The real story behind America’s new $20 trillion debt

Late yesterday afternoon the federal government of the United States announced that the national debt had finally breached the inevitable $20 trillion mark.

This was a long time coming. It should have happened back in March, except that a new debt ceiling was put in place, freezing the national debt.

For the last six months it was essentially illegal for the government to increase the debt.

This is pretty brutal for Uncle Sam. The US government hasn’t run a budget surplus in two decades; they depend on debt in order to keep everything running.

And without the ability to ‘officially’ borrow money, they’ve basically spent the last six months ‘unofficially’ borrowing money by plundering federal pension funds and resorting to what the Treasury Department itself calls “extraordinary measures” to keep the government running.

Late last week the debt ceiling crisis came to a temporary armistice as the government agreed once again to temporarily suspend the debt limit.

Overnight, the national debt soared hundreds of billions of dollars as months of ‘unofficial’ borrowing made its way on to the official books.

The national debt is now $20.1 trillion. That’s larger than the size of the entire US economy.

You’d think this would be front page news with warnings being shouted from the rooftops of America.

Yet curiously the story has scarcely been covered.

Today’s front page of the New York Times tells us about Hurricane Irma, North Korea, and alcoholism in Iran.

Even the Wall Street Journal’s front page has zero mention of this story.

In fairness, the number itself is irrelevant. $20 trillion is merely a big, round, psychologically significant number… but in reality no more important than $19.999 trillion.

The real story isn’t the number or the size of the debt itself. It’s the trend. And it’s not good.

Year after year after year, the US government spends far more money than it collects in tax revenue.

According to the Treasury Department’s own figures, the government’s budget deficit for the first 10 months of this fiscal year (i.e. October 2016 through July 2017) was $566 billion.

That’s larger than the entire GDP of Argentina.

Since the government has to borrow the difference, all of this overspending ultimately translates into a higher national debt.

Make no mistake, debt is an absolute killer.

History is full of examples of once-dominant civilizations crumbling under the weight of their rapidly-expanding debt, from the Ottoman Empire to the French monarchy in the 1700s.

Or as former US Treasury Secretary Larry Summers used to quip, “How long can the world’s biggest borrower remain the world’s biggest power?”

It’s hard to project strength around the world when you constantly have to borrow money from the Chinese… or have your central bank conjure paper money out of thin air.

And yet tackling the debt has become nearly an impossibility.

Just look at the top four line items in the US government’s budget: Social Security, Medicare, Military, and, sadly, interest on the debt.

Those four line items alone account for nearly NINETY PERCENT of all US government spending.

Cutting Social Security or Medicare entitlements is political suicide.

Not top mention, both of those programs are actually EXPANDING as 10,000 Baby Boomers join the ranks of Social Security recipients every single day.

Then there’s military spending, which hardly seems likely to fall significantly in an age of constant threats and warfare.

The current White House proposal, in fact, is a 10% increase in military spending for the next fiscal year.

And last there’s interest on the debt, which absolutely cannot be cut without risking the most severe global financial meltdown ever seen in modern history.

So that’s basically 90% of the federal budget that’s here to stay… meaning there’s almost no chance they’re going to be able to reduce the debt by cutting spending.

But perhaps it’s possible they can slash the national debt by growing tax revenue?

Possible. But unlikely.

Since the end of World War II, the US governments’ overall tax revenue has been VERY steady at roughly 17% of GDP.

You could think of this as the federal government’s ‘slice’ of the economic pie.

Tax rates go up and down. Presidents come and go. But the government’s slice of the pie almost always remains the same 17% of GDP, with very small variations.

With data this strong, it seems rather obvious that the solution is to allow the economy to grow unrestrained.

If the economy grows rapidly, tax revenue will increase. And the national debt, at least as a percentage of GDP, will start to fall.

Here’s the problem: the national debt is growing MUCH faster than the US economy. In Fiscal Year 2016, for example, the debt grew by 7.84%.

Yet even when including the ‘benefits’ of inflation, the US economy only grew by 2.4% over the same period.

In other words, the debt is growing over THREE TIMES FASTER than the economy. This is the opposite of what needs to be happening.

What’s even more disturbing is that this pedestrian economic growth is happening at a time of record low interest rates.

Economists tell us that low interest rates are supposed to jumpstart GDP growth. But that’s not happening.

If GDP growth is this low now, what will happen if they continue to raise rates?

(And by the way, raising interest rates also has the side effect of increasing the government’s interest expense, essentially accelerating the debt problem.)

Look– It’s great to be optimistic and hope for the best. But this problem isn’t going away, and it would be ludicrous to continue believing this massive debt is consequence-free.

