US Debt

[Noslien]

Should we be concerned about our $ investments?

"To put things into some perspective, the total output of the US economy as measured by GDP was only $25.46 trillion. That means the US economy would have to grow by 33.5% to cover the national debt.

At $33 trillion, the US national debt is more than the total economies of China, Japan, Germany, and the UK combined.

Looking at it another way, as of Oct. 10, every US citizen would have to write a $99,839 check in order to pay off the debt, and every American taxpayer is on the hook for $258,257."

Full story
https://www.zerohedge.com/economics/bid ... st-20-days

[Gilgongo]

If we take US debt as basically the same as how the UK national debt works, I thought this was a good explainer:

https://www.youtube.com/watch?v=ZIb9wA4raPo&t=4s

[GoSeigen]

Looking at that red, green and orange chart it’s obvious that if you’re an American who doesn’t like federal debt then don’t elect Republican presidents!!

GS
P.S. As usual for these alarmist posts charts are not semi log as they should be.

[Adamski]

Rather than the absolute size of debt what matters is the debt as a proportion of gdp and the ability to service the interest. I'm more concerned about the UK national debt as we've got debt 100% of gdp, a stagnant economy and ageing population, not a great mix.

[GoSeigen]

Rather than the absolute size of debt what matters is the debt as a proportion of gdp and the ability to service the interest. I'm more concerned about the UK national debt as we've got debt 100% of gdp, a stagnant economy and ageing population, not a great mix.

Right, so don't buy gilts, hold shares instead.


GS

[ursaminortaur]

Rather than the absolute size of debt what matters is the debt as a proportion of gdp and the ability to service the interest. I'm more concerned about the UK national debt as we've got debt 100% of gdp, a stagnant economy and ageing population, not a great mix.

It is being able to service the interest that counts. The UK national debt has been above 100% of GDP for about a third of the time since the Bank of England and that debt were first created. After WW2 the UK debt reached 238% of GDP in 1947. The 100% of GDP idea may be a psychological trigger for some but is really pretty meaningless.

https://www.ukpublicspending.co.uk/debt_history

But that was just the beginning. The Revolution in France and the subsequent Napoleonic Wars led to another explosion in military spending and the National Debt rose to 237 percent of GDP in 1816 after the battle of Waterloo. The rest of the 19th century was spent in drawing the debt down, to a low of 25 percent of GDP in 1914. That was just before the outbreak of the Great War in Europe.

At the beginning of the 20th century in 1900 the National Debt stood at a very manageable 30 percent of GDP and dipped to 25 percent of GDP by 1914 despite the intervening Boer War. But the Great War, World War I, caused an explosion in the National Debt up to 135 percent of GDP in 1919. Then, in the economic troubles of the 1920s it rose to 181 percent in 1923 and stayed above 150 percent of GDP until 1937. The National Debt dipped to 110 percent of GDP in 1940 before soaring to 238 percent of GDP after the close of World War II in 1947.

Most of the UK National debt is owned by the Bank of England, UK pension funds and others in the UK - only 28% is owned by foreign investors.

https://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/

The majority of UK debt used to be held by the UK private sector, in particular, UK insurance and pension funds. In recent years, the Bank of England has bought gilts taking its holding to 25% of UK public sector debt.

Overseas investors own about 28% of UK gilts (2022).
The Asset Purchase Facility is purchases by the Bank of England as part of quantitive easing. This accounts for 26% of gilt holdings.

Other countries have worse National debt/GDP ratios. The worst being Japan with a ratio of 263%. The last time Japan's National debt/GDP ratios was below 100% was in the last century.

https://en.wikipedia.org/wiki/National_debt_of_Japan

As of March 2023, the Japanese public debt is estimated to be approximately 9.2 trillion US Dollars (1.30 quadrillion yen), or 263% of GDP,[1] and is the highest of any developed nation.

[GoSeigen]

Other countries have worse National debt/GDP ratios. The worst being Japan with a ratio of 263%. The last time Japan's National debt/GDP ratios was below 100% was in the last century.

Yes, but Japan is completely hosed you'd have to admit...

GS

[Urbandreamer]

I know that some are going to reject this link, because it's an extract from a bitcoin convention in the US.

However I do suggest watching it.
https://www.youtube.com/watch?v=QFqjw47biPM

After doing so, by all means reject bitcoin. It needs no sales force and to be honest may not be the solution*.

However I would be interested to hear arguments as to why there is no debt spiral.
Or arguments about how it won't be a problem for companies or individuals.

Just ignore who is providing the arguments and consider the facts and the arguments about the facts.

*I suspect that there is no single solution for individuals or companies, but that we need a range of options.

[vand]

National debt is a problem for most developed economies, but as correctly pointed out it is really 2 things that matter:

The debt/GDP ratio, and the deficit (how fast the debt is increasing).

In these terms the US is not in the worse shape; the countries to watch are Japan & Italy, which both have very high debt/GDP and now their demographics are collapsing - in Italy they have a birth rate of 1.24 which means each generation is 40% smaller than the last, which is a frightening thought when the debt is also inexorably growing - I don't see any way that it doesn't end without their total bankruptcy.

I tell you all - watch how these 2 countries struggle and go backwards over the next decade. The decline has already started - it has been baked into the demographics for decades now.

[Gilgongo]

I know that some are going to reject this link, because it's an extract from a bitcoin convention in the US.
However I do suggest watching it.
https://www.youtube.com/watch?v=QFqjw47biPM

Just ignore who is providing the arguments and consider the facts and the arguments about the facts.

So it's a fact that the Fed is simply stupid, and the arguments are that despite the US and many other countries running increasingly large deficits for decades, they've discovered some (as far as I can tell, unexplained) line that's now been crossed that means we all need to buy crypto. I mean - that's what they're saying, isn't it?

[Gilgongo]

I tell you all - watch how these 2 countries struggle and go backwards over the next decade. The decline has already started - it has been baked into the demographics for decades now.

Most of these countries debt % of GDP seem to be trending down though? It was massive during the Covid years for obvious reasons, so was it only interest rates that saved us?

https://www.ceicdata.com/en/indicator/i ... bt--of-gdp

https://www.ceicdata.com/en/indicator/u ... bt--of-gdp

I admit I struggle with the logic on all this.

Also, what I don't understand about the doom and gloom about national debt is where is the money that governments are borrowing being spent if not on various parts of the economy to keep it going? About 20-25% of US national debt is held by intergovernmental accounts - the government doesn't pay interest to itself, does it? Similarly with notes and coins (although I guess that's small). The rest of the interest paid is allowing things like pensions to happen and people to spend money on stuff, no? So is all of this just about inflation? But that's not far off historic averages (apart from the in the UK perhaps)?

[Urbandreamer]

I know that some are going to reject this link, because it's an extract from a bitcoin convention in the US.
However I do suggest watching it.
https://www.youtube.com/watch?v=QFqjw47biPM

Just ignore who is providing the arguments and consider the facts and the arguments about the facts.

So it's a fact that the Fed is simply stupid, and the arguments are that despite the US and many other countries running increasingly large deficits for decades, they've discovered some (as far as I can tell, unexplained) line that's now been crossed that means we all need to buy crypto. I mean - that's what they're saying, isn't it?

Not quite.

Sure you can see it that way, if that is the ONLY message that you want to hear. Or the ONLY message that you want to reject.

Another way to look at it is:

Don't buy government bonds.
Don't put money on deposit.
Don't trust government money (The pound in your pocket is still the pound in your pocket: look it up)

Mr Buffet when asked about Bitcoin said. "I don't invest in unproductive assets". A valid point.
But the same point can be made of government debt.
You know. Like National Savings etc. I suspect that he, and many here, would argue that holding a share of productive companies is a far better idea.

You do know that this thread was not about bitcoin? Which in any case some just regard as another form of gold (unproductive and providing no return).

Ps, as has been stated by others, it's not just the Fed. Every government is doing it. Arguably if the US catches a cold, our country and others will as well.

[vand]

I tell you all - watch how these 2 countries struggle and go backwards over the next decade. The decline has already started - it has been baked into the demographics for decades now.

Most of these countries debt % of GDP seem to be trending down though? It was massive during the Covid years for obvious reasons, so was it only interest rates that saved us?

https://www.ceicdata.com/en/indicator/i ... bt--of-gdp

https://www.ceicdata.com/en/indicator/u ... bt--of-gdp

I admit I struggle with the logic on all this.

