Posts Tagged ‘national debt’

Paul Krugman is an NYT op-ed columnist, economics professor at Princeton, and everything that is wrong with academic economics. His recent article aimed at blasting Rand Paul about a tweet is a great example of his academic shortsightedness.

His worst quote is the following:
“issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.”

This would have made since back when the National Debt was 1/10 what it is today. Had that borrowed money been spent on infrastructure like Krugman is suggesting, we’d have amazing roads (maybe even paved in gold!), freeways, practically no student loan debt, an abundance of water retention systems in California, and massive alternative energy infrastructure. Instead, our roads are in horrible condition and cost us an average of $515/month (after double taxes – income and excise- mind you).

Sure, Krugman’s statements make sense on paper. I’ve seen this kind of thinking before when I was studying economics in college. It’s the same shortsightedness that had me question whether a degree in economics was worth anything more than the paper it is written on. Spoiler alert: the ink costs more than the paper.

Earlier this year, Krugman wrote another half-witted articles about debt (amongst so many others).

With statements like “Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer)”, Krugman proves that studying economics at Princeton is a waste of money. First, our national debt is not owned entirely by American citizens. Second, owing YOURSELF money is fine (great example is taking a loan against your 401K) ONLY IF you pay it back. At some point, you aren’t going to have income, and if you’ve borrowed your entire 401K, you’re really hurting your retirement as well as what you are leaving behind for your family. The argument that the microeconomics doesn’t apply to the macroeconomics is false.

It’s certainly a reasonable argument to make that America borrowing money from itself and then paying it back is a good thing much like borrowing from a 401K is a good thing for an individual. However, if that money doesn’t get paid back and just piles up instead, you’re left with an accelerated increase in debt:

National Debt per citizen in 1980: $4,118
National Debt per citizen currently: $57,093

Even adjusting for inflation, the $4,118 only equals a mere $11,926.11. That’s quite a bit off from the $57K each citizen owns. It gets even worse when you only count taxpayers.

Borrowing and paying back is fine, but that’s not what America is doing. We’re borrowing and then having someone else pay it back (maybe, if they can). That’s called a Ponzi scheme. If America was borrowing from itself (which it isn’t since 35% is foreign owned) and paying back the debt within a generation, we’d see a much smaller national debt than the $18MMM+ we currently have.

At the end of the day, it appears Krugman is too smug with his academia version of national debt that he can’t see the flaws of his logic when applied to the real world as opposed to the fictitious one in which he wants to believe actually exists. He’s played his cards right and gotten to a level of academic prestige, which is great for him and the New York Times; not so good for public perceptions of debt.

It’s always interesting that our Federal debt and annual deficit is always compared to GDP. It really helps make the numbers look better and paint a rosy picture for spendthrift politicians. However, it’s a very inaccurate picture of a debt situation. It would be like an individual looking at their individual spending compared to the revenue of the company they work for.

The real numbers to be looking at are the actual revenues generated by the United States government. For Fiscal Year 2010, the Federal government collected ONLY $2.16 trillion. At the time of this blog, we had $14.29 trillion in debt. What that means that *IF* the Federal government did nothing but pay down the national debt (and we don’t compound interest), it would take 6.6 years to pay it off. Of course, that is also assuming that the Federal Government will continue to receive $2.16 trillion in revenue each year. Of course, interest does compound, the Federal Government can’t spend 100% of all revenue on paying down the debt, and the Federal Government wouldn’t continue to received $2.16 trillion/year if it paid just the national debt over the next 6.6 years.

What this all really means is that politicians are blowing smoke when they talk about reducing the deficit and national debt by marginal numbers. Costs of major social programs are just going to continue to skyrocket (just read my blog about Diminishing Healthcare Returns). With a quadruple digit increase in the costs of healthcare over the last 40 years, does anyone really expect Obamacare to curb that? Even if it does reduce the rise in healthcare costs (which it won’t) by half, it still means that we’ll be paying 700% more for healthcare in 40 years than we pay today.

This is precisely why GDP is used in comparison to deficits. It is the perfect smoke and mirrors for politicians to use to pull the wool over our eyes to the true state of our financial affairs. It helps make the numbers of programs like Obamacare look bearable. The reality is that we aren’t going to pay back this debt, and the costs of so many social programs will exceed the Federal Government’s income. Since we don’t care to look at the Federal Government’s income, we won’t even see it coming. We haven’t for the last several decades!

American capitalism is dead.