There’s no reason to panic or be alarmist.

But it’s clearly time for rational people to consider this obvious data… and start thinking about a Plan B.

http://www.zerohedge.com/news/...new-20-trillion-debt

quote:

Just look at the top four line items in the US government’s budget: Social Security, Medicare, Military, and, sadly, interest on the debt.

Those four line items alone account for nearly NINETY PERCENT of all US government spending.

Cutting Social Security or Medicare entitlements is political suicide.

Not top mention, both of those programs are actually EXPANDING as 10,000 Baby Boomers join the ranks of Social Security recipients every single day.

Then there’s military spending, which hardly seems likely to fall significantly in an age of constant threats and warfare.

The current White House proposal, in fact, is a 10% increase in military spending for the next fiscal year.

And last there’s interest on the debt, which absolutely cannot be cut without risking the most severe global financial meltdown ever seen in modern history.

So that’s basically 90% of the federal budget that’s here to stay… meaning there’s almost no chance they’re going to be able to reduce the debt by cutting spending.

This is the problem in a nutshell. At some quickly approaching point in the future, Congress will have to defund or radically restructure Medicare and Social Security. It will have to be a bi-partisan solution. Either party doing it unilaterally would be committing suicide, and I don't see the Dems or GOP growing the kind of backbone that would require. Forging that kind of bi-partisan effort will take a crisis of epic proportions.

I'm less than optimistic.

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At some quickly approaching point in the future...

The debt is growing over 3x faster than the economy! And yet, with a Republican Congress, and a Republican in the White House.... we just kicked the can down the road again.

It's going to take serious leadership to avoid a crisis of epic proportions. I'm wondering where that is going to come from?

A world war may take care of reducing the obligations of SS and Medicare.... Why do I suddenly feel like a Pelican Brief....

quote:

You’d think this would be front page news with warnings being shouted from the rooftops of America.
Yet curiously the story has scarcely been covered....

People are collectively burying their heads in the sand. No one wants to talk about it.

Well, except for William Devane.

Speaking of gold, where do you guys buy it from?

"Hi, I'm William Devane."

Seriously... that guy has made more money on gold than anyone else in the last 8 years or so.

But gold isn't the answer.
We are seriously fucked if we don't address this problem.

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Originally posted by chellim1:It's going to take serious leadership to avoid a crisis of epic proportions. I'm wondering where that is going to come from?

Not from any elected official. When was the last time anyone got elected by promising to REALLY cut benefits for anybody?

I'm not sure I consider social security and Medicare "entitlements" as most of us pay into these programs all of our working lives.
Of course over the years these programs have been bastardized and have had funds raised for other things.

quote:

Originally posted by chellim1:
Seriously... that guy has made more money on gold than anyone else in the last 8 years or so.

But gold isn't the answer.
We are seriously fucked if we don't address this problem.

Hopefully you're being facetious. Gold was $1800 on its way to $2500 5-10 years ago. I heard it 18 times a day and on the radio, too.

Gold has come up from close to $1000 in the last year or so.

quote:

Originally posted by BadDogPSD:
I'm not sure I consider social security and Medicare "entitlements" as most of us pay into these programs all of our working lives.
Of course over the years these programs have been bastardized and have had funds raised for other things.

Correct, they are only entitlements if the recipient never dropped a dime into them, if you paid in then you should get something back, if you didn't pay in you shouldn't get a wooden nickle unless your spouse paid in and you're getting that.

quote:

Year after year after year, the US government spends far more money than it collects in tax revenue.

I would love to see an Amendment that makes this illegal. Deal with it. Make it work.

quote:

Just look at the top four line items in the US government’s budget: Social Security, Medicare, Military, and, sadly, interest on the debt.

Those four line items alone account for nearly NINETY PERCENT of all US government spending.

Cutting Social Security or Medicare entitlements is political suicide.

Yet both must be cut, just the same. Make it work. Deal with it.

quote:

Then there’s military spending, which hardly seems likely to fall significantly in an age of constant threats and warfare.

The current White House proposal, in fact, is a 10% increase in military spending for the next fiscal year

Instead, they need to cut 10% to make room for the new 10% they want.

It's just that simple, and anything else is flatly wrong and ought not be allowed under any circumstances beyond, perhaps, some extraordinary situation (say, zombies, or aliens...). There is no fucking way, none, that they can't find 10% fat that it's safe to cut. Their spending is often outlandish and out of control. Pick a camo and stick to it, fuckers, and quit fighting amongst branches for attention and otherwise. You all work for us, and it's not your money, so how about acting like it... consistently... without exception...

