Sunday, April 06, 2008

What is bad about having a National Debt

What is Bad About Having a National Debt?

Commentary/A Theoretical, Speculative Inquiry

By Richard E. Noble

There is an implication in the above question as regards the legitimacy of debt. Is debt good or bad? Being of the older generation I have always learned that "debt" was bad. Younger people seem to have no fear of debt - national or personal.

When I was in business for myself, I was forced to borrow money. I was very thankful for that ability. If I could not have borrowed money, I could not have started my business nor continued in business. Borrowing and debt were a part of my every day business existence. So one might conclude from this fact of life that "debt" was good.

Well, when I borrowed or created my "debt" I hunted and searched for the lowest interest rate. Borrowing money at five percent was certainly better than borrowing money at ten percent. Why? Because borrowing at a lower interest rate translated into lower monthly payments. Lower monthly payments translated into higher profits. Higher profits yielded greater personal income and an ability to seek better help via higher wages. Consequently the lower interest rate I paid, the more money I had to improve my life and expand my business and treat my help better.

I was able to borrow money on the anticipation of projected future growth. If I borrowed money on the anticipation of increased future gross sales and my sales did not increase, I would have more debt to pay out of my already meager profits. If I kept borrowing and my gross sales continued to decline, I would soon reach a point where I would not be generating enough income to pay my debts. I would have to fire employees. I would have to accept less income for myself. I would have to curtail any improvements to my business. Eventually if this trend continued I would go bankrupt.

On the other hand what if I could borrow from different sources? What if I could borrow from Peter to pay Paul even though my gross sales were on a continuous decline? And then what if I could borrow from Jerry to pay Paul and from Rudy to pay Jerry and from Ralph to pay Rudy etc. Well if I became good enough at this type borrowing I could eventually abandon my business altogether and simply borrow everything that I needed - including money to enhance my style of life. In this case, one might say that "debt" doesn't matter as long as I can continue to find new and more generous people to borrow from. In this case you might claim that debt is neutralized - you might even say that debt is good. Debt is good because borrowing and creating debt has become the main source of your income.

But for some reason this method of making a living has been deemed as illegal. Believe it or not people have done this and have ended up in jail for doing so. A man named Ponzi did very well at this type of financing for a number of years. The Banking System is based on a variation of this basic philosophy of borrowing. This is why so many in the past and the present day have labeled Banking as an immoral endeavor.

But banking is based on "money" and money is a separate problem in itself. Money whether it is "fiat" or "hard" when analyzed presents problems with "value." When we ask what real value does Fiat money have we must also ask what real value does any money have. To pursue this line of thought would be interesting philosophically but does not seem to me to be of any pragmatic value to this essay. Why not continue to deal with what we have and is presently working and see if we can not make it work better.

To my way of thinking, money and banking started off in a nebulous cloud of borderline morality and legality. Its defects soon became apparent and over the centuries adaptations were incorporated.

Today we have a semi-legitimate system that can be manipulated for good or for bad by the moral or the immoral. I consider it the job of the moral conscience to expose the immoral and advance the moral - but the overall goal would be to expand, improve and grow; not destroy. At least that is where I am at this moment. As my knowledge increases maybe my philosophy will change also. If we have got into this mess by clever thinking we should be able to get out of it by more clever thinking. I hope.

So then, creating debt greater than your ability to generate income leads to bankruptcy or imprisonment or both. In which case, I think that we will all agree "debt" is bad.

But let's go back to positive debt creation. Debt can be considered good if it can expand and increase my gross income and hopefully my personal income. But it is a better debt if I borrow at five percent than at ten percent. Following this line of thinking, it would then be even better to borrow at even lower interest rates - or at no interest rate at all. And even better than borrowing at zero rate of interest would be to get money from my Daddy who had so much money that he charged no interest at all and no repayment of the principal. Big Daddy just gives me the money.

Getting the money that I need to expand my business from Big Daddy would be my best option but next best would be to earn enough from more gross sales so that I had enough left over after paying all my expenses to invest in the expansion of my own business.

If the last option is truly the best option then one should be able to draw the conclusion that no debt is better than any debt.

