So tonight, as a result of a discussion with my neighbor Hoss (He reads, but doesn’t write… YO DUDE!), I did some research on the National Debt.
I ran across the National Debt Clock, which keeps a running tally of our current debt. I owe $27,000 today. As does my wife. As does each of my kids.
I have four kids.
So what does this mean? This means that I owe a total of $162,000 to domestic and foreign interests as a result of the spending decisions of my representatives in Washington.
That’s a pile of money. I wonder if I could just pay off my share and opt out of taxes?
But seriously, what is to be done about this? We are talking actual, cold, hard cash which our government is in debt for. Since the government of the USA is us, what are we gonna do about this pile of money we owe? $27,468.48 is a big chunk of a working year for most of us. What will be done in our great-grandchildren’s day when they will be born in debt to the tune of 10 years of their working life?
In Reality
Isn’t this idea of “debt” a little less binding than the debt I currently owe my mortgage company? Hasn’t the US forgiven tons of debt to European and Asian countries (and probably African as well, but that’s pure speculation)?
Also, isn’t this a statistic that’s a little sketchy? For one thing, the largest chunk of the debt is intra-government debt, meaning what one part of the US gov’t owes another.
I think as a country, America gives a lot. Let’s see what happens in the world if some foreign country tries to cash in and we stop sending aid.
My $.02 Weed
One hand robs the other
Federal debt is a large portion of the debt, but that’s still real debt. For example, Social Security takes in more than it needs every year. If it buys Treasury notes, it’s lending money to another equally frivilous pursuit, such as building nature walks in Fargo, ND. It’s still debt, in that we’re spending money elsewhere, but SS will still need that money in cash (not promises) at some point in the future.
It’s interesting to think about the impact of a default on Treasury notes. I’m sure someone smarter than me has wrestled with this, but as it stands, US debt is defined as risk-free. Thus, all risk-adjusted investments (such as your mortgage) are based on a premium relative to US Treasuries. A lot of the financial world runs on models which presume the US will never default. And, as the owner of the printing press, the US really doesn’t need to; it just needs to print an $8T bill! (Pray you don’t have much in savings when that happens.)
Economics Majors Pat Attention!!!
So for all you in the know about economics, what would happen if the US printed a bunch of money to cover the debt?
I know roughly that it would devalue the dollar, but since money isn’t backed by anything solid anymore (i.e. gold, silver, etc), I’d be interested to hear what would happen and why.
My $.02 Weed
A Bad Attempt
Weed, dude, I keep missing your calls! I’ll try ringing you tonight.
Here’s a bad attempt at an explanation…
You have a credit card. It has a limit. You run the credit card up to that limit. You make the minimum payments each month. The credit card company places a risk score, or credit rating, on your ability as a customer to make payments on time. Meanwhile, your payments each month are only paying off the monthly interest fee. Then, you exceed the credit limit. Your small monthly payments are then going to cover only the monthly interest fee plus the penalty for exceeding the credit limit. You really aren’t making a dent into the actual purchases on your monthly statement.
To resolve the issue, is it smart for the credit card company to simply raise the credit limit and let you continue to run up more charges?
The U.S. owes a lot of money to other countries. I believe the way to restore the export/import balance and valuation of the dollar is to lead the world in renewable energy, medicine and info tech. The U.S. needs to base its competitive advantage on innovation, rather than materials goods and manufacturing, because it’s obvious that the standards of living in this country has raised the relative wage acceptance beyond any competitive stance. It’s cheaper to find someone in India prepare your tax return…
No economist, but…
One theory that I’ve come across in my travels is the quantity of money equation:
MV=PT
where M = Amount of money V = Circulation factor (amount available at any time) P = Price level T = Transactions.
The current M for US$ is $575B. I don’t know any of the other factors, but if M goes to $8.575T, P must also rise by 15. (Is there a reason to see T or V drastically changing?) So, average-Joe’s take home purchasing power would drop from say $45,000/yr to $3,000/yr. I’m sure there are a lot of wrinkles to the model that I’m missing, but I’d wager that’s within an order of magnitude. Takes you back to post-WWI Germany, with people running to spend their paychecks during lunch before eggs went up another billion marks in the evening.
Bernanke warns US of Fiscal Crisis
This week Ben Bernanke used the words “fiscal crisis” when describing the impact of soaring Social Security and Medicare costs on the future US economy. While his comments question the need for entitlement program reform, the warning was about the threat to U.S. prosperity. He said recent improvements in U.S. trade accounts were “the calm before the storm.”
People question what a serious impact to the US standard of living would look like. A housing market free fall, 15%+ unemployment rate, and riots in the streets would be preceded by a default on Treasury notes.
Thank you Bush administration!
Greeaatt
Just when I thought the nutty”ness” of things were leveling out.
