C i am guessing
But I'm wondering if there is a point where they can't do that anymore?
if our income taxes go to pay interest on the public debt... and the public debt is increasing.. at what point does our income tax become not enough to pay it? and when that happens do taxes go up or does something else happen besides default?
Topic: The implications of the United States' "unsustainable debt trajectory" - page 2. (Read 3455 times)
February 24, 2013, 11:02:17 PM
February 24, 2013, 10:10:18 PM
A research paper titled Crunch Time: Fiscal Crises and the Role of Monetary Policy came out last week which is summarized reasonably well by a CNN article. The message is similar to that in a book I am reading that argues that the US Debt and Dollar are both overvalued and set to pop.
So here is my observation. Do share your thoughts.
The US debt is currently ~$16 trillion and it is growing by $1 trillion annually.
One of these three things will happen.
I have trouble envisioning A happening. I have trouble imagining a public tolerating something like 10% tax increases and 30% spending cuts at the same time. The public has grown used to deficit spending and will demand that politicians continue on our path. The obvious problem is that there will inevitably come a time when investors will not be willing to lend the government more money, which will cause interest rates to rise, which will cause investors to flee US investments which will cause severe dollar inflation.
The US is increasingly borrowing to pay back debt. This is a ponzi scheme. I suspect that investors in US debt understand this. The situation reminds me strongly of Pirate's ponzi scheme from months ago: may people wondered openly how he could have raised so much money despite the thing so clearly being a ponzi scheme but the answer eventually became obvious: many of the investors understood that it was a ponzi scheme and were playing anyway hoping to pull out before everyone else and come out unscathed. Right when Pirate showed the first signs of straining (lowered interest payments) people wanted their money back en-mass and that was the end. I believe that the same mentality might be in effect today with US debt: once the thing shows signs of straining, interest rates start to rise, people will try to sell the debt and it will resemble a popped bubble. The US won't be able to (or won't want to) continue with the interest payments and either B or C above will happen.
Thoughts?
So here is my observation. Do share your thoughts.
The US debt is currently ~$16 trillion and it is growing by $1 trillion annually.
One of these three things will happen.
- A. Politicians in the US will start working together in the coming years and will significantly raise taxes and reduce spending on Medicare, Medicaid, and defense in order to turn the 1 trillion dollar deficit into a 500 billion dollar surplus and pay down the debt over the next 40 years. They do this without the support of the electorate. As an example, if taxes aren't raised, this would require reducing spending from 3.5 trillion per year to 2 trillion, a 43% drop. The situation in the coming years only gets worse as health costs climb.
- B. The government defaults
- C. The FED monetizes the debt causing vast inflation
I have trouble envisioning A happening. I have trouble imagining a public tolerating something like 10% tax increases and 30% spending cuts at the same time. The public has grown used to deficit spending and will demand that politicians continue on our path. The obvious problem is that there will inevitably come a time when investors will not be willing to lend the government more money, which will cause interest rates to rise, which will cause investors to flee US investments which will cause severe dollar inflation.
The US is increasingly borrowing to pay back debt. This is a ponzi scheme. I suspect that investors in US debt understand this. The situation reminds me strongly of Pirate's ponzi scheme from months ago: may people wondered openly how he could have raised so much money despite the thing so clearly being a ponzi scheme but the answer eventually became obvious: many of the investors understood that it was a ponzi scheme and were playing anyway hoping to pull out before everyone else and come out unscathed. Right when Pirate showed the first signs of straining (lowered interest payments) people wanted their money back en-mass and that was the end. I believe that the same mentality might be in effect today with US debt: once the thing shows signs of straining, interest rates start to rise, people will try to sell the debt and it will resemble a popped bubble. The US won't be able to (or won't want to) continue with the interest payments and either B or C above will happen.
Thoughts?
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