# Why is America in debt and how can we fix it?

1. Jun 10, 2015

### OmCheeto

For the most part, I enjoyed all of those threads, as I was always learning something new, and usually peculiar.

June 2009 thru July 2012:
Looking back again, I find it amusing that any of us thought we could predict how it would all shake out, when the Economists didn't seem to have a clue.
It was pure luck, IMHO, as to who was correct back then.

hmmm.... I appear to be having a senior moment of nostalgia. Perhaps I should get back to the present.

I guess I have nothing to add, except, whatever happened to the OP? He hasn't been around in over a month.

2. Jun 19, 2015

### JonDE

Doesn't increasing inflation generally lead to an increase in interest rates on government bonds though? For example, if inflation was 6% buying a bond that pays 2% would seem to be a terrible investment, it would seem to be a better investment to buy almost anything else.

As for SS, correct me if I'm wrong, but I don't believe that it is even a source of debt or deficit at the moment. From the way I understand that how it works, when SS runs a deficit, intra-governmental bonds (those that are held for SS) are sold to pay for it, since the government would then run a larger deficit, more extra-governmental bonds (not sure that's a term, but I think its obvious what I meant) are sold. Since both are counted towards the total debt, there is no increase in total debt. Its just transferring debt from between the government to outside the government. Of the 16 or so trillion we are in debt, none of it is from social security and can't be until the SS trust fund runs out of bonds, which last estimate I saw, wont be until the 30's. So I don't see it as a viable short term problem or answer.

3. Jun 20, 2015

### Staff: Mentor

Yes, but not nearly enough to compensate for the inflation. In other words, the US government can reduce its debt in real terms by printing more money, even after you allow for the effect that printing the money will have on the interest rate on the debt.

But that makes a big difference. Debt that the US government owes to itself can be handwaved away by politicians--which is, of course, exactly what they have been doing for decades about the fact that the SS trust fund's surplus has been used to finance other government activities. Debt that the US government owes to outside entities has to be taken more seriously--for example, it can cause the US government to want to print more money in order to inflate the debt away, which doesn't happen with debt owed from one part of the US government to another.

4. Jun 20, 2015

### JonDE

Is there evidence of this though? Looking at it from an investor's perspective, if the interest rate didn't keep up with interest, then it would be less appealing, driving down demand, and driving price up. That and the treasury sells some Treasury Inflation Protected Securities (TIPS) that are adjusted for inflation, which wpuld completely negate any attempt to inflate away debt, they don't normally sell well because they are considered a bad investment.
But I don't hear politicians hand wave this away, in fact the only numbers I ever hear are the total debt number and the total deficit number. Most of us have heard at one point what the deficit is, but can you honestly say you have ever heard of what the deficit is minus the portion owed intragovernmentally?

5. Jun 20, 2015

### SteamKing

Staff Emeritus
Some investors look at other things besides interest rates. Investors, above all, want to make sure that if they buy a government bond, the government is going to be there when this bond matures, so they can get their money back, and maybe some interest. You can't say that about Greek government bonds, or the bonds of many other countries around the globe. Even at the abysmally low interest rates which U.S. Treasury bonds are currently fetching, there aren't a lot of investors who would touch a Greek bond, no matter what interest rate is being offered.

It all depends on the amount of TIPS securities sold versus the amount of other types of debt instruments sold by the Treasury. If there is only a small fraction of outstanding debt in TIPS, it doesn't really matter that these bonds are "inflation protected", 'cuz the government just sells that much additional debt down the road, when the bonds are redeemed, to make the bondholder protected against inflation, by the way, which is a number conjured up by the same government selling the TIPS in the first place. IMO, to make the process fair, someone else should decide how much the rate of inflation is than the seller of the bond.

Since when do you expect politicians to tell the truth, the whole truth, and nothing but the truth? Just because you limit yourself to keeping track of only two numbers, this does not mean that these numbers are the only critical information to be considered. Much additional information can be gleaned from reading all sorts of government reports and white papers prepared by think tanks.

