The Debt Worrier’s Paradox

The National Debt (Source: U.S. Treasury Department)

As of 2/29/2012 the national debt stood at $15.49 trillion… and rising.

So far in the first 60 days of calendar year 2012 the national debt has already grown $266 billion. The growth rate is about $4.4 billion per day.

Even more disturbing is the growth rate of public debt. So far this year public debt has grown $275 billion at a rate of nearly $4.6 billion per day.

Public debt is growing faster than the national debt!! That should be absolutely horrible news, yet it isn’t entirely bad.

Why? Therein lies the debt worrier’s paradox.

Sovereign Debt

U.S. public debt – $10.72 trillion – is what we owe to foreign governments and outside investors. Once it gets to large, it is the most economically damaging type of debt for governments to have. Its what is killing Greece.

Unlike “intragovernmental holdings”, it MUST be paid back. That is what counts against a government’s credit rating. Our credit rating has already been lowered once and could be lowered again soon if we don’t fix our long-term debt problem.

Public debt is also called “sovereign debt”. That is the problem in Europe that we hear about so prominently in the news.

Why is U.S. sovereign debt growing faster than even the humongous national debt? The answer is simple. We are cashing out Social Security, Medicare and other public investments now held as U.S. Treasury securities.

Fast growing sovereign debt is NOT a good thing.

Draining the Trust Funds

Social Security, Medicare and the Prescription Drug Program are not self-sufficient. Their expenses exceed their revenues. That will remain so forever unless changes in those programs are made.

No amount of job growth and/or tax increases can pay for their projected unfunded liabilities:

  • $15.5 trillion: Social Security
  • $81.7 trillion: Medicare
  • $20.5 trillion: Prescription Drug Program

Social Security has been particularly hard hit by growing expenses, due to more retirements, and by four years worth of payroll tax cuts. In ARRA, the payroll tax cut was called a “tax credit”, but that is the same thing.

To pay for their budget shortfalls those programs are cashing out their trusts to meet today’s expenses. Necessarily, more public borrowing must be done to make up the difference. That is why the United States sovereign debt is growing at an accelerated pace.

In other words, we are dipping into the trust funds to keep up with the government’s voracious appetite for spending beyond its means.

Debt that used to be held in public trust fund investments is now morphing into sovereign debt.

U.S. Treasury Yields

Rapidly rising sovereign debt would be horrifying news if it weren’t for one bright spot… borrowing is a bargain right now!

As of 3/2/2012, the interest yield on 10-year U.S. bonds was 1.99%. Yields are at historic lows!

Interest paid on today’s borrowing, by far, is the lowest its been since 1990 and won’t likely be this low again for decades… assuming we avoid a global depression.

By chance, it is just as well that we don’t have Social Security surplus revenues. U.S. public investing in Treasury securities is a terrible idea right now. You can’t make anything off of it at the moment.

The Silver Lining

If the federal government could refinance the entire national debt at today’s Treasury yield rate we’d be a long way toward solving our long-term debt problem. Our debt would naturally erode away as economic growth returns back to normal levels.

Unfortunately, there isn’t $15.49 trillion dollars laying around anywhere in the world to totally refinance our national debt.

But this is the perfect time to borrow as much money as possible. The federal government should be borrowing to fund worthy infrastructure or other large scale institutional projects that have a lasting positive impact on economic growth.

That thought is what drives debt worriers crazy.


Today’s greatest fiscal irony is that it is the right moment for government to borrow and spend as much as possible. We should be making strategic investments in national infrastructure or other improvements that drives long-term economic growth and creates jobs.

The time for borrowing will never be better.

However, we are entering a period of systemic sovereign debt growth since expenses are totally out-of-whack with income. We are spending $4.4 billion dollars more each day than comes in as revenue, and that is just to keep up with day-to-day expenses!! We are facing a rapid growth spurt in debt-to-GDP ratio because of the unfunded liabilities.

Why did we ever allow ourselves to get into this pickle? Look no further than Congresses and Presidents, both past and present, and ourselves.

Big government screwed it up for all of us by making costly promises they couldn’t possibly keep, just like Greece did. Us ordinary citizens, ever clamoring for more freebies from the government, are also to blame.

And now, when government borrowing costs are the lowest that we will see in our lifetimes, we are unable to take advantage of it to stimulate desperately needed economic recovery.

It is misguided thinking that we can tax the rich and close corporate loopholes enough to solve all our debt problems. We can’t! Not even remotely close. But it must be part of the solution.

The most crucial element is to cut spending and cut till it hurt, then scarf up what little we can spare for limited stimulus.

And, yes, cutting spending will further slow recovery.

For past fiscal sins, we must endure short-term suffering and rightsize entitlements to attain long-term prosperity.


About azleader

Learning to see life more clearly... one image at a time!

Posted on Mar 2, 2012, in Debt, Debt crisis, Deficit, economics, Entitlements, National Debt, news, Politics, Social Security, Taxes. Bookmark the permalink. 5 Comments.

  1. “For past fiscal sins, we must endure short-term suffering and rightsize entitlements to attain long-term prosperity.”

    Good advice, AZ. Unfortunately, the Democrats don’t believe it is necessary and the GOP, even if they should make a clean sweep in November, will not follow your advice because they rightly believe they would thrown out of office at the first opportunity if they were to apply the “short term suffering”. Too many people have become accustomed to big nanny government. America will continue to follow the path of Greece.

  2. It is only on your site that I get the correct picture of the debt scene. The sovereign and intragovernmental parts are key, and few understand this. I have seen on big commercial web sites big confusion over the numbers. The pundits are retards. I have found more truth combing this site than 30 minutes of crapola from the tv, or even the Wall Street Journal. Keep up the good work. I like the factualist approach you use.

  1. Pingback: » Blog Archive » The Debt Worrier's Paradox « Inform The Pundits!

Comments and questions are welcomed!

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: