exclude categories where consumers spend massive amounts of their income and then say the calculation is a true reflection. I also don't get how you devalue the dollar by 80% yet it's still got the same purchasing power. They can give their BS statistics all day long but that's what they are, BS. According to what they're saying we should multiply QE tenfold as there are no consequences. Then everyone can be a millionaire.

Food and fuel are calculated into inflation measures. Dollar devalued 80% relative to what? What part of QE makes everyone a millionaire?

 

[ThorOdinson13]

I disagree that inflation helps the poor and middle class due to wage increases. There is a lag between inflation and wage increases. By the time wage increases catch up with inflation the poor and middle class have already been paying the higher cost for quite sometime and are already paying for new inflation for wages yet to come. This is why families may not increase goods and services being purchased but still end up with a diminishing budget.

 

[davidallen]

Middle class property owners typically are mightily benefited by a sustained inflationary period with outsized gains in the value of real property...

 

[07pilt]

I disagree that inflation helps the poor and middle class due to wage increases. There is a lag between inflation and wage increases. By the time wage increases catch up with inflation the poor and middle class have already been paying the higher cost for quite sometime and are already paying for new inflation for wages yet to come. This is why families may not increase goods and services being purchased but still end up with a diminishing budget.

Wages track inflation pretty closely(except oil shocks) and sometimes lead inflation. It is easy to remember how inflation screws you sometimes, but you forget that everytime you got a 3% raise since the elder Bush you were probably beating inflation.

 

[Cowguy]

I'm amazed people keep finding a way to minimize the debt crisis.

Chickens will come home to roost. It's a matter of time.

 

[07pilt]

I'm amazed people keep finding a way to minimize the debt crisis.

Chickens will come home to roost. It's a matter of time.

Based on?

 

[Cowguy]

Based on?

Based on pretend money will eventually buy pretend things

 

[davidallen]

I don't like it - should hold it much lower as a percentage of GDP - but the OP was asking a different question...

 

[TPOKE]

I'm amazed people keep finding a way to minimize the debt crisis.

Chickens will come home to roost. It's a matter of time.

Don't worry cowguy, the government will save the day. History shows that they have an impeccable record of handling finances. It will never happen here because...well..it just won't. If you don't believe me, ask Greece.

 

[07pilt]

Based on pretend money will eventually buy pretend things

Who is talking about pretend money?

 

[07pilt]

Don't worry cowguy, the government will save the day. History shows that they have an impeccable record of handling finances. It will never happen here because...well..it just won't. If you don't believe me, ask Greece.

Ah yes the Greece analogy, a sure sign that someone is intellectually dishonest or doesn't know shit. Which one are you?

You all can start panicing the very moment our debt quits being in dollars.

 

[Cowguy]

Who is talking about pretend money?

If you can make more on a whim, it's essentially pretend. Some of our creditors may buy into the lie for awhile, but when the value continues to decrease, and we can't get China, or whoever, to buy our debt, what's going to happen.

This isn't some esoteric math 2+2 has to equal 4.

 

[JimmyBob]

If you can make more on a whim, it's essentially pretend. Some of our creditors may buy into the lie for awhile, but when the value continues to decrease, and we can't get China, or whoever, to buy our debt, what's going to happen.

This isn't some esoteric math 2+2 has to equal 4.

As a retired CPA, I checked your math and approve.

 

[vetmedpoke]

What happens when interest rates go north of 10%? How will the government operate when all of it's income is going to interest?

 

[07pilt]

If you can make more on a whim, it's essentially pretend. Some of our creditors may buy into the lie for awhile, but when the value continues to decrease, and we can't get China, or whoever, to buy our debt, what's going to happen.

This isn't some esoteric math 2+2 has to equal 4.

Literally all forms of exchange can be made (or mined). As long as people have to pay taxes, dollars will have value. We don't need China to buy our debt, it is a privilege we allow them.

 

[07pilt]

What happens when interest rates go north of 10%? How will the government operate when all of it's income is going to interest?

First, interest rates are controlled by the fed. Second, interest rates go up with the economy and deficits go down with the economy.

You have to stop thinking about dollars as a limited resource for the government, they are a limitless tool for marshaling and directing the economy. If you have to be concerned, worry about the real economy (actual production) not the monetary economy.