It's in the interest of incumbent politicians not to talk about possible insolvency in government programs like Social Security. If they did that, even low-information voters might get scared and vote for the other guy come the next election.

6. Jun 20, 2015

### JonDE

But, we are only talking about US treasury bonds here, so in the example the ability of that government to repay is going to be static. The only difference we are talking about here is changing inflation numbers for the same entity. My argument is simply this, rates must increase parallel with inflation, or demand for those bonds will go down, which in turn will drive those same rates back up.
The rate is for TIPS is just the standard CPI which is used for virtually all government processes and budgets. The point of that part was it being considered a bad investment, which means that the government is not inflating away its debt, otherwise these securities would be better then normal securities.
Maybe I should have made my point clearer on this part. I was not arguing which is more important, I was simply arguing against PeterDonis`s point that these numbers were being used by politicians to handwave part of the debt away. I was just stating that I don't think they are doing that.

7. Jun 20, 2015

### al m

have not heard any body mention the rich, the corporations ? their interest and the interest of the nation may not coincide but thru lobbying they get their way

8. Jun 21, 2015

### SteamKing

Staff Emeritus
But the market for U.S. government bonds is international. Investors the world over keep a keen eye on what policies come gushing forth from Washington. Just ask the Chinese or Japanese about this. Since the Chinese and the Japanese each hold a sizable amount of U.S. debt in their portfolios, if the Chinese or Japanese should indirectly signal that they may not desire to continue purchasing so much U.S. debt in the future, that would send a strong signal to the rest of the financial world that major changes are coming. One way to keep the Chinese, the Japanese, or whoever else might be interested, in continuing to purchase your debt is to increase the interest rate on the bonds being offered, above what only the inflation rate might indicate.

9. Jun 21, 2015

### JonDE

That only seems to reinforce my point that if inflation goes up, bond rates must go up equally, otherwise the Chinese and Japanese would lose interest. That is to say, if inflation one year is 2% and bonds rates are 4%, then the next year inflation goes up to 4%, then the bond rates must also go up 2% to 6%, otherwise its a worse buy for everyone, including the Chinese and Japanese, as the dollar would be weaker and would buy less of their own currency, in fact it may have to go up even more to account for this, but I'm not sure.

Anyways rather then just argue about it, I've decided to look up the numbers. From this article http://www.crestmontresearch.com/interest-rates/
The graph can be found here http://www.crestmontresearch.com/docs/i-rate-relationship.pdf
As you can see form the graph, since the 1960s the bond rate has followed the interest rate very closely, I'm going to assume that the reason is had trouble following it in the first part of the century, was due to wildly fluctuating inflation, as you can see from the graph inflation one year went from 15% to -10% the following year. Once inflation because less volatile, the bond rate began to track the interest rate very closely.

10. Jun 21, 2015

### OmCheeto

Please don't bother pointing out the elephants in the room. It's been tried before.

11. Jun 21, 2015

### SteamKing

Staff Emeritus
Which gives current politicians much more incentive to "cook the books" with regard to inflation.

In the 1960s, programs like Social Security were quite solvent, in the fact that the payroll taxes which supported the program were low and there were many more workers paying into the program than people drawing out benefits. The baby boom generation was starting to enter the labor force, generating plenty of taxes, and government spending was relatively well managed. Heck, in 1969, the budget showed a small surplus, something which would not occur again for almost 30 years.

