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I mentioned last week that I “feel a post about the deficit coming on.” Which makes it sound a little bit like a bowel movement. Perhaps that’s a valid comparison. Certainly it’s a subject that affects our lives a lot more than we would like to admit, but also rarely discussed in polite society. Finally, if things get out of whack, there can be disastrous consequences.

I don’t recall specifically thinking about this at the time, but I’m sure the news that the national debt recently passed 20 trillion dollars had to play a part in my desire to write about it now.

Perhaps you also heard the news that the national debt had passed $20 trillion, but it’s equally probable that you didn’t. It didn’t appear to be very big news, at least from my perspective. Certainly people mentioned it, but I think the news was dominated by Irma and as usual, i.e. Trump. As I said, it’s possible that it was just me, but in an effort to find a more objective source I stumbled onto the Vanderbilt Television News Archive. Searching a period from September 11th (I’m sure that’s part of the problem) to today (October 20th) There were zero stories which mentioned the “deficit”, 4 stories which mentioned “debt” (and none of them actually appear to be talking about the national debt) versus 109 stories which mentioned the word “hurricane” and 190 stories which mention Trump. Leading me to conclude it wasn’t just unremarked on from my perspective.

I do understand that $20 trillion is somewhat arbitrary, and it would be difficult to make the case that somehow $20 trillion is qualitatively different than $19.5 trillion. Still they’re both staggering numbers, high enough to deserve some comment, I would think, even if we hadn’t passed a major (albeit somewhat arbitrary) milestone. My go to source for the a snapshot of the problem and all its facets is the US Debt Clock, which is equal parts illuminating and frightening. As of this writing the debt, stands at $20.424 trillion (meaning we’re closing in on halfway to our next trillion.) The debt clock helpfully translates this into more easily understandable numbers and tells us that this equates to a debt of $63,646 per citizen and $169,251 per taxpayer.

I would hazard to predict that most people start worrying when they hear these numbers, but it’s most likely a directionless worry. What can the average citizen do about a $20 trillion dollar or even a $63k of debt? Of course there are people whose job it is to worry about these sorts of things and to offer advice about what should be done. This includes people with direct responsibility like those who actually work at the Treasury Department, but I would also extend it to include people outside the system, like economics professors and newspaper columnists. And many, if not most, of these people, the most notable of which is Paul Krugman, contend that there’s really nothing to worry about.

Why aren’t they concerned? Well, if you look into it you’ll come across a few different reasons for this. I’ll provide a brief overview of several of them, though this list is not comprehensive. And then later I’ll look at why, despite these reassurances, we might still need to worry.

  1. Unlike individuals who are obligated to pay back their debt according to the terms of the original loan, governments are not so obligated, they just have to, as Krugman said, “ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.”
  2. Krugman also points out (from the same article) is that, unlike individual debt, which is money we owe to someone else. The national debt is money we owe to ourselves. Just to be clear this is true for the majority of the money, but there’s still $6 trillion dollars which is owed to foreign investors.
  3. When you compare the debt to the national GDP, and compare the US’s indebtedness to other countries it’s not that bad. The US is only number 8 in terms of indebtedness, and based on debt as a percentage of GDP, we’re only half as bad as the #1 country, Japan. (Over 100% vs. well over 200%.) And Japan is doing okay, meaning presumably we have a long way to go before we have to worry.
  4. Borrowing money is currently a very good deal. Ever since the financial crash the interest rate the government has to pay to borrow has been extremely low. To once again use the analogy of a typical consumer, sure it’s stupid to borrow money on a credit card that charges 18%, but borrowing money at 1.5%, particularly if you could find a way to reinvest it at 5% would be a great deal.
  5. Our debt is in dollars, and we can print dollars. One person compared defaulting on our debt to the difficulty of starving to death in a warehouse full of food. It’d be possible, but not very likely.
  6. Our assets greatly exceed our liabilities. The US government owns buildings, land, infrastructure, and some exceptionally valuable nuclear missiles. Our debt may be a huge negative value, but our net worth is an even huger positive value.

Those are a selection of the most common reasons the experts give for not worrying about the national debt or the current deficit. I may have missed one or two, but I think I got all the big ones. And now, if you’re anything like most people you may be torn between the gigantic size of the debt, and your long standing belief that debt is bad, on the one hand and the “experts” telling you, on the other hand, not to worry about it.

Unless this is the very first post of mine that you’re reading, you can probably guess that I think the debt, and the ongoing deficit, are problems. Problems we should be worried about. That being the case, what would I say in response to the six reasons listed above urging me and everyone else not to worry?

