The Iceberg

Thanks to technological advances like radar and satellite tracking, icebergs aren’t the bane of shipping that they once were, but we can still learn something from them.  Most of the mass of an iceberg is under water, which is why people refer to the “tip” of an iceberg.  Well, the national debt is like an iceberg in some ways.

We see a number, right now over 19 trillion dollars.  That number is so large that nothing in our everyday experience helps us to comprehend it.  It’s almost doubled in less than eight years under the progressive Obama administration and there’s no reason to think that Democrats would curb that growth.  That’s an annual increase of around 9%.  Are your CDs paying that?

What we don’t see is what lurks beneath that number; the impact on our economy and national security.  Like any other debt, the national debt isn’t free; the government must pay interest on that debt to the bondholders.  Interest rates have been at record lows for years but they won’t stay there forever.  As interest rates rise the government will have to pay higher interest on new debt as it’s issued.  This is one part of the debt iceberg we don’t see.  Debt interest is paid from tax revenues, so as the debt rises the government will either have less money to spend on national defense, social programs, and environmental protection or it will have to raise taxes.  A second part of the debt iceberg that’s largely hidden is that the debt eventually has to be repaid as the bonds mature.  This is a huge and growing mortgage on future generations.  Of course that debt can always be refinanced at a higher interest rate but we all know where that leads: bankruptcy.  The third, and least conspicuous hidden part of the debt iceberg is that trillions of dollars in US debt are held by foreign countries.  That gives these countries leverage to demand special treatment and even an economic weapon to use against us in case of a conflict.

Here’s something to think about.  The national debt is now over 105% of the US GDP.  That’s right, it’s higher than the total annual output of our nation.  Anyone who thinks this can go on forever must believe that money grows on trees.

Here’s what we need to bring this situation under control before the iceberg of debt sinks the ship of state:

  1. Responsible elected officials who recognize the problem and are actually willing to do something about it.  This means keeping spending within revenues and actively reducing outstanding debt.
  2. A plan to reduce the outstanding debt.  If we ever get real tax reform (not just more pages of rules) this should be part of it.  For example, under a flat tax we could have Flat+1, where the flat portion covered expenses, 1/2 of the extra 1% goes to debt reduction, and the other 1/2 of the extra 1% goes to upgrading our infrastructure (see “Infrastructure: Circulatory System of a Nation” for more on this issue).
  3. Limits on both the total amount of debt that can be held by foreign countries and the portion of that amount that can be held by any one country.  See “The More You Owe Me the More I Own You” for further discussion of limits on foreign debt.

 

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Security II

Economic security at the national level is basically sound money management, including setting priorities, managing budgets, and limiting debt.  Congress doesn’t seem to be too good at these.  Well run companies carefully manage their capital structure.  Government at all levels doesn’t bother because it can always raise taxes.  Debt can reach a point where raising taxes alone won’t work.  Can anyone even conceive of how much $17 trillion is?  How are our children and grandchildren supposed to pay this off?  True, it’s not all due at the same time, but as some debt is retired we keep adding more so the trend is upward.  Has foreign debt given other countries too much leverage in setting US policy, or could it be used as an economic weapon?

At the personal level economic security starts with a good education that leads to a decent paying job that leads to a secure retirement.  This was an improving trend in our country but that trend seems to have reversed as the middle class is in decline.

Emotional security is simply the feeling that things are good in this country.  For generations many parents found emotional security in seeing their children do better than they did.  I was the first in my family to go to college and my parents were proud.  For immigrants from oppressive countries emotional security may come from freedom from the fear of a brutal government.  Emotional security contributes to the “pursuit of happiness”.

There’s an economic metric that retailers watch called the Consumer Confidence index.  It’s a measure of both the economic and emotional status of the population.  Higher confidence means consumers are more likely to spend than when they’re worried.