Also, what I don't understand about the doom and gloom about national debt is where is the money that governments are borrowing being spent if not on various parts of the economy to keep it going? About 20-25% of US national debt is held by intergovernmental accounts - the government doesn't pay interest to itself, does it? Similarly with notes and coins (although I guess that's small). The rest of the interest paid is allowing things like pensions to happen and people to spend money on stuff, no? So is all of this just about inflation? But that's not far off historic averages (apart from the in the UK perhaps)?

CEIC methodology seems to be counting unfunded liabilities as well as many other things, which isn't conventional.

That said there does seem to have been a pull back in debt/gdp over the last couple of years but I'm sure this will be due to wild fluctuations in the denominator as GDP numbers bounced back from their COVID nosedive. The extra COVID stimulus taken on everywhere will means most economies will have taken on more debt than they otherwise would have

[Gilgongo]

Apologies, I didn't want to get sidetracked by Bitcoin, but the arguments around it are at least symbolic as it were of the thinking I'm having hard time understanding when it comes to national debt.

Mr Buffet when asked about Bitcoin said. "I don't invest in unproductive assets". A valid point.
But the same point can be made of government debt.

That statement, for example. In the video you posted, they made a reference to defence spending. When the US government adds an extra billion to their borrowing to buy, say, more weapons, that money ultimately goes to pay salaries, share holders, and (corporate) bond holders in the wider economy. Not to mention pensioners! How on earth can you call that "unproductive" and why would we want to take money away from those things (moral issues about defence industry aside)?

I suppose eliminating the national debt makes sense if you simply don't believe in the concept of government. In which case I'll bow out. But it's been the way governments (give or take the odd gold standard or two) have managed economies since William III.

The extra COVID stimulus taken on everywhere will means most economies will have taken on more debt than they otherwise would have

Well yes. The US and other countries funded their way out of COVID. Money literally appeared out of nowhere to fund and implement a massive mobilisation of scientific and industrial resources (just don't mention a few billions down the drain for non-functional PPE in the UK). So why wring our hands now as all that winds down? Yes, interest rates are up (to historical averages), as is inflation for now (but that means the national debt is cheaper to service), and both are showing signs of going down a bit after a while.

I get that if (and it's a massive "if") the US went the way of Russia and became in actual danger of being unable to service the interest on the debt, then that would be problem. But on the measures I can see, the sky is simply not falling at all and I don't understand what all the fuss about national debt in the US or anywhere is about.

EDIT: US net public debt as a percentage of GDP has been falling quite rapidly for years because the national debt is a good thing for the economy:

https://www.fisherinvestments.com/en-us ... debt-today

Some of this is Liz Truss territory, I admit, since the argument is also that tax revenue will go up to service the debt. But tax revenues don't have to pay it off. Indeed they shouldn't because money IS debt, fundamentally. If nobody is getting into the red then nobody is getting into the black. Or do you also want banks to clear out the balance sheets too?

[Urbandreamer]

Well yes. The US and other countries funded their way out of COVID. Money literally appeared out of nowhere to fund and implement a massive mobilisation of scientific and industrial resources (just don't mention a few billions down the drain for non-functional PPE in the UK). So why wring our hands now as all that winds down? Yes, interest rates are up (to historical averages), as is inflation for now (but that means the national debt is cheaper to service), and both are showing signs of going down a bit after a while.

If only. Sticking to the US, many may remember the US government hitting the debt ceiling recently. Most may remember them hitting it before COVID. There is absolutely no evidence that the debt is being wound down. The same is true in the UK, though we don't have a debt ceiling. I invite you to look at the UK money supply figures published.

As for your arguments about defense being productive? Well I may be willing to accept that it is a necessary expense, unlike for example smashing all our windows to employ glaziers. However I will note that your argument about it's productivity is exactly the same as the window argument.