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But perhaps it’s possible they can slash the national debt by growing tax revenue?

Possible. But unlikely.

Since the end of World War II, the US governments’ overall tax revenue has been VERY steady at roughly 17% of GDP.

You could think of this as the federal government’s ‘slice’ of the economic pie.

This, too, ought to be fixed by an Amendment, and for that matter, cap it at 15%, forever, and furthermore, cap all taxes at a maximum of 25%, Stale and Local can share that 10%.

And within that limitation, make it fucking work. Leaner, Meaner, Smaller, Better, more Optimized. That's the real work, the hard work, the respectable work, is making due with what you have, working within a defined limit, trimming fat and outdated things to make way for new...

Spending money, much less like there's a never ending supply, is easy, any asshole can do that, we don't need powerful politicians to fuck that up. Do your job, Congress, all Agencies, all branches, and if there's even one unnecessary janitor on the payroll, end that shit right fucking now. I suspect Congress alone wastes enough paper to fund a small town. It's ridiculous, this cycle, this aversion to reality and basic budget management.

quote:

Originally posted by roberth:

quote:

Originally posted by BadDogPSD:
I'm not sure I consider social security and Medicare "entitlements" as most of us pay into these programs all of our working lives.
Of course over the years these programs have been bastardized and have had funds raised for other things.

Correct, they are only entitlements if the recipient never dropped a dime into them, if you paid in then you should get something back, if you didn't pay in you shouldn't get a wooden nickle unless your spouse paid in and you're getting that.

That seems to be the complete opposite of what an entitlement is. We paid in to it and therefore are entitled or have a right to collect on it. Hence, social security and Medicare are entitlements. No?

quote:

Originally posted by chellim1:
Seriously... that guy has made more money on gold than anyone else in the last 8 years or so.

But gold isn't the answer.
We are seriously fucked if we don't address this problem.

There is no answer politicians will consider. The correction is coming and unavoidable. Combine that with an immoral and desperate population.

Social Security, if it had not been turned into an IOU hole by Lyndon Johnson, would not rightly be termed an entitlement. The money was there, the Federal government used it and left IOUs there instead. Now that there's no real money there, it's being called an entitlement since there would be no benefits unless the government pay for them out of revenues. There are entitlements. Social Security and Medicare have been drained by politicians stealing the money to fund the real entitlements and I won't even get into naming the ones I can think of, but I bet you can name a few on your own.

only two entitlements

Medicare/Medicaid and Unsociable Insecurity

you've paid into them, you're entitled to collect from them

that was the promise

Everything else is up for grabs. We need a wholesale cleansing of the government - getting rid of entire organizations that we don't need - Department of Energy, Department of Agriculture, Department of Veterans Affairs, Department of Education, Environmental Protection Agency...and the list goes on

Eliminating these agencies 100% won't solve the problem - that will take decades to reap the benefits but you want less government spending, get less government. Cuts everywhere. The only thing that needs to be considered is military procurement and why we have an airplane - the F22 - that is already considered by the AF to be obsolete when its barely started flying, and why we have an airplane - the F35 - that has been in development for approximately 18 years and it still isn't right.

We can't fight the debt - that money is already wasted - what we need to fight is the deficit.

But we all know that will never happen.

quote:

Originally posted by nhtagmember:
only two entitlements

Medicare/Medicaid and Unsociable Insecurity

you've paid into them, you're entitled to collect from them

that was the promise

Everything else is up for grabs. We need a wholesale cleansing of the government - getting rid of entire organizations that we don't need - Department of Energy, Department of Agriculture, Department of Veterans Affairs, Department of Education, Environmental Protection Agency...and the list goes on

Eliminating these agencies 100% won't solve the problem - that will take decades to reap the benefits but you want less government spending, get less government. Cuts everywhere. The only thing that needs to be considered is military procurement and why we have an airplane - the F22 - that is already considered by the AF to be obsolete when its barely started flying, and why we have an airplane - the F35 - that has been in development for approximately 18 years and it still isn't right.

We can't fight the debt - that money is already wasted - what we need to fight is the deficit.

But we all know that will never happen.

Sorry man. Promise broken. They stole our money. It is gone.

Pay 7% interest on that $20 Trillion and let me know how that works for you.

quote:

A world war may take care of reducing the obligations of SS and Medicare.

No it would kill off the young who are supposed to pay for the ponzi scheme.

