To finish this little penny-0dreadful three-act about federal misrule, I’d like to talk for a bit about the deficit (the amount we spend over what we take in every year), and the debt (the accumulation of those deficits over time, minus payoffs. People, particularly fiscal conservatives, like me, are worried about he federal debt, which is now larger than the economy itself. Is this a problem?
I’d like to start with the authoritative assertion of one of America’s heads of state: “Deficits don’t matter”. Well, do they?
I’d also like to thank the treasury for keeping its web servers and data libraries open so I could get some basic numbers for this article.
The way America finances its deficits is neat and easy: we sell bonds. You can buy bonds that pay back over months or years, as long as the government gets to play with your money this year. Who holds those bonds is interesting, and fairly well profiled, here.
* Note that this graphic is a little outdated. It is c. 2011. I’m going to assume nothing marvelous has happened to these bins, and that they are more or less in the same proportions today.
A famous canard of many is that most of the debt is held by the fed or social security anyway, so what’s the worry if they don’t get paid? As you can see in the link above, domestic investors outweigh social security bond holdings, and foreign investors *really* outweigh it.
Another canard is that China holds most of our debt. Not true, at all. The Fed holds half again as much debt as China. 1.1 Trillion is nothing to sneeze at, however. That’s almost as much as Americans spend on Traffic every year, and half what we spend on Wealth Care every year. Serious money, but not the whole story.
So as long as people get paid, everything is alright. And it doesn’t really cost us much to service that 17 trillion dollars in debt. Due to declining interest rates on these bonds (and every other asset in the “economy”) we are spending less on servicing the debt that we did in the 80s or 90s.
After 2007, the interest rates we paid back to investors dropped to their lowest levels on record. Interest rates are a measure of opportunity in the economy. If there is no opportunity to be bought elsewhere (real estate, construction, venture capital, etc.), then you may as well have 0% interest rates. It has been getting cheaper and cheaper for the government to borrow during its time of greatest borrowing.
The reason people are willing to keep buying bonds from us is that they are sure that they will get paid back. Certainty is worth a lot, especially c. 2007-2009, when other formerly reliable places like the Euro and um, Europe were undergoing their own collapses. If people are not certain they will get paid back, that is when there is trouble. That is when they take their money elsewhere. Even during the economic collapse that America caused, we were still the elsewhere of last safe haven. Go Us.
The government isn’t the GDP, thankfully, so the GDP is poor measure for the burden of the debt service. From what I could find, however, the service on the debt hovers around 4-10% of the federal non-budget every year.
I’ve been reading a bit about the stock watering days of the 19th century, when companies would finance their growth by selling more stock than the company was worth. As long as there was growth, everybody got paid and everything was gravy. But the minute the growth paused, as in the Equine Influenza epizootic of 1872, bubbles popped all over the place. At a glance, it looks like America was in recession for about half of the 1800s from such chicanery. I was told the gold standard would prevent this from ever happening, and yet we endured more recessions under the gold standard than it ever did under fiat currency.
That is what makes the issue of default so urgent. I’ve read that the Tea Party vision for budgeting is that a default will at last force the government to choose to live within its means. I hope the government is able to turn on a dime like that. They might need to in a week. Deficits don’t matter, until they do.
Monday, I’m going to move back towards matters of real import starting with a bit of optimism.