I've decided that if I've put the time and effort into writing something moderately interesting, I may as well post it here. Recently I received an email from an acquaintance that suggested with urgency and confidence that because of the current debt financed federal deficit and the associated cost of interest the US economy will probably collapse within the next decade. What a terrifying prospect! For my own peace of mind and some hope of bringing another perspective to the grim proposal, I decided to do my own analysis.
First, a few items of business. I'm not an economist by a long shot. The extent of my economic training is an elective course titled Economics as a Social Science, in which I got a C. Next, as clarification, the federal deficit and the federal debt are two distinct things: the deficit refers to the difference between expected yearly income and expenditure in the government budget, which is usually what's in the news and also is typically "in the red," otherwise we'd know it better as the federal surplus. The federal debt, on the other hand, is the total accumulated debt, which has been in the red for the majority of the history of the US. According to the US Debt Clock, our national debt is currently very near 13 trillion dollars. This is an unintelligibly large number, obviously, but it's all relative. One of the more useful perspectives of this otherwise ambiguously huge figure is as a percentage of Gross Domestic Product (GDP).
Find the relevant bit of the email and my response after the jump...
First, the part of the email I responded to:
"The 2009 Federal deficit is $1.42 trillion. The average interest rate of 3.2% on this new debt is an $45.4 billion. This means that we need to cut spending or increase taxes to fund this new debt. More likely the interest payments will be added to next years deficit.Most of the Federal debt is funded with short term bonds. During the Carter administration government bonds paid an interest rate of 15%. At this rate the annual interest payment on the 2009 deficit would be $213 billion (payments on the debt would be impossible)."
...And here's my response. Please note that there was no intention of offense in my response, just a different perspective:
The federal debt as a percent of GDP is at the higher end of the range throughout the history of the US, but it's not at its highest. We don't necessarily need to raise taxes or cut spending, the GDP of the country could rise enough for the increase in existing taxes to cover the new debt. I would like to think that involved in the calculus for the feasibility of increased debt financed expenditure was an involved probabilistic estimation of the impact the spending would have on GDP. My knowledge regarding the fiscal management of the largest economy in the world is at a bare minimum, but from information like that here and here and a little bit of logic I don't see a reason to to start panicking just yet. I have sort of a half joke/half serious idea that the good portion of the federal budget that goes to the military is in part a measure to dissuade any country from getting too pushy about debt collection. More importantly though, the world economy is so tied up in the performance of our own that essentially nobody can pull the trigger on our debt without shooting themselves in the process. Certainly there are things that could potentially bring the whole of human society on earth as we know it to its knees, rapid onset of peak oil prices for one, but I think that in comparison public debt practically isn't a threat to economic functionality. If the influence of the dollar continues to weaken in countries worldwide, I imagine the importance of managing public debt would grow inversely proportionate, but approximately 50% of our debt is held by the 2nd (China) and 3rd (Japan) largest economies making such a prospect a distant one, particularly given that these 3 economies comprise about 38% of the world GDP. Other than the possibility of a slow decline, a naive examination seems to indicate that the forced collapse of the US economy by debt collection demands would most likely collapse the financiers themselves. In effect, the most involved countries can't even refuse to lend us more since doing so would be an exceptional risk to their own interests; indeed I doubt that any country would fare well after the collapse of the US economy and the vanishing of ~20.7% of world GDP with it. Just the same, I intuit that the worlds largest economies would prefer not to lose that kind of position, thus being less likely to ignore the substantial risk the instability of our economy would present than to take the much smaller risk of helping to stabilize. Logically then it seems to follow that until financing us becomes riskier than the collapse of our economy, they will continue to finance us. Furthermore it seems to me as though at least these two countries are so involved that an adequately massive shift in risk is highly improbable. Mutually assured destruction is a precarious line to walk, but it works pretty well.
While I wouldn't say I trust economists nor the folks at the treasury (the assumption of competence is a dangerous one), I must say that they probably have a much better understanding of the situation than I ever will. At the very least, it doesn't seem to me that behaving as though economic collapse is imminent will do much at all to prevent it from happening--the monetary system is, after all, a faith based system, and I have my doubts that any other way could possibly enable the incomprehensible rate of technological growth we've seen over the past millennium. I see the economy as a force of nature: maybe it will set humans back a hundred years some day, but I'm led to believe that an event like that is as timely and predictable as a major pandemic, meteor impact, gamma ray burst hitting Earth from a distant supernova, or the spontaneous generation of life successful enough to persist for 3.7 billion years. I suppose that if you're confident enough in your analysis of the future you shouldn't be too worried, given that you ought to be able to make a few choice investments (be it guns, food storage, foreign currency, etc.) that will see you come through the other side as fantastically wealthy. That makes me think, if the willingness of one to risk to their resources isn't a test of confidence, I don't know what is. Personally, the only thing I'm willing to bet the farm on at this point is that everything will continue to be crazy and unpredictable for better or worse, though lately I've been inclined to optimism, economics be damned.