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As Congress and the incoming Obama administration work out the details of a massive economic stimulus plan, some readers are asking: Where is all this money going to come from? How long can we keep up with all this borrowing? And why should my tax dollars be spent to clean up the mess made by other people’s mistakes?
Just how long can the U.S. government sustain all this borrowing and spending? First of all, basic revenues and expenditures are out of balance, generating the large annual federal deficit. Now, we have one or more bailout programs, plus a stimulus package or two; and on top of all that, all the governors want a $1 trillion bailout. How long can this go on?
— Tom Kwiat, Address withheld
The only honest answer: No one knows. For the past few decades, a number of economists, analysts and a few members of Congress have been pressing to balance the federal budget; some have called it a national security issue. During that period, the U.S. economy enjoyed one of its longest economic expansions in history — interrupted by two relatively mild recessions. The takeaway for some: Rising national debt isn’t a problem as long as the economy keeps growing at roughly the same pace.
Proponents of this idea argue that the overall level of debt is less important than its relationship to the size of the U.S. economy. If you’re carrying a $5,000 credit card balance with an annual income of $30,000, your debt load is going to ease considerably if you get a new job that pays $60,000. In fact, you could then double your debt and carry the same load on a percentage basis.
Today, the U.S. national debt is about two-thirds of its gross domestic product. We’ve seen much higher: During World War II, the debt hit 120 percent of GDP.
But when the war was over, defense spending plunged and the economy surged, bringing the ratio back down to 60 percent by the early 1950s. That’s about where it was in the late 1980s and early 1990s before concerted efforts by Congress and the White House balanced the budget and cut that ratio below 60 percent. In the past eight years, heavy tax cuts and spending on the war and prescription drug benefits pushed the percentage back to the mid-60s.
That ration is almost certainly headed higher. On top of the ongoing, multibillion-dollar shortfall between taxes and spending for government services, the congressionally approved bank bailout program will add at least $700 billion to the debt. Now Congress and the White House are considering a plan that would add another $675 billion to $775 billion in relatively short order. That would push the overall national debt closer to 85 percent of GDP.
The gamble is that the economy will begin growing again and the government will recoup some of the borrowed money by selling off assets it is buying in the bank bailout program, bringing the debt-to-GDP level back down to (roughly) currently levels.
Even if the bet pays off, there’s a real risk of nasty side effects. For starters, there’s only a certain amount of hard money (savings and investment) around the world for Uncle Sam to borrow. As the U.S. soaks up this cash, there’s less money for businesses to borrow and grow or for homeowners to buy houses. That forces interest rates higher — reversing the stimulus effect the Federal Reserve is trying to engineer with lower rates.
Churning out more debt also increases the amount of dollar-based investments flowing through the global financial system. It’s not exactly the same as printing dollars, but the effect is similar. As the global system is flooded with dollars — and investors start wondering how Uncle Sam is going to pay all this back — the value of the dollar falls.
If it falls a little, that’s not a bad thing — it helps U.S. exporters sell goods overseas. But if the value of the dollar falls too far, so does its purchasing power — even if demand for goods and services remains sluggish during a recession. That’s where inflation comes in. And if you have inflation in a recession, you get stagflation, the disease that left the U.S. economy and stock market in ruins throughout most of the 1970s.
Even if policymakers manage to navigate successfully through the current recession and the trillions in new debt bring the desired economic recovery, this is not a great time to raise the level of debt relative to GDP.
That’s because another multitrillion-dollar bill is coming due — no matter how well the economy recovers. As baby boomers retire and begin making claims on the Social Security and Medicare systems, the government will be forced to borrow heavily to meet those obligations. Unlike the surge that sent debt levels above GDP during World War II, that level of borrowing for decades of Social Security and Medicare payments just isn’t sustainable.
As the problem comes into clearer focus over the coming years, it could get more difficult to convince the rest of the world to lend their money to the U.S. Treasury.
Why should those of us who purchased cars and homes based on our budget have to help out the builders, lenders and people who made commitments they obviously could not afford?
— Don W., Hesperia, Calif.
Because if we don’t, we won’t have an economy to produce more homes and cars for our kids.
No matter who you think is to blame, no matter what you think about the importance of letting businesses and people fail, we’re past the point where that debate matters much. There will plenty of time for that later — after the economy is stabilized. At the moment, there are few signs that’s happening.
