The Congressional Budget Office projects the federal debt will exceed the economy's size by the end of 2021, and will reach 202% of GDP over the next 30 years; and this was before Mr. Biden's most recent $1.9 trillion stimulus package. When will it stop? The answer is a frightening one.
As many of our readers probably know, we live in Puerto Rico where the debate over statehood is currently dominating the daily news juxtaposed with another salient item; our ongoing bad-debt negotiations.
You see, Puerto Rico went bust a few years back. Wild pension programs, a rail system few use, matching funds for federal programs, and a host of other social experiments funded by deficit spending and, at best, questionable bond issues, came to a head when people stopped buying the bonds and everything suddenly came to a crashing halt. To address this problem the federal government created PROMESA, a fiscal oversight board (The "Junta" as we call it here) to sort out the mess and negotiate with the creditors. We'll see. A recently filed plan was very promising, but our governor is still trying to hold onto those pensions which on one hand is noble, since the people expecting them did work with that expectation in mind; but is also misguided, because the pensions were never feasible to begin with (hence the deficit spending).
However, the supreme irony here is that the federal government would be overseeing anything regarding fiscal responsibility for anyone. As of this week, the United States are most likely adding nearly another $2,000,000,000,000 to our national debt and inching every closer to the horrific number of 100% of our GDP. And lest we forget, that does not include future debt; namely Social Security payments owed to future recipients that we conveniently keep off our national Balance Sheet.
This is a grave situation no matter how much some economists like to pretend otherwise. In an excellent piece written by William G. Gale last year (May 2, 2019) reprinted in Brookings and originally published by the Washington Post entitled: "Five myths about federal debt," Mr. Gale does an exceptional job of dispelling these myths. I will leave the reader to explore this article in its entirety, but I will pull-out one salient extract from MYTH NO. 5: There’s an easy solution to the debt.
Any serious plan to lower the debt must involve significant tax increases and/or major spending cuts. Foreign aid, government salaries and other programs that politicians typically target are tiny, and eliminating them would not make much difference. Almost 70 percent of federal spending goes to Social Security, health care, defense and interest on the debt. Spending cuts will have to come from those areas. We can’t unilaterally cut interest payments — that’s called defaulting. And the other programs are extremely popular.
Popularity notwithstanding, like Puerto Rico and its generous pension programs, Social Security is not feasible. It never was; but that is a whole essay in and of itself. Now we want to increase social spending? What number will be good? 150% of the national budget? This is absurd in the extreme, but that is exactly what's happening with a segment within congress who want to focus on "popularity" and"the right thing to do" as if these are tangible factors in a realistic world.
Here is the reality. If you borrow money and can't pay it back, you are bankrupt. However, this segment in congress has been influenced by a rather curious concept called Modern Monetary Theory where, so the thinking goes, governments can print as much money as they like. As Stephanie Kelton, a prominent advocate of modern monetary theory, says, “we should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy.” For those of you who ever played Monopoly this is the macroeconomic equivalent of grabbing some extra money from your next-door neighbor's game set if you run short, and adding it to your own. Suddenly landing on Boardwalk and Park Place is no big deal; you have plenty of money to pay the rent. The only problem is, that's because the value of the rent has deflated because the money supply has inflated. What happens when you land on those properties for the thirteenth time and there are no more neighbor's with game sets to raid for more money?
And that happens with governments too. Just ask Argentina (three times) or Greece, Italy, Ireland, Spain, Portugal. The EU is teetering on a debt crises. Who is going to be left to buy our bonds when we can't sell any more to the Social Security Trust Fund because there are not enough employees contributing FICA taxes to service the debt?
This week in the In-Depth Perspective Report at The Socratic Review we will be exploring governmental bankruptcy and its dangers to us and our future as a sovereign country. I hope you will find it interesting and enlightening.
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