Tick, Tick, Tock – The Big Debt Clock

Tick, tick, tick – the debt clock hands move on.  Back in Spring 1985 I wrote a commentary…”Listening for the Debt Time Bomb Clock.”  I was concerned: the U.S. Federal budget was unbalanced (had been since FY 1969 under President Lyndon Johnson); government debt was being liberally issued (by a new era “conservative,” President Ronald Reagan); we were building a significant trade imbalance; and, tax reform was being hotly debated (resulting later in the 1986 tax reform measures, which in part was supposed to figure out to how to pay for government operations).

What troubled me was something not many folks were talking about:  The mounting debt levels of the government of the United States.  As I wrote back then…[pushed aside in the public debate about the above] or ignored is the ticking time bomb of our collective debt…debt of all kinds…Federal government debt (then at $7 trillion)…Third World debt…US household debt…state and municipal debt…corporate debt…and commercial bank and savings and loan debt…

American banks in the 1980s were being encouraged to lend out billions’ of dollars to sovereign borrowers [as public policy] in the developing world (recipients including Thailand, Nigeria, Brazil, Taiwan).  The “big nine” borrowers owed more than US$500 billion, which is more than $1 trillion in constant dollars. (Brazil then was the leader with 20% of the total.).  If the borrowers defaulted, banks could fail…or the US taxpayer could become the backstop. (We skirted that crisis but 23 years later the US government would have to bail the US banks out in spectacular fashion not because of foreign debt but because of the American appetite for debt, including sub-prime mortgage obligations.).

Back in the 1980s US government public debt was fast mounting — the “trillion dollar” level was reached about the time the country celebrated our bicentennial.  A decade later it was at $2 trillion (about $4 trillion in constant dollars).

Historical note – 1969 was an important year.  A former client of mine, Charles Zwick (CEO of Southeast Bank in Miami) used to tell folks that he was in charge in the OMB when the “last” budget was balanced in 1969…in the years after, presidents and the Congress frequently held the line on taxes but not on spending.  Give the folks what they want, Chairman Zwick characterized this…which is the practice of Republicans and Democrats alike.  Big government got bigger and bigger.

And so today we have a new FY Federal budget with US$3.77 trillion in spending and projected income of $740 billion less.  How long could you run your business or household on this kind of shortfall?  Well, with easy credit, maybe a long time.  The Federal government shows us how.  My App debt clock shows $17 trillion Federal debt on the books going into 2014…$61,000 owed for each of us.

How do we close the shortfall?  Issuing bonds.  Who invests in these (safe instruments)?  Here is where we are today — the major debt holders are…us.  40% worth.  The Social Security Trust Fund holds 16%; other Federal units, 13%; the Federal Reserve Banks, 12%; other (foreign) governments, 19%. (China, 8%; Japan 7%). The financial industry’s instruments hold but 6%. The Fed with its “quantitative easing” policy has been buying $85 billion monthly of debt.  Remember the days when we bought US bonds?  (Which is so not the way to invest for most of us.) The traditional US bond accounts for but 1% of the holders today of Federal debt.  (My source for this is Fact Check.org)

So the question hangs in the air – how and when do we pay down the debt if “we” the government hold 40%?  Higher taxes?  Lower spending?  A combination?  What gets cut?  Wall Street interests are accustomed now to the Fed buying binge and slightly panic when rumors of reducing the “easing” gets going.  Are we all in this country permanently addicted to issuance of Federal government debt?

“Read my lips – no new taxes,” promised candidate George H.W. Bush.  He found out when he assumed the presidency that was not realistic. And he paid the price with a one term presidency. The lesson of that haunts the Republicans and some Democrats. Taxes to pay down debt?  We don’t see the prospect raised when Congress debates the debt ceiling or the national budget.

As I wondered aloud in my 1985 commentary…Our children face the specter of entering the workforce to begin their 40 years of toil carrying the load of national indebtedness…totaling what in their lifetimes? And with what effect?

Question we should be raising:  What dampening effect might the Federal debt have on our recovering economy? That would be a healthy discussion with business leaders lending their voice.

And, what lessons in public governance are we instilling in or passing on to our children?  Thinking about debt clocks, perhaps if we put a number of these in the halls of Congress and corridors of the White House, loudly ticking away the dollar amounts of the rising debt, rationale thinking might return to budget-making and deliberations over realistic tax policies. Like question of the tree in the forest question (does it make a noise if no one is there?), does Federal debt really matter to most folks if no one is really watching?  Tick, tick, tick…

What are your thoughts on this?

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