The Significance Of The National Debt

On the day in 2011 when the gross national debt crossed $14 trillion Bill O'Reilly emphatically proclaimed on the O'Reilly Factor on FNC that we had reached our borrowing limit.  The USA could go no deeper into debt in this pundit's opinion without serious widespread bad effects to our country.

Well, @ the end of fiscal year 2019 the gross national debt had reached $22.7 trillion & after the deficit spending authorized to combat the Wuhan coronavirus pandemic it reached its current level of $27.2 trillion - almost twice the level that troubled Bill less than a decade before.  Of further concern is that both of these national debt numbers are greater than the annual GDP of the country.  And there is another $463.8 billion waiting in the wings in the form of increased individual checks of $2,000 per person up from $600 that was signed into law last month.  Further, Biden has proposed a "first installment" for his administration of $1.4 trillion (net of the increased $2,000 individual checks) bringing the total to $5.7 trillion of deficit spending in less than a year.

Note - the federal government divides the gross national debt into two main categories: 1) $16.8 trillion in publicly held debt such as that held by individuals, corporations, local governments, & foreign governments like China, & 2) $5.9 trillion in intergovernmental debt which is owed to special funds like the Social Security Trust Fund (an empty fictitious accounting ledger filled with IOUs of money that has already been spent on other politically expedient projects).  Figures are for the end of fiscal year 2019 so the large increase in debt due to Covid 19 spending in 2020 are not included in these subtotals.

With the growth & concern of the gross national debt during the past forty years we should have learned that the problem, if any, is not a number (i.e., an amount).  In fact, if you add in unfunded liabilities like federal employee retirement benefits, obligations for current Social Security participants above & beyond both projected revenues from their payroll & benefit taxes & the IOUs in the Social Security Trust Fund, & obligations for current Medicare participants above & beyond both projected revenues from their payroll & investment taxes & IOUs in the Medicare Trust Funds the unfunded liabilities are well over $100 trillion by the most conserative calculations & twice that amount by most others.  To put this debt & unfunded liabilities into perspective the entire American household net worth (i.e., not just assets or income) @ the end of the third quarter 2020 is $123.52 trillion. 

So even to the least discerning among us, after all the years of deficit spending, it should have become clear that the gross national debt problem is not just a large dollar number.  

Dr. John Cochrane put his finger on the problem with the debt, writing in the WSJ on March 18, 2020: America's "unique ability to borrow, & to promise eventual repayment by taxation, is a treasured but finite resource.  When a crisis comes in which even the Treasury can't borrow, we are in for a true catastrophe."  Until we reach this point our political leaders are more than happy to play musical chairs with our lives & economy hoping they will not be standing (i.e., in office) when the music stops.  We are just too ill-informed or disinterested to realize this is what is happening.

Professor Friedman taught that money available for taxation is composed of direct taxes & deficit spending (borrowing) & that the portion of the national debt that is paid every year is the interest payments on that debt.  The great libertarian professor explained that government spending should be minimized in order to have the most robust economy possible because the larger the proportion of private sector resources that the government takes (spends) the less money is available for consumption, production, savings , & investment - the things that drive the economy & prosperity.  

The above point is illustrated by the famous Harvard study by Carmen Reinhart & Kenneth Rogoff in that they found that advanced economic countries with public debt above 90% of GDP typically had slower economic growth - median growth rates fell by 1% & average growth rates by considerably more.  This reduction in economic growth is largely an unseen cost compared to, for instance, a very visible direct cut in pay by your employer.

Now the debt & deficits can become much more serious than just a slowdown in economic growth - which is bad enough because increases in your standard of living depend on economic growth.  Without economic growth our futures are less robust.  This seriousness starts to turn into a crisis when the Treasury begins to have problems borrowing money to fund much of the programs that far too many Americans count on for living expenses. 

This borrowing problem for America has not gone unnoticed by communist China, whose plans to supplant American leadership is known by all but the majority of the American citizenry, who are oblivious to such matters preferring to concentrate on identity politics, racism, & political correctness matters.  

The real annual growth rate of China's GDP has exceeded America's for over 40 years, with much of this time China's real annual growth rate being twice or even more than four times greater than America's, thereby setting China up to replace America as the preeminent country in the world - if America stumbles like in a Harris/Biden administration.  

China is projected to be the only major world economy to grow during 2020 - a year that America's GDP was in decline.  China's 2020 GDP growth rate will be reported Monday, but we know that Chineses exports rose 3.6% from a year earlier to a record $2.6 trillion, Chinese imports rose 6.5% from a year earlier reflecting strong domestic demand in China - a new source of Chinese growth, & its currency gained 6.6% against the dollar in 2020 (0.1436 dollars per yuan rising to 0.1531). 

