September 12, 2023
Dear Friends and Family,
The major reason for the decline in recent empires as well as the Roman Empire has been economic troubles. Running out of money in the case of Rome and losing reserve currency status is the case of the Dutch Gilder and the British Pound.
This segment first analyzes the economic health of our country via three measurements: Debt-to-GDP ratio; Interest Bite (how much is the debt service taken out of the federal tax receipts); and Government Spending-to-GDP ratio. Unfortunately, we are not in good shape on any of the three and projections are in the wrong direction.
Second, the excerpts discuss the importance of the country’s creditworthiness. The author states there are two indispensable requirements for sustaining creditworthiness: (1) continued robust growth of the nation’s economy, and (2) continued political stability. It was written in 2015 and we have faltered on both measures significantly in the last three years.
Our current status, as reported in segment 9 and verified by our second credit rating downgrade in the last 12 years, puts in play the confidence foreign governments have in the long-term stability of the U.S. dollar. That creditworthiness doubt affects not only our ability to find investors to continually finance our huge debt but also the use of the dollar for international transactions and investments throughout the globe. The U.S. has had the good fortune since World War II of foreign governments confidence in the stability of the dollar to make it the reserve currency most often used globally. Loss of that status historically has resulted not only in economic chaos for the country but also loss of power to influence geopolitical aspects of the world. Maintaining the reserve currency status is, in my opinion, the number one priority for the country, without doubt. Yet, it is hardly mentioned by the political forces today, undoubtedly because the reserve status of the dollar is viewed as sacrosanct which it is not.
Also included in the excerpts is a very interesting perspective on the accounting system limitations for Congressional analysis and action which I find extremely troubling. But it could be a potential game changer if fixed and utilized. Also included is a compelling argument for not having a Balanced Budget Amendment given the accounting system limitations.
Happy Learning,
Harley
Dear Friends and Family,
The major reason for the decline in recent empires as well as the Roman Empire has been economic troubles. Running out of money in the case of Rome and losing reserve currency status is the case of the Dutch Gilder and the British Pound.
This segment first analyzes the economic health of our country via three measurements: Debt-to-GDP ratio; Interest Bite (how much is the debt service taken out of the federal tax receipts); and Government Spending-to-GDP ratio. Unfortunately, we are not in good shape on any of the three and projections are in the wrong direction.
Second, the excerpts discuss the importance of the country’s creditworthiness. The author states there are two indispensable requirements for sustaining creditworthiness: (1) continued robust growth of the nation’s economy, and (2) continued political stability. It was written in 2015 and we have faltered on both measures significantly in the last three years.
Our current status, as reported in segment 9 and verified by our second credit rating downgrade in the last 12 years, puts in play the confidence foreign governments have in the long-term stability of the U.S. dollar. That creditworthiness doubt affects not only our ability to find investors to continually finance our huge debt but also the use of the dollar for international transactions and investments throughout the globe. The U.S. has had the good fortune since World War II of foreign governments confidence in the stability of the dollar to make it the reserve currency most often used globally. Loss of that status historically has resulted not only in economic chaos for the country but also loss of power to influence geopolitical aspects of the world. Maintaining the reserve currency status is, in my opinion, the number one priority for the country, without doubt. Yet, it is hardly mentioned by the political forces today, undoubtedly because the reserve status of the dollar is viewed as sacrosanct which it is not.
Also included in the excerpts is a very interesting perspective on the accounting system limitations for Congressional analysis and action which I find extremely troubling. But it could be a potential game changer if fixed and utilized. Also included is a compelling argument for not having a Balanced Budget Amendment given the accounting system limitations.
