Monday, June 27, 2011

“Dream A Little Dream”: How Long Would It Take To Pay Off The U.S. Federal Government Debt?

Let’s dream: Let’s imagine that the American political leadership decides to get serious about U.S. Federal government debt reduction—crazy as it may sound.

Actually, that’s too crazy. The American political leadership will never “do the right thing” with regards the deficit. After all, last spring, the American political leadership couldn’t agree on a measly $50 billion worth of cuts—a mere 1.4% of the total Federal government budget.

Okay, so in order to give our daydream a veneer of verisimilitude, let’s pretend instead that the members of Congress and the president are the victims of a cunning biological terrorist attack—they are infected with truly massive doses of both the Responsibility Bug and the Austerity Virus.

And then—under the unnatural effects of these sneaky terrorist pathogens—the American political leadership decides to cut the deficit outright, and start retiring the national debt.

Yeah: That’s much more realistic.

How much would they have to cut, in order to pay off the national debt? And how long would it take, to retire that national debt in its entirety?

Well, in order to figure this out, first they’d have to get honest about exactly how much is the U.S. Federal government’s debt. (Honesty is a perverse side-effect of the Responsibility Bug and the Austerity Virus. Scientists are working feverishly to try to stop this honesty stuff.)

Total outstanding Treasury debt is $9.7 trillion—but that’s not the entire Federal government debt. To those $9.7 trillion, you have to add another $4.6 trillion, which corresponds to “intragovernmental holdings”—basically IOU’s or markers the Federal government has put in the famed “Social Security lockbox”.

Thus the total Federal government debt: $14.35 trillion.

That’s the number the Congress and President of our dreams has to close: $14.35 trillion. Or to be more precise: $14,344,491,791,132.71.

The current deficit is $1.65 trillion per year—but that bald number doesn’t help up much.

A better factoid would be knowing, How much revenue does the U.S. Federal government bring in per year, via taxes, fees and so on?

That would be $2.173 trillion, according to the OMB.

So let’s imagine that the Capitol Hill and the White House of our dreams agree to immediately cut all deficit-expenditures—that is, cut $1.65 trillion right off the top—and then they also agree to pay down the national debt on an “accelerated” schedule: Let’s say they set aside a third of all Federal revenue to pay down the Federal government debt. In other words, for every $3 of revenue the Federal government brings in, $2 will be for government services and operations, and another $1 will be for paying down the debt.

A third of $2.173 trillion is $724 billion.

So they start paying off the Federal government debt at this pace: $724 billion a year—a TARP per year. The Federal government “makes do” with just the two-thirds of its revenue, $1.45 trillion.

Question: How long would it take for the Federal government to pay off the total Federal government debt?

Answer: If the Federal government took on no new debt, and instead paid off all its outstanding debt at a pace of $724 billion per year, it would take just shy of 20 years to pay off the National debt.

That’s right: At a minimum, it’ll take 20 years to pay off the Federal government deficit—assuming there are balanced budgets from here to fiscal year 2032, and the Federal government devotes one-third of its total revenue just to retiring the National debt.

Like I told you at the outset: This is just a dream.

Let’s keep on dreaming—hell, it’s one of the few things in this life that’s free.

So now that they’re cutting the deficit and the debt, what will our Dream-Congress and Dream-President have to cut in the budget, in order to make this target?

Let’s assume that Social Security is the sacred cow—after all, people have actually contributed to this fund, so in a sense it’s “theirs”. So no cuts in Social Security.

And no cuts in the interest payments, which in 2010 was $197 billion. Can’t unilaterally cut what you owe, so that’s also Untouchable.

Social Security was $701 billion in 2010. To make the math simple, let’s ignore the demographic time-bomb that is the Baby Boomer generation. So say it’s the same $700 billion moving forward. Ditto with the interest payments, which were $197 billion in 2010 but which of course would begin to decrease as we retired debt. These two fudges more-or-less cancel one another out.

So if Social Security and interest payments are Untouchable, that means $900 billion gets lopped off our $1.45 trillion budget.