The hope is that the government’s massive intervention can break a downward spiral that shows no signs of letting up in the short term. Falling house and stock prices have destroyed trillions of dollars of wealth, which has forced companies and consumers to cut back. Those job losses have further cut into spending and home buying, which is bringing more layoffs.
So far, trillions of dollars have been dropped on the economy by the Federal Reserve. The Treasury has pumped $350 billion in taxpayer funds into the banking system. And Congress and the incoming Obama administration are prepping a massive spending package to fill in the gap created by the shutdown of consumer spending.
In the midst of all this, we’re getting a bonus: Crashing oil prices have slashed prices at the gas pump. That’s freed up an estimated $250 billion in consumer spending power. Every hundred billion helps.
This flood of money will take time to work its way through the system; some of these programs will work more quickly than others. The Fed’s effort to push mortgage rates lower is barely under way, and rates already have fallen sharply. On the other hand, there’s evidence that banks are hanging on to much of the money they have received.
It all goes well, these measures should begin to have the desired impact by the middle of next year. A lot, though, can go wrong.
On top of the list is a new surge in foreclosures that is just now getting under way and expected to continue through next year unless something can be done to prevent it. As long as lenders keep dumping houses on the market at distressed prices, more home equity will be destroyed for all homeowners, spending will continue to shrink, jobs will be lost and the economy will remain in its downward spiral.
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 | The Real Bailout Needed is a Consumer Bailout - Part 2 | sleser001 | Sun Jan 4 | 1 |
 | U.S. Debt Set to Soar in This Year - washingtonpost.com | The Washington Post | Mon Jan 5 | 1 |
| U.S. Debt Expected To Soar This Year | The Washington Post | Sun Jan 4 | 0 |
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{"commentId":4698468,"authorDomain":"thattune1"}
How is taking money from people who pay taxes, filtering it thru the government and then giving it to the 40+% of people who don't pay any taxes going to help any economy other than the Chinese? Our government is corrupt and failing at every level and with the people Obama is bringing in it is only going to get worse! It used to be only Americans were ripping us off but he will make sure the rest of the world gets a crack at us too.
{"commentId":4698468,"threadId":"461248","contentId":"2276055","authorDomain":"thattune1"}
- 1 vote
#26 - Wed Jan 7, 2009 9:55 AM EST{"commentId":4699863,"authorDomain":"tinbender1000"}
Sounds like to me that Uncle Sam is just following the American consumer during the past few years. Just borrow it without thinking how we will pay it back. Never did hear anyone complain when their return on 401k's and investments exceeded all expectations. Sure hears a lot of crying now huh?
{"commentId":4699863,"threadId":"461248","contentId":"2276055","authorDomain":"tinbender1000"}
#27 - Wed Jan 7, 2009 11:17 AM EST{"commentId":4699985,"authorDomain":"marco1969"}
as I read this article I can't but think its non-sense. All our money has once again gone to the bankers wallets. there is no evidence that all the banks that received money from the fed have actually spent it on new loans to businesses. the only way to actually find the money trial is by having a gov't audit not only on the banks but the on the gov't itself. highway robbery is going on and we are just accepting it as a normal day at the office. wake up people, the only change you will see will come from lobbyist who will influence politicians and put money into their pockets to get their way. what a freaking joke.
{"commentId":4699985,"threadId":"461248","contentId":"2276055","authorDomain":"marco1969"}
#28 - Wed Jan 7, 2009 11:24 AM EST{"commentId":4700603,"authorDomain":"TslkM"}
I still think capitalism does not work! Want proof.
A truck use to cost $4,000 (1970) now in todays world, a similar truck costs $40,000. My parents bought their first house for $9,000 (1960). That same house sold for over $120,000 just recently.
Of course in this capitalist society, which in its greed, outsourced its job market, wanting immediate returns on investments, with no obligation to its future, there will be "recessions" (depressions) where the economy "contracts".
The US got the world involved in its capitalist ways and the capitalist pyramid scheme world wide is collapsing. Immediate self gratification is over!
It is time to pay up for past greed! Defecit spending is how the US got in this mess, and now the US is gambling defecit spending will get us out, hoping the rest of the world realizes, we all need each other to survive. This remains to be seen.
Now it is time to survive and live within ones means. The party is over.