Happy Learning,
Harley
SEEKING WISDOM FOR AMERICA – SEGMENT 10
ROMAN DECLINE #5: ECONOMIC TROUBLES – EXCERPTS
INTRODUCTION: The U.S. dollar’s reserve status gives us unparalleled abilities to influence global transactions and borrow extensively. Sadly, we have abused that privilege. Our national debt exceeds our GDP and is growing quickly. More than a decade of low interest rates has made our payments on that debt manageable, but as rates return to their historic levels, more and more taxpayer money will be required to pay our creditors – thereby causing the deficit, which hit nearly three trillion dollars in 2021, to continue to grow. That spending is mortgaging our nation’s future and contributing to inflation hitting its highest rate in forty years.
Source: Superpower in Peril by David McCormick (2023).
The cultural circumstances that allowed the dollar to thrive as the reserve currency under Reagan no longer exists today: Americans at home and foreigners abroad have simply lost confidence in America itself. There’s no other way to say it. America’s citizens doubt its stability; other countries doubt its word, as they watch us stagger from one regime to the exact opposite every couple of years. Our nation’s cultural decline threatens to become a vicious cycle where the perception of decline itself creates heavy economic costs.
Source: Nation of Victims by Vivek Ramaswamy (2022).
MEASUREMENTS OF ECONOMIC HEALTH:
Debt-to GDP Ratios: The “debt burden” indicator most popular with economists is the magnitude of the federal debt compared with the size of the economy: the “debt-to-GDP ratio.” It’s not a perfect measure, but economists tell us it’s the best one available across (nearly) all countries. [Note: The debt to GDP ratio in 1990 for the U.S. was 40%; the ratio in 2021 was 126.43%; the projected rate for 2028 is 136.2%. The current ratio is the 12th highest out of 195 countries in the world per Statista].
Interest Bite: The interest bite is the chunk that debt service takes out of the federal tax receipts. It tells a slightly different story that the debt-to-GDP ratio for two good reasons: first, interest payments depend not just on the magnitude of the federal debt, but also on the interest rates the credit market demands on Treasury bonds; second, tax receipts depend not just on the size of the economy, but also on the tax rates the government imposes on incomes earned within that economy.[Note: The interest bite in 2021 was 8.8%; in 2022 it was 9.7%; in 2023 its estimated to be 13.3%; in 2024 estimated to be 15.3%, in 2033 estimated to be 20.1%. The target is below 15%.
Source: Congressional Budget Office (CBO)]
Government Spending- to -GDP Ratios: John Taylor, the famous economist at Stanford states:
“A commonsense and quite reasonable budget plan would be to insist simply that federal spending be brought down from 24% to 19 ½ per cent of GDP and held there.” [Note: The ratio in 2022 was 24.8% and is estimated for 2023 at 23.8%, 2024 at 23.8% and 2033 at 24.9% per the Congressional Budget Office (CBO) The target is below 19 ½ %]
Source: Neutering the National Debt by Steve Conover, Ph.D. (2015)
SHOULD AMERICANS BE CONCERNED ABOUT THE SIZE OF THE NATIONAL DEBT?
Answer: Yes, Americans should be concerned about the national debt, especially if it continues to escalate at current rates, because there could be some painful consequences down the road. As the debt surpasses record levels as a function of GDP – a record previously set during the waning days of World War II – the issue has indeed become concerning for a variety of reasons. An abundance of debt leads to massive interest payments; it puts pressure on rates of taxation; the creditworthiness of the of the country may suffer; and it may detract from the ability to fund certain priorities down the road --- when a high degree of borrowing is most urgently needed.
The second-highest debt-to-GDP ratio was recorded in the immediate wake of World War II. In 1946, it stood at 121%, setting the previous record. In 2022, however, after the record spending associated with the COVID-19 crisis, it stands at the high watermark of 136%. Rather than borrowing trillions more, the United States needs to begin paying down some debt before the burden becomes crushing.