  1. Krugman says that we just have to ensure that the debt grows more slowly than the tax base. I agree, but I don’t see any evidence that this is happening. The government consistently spends about 18% more than it takes in, and most future projections show that this will only get worse. I’ll have a lot more to say about this point.
  2. I also understand that this is money we owe to ourselves, but that doesn’t make it frictionless. It’s not like when my wife owes me $20, but really she doesn’t, because we have a joint checking account. This joint ownership has significantly more players involved, with significantly less affection. As a thought experiment, imagine the US reneging on the domestic portion of the debt with a cheery, “Well it was all money we owed ourselves!” And see if, afterwards, anyone is still making that argument from the smoking ruins of Washington DC.
  3. I agree that other countries have it worse. And perhaps as long as Japan is fine we can confidently continue on our course, but just because Japan is fine now (though there’s argument even with that) doesn’t mean they’ll be fine forever, nor does it even mean that we’ll be fine until we hit the same level as Japan. Japan is one data point, and not even a very good comparison to the US, given the vast differences.
  4. Yes, interest rates are currently low, but it’s not as if there’s some method whereby the minute they go up we pay off the $20 trillion dollars and go back to being financially prudent. Rather we still have that debt (and probably a lot more) and we start to have to pay the higher rate of interest, which takes up an increasing percentage of the total budget. Federal debt isn’t a 30 year fixed rate mortgage it’s an adjustable rate mortgage that lasts forever.
  5. It is true that our debt is denominated in money we can print, but that doesn’t mean that printing money is free of consequences. You may have heard of a little thing called inflation? I suppose this technically does mean we can’t default on our debt, but that doesn’t mean bad things can’t happen and that we shouldn’t be worried.
  6. Finally, getting back to friction, we do have vast assets, but how liquid are those assets? If it comes to it, who’s got the money to really buy an aircraft carrier? I’m sure China would, but that’s a situation where the cure is worse than the disease. People like Krugman make a lot of noise about how you can’t compare household debt to government debt, and in this case, you can’t compare household assets to government assets. There is no ebay for the Pentagon.

At this point we have a bunch of clever reasons not to worry about the deficit and a bunch of clever responses for why we still should. And if asked to choose between the cleverness of a Nobel Prize winner like Krugman and my cleverness, or what I’m attempting to pass off as cleverness, it’s perfectly reasonable to want to choose the Nobel Prize winner over me. But before you do that, there are some additional things for you to consider. First there is no true cleverness here or on the other side. No one really knows anything. Having a debt of $20 trillion dollars is so far outside of the range of normal human and historical experience that neither the expert’s reasons for calm, nor my responses are based on anything actually resembling data.

This is not to say people haven’t tried. As I mentioned above, when you compare the US to Japan our debt as a percentage of GDP looks pretty good. But how strong is this comparison? Well, by the normal standards of scientific rigor it’s really, really weak. On the other side of things Reinhart and Rogoff released a study which showed once your debt to GDP ratio got over 90% that economic growth slowed. This at least was more than a one to one comparison between the US and Japan, but it also had some problems, not the least of which was the lack of real data. In other words, it doesn’t matter what side you’re on, we’re definitely in uncharted territory. Which is fine, if the consequences for being wrong are small, but the consequences for being wrong are not small, the chances of being wrong may be small, but the consequences of being wrong definitely aren’t. (And I don’t think the chances of being wrong are especially small either.) The US Government Bond market represents a single point of failure, and if it fails, it would be catastrophic in ways you could hardly imagine.

All of which takes us to a point I make again and again, certain risks are so great that even if the probability is low, making sacrifices to prevent that catastrophe are not only warranted but wise. And while I agree that in the short term the danger is pretty low, no one is sure what the endgame is going to be, and that’s where I’d like to turn now.

To begin with, let’s return to Krugman’s assertion. That debt just needs to grow more slowly than the tax base. Once again, I agree, but this last happened around the year 2000, and it was a tiny blip even then. I don’t see any reason to suspect it’s going to happen again, certainly not in the foreseeable future, particularly when you consider the enormous, and increasing cost of the entitlement programs. Thus even if we grant that a certain amount of debt is okay and maybe even beneficial, I don’t think anyone believes that we can take on infinite debt. But if debt continues to grow faster than taxes, something is going to have to give. That might not even happen until debt is 1000% of GDP, but regardless, as long as debt grows faster than taxes something will have to change. So what are the options?

Given that it’s worked so far, let’s turn to another list of six items. This time a list of options.