FWIW, there was an interesting read in the WSJ Opinions page a couple of days ago on "entitlements".

http://thedeepstate.com/entitlements-growing/

Why Entitlements Keep Growing, and Growing, and ...
By Tunku Varadarajan, The Wall Street Journal, September 9, 2017

Donald Trump’s gleeful deal with the Democrats—ratcheting up the debt ceiling, as well as the ire of the Republican establishment—puts John Cogan’s mind on 1972. Starting in February of that year, the Democratic presidential candidates engaged in a bidding war over Social Security to gain their party’s nomination. Sen. George McGovern kicked off the political auction with a call for a 20% increase in monthly payments. Sen. Edmund Muskie followed suit, as did Rep. Wilbur Mills, chairman of the Ways and Means Committee. Former Vice President Hubert Humphrey, never one to be outdone, offered a succulent 25%.

Mr. Cogan has just written a riveting, massive book, “The High Cost of Good Intentions,” on the history of entitlements in the U.S., and he describes how in 1972 the Senate “attached an across-the-board, permanent increase of 20% in Social Security benefits to a must-pass bill” on the debt ceiling. President Nixon grumbled loudly but signed it into law. In October, a month before his re-election, “Nixon reversed course and availed himself of an opportunity to take credit for the increase,” Mr. Cogan says. “When checks went out to some 28 million recipients, they were accompanied by a letter that said that the increase was ‘signed into law by President Richard Nixon.’ ”

The Nixon episode shows, says Mr. Cogan, that entitlements have been the main cause of America’s rising national debt since the early 1970s. Mr. Trump’s pact with the Democrats is part of a pattern: “The debt ceiling has to be raised this year because elected representatives have again failed to take action to control entitlement spending.”
A faculty member at Stanford’s Public Policy Program and a fellow at the university’s Hoover Institution, Mr. Cogan, 70, is one of those old-fangled American men who are always inclined to play down their achievements. The latest of his is the book that draws us together in conversation. To be published later this month by Stanford University Press, it is a 400-page account of how federal entitlement programs evolved across two centuries “and the common forces that have been at work in causing their expansion.”

Mr. Cogan conceived the book about four years ago when, as part of his research into 19th-century spending patterns, he “saw this remarkable phenomenon of the growth in Civil War pensions. By the 1890s, 30 years after it had ended, pensions from the war accounted for 40% of all federal government spending.” About a million people were getting Civil War pensions, he found, compared with 8,000 in 1873, eight years after the war. Mr. Cogan wondered what caused that “extraordinary growth” and whether it was unique.

When he went back to the stacks to look at pensions from the Revolutionary War, he saw “exactly the same pattern.” It dawned on him, he says, that this matched “the evolutionary pattern of modern entitlements, such as Social Security, Medicare, Medicaid, food stamps.”

As he explains it, entitlement programs typically begin with relatively narrow eligibility requirements. “For the Civil and Revolutionary War pensions,” he says, “original eligibility was limited to soldiers who had been injured in wartime service, or the widows of those killed in battle.” Marching and fighting wasn’t enough; you had to have lost life or limb for your country. But these rules were incrementally relaxed, and by 30 or 40 years after each war, virtually all veterans were covered, “regardless of whether you were disabled or not, and regardless of whether your disability was related to wartime service.”

We’ve seen the same phenomenon in modern entitlements. “When Social Security started, we had about 50% of the workforce covered,” he says. That was 1935. “By the 1950s, coverage was universal. The Social Security disability program was originally limited to those 50 years or older. And you had to be totally disabled—so disabled that you were unable to perform any job in the U.S. economy.” Gradually, Congress eliminated the age requirement. Then lawmakers allowed benefits for temporary disabilities.

“You see the exact same phenomenon in the low-income benefit entitlement programs,” Mr. Cogan says. Medicaid “extends to all individuals who live in poverty, regardless of whether or not they’re receiving cash welfare.” ObamaCare gave federal health-insurance subsidies to households with incomes up to 400% of the poverty line—currently $98,400 for a family of four.


The same forces that were at play in the 19th century are alive and kicking (the economy) today. “It’s step-by-step expansion,” Mr. Cogan says. “Each expansion tends to be permanent. And each expansion then serves as a base upon which Congress considers the next expansions.”

But what fuels this process? Why is it so relentless? Mr. Cogan identifies a form of moral argument as being a key factor. “After an entitlement is created,” he says, “individuals who are just outside the eligibility line start clamoring for assistance on the grounds that they’re no less ‘worthy’ of receiving assistance than the group that is eligible.” In the case of Social Security disability, why should a 49-year-old who was disabled in a car accident receive any less help than a person who’d had an accident at 50?

