Hummel: The US Will Default On Its Debt

DrunkenAsparagus said:

A public option plan would only put more people into a non cost effective government program. I also point out the problems with the tweaks, because I doubt that enough politicians in Washington have the balls to do that.

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Well, any program can be cost-effective provided that the premiums are high enough to cover the outlays. If that means the public plan isn't as good as the private plans, so be it. It should be allowed to sink or swim on its own merits.

As for tweaking social security...while I agree that it has become alarmingly difficult to make even the smallest tweaks, it would be much more difficult to overhaul the entire system. Look at what happened when Bush tried to do it in 2005.

Should I know who this hummel person is? Because I like, have no clue. At all.

Kandahar said:

Well, any program can be cost-effective provided that the premiums are high enough to cover the outlays. If that means the public plan isn't as good as the private plans, so be it. It should be allowed to sink or swim on its own merits.

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The thing is that this almost never happens. Look at Amtrak

Kandahar said:

As for tweaking social security...while I agree that it has become alarmingly difficult to make even the smallest tweaks, it would be much more difficult to overhaul the entire system. Look at what happened when Bush tried to do it in 2005.

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Tweaks would help, but a major change to the system is needed. SS in its current state is little more than a glorified ponzi scheme

Truth Detector said:

What other countries would those be? Germany, Britain and France? I think if one were to make an honest introspection, these countries are indeed headed for severe problems balancing the huge tax burden already being levied and the ability to continue their generous public welfare programs.

They have violent riots about every month in France. Imagine if that started occurring in the US?

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[ame=http://en.wikipedia.org/wiki/List_of_countries_by_public_debt]List of countries by public debt - Wikipedia, the free encyclopedia[/ame]

Japan and Singapore come to mind, both of their problems are largely due to weak exports rather than internal welfare problems. And both are over 100%. Sweden has very low (36%) and it has many of the same problems as Germany, Britain and France, suggesting it is not debt to GDP, but something different. Russia has a mere 6.8% and that country has problems.

The problem itself is not debt to GDP, it's what you spend it on as countries with low debt to gdp and countries with high debt to gdp yet have similar programs share the same problem.

I am horrible with economics so this is a very weak subject for me but I am under the impression that as far as the Obama stimulus package goes we borrowed serious gazoobies for it but in reality have spent only something like 50 million of it? If this is the case and the economy seems to be regaining on its own albeit slowly then wouldn't that mean that we would have a surplus at least in the sense of borrowed funds that either we could return to the countries that we borrowed it from or use to help out our own country in other ways? I do realize that regardless of using the money or not that huge interest payments are piling up on a daily basis but still even if we borrow the money but do not spend it does that mean that since Obama our actual debt has skyrocketed and we are in danger of defaulting compared to what it was when he took office?

Not worded very well but I hope somebody can understand what I am asking.

Moe

The US problem is not public debt, but private unsecured debt.. aka credit card debt.

PeteEU said:

The US problem is not public debt, but private unsecured debt.. aka credit card debt.

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You would of course be wrong again. But I would be fascinated to see details from you on how privately held debt is the BIGGER problem than the $12 trillion in debt the US will soon owe.

PeteEU said:

The US problem is not public debt, but private unsecured debt.. aka credit card debt.

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But aren't both of these debts deeply connected? People pay with credit cards but default. Companies and banks go broke because of personal debt defaults. Government borrows money to shore up failing business with borrowed funds from other countries rather than local businesses showing real profits to stay in business. Business uses bailout money to give more credit to private citizens who cannot really pay. private citizens default...............Rinse and repeat. True?

Moe

moe said:

But aren't both of these debts deeply connected? People pay with credit cards but default. Companies and banks go broke because of personal debt defaults. Government borrows money to shore up failing business with borrowed funds from other countries rather than local businesses showing real profits to stay in business. Business uses bailout money to give more credit to private citizens who cannot really pay. private citizens default...............Rinse and repeat. True?

Moe

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Yes and no.

The US growth has been driven by consumer consumption since almost forever.

This means that if the consumer is debt ridden, then that consumer either defaults or cuts spending down to repay debt and basically stay alive. That is not good for the economy.

This in turn is a problem for the over all economy because it needs consumer consumption to drive economic growth and keep jobs.

This in turn means that the government has to step in to save certain "too big to fail" companies/banks because of the fear of the cascade effect. Having major banks go bankrupt would be catastrophic for the economy. This has to be done by borrowing money abroad if there is no nest egg (which there aint in the US).

