PREVIEW: Debt and Taxes - Defusing America's Debt Bomb

“Trump’s suggestion that America default on its national debt is beyond dumb”

Thank you for following Barry’s Substack! This is a Preview of the full version of the Monday feature focusing on the meaning behind the headlines.

We are borrowing from our future to pay the way of billionaires today.

We’ve had plenty of warning of what will go wrong: 15 years ago Ben Bernanke, former Chairman of the Federal Reserve Board waved a red flag: the trajectories of debt to national income were unsustainable.

At that time debt made up 81% of national GDP.

Today, it is entering the realm of more the 122% of GDP.

Howard Mick has written a book that brings home the case: We need to adjust spending and revenues sufficiently to ensure the growth of the debt is less than the growth in GDP. In other words, reverse the debt ratio trajectory.

Mick is an expert in banking law who has been practicing for more than 50 years. His new book “Debt and Taxes: Defusing America's Debt Bomb,” is an alarm bell about our financial crises.

By definition, the unsustainable trajectories of deficits and debt that the Congressional Budget Office outlines cannot actually happen, because creditors would never be willing to lend to a government whose debt, relative to national income, is rising without limit. CBO projections in 2024 predict that debt held by the public will grow to $ 56 trillion in 2034, 122 % of GDP. The CBO further projects a 2034 deficit of $ 2.9 trillion, of which about $ 1.7 trillion will be interest cost.

We can’t let that happen, says Mick. He quotes Senator Tom A. Coburn, who warned of a "Debt Bomb" that, unless defused, would pass through discrete stages, with severe consequences awaiting us at each stage if we do not act to rein in the unsustainable trajectory:

Creditor Reluctance: Eventually, creditors would never be willing to lend to the U.S. government if its debt, relative to national income, continues to rise without limit.

"Debt Bomb" Staged Explosion: The sources indicate the U.S. has already passed the stage of ratings downgrades. These have come from Standard & Poor's in 2011 and Fitch in 2023.

Stage 3, Soaring Interest rates, harming consumers and sending interest payments on the national debt soaring. CBO projections for 2034 show that interest cost could be a major portion of the deficit, potentially exceeding $2 trillion per year according to one projection. Over $200 billion in interest is already paid to foreign governments and investors annually.

Stage 4: Soaring Inflation accompanied by a drop in the value of the dollar. The historical example of the British Pound suggests that the US dollar can lose its status as the major reserve.

Reduced Real Economic Growth that accompanies a high Debt Ratio. A World Bank study indicated that for developed economies, when the debt-to-GDP ratio exceeds 77%, each point above that costs 0.017 percent in real economic growth. With the debt ratio projected to reach 122% of GDP by 2034, this reduction in growth would become substantial, potentially lowering growth that might otherwise be 3% down to 2.63%, which is described as a significant drop.

Difficulty Responding to Emergencies because a high debt ratio makes it harder to respond to future national emergencies or pandemics that require major governmental outlays.

Increased Burden on Future Generations from the fact that the current practice involves borrowing from creditors, including foreign ones, to pay for current government services and benefits. This passes the resulting debt onto future taxpayers rather than having the current generation pay the bill themselves. This is described as "decadent" and potentially characterizes our generation as "the greediest (or most irresponsible) generation" for passing on the burden of debt rather than the blessings of liberty.

Universal Negative Impact as "there will be no winners. We will all be losers" if the growth in the Debt Ratio is not reversed.

Mick advises that the goal should be to adjust spending and revenues sufficiently to ensure the growth of the debt is less than the growth in GDP, thereby reversing the debt ratio trajectory. Without this reversal, the sources paint a bleak picture of the future for the U.S. economy and its citizens.

If we do not, the inevitable result of an adverse trajectory is never-ending growth of debt, well beyond the level of GDP. The general government (GG) deficit was expected to rise to 6.3% of GDP in 2023; the actual 2023 fiscal year deficit was approximately 7.5 % of GDP.

It appears that the U.S. has passed through Phase 2 (further rating agency downgrades) predicted by Senator Coburn.

The World Bank Group recently completed a study to determine at what point sovereign debt as a percentage of GDP impacts real economic growth.

when the ratio of debt to GDP of a developed economy reaches 77 % for an extended period, each point above 77 % costs 0.017 percent in real economic growth.

The current Debt Ratio is reducing real economic growth by 0.37 % per year. That would reduce real economic growth that otherwise might be at 3 % down to 2.63 %, a significant drop.

The Debt Ratio is currently too high and is projected to grow faster than the economy. What do we do if there is another pandemic or other national emergency which requires major governmental outlays ?

The debt is now so large that even small changes in the interest rate have an outsized effect on the deficit.

An aging population that will create increasing needs for Social Security and Medicare spending presents a continuing funding challenge.

The United States government should be so financially strong that even a remote discussion of downgrading the rating of our bonds should be unthinkable.

America’s Debt Ratio is the ninth highest out of more than 100 reporting countries…

Final words: Donald Trump has been elected president, not emperor.

As voters, we must make sure that lawmakers know they will be held accountable if they fail to do so.

Trump wants to default on America. There are other answers, and Howard Mick’s book is a good place to start looking. You should tell our Senator or Congressperson that this is THE PRIORITY for America.

Thank you for following Barry’s Substack! This is a Preview of the full version of the Monday feature focusing on the meaning behind the headlines. I am also a feature writer on the environmental site, Job One For Humanity, and work on community development programs. Each week a summary of a topical book helps full subscribers share expert views of vital subjects.

Next week will be ANOTHER WORLD IS POSSIBLE – Lessons For America From Around The Globe

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