America’s Trojan Horse

America’s Trojan Horse

A Different Look at the National Debt

 

Copyright 2009 by Ted Kavadas

Created August 15, 2009

 

It is well documented that the United States has incurred an ever-growing level of national debt.  However, why we have embraced the incurrence of ever-increasing national debt is not well documented.  At least three mitigating factors have prevented, to this point, a rebuke of the practice.

The first of these concepts is that the financial markets have allowed us to grow and perpetuate our debt loads, absorbing this debt issuance at reasonable, if not low, interest rates.  While this continual absorption of ever-increasing debt at lower rates is counterintuitive, it has nonetheless occurred.  Why this counterintuitive event has occurred is largely unknown.  Although it appears to be a long-term market anomaly (a propitious one at that) it might also be a concatenation of short-term market anomalies.  The latter supposition is certainly a troubling facet to ponder, as it would likely make our ability to sustain such debt levels more tenuous.

The second of these concepts is the long held theory that the size of the national debt and deficits is almost inconsequential, as the government can always increase taxation to service and repay debt.  This theory has became a self-evident truth, albeit one built on two faulty assumptions: that there will always be willing and able taxpayers to pay whatever taxation amount required.  As we have seen recently, both of these “pillars” are crumbling as the economy has weakened.  It is important to note that taxpayers don’t always stage a vocal or visible protest over taxation; protest can be, and often is, more subtle, like moving from a region of higher taxation to lower taxation; and/or altering one’s activities when it is deemed that given the particular situation the taxation rate is too onerous. 

The third of these concepts is that taxation to support debt and deficits is inherently sustainable.  This assumes that the practice of taxation, to attain a certain amount, does not at some point resemble a “vicious circle.”  A simple example of this is the following: If a state needs $500 million to support its obligations, and figures it can gather this at a rate of 10%, it may need to increase this rate if the economy weakens and the tax base shrinks in order to attain the $500 million.  As it increases the rate, further economic weakness, as well as the punitive effects of the higher tax rates, can further dampen economic activity, requiring the rate to be raised higher yet; which could kick off another iteration of this “vicious circle.”  This type of unsustainable situation is certainly possible, especially in an unpredictable economic environment.

Additionally, there is at least one other dimension that allows us to incur ever increasing debt levels:  There is little or no political fallout from making decisions that include incurring more debt.   This is seen by the infamous, yet sadly accurate, phrase that “Deficits don’t matter” from a political standpoint.  There also appears to be a growing insensitivity to higher deficits and debts.

 

Today’s National Debt Level

Today’s total national debt figure is either sizeable, or gargantuan, depending upon how one chooses to measure.  Low-end figures approximate $6 Trillion, while official government statistics for FY 2008 indicate roughly $10 Trillion.  Accrual-based figures have been seen as high as $56 Trillion and above.i  Regardless of how one measures it, these national debt figures range from a high, yet seemingly manageable sum at the low- end, to a truly towering figure at the high-end, especially when compared to a GDP of $14 Trillion.

However, somewhat unbelievably the amount of this debt may not be the most troubling facet of our proclivity towards amassing it. 

 

The Trojan Horse Resemblance

Unfortunately, America’s proclivity to incurring substantial debt has strong parallels to a “Trojan Horse” scenario, in the following manner:  In a Trojan Horse scenario, a beguilement occurs in that a seeming attractiveness overshadows a more powerful hidden threat.  This hidden threat is not realized until well after the “Trojan Horse” is assimilated, or “let through the gates.”

America came to marvel at the “different aspects” of debt, those that allowed us to do things that previously were impossible due to fiscal prudence (i.e. running balanced budgets with largely contained national debt levels.)   We became an admirer of debt’s apparent grandeur, majesty, and beauty.  We allowed it through the gates of our previously fortified walls, those of fiscal prudence dictating that debt should be avoided.  By focusing on its purported benefits, we have been beguiled in allowing its dangers to go undetected.

