03 December 2007

$1 Million a Minute (After a Few Years it Adds Up)

Every minute, the national debt increases by another million dollars. The debt was only $5.7 trillion when Bush became president and will be $10 trillion when he leaves office. Last year, interest payments totaled $430 billion, behind only Social Security, Medicare, and Defense Spending.

There is a misconception that conservatives find this abhorrent, given that it is a sure sign of fiscal mismanagement.

Yet the debt does two things that conservatives like. One, it provides guaranteed money to people with money. If you are an individual worth $20 million, you are probably more anxious about losing your money than getting an annual return of 10%. Treasury bills are a wonderful way to maintain wealth. (At least in dollar terms.) Debt that generates regular payments to people with wealth isn't exactly abhorrent to conservatives who are eager to preserve the status quo.

Two, debt forces the government to make interest payments, a portion of federal spending. $430 billion in interest payments crowds out about $430 billion of spending that could go into wasteful things like education, transportation, research into alternative energies, or helping the poor. Making the government commit to interest payments is one means of ensuring that the government makes fewer new commitments.

Liberals incentive to run up debt is more obvious. It's a way to get new programs without forcing anyone to pay for them.

Liberals and conservatives alike have made their peace with annual deficits and the resultant growth in debt. On this count, I don't necessarily fault them. Debt is, in fact, neither obviously good or bad. What determines whether or not it is sustainable is whether the money you're paying, say, 5% for is making you, say, 10% or 2% in return. If the money costs you more than it is worth, the debt is unsustainble. If the money costs you less than it is worth to you, the debt is sustainable.

This brings us to the distinction between investment and spending. In fact, even a deficit of half a trillion dollars would not automatically be a bad thing if that money were spent - at least in part - on things that enhance productivity, generating returns that could easily repay such debt. It is one thing to go into debt because you're buying too many shoes - it is quite another to go into debt because you're financing a start up you hope becomes the next FedEx or Panera, or, at the national level, financing a new transportation system that alleviates dependence on oil.

The worst part about our debt is not that we've incurred it. The worst part is that we're incurring this massive debt with no real goal or expectations of it generating any kind of return. That, like so many things about our modern policy, is unsustainable.


Anonymous said...

Borrowing power is finite: at some point the piper must be paid. Likewise, the ability to print money is finite: at some point the american people will no longer believe in the buck. The Denver mint is so sure of this, they are already minting the new coins (Google "amero coins arrive").

An annual return of 10% is going backwards: independent calculations of USM3 (nowandfutures.com and shadowstats.com), or the largest measure of the US money supply, have it growing at 15-17% - that is hyperinflationary and unsustainable for economic stability.

Ron Davison said...

I had not seen the data you mention. M3 is growing at 15 to 17% a year? Wow. That alone would explain the fall in the dollar, to say nothing of the trade and government deficits.

Life Hiker said...

Right on, Ron! "What you spend it on" is important.

My old economics professor pointed out that military expenditures have a super-high potential for being useless. The only benefit from a lot of military spending is the rather illusive benefit of "protection". When you pay a soldier and there is no country-threatening war, he has really produced nothing of direct benefit to our economy. When you buy a tank and it becomes obsolete, it is a total waste.

Now, as an ex-officer, I appreciate the value of having a military to protect us. However, one might wonder why we need to spend more than the rest of the world combined for defense. Much is wasted, and the Iraq war is the biggest waste of all - a war that never had to be fought.

When our economy is in dire straits sometime down the road, we will remember George Bush and his massive contribution to our pain.