The Debt Bomb

During the holiday season, generosity rather than parsimony prevails.  After Christmas comes the bills but for the moment they can wait.   And in Washington too, generosity is the watchword as both major parties have now clearly abandoned any pretense to be concerned with the deficit, our mounting public debt and other obligations.  Any responsible American should be very concerned however....

As I began writing this evening, US national debt was $21,855,143,508,172 and growing by $1,000,000 every 37 seconds ( USdebtclock.org ).  Average debt per taxpayer was $178,960.  How did we get here?

Public debt in America has exploded since 1980 with the slope steepening with every recession.  Additional contribution factors include the War on Terror together with unfunded pension and entitlement obligations ( www.thebalance.com ).   Add to that new concerns that the recent tax cuts will not pay for themselves with increased government revenue in other areas.

But surely we can afford this since we have such a large economy, no?  Well if we look at  the critical debt to gross domestic product (GDP) ratio we're among the worst in the world.

The numbers for China are wrong in this map; since the economy is largely state owned and financed, they should be up with Japan at  more than 250% debt-to-GDP.   We can take only small comfort however, sitting at 108% debt-to-GDP.    Unfortunately, this situation is only going to get worse:

The International Monetary Fund and Deutsche Bank have pointed out that American debt-to-GDP is set to grow by another 10% in the next five years - assuming we don't have a serious economic slowdown in that period which would make it even worse.  In their definitive study of financial crises over the past 800 years, Reinhart & Rogoff (2010) pointed out that the tipping point where debts get unmanageable and disaster can strike is debt-to-GDP greater than 90%.   We're well into the danger zone.

We have enjoyed historically low interest rates over the past 18 years but they are about to revert to the longer term mean.  Historical average long term interest rates have generally stayed above 5%.  Interest rates are increasing and as they do, the debt service burden (interest) will skyrocket - eating up an increasingly large share of our taxes and the Federal budget.

There are only four ways a country can get out from crippling debt:

1. Increase tax revenue to pay down the principal.  Who's up for a big tax hike?
2. Inflate your currency (a lot!) and pay your debts with inflated, worthless money. Weimar Germany tried it and more recently so did Zimbabwe.
3. Write-off debt: this happened in the Great Depression and the Great Recession. 
4. Grow your economy rapidly and use increased tax revenues to pay down the principal.  A political favorite, this is a bit of a moon-shot and our currently elected politicians have proven incapable of doing it now with GDP growing at nearly 4%.

So, the first three ways are painful and the fourth unlikely.   We're in a mess.  We have broken the contract with our descendants to leave them a better country and future than we received.

Only one major American political party is committed to dealing with the debt bomb - The Alliance Party.   The first plank in the party's platform is:

We believe the national debt is one of the most serious crises facing our country and must be remedied through fiscal responsibility, transparency and balanced budgets.

Join us to make sure this issue gets tackled in the next general election.  

- Mike Power


PS. It's been an hour or so since I started this post and $100,000,000 has been added to the national debt.

We are now the Alliance Party of Nevada!

On Monday December 10 we became the Alliance Party of Nevada - the old Nevada Modern Whig Party with some new supporters joining the campaign. 

Now as a larger group we can move on to tackle the gridlock in Washington and build an effective voice for moderate Nevadans fed up with the status quo.