James Grant is what every blogger, including SLL, aspires to. His analyses are so apt and his writing so stylish, easy to read, and often downright fun that he’s able to charge more than $1000 a year for a subscription to his biweekly Grant’s Interest Rate Observer. He reportedly has over 10,000 subscribers. You can do the math. SLL recommends his books, which come a lot cheaper. It’s rare that his writings enter the public domain, but this article appeared on davidstockmanscontracorner.com:
$13,903,107,629,266. Can the nation afford this much debt?
This much I have learned about debt after 40 years of writing and study: It is better not to incur it. Once it is incurred, it is better to pay it off. America, we have a problem.
We owe more than we can easily repay. We spend too much and borrow too much. Worse, we promise too much. We conjure dollar bills by the trillions–pull them right out of thin air. I won’t insist that this can’t go on, because it has. I only say that it will eventually stop.
I don’t know the date, but I believe that I know the reason. It will stop when the world loses confidence in the dollars we owe. Come that moment of truth, the nation will resemble Chicago, a once prosperous polity now trying to persuade its once trusting creditors that it is actually solvent.
To understand our financial fix, put yourself in the position of the government. Say you earn the typical American family income, and you spend and borrow as the government does. So assuming, you would earn $54,000 a year, spend $64,000 a year and charge $10,000 to your already slightly overburdened credit card. I say slightly overburdened–your outstanding balance is about $223,000.
Of course, MasterCard wouldn’t allow you to run up that kind of tab. At an annual percentage rate of 15%, the cost to service a $223,000 balance would absorb 62% of your pretax income. But the government is different from you and me (and Chicago). It has a central bank.
The Federal Reserve is the government’s Monopoly-money machine. It sets some interest rates and influences many others. It materializes dollars. It regulates–now regiments–the nation’s banks. It pulls levers to make the stock market go up.
Congress is the source of the Fed’s power. The Constitution is the source of Congress’s power. The parchment enjoins Congress to coin money and regulate the value thereof. The founders viewed money as a scale or yardstick, something that measures value. The Fed views money as a magic wand, something that creates value.
Dollars aren’t so much minted these days. Rather, they issue from the Fed’s computers in billowing digital clouds. The cost of producing them is only the energy expended on tapping the keys. The Fed emits these electronic greenbacks to attempt to control the course of economic events. It’s a heaven-sent monetary system for a big-spending government.
You may struggle to pay that midteens rate on your outstanding credit-card balance. The Treasury gets by paying an average of just 1.8% on that portion of the debt, held by savers and investors both here and abroad. Defined in this way, we owe $13.9 trillion. The $19 trillion figure ticking upward on the famous National Debt Clock adds the debts the government owes itself. (How does this pseudo bookkeeping work? The Social Security Administration takes in–temporarily–more than it pays out. With the surplus it buys Treasury bonds. The bonds enlarge the debt clock’s debt.) It’s not so important that the government pays itself on time. What is important is that the government pay its public creditors on time. So cast your eyes on the exact numerical rendering of that slightly smaller sum: $13,903,107,629,266. It is unmanageable.
To continue reading: Jim Grant On The United States Of Insolvency