Source: America’s National Debt: Examining the Facts by Thomas Arndt (2022)
CREDITWORTHINESS:
The major problem is that Capitol Hill separates the spending decision from the borrowing decision: Congress votes on spending bills – then, at a different time down the road, votes on the lump-sum debt limit. Separating the spending vote from the borrowing vote set the stage, for “a grand political shell game” of making commitments. It grabs headlines for political grandstanders at the price of threatening Uncle Sam’s blue-chip standing in the credit markets. A debt limit is not a debt burden limit. Changing the law in order to limit the federal debt burden limit would be helpful, because it would force both the national security and economic growth into the federal spending debate, shifting the debate away from the negative issues of how to cut spending or raise taxes, and towards the positive issue of how to grow the economy. The current debt limit law is a dangerous, unnecessary threat to our nation’s creditworthiness, and should be repealed. Needless to say, it behooves the U.S. government to do whatever it takes to keep its status of “blue-chip borrower” intact and its debt-rollover option in play. That means growing our economy at a pace sufficient to justify our growing federal debt – and it most certainly means not committing financial suicide via the unbelievably ignorant act of forcing the U.S. Treasury to stop meeting our government’s prior financial commitments.
The creditworthiness of the U.S. Treasury bond, as judged by the world’s dollar investors, is an intangible asset more valuable than gold. Keeping it that way is arguably the federal government’s highest financial priority. The two indispensable requirements for sustaining that creditworthiness are pretty simple: (1) continued robust growth of our nation’s economic strength; and (2) continued political stability, which helps to assure the markets that our nation will remain a reliable “going concern.” Although paying back each maturing T-bond is mandatory, “paying down” the aggregate debt is not a requirement. Creditworthiness is the reward for successful growth.
Source: Neutering the National Debt by Steve Conover, Ph.D. (2015)
DOES A BALLOONING NATIONAL DEBT COMPROMISE U.S. NATIONAL SECURITY INTERESTS?
The nexus between record-setting national debt and the ability of the United States to preserve its national security looms as a particularly interesting (and consequential) element of this discussion. Observers have noted how there is a potential for the burdensome aspects of debt- especially financing the debt (i.e., making interest payments) – to weight down and degrade American power. This is because a country’s military capability is directly linked to its financial might. Without sufficient funding for staffing, training, and equipping the armed forces and intelligence services, the country’s defenses can begin to erode and more easily become eclipsed by other powers on the world stage. This dynamic leads many experts to conclude that as interest payments grow to occupy a larger and larger share of the budget, funding for the military (and all other programs for that matter) will inevitably suffer and will have to shrink.
More broadly, from a geopolitical standpoint, some scholars fear the issuance of excessive federal debt instruments could lead to a different kind of insidious problem. They warn it could signal to the international community that the U.S. is precariously overextended, perhaps even making foreign countries and investors question whether the U.S. is truly on firm economic ground. If international “skepticism about America’s future” grows too strong, allies may feel less allegiance to their relationship with the U.S. and geopolitical adversaries could become more comfortable playing the role of “bully” in their own regions of the world. For their part, the politicians in Congress have shown considerable drive, especially among Republicans, to ensure that the defense budget is not swallowed up by debt service costs and America’s military commitments around the world are maintained. This means keeping up colossal defense appropriations, no matter the other pressures on the budget.
Ultimately, if investors lose confidence in the nation’s fiscal position, interest rates on federal borrowing could rise as higher yields would be demanded to purchase such securities. A rapid increase in Treasury rates could also lead to higher rates of inflation, which would reduce the value of outstanding government securities and result in losses by holders of those securities -- including mutual funds, pension funds, insurance companies, and banks – which could further destabilize the U.S. economy and erode confidence. However, many economists place stock in the notion that the United States is the de facto global reserve currency issuer, which carries with it certain privileges of what seems like a nearly unshakable degree of investor confidence.
WHAT WOULD BE THE RESULT OF THE UNITED STATES DEFAULTING ON ITS DEBT REPAYMENT?
