Our Federal Debt is out of control

It is general public knowledge that the Federal Debt is out of control.  Here it is in simplified form. The Federal Debt is like a personal debt, if not addressed there are consequences, like that of the Financial Crisis.  Next time Congress does not want to increase the Debt, we start defaulting on our debt. The esteemed

simplified-federal-debt-jpeg

reputation of the United States will evaporate. Data it is very evident that the debt drastically increases under George W Bush because of Tax Cuts. It continues increasing because of continuing War and explodes start of 2007 Financial Crisis.

Clinton brought the deficit to zero because of Tax increase and PAYGO spending discipline.   There are known solutions, all that is lacking is political will.  First we will get the facts to start the discussion.  A useful website depicting the up to date Debt with is provided here: http://www.usdebtclock.org/  Note we are approaching 20 Trillion as the chart predicts. A lot of other useful data is in this website

The public and Congress had been warned about this most notably by former comptroller general David M. Walker and other financial luminaries: https://en.wikipedia.org/wiki/David_M._Walker_(U.S._Comptroller_General)

We will be looking at :

  1. Data for the Federal Debt/Deficit
  2. Data for Federal Income, Outflows and the Deficit
  3. Who owns the Federal Debt and whose problem is it

 

We need to get the factsThe Federal Office of Management and Budget (OMB) maintain the Federal Historical Tables which contain a lot of Federal Data in different categories in spread sheet format (https://www.whitehouse.gov/omb/budget/Historicals ). We will be concentrating on Tables 1.3 Summary of Receipts, Outlays and Surplus / Deficits and Table 7.1 Federal Debt at the end of the year. We will start Table 7.1 Total Debt.

Table 7.1 Federal Debt

We will plot a subset of the table 7.1 data starting with the Carter Administration forward. The Debt is described by the black line and left side axis. We use the current dollar column to keep things simple. The red line is the calculated incremental debt from the previous year, the magnitude described in the red right hand column. Note that the red line basically is the change / slope of the debt. In mathematics it is similar to the first derivative. So a large change in debt corresponds to a larger change in the red line.  The red line is basically the yearly deficit.

It is useful to note that the debt drastically increases during the George W Bush administration. That is because of Tax cuts, War of choice spending and the impact of the Financial Crisis which started in 2007. The Financial Crisis was due to drastic financial deregulation and complete no enforcement of financial fraud.

The following observations can be made

  1. The Federal Debt (black line) keeps rising which means we have not paid off any of it. At some time our debt service costs (interest) will become a significant portion of the budget, diminishing our ability to focus as a government. Note that our debt has been exploding starting with the Reagan and George W Bush administrations. We will talk more about that in the next graph
  2. The calculated Deficit for each year (red) is essentially the slope of the Debt. Deficits increase debt. This basically says that as a country we are living beyond our means.
  3. Note that the most control we had on debt was in the Clinton years. True the economy was good in those years, because of the increase in productivity of Labor and Capital. Most  of this improved data  was due to controlled spending using the Pay As You Go (PAYGO) discipline followed by Congress and the President.    This is a simple concept followed by any prudent home budget. You decrease existing spending or raise taxes for new programs. Note that PAYGO started with the Clinton administration and was immediately discarded with the start of the George W Bush administration.
  4. Despite political propaganda, Debt and Deficit curves show us that the Reagan, Bush I and Bush II administrations are the most out of control.
  5. David Stockman, Reagans Budget director (an ardent conservative) wrote in his book that Reagan would not rein in Defense and Commerce Cabinet Secretary’s spending.
  6. George H W Bush continued the Reagan policies and the debt continued to rise. In the last year of his presidency, he realized we were in trouble and he instituted a tax raise. Note the down turn of the deficit in his last year. Despite his popularity in managing the Gulf War, it is believed he lost the election to Bill Clinton because Republicans defected to Ross Perot or stayed home because of the Tax increase.
  7. Bill Clinton raised taxes again and the Deficit continued to come down. Despite the tax increase, the economy continued to flourish. The PAYGO discipline is probably the most effective control of government spending.  Other programs needed to be reduced or taxes increased to pay for new additional programs. Note the Deficit was near zero at the end of the Clinton Term.