In recent years, government spending has not been well managed at all. For the current decade to date, out of every $3 spend by the government,$1 was borrowed, and this is a severe problem when budgets are running at about $3.5 trillion annually. The cumulative debt curve starts to turn upward quite noticeably, and even the dimmest politician knows that if something isn't done, then more of the budget must be devoted to debt service and less will be available for spending on various other programs. Up to now, surpluses amassed by Social Security have lessened the impact of huge annual deficits, but eventually, theses accumulated surpluses will be exhausted, and the difference between payroll taxes collected and benefits going out will hit the budget with a resounding thud. The government will either have to sell more debt to service current and future beneficiaries or cut benefits, the politicians having shown no great desire to implement any reforms to the system. It's not just SS, but with people living longer, Medicare will also become a huge line item in the annual budget, as the number of people working and paying taxes will not be sufficient to sustain the program. In the past decade or so, we have been assured by Washington that inflation is not a problem, and, of course, a handy set of numbers with an official stamp was provided which supported this claim. However, the increase in food prices and fuel prices, some of which is due to various policy positions instigated in Washington, are not included in the calculation of the rate of inflation. The rate of inflation which is reported is what the government tells everyone it is, but your wallet gets much lighter because you cannot ignore paying more for food and energy. The government has a huge incentive to minimize the rate of inflation, not least because it would increase the cost of borrowing to cover the huge accumulated debt. Things may not unwind as quickly and as dramatically in the U.S. as they have in Greece in recent months, but the current course is not sustainable. In the next 15 years or so, the last of the baby boomers will have retired, but the young people coming into the work force today may not be able to make up for the loss of the boomers, seeing that many young people are drowning in massive debt incurred by taking out student loans. That little drama hasn't fully played out yet. 12. Jun 21, 2015 ### JonDE I don't disagree with any of this. This is both correct and incorrect. Core inflation does not include food and fuel prices, CPI does. I'm also not sure how they are "cooking the books", since as far as I can tell CPI calculations have not changed since 1983. While I'm not arguing that SS needs to be fixed/adjusted in some way long term, I'm simply stating that it is not a short term problem. SS is projected to run a surplus through 2021, which is 6 years in the future, and wont exhaust its trust fund until 2033 (these numbers are from Wikipedia, so they may not be 100% accurate, or up to date). https://en.wikipedia.org/wiki/Social_Security_Trust_Fund I just don't understand why, in a conversation about how to reduce the debt, the one area a lot of people are focusing on, is the one area of the government that is running a surplus at the moment. That seems backwards. Yes SS needs to be adjusted in the future, but really not before 2021, but definitely before 2033. To be on the safe side and because I don't really want to look up the numbers, I'll agree that changes should be instituted for fiscal year 2022. To get back on topic, I don't think we can or should put off making changes until 2022. Something should be done before that time, which is what my point is, SS is not the pressing issue, with regards to the debt. 13. Jun 21, 2015 ### Czcibor Reality check: you wrote it when the oil was actually cheaper than usual, so all good rant was unfortunately wasted. In my country the central bank publishes both inflation rate and inflation rate after excluding food and energy prices. The logic behind is that such prices swing (in case of food also seasonally) so may make mask any long term trends. 14. Jun 23, 2015 ### russ_watters ### Staff: Mentor First a clarification which I'm only 75% certain of, so please correct me if I'm wrong: Currently, the running "surplus" is based on interest on the Trust Fund's "investments", which are in government bonds. So the "surplus" is still adding to government debt. Anway: I don't understand this mentality at all. Even if you don't recognize that SS is an ongoing economic disaster (more on that later), when is it ever better to let a known problem get much, much worse before fixing it? It just makes it tougher/more painful to fix. Brakes are squealing? Tire pressure low? Meh - let's wait until we get into an accident before fixing it! But more to my main point, it seems to me like people are getting distracted by the insolvency date into not dealing with the reality that it's a terrible program to begin with. As it stands today (if we assume a magically stable status quo even after 2033), SS will return people a sum roughly equal to what they paid into it. That's not just a bad deal, that's a disaster. People talked about how bad it was when they lost half their life savings in the 2000 stock market crash: this is both twice as deep* and unlike the crashes it is actually real and not just a temporary paper loss (if you include the preceding decade of gains, people came out ahead from the tech bubble, not behind). Even worse, unlike the crash of 2000, this disaster happens bi-weekly. Every two weeks, you get a paycheck that has 12% taken out, with the "promise" that it acts like only 3% was taken out. The other 9% is effectively lost. For someone who makes$48,000 a year, that's $170 per paycheck that gets wasted. This lost 9% (9%!) has a crusing effect on our economy. *The 75% loss is based on a reasonably returning retirement investment fund that should provide you back in retirement at least 4x what you put into it, after inflation. 