Mar

31

Most Americans would quickly answer "Of course it is". But hold on; not so fast. My On Line Dictionary says:

debt |det noun • the state of owing money

…something, typically money, that is owed or due : "I paid off my debts"

The US Federal Debt is reported as [Ref: www.deficitsdomatter.org]:$ 9,383,418,000,000 as of last week. Truly a "princely sum". And why is it so high? Most would say it is obvious; it is because of past (and current) government deficit spending. So it seems clear to anyone that we are rapidly increasing our National Debt because we are spending more than we are collecting in taxes and from other sources (fines, import duties, etc.).

At the same time, inflation is hovering around 4.28% (that is as of a month ago, the more recent figure is 4.03%) [Ref: inflationdata.com ]

Assuming inflation hovers at around that rate for the year, what effect will it have on us?

It will reduce the "street value" of all assets at about that rate, including the dividends we collect and that cash under your mattress.

But it will also reduce the "street value" of our debts, including our home mortgage and what we owe on our cars, etc.

And that applies equally to our humongous National Debt.

Applying the inflation rate predicted for 2008 (4.28%) to the debt ($ 9.383 trillion) says its street value will be reduced by: $ 401 billion

The US Federal Deficit for 2007 is reported as:  The U.S. federal budget deficit will fall for the third year running, totaling $158 billion in fiscal-year 2007" [Ref: blogs.wsj.com ]

Thus the deficit is projected to be well under half the reduction in the street value of the debt, resulting in a net reduction in the real debt value of :

$401 – $158 or about $240 billion in current dollars.


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11 Comments so far

  1. Lon Evans on March 31, 2008 3:13 am

    G-d Almighty Mr. Hanes, Are you some sort of oddball, or just ignorant of history? Go back and do but a bit of research. Think Germany, post Versailles. Yeah, that ended well. "Let's just abrogate our debt by means of inflation!" So, you're ready to pay $250 for a loaf of bread? How about $1000 for a gallon of gas? Once initiated, Mr. Hanes, when does it end? What, with World War Three? You've got to be a Bushista! No one else would so easily and so stupidly espouse such lunacy. Dittohead, Dittohead, Dittohead… Lon (for once offered capitalized)

  2. Curmudgeon 3417 on March 31, 2008 3:45 am

    I think the previous commenter did not read very carefully. The post does not advocate the repudiation of the national debt through hyper-inflation. It just points out that at the present time the debt is not increasing in real terms. Which is important, and somewhat reassuring (the opposite case, a rapidly increasing real debt would be a danger sign).

  3. Lon Evans on March 31, 2008 4:06 am

    Excuse Me Curmudgeon, We've still wars in Afghanistan and Iraq (which continue to rage incessantly) to pay for. We've both Social Security and Medicare (which the Bushistas inform us are soon to be insolvent) to pay for. We've commitments for Federal pensions (which are not included in popular estimates of the National Debt) to pay for. And we continue to pay more in interest on this same National Debt than we do in principal. We pray that China continues to buy our (perfectly inflationary) dollars to make all this possible (at the same time that we are amazed that they continue to do so). You might, as well, do a bit of research. I haven't the foggiest as to what you refer to as "real terms?" lon

  4. Craig Bowles on March 31, 2008 8:43 am

    If you use a 12-month average, the budget balance has doubled since the middle of 2007. It worsens every recession and is a good thing to check if you aren’t sure if we’re in a growth slowdown like the mid-1990s or a recession. The current decline is really fast compared to 1981 and 1990 but 2001 was rapid, as well. All these attempts by the Fed is so similar to putting off a hangover by trying to keep the party going. The hangover is only going to be worse if they keep the juice flowing. If the Fed raised rates more quickly when the lagging indicators move into positive growth rates, we would get this inverted economy. It’s the most inverted since the data began but I don’t have data for the depression.

  5. George Parkanyi on March 31, 2008 12:49 pm

    Lon, Craig,

    If we’re roaring down the path of hyper-inflation, then why are house prices going down? Real-estate is after all THE sacred-cow inflation hedge, is it not?

    Read Ken Fisher’s book “The Only Three Questions that Count”. He puts the national debt into quite good perspective. It’s still actually quite manageable in relation to US GDP, and particularly world GDP.

    The other thing you have to understand is what happens to money after it is created. Even if the first buy is “bad” say a sub-prime loan, as that money gets spent or re-invested or whatever, there are usually 5 additional spends which course through the economy in quite “normal” fashion - paychecks, people buying groceries and so on.

    As long as the movement of goods and capital doesn’t slow too much (from say protectionism), all that “inefficient” spending by government actually becomes quite economically useful after the first spend or two - even the DoD $1200 hammers.

    Also, the US dollar is not going to collapse. The US has a natural safety barrier of two major oceans. (You only have to worry about us menacing Canadians and Mexicans). People in countries that have to worry about things like oh, bombs in the marketplace and gunmen on the corner, tend to like to put their money here where it’s safe, and they are and will buy North American assets as they become relatively cheaper.

