Our Ballooning Deficit! Explanations, please....

[theHandpuppet]

First off, let me admit that I'm totally clueless when it comes to matters of economics such as this (as are most Americans, I suspect). Can someone explain to me, in layman's terms, at what point the US reaches critical mass with regards to our deficit? What are the consequences of the US continuing to carry such an astounding and ever-growing debt? Framing this as talking points would be most helpful!

Thanks much!!

[shoelace414]

1. For one

We have to pay the intrest on the debt every year

[Warpy]

2. Every dollar we spend on "debt service"

which means interest paid to the people and foreign countries lend the government that money, is a dollar we don't have to spend on schools, roads, healthcare, the military, police, and all of the other functions government performs. When a fiscally ignorant party takes control and decides a group of citizens should not have to pay taxes (the wealthy and the corporate, in this case), less money is taken in. The services must still be provided, so the government either raises taxes on the poor or goes begging for loans.

We all know the way out of this particular hole, a progressive tax system, but there are entrenched dogmatics throughout government right now, and they're not going to budge until a depression forces them to.

[Zorra]

3. So basically, republican administrations run up huge national debts

so that their banker puppetmasters can insure that they are going to make enormous profits on the interest that we, our children, and our grandchildren are going to have to pay off.

Basically, Bu$h has one big credit card and he is on an unrestrained fiscally irresponsible spending spree. The joke on us is that Bu$h has committed a form of "identity theft" and credit card fraud. Bu$h has taken out a "credit card" in our name, and we will be responsible for these humongous bills that he is irresponsibly running up. The double whammy is that while Bu$h mortgages our future, he is in the circle that will profit from the interest on our debt.

Since Bu$h was not legally elected, I hereby declare and give public notice that I am not responsible for any debt other than my own, particularly not the debt incurred by the Bu$h administration.

Whoever loaned the money to the Bu$h administration should have recognized that this was a bad risk. They are just going to have to eat their losses unless they can get Bu$h to pay them back as an individual.

[ProfessorPlum]

4. I've heard that the problem is our debt is financed

primarily by foreign economies. At this point in time, economies in Asia. If they decide that America is a bad debtor, and remove their financial backing, the whole house of cards comes tumbling down.

So, I consider it a matter of national security, not to have our country so dependent on others.

[ProfessorGAC]

5. There Is No Known Threshhold

Since the deficit has only been this high a percentage of GDP two other times (WWII and Reagan), there isn't any data to demonstrate where the trigger point is.

However, studies done by me and others of econometric data indicate that the sustainability of economic growth through deficit spending is at best 5 years, and averages around 3.5 years.

After that point, there is a negative effect on the economy due to three principal things:

1) The velocity of money slows when the federal gov't spending becomes too large a fraction of GDP. (Remember GDP = C + GS + TP + NE) THe gov't is actually the slowest to transfer funds. They wait the longest to collect what they're owed, and the slowest to send that money back out. So, the reduction in the velocity of money causes the tautalogical mv = pq to cause "q" to drop. (Prices won't fall just because the gov't is taking too long to get the money into another cycle of circulation.) Less production means that eventually, "p" will rise. We call this "inflation". This effect is a relatively short term lag of a few months.

2) As demand for money by the federal gov't increases, the only attraction to divert from higher earning (though not guaranteed) investments is interest rate increases. As the interest paid on gov't securities goes up, the risk premium on other market securities goes down. This makes equity and capital markets less attractive and pulls money away from private sector development and innovation. This has a long term lag of 2 to 3 years.

3) Government spending of borrowed money, due in part to #2 above plus a myriad of other factors, does not enhance the employment markets. Thus, the longer range outlook for increased productivity and subsequent consumption are poor. Since consumption is around 70% of GDP, it should be obvious to any of us that less people with decent money to spend on goods and services will make GDP fall. That not only has a macroeconomic effect, but reduces profitability of firms big and small. This creates even greater downward pressure on wages and reduces employment opportunities further.

I published a paper on these effects (including all the mathematical models) back in 1994. I updated them with new data, but still the same model, in 2000. I have no reason to believe that those models are not still valid today.

The economy, as a whole, is a massive glacier. Moves slowly, intractably, and is not prone to sudden changes in dynamics. So, once causal relationships have been established and proven within the data, those conclusions should be equally valid.

Hope that helps.
The Professor