Once ensconced within our walls, the many problems of debt, as discussed below, have come piling out.  Sadly, we have been practically unaware of these invading “warriors” which have made them all the more formidable and pernicious.  These “warriors” have been busy inflicting damage, and their damage has taken the form of the array of problems that debt has directly and indirectly allowed and caused us to amass. These problems have taken many forms;  some are mentioned below:

Poor decision making allowed

Under circumstances where there appears to be little, if any, constraints on assuming more debt, the necessity of proper decision making is compromised.  Decisions can be poor and/or inefficient because if need be, more debt can always be accessed.  There is little imperative for making the proper decision “the first time around.”

A “fatal attraction” toward “quick fixes”

There exists a natural propensity against “quick fix” solutions, and rightly so – they only serve to, at best, delay the need for proper decision making.  At worst, by delaying the implementation of a proper solution, “quick fixes” exacerbate the underlying problem, perhaps significantly.

Although this natural, common sense propensity exists against “quick fixes,” it is overridden by the ability to easily assume more debt.  There may be little need to make a proper decision now, especially one that may be unpopular, when this unpopular decision can be deferred, if not deferred indefinitely.  That this later solution may be more expensive is not really an issue when piling on debt seemingly carries little adverse consequences. 

Every problem has one solution

In support of the above, it appears as if the government’s incurrence of debt is growing at an ever-increasing rate, as measured by the growth in both deficits and debt.  It appears to be growing along with the list of chronic problems.  It is beginning to appear as if every problem has one solution – one that includes incurring more debt.  Can’t decide which budget items to cut?  Cut none of them and incur more debt.  Is the economy not as strong as one would like?  Propose massive stimulus plans that incur tremendous debt.  Don’t want to cut back on various social programs?  Don’t cut back on them and in the process incur more debt.  Can’t say no to “pork” spending?  Don’t worry about it – just incur more debt.  The list is endless. 

Throwing money at problems

As time progresses it appears as if we are increasingly “throwing money at problems” as opposed to diligently trying to understand and solve problems.  This may, at least in part, be fuelling the ever-increasing growth rates of deficits and debt.

No intellectual leadership required

Sadly, intellectual leadership and the need for more sophisticated and effective decision making is largely displaced by the ability to incur ever-increasing debt levels.  This is especially problematical now, as the problems we face as a nation are as troubling as they are tenacious.  Intellectual leadership and sophisticated decision making is desperately needed in order to truly solve many of our problems.  Instead, our desire for intellectual leadership and sophisticated decision making is subrogated by the slovenly practice of embracing increasing indebtedness.

 

Sustaining This Debt Load

Many believe the pivotal question with regard for sustaining this debt load is “when will our capacity for further borrowing end?” This question is difficult to answer, as it relies on many factors.

Some will argue that we can “inflate away” our debt, and thus, the amounts of debt aren’t as formidable as they may appear.  This “inflation palliative” theory may seem like a viable and potentially attractive option; however, it assumes many conditions and is most likely practically and theoretically flawed.  The amount of inflation required would be large; and would most likely create more problems than it would solve.  Furthermore, it is doubtful that debtholders would passively “stand by” as large inflationary machinations unfold without taking various countermeasures to protect themselves against this inflation risk.

The obverse of this inflationary “solution” is that of deflation.  If a deflationary mindset becomes prevalent, large levels of debt become even more formidable, as the debt will appear even less likely to be repaid.  Thus, if the markets start to adopt a deflationary mindset, this in itself may well sharply curtail, if not eliminate, an ability to further sustain high debt levels.

 

Conclusion

It appears as if our debt will continue growing in an increasing fashion. The array of problems that debt has directly and indirectly allowed and caused us to amass is formidable.  Both of these aspects call into question as to whether we, as a nation, can achieve Sustainable Prosperity given this dynamic. 

As history has shown, Trojan Horse situations are deadly.  Our proclivity for amassing debt needs to be sharply curtailed, if not completely eliminated, in a post-haste fashion.

 

 

 

For more of my  commentary on issues regarding America’s Economic Future, please visit the http://www.EconomicGreenfield.com blog

 

 

 


[i] Low-end figures as quoted by various economists; the $10 Trillion figure is from the U.S. Treasury – 2008 Financial Report of the United States Government.  The $56 Trillion figure is from The Peter G. Peterson Foundation and is figured on an accrual basis.  Additionally, accrual-based figures higher than $56 Trillion have been seen from other sources.

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