The U.S. is Not Drowning in Debt

I didnt say it, he did. interesting article.

http://moneyland.time.com/2011/07/15...wning-in-debt/

THE ECONOMY
The U.S. Is Not Drowning In Debt
By ZACHARY KARABELL | @zacharykarabell | July 15, 2011 | 6 COMMENTS

In case you haven’t noticed, Washington is currently consumed in an acrimonious debate over whether to raise the debt ceiling. There is no agreement about whether to do so or how, but both parties appear to accept the logic that the United States is suffering from an unacceptably high level of government debt and that further debt will doom the U.S. to generations of decline. Judging by polling data, large swaths of the country agree. Nonetheless, that consensus is wrong.

The Republicans have generally been most vocal on this score. Eric Cantor, the House Whip and a major player in the negotiations, has said,

“The government is a fiscal train wreck. It is over $14 trillion in debt and borrows nearly 40 cents of every dollar that it spends. Before us lie two divergent paths: one defined by crushing debt, slow growth and diminished opportunity; and one defined by achievement, innovation and American leadership. We stand at a crossroads. If we are to leave our children a nation that offers everyone a fair shot at earning their success, we must take the later path… House Republicans have taken an honest, responsible approach to confront the debt crisis facing our nation.”
Yet even President Obama believes further debt is untenable and has pledged to cut spending by trillions of dollars in the coming years.

What neither side seems to recognize — or at least acknowledge — is that what matters about the debt isn’t the dollar amount per se, but how much it costs us to service it. And by that measure, the debt isn’t nearly as big a problem as it’s being made out to be.

Yes, the federal debt has grown by nearly $3 trillion dollars in the past three years. And yes, the dollar amount of that debt is quite large (in excess of $14 trillion and headed toward $15 trillion should the ceiling be raised). But large numbers are not the problem. The U.S. has a large economy (slightly larger than that debt number). And, crucially, we have very low interest rates.

Because of those low rates, the amount the U.S. government pays to service its debt is, relative to the size of the economy, less than it was paying throughout the boom years of the 1980s and 1990s and for most of the last decade. The Congressional Budget Office estimates that net interest on the debt (which is what the government pays to service it) would be $225 billion for fiscal year 2011. The latest figures put that a bit higher, so let’s call it $250 billion. That’s about 1.6% of American output, which is lower than at any point since the 1970s – except for 2003 through 2005, when it was closer to 1.4%.

Under Ronald Reagan, the first George Bush, and Bill Clinton, payments on federal debt often got above 3% of GDP. Under Bush the second, payments were about where they are now. Yet suddenly, we are in a near collective hysteria.

If you point all this out, the response you typically get is that today’s interest rates are artificially and atypically low — and that when they skyrocket, that debt burden will become much more painful. Well, yes, but rates don’t skyrocket unless there is a collapse of market confidence. Rates may rise, and that will force hard choices in future spending or trigger the need for new sources of revenue. But only crisis triggers dramatic rate swings, and the only thing that will create that crisis is brinksmanship over the debt ceiling or levels of debt that are substantially higher than they are now.

I’m not saying that the money we’ve borrowed recently has been well spent. One could persuasively argue that the government has done a terrible job of using debt to spur economic activity. But that has nothing to do with whether the debt is itself harming the country.

This view of debt isn’t popular. But the numbers aren’t debatable and indicate that by historical standards there is no debt emergency except for the one we are making. Our diminishing competitiveness and ability to invest in the future – those are real crises, and ones that the debt ceiling debate will do nothing to solve.



Read more: http://moneyland.time.com/2011/07/15...#ixzz1SBi1RW2x

http://www.washingtonpost.com/busine...y.html?hpid=z1
Ezra Klein
Beyond a default: Catastrophic Calculations
Friday, July 15, 7:56 PM
It’s easy to understand why the government will have more trouble borrowing if it fails to pay its debts. It’s a bit harder to see why ordinary Americans, the city of Pittsburgh, hospitals in Iowa, or medium-size corporations will have more trouble borrowing.
But they will


Debate heats up between Obama, lawmakers over debt limit: Negotiations are in limbo as the clock is ticking toward an Aug. 2 deadline for raising the debt ceiling.
Gallery

Debt ceiling doomsday scenario: What happens if Congress fails to raise the debt limit and the U.S. can no longer make payments on its obligations?
And their trouble borrowing is the primary way a default, or even something too close to it for the market’s comfort, could deal a body blow to the economy.

It all comes back to U.S. Treasury bonds, which are the foundation of almost all other financial products — the base of the global financial pyramid.

If the federal government’s borrowing costs rise, so will everyone else’s. Mortgages rates will jump, car loans will be harder to come by, universities won’t be able to float bonds, cities won’t be able to fund themselves.

Treasuries are supposed to set the rate of “riskless return” — the price of loaning someone money and knowing, with perfect certainty, that they’ll pay you back, with interest. So when lenders decide how much to charge, they start with the riskless rate and then add to it to cover the risk that you won’t pay them back, and the inconvenience of having to wait for you to pay them back.

It’s a practice called benchmarking, and it’s everywhere: in your mortgage, your credit card, your car payments, the loan you took out to hire three new employees at your business. It’s even common internationally. The fact that Brazilian loans tie themselves to the American government’s debt just shows the high esteem in which the world holds us.

But if the rate on 10-year Treasuries rises, it means rates rise for everything else, too. That’s why economists consider the Federal Reserve’s power to affect interest rates — a power it has virtually exhausted during this crisis — so potent: if you can move the basic interest rate, you can move the whole economy.

“There’s a whole credit structure,” says Pete Davis, president of Davis Capital Investment Ideas. “Think of it as roads and bridges, but it’s finance, it’s all connected, and it’s all on top of Treasuries. . . . So when you shake the basis of it, everything on top of it shakes, too.”