Arguably building road or rail, improving harbors, education and energy supply is investment in the country, but spending for the sake of spending? As for creating money to "stimulate" the economy, well we are back to Keynes or the Austrian's. I'll note that many of the original Austrian economists had personal experience of deficit spending in the early part of the last century.
The book "When money dies" is a quite distressing historical treatise published in the 70's.
https://theworthyhouse.com/2020/06/15/w ... fergusson/

With respect to the national debt getting cheaper, well I'll just note that in order to sell new debt they seem to now have to issue more that is "index linked". That can only be cheaper IF inflation is significant and the savings made by the time lag compiling an "honest" index.

This is of course ignoring those post Keynes who argue for the "Modern Monetary Theory".

Returning to the subject though, the question that arises is how such management / mismanagement will affect the productivity of companies in a given jurisdiction. Or what is known as geopolitical issues.

Personally I believe that it really does depend upon politics. The UK government recently sent a really strong message to those who wish to invest in renewable energy that they won't be allowed to profit from doing so, while the US sent the opposite message to investors there with it's somewhat humorously titled "Inflation reduction act".

[vand]

Apologies, I didn't want to get sidetracked by Bitcoin, but the arguments around it are at least symbolic as it were of the thinking I'm having hard time understanding when it comes to national debt.

Mr Buffet when asked about Bitcoin said. "I don't invest in unproductive assets". A valid point.
But the same point can be made of government debt.

That statement, for example. In the video you posted, they made a reference to defence spending. When the US government adds an extra billion to their borrowing to buy, say, more weapons, that money ultimately goes to pay salaries, share holders, and (corporate) bond holders in the wider economy. Not to mention pensioners! How on earth can you call that "unproductive" and why would we want to take money away from those things (moral issues about defence industry aside)?

I suppose eliminating the national debt makes sense if you simply don't believe in the concept of government. In which case I'll bow out. But it's been the way governments (give or take the odd gold standard or two) have managed economies since William III.

The extra COVID stimulus taken on everywhere will means most economies will have taken on more debt than they otherwise would have

Well yes. The US and other countries funded their way out of COVID. Money literally appeared out of nowhere to fund and implement a massive mobilisation of scientific and industrial resources (just don't mention a few billions down the drain for non-functional PPE in the UK). So why wring our hands now as all that winds down? Yes, interest rates are up (to historical averages), as is inflation for now (but that means the national debt is cheaper to service), and both are showing signs of going down a bit after a while.

I get that if (and it's a massive "if") the US went the way of Russia and became in actual danger of being unable to service the interest on the debt, then that would be problem. But on the measures I can see, the sky is simply not falling at all and I don't understand what all the fuss about national debt in the US or anywhere is about.

EDIT: US net public debt as a percentage of GDP has been falling quite rapidly for years because the national debt is a good thing for the economy:

https://www.fisherinvestments.com/en-us ... debt-today

Some of this is Liz Truss territory, I admit, since the argument is also that tax revenue will go up to service the debt. But tax revenues don't have to pay it off. Indeed they shouldn't because money IS debt, fundamentally. If nobody is getting into the red then nobody is getting into the black. Or do you also want banks to clear out the balance sheets too?

It is a concern because given that the US government spends $4 for every $3 they collect via taxation, they have no chance of running a balanced budget. Either you believe that the debt can continue to grow indefinitely - to 300%, 500%...? OR, you believe that it will, at some point stop growing.

It is an impossibility that you can just continue to pile on debt without consequences, and at some point the numbers unravel. If you have to spend 5% of your income to service the existing debt at 100% debt/gdp, at 300% that goes up to 15%, but not really, because as I said nobody runs balanced budgets - so not only do you have to service the debt, you have to issue even more debt just to maintain the payments on the old debt, and then in the future you have to issue even more than that just to stay in the same place

Again, not saying that the US government is a special case because its a problem everywhere, but if everyone is spending more than they are bringing in then "Houston, we have problem..." because that means far too many promises are being made where there is not the real wealth to support those promises.

Ultimately debt is promise of future payment - if too many promises are being made that can't possibly be kept, and people really believe they can't be kept, then the backing of the issuing authority and the buying power of its promises is worth zero

[ursaminortaur]

Well yes. The US and other countries funded their way out of COVID. Money literally appeared out of nowhere to fund and implement a massive mobilisation of scientific and industrial resources (just don't mention a few billions down the drain for non-functional PPE in the UK). So why wring our hands now as all that winds down? Yes, interest rates are up (to historical averages), as is inflation for now (but that means the national debt is cheaper to service), and both are showing signs of going down a bit after a while.