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#29 - Wed Jan 7, 2009 11:55 AM EST{"commentId":4702262,"authorDomain":"atpltd"}
A point to consider....we raised money during WW II by the governments push on selling WAR BONDS. It worked as the gov. needed the money to buy war materials and our parents gave it to them. This current financial "crisis" is similiar to a "war" on our lousy economics. Why not again offer special "Crisis Bonds" to we US Citizens with a decent interest rate. WE the people would get the monatary benfits, instead of the interest going once again overseas. The benefits would put interest into our hands that we would spend at some future date. Keep the money at home. This could at least assist in the trillion bail out package that is now being sort on Capital Hill. I'm no genius, but we are going down, if we don't figure out a solid way of keeping the money at home. A mere one or two hundred dollars per family could help out. That would translate into couple trillion. Thinking of what is taking place now, this tact couldn't be much worse.
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#30 - Wed Jan 7, 2009 1:28 PM EST{"commentId":4712274,"authorDomain":"letsplay-66801"}
Okay I know I am slow, but first we determine ther needs to be a bailout for the major banks. Then as the monies are approved and given to the banks no auditable means exists to determine the money is being used in a means that it was intended. Then the Auto makers jump in and state they need a bailout also. So we go to China and want to "Borrow" more money again. We want to lower the middle class taxes while not raising the upper class tax, and still contine to talk about a stimulus plan and bailout packages. I know I''m not a professor on economics, but what happened to the idea that you run your house on the money you know that you have. I know I can't run my personal budget on promises of getting a raise each year and then when it doesn't materialize call my debt collectors and whine because I made a crucial error in judgement. Please we need to let our congress and senators know we cannot continue to live this way. Lets stop programs we really don't need. Lets ask that raises be held in check for senators and governors. Lets take a hard stance that we need to run the United States on what money we have in our pocket, not what may come later. To keep up borrowing from peter to pay paul is lludicrus and that is what our government is doing.
Lets stop the insanity!
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#31 - Thu Jan 8, 2009 7:10 AM EST{"commentId":4712435,"authorDomain":"WILDWONDERFUL"}
I could not agree more we just cannot borrow our way to prosperity.
{"commentId":4712435,"threadId":"461248","contentId":"2276055","authorDomain":"WILDWONDERFUL"}
{"commentId":4712442,"authorDomain":"WILDWONDERFUL"}
Hasn't anyone ever borrowed money for what at the time seemed to be a good idea? But then came the payments and with each payment the glitter of your purchased fizzled to the point you wish you had never borrowed the money.
{"commentId":4712442,"threadId":"461248","contentId":"2276055","authorDomain":"WILDWONDERFUL"}
#32 - Thu Jan 8, 2009 7:54 AM EST{"commentId":4764859,"authorDomain":"rocky5719"}
MSNBC is the most useless and propagandized 'nes' service of them all. Keep spreading your lies about the rcovery and the Fed's and all. This country is in dire straits and if the mainstreamers don't want to tell the truth so be it. We will get it from alternate nes services. you guys ought to just change your name to something like ' StateTV' instead of MSNBC.
{"commentId":4764859,"threadId":"461248","contentId":"2276055","authorDomain":"rocky5719"}
#33 - Sun Jan 11, 2009 2:47 PM EST{"commentId":4765334,"authorDomain":"randyp910"}
I sit here and wonder why we never saw this coming.The old addage the bigger they are the harder they fall rings true.Over the past 20 years the worlds wealth has become so drastically out of balance it is hilarious.When I was a kid people strived toi become a millionaire but in todays world we now have multibillionaires.My wife and I make about $125,000 per year and still have to worry about retiring.We live in a house that is well within our means ( we paid $130,000 4 years ago).Unfortunately with the housing market being so pathetic and people losing there homes because of living above their means my home is worth about $30,000 less than I paid for it and thats with me putting $25,000 in home improvements.All thats happening is that our economy is just correcting itself because it grew at such an uncontrolable rate for far longer than it should have been allowed to.Banks being forced to give everyone and there brother loans and credit cards.Then allowing them to charge interest rates that would make loan sharks blush at.20% auto loans 29% credit card rates and interst rates up around 10% on 30 year mortgages.What did we expect the $ 130,000 home that I'm buying will end up costing me nearly half a million dollars to buy if I take the full 30 years to pay for it.Banks are gambling on people meeting their obligations when most people can only meet them temporarily.But things happen like less overtime sickness death and job insecurity.The best thing that could happen to this country in the long run is to completely eliminate all future credit to consumers.If you can't pay for what you already have then you sure as hell don't need more.The younger generation seems to think that credit is a right intead of a priviledge that should be earned and taken very seriously.Instewad they are give thousands of dollars of credit with little or no thought of how to pay it back.I envy the older generations who lived within their means.They saved their money paid their bills meaning utilities grceries and bought things with cash after they saved up enough money to pay for it.My wife and I recently thought about trading in her 4 year old minivan that is in great shape to try and help out the big 3 and possibly get a deal on a braand new car only to find out that we owe twice as much on the car then it's worth.This story was told just to prove that credit is nothing but a scam to get more money distibuted from hard working americans and into the pockets of multibillion dollar companies. the whole problem is that the people who try to use it responsibly get screwed Their not talking about readjusting my mortgage because I can still afford to pay it.I'm notgetting any kind of debts forgiven or filing bankruptcy to erase my obligations.What we're doing is continuing to reward dumbass people for not using their head and the responsible people like me and my wife have to foot the bill.