But what if I could take the excess profits from my own business and put it into an investment portfolio and gain 15% interest and then go to another source and borrow money at 5% interest. In this case would it not be better to have debt than to have no debt?

It would seem so. But, it would depend on what the return from investing in my own business is. If investing in my own enterprise would yield a 30% return, then putting my money elsewhere to get 15% and borrowing at 5% to do it would be rather foolish logic. I would be out-clevering myself, wouldn't I? I sometimes think that this is the mental condition of many in our investment community - they are so smart that they are now outsmarting themselves.

What if I could borrow money and create debt but then use that debt as a deduction on my income taxes?

Well, if the money I saved on my income tax deduction was greater than the break-even interest payment on my debt - it would be better to have a debt and get the deductions than to have no debt and be forced to pay higher income taxes.

If I could borrow money and use that borrowed money to make more money than the payments would be on the borrowed money - then one might say once again that "debt" is good.

But on the other hand if I had excess money available to make the above investments without borrowing any money at all wouldn't that be better? I would get all the investment dividends as opposed to just a portion. And if the government is encouraging me to do something that seems to be directly opposed to what most would agree is common sense in economics - should the government not revise its policy? Government policy should not encourage what society has deemed criminal nor should its laws encourage ignorance or stupidity. And I would think that it would be easier to change government thinking than to revamp fundamental principles of logical thinking - but I don't really know.

So can we not conclude that having money is better than borrowing money and that therefore no debt is better than any debt?

If we can accept this argument as true then the question "What is wrong with having a National Debt" should be self-evident.

But does this thinking apply on the National Level?

I have heard and read many people who say that the Federal Government is different from the individual or even the State Governments because the Federal Government has the ability to create money - create in the Christian sense; to bring into existence from "nothing."

If only this were so. But that is not the way it works, as I understand it. The Federal Government doesn't simply print up money or create valuable dollars from worthless pieces of paper. The Federal Government makes new money or additional money available for circulation via a process of borrowing and debt through the central banking system.

The government does have the ability to "create" coins some what, but it must borrow or finance debt in order to produce more paper money.

With coins the government can buy the metal material and stamp out all they want and this would be "free" depending on the cost of the particular metal involved as compared to the commercial or monetary value of the coin that is being produced. For example if the amount of copper or lead going into a particular coin plus the cost of production was more valuable or costly than the market value or purchasing power of the printed coin then it could cost the government to produce a penny. Stamping out pennies could cost the government more than it is actually worth. For example, if the government hired a firm to manufacture pennies it could theoretically cost the company two cents to make a one cent piece. The government could go broke coining money.

With paper money the situation is different. The government doesn't just buy paper and stamp pictures of dead president onto it. The government actually finances its right to print up paper money by issuing bonds or notes and selling them at an interest to financiers. So for every dollar printed, a dollar or more of debt is created. Not only does the government have to pay a dollar from every dollar printed it must pay an interest premium along with a service charge - plus absorb all the cost of producing the actual currencies that is eventually distributed. Even if no actual paper is printed and everything is done electronically the government must still pay for the banking and electronic services plus interest. So making more money for the government is a losing proposition - it creates debt.

The banking system on the other hand is another story - but let's stick with the government.

Why does the Government do this?

I really don't know but my guess is that it all started as a protective device - like our checks and balances. In the beginning people didn't trust the government. Strangely enough they trusted the Banks instead. Talk about hiring the fox to guard the chickens? But this is the way money works all around the world.

Is there a better way?

I have been looking for alternative ideas on this in the literature but I haven't found anything yet. The Communist and the Socialist supposedly have alternative systems but I'm just getting into some of their ideas. At the moment, I have my hands full trying to fathom this one. Maybe what we have should be scrapped or thrown out but I don't have enough information to make that determination at this point. I have a feeling that any system will have its problems. So isn't it better to try and tweak the one you got than to start all over from scratch?

It may be true that if you start off with something that is founded on nonsensical principles in the first place, no amount of tweaking will be a remedy but we have achieved a lot of good things from what we have been doing; we don't want to throw the baby out with the bath water.
This is the same problem humanity has with religion.