That leaves us with $550 billion a year for “everything else”: The military, Medicare, Medicaid, mandatory and discretionary expenditures, infrastructure, NASA, the FBI, Homeland Security—everything else has to be covered by that $550 billion. A year.

Thus every other Federal government department would have to be cut by about 80%.

Sounds extreme, huh? But 80% cuts across the board is the number, once you start to think about it:

If the total outlays of the Federal government in 2010 were $3.45 trillion, and we’ve said that $900 billion of that is Untouchable in our new $1.45 trillion budget, then that leaves us with $550 billion to cover what used to be $2.55 trillion in expenditures.

That is, 80% cuts.

Thus the military would go down from about $700 billion (not including wars) to $140 billion. Medicare and Medicaid? From about $800 billion down to $160 billion. And so on, across every budget item.

An easier way to think of it is from the point of view of employment: If we cut 80% of the budget, how many Federal employees would we have to lay off?

Well, according to the U.S. Office of Personnel Management, there were 4.43 million people employed by the Federal government in 2009, of which 1.6 million were military personnel.

If we lay off 80% of that work force, we’d reduce the Federal government to a mere 880,000 employees for all branches and departments.

Or in other words, we’d have to lay off 3.54 million people. They’d be some very unhappy voters, those 3.54 million unemployed—but they’d be doing their bit, to reduce the deficit!

So they’d be happy, right?

. . . right?


This, of course, is a dream: Let’s get back to the nightmare.

Like I said, last Spring, the Congress and the White House could barely manage to cut a measly $50 billion from the Federal government budget—a mere 1.4% of the total Federal government outlays.

So there is no way—ever—that the political leadership will get serious about reducing the deficit, much less the overall debt. Hell, they’re about to raise the debt limit, and probably kick it up by a couple of trillion dollars—at least!

So there’ll never be any cuts—ever.

Therefore, the U.S. Federal government has to look at other alternatives to get out of paying its debt—and generate more nominal revenue.

After all, that huge Baby Boom generation is beginning to retire and—wouldn’t you know it—they didn’t provide for themselves in their retirement: They will be completely dependent on Social Security, which is as everyone knows a pay-as-you-go scheme. Or in other words, a Ponzi scheme.

Therefore, the Federal government can’t cut spending—and has to increase nominal spending. In other words, it has to go into even more debt.

In the end, there are only two ways to get out of a sovereign debt you can’t pay, or don’t want to pay: Either default, or inflate.

The U.S. Federal government will never default—because if it did, the entire U.S. financial superstructure would blow up on the spot. Even if it were a “half-hour default”, as some Neanderthal Republican politicians are saying ought to happen, it would still be a credit event—all sorts of contractual hedges would trigger. Even if this “default” really were merely a half-hour long, it would be akin to throwing sand into the gears of a nuclear reactor—unpredictably damaging to the U.S. financial system, potentially from merely “very bad” all the way to “mortal”.

So no default.

Therefore, inflate.

QE-2 is ending—but QE-lite is still going strong: The Federal Reserve reinvestment of excedents from its MBS and other toxic asset positions, brought onto the Fed’s balance sheet back during QE-1 in 2008 and 2009.

QE-lite is about $25 billion a month.

Furthermore, QE-3 is likely in the offing, as the Treasury department simply does not have the buyers for the debt it has on deck—and the Federal Reserve has become the buyer of last resort. The Fed can—and probably will—launch QE-3 under the cover that the “recovery” has been “sluggish”, and that therefore more monetary stimulus is necessary.

Therefore, more money printing by the Fed, to keep the Treasury department funded.

Therefore, more inflation, as we have been seeing lately, even in the official numbers.

Therefore—inevitably—an eventual Moment of Clarity in the markets, when they realize at a zeitgeist level that Fed-induced inflation is the only solution to the U.S. Federal government debt issue.

When that Moment of Clarity in the markets happens, then that’s the day the dollar dies: Weimar here we come.

Don’t believe me? OK—then go convince Capitol Hill and the White House to get serious about cutting the deficit: Go tell them to eliminate the national debt in 20 years. See if they take any serious steps in that direction.

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