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Understanding the National Debt

August 9, 2018

Dealing with the national debt is a continuing conversation and regardless of how anyone in Congress feels or what they say, no one is doing anything to address its mounting rise. Here is some information to help you make some sense of its multifaceted complexity.

Some facts

  • The national debt is what the federal government owes. The amount as of today is about $21,300,000,000,000; that is $21.3 trillion. You can get an update anytime you want by clicking here:
  • The projected interest to be paid in the next twelve months is $310 billion.
  • The total federal projected expenditures over the next twelve months is $4.2 trillion.
  • The total federal projected revenues over the next twelve months is $3.4 trillion.
  • Simple arithmetic: $4.2 – $3.4 = $.8 trillion deficit or $800 billion more spending than income increasing the national debt by that amount in the next year.

A logical argument

  • More arithmetic: If the average interest rate the government pays increases by 1 percentage point the interest payments will increase by about $220 billion making the total interest payments $530 billion.
  • For the past few years interest rates have been pretty stable, but that stability has been drastically disrupted recently by large increases in the short term rates. At some point, it is probable that the long term rates will also increase further pushing up the government’s interest costs.
  • Simple fact: When governmental expenditures increase it will increase the national debt unless there is a corresponding increase in revenue.
  • The primary source of government revenues are taxes. Tax revenues usually increase when the economy expands raising income levels that are then subject to taxation, or when the tax rates are increased.
  • Comment: When tax rates are increased it tends to stunt economic growth, which then will reduce or retard government revenue growth sometimes wiping out any windfall from the tax rate increase.
  • Tax rate increases also will reduce taxpayer spending which will dampen the economy.
  • A possible plan that has been suggested is for the government to increase spending on projects that will accelerate job creation thereby increasing the tax base, but at its best this is a slow drawn out process, and the funding for these projects will further increase the debt.

Vicious cycle

  • When there is a deficit and taxes are reduced, and if income doesn’t expand sufficiently keeping the gap between spending and revenue about the same, a vicious cycle is created by growing interest costs on increasing debt that then further increases the interest costs.
  • Note that as the government borrowing is increased, interest rates will trend upward to offset the increased amount of debt that the market will need to absorb.
  • More fuel for the vicious cycle.
  • Increased borrowing and increased interest rates usually are accompanied by decreased confidence in governmental policy further causing interest rate increases and reductions in taxpayer spending. Add that to the vicious cycle.

It won’t be getting better

  • All of these items, i.e. the national debt, annual deficits, interest rates and a lessening of taxpayer confidence, will be increasing annually for the foreseeable future exasperating the situation.
  • That is, it won’t be getting better anytime soon.

What is being done about this?

  • Question: Who in Washington is doing anything about this?
  • Answer: No one!
  • Question: What legislator would actively move to cut government spending, or increase taxes?
  • Answer: No one!
  • Question: Is the level of taxpayer confidence in our legislators increasing or decreasing?
  • Answer: What do you think?

Alternative hypotheses

  • Inflation can help cure some of the burden of repaying the debt by lessening the value of the debt.
  • The government can literally “print” money fueling inflation and that would increase the money in circulation having the effect of devaluing the debt.

I am concerned about the mounting debt, but cannot figure out anything I could do, other than writing a blog such as this attempting to make people aware of the situation, as I see it. As to my long term planning, it is only as good as the stability of the country’s economic situation. Right now this is not keeping me awake, but it has been creeping into my mind a little more than I would like.

The above expresses my personal opinions. I have been assisted with considerable research from a summer intern, Anthony Imbesi, who skillfully found me the objective data I needed to present my opinions, but he is in no way expressing any opinion about the above.

Ed Mendlowitz

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