15. Jun 23, 2015 ### JonDE From what I understand, you are correct, but it runs contrary to intuition. The only way to decrease what is paid into interest in the trust fund, is to decrease how many bonds the trust fund owns. To do this, SS must run a deficit. I think a lot of people are confusing this, because there is a natural intuition to tie what SS owes in future payments, to the trust fund, but they are not connected. Its better if the bonds are thought of as an accounting effort. If SS runs a surplus, the treasury owns more bonds, an interest paid on those bonds goes up. But this cannot effect the total debt because the same amount that the trust fund receives in bonds, is the same amount that the general fund gets in cash, so its a wash. I guess this is where we differ on opinion. I don't see the brakes squealing yet. I see the brakes squealing when it stops running a surplus, and completely failing sometime in 2033. It seems like here that you are pushing for privatized SS accounts. Personally I am not against them, I think it would be a great idea, and I can't even argue that they would/should pay out more to retirees. But, that is not what this thread is about, what this thread is about is way to lower the debt. Privatizing SS would have the opposite effect here that we are looking for, in that regard. http://www.bloomberg.com/bw/stories/2005-01-23/social-security The main problem with transitioning, is the same reason many people don't like it. It acts similarly to a pyramid scheme, in that it requires more people paying in, then there are collecting. This is not a problem with the bonds alone, it is a problem of SS not running a true surplus. That is to say that the surplus of what has been paid in minus what has been paid out is less then what current workers have paid in. I'm still not sure I'm being 100% clear, so I will further simplify, that is to say that not 100% of what you have paid in has gone into the trust fund, some of it has gone to older generations, to the tune of 1-2 trillion dollars. So to implement privatized SS they would first have to sell the$2.7 trillion held by the trust fund to the general public, then they would have to sell an additional $1-2 trillion. I have doubts that they would even be able to sell that many securities short term. Even if they were able to, it runs the risk of raising interest rates on bonds, further increasing the federal debt. Once again, I'm not saying privatized SS is a bad idea, I'm simply saying, its a bad idea with regards to this thread, which is about minimizing debt. 16. Jun 23, 2015 ### Czcibor I consider your statement here as a bit misleading. For example like assessing social security program in comparison to retirement investment through investment funds. Like claiming that a car don't fly well. (which is actually correct...) -As far as I remember the program was intended as fully funded, then somewhere around the Great Depression, it was drained to provide some money to old people right away and turned in to more flow through program. (good idea at that time? ;) ) -such programs are intended to have moderately redistributive function (if someone puts a lot in to it, that's the point that he gets poor return on investment, the unfortunates are intended to have a very good one) And the best part - nowadays there is not much choice. There are small assets, big liabilities and implicit assumption that system would be financed by next generations. The "good" program, presumably, except from redistributive function would invest something in to stock exchange. But to get to such program you'd have to somehow pay this implicit debt (I don't know what are guesses for USA, for my country somewhere around 3 times annual GDP). From an extra tax? ;) Or maybe you'd start a 100 year plan to pay off such debt? You'd just spread the pain among generations through depressing investment return on social security contributions. If I would think about going to a "good" program that would be the only idea, that I would consider as not doomed... but you expressed your outrage at low returns. 17. Jun 23, 2015 ### russ_watters ### Staff: Mentor I think we're in agreement there (though later, you seem to contradict it...), so my point in that first part was - in response to your confusion as to why people would focus on Social Security - that the current trust fund's interest-only surplus and the national budget debt are in fact linked. When you combine them, the net is not a surplus, it is a deficit. That's why when you said: ...that implies the SS "surplus" it is helping close the budget deficit when in fact it is worsening the decifit. Because the "surplus" is below the interest rate, the "surplus" is increasing the net government debt. So at the very worst, we're talking about exactly the same problem, but looking at fixing at least some of it from different sides. Then: Since SS is today a part of the debt problem and will in the future become a much larger part of the debt problem, any discussion of any changes to SS for any reason are a relevant part of that discussion. Frankly, it is disturbing to me that people want to compartmentalize and ignore the SS issue for what seems to me like very weak reasons. And, of course, once on the table, it is best to talk about what fixes would be best both for the debt and for the citizens' retirement well-being. Just like trust fund vs general fund is a totally meaningless distinction, so too is "private" vs "public" for what to call the accounts. What matters is what happens in the accounts. IE: Whether any plan of any type would increase or decrease the debt depends entirely on the details of the plan. I would, of course, only support a plan that caused a long-term reduction in federal budget debt and increase in retirement savings ROI for Americans. The rest of that paragraph: So that would be painful, right? So does that make private accounts a bad deal? No. What people need to recognize/accept is that we are already in pain and it is going to get much, much worse. Yes, there is going to be even more short term pain. Surgery hurts, but we need to remove the bullet to stop the problem from continuing to get worse and worse. We're going to have to make up those trillions in shortfalls one way or another and it would be better to do it with a program that can actually work instead of just making the problem worse and worse and worse until it consumes all of the money in the economy and destroys us all (at least those of us who are still alive when it collapses). Remember: SS currently outlays$750 billion a year. If we lose 25% because we did nothing (the current plan), that's a loss of $187 billion a year (at today's outlay rate). That means the$1-$2 trillion transition cost is recovered in 5-10 years by fixing the program. Frankly, I don't see a 10 year transition period before pain turns to gain to be a huge hurdle. Note also: those numbers are specific to Bush's program and would not necessarily be the same for other proposals. In particular, the percentage is only 1/3 of the 12%, up to$1000 per year. That's a tiny fraction of the money flowing into the program. Even a median income earner pays-in \$6,000 per year, so that's only 1/6th of their current pay-in and less than 1/12th for someone at the max. In short, that's way too small of an effort.
That's only during the transition itself and only insofar as the transition doesn't instantly fix that flaw. The way you say it, the transition creates the flaw, but no, the flaw is already there. By definition, a "transition" is the time it takes to eliminate the flaw: After the transition, that flaw in the program would go away. That would be the primary point of doing the transition - to eliminate the current pyramid-scheme structure. That's a good thing, not a bad thing. What you are suggesting sounds like saying you wouldn't get surgery because the pain won't go away instantly and it will hurt to pull the band-aid off the incision after it heals!