In the world of finance, there is nothing worse than “default” – being unable to pay back a loan when it is due. It represents a fundamental breach of lender/borrower relationship and given that trust is the basis of all finance, a default on America’s debt repayment obligations would present a huge hit to the creditworthiness of the U.S. federal government. Defaulting on parts of the national debt would severely damage the country’s reputation and mean that subsequent investors would be extremely unwilling to own U.S.-issued debt. At a minimum, “a downgrade of the nation’s pristine credit rating could lead to higher borrowing costs for the U.S. Treasury, companies, and consumers.” If it got bad enough, interest rates would go through the roof, the U.S. government would find it much harder to borrow money even in times of national financial emergency, and Congress would be forced to live strictly within its means.
The rock-solid reputation of the United States’ financial institutions is an extension of the idea that the U.S. dollar is the world’s reserve currency and that no other financial entity on the planet commands as much power. American banking and its financial policies undergird the entire system and have maintained the best possible credit score – based on their reliability in repaying loans – for as long as such ratings have existed. Theoretically, however, no country is immune to debt problems for all time.
The aftermath of any kind of default is grim. Crashing and burning in this way induces all kinds of pain and significant disruption that can reverberate throughout the entire global financial system. Even a small downgrade in a country’s credit rating can bring about very real fallout. Interest rates for mortgages and credit cards can spike, stock and bond markets may take a nosedive, state and local governments lose funding, students’ borrowing costs rise, and government pension funds are depressed.
PARTISAN POLARIZATION:
One of the issues that drives a huge wedge between Democrats and Republicans is the national debt because the two camps have such different beliefs about how best to handle it. Liberals and Democrats tend to argue that borrowing is a vital instrument badly needed to make critical investments, even if substantial amounts end up getting added to the national debt. Conservative and Republicans tend to argue that excessive deficit spending is out of control, that it hinders national security, and even that it is immoral to future taxpayers who will be on the hook for repayment. Conservatives are anxious about an imagined debt problem that will never be resolved. Liberals bemoan the interruption of social progress in the name of debt reduction that is never achieved.
Source: America’s National Debt: Examining the Facts by Thomas Arndt (2022)
THINKING CRITICALLY ABOUT THE DEBT: A Business Perspective on the Federal Budget:
It doesn’t take much of a tweak to reveal a businesslike perspective of the federal budget; it’s a big step closer to the way successful businesses classify their cash flows, and it should be instantly recognizable to anyone who has a feel for the difference between a capital budget and an operating budget.
Total “spending” breaks out into two key categories: spending for current-year operations and spending for longer-term (capital) investments. In business, the two spending categories are called operating budgets and capital budgets, respectively, and they are analogous to what economists’ call “consumption” versus “investment.”
“Tax receipts” also break out into two key categories: the amount that funds operating expenditures and a residual (which I’m calling “equity funding”) that helps to fund investment spending. “The deficit” becomes the “debt funding” portion of the investment spending.
State and local governments typically keep their operating budgets and capital budgets separated. They must balance their operating budgets, but they are well-versed in borrowing money (by floating municipal bonds, for example) to help fund capital projects like roads, bridges, airports, and water systems. Keeping such borrowing inside the capital budget is what gives bragging rights to ex-governors running for president – “I balanced eight consecutive state budgets when I was governor.” The catch: the budget they balanced was the operating budget. It’s not as if no borrowing was going on, because it was: the borrowing was happening in the capital budget. It is perfectly legitimate, easily justifiable, and common practice within the budgets of the state and local governments.
However, the federal government mixes it together with the operating budget before it calculates deficits and surpluses. The “businesslike” perspective provides a much-improved basis for debating the elements of the budget.
A Balanced Budget Amendment? No! The general idea of a Balanced Budget Amendment (BBA) enjoys broad populist appeal. I think a Balance Budget Amendment is a terrible idea.
Every version of a BBA would allow for deficit spending in times of national emergency – such as a major war – here’s the brain teaser.”
A BBA would permit running deficits as necessary to fight and win a war in progress. But it would make it unconstitutional to run any deficits beforehand, to prevent war from starting.