WE HAD DEFINITE CONTROL OF THE FEDERAL DEBT IN THE CLINTON ADMINISTRATION

  1. As soon as Bush II took office the debt started exploding. This was due to a tax decrease, wars and an out of control Financial System devastating the economy. We will discuss how the financial failure happened later. For now it is sufficient to say that the Financial Crisis was induced by reduction of regulation which allowed reckless risk, much of it went bad contaminating the rest of the economy. The result of the financial failure left a devastated economy, dramatically decreasing receipts because people lost jobs, corporations failed. It drastically increasing the federal debt.
  2. The Obama administration inherited a failed war, a failed economy and a nonfunctional Financial System desperately in need of repair. But he asked for the job. Obama has made progress, however has been hampered by a dysfunctional congress and a blatant lack of understanding of the crisis we are in. Like Bush he refused to prosecute financial fraud
  3. It might be that new revenues from Tax Cut are received back into the government and spent on pork versus paying back the debt.

 

Table 1.3 Receipts Outlays and Deficit

A subset of Table 3.1 is plotted below starting with the Carter administration. No magic here when revenues are larger than outlays the deficit is reduced.  So – note that the data was evident, indicating a problem. The Republican administrations lacked the political will to fix the problem.

Several observations need to be highlighted.

  1. In the Carter administration, revenues are pretty close to outlays, however was starting to diverge in the last year
  2. Under Reagan, Outlays / Receipts diverge substantially and note Surplus / Deficit stays negative at a consistent rate. There is no political will to close the gap. The Reagan Tax cut and increased Defense and Commerce spending are the main reasons for the disparity in revenue and expenditures.
  3. Note in the 2nd and 3rd year in the first Bush administration the deficit continued  to increase.  George HW Bush recognized the problem and initiated a tax increase to get control and the divergence decrease just as Clinton took office. Bush lost the election to Clinton because of Ross Perot and Republicans rejection of the Tax Increase. We have to conclude: he saw the problem and did something about it.
  4. Clinton further increased taxes and followed the PAYGO budget discipline and The Deficit continues to go down.
  5. In the George W Bush administration, he initiated tax cuts, incurred war spending and the disparity was immediate, drastically increasing the deficit and increased Debt. Also during his administration he drastically reduced Financial Regulation which started with Clinton in 1999. The Financial Industry had free rein making many poor choices demonstrating the inability to self-regulate. The collapse started in 2007 and culminated with the collapse of Lehman and AIG in 2008. The other banks were failing and a massive government bailout was initiated. IN EFFECT, THE FINANCIAL INDUSTRY UNDER A SELF REGULATING STRUCTURE COLLAPSED IN 7 YEARS. This was not a rare event. It was brought on by the Financial Industry taking high risk ventures.
  6. The Obama Administration inherited a collapsed Economy and a Failed War strategy. He exacerbated it by appointing Treasury, SEC and Attorney General people who did not prosecute Financial Fraud. The Big Bank executives got bailed out and big bonuses paid to their executives. It is easy to give Obama a pass because of the mess he inherited. The fact of the matter was he was a weak negotiator and did nothing to reign in the banks who committed aggressive fraud. In fact his administration was riddled with sympathetic bank people who wanted to continue the disastrous practices. Enron people and Bernie Madoff were the last people to be put in jail for financial fraud.

Conclusions from Deficit and Debt charts

There are some major observations  to be drawn from the two charts

  1. Tax cuts do not show up as additional tax revenue from increased business activities
  2. PAYGO is a validated process and should be re instituted.
  3. The FED and Treasury cannot continue printing money as inflation will appear. Good news there is that we pay off Debt with cheaper money. Federal Debt investors will raise interest rates.
  4. Because of the Tepid economy, the Debt continues to grow and at some point those buying our Debt will find it risky. That will be the start of the 2nd Financial collapse. 

It is useful to look at two speeches by FED Chair Alan Greenspan given at the end of the Clinton administration. Basically he is confirming the depletion of the annual deficits.

Greenspan – Outlook for federal budget and implications for fiscal policy. Jan 25, 2001

http://www.federalreserve.gov/Boarddocs/testimony/2001/20010125/default.htm

Confirming  the robustness of the economy and the need to reshape the economy with the zero deficit continuing .

