The Weiner Component #140C – Congress & the National Debt

National-Debt-GDP

National-Debt-GDP (Photo credit: Wikipedia)

The National or Public Debt is money that the United States has borrowed above what it collects in taxes and which, with taxes, it uses to operate the country.

 

The high current level of the National Debt was brought about by the three last Republican Presidents: Ronald Reagan and the two Bush presidents, father and son.  The majority of the balance came about by policies and wars by these three men.  Prior to Reagan assuming office the National Debt, which had existed since the inception of this nation, was under one trillion dollars.

 

Republican led economizing actions toward the Public or National Debt have been penny wise and dollar stupid; particularly since the Republicans took control of the House of Representatives in 2011.  Since this period their economizing policies have actually exacerbated both the unemployment situation and lowered the overall economic health of the United States, actually keeping the GDP (Gross National Product) considerably lower than it could or should have been.    Their tactics of forcing their agenda through by refusing to enact necessary legislation unless their economizing bills were also passed have cost the government millions, if not billions.  This is particularly true with bills funding the Federal Government or raising the nation’s debt limit that they mostly caused to be as high as it is.  In fact we are just passed a point in time when the government once again needed to have the debt limit raised above the 18.1 trillion limit or cause financial crises by not allowing the Treasury to have enough funds to pay the continuing costs of running the Federal Government.

 

Fortunately this was one of the final acts of the retiring Speaker of the House of Representatives, John Boehner.  He, with the majority leader of the Senate, Mitch McConnell, and with President Obama worked out a compromise bill through a telephone conference.  They raised the National Debt so that it will not have to be adjusted for two years and also funded the military properly for the oncoming year.  This was done in both Houses of Congress with Democratic help.

 

The conservative Congress presumably wants to or was attempting to use this as a bargaining/blackmailing tool to force the President to cut discretionary spending, which already has been and will again be automatically cut by the sequester at the beginning of the New Year.

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The National Debt, all 18.1 trillion of it, consists of two categories, Public and Private Debt.  The Federal Government owns through its assorted agencies probably, at least, 50% of its own debt.  It could be a lot higher than that.

 

Question: Can an entity owe itself money?  Can any individual or entity owe itself money and legally charge itself interest on these funds?  Apparently only the Federal Government can and does do this.

 

But is it real?  Since money has no intrinsic value the Federal Government could print any amount it wishes.  There is absolutely nothing behind the dollar but the word of the National Government.  There are, of course, reasons why it doesn’t but the Federal Reserve can and does occasionally increase the amount of money in circulation in the National Cash Flow.

 

Of course if any agency like Social Security, which has been showing a profit since 1983 when it was last adjusted and is currently owed about three trillion dollars, were to need any of its additional funds or some of the monies owed to it, that would create problems since the monies has been and are continuing to be spent, both the principle and the interest, and Social Security is given book credit for all these amounts.

 

This process is also true for a large number of government funds that run a surplus; the excess money is freely added to the general fund.  The major exception to this practice would be the Federal Reserve which will and has used debt funds to make adjustments in the National Cash Flow, adding money when there is a shortage during periods of deflation or recession and taking funds out of the National Cash Flow during periods of increasing inflation when there is too much money available in the flow.

 

The rest of the Public or National Debt is private, borrowed on a short or long term basis, from individuals, countries, and other entities.  The major foreign holder of American debt is China, (whether its individuals, companies, or the government itself is another question), holding about 3 trillion dollars’ worth of this loan paper.  Japan is next holding a little less.  The third, I believe, is India.  Companies and individuals hold this mortgage paper.  The FED has sales of it going on all the time, selling short to long term bonds.

 

In addition people buy EE bonds as gifts and as a form of savings.  These bonds function over a 5 year period and their cost is less than the face value of the bond which is the value after 5 years.  They make nice gift for youngsters in that they cost less than their face value and if they are held over 5 years pay additional interest.  I bonds tend to cost more and generally pay a higher rate of interest.  Here the interest is added on to the bond.  There are no state or local taxes on these bonds.

 

How real is the Public or National Debt if the Federal Government owns a large percentage of its own debt?  An interesting question and different economists have different conclusions or interpretations of this fact.

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Alan Greenspan, a conservative economist, was appointed Federal Reserve Chairman by President Ronald Reagan in August 1987 and served until January of 2006.  He held that the Free Market was essential in making economic decisions.  Reagan and his advisors followed the same principle.  They deregulated the banking industry and allowed them to move freely forward.

 

Greenspan served for almost 20 years as Chairman, the second longest tenure of any chairman in the FED and was looked upon by many members of Congress almost as a seer who could foretell the economic future.  Unfortunately Greenspan, even with all the information provided by the Federal Reserve’s constant monitoring of the economy missed the major change that occurred during his term as Chairman.  That was the need for rapid monetary expansion by a rapidly growing economy.  Instead of the FED increasing the money supply in a sane fashion it was left to the unregulated banks to expand the amount of currency in circulation.  This was done slowly at first and then gathered speed like a free moving vehicle rushing downhill.  By 2007 the signs of eminent economic collapse were present.  But they were faced with denial by a generation of bankers who had known only rising real estate values.  The Real Estate Crash came in late 2008 when the entire real estate market disintegrated overnight.  So much for economic awareness by the experts!