“The natural human impulse to treat similarly situated individuals equally under the law,” Mr. Cogan argues, inevitably results in “serial, repeated expansions of eligibility.” Congress responded in the 19th and early 20th centuries, when there were large budget surpluses. “But it also responds now, in the 21st century,” when deficits are endemic and the country is $20 trillion in debt.

Can an entitlement expansion, once granted, ever be taken back? Mr. Cogan refuses to say “never,” but says such rescindments “occur under rather extraordinary circumstances.” He offers a remarkable example: “You might ask, ‘Who achieved the largest reduction in any entitlement in the history of the country?’ Well, surprisingly, it was FDR, a person whom we normally associate with launching the modern era of entitlements.”

When Franklin D. Roosevelt took office in 1933, “the budget was in shambles, in deep deficit as a consequence of the Great Depression.” The new president had campaigned on a promise to put Washington’s fiscal house in order, and at the time, veterans’ pensions accounted for 25% of all government spending. “Within seven days in office,” Mr. Cogan says, “FDR asked Congress to repeal the disability entitlements to World War I, Philippine War, and Boxer Rebellion veterans. Congress gave him that authority, and within a year, he’d knocked nearly 400,000 veterans off the pension rolls. By the time we got to World War II, the benefit rolls were a third lower than they were when he took office.”

Who would feature in an Entitlement Reform Hall of Fame? Mr. Cogan’s blue eyes shine contentedly at this question, as he utters the two words he seems to love most: Grover Cleveland. “He was the very first president to take on an entitlement. He objected to the large Civil War program and thought it needed to be reformed.” Cleveland was largely unsuccessful, but was a “remarkably courageous president.” In his time, Congress had started passing private relief bills, giving out individual pensions “on a grand scale. They’d take 100 or 200 of these bills on a Friday afternoon and pass them with a single vote. Incredibly, 55% of all bills introduced in the Senate in its 1885 to 1887 session were such private pension bills.”

The irrepressible Cleveland “started vetoing these private bills right away”—220 of them in his first term—which explains why he still holds the presidential record for most vetoes. Mr. Cogan admires Cleveland particularly because “each of his vetoes contains an explanation of the reason why and the facts of the case. As time went on, he became more exasperated with Congress, and his veto messages more acerbic.” In one veto, involving a widow who’d claimed her husband had died in battle, Cleveland noted that the man had died in 1882 and wrote: “No cause is given for the soldier’s death, but it is not claimed that it resulted from his military service.” A newspaper later reported the soldier had “choked to death on a piece of beef while gorging himself in a drunken spree.”

The FDR of 1933 is also one of Mr. Cogan’s Hall of Famers, as is Ronald Reagan : “There’s no president who has undertaken entitlement reform in as comprehensive a way.” Reagan “fought a very good fight and he slowed the growth of entitlements like no other president ever had.” He achieved significant reductions in 1981 and 1982, and then “battled to preserve those changes through the rest of his two terms. The growth of entitlements during his time in office is the slowest of any modern administration.” Still, this striking accomplishment “ultimately only slowed, and did not reduce, the aggregate financial burden of entitlements.”

Mr. Cogan also gives an honorable mention to Bill Clinton for his welfare-reform plan. Mr. Clinton’s was “a fairly narrow reform compared to the broad swath of entitlements, but history will show that it’s one of the most successful reforms that’s ever been achieved. The reform not only reduced welfare’s burden on taxpayers, it has also benefited the recipients, whom the old unreformed program had been harming.”

I ask Mr. Cogan how America can break the grip of ever-expanding entitlements. He balks at offering a specific policy agenda, insisting, that his book is a work of economic history. But he does identify three necessary political conditions for any entitlement reform. The first is presidential leadership, without which “there has never been a significant reduction in an entitlement.” Veterans benefits in the 1930s would not have been trimmed without the “strong leadership” of FDR. The restraint on growing expenditures in the 1980s wouldn’t have happened “without Reagan’s steadfast commitment to spending control.” And there would have been no welfare reform in 1996 without Mr. Clinton’s push.

Mr. Cogan’s second sine qua non is “a significant agreement among the general public and the elected representatives that there’s a problem.” In Roosevelt’s day, the belief was widespread that the fiscal crisis had to be addressed. Both Reagan and Mr. Clinton enjoyed public support and a workable legislative consensus.

The third condition is the most piquant, especially given the warring nature of American politics today. Any solution to the problem of entitlements, Mr. Cogan says, “has to be bipartisan.” No significant restraint, he believes, can be imposed by one party alone: “It took a bipartisan effort on the part of Congress and presidents to create our entitlements problem. It’ll take bipartisanship to solve the problem.”

Mr. Varadarajan is a research fellow in journalism at Stanford University’s Hoover Institution