 

Greenspan – Pay down of federal debt – April 27,2001

Basically a discussion confirming pay down is feasible and alternate financial planning is required.  It is a lengthy  giving pro and con benefits of paying down the debt

http://www.federalreserve.gov/boardDocs/speeches/2001/20010427/default.htm

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Who owns the Federal Debt and what is their/our vulnerability?

It is obvious that our Federal Debt has exploded to record highs since the George W Bush administration. The problem here is that eventually debt needs to be paid back. We need to be cognizant that since 2008 our government (Federal Reserve Central Bank) has been printing money. This can continue since we are the world major currency. Eventually the flood of printed money will diminish in value due to inflation. A lot of foreign money has purchased U.S. debt (Government Bonds) because of perceived safety.  A lot of the U.S. financial community has invested in government bonds. Again this will continue as long as people can get their money back. As soon as we default on debt, people will stop buying U.S. government debt.  As soon as the credit rating of the Federal Bonds diminishes , interest rates will rise. The result will be massive.

If you google “who owns Federal Debt” a lot of sources come up which essentially have the same data. The pie chart shown comes from:  http://www.factcheck.org/2013/11/who-holds-our-debt/.  The article identifies their source of information.

who-owns-federal-debt

 

Several comments regarding the components of debt

  1. Social Security is an inter-generational minimum retirement system meant to provide poverty levels in retirement. In the 70’s and 80’s we determined that the fund could not cover the anticipated longevity and numbers of Baby Boomers. Ron Reagan and Tip O’Neil got their heads together and increased the Social Security tax for everyone generating a minimum retirement system. Hence generation of the Social Security Trust Fund. Right now, the taxes are not adequate to cover all expenses and the fund is being depleted, as planned. It is slated to be expended in 2034. There after Social Security payments will diminish as they should. Further generations can choose to maintain the fund or be reliant on their savings. More information is at: https://www.ssa.gov/OACT/solvency/index.html
  2. Tax Cuts have not returned revenues to the Federal Budget to reduce Federal Debt. That is especially shown in Graph 2 of this article. The current practice of corporations putting headquarters off shore is drastically affecting the Federal Debt. This subject needs a lot of sunshine
  3. Massive spending on failed Middle East Wars, massive Financial Deregulation and Tax codes are things that need to be addressed now
  4. So whose problem is it? Certainly not the Foreign investors, as they will stop buying out debt and try to draw out their investment.
  5. Once the credit rating goes down, the economy will falter. So much money has been printed to date, inflation will kick in.
  6. Social Security will continue to draw down, possibly earlier because of early retirement increasing due to poor economy for seniors not having skills to do today’s jobs.

Presidential  and Congressional Terms

It is useful to have some idea of who was in charge of the Presidency, the Senate and the House during the period we are looking at. It is important to see that Clinton mostly had a Republican Congress. Bush has only a Democratic Senate to contend with.

horizontal-political-time-line

So W Bush could have fixed it but he had no inclination to do it. Obama had to contend with a Tea Party House who would not cooperate. All spending initiates in the House. The FED was calling for more Fiscal spending to generate Jobs. The only valid program generating new jobs (like the space program) was Energy Smart Grid. Federal Pork Barrel spending to save Police and Teachers jobs maintains the status quo but does not generate new jobs.

For certain each President has veto power and can control spending if they chose to do so. However Presidents, Senators and Congress people have their own pork barrel agenda’s. There are certain Bills that must pass or revert to the last year spending levels. Pork spending gets attached to those bills. The government has three options regarding funding: taxation, borrowing and printing money. All three have been used since the Carter years.

Conclusion

We now have the facts to enable a rational discussion. The ball is in our court. It is easy to blame the politicians. However if you are seriously concerned each and every one of us need to drop a note to our Senate and House representative. It is easy to do by googling their website. Each and every one of them has a contact message. We need to start now and be done monthly. We need to encourage out friends to do it also. It needs to be done quarterly to let them know people are watching and they will vote. House members are most vulnerable as they all face election every two years. Each election, 1/3 of the Senators are up for reelection.

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