However the government has a hell of an easier time getting credit than the average consumer or even company, because the government has a revenue stream regardless of the economic situation. The consumer or company does not have that option.

But it all comes back to the consumer. Because of the high personal unsecured debt ratio by the American consumer and the fact that most US consumer "wealth" is tied to their home which has fallen in value considerably, then you have a problem.

For one, the consumer can not get a new loan on the house because the amount of debt already in the house is either close too or over the actual value of the house. They cant repay the loans because the average American had up to the crisis a savings rate of under 2%. They cant get more credit-cards because the companies are not spitting them out like candy any more and those that have credit cards and do pay off their debt are having their credit lines cut as the companies de-leverage. And they cant get new loans because they are not "credit worthy" any more since the standard by the banks has been changed.

If we look at the numbers.. by the end of 2008 the average American had credit card debt of 923 billion dollars or about 8300 dollars per every man, woman and child in the US. On top of that you have the secured debt (mortages) of almost 10.5 trillion dollars as the end of 2008. From 1996 to 2007 the average American home went up 125% in price.. and has since fallen by quite a bit.

This in turn meant that the wealth of the average American has fallen because most of the average American's wealth is tied to the home, but the debt has not fallen, nor the interest payments and so on. This is a dangerous cocktail, especially considering the lack of savings by the average American.

Now saying that since the crisis started the US saving rate for consumers has jumped by several 100%, which under normal time would be good, but in the situation we are in, it is not exactly good. Credit card debt is also falling, for the first time since 1956... which is also good and then again is not. I say this because, with every dollar saved or dollar paid back, that is a dollar not consumed to drive the economy, because the banks are no giving out loans based on your savings or paying back of debt.. so far any ways. And the more is saved and paid back, the longer the crisis in the US will last.

Now at some point you will reach a situation where personal debt is down considerably and savings are high, and the question is if the consumer will have the confidence to start spending again and the question is how long will that take and how big a causality list will there be.

No matter how you look at it, and does not matter how much :spin: and "fog of war" by the right wing, the engine of the US economy will be and has been the US consumer, aka the average American, and the average American is in big trouble debt wise on average, in a declining job market.. and that means less income, which means less spending/consuming which in turn means no growth and loss of more jobs. And all this means that the US government is forced to go out and loan money to keep it running and stimulate the economy in a hope that it will draw out the US consumer to spend. But the government debt has no real barring on the economy per say, especially compared to the debt of the consumer. The debt of the US only has a barring when the rest of the world see's the US as a problem and not as an opportunity, and that aint going to change any time soon. Plus the rest of the world has far too much invested in the US to let it happen.. at least for now.

But basically American's have been living beyond their means for over a decade and it is now coming home too roost. On top of that the government (state, local, federal) have not saved up during the good times to help pay off the bad times, and instead it has actually cut its revenue via tax cuts while increasing its spending.... a brain dead move... and now that too is coming home too roost.

And no it is not American bashing, it is the cold hearted truth.. and I would say the exact same thing about the UK because they are far worse off than the US as it stands now.

Part of Russia's plan in the cold war was to run up massive debt and then default.

Is there any doubt that China is our enemy right now ?

I am just fine with repudiation of only those treasuries held by Chinese.

They can consider it a fine for ramming our surveillance aircraft over intl waters.

moe said:

I am horrible with economics so this is a very weak subject for me but I am under the impression that as far as the Obama stimulus package goes we borrowed serious gazoobies for it but in reality have spent only something like 50 million of it? If this is the case and the economy seems to be regaining on its own albeit slowly then wouldn't that mean that we would have a surplus at least in the sense of borrowed funds that either we could return to the countries that we borrowed it from or use to help out our own country in other ways? I do realize that regardless of using the money or not that huge interest payments are piling up on a daily basis but still even if we borrow the money but do not spend it does that mean that since Obama our actual debt has skyrocketed and we are in danger of defaulting compared to what it was when he took office?

Not worded very well but I hope somebody can understand what I am asking.

Moe

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There is no short answer, so here is my attempt to answer your question.

The deficit is the difference between projected revenues, before revenues are fully collected and projected expenditures.

You are right in that if all the money isn't spent, it will not be added to the final deficit numbers. But wrong in thinking that it would amount to a "surplus" because revenues are in decline right now and entitlement spending is forever increasing. Therefore, revenues will not match spending and result in deeper deficits.