If only. Sticking to the US, many may remember the US government hitting the debt ceiling recently. Most may remember them hitting it before COVID. There is absolutely no evidence that the debt is being wound down. The same is true in the UK, though we don't have a debt ceiling. I invite you to look at the UK money supply figures published.

The debt ceiling is a dollar amount hence eventually it will always be hit if for no other reason than that the dollars value declines because of inflation.
Although Andrew Jackson paid off the US debt in 1835 the more usual state of affairs is for the debt to increase in nominal terms with countries instead just aiming to reduce their debt/GDP ratio.

[Urbandreamer]

The debt ceiling is a dollar amount hence eventually it will always be hit if for no other reason than that the dollars value declines because of inflation.
Although Andrew Jackson paid off the US debt in 1835 the more usual state of affairs is for the debt to increase in nominal terms with countries instead just aiming to reduce their debt/GDP ratio.

Ok, so, why does inflation exist?

I seem to recall someone called Adam Smith explaining how things like pins got cheaper. Something to do with productivity improvements.
I wonder if there have been any since then and at what point things became more difficult and expensive to make.

Back to the US, it once suffered 28.77% inflation!
What! When? 1778. They had a civil war funded by fiat. Obviously a VERY productive time!

However inflation was probably a lot more in 1849. Wage increases of 515% etc.
https://coffeeordie.com/gold-rush-inflation-coffee

Similar events happened in Spain with the silver discoveries in the likes of Argentina (named after silver).

However inflation didn't exist to any significant extent for quite some time. Something to do with the difficulty in increasing the money supply when it entailed finding, digging and smelting gold or silver.

Wouldn't it be good if we had a currency that had a fixed base. Ooops. Sorry I should get off my hobby horse.

But honestly you can't simply assume that inflation is a given and can not be eradicated or controlled. Indeed isn't the BoE and the Fed instructed to try and ENSURE inflation of 2%. Why 2% and not 0%? After all are they not supposed to be in charge of regulating the respective countries money supply?

[scrumpyjack]

At one point in the 1970's the annualised rate of inflation in the UK reached 27% as I recall. What cost 3p at the start of the 70's now costs 100p.

The reason inflation targets are at 2%, rather than nil or 0.2%, is because economists think that will lead to higher growth, lower unemployment etc etc. and it is very convenient for governments

The problem is that inflation doesn't stay low when they debase the currency, as they always do in the end.

For inflation to stay low, when something rise in price sharply (oil, energy costs etc), other things need to fall in price to maintain a low inflation rate.
Unfortunately it doesn't happen and instead the overall price level rises above target.

Financially canny people have long realised that this means, if you borrow depreciating currency and buy real assets that are likely to at least maintain real value, you will make a LOT of money. So the best brains focus on financial manipulation rather than more productive things.

Less savvy people put their money in government stocks and see it steadily wiped out (my parents and grandparents generation)

[Gilgongo]

It is a concern because given that the US government spends $4 for every $3 they collect via taxation, they have no chance of running a balanced budget. Either you believe that the debt can continue to grow indefinitely - to 300%, 500%...? OR, you believe that it will, at some point stop growing.

No country has had a "balanced budget" since 1680 becasue that would destroy the economy. I found a quote on this from the economist William Vickrey that explains what I mean:

"Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level. Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses."

Ultimately debt is promise of future payment - if too many promises are being made that can't possibly be kept, and people really believe they can't be kept, then the backing of the issuing authority and the buying power of its promises is worth zero

Again, trivially true perhaps. Yet the keeping of the promise is entirely under govermment control. In terms of the servicing of interest on the debt, numbers are just numbers - there is nothing magically bad about big ones. Of course, if the US government doesn't raise the debt ceiling it would lead to a huge decline in the value of the US dollar, sky-high interest rates, and a massive recession. But that's not going to happen because the ceiling is a strategic pawn on a political chessboard about completely unrelated things like abortion, Ukraine and lordy knows what else the Republicans want to be angry about. If they want to burn down the world, well perhaps, but they know they would lose everything if they did.