During the end of the Clinton Administration, people were seriously thinking that the national debt could be totally paid off in the near future. One of my friends on Facebook recently posted a link to this article.
We are a long ways from that reality now.
Besides this dramatic change of fortune, the article brings up another concept; the use of national debt as an investment tool. Some economists, in the government, were starting to worry toward the end of the Clinton years that if there was no national debt, the government wouldn't be selling many bonds so there would be less of the "super secure" bonds for investors to buy. Money managers might have to park their funds in more risky investments, such as stocks, if the government didn't need to sell so many bonds.
Don't we wish we had that problem now?
It may not be seen as a serious problem compared to the out of control government debt of today, but less treasury bonds on the market for purchase would mean that investors would need a different strategy. The "safe haven" US Treasuries would not be as prolific as they are today.
Looks like the national debt has at least two purposes.
One purpose, of course, is to help fund the government when it is spending more money than taxes bring in. That's the purpose which most people think about.
Another purpose of national debt is to provide a safe haven for investors to park their money in US Treasury bonds.
This second purpose may play a part in enabling the national debt, to some extent.
Basically, it's all that money out there needing to be invested in safe bonds. That huge pool of money is part of the reason why interest rates have been low in recent years.
There's money coming from many sources. For instance, there's money coming from countries like China who run large trade surpluses, thus accumulating lots of cash to invest.
Another source of money is institutional investing such as retirement funds. This would also includes the Social Security Trust Fund which has created a vast source of revenue for purchasing of federal bonds.
Another source is the wealthy elite around the world. Rich folks with lots of money that they wish to hold onto.
All this capital, which is looking for safe parking, may be one of the byproducts of income disparity. As the rich get richer, they have more and more money to store. In recent times, this money has tended to favor safe haven type investments; like US Treasuries, rather than more risky investments such as stocks. It's often called the flight to safety.
Ironically, all this money has contributed to low interest rates and easy government borrowing. It can be said that this money has helped to "enable" government deficits.
If this money was not so readily available, governments, and the political climate that drives them, would have to behave differently. For instance, if it wasn't so easy to borrow money, the politics of conservative tax cutting folks might not be so popular. It's likely that tax cuts would have been less popular if they lead directly to cuts in popular government programs such as Medicare or veterans benefits.
Instead, we have been able to have tax cuts without serious consequences in terms of cuts to things like Medicare. Now, some of these cuts are being proposed to try and balance the budget and this is creating a political reaction. Notice popular reactions like Occupy Wall Street.
For years, the pool of money that is available for borrowing has enabled tax cuts at the same time as spending for things like two foreign wars and the Medicare drug benefit (Medicare Part D). If it wasn't so easy to borrow the money, we would have either raised taxes to pay for these things, or figured out how to live without these things.
It is easier to have never had these things in the first place than it is to take them away after we have already become dependent on them. It seems like it is harder to kill a program that people have become reliant on than it is to have never started the program in the first place.
Borrowing has enabled us to "have our cake and eat it too." Low taxes and the programs such as Medicare that people have become dependent on.
Part of this problem is related to the income disparity around the world. So much wealth among the rich that needs to be parked, thus enabling governments to spend above what they tax.
Ironically, safe haven investing is now leading to possible default. Governments that are so far in debt that paying off this debt is impractical. Just look at Greece right now. USA and other nations may not be far behind.
This huge pool of money that's looking for "safety" has also helped to enable bad banking practices in the private sector. Too much money floating around can lead to inflationary bubbles in the economy, such as the housing bubble.
This problem wouldn't be so bad if the economy was growing. If we were growing into a new frontier, for instance, money could be invested to create new wealth. Debts could be paid off from the ever increasing wealth.
For growth and creating new wealth, we currently face the problem of not having a frontier. The US has already tamed its western states. Environmental restraints make growth more difficult all around our limited Planet Earth.
To some extent, new technology can help to bring growth which is not necessarily dependent on a spacial frontier. Back in the 1990s, it can be said that we were able to grow the economy into cyberspace. New technology of the Internet was one of the things that blessed the Clinton administration with a growing economy.
These days, even the growth into cyberspace does not seem to be enough. Growth is stagnant at best. This can mean the formation of inflationary bubbles from capital, rather than real growth.
So we have had a lot of inflationary bubbles in the private sector and also a rush to park extra money in various instruments of government debt.
Public sector investment can grow the economy as well. For instance, investing in infrastructure can lead to economic growth. Investing in things like an educated workforce, better transportation or research and development comes to mind.
The problem is, much of current government investment is not in infrastructure. Instead it is in things like entitlements. Entitlement spending is things like people's retirement benefits. This type of spending is less likely to return increased wealth on the investment so future prospects for paying back the money are less likely.
Basically, there's been too much money available to borrow. More money than the recent growth of the economy can account for.
Higher taxes on the wealthy may be one step to help us get out of this situation. Seems like the wealthy have not wanted to pay enough taxes, but they, and the financial practices that so many of them support, have been more than willing to lend money to governments. Instead of paying taxes, they invest in government debt.
Maybe the wealthy, as well as the rest of us, should have paid more taxes to begin with. Paid more taxes rather than loaning out our money to governments and other entities that are likely to tax us anyway, as we "take a haircut" when they default.
Hard default is kind of a radical prediction. It's more likely that there will be some sort of "soft default," like when central banks and governments have to print money to meet debt obligations. This isn't quite the same as a true default, but it does lead to devaluation of currencies. It's the process of economies paying off their debts by basically inflating their way out of debt.
Economic growth could avoid the need for even a soft default, but the prospects of the kind of growth that would be needed to pay off this mountain of debt are daunting.
New technology and innovation; we need you to help us create growth. We will most likely also need to swallow hard and realize that much of this debt will not be paid back.
It's a case of "pay me now or pay me later." Wealthy folks, as well as the rest of society, have not wanted to pay high taxes, especially in USA, but people have been willing to park that money in government debt. Some of that parked money may turn out to be a tax in disguise.
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