    Also, take into account that other countries with more rigid economic systems that can’t flush out the bad stuff so quickly are going to start having serious problems, and their currencies aren’t going to hold up forever. Japan and Europe come to mind. China also has all sorts of potential environmental and social problems.

    So chill, guys. We’re not dead yet. :)

    Cheers,
    George

  6. John on April 1, 2008 3:01 pm

    Disregarding the political, policy, and ideological demagoguery surrounding your question, there are a few points that I think you should consider that might improve the accuracy of the answer to your question. First, the article you reference is from Aug 23, 2007, and in my opinion, is out of date. In addition to the deficit projection, and I quote:

    “CBO also predicted that despite recent market disruptions, the nation’s economic outlook remains “sound.” It predicts real GDP will grow by 2.1% in 2007 and by 2.9% in 2008.”

    According to the CBO’s monthly budget review from Nov. 2007 (http://www.cbo.gov/ftpdocs/87xx/doc8792/11-2007-MBR.pdf) the actual budget deficit for FY 2007 was $163 billion. That’s $5 billion higher than the projection made in August. Even that number is misleading which brings me to my next point.

    The headline number the CBO reports is the “Unified Budget Deficit”. That means they count the receipts and outlays for social insurance in the totals. This method of accounting glosses over the fact that surplus receipts from payroll taxes are actually additional debt that the Federal government owes back to Social Security, Medicare, and Medicaid. When these programs begin to take in fewer receipts than they pay out, they will begin cashing in that debt and the Federal government will have to pay up. Thus, in my opinion, the simple arithmetic of comparing the inflation adjusted value of the National Debt to the Unified Budget Deficit is not the best way to determine if the National Debt has grown. In my opinion, the most accurate measure of the growth of the National Debt is the growth of the National Debt. This information can be easily found at http://www.treasurydirect.gov. On 9/29/2006, the last business day of FY 2006 the total public debt outstanding was $8,506,973,899,215.23. On 9/28/2007, the last business day of FY 2007 the total public debt outstanding was $9,007,653,372,262.48. That means that the increase in debt during the 2007 fiscal year was $500,679,473,047.25 in nominal terms. This brings me to my third point.

    Let’s compare apples to apples. You use the deficit data for FY 07, but the debt amount for last week, and then the predicted inflation rate for 2008. Who’s predicted inflation rate? Are you only deflating the debt for the months between now and the end of the fiscal year? Shouldn’t you be using the FY 2008 projections? Or is this all ballyhoo? According to the BLS who keep the monthly CPI data, the increase in prices for all urban consumers (headline, not core) from 9/06 to 9/07 was from 202.9 to 208.49 or 2.76%. Excluding food and energy, prices went from 207.2 to 211.628 or 2.14%. Personally, I think food and energy are kind of important, so I’ll use that number. This means that the real value of the debt was $248,611,233,074.44 less than the nominal value of the debt, which means that the real value of the debt increased by $252,068,239,972.81 during the 2007 fiscal year.

    So my answer to your question is, “Yes. The national debt is growing.” But I would posit another question that I believe to be more pertinent to the fiscal health of our country. Is the real national debt growing as a percentage of real GDP? I’ll leave that one up to you.

  7. Barry Gitarts on April 1, 2008 9:17 pm

    So what is the optimal ratio of cash to debt one should have going forward to be best positioned?

  8. Lon Evans on April 2, 2008 2:46 am

    Lord do I love this site,

    George - Yes, housing is collapsing. I informed you of this some six months ago. But oil, and corn, and wheat, and soy, and treasuries, and trucking, and do you want me to continue, are raging, just in the same manner that the ‘inevitably’ bulls pray that the financial markets will.

    When you give up, we’ve reached the bottom. Until you give up, I’m short.

    With all respect, and I’ve much,

    lon

  9. George Parkanyi on April 3, 2008 1:17 pm

    Careful Lon,

    I never give up. I may make mistakes, but I don’t give up.

    Sure you want to be short the rest of your life? :)

    Cheers,
    George

  10. Lon Evans on April 4, 2008 2:54 am

    Oh George, I am the most careful sort.

    Yes, I look forward to shedding the rug and assuming the hide. The day that I see my indicators suffer, on that day I'm long. Until then I sit. I know no other way to play the game. One must have conviction, or he is 'whip-saw's' bitch.

    You must know that my comments intend for the occasional rise. I read very carefully your personal note. I took much from it. I don't disagree with your evaluation, only the time frame it seems to suggest.

    Please don't begin to assume that I'm the fool that Nigel, and a few others, would paint me.

    Respectfully,

    lon

  11. bob pisani on April 17, 2008 1:03 pm

    Just a couple of comments:
    1 - As the dollar falls in value relative to other currencies, our national debt also falls, at least in the eyes of foreign lenders. Of course we still have to pay the debt off in dollars.
    2 - The US government, seen as an organism with its own desire to thrive, has an interest in inflation, for inflation causes it to grow. If, for instance, real estate were to double in value, tax revenues on sale would more than double, bringing more revenue to the government, and more revenue enables it to grow.

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