A Little More Simple Math: The Debt Crisis Multiple Choice

As has become the norm in this increasingly complex world, almost all of the information we get here in the cheap seats is fast pitch media spin.  Let’s just try to keep it simple enough to see through the posturing, shall we?

The budget deficit is roughly $1.6 trillion and equal to about 12% of GDP.  “Let me be clear”:  this means that 12% of our economy is based on our willingness and ability to borrow (and/or print) that much and then spend it on guns and butter. 

Balancing the budget, if it were ever to be accomplished, would necessarily reduce the size of our economy by 12%.  Why?  Because we wouldn’t be borrowing (and/or printing) that money any longer.  And, just for the record, any real decline in GDP is, at best, a recession, and on this scale more accurately described as a depression.  OK, clear on this?

It matters very little whether the budget is balanced by spending cuts or tax increases.  These various mechanisms merely target the pain.  Raise taxes and the private sector bears the major brunt of sacrifice, partly in reduced household spending and, in the end, a loss of jobs more or less equivalent to the amount of money sucked out of the economy. 

Take 12% out of private sector spending and you’ll likely see unemployment increase by a commensurate amount.  Based on current civilian employment, that would be roughly 16,800,000 new job losses.  Hey, just keeping it real.

So, as any reasonable person should understand, we might also simply reduce federal spending; learn to live within our means.  So, take $1.6 trillion off the budget and, well, we get more or less equal outcomes:  12% decline in GDP and a commensurate reduction in employment.  Of course a bigger share of these would be federal employees.  As these currently number about 4.4 million, however, even firing all of them won’t do the job.  The difference would be made up by every government contractor and those who depend on their salaries.

Either way, it’s 12% of phony, ginned up, debt encrusted GDP that goes away.  Either way it will shrink the economy and, therefore, the number of jobs in the economy.  Don’t kid yourself (or let anyone else tell you differently), that’s the real problem with deficit spending…it’s a bad drug.  When it get’s to this scale, there are no “happy outcomes”.

So, we might also keep “kicking the can down the road” as they say and raise the debt limit ad infinitum.  What’s that get us in the long run?  Well, we do get to “extend and pretend” for another day or year, but at some point, our creditors call our bluff anyway.  The price of those borrowed funds will rise.  The only outcome of this is virtually the same, with a nice bout of inflation and high interest rates thrown into the equation.

In point of fact all the while we have blithely become accustomed to spending 12% of phone fiat GDP dollars, we’ve been experiencing the supposed “benefits” of inflation.  After all, it’s the only thing that has prevented serious deflation, right?  Our GDP would be smaller without it, so we’re already 12 points higher than we would have been, ignoring of course all of the increased economic potential that would have come to pass as result of less debt, smaller government, lower prices, etc.

But, where this really starts to get serious is when the market starts to realize that this 12% growth rate in our debt is not static.  Shoot, even if it were, 12% is big enough to have a doubling time of only 6 years.  That means we’d need to raise the debt limit by another $14+ trillion by 2018.  But, as it happens, these rates are not static at all, they accelerate…a purely mathematical phenomenon related to the interest carry itself, which accrues at a faster and faster pace until, they dominate the budget. 

But, (yes) it gets worse.  The more rapidly the deficit grows, the harder it becomes to sell all that debt.  There’s only so much appetite for it, as we’ve discovered already, necessitating the Fed to print money to buy our Treasury debt.  This problem only get’s worse as the supply of debt grows larger.  So either the interest rates for the bonds goes up or we print more money to buy them…

which devalues the currency and further spurs inflation….

 which leads the market to devalue the bonds and require higher interest rates…

which requires higher interest costs as part of the budget and increases the deficit….

which increases the supply of bonds needed to sell….

ad infinitum…well, almost.  At some point, all of this blows up.  Even if you stop that runaway train, say in the neighborhood of 15% 10 year bond rates, you’re now consuming 93% of our current revenue stream with paying interest on the debt. 

Oh, yeah, one more thing.  Higher interest rates kills consumer spending and business investment and the GDP. 

Practically speaking, I don’t see how any of these roads don’t lead to a major depression.  It all really boils down to how much inflation we get in the process and which sectors lose the most jobs.




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