Will the US government ever pay off its debt?

While the eurozone crisis flips between panic and temporary calm after the latest ‘plan’ from European leaders, let’s not forget the mountain of debt the US government has built up.

It currently stands at a whopping $14.8 trillion, and there’s the small matter of the $1.3 trillion annual deficit as well.  The US GDP is $14.9 trillion, so let’s just round off the figures and state that the debt is 100% of GDP.

This means if the whole annual economic output of the US was diverted to pay off the debt, rather than doing useful things like paying salaries and buying goods, it would just pay off the debt. Obviously that’s not going to work….

To just balance the books, and not increase the debt any further, there needs to be a combination of tax rises and spending cuts to the tune of $1.3 trillion. Congress could barely agree on cuts of $100bn, so don’t hold your breath. This is more than the sum of federal income tax receipts ($1trn), so there would need to a the equivalent of a whole new federal income tax. That’s going to be popular….

But let’s imagine that by some miracle, the budget turns from deficit to a $500bn surplus overnight- even then, it will still take 30 years to pay off all this debt. Considering the current spending path, there’s no chance of this happening.

More realistically (perhaps), let’s suggest the budget is balanced at the end of the next presidential term (2016), by cutting the deficit each year. $1.3trn (2012), $1trn (2013), $0.66tr (2014), $0.33 trn (2015). This adds another 3.3trn to the debt, bringing us to $18trn.

This would the take 36 years if we had a $500bn surplus, but would Congress ever be disciplined enough to maintain a surplus of this size for 36 years? Somehow, I doubt it.

If Congress were disciplined enough to maintain a meagre $100bn surplus, then it would only take 180 years to pay off the debt.

The interest on the debt already stands at over $200bn a year, a sum that will only increase, and if the Fed ever raises rates, it could go up significantly.

If nothing happens, the US debt will double in roughly 10 years.

Let’s not forget most of this debt is not investment, and there is no collateral for it, rather it is mostly the result of consumption. There’s no payoff after so many years, no profits to be realised, no house to be owned rent-free at the end.

In the current political climate, where both tax rises and spending cuts are unacceptable, this pile of debt is just going to keep on growing, with ever greater consequences for the US economy. Tough choices are going to have to be made at some point – the question is whether it’s done now with the luxury of time, or later, when politicians will have no choice, and the bill will be much higher.

The scariest part we haven’t even touched on. The various entitlements like Medicare, and Social Security (officially bankrupt by the way) are unfunded to the tune of $61.6trn (source), dwarfing the national debt 4 fold. Some sources place this figure even higher – but the biggest problem is that these entitlement costs are growing each year. As Tom Woods explains in Rollback,

[The cash flow deficits,] staggering as they are, do not reflect the impending problem posed by the unfunded liabilities of Social Security and Medicare. Even if the federal budget were balanced [immediately] and the deficit reduced from over $1 trillion to zero, when we factor in the unfunded liabilities problem, the U.S. government would still fall further into the hole by $2 trillion to $4 trillion a year (p. 6).

The stark truth is that many young people working today are very unlikely to be checking in their social security when they retire – the government is broke.

All figures except where stated from usdebtclock.org

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1 Response to Will the US government ever pay off its debt?

  1. Pingback: BMG: Buy Bullion| Unfunded Liabilities and Official Government Debt

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