What sense does that make? Not much, right? That’s a built-in paradox of a balance budget amendment. The policies that yielded the results Reagan pulled off in the 1980s to end the Cold war with Russia would have been unconstitutional. A no-borrowing rule would have prevented Thomas Jefferson from acquiring the Louisiana Territory and I haven’t met anyone who thinks the Louisiana Purchase was a bad investment, or who thinks we shouldn’t have done it because it increased the federal debt. Good investments aren’t limited to war-prevention, and borrowing for good investments is perfectly legitimate.
There is near-unanimous agreement, going all the way back through the Founding Fathers and Adam Smith, that the federal government’s first and foremost responsibility is to provide national security. Sacrificing national security just to get somebody’s accounting number right is suicidally stupid. Getting national security right means investing for the future, and as the federal government demonstrated during the Reagan era, the necessary investing for the future usually involves borrowing money – i.e., employing a mix of debt and equity—by selling U.S. Treasury Bonds. Most importantly, the underlying enabler for all of this is a healthy, growing economy. Our ability to tax, to borrow, and to afford the cost of borrowing, ultimately depends on a healthy, vibrant economy. It depends on innovation and growth driven by the private sector.
At this point, one might ask the same question I did a few years ago. Why doesn’t the federal government start accounting for the budget in a businesslike way, instead of mixing everything together into the stinky, homogeneous mass of gray goo the called the “unified budget?” Their short answer boiled down to this: the alternative is too hard to do. Even so, because it might be too hard to sort out the numbers doesn’t mean we shouldn’t try to frame the policy debates this way.
Source: Neutering the National Debt by Steve Conover, Ph.D. (2015)
[Note: In my opinion it is a must to separate the operating budget from the capital budget. Having experience on a much smaller scale I couldn’t imagine effectively managing an operation where the two were intermingled. Certainly, with today’s computer capabilities an accounting system could be developed to do so. Without it I don’t see how Congress can do their job, which obviously is the case today].
The unabbreviated version of the above can be found in the pdf document below.
ROMAN DECLINE #5: ECONOMIC TROUBLES – EXCERPTS
INTRODUCTION: The U.S. dollar’s reserve status gives us unparalleled abilities to influence global transactions and borrow extensively. Sadly, we have abused that privilege. Our national debt exceeds our GDP and is growing quickly. More than a decade of low interest rates has made our payments on that debt manageable, but as rates return to their historic levels, more and more taxpayer money will be required to pay our creditors – thereby causing the deficit, which hit nearly three trillion dollars in 2021, to continue to grow. That spending is mortgaging our nation’s future and contributing to inflation hitting its highest rate in forty years.
Source: Superpower in Peril by David McCormick (2023).
The cultural circumstances that allowed the dollar to thrive as the reserve currency under Reagan no longer exists today: Americans at home and foreigners abroad have simply lost confidence in America itself. There’s no other way to say it. America’s citizens doubt its stability; other countries doubt its word, as they watch us stagger from one regime to the exact opposite every couple of years. Our nation’s cultural decline threatens to become a vicious cycle where the perception of decline itself creates heavy economic costs.
Source: Nation of Victims by Vivek Ramaswamy (2022).
MEASUREMENTS OF ECONOMIC HEALTH:
Debt-to GDP Ratios: The “debt burden” indicator most popular with economists is the magnitude of the federal debt compared with the size of the economy: the “debt-to-GDP ratio.” It’s not a perfect measure, but economists tell us it’s the best one available across (nearly) all countries. [Note: The debt to GDP ratio in 1990 for the U.S. was 40%; the ratio in 2021 was 126.43%; the projected rate for 2028 is 136.2%. The current ratio is the 12th highest out of 195 countries in the world per Statista].
Interest Bite: The interest bite is the chunk that debt service takes out of the federal tax receipts. It tells a slightly different story that the debt-to-GDP ratio for two good reasons: first, interest payments depend not just on the magnitude of the federal debt, but also on the interest rates the credit market demands on Treasury bonds; second, tax receipts depend not just on the size of the economy, but also on the tax rates the government imposes on incomes earned within that economy.[Note: The interest bite in 2021 was 8.8%; in 2022 it was 9.7%; in 2023 its estimated to be 13.3%; in 2024 estimated to be 15.3%, in 2033 estimated to be 20.1%. The target is below 15%.