See graphic below that shows China's growth on the world stage compared to America's declining then flat line stagnation.

click on graphic to enlarge

Once the general public, from all countries, refuses to lend money to the U.S. Treasury to fund the federal government (including forcing the U.S. to redeem - pay off - the face value of maturing bonds, i.e., the lenders want their money back), the Treasury is limited to raising taxes or counting on the Federal Reserve to print money to buy government debt meaning increasing the money supply & in turn inflation. 

If replacing foregone borrowing with increased taxes to finance government programs like Social Security, Medicare, & Medicaid starts slowly then increasing taxes like the corporate income tax, which is an invisible tax that most people incorrectly think corporations pay, will work for a short time.  But this could quickly turn into substantial individual income tax hikes as wealthy people & corporations flee America which will eventually turn to the obvious conclusion that the only people who can pay off the national debt are the property owners of record - the only people who cannot readily flee the country's direct tax burden, @ least not legally.

Property owners will also quickly realize that paying off the principal & interest on the national debt is a form of hidden taxation - inflation financed by the Federal Reserve printing money accompanied by an invisible tax on all property whose future income on that property, & in turn its owners, will not be able to keep up with the taxes due caused by inflation.  

Please understand I'm not talking about hundreds of thousands of dollars of debt that an undefined & vague group you hear about on TV known as our children & grandchildren will each pay off one distant day - I mean once the United States can no longer readily borrow money from the general public, because China has replaced America as the financial leader on the world stage, devastating problems will quickly set in for us like they most recently did in socialist Venezuela - @ one time the fourth richest country in the world with the world's largest oil reserves that now sees its people searching garbage dumpsters for food.

Venezuela has been devastated by an annual inflation rate of 2,000,000% & the local currency, the strong bolivar, has become worthless.  The strong bolivar lost 99.996% of its value against the dollar in eight months in 2018 during which time the dollar gained 2,401,878.4% against the official Venezuelan currency.  On August 31, 2018 there was 0.00417% remaining of the January 1, 2018 value of 1 strong bolivar per 0.0967 dollar.

Professor Friedman taught there is not one expenditure of the government that does less harm than making interest payments, which are simply a transfer of money from taxpayers to bondholders with the majority of American bondholders most likely putting the money right back into the economy.  Interest payments do not use up any resources - e.g., there is no labor that is unavailable for something else.  But there is a net outflow of wealth from America to foreign holders of our debt if they don't put the interest received back into the U.S.  Foreigners own 35% ($7.07 trillion) of our outstanding debt with Japan owning $1.27 trillion & China owning $1.06 trillion.  Source - U.S. Treasury as of September, 2019.  So this bond market - national debt game will work with unnoticeable disruption to our lives as long as there are willing lenders of money to America - both foreign & domestic.

The national debt went from $5.6 trillion to $10.0 trillion under GW Bush, $10.0 trillion to $19.5 trillion under BO, & from $19.5 trillion to $27.2 trillion under Trump in less than four years.  The latest assault on the national debt being the 5,593 page combined Covid relief & omnibus spending bill that passed Congress the week of December 21, 2020 - two bills that no one read, as usual.  Pelosi's nonsense is starting to worry me because it really looks like Congress has to pass a bill to find out what is in it.  Click here to see how individual senators voted on this bill & here to see how each congressman voted on it.

The further left into socialism the country goes in the Harris/Biden administration, with greater resources taken from the productive private sector to give to unproductive people dependent on government programs, the harder the fall will be if sources of borrowing dry up.

A decade ago pollster Frank Luntz said this Citizens Against Government Waste ad concerning a Chinese professor was the most powerful ad he had ever run.  Before I presented the ad originally in 2010 I had a charter member of the readership who was born in Shanghai verify the translation.

Now whether the Chinese professor is correct or whether there will be an exact duplication to the extent of the ordeal in Venezuela (inflation & currency devaluation) no one knows for sure.  But it is not far-fetched to think that having a national debt & unfunded liabilities that are five to ten times greater than our country's annual output, or equal to or greater than our net worth, will not end well if the worldwide public stops buying our debt.

This post answers the first presidential debate question I hoped would have been asked last September to Biden & Trump - What is the significance of the national debt now that the federal government owes more to the public than the economy produces in a year?  

This is the type of question & issue the country needs to focus on.  Answering it correctly, in understanding & action, will keep America growing, create wealth & value, & ensure America remains prosperous so that enemies like China do not overtake us.  We need to reduce government dependence among our people so that the increased free cash flow resulting from such independence can reduce our national debt & the need for foreigners to fund it.

Instead we elected a majority of representatives who supported Pelosi to immediately put in new, trivial, & superficial House rules regarding gender neutral language showing just how distracted America is from the issues that matter.