$19Trillion Debt is no problem?

This article from Business Insider is what passes for economic commentary on the budget and national debt today. Ugh.

Yes the $19Trillion figure is US, but whilst our numbers in Australia are vastly different, the principles are identical. It’s astonishing to me how many people, including many who should know better, are firmly in the ‘head in the sand’ camp when it comes to the long-term consequences of sustained debt. Let’s lay out a few home-truths that should come as a surprise to no one, but I’m sure will be a point of bitter dispute for many:

  1. Borrowed money costs more. And the longer we hold over the debt, the more that money cost us. So if some infrastructure, or ‘stimulus spending’ costs $1B, but we finance it over 30 years then in actual fact it cost us $2B+ depending on the terms of the finance. Now from an accounting point of view it’s wrong to say that we’re not paying off our debts… we are, we’re just adding new ones on top at an even faster rate. This is important if you find yourself in a semantic debate with an accountant or an economist, but it makes no practical difference to the budget bottom line. We’re carrying more and more finance costs with each new dollar of borrowed money.
  2. Carrying debt is robbing from the future. In exactly the same way that having savings enables you to pay with past effort for present costs, going into debt is paying with future effort for present costs… and you can only do so much of that before people start to question your ability… or your intention, of paying it back. People like the author of this article like to fantasize that we can carry debt indefinitely, that because we keep paying off the old debts and replacing them with new ones, that our creditors are happy and in theory we never need to actually pay the total back… and they’re actually right, but incredibly stupid. Doing this means that every dollar we spend costs two… or more. And it’s forcing our children to fund our lifestyle today through their taxes tomorrow.
  3. We can’t print our way out of debt. I was staggered to read that suggestion in this article, and that’s what really sealed the deal for me to post about it. If you’re not familiar with the problems with ‘printing your way out of debt’, google Yugoslavia, Zimbabwe, Venezuela, or save yourself all the trouble and just google ‘Banana Republic’. Bottom line, if you’re even thinking about printing your way out of debt, then your creditors are thinking about pulling your credit and increasing your costs of financing… and you’re entering a financial ‘death spiral’ you’re not going to get back out of.

The author makes a mockery of himself throughout this article, and in fact mocks the very things we need to be doing as a matter of urgency. Yes we need to balance the budget and start reducing the debt ASAP. For every dollar we don’t cut today, we’re costing ourselves two dollars or more of spending in future, just to keep up with the cost of finance. Whilst it is theoretically possible to sustain high levels of debt indefinitely, it’s absolutely stupid, and given that we’re not ‘sustaining’ high debt levels, we’re growing our debt levels, it stands to reason that sooner or later we’ll reach a point where we’re unable to grow our debt any further and we’ll have to balance our budget simply to not take on more debt… plus we’ll have the burden of making the interest payments on the debt we’ve accrued.

So to put it simply, yes it’s true that we can sustain high levels of debt indefinitely, and no it’s not a good idea or something we should think of as normal or be ok with. And everything this article says is good, is bad, and everything they say is bad… well you get the idea.

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Categories: Capitalism, Taxation
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One thought on “$19Trillion Debt is no problem?”

  1. My only thing on this topic is who has the right to issue money in Australia? The parliament of the Commonwealth of Australia had the right to be the only money issuer in its constitution, which could be leant interest free to fund infrastructure projects like the Adelaide to Darwin railway, and by my research has given up that right to PRIVATE banks who lend the money (creating it on little screens)at interest (which is never created) and gaining massive profits. Money is created as DEBT. You need a loan of $100,000 they don’t go take other peoples savings and lend it to you (have you ever been to your bank and the money you had saved is not there cause they leant it to someone else?) they put that $100,000 in your account by pressing keys on a computer thus creating $100,000 more in the money that is in the economy. When you pay back the loan (the $100,000 is taken from the economy by deleting it off of the computer screen) and any interest which has been payed is pure profit for the banks. The only thing is they created $ 100,000 and over say 10 years you paid back $150,000 so the bank with no risk at all to them (as they haven’t put anything of value of theirs at risk in this contract) gets $50,000 just for adding extra zeros to your account. Also they have never created the $50,000 in interest you have paid back so therefore it is impossible to ever get out of debt. Eg if it was the first transaction ever in an economy and they created the $100,000 for you to build your business and thats all the money that has been created in the economy and tell you that you meed to pay back $150,000 where are you getting that extra $50,000 from to pay interest. Even if they leant 10 people a $100,000 and you earnt $150,000 in the year and paid back your loan, not everyone who got a loan will be able to pay back the loan as there is only $850,000 left in circulation (economy) yet 9 more people need to pay $150,000 each or default on loan. With 10 people they create a million dollars but expect you (Everyone who got a loan) to pay back 1.5 million using only the million in circulation. IMPOSSIBLE. So as a mathematics equation MONEY is created as DEBT, therefore Money = DEBT or DEBT = Money and that would mean NO DEBT = NO Money in this system.

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