Source: Congressional Budget Office (CBO)]
Government Spending- to -GDP Ratios: John Taylor, the famous economist at Stanford states:
“A commonsense and quite reasonable budget plan would be to insist simply that federal spending be brought down from 24% to 19 ½ per cent of GDP and held there.” [Note: The ratio in 2022 was 24.8% and is estimated for 2023 at 23.8%, 2024 at 23.8% and 2033 at 24.9% per the Congressional Budget Office (CBO) The target is below 19 ½ %]
Source: Neutering the National Debt by Steve Conover, Ph.D. (2015)
SHOULD AMERICANS BE CONCERNED ABOUT THE SIZE OF THE NATIONAL DEBT?
Answer: Yes, Americans should be concerned about the national debt, especially if it continues to escalate at current rates, because there could be some painful consequences down the road. As the debt surpasses record levels as a function of GDP – a record previously set during the waning days of World War II – the issue has indeed become concerning for a variety of reasons. An abundance of debt leads to massive interest payments; it puts pressure on rates of taxation; the creditworthiness of the of the country may suffer; and it may detract from the ability to fund certain priorities down the road --- when a high degree of borrowing is most urgently needed.
The second-highest debt-to-GDP ratio was recorded in the immediate wake of World War II. In 1946, it stood at 121%, setting the previous record. In 2022, however, after the record spending associated with the COVID-19 crisis, it stands at the high watermark of 136%. Rather than borrowing trillions more, the United States needs to begin paying down some debt before the burden becomes crushing.
Source: America’s National Debt: Examining the Facts by Thomas Arndt (2022)
CREDITWORTHINESS:
The major problem is that Capitol Hill separates the spending decision from the borrowing decision: Congress votes on spending bills – then, at a different time down the road, votes on the lump-sum debt limit. Separating the spending vote from the borrowing vote set the stage, for “a grand political shell game” of making commitments. It grabs headlines for political grandstanders at the price of threatening Uncle Sam’s blue-chip standing in the credit markets. A debt limit is not a debt burden limit. Changing the law in order to limit the federal debt burden limit would be helpful, because it would force both the national security and economic growth into the federal spending debate, shifting the debate away from the negative issues of how to cut spending or raise taxes, and towards the positive issue of how to grow the economy. The current debt limit law is a dangerous, unnecessary threat to our nation’s creditworthiness, and should be repealed. Needless to say, it behooves the U.S. government to do whatever it takes to keep its status of “blue-chip borrower” intact and its debt-rollover option in play. That means growing our economy at a pace sufficient to justify our growing federal debt – and it most certainly means not committing financial suicide via the unbelievably ignorant act of forcing the U.S. Treasury to stop meeting our government’s prior financial commitments.
The creditworthiness of the U.S. Treasury bond, as judged by the world’s dollar investors, is an intangible asset more valuable than gold. Keeping it that way is arguably the federal government’s highest financial priority. The two indispensable requirements for sustaining that creditworthiness are pretty simple: (1) continued robust growth of our nation’s economic strength; and (2) continued political stability, which helps to assure the markets that our nation will remain a reliable “going concern.” Although paying back each maturing T-bond is mandatory, “paying down” the aggregate debt is not a requirement. Creditworthiness is the reward for successful growth.
Source: Neutering the National Debt by Steve Conover, Ph.D. (2015)
DOES A BALLOONING NATIONAL DEBT COMPROMISE U.S. NATIONAL SECURITY INTERESTS?