I’m sensationalizing a bit with the first sentence, but the reality is that American capitalism is on life support. We’re propping up a facade of capitalism and millions of people are blaming “deregulation” (to slander the ideals of capitalism) on this long drawn out “recession”. I’m using a lot of “quotes” here because “deregulation” is a misnomer and the “recession” is really a depression masked by bogus inflation numbers and massive government deficit spending and a decline in the value of the US Dollar. That last sentence was a mouthful, so let’s start with these myths…

Deregulation is defined as the act of freeing from regulation, particularly government regulation. The idea that the federal government deregulated the banks is much like the idea that The Constitution clearly uses the words “separation of church and state”. Deregulation, in the sense that is being used to slander capitalism, was merely a change in the regulations by the government that created holes that thousands of bankers and millions of consumers took advantage of.

Nobody can take a loan out for 125% of the value of their home and honest think there is nothing wrong with that. Just like nobody can offer a loan at 125% of the value of a home and not think there is nothing wrong with that. Just like nobody in the Federal government can pickup a newspaper from 10 years ago about 125% loans and not think there is something wrong. If you can, you’re exactly why we are in the banking mess we are today.

 

Recession is defined as a decline in GDP, employment, and trading lasting a period of six months to a year. Earlier, I referred to bogus inflation numbers and massive government deficit spending and a decline in the value of the USD. First, the inflation numbers don’t require a rocket scientist (because supposed economists clearly aren’t capable of the math)  to figure out that they are false.

Simply take a look at what goes into calculating the Consumer Price Index (CPI). You will find few line items where the government is not heavily subsidizing/regulating that industry. Given that the federal government is more than $14 trillion in debt, it’s pretty clear that inflation numbers are considerably underestimated. If you didn’t follow that last part, I’ll help explain: if is costs you $3.15 for a gallon of milk at the grocery store but the federal government is providing subsidizes to milk producers to the tune of $0.50/gallon, the true cost of a gallon of milk for you is actually $3.65. I’ll admit that I haven’t done the research to find out the exact $/gallon of milk the subsidizes equate to, but you can get the point. Now, count this over the hundreds of entitlement programs the Federal government spends money on, and you have a real problem with the calculation of the CPI (inflation).

To further exacerbate the national debt issue, people don’t really consider the buildup of interest on the national debt as part of the total problem. This isn’t that unusual. A lot of people in business often forget about how borrowing money from a bank or investors requires payments that impact the actual bottom line of the company. Here’s a simple way to think about it: when the Federal government was over budget by $455 billion in 2008, the total increase in national debt was actually more than $1 trillion.

This all compounds!

When you include the devaluation of the USD abroad and the fact that we purchase so much product from overseas and that it takes 6+ months for that devaluation to ripple its way into our prices, you get rest assured that there are much higher prices coming to a store near you very soon…

 

Now, let’s get back to capitalism. At the beginning of this article, I needed to dismiss the myth of low inflation over the last decade so that we could really see that this “recession” is indeed a depression (I’m betting that decades from now, we will finally admit in our history textbooks that the numbers were wrong and that this is a depression).

Capitalism has been slandered by the myth of deregulation. Deregulation was a change in regulation that anyone sane and honorable would have realized had massive holes that were being taken advantage of. Nobody wanted to halt the good times, so our governments (which could have done something about it) did nothing for years! That’s NOT deregulation. It wasn’t an act of capitalism. Plenty of people warned for years about pending doom, and they were dismissed as pessimistic and bearish.

However, these aren’t the true measure of capitalism’s comatose state. The true measure is that we look to our politicians to “create jobs” and provide “bailouts”. What is capitalistic about bailouts? NOTHING! What is capitalistic about too big to fail? NOTHING! The funniest part about “too big to fail” is that the giant banks that were too big to fail were merged with existing banks, making those new banks too bigger to fail! Why weren’t the banks broken up into smaller pieces with the non-profitable sections written off and offset by “bailout” money? But I digress, and that’s for another sub-1000 word blog.

The Capitalist mindset in this economy would be this: What can I improve, change, or invent that would make a profit, provide jobs, and improve our economy. Instead, we are waiting for Obama to create more Federal jobs, and the “Republicans” are spewing forth their usual taxes rhetoric. Even Sarah Palin is talking about how can the federal government create jobs and stimulate the economy. What would best stimulate the economy would be a strong USD position, 10% reduction in all federal government spending and an increase in taxes. Of course, anyone will say I’m crazy and it wouldn’t work. Because it obviously didn’t work in the 90s when Clinton did it, right?

There are varying opinions about when the recession started and even IF we are in a recession. My estimates put our recession as having started in late 2007. With so much evidence pointing towards a recession, why is it that so many people (including President Bush) don’t believe we are in a recession?

I finally figured it out this evening and wrote about it in my recession article on Words Cause.