Last edited: Jun 23, 2015
18. Jun 23, 2015

### Staff: Mentor

That's actually a great analogy, but for both I think you are viewing the issue to narrowly: why limit the discussion to driving characteristics when flying might be better? In other words, why does it matter that SS is functioning as originally intended if the way it was intended/functioning is bad? Why drive when you can fly?
SS was always intened as a flow-through program (a pyramid scheme). But regardless of when it happened, it happened and the economics have been getting progressively worse and worse over time as the pyramid has narrowed. It actually was a good deal for people who died 50 years ago: all pyramid schemes are good for early adopters and screw-over people coming later. The impossibly great returns for early adopters are a key selling point and helped FDR immensely in getting it passed. And hey, as long as the only people who suffer were their children, grandchildren and great-grandchildren, everyone relevant was happy.
Re-distributive effects (not to mention funding other currently included programs) would certainly still be included in any replacement program.
On the contrary: right now, there are only two choices:
1. Do nothing and the benefits get cut by 25% in the early 2030s (it is required by law that the program not be in debt, so the benefits will adjust automatically).
2. Do something to fix it.

Keeping the status quo of the program simply is not an option. Just like that crashing plane, you can't keep riding it after it hits the ground. The situation will change one way or the other.
Yes, that is what I'd like to see happen. And yes, that would mean - like a heavily loaded mutual fund - the returns would be limited until the program phases-itself out (essentially, when everyone currently paying-into it is dead, in about 80 years). But at least the program as a whole, would switch from a negative return "investment" to a high return "investment", instantly -- even if I only got to keep part of that return.