  1. Grow our way out of debt:  As I have already mentioned this is the ideal way to deal with debt. But as I have also pointed out it doesn’t seem very likely to happen. Since 1967 the debt has grown at an average rate of 8.65%, while GDP has grown at an average rate of 2.85% during that same period. Increasing the tax rate can overcome some of this gap, but that will only take you so far. (See Option 3) Also if anything growth appears to be slowing while the budget (particularly mandatory spending) just keeps getting bigger. Again I agree with Krugman that as long as our growth keeps up with our debt, we probably have bigger things to worry about, but I don’t see the slightest evidence that this is happening.
  2. Cut Spending: Obviously this is where all the arguments are taking place. Though despite all the Sturm und Drang over entitlement cuts and the revocation of Obamacare, I haven’t seen much evidence that anything like this is going to happen.  And if you look at the amount that would have to be cut, it’s frankly ridiculous. Imagine that you wanted to get the debt down to 50% of GDP within the next 20 years. Assume that the economy grows at 3% per year without a recession. (Which is extremely optimistic.) Our current GDP is around $18.5 trillion, so in 20 years it would be $33.5 trillion, meaning 50% is $16.75 trillion. That’s $3.25 trillion dollars less than our current deficit, meaning we’d have to not only balance the budget, we’d have to be 162 billion dollars under budget on average, every year for 20 years. In the recent history that did happen from 1999-2001. But 3 years in a row is a lot different than 20 years in a row, particularly given that in less than 20 years, according to the Congressional Budget Office projections, entitlements and interest are expected to consume 100% of revenues. Finally, even if we assume that the right mix of politicians could do this, how would they ever get elected?
  3. Raise Taxes: Obviously these first three options are all closely related, and, to me, they all appear extremely unlikely, though I know that some people feel that raising taxes would be the easiest of the three. That said it’s not as straightforward as people think. There’s a functional limit to how much you can extract both practically and politically in taxes, and the tax rate has less to do with it than you think. Look at this graph and observe how despite the top marginal rate being all over the place (at one point as high as 90%) the actual revenue collected since World War II, as a percentage, has barely budged. And as I mentioned, there’s very good reason to believe that growth is slowing, and when that’s combined with increased spending, which is already locked in by law, the tax increases would be pretty staggering. In the near term 50% is not out of the question, and in the long term, if trends continue as they have, you could be looking at having to double tax revenue. If you thought it was hard to get elected by promising to cut the deficit, imagine how hard it would be if you promised to double taxes.
  4. Inflate the debt away: From 2008 to 2009 Zimbabwe entered a period of hyperinflation. The numbers are astonishing, and almost hard to grasp (how often do you hear someone use the term  “sextillion percent”?) But one illustrative example is that at the beginning of things they were printing 10 dollar Zimbabwean Bills, and by the end they were printing 100 billion dollar Zimbabwean Bills. Meaning, if the same thing happened to the US, you might be able to pay the entire debt off with the equivalent of 2,000 pre-hyperinflation dollars (presumably in gold or something like that). This is a particularly extreme example, and I’m not suggesting that’s what will happen in the US, if it did the cure would be much worse than the disease. The question is, is there some less extreme version of this? There might be, but I’ve never seen a good explanation of how it might work. But at a minimum if the gap between debt growth and GDP growth continues at 5.8% (see figures in option 1) then inflation would have to be at least that much, and that assumes that the debt doesn’t start growing faster, but it almost certainly would since much of spending is indexed to inflation, and even the stuff that isn’t indexed to inflation would still be influenced by it.
  5. Default on the debt: Given that this is precisely the cataclysm we want to avoid, I don’t think it’s an option anyone would choose voluntarily. But it is an option, and definitely the option that is mostly likely to happen without warning and without any planning, and perhaps without even much advance warning. Needless to say while most people acknowledge this it’s a possibility, no one wants to discuss it. And to use a quote from Douglas Adams: “The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair.” I’ve already linked to people who say we can’t possible default on our debt. I hope they’re right, but consider that there have been all manner of things which cannot possibly go wrong, but have gone wrong despite this.
  6. A singularity: Long time readers of this blog were probably wondering when this was coming. And for those that are just joining us. Here I refer to something that changes the rules in such a way that none of the previous assumptions are valid. In this case it would probably have to be something big enough that it eliminated the need for money all together. A nanotechnology manufacturing revolution which creates a post-scarcity society. Brain digitization into a virtual world where nothing costs anything because it’s digital. Something of that nature. Of course, what this amounts to in essence, is hoping for a miracle. Or at the very least they’re hoping that something will come along in the future and fix it. A more accurate name for this is kicking the can down the road.

I don’t think most of the people telling us not to worry about the debt will actually come out and say they’re advocating kicking the can down the road, but if they’re not, which of the other solutions I listed above are they proposing?

I honestly don’t know. There are people who argue that we don’t need to worry about the debt, but they mostly seem to be arguing that we don’t need to worry about it right now. Primarily because the US can still borrow very cheaply and there’s no sign of that anyone is losing trust in our ability to repay the debt. That does appear to be true, for now. The question no one knows the answer to, regardless of what they claim, is how long that will last.

The national debt is a giant source of fragility. And the best plan for dealing with it seems to be “ignore it and hope something comes along later to solve it.” Which takes us back to a theme I’ve been emphasizing since the beginning, we’re in a race between singularity and catastrophe. And as far as the national debt goes, I think catastrophe has a sizable lead.


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