The nexus between record-setting national debt and the ability of the United States to preserve its national security looms as a particularly interesting (and consequential) element of this discussion. Observers have noted how there is a potential for the burdensome aspects of debt- especially financing the debt (i.e., making interest payments) – to weight down and degrade American power. This is because a country’s military capability is directly linked to its financial might. Without sufficient funding for staffing, training, and equipping the armed forces and intelligence services, the country’s defenses can begin to erode and more easily become eclipsed by other powers on the world stage. This dynamic leads many experts to conclude that as interest payments grow to occupy a larger and larger share of the budget, funding for the military (and all other programs for that matter) will inevitably suffer and will have to shrink.
More broadly, from a geopolitical standpoint, some scholars fear the issuance of excessive federal debt instruments could lead to a different kind of insidious problem. They warn it could signal to the international community that the U.S. is precariously overextended, perhaps even making foreign countries and investors question whether the U.S. is truly on firm economic ground. If international “skepticism about America’s future” grows too strong, allies may feel less allegiance to their relationship with the U.S. and geopolitical adversaries could become more comfortable playing the role of “bully” in their own regions of the world. For their part, the politicians in Congress have shown considerable drive, especially among Republicans, to ensure that the defense budget is not swallowed up by debt service costs and America’s military commitments around the world are maintained. This means keeping up colossal defense appropriations, no matter the other pressures on the budget.
Ultimately, if investors lose confidence in the nation’s fiscal position, interest rates on federal borrowing could rise as higher yields would be demanded to purchase such securities. A rapid increase in Treasury rates could also lead to higher rates of inflation, which would reduce the value of outstanding government securities and result in losses by holders of those securities -- including mutual funds, pension funds, insurance companies, and banks – which could further destabilize the U.S. economy and erode confidence. However, many economists place stock in the notion that the United States is the de facto global reserve currency issuer, which carries with it certain privileges of what seems like a nearly unshakable degree of investor confidence.
WHAT WOULD BE THE RESULT OF THE UNITED STATES DEFAULTING ON ITS DEBT REPAYMENT?
In the world of finance, there is nothing worse than “default” – being unable to pay back a loan when it is due. It represents a fundamental breach of lender/borrower relationship and given that trust is the basis of all finance, a default on America’s debt repayment obligations would present a huge hit to the creditworthiness of the U.S. federal government. Defaulting on parts of the national debt would severely damage the country’s reputation and mean that subsequent investors would be extremely unwilling to own U.S.-issued debt. At a minimum, “a downgrade of the nation’s pristine credit rating could lead to higher borrowing costs for the U.S. Treasury, companies, and consumers.” If it got bad enough, interest rates would go through the roof, the U.S. government would find it much harder to borrow money even in times of national financial emergency, and Congress would be forced to live strictly within its means.
The rock-solid reputation of the United States’ financial institutions is an extension of the idea that the U.S. dollar is the world’s reserve currency and that no other financial entity on the planet commands as much power. American banking and its financial policies undergird the entire system and have maintained the best possible credit score – based on their reliability in repaying loans – for as long as such ratings have existed. Theoretically, however, no country is immune to debt problems for all time.
The aftermath of any kind of default is grim. Crashing and burning in this way induces all kinds of pain and significant disruption that can reverberate throughout the entire global financial system. Even a small downgrade in a country’s credit rating can bring about very real fallout. Interest rates for mortgages and credit cards can spike, stock and bond markets may take a nosedive, state and local governments lose funding, students’ borrowing costs rise, and government pension funds are depressed.
PARTISAN POLARIZATION:
One of the issues that drives a huge wedge between Democrats and Republicans is the national debt because the two camps have such different beliefs about how best to handle it. Liberals and Democrats tend to argue that borrowing is a vital instrument badly needed to make critical investments, even if substantial amounts end up getting added to the national debt. Conservative and Republicans tend to argue that excessive deficit spending is out of control, that it hinders national security, and even that it is immoral to future taxpayers who will be on the hook for repayment. Conservatives are anxious about an imagined debt problem that will never be resolved. Liberals bemoan the interruption of social progress in the name of debt reduction that is never achieved.
