Why the surging US debt should have you prepping for a fiscal crisis
CNBC
The U.S. national debt is on pace to rise to record levels vs. the U.S. economy, its only precedent being the debt levels reached in World War II, according to a new report from the Congressional Budget Office. However, the government paid off much of that debt in the middle of the last century and the U.S. saw its most economically prosperous years in the ensuing decades, whereas the current debt has been neglected, morphing into a festering wound.
While interest rates are unlikely to rise significantly in the near future, they could see a dramatic spike in the long term. According to the Congressional Budget Office, the rise in national debt will stagnate economic growth within 10 years.
A stagnant economy could retroactively drain government revenue and back the government into a corner of perpetual borrowing. Tapered spending or increased taxes could help us dodge a catastrophic economic meltdown. The CBO's report adopted common conservative arguments, warning that financial aid to the poor leaves them with no incentive to join the workforce while entitlement spending as a whole continues to depress the economy.
Although we should see slight improvement over the next couple of years as we climb out of the crater-sized hole George W. Bush left in his wake, things look much worse over the long haul. The CBO blames the bleak long-term economic outlook on large deficits that occurred under Obama's stimulus, as well as the many Americans leaving the labor force and taking refuge under the government's umbrella instead of making their own. The retirement of the baby boomers and the lack of motivation in the workforce will also hike up the debt burden by causing future deficits. The CBO believes that we'll see deficits as high as $1 trillion by 2025.
The CBO can make projections, but not even it knows for certain how high the debt can get before an economic meltdown ensues. However, there will come a time when investors lose trust in the United States' ability to pay back it's loans and will be forced to raise the interest rates they charge on them.
Interest rates are projected stay at very low levels for the foreseeable future. But when they increase, it will greatly effect federal spending. U.S. interest payments are expected to more than double in the coming decade, jumping from 1.3% of GDP to 3% of GDP. These seemingly small deviations in percentage points appear harmless, but they could have a dramatic effect on federal debt many years down the road. It's time for our government, and, more importantly, its people, to stop ignoring these numbers and display prudence in financial behavior.
With a Congress that refuses to tighten the lid on spending despite an unprecedentedly high national debt, it shouldn't come as a great shock if the debt continues to mount. It may require a fiscal catastrophe--per usual--to bring Washington down from cloud nine. It is imperative that you sleep with one eye open on your spending and saving habits, because taxes could see a spike parallel to that of our nation's debt.















Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, "there'd be a revolution before tomorrow morning".
Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.
To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.
The central bank can print as much money as it wishes (Look up the term FIAT currency). But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.
It's this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."
In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. (Look up the term Fractional Banking) This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.
What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite.
Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true. The Bank's job is to actually run the system, and of late, the system has not been running especially well. It's possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.
But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.
Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that's what's happening here, we might soon be in a position to learn if Henry Ford was right.