I really think that what we have is a Rube Goldberg now. It has been doing the job as we thought that we wanted that job done - now we want it to do more and we want to do it better. So there you go.

So once again it would be best not to have the government print up more money; but more money is necessary structurally. As the population of the nation grows there has to be more money out there or how is everybody going to be paid; how will more jobs be created; how will business expand etc.? So the government is just about the same as we are when it comes to Debt. The government can increase its debt and borrow in order to "create" more money so long as the new money that is created will stimulate new growth in the economy and eventually return to the government more than it costs the government. Actually the government doesn't have to make a profit - it just has to pay its expenses and break even – get returned to it in new taxes from new jobs what it borrowed to create the new jobs.
But how does the government make money or earn its own keep?

The Federal government's income comes from taxes, tariffs, licensees, fees, and, in a few countries, lotteries. As far as I know that is it. So when the government prints up more money (borrows) it must recoup the costs of that borrowing via one or all of the above.
If the government borrows and then is unable to pay it back this deficit is added to the National Debt.

The National Debt is often compared to a mortgage. The National Debt is the People of the United States' mortgage.

Once again we could ask if it is better that we have a mortgage or we have no mortgage. I would think that the argument that we used at the beginning of this essay would be the same in this case. Though we can think up plenty of rationalizations, the bottom line is that it is better to have no mortgage than to have any mortgage. To argue otherwise is to be a "Compensation Bill" as described by Robert Service or a Pangloss in Voltaire's "Candide." It seems much the same to me as an unfortunate soldier who has lost both of his legs in a war, justifying that war and his horrible loss by claiming that if it were not for the war and his injury he would never have realized the great pleasure of playing wheelchair basketball.

As it is with legs so too having a mortgage may have subtle benefits but surely having no mortgage would provide even greater benefits.

Many defend deficits on the grounds of stimulating growth and increasing revenue. Yes, but after the money has been spent by the government and the economy has been stimulated, the government was supposed to recoup its initial spending and replace the money it had expended so that it could do the same again when necessary in the future. To have the government spend to stimulate the economy and then never get any money back and create a huge and massive debt (mortgage) certainly cannot be considered sensible economic practical thinking.

Some people even argue that paying the gigantic interest payments on the National Debt is good because the interest payments go to Americans and they then spend the money to stimulate the economy.

First of all the interest payments no longer go to only Americans. Foreign countries now own portions of our mortgage and they don't necessarily use our payments to our advantage. To exaggerate this point they could be using our interest payments (paid by all American taxpayers)to build nuclear weapons to eventually attack and kill us; or to build their own aggressive military might; or to invest in their own economy or other economies to compete and devastate our own.

Secondly, only a small percentage of Americans own treasury bonds. The richest among us own the vast majority of that portion of the mortgage owned by Americans. So although the majority of us pay the taxes that make the interest payment on the National Debt, only a very small percentage of us Americans are able to reap any reward and recoup any of the loss caused by the debt.

When you cut taxes to the wealthy and the super wealthy while borrowing and increasing the National Debt, you are in effect taking taxes from the majority and giving that money to a rich minority - unless you believe that the progressive tax system is unjustified - this would not be fair to all. So the super wealthy and the much-better-off benefit from debt creation. For them it is a win/win situation. They have their obligation to the Nation refunded and then they can take that money and buy interest bearing bonds. So as the Treasury is drained, the pockets of a few wealthy are filled. The National Debt is certainly good if you are rich enough to be a part of this overall unhealthy situation. But for the average and middle-class taxpayer - you are being taken for a ride.

For the poor who pay no federal taxes, it is a loser also. Debt creates inflation - so everybody, even the poor, end up paying their share at the grocery store and the gas pump - even the rich and super wealthy. The only difference is they (the wealthy and super wealthy) probably also own shares in the grocery store and the gas station.

The nation loses while the few prosper. I think this is the reason why many modern day Conservatives now have no problem with the National Debt and this is why we now hear so little about it in the mainstream news.(this articles was written when Reagan and the Republicans were the ones building the National Debt.)