Source: America’s National Debt: Examining the Facts by Thomas Arndt (2022)
THINKING CRITICALLY ABOUT THE DEBT: A Business Perspective on the Federal Budget:
It doesn’t take much of a tweak to reveal a businesslike perspective of the federal budget; it’s a big step closer to the way successful businesses classify their cash flows, and it should be instantly recognizable to anyone who has a feel for the difference between a capital budget and an operating budget.
Total “spending” breaks out into two key categories: spending for current-year operations and spending for longer-term (capital) investments. In business, the two spending categories are called operating budgets and capital budgets, respectively, and they are analogous to what economists’ call “consumption” versus “investment.”
“Tax receipts” also break out into two key categories: the amount that funds operating expenditures and a residual (which I’m calling “equity funding”) that helps to fund investment spending. “The deficit” becomes the “debt funding” portion of the investment spending.
State and local governments typically keep their operating budgets and capital budgets separated. They must balance their operating budgets, but they are well-versed in borrowing money (by floating municipal bonds, for example) to help fund capital projects like roads, bridges, airports, and water systems. Keeping such borrowing inside the capital budget is what gives bragging rights to ex-governors running for president – “I balanced eight consecutive state budgets when I was governor.” The catch: the budget they balanced was the operating budget. It’s not as if no borrowing was going on, because it was: the borrowing was happening in the capital budget. It is perfectly legitimate, easily justifiable, and common practice within the budgets of the state and local governments.
However, the federal government mixes it together with the operating budget before it calculates deficits and surpluses. The “businesslike” perspective provides a much-improved basis for debating the elements of the budget.
A Balanced Budget Amendment? No! The general idea of a Balanced Budget Amendment (BBA) enjoys broad populist appeal. I think a Balance Budget Amendment is a terrible idea.
Every version of a BBA would allow for deficit spending in times of national emergency – such as a major war – here’s the brain teaser.”
A BBA would permit running deficits as necessary to fight and win a war in progress. But it would make it unconstitutional to run any deficits beforehand, to prevent war from starting.
What sense does that make? Not much, right? That’s a built-in paradox of a balance budget amendment. The policies that yielded the results Reagan pulled off in the 1980s to end the Cold war with Russia would have been unconstitutional. A no-borrowing rule would have prevented Thomas Jefferson from acquiring the Louisiana Territory and I haven’t met anyone who thinks the Louisiana Purchase was a bad investment, or who thinks we shouldn’t have done it because it increased the federal debt. Good investments aren’t limited to war-prevention, and borrowing for good investments is perfectly legitimate.
There is near-unanimous agreement, going all the way back through the Founding Fathers and Adam Smith, that the federal government’s first and foremost responsibility is to provide national security. Sacrificing national security just to get somebody’s accounting number right is suicidally stupid. Getting national security right means investing for the future, and as the federal government demonstrated during the Reagan era, the necessary investing for the future usually involves borrowing money – i.e., employing a mix of debt and equity—by selling U.S. Treasury Bonds. Most importantly, the underlying enabler for all of this is a healthy, growing economy. Our ability to tax, to borrow, and to afford the cost of borrowing, ultimately depends on a healthy, vibrant economy. It depends on innovation and growth driven by the private sector.
At this point, one might ask the same question I did a few years ago. Why doesn’t the federal government start accounting for the budget in a businesslike way, instead of mixing everything together into the stinky, homogeneous mass of gray goo the called the “unified budget?” Their short answer boiled down to this: the alternative is too hard to do. Even so, because it might be too hard to sort out the numbers doesn’t mean we shouldn’t try to frame the policy debates this way.
Source: Neutering the National Debt by Steve Conover, Ph.D. (2015)
[Note: In my opinion it is a must to separate the operating budget from the capital budget. Having experience on a much smaller scale I couldn’t imagine effectively managing an operation where the two were intermingled. Certainly, with today’s computer capabilities an accounting system could be developed to do so. Without it I don’t see how Congress can do their job, which obviously is the case today].
The unabbreviated version of the above can be found in the pdf document below.
| america_10l_economic_troubles_--_segment_10.pdf |