On top of the reckless spending we are seeing, there is the matter of not having the tax revenues to pay for the spending which results in further borrowing, which is called the National Debt. That number is rapidly approaching the $12 trillion mark. Anyone doing simple math can quickly estimate the HUGE amount of money it takes to pay the interest in such debt which is the third largest expenditure of the US budget behind social welfare programs and defense.

http://www.whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf

There are three ways politicians can deal with this type of deficit spending; (1) they can increase taxes to cover the anticipated spending; (2) they can CUT programs to balance the spending; or what is currently happening in California (3) they can play accounting tricks in an effort to give the appearance that they are doing something.

What we have currently is a Democrat majority which is reluctant to raise the taxes necessary to cover these pork barrel projects for purely political reasons and for the same reasons, refuses to cut programs. Therefore you have the accounting game of reducing the looming disaster by predicting economic growth and savings that will never ever materialize.

This is the reality we are currently living with. In addition, when the Government recklessly spends our hard earned tax dollars and is desirous of spending ever greater amounts, the end result is that the Government is now competing with private industry, the ones who REALLY create growth and GDP, for scarce capital and thus you end up with higher interest rates and less investment.

The end result of such irresponsible spending is not economic recovery, but rather economic stagnation, higher unemployment rates, less investment and continuing declines in tax revenue.

It is my prediction that this Presidency will make the last disastrous one, the Carter years, look like a cake walk.

Voidwar said:

Is there any doubt that China is our enemy right now ?

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Yes. They are a rival, not an enemy.

Voidwar said:

I am just fine with repudiation of only those treasuries held by Chinese.

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That's not how the global economy works. This is both impossible and undesirable. If we defaulted on our Chinese debts, is there any doubt that our credit rating would go to **** with the Japanese, Britons, Brazilians, Russians, and all of our other creditors as well?

Kandahar said:

This is both impossible and undesirable. If we defaulted on our Chinese debts, is there any doubt that our credit rating would go to **** with the Japanese, Britons, Brazilians, Russians, and all of our other creditors as well?

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Perhaps you don't understand what I am saying.

Of course we can surreptitiously document who is holding what and when.

Of course we can simply announce the "serial number" of those particular securities as invalid without announcing all bonds / securities / notes are invalid. If we are wrong about the "chinese-ness" of a few holders, oh well.

The chinese, in particular can be targetted for repudiation, with all the diligence and accuracy we care to use. Ain't Sovereignty a bitch ?

Voidwar said:

Perhaps you don't understand what I am saying.

Of course we can surreptitiously document who is holding what and when.

Of course we can simply announce the "serial number" of those particular securities as invalid without announcing all bonds / securities / notes are invalid. If we are wrong about the "chinese-ness" of a few holders, oh well.

The chinese, in particular can be targetted for repudiation, with all the diligence and accuracy we care to use. Ain't Sovereignty a bitch ?

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The point is that if we did something like that, our British/Japanese/Brazilian/Russian creditors would worry that we might do the same thing to them, and adjust our interest rates and credit rating accordingly.

This is not Zimbabwe. We pay our debts.

Kandahar said:

The point is that if we did something like that, our British/Japanese/Brazilian/Russian creditors would worry that we might do the same thing to them

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Why, do those nations have the same history of working with our enemies and downing our planes ? Stealing our intellectual property and sending us lead covered toys ? To put your whole point away for good, WE CAN single out one nation, and all nations already know it.

I doubt the rest would worry much if we blatantly announced what we were doing to China and why.
Further, so what if they do ? Ain't Sovereignty a bitch ?

Voidwar said:

Why, do those nations have the same history of working with our enemies and downing our planes ? Stealing our intellectual property and sending us lead covered toys ? To put your whole point away for good, WE CAN single out one nation, and all nations already know it.

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Those other nations would view that as a cheap pretext to avoid paying our debt...and they'd be right. What happens if any other nation does something in the future that pisses the United States off, as they invariably will since they have different interests? How could they be sure we wouldn't do the same thing to them, and why wouldn't they take that into account when determining our credit worthiness?

Wasn't our total debt highest during the Reagan years? As compared to our GDP?

sazerac said:

Wasn't our total debt highest during the Reagan years? As compared to our GDP?

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I think our debt-to-GDP ratio was the highest its ever been at the end of WWII...

sazerac said:

Wasn't our total debt highest during the Reagan years? As compared to our GDP?

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According to this chart which I believe to be accurate, it was highest under Truman and then continued to rise with Clinton before it started to decline then increase again with Bush II.

But under Obama, it is now climbing to levels that rival the Truman years and may even exceed them if the economy does not start making a comeback.

Now I must ask you, was there a point here?

U.S. National Debt Graph: Since Great Depression