Are there projected timeslines to go with the projected catastrophies?
—->> I think as a country,
—->> I think as a country, America gives a lot. Let’s see what happens in the world if some foreign country tries to cash in and we stop sending aid.
The average percentage of the budget that a first-world country devotes to foreign aid is somewhere between 5-10%. The percentage of the budget that WE give to foreign aid is around 0.5%.
Yes, that’s still a @*#$-load of money, but it does make our priorities look more than slightly askew.
Also, do you mean that we’d stop sending aid to a country that tried to cash in? Because I’m pretty sure that the ones who we owe money to are not the ones who need our help.
Make love, not war
%’s don’t feed starving children, $’s do. At more then double the next largest giver, the US is the largest contributor to foreign aid, period. The fact that we’re also the biggest economic engine ever known to man should not be counted against us. Would you rather get 50% of my income, or 5% of Steve Jobs’s?
More interesting perhaps is how much aid we give to Israel. As a key ally in a sensitive geopolitical region (and, better still, a democratic key ally focused on protecting the rights of its citizens) I am all for helping them out, but I was suprised at the amount of donations, particularly on a per capita basis. I’m sure this pisses off terrorists to no end…I chuckle to myself just thinking about it. The more of these sitting in the Negev, the better.
That’s Funny
That’s funny, I thought I brought this up less than one month ago…
http://barnson.org/node/860
New site, slightly different take
Yeah, I guess it’s pretty closely related.
Now I get why Slashdot editors frequently post dupes.
—
Matthew P. Barnson
Idea
I’ve got the perfect idea: we sell to China all our old used tires. YES. It’s only a matter of time until all 1B+ of them are driving around their newly-paved roads in their razzed Hyundais.
The Latest
I think the government should start listening to my used tires idea, because it isn’t getting any better…another blow to the national debt…
2/10/2006 — AP — The U.S. trade deficit soared to an all-time high of $725.8 billion in 2005, pushed upward by record imports of oil, food, cars and other consumer goods. The deficit with China hit an all-time high as did America’s deficits with Japan, Europe, OPEC, Canada, Mexico and South and Central America.
Trade Deficit Getting Worse
Published 03/14/06 – StarTribune
America’s deficit in the broadest measure of international trade surged to an all-time high of $804.9 billion last year as the country went deeper into debt to foreigners.
Fed Warns U.S. Living Standard At Risk
So here’s some macro data I was finally able to compile, thanks to the Bureau of Economic Analysis. The current account deficit is the annual trade deficit, which includes things like goods, services and investment income traded across our border.
U.S. Current Account deficit: 2000: -$416.0B 2001: -$389.5B 2002: -$475.2B 2003: -$519.7B 2004: -$668.1B 2005: -$804.9B 2006: -$950.0B (projected)
Since 2000, the U.S. trade deficit has more than doubled. We are now the first industrialized nation to run a deficit at this size, at 6.4% of economic output. This has gotten so bad that the new Fed Chair, Ben Bernanke wrote a letter to the Senate Banking Committee this week stating, “I am quite concerned about the intermediate to long-term federal budget outlook…the prospective increase in the budget deficit will place at risk future living standards of our country.”
I am glad to hear that a bunch of Senators are en route to China in support of their upcoming legislation to put high tariffs on Chinese imports as a means to level the playing field. Since the Yuan isn’t getting pegged properly against the dollar, the U.S. is going to put tariffs on imports to, in their words, “make it fair.
Thank you Sam
Thanks for compiling that information in an easy-to-digest format, Sam. I think the time has come to pass a balanced-budget amendment to the Constitution, with an eye towards 4-year balance, or maybe 8 or 10, rather than year-to-year so that we can deficit-spend when necessary, but tighten the belt over the long-term.
In the long run, bread and circuses are going to kill us if we don’t stop. But, then again, Rome had a really long run before it finally died…
— Matthew P. Barnson – – – – Thought for the moment: A man was griping to his friend about how he hated to go home after late card games. “You wouldn’t believe what I go through to avoid waking my wife,” he said. “First, I kill the engine a block away from the house and coast into the garage. Then I open the door slowly, take off my shoes, and tiptoe to our room. But just as I’m about to slide into bed, she always wakes up and gives me hell.” “I make a big racket when I go home,” his friend replied. “You do?” “Sure. I honk the horn, slam the door, turn on all the lights, stomp up to the bedroom and give my wife a big kiss. `Hi, Alice,’ I say, ‘How about a little smooch for your old man?'” “And what does she say?” his friend asked in disbelief. “She doesn’t say anything,” his buddy replied. “She always pretends she’s asleep.”