{"commentId":4765334,"threadId":"461248","contentId":"2276055","authorDomain":"randyp910"}
#34 - Sun Jan 11, 2009 3:31 PM EST{"commentId":4884559,"authorDomain":"lokkende"}
I am really getting tired of hearing that Social security needs fixing. Especially the part about retired or future retires need to have their benefits cut. Why is the fact that the government has borrowed over $3 Trillion from the social security trust fund continue to be overlooked? WHen is the government going to pay this money back? WHen is the government going to pay back the interest that is due to the fund?
Why was social security moved to the general fund in the first place? Why doesn't congress or this nation honor the retired people of this country and continue to try and make their lives insecure and miserable?
I personallly have paid in over $100,000 to the Social security trust fund. The employers I have worked for have also paid in the same amount. If I had purchased a $100,000 annuity I would be able to draw out the same amount as social security pays on a monthly basis.
I would happy to give up social security if the government pays me back the $200,000 that has been collected by myself and by employers on my behalf in exchange for a an annuity that the government can not touch.
Fix social security by paying back what is owed to it and by eliminating NAFTA which will produce more jobs "good jobs" in this nation. Penalize empoyers who move jobs out of this country and the Fix is elementary.
{"commentId":4884559,"threadId":"461248","contentId":"2276055","authorDomain":"lokkende"}
#35 - Mon Jan 19, 2009 2:48 PM EST{"commentId":5560751,"authorDomain":"Truthwill"}
Bernie Madoff MUST go to prison!
{"commentId":5560751,"threadId":"461248","contentId":"2276055","authorDomain":"Truthwill"}
#36 - Tue Feb 24, 2009 7:01 PM EST{"commentId":5563037,"authorDomain":"tlbeck777"}
I just want to comment on all the people asking the question, Why should we help those people who took out loans they couldn't afford. A lot of those people didn't take out loans they couldn't afford at the time they took them out, they lost their jobs. It is almost impossible to pay for your mortgage on unemployment and to try and keep up with other bills as well. I know several families that have worked hard for everything they have and have always lived modestly and they too now are struggling to stay out of foreclosure. Before all of you who are so quick to judge just remember you could also soon be without a job and feeling pretty bad about your comments. My husband and I both work very hard everyday and we live modestly but we are not so blind to see it could all change quickly. We have been lucky so far, Thank God. I agree many people have been careless but just as many are hard working responsible people that have hit some hard times and are feeling really helpless. I would just like people to think before they speak and listen to their neighbors before they pass judgement on them.
{"commentId":5563037,"threadId":"461248","contentId":"2276055","authorDomain":"tlbeck777"}
#37 - Tue Feb 24, 2009 9:06 PM EST{"commentId":5567109,"authorDomain":"lancesmith817"}
HA HA, to all of you who somehow manage a way to earn 250K... Obama, "get's it". And it's OK for the CEO-- Nancy Pelosi-- to have her own jet? By the way WHO invented the automobile???
What a DUFUS!!!
{"commentId":5567109,"threadId":"461248","contentId":"2276055","authorDomain":"lancesmith817"}
#38 - Wed Feb 25, 2009 12:16 AM EST{"canLink":false,"threadId":"461248","isPrivate":false}
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