It seems to me that if you have enough money no economic situation is detrimental. For example, if there is a depression - recession or deflation - the money that you have becomes more valuable even though you may have less of it. If there is inflation, the interest on your treasury bonds and investments goes up. So what you lose on the one hand you gain on the other. On the other hand, if you are either poor or middle class you only want growth and prosperity - depression and recession hurt these classes and offer very little that is positive.

But I do think when it comes to the growth of the National Debt even the rich better stop playing around. If they do succeed in bankrupting the American Treasury and making the Federal government powerless and completely dependent on them - which I think is their goal - it could all backfire. It could eventually stimulate a lack of faith in the dollar around the world which could then lead to a world wide currency failure or "panic" which would then lead to international chaos.

International economic chaos could then "trickle down" into the streets leading to revolution and violence everywhere - then all the gold and jewels and precious everything could be baked, boiled or incinerated. The super rich and exceptionally wealthy have always been able to hide here in America behind their investment portfolios but with no safe America - I see no place on the global horizon quite so secure.

Patriotism to the longevity of America I still see as the best investment for the rich and famous - even if they have to pay a little more to get it.

Actually what Donald Trump suggested a few years back might be a very wise suggestion. Mr. Trump was greatly criticized and accused of being a traitor to his class but his suggestion was viable and logical. He suggested that the super rich and the exorbitantly wealthy all chip in and make payments towards the paying off of the National Debt. He argued that it would make virtually no difference to them. They could easily get it all back in the invigorated new economy; their homeland would once again have the respect and confidence of the whole economic world; and they would be looked upon as American heroes as opposed to the traditional rich scumbags of the planet. I would also add to that logic that many of the poor and average give their lives and have given their lives so that the rich and famous would have the opportunities that they have had here in America. A small percentage of their millions and billions each year for ten years or so would be a small price to pay in comparison. I admit that they do not "owe" anybody anything. It would be an act of extreme generosity to be admired and appreciated by all Americans and all economies around the world - but it could be done and it would work.

If the rich and powerful of the world truly wish to bankrupt the good old U.S.A. for their own personal power and gain they better have a bigger and better country on their list to take its place - the U.S.A. has been pretty damn good to the wealthy - all things considered.

They also need to establish an alternative currency to the Dollar. This economic "brinkmanship" - to steal a play from John Foster Dulles - only works until you go over the brink and then it’s World War III, death and destruction, for everybody.

But let's get back to our discussion.

I am right now reading about how inflation is tied to unemployment. I will have to get back to you on inflation - I'm still learning. But if the growing National Debt leads to inflation and inflation leads to unemployment, I think we can then project that it will also be the poor, lower, and middle classes who will suffer from that effect. Even the rich don't seem to like inflation - at least those of them who have their money in long term bonds; or fixed mortgages etc.

So it costs the government to "make" money and how does the government recoup these costs - taxes, tariffs, fees, licenses and possibly Advanced National Bingo - a lottery.

At this moment income taxes are the biggest source of Federal revenue. If the government stops collecting taxes and borrows to pays its debts - we are back to Mr. Ponzi.

Granted the economics of the society may grow by this method but the government could and probably will eventually collapse - and this is especially true in a Global economy. In a National economy it would be plain stupid to undermine the national economy - but it has already been done by stupid wealthy people in the past; but in a Global economy other nations may think that a collapsed U.S. economy would be to their benefit. We must keep in mind that all of the world's economic systems are all based on faith and good will - that's the bottom line. If the world loses its confidence in the dollar, dollars could start returning to the U.S. in such large amounts that the German post World War I inflation would look like stability.

Right at this moment there is no one country in the world that could undermine U.S. economic hegemony, but who knows what the future will bring or what economic alliances could be formed. All that has to be figured out is a way to keep an opposing economic entity viable why the U.S. is collapsed. At this moment that option is not available to anyone - all viable nations are tied into the world banking system and the U.S.A. But it is not beyond reasonable thinking to suggest that there are not other nations out there who are working on this very possibility.

At this moment it is like an economic Cold War or nuclear standoff. If any nation tries to destroy the U.S. economically they will also be destroyed. They must bide their time, form alliance, gain economic strength and wait. Strangely enough if they wait long enough they may not have to do anything - we will do it to ourselves for them.