Peeling back the onion
There are other views on how well these numbers reflect the actual flow of resources in the world (Answer: not very well). Here is one from Michael Mandel. The basic premise is that intangible creations (software used to fall into this category) are not considered assets in the same sense as tangible creations. Thus, they do not enter into traditional economic models.
The author blogs, providing more insight into reactions to the first article.
Informative…
Very informative and thought-provoking, though I’m not entirely convinced by his arguments. Time will tell whether he’s right, I guess.
—
Matthew P. Barnson
The System Is Right On
I appreciate the posting of other opinions on the state of the current deficit and national debt. I am also disappointed that Chris Farrell was a part of that writing. I love listening to him on NPR, and now I may be forced to reevaluate his opinions since he was involved with that idiotic article.
To summarize, this article feels that the U.S. is in better shape than stated by the Bureau of Economic Analysis because the government statisticians don’t calculate for the “billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today’s global economy.
Kicking the sleeping dog
Economics aside, I think the accounting explanation here is doing a disservice to our fellow bloggers. Let’s clarify this further.
The above sentence doesn’t really make sense. A future benefit, within the company’s control, is an asset. If an expenditure is expected to create future receipts, it should be capitalized, not expensed. Building a factory is an investment in future sales. Transforming raw materials into finished goods is an investment in future sales. Neither of these things is booked as an expense. Rent, administrative salaries, depreciation, etc. are expenses.
The reason R&D (along with brand-focused advertising) is an expense rather than an asset is that it’s intangible. That’s the only reason. Assets (in the US) are booked at acquisition cost, and impaired based on future expected cash flows arising from the use of the asset. That’s hard to do with an intangible, but that doesn’t mean it’s any different from a factory in an economic sense. One need look no further than FASB guidance on intangible assets, namely, that internally developed intangible assets are not on the balance sheet but purchased intangible assets are. This means that if “Coke” is worth $30 billion dollars, it’s not on Coca-Cola’s balance sheet, but if it sold the brand to Phillip Morris, it would show up. It’s the same asset, either way.
Please…
Hey, something we agree on! Bush should have killed Medicare/Medicaid/Social Security with his “conservative” majority in Congress. Instead, they outspent the “liberals.” But you can count on the next administration to set all new records, of course.
Economics Aside?
Yikes! You’re opening up a post on an economic thread writing “economics aside?”
I absolutely stand by my words. It’s all an investment in future sales…because sales and growth potential are what attract investors and makes economies go forward. Investment Income flows to an economy because of growth and growth potential. I’ve never sat in a pitch meeting and said, “Don’t worry about product development being steady at 75% of sales, because we’ll always get to capitalize the costs and bring the losses forward on future returns.” I spend time figuring out how my business’ various COGS and materials can best benefit cash flow through optimal capitalization scheduling, but this isn’t what pays the bills. Everything is an expense and an investment in future sales.
Your post is out of context, in my opinion. For that matter, I’m seeing a trend. You brought in an article that claims to invalidate the system in which the U.S. economy is measured. Then you tried to invalidate a poster by nitpicking at a statement. I’m not buying it — the U.S. economy is in a bad place, it’s been deteriorating on the Bush administration’s watch and no amount of illusional gadgetry can confuse people when interpreting the metrics that measure the economic performance of our country.
Trend-spotting
Well, when the discussion changes to accounting, what do you expect?
Any time I’ve interacted with VC’s, the discussion about company value has been around future cash flows. In that sense, capital expenditure and R&D expenditures are equally unattractive in the short-term. But an expense is not necessarily an investment in future sales (COGS on discontinued inventory, just to name an obvious example.) Ergo, there is something economically different about investing in R&D and paying rent, both of which are accounting expenses, but one of which is clearly creating an intangible asset (savings, in essence).
As for context, you seemed to me to be pretty clearly trying to debunk the article authors by using (among other things) accounting ideas. Those accounting rules are not tied to economic reality, and you were misusing terms anyway. If you don’t think words have meanings (or that clarification of definitions is nitpicking), then you probably shouldn’t use them. As a great woman once said, “Judge, and expect to be judged.”
The real Budget Deficit
Just in case you thought the fallout from Enron, Worldcom and MCI cleaned up all financial malfeasance, I found it jaw dropping that an auditor team from the U.S. Treasury reported that the Legislative branches haven’t been sticking with GAAP rules when presenting their deficit figures.
http://www.usatoday.com/news/washington/2006-08-02-deficit-usat_x.htm
Yes, those pesky auditors came in and said that the Bush admin’s -$318B official deficit was really -$760B. :jawdrop:
Our government was just caught hiding behind crooked-books.
Debt Clock has run out of digits
NEW YORK (AP) — The National Debt Clock in New York City has run out of digits to record the growing figure…
EDIT by matthew: Moved to new post: http://barnson.org/node/1717