Let me say that another way: pretty much any such plan change would provide a benefit to everyone, vs the status quo, which is currently guaranteed to get even 25% worse than it is today.

Last edited: Jun 23, 2015
19. Jun 24, 2015

### Czcibor

I'd rather see it in line of system that

OK, but if you cut a chunk to finance ex. spouse benefit, then the return from the remaining part would have problems to match any portfolio which started uncut.

I do not get you.

If I was asked to phase out such program, I'd guess that it would mean ex. benefits cut of 33% right now (guess number, insert any ultra painful slash, much bigger than 25% you mentioned). Then indeed the program would not only finance itself but give a chance to pay back whole pyramid. But your idea involves creating a sovereign wealth fund?

Benefit to everyone? Not specially. You can either:
a) make a big slashing right now (which would s**** contemporary retires and those who would retire soon)
b) do nothing and s**** those retiring around 2030 or at that time drastically raise taxes thus s**** those being taxpayers at that time
c) spread the moderate pain all over a few generations to have this system more or less balanced (more or less reasonable idea, but you'd have to fight fierce resistance of baby boomers, who can try to delay any painful reforms until they are dead)
d) spread high pain all over a few generations to have the system paid back around ex. 2100. Sounds good, but it would benefit everyone... born in next century... hopefully... if such reforms are not reversed somewhere on the way by a wave of populism in ex. 2050

20. Jun 24, 2015

### JonDE

No this is wrong because the total debt of the country would be exactly the same whether or not SS had ever been created. Instead of that debt being paid to SS in the form of securities, it would have been borrowed from the public, with at least the same amount of interest, if not higher. The only way I can really explain this is to think of SS as a separate entity completely. In this scenario the federal government (without SS) has run a cumulative debt of almost 18 trillion. This federal government then found a great buyer for its debt in the name of the bank of SS, who agreed to buy 2.7 trillion worth of its debt. Either way, the federal government is paying interest on nearly 18 trillion, whether it is paying it to SS or to the public doesn't really matter. The only difference is, that SS is a guaranteed buyer, which should push interest rates lower, decreasing the federal debt.
From more of the article
So it will be debt neutral in 100 years, and in the meantime, everyone gets screwed, with the young people today getting only half of what they would otherwise get? Even with the problems SS has, its gap is only 25% which is not "nearly half".
The numbers don't seem to be adding up. I think its partly because I misread the article originally. The shortfall is apparently 3.7 trillion, and the 1-2 trillion is the transition costs. That still doesn't explain the discrepancy though. Maybe because the article is 10 years old might explain part of it, so these numbers need to be adjusted for inflation. The author was saying 90-100 years not including transition costs, which is much different then the 5-10 years you are talking about.

21. Jul 4, 2015

### AgentSmith

Both of those options are just ways to borrow money.
There is nothing arcane about the answer to the question. You live within your means. Some years a government may spend a little more, others a little less, than income.
Cases in point is Greece, and Puerto Rico.

22. Jul 16, 2015

### mheslep

Or, inflate the currency which devalues the debt. Also destroys individual savings.

23. Jul 16, 2015

### Staff: Mentor

In the sense that they take away purchasing power from present holders of money, and transfer it to someone else, yes, they are like borrowing money. But actual borrowing of money creates explicit debt which has to be paid back. Printing new money or devaluing the currency does not; the people whose purchasing power gets taken by these means have no way of getting it paid back.

24. Jul 27, 2015

### BWV

It is not possible to pay off the US debt and trying to do so is folly. Just get the deficit comfortably below nominal GDP growth, preferable with small surpluses during good years.​

25. Aug 30, 2015

### Hornbein

People like free money more than they dislike devaluation of the currency.

Money is created by the government going into debt. It isn't practical to pay off the debt completely. Andrew Jackson's administration did it. It caused a financial crisis because there wasn't enough money.

North Korea is the only country with almost no national debt.

BUT 20 trillion in debt does seem excessive. What are they going to do if interest rates go back up to 10%?