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First, what is the real National Debt?  Is it just the Private Debt or is it both, the Public and the Private Debt?  The American dollar today is still considered one of the most prized currencies in the world.  The FED has never had any trouble selling its bonds both domestically and to foreign investors.   Most other nations rank their currencies to the value of the dollar.  Some economic theories or beliefs seem to occasionally be in a process of change.  Finally the United States does not seem to be even near the point of going bankrupt.

 

We are moving into economic areas where it would seem new laws of economics seem to be about to be discovered.  Money, in terms of Macroeconomics, is related to the system of taxation but not dependent upon it.  Money, to the state, is a tool utilized to enhance productivity and the levels of national consumption and standards of living for the entire population.

 

The determining factor of how much money should be in circulation is or should be determined by the level of inflation or deflation that exists in the nation.  A high rate of inflation determines that not enough goods and services are being produced. People are bidding up the price of everything.  A rapid drop in prices indicates that too much goods and services are available and there is not enough cash in the general society to purchase them.  One of the main jobs of the Federal Reserve is to maintain a balance between these two forces. For this process the 12 Federal Reserve Banks are supposed to constantly monitor their areas of responsibility.

 

This was not done properly by the FED from the 1970s through 2008 and the Real Estate Collapse was brought about by the deregulated irresponsible banking industry that created excess trillions of dollars that were added to the National Cash Flow.  If the increased cash needed for the economic growth for this period had gradually been added to the national economy by the Federal Reserve there would never have been the 2008 Real Estate Disaster.  The FED, under Alan Greenspan, allowed the Free Market or unregulated Capitalism to bring about economic disaster.

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Many economists believe that as long as the Public Debt does not exceed the Gross National Product (GDP), which is all the goods and services produced in the nation in one fiscal year, the country is safe.  The GDP is estimated to be 17,419 trillion dollars for 2015, the Debt Limit has to be raised beyond 18.1 trillion dollars.  The estimated growth in the GDP between 2014 and 2015 is estimated to be 651 billion dollars.

 

There have been times in the past, usually during major wars or economic emergencies like the Great Depression, when government spending has exceeded the value of the GDP.   These have lasted for short periods of time.  Once it regularly exceeds that level there is, according to some economists, a serious problem.

 

Also as we move toward the middle of the current century the retired population and those needing more continual medical treatment will increase significantly raising the costs of Social Security and Medicare.  Both of these programs will take a larger and larger percentage of discretionary spending continually bringing up the Federal Government’s costs.  Presumably the costs will increase far above the GDP.  At this point, according to some economists, the ever growing National Debt could cause continual economic harm to the country.

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If we accept this premise as accurate there are certain known variables that have not been factored into this premise.  There may also be other unknown variables that could come up.

 

The first major factor to consider is time.  Most of these future projections are based upon the present; that is, given a future of a decade or two or more, if everything remains exactly the same except for what is being discussed, then the projection will happen.  Generally no one can accurately project all the changes that will come about ten or more years from now.  On that basis any prediction is flawed.

 

Think of your own lives.  What was your world like ten or more years ago?  Could you even imagine being where you are now?  Could you imagine the world as it is now?  I recently found myself standing in a supermarket checkout line looking at a display of chocolate bars.  They were on sale, 4 for five dollars.  For no reason I said aloud, “What happened to the 5 cent bars of chocolate?”  The person in front of me, who was being checked out, start to muse aloud about how, as a child, how much candy he could buy then for a quarter.  He was in his mid-fifties.  Values or prices have changed considerably since then.  Money has decreased in value.  That is one variable that no one really projected.

 

Social Security was last fixed or its premiums were raised in 1983 during the presidency of Ronald Reagan.  It has had since then and currently still has a surplus.  Presumably sometime well past the middle of this century it will begin using this surplus and toward the end of this century will have used it out and have to be readjusted, if this is not done earlier.  Medicare was separated from social security in the late 1980s.  From that time on it was funded by an additional payroll tax paid by, like social security, both by employees and employers.  Both or either of these funds can be again increased or fixed.

 

What many economists are projecting into the future is what will happen if the present becomes the future.  Essentially with no other changes in the future except the increase in the elderly population they are predicting what will happen.  They are not taking any other variabilities into consideration.  The probability of the projection coming true as stated is very low, probably well under 25%.

 

In the last few years the amount of money, as a percentage of taxes collected, has been significantly decreasing but so has the cost of running the Federal Government.  We could possibly in Barak Obama’s last year as president actually have a slight surplus decreasing the National or Public Debt.  This did occur during Clinton’s last year as President.

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Will the Federal Government raise the National Debt further toward the end of this century?  We still haven’t defined what is the real National Debt or, for that matter, the reality of the National Debt as a factor in the operation of this nation in terms of Macroeconomics.  We are moving forward in time with assorted future projections by assorted economists, some of these forecasts contradicting other forecasts.

 

Has Congress even begun to study this problem?  Most of what I have heard from Republican Congressmen has been doom and gloom, the country is headed for bankruptcy unless we cut down Federal spending.  Yet the Republican headed Congress can spend well over 4 and 1/2 million dollars holding numerous standing committee hearings trying to tear down or blame Hillary Rodham Clinton for what happened in Benghazi, Libya while Clinton was Secretary of State.  And this same Republican Congress earlier wasted over a billion dollars shutting down the Federal Government by refusing to fund it.  Some of the potential Republican candidates for the 2016 Presidential Elections seem to want to massively expand the war against ISIS.  They seem to have a problem dealing with the real world!

English: The holders of the United States nati...

English: The holders of the United States national debt as of December 2008. (Photo credit: Wikipedia)