Is the budget actually balanced?

Discussion in 'Budget & Taxes' started by sunnyside, Jul 30, 2015.

  1. sunnyside

    sunnyside Well-Known Member

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    I know we're supposed to be running a deficit. I've seen different projections for the year from just above $400 billion to nearly $500 billion.

    However we've also got over $18 trillion in debt. Which isn't a good thing exactly, but it means we've essentially got a hidden income source because of inflation. We seem to generally be running a little below 3% inflation, and so we're essentially obliterating around $500 billion in debt.

    So in the end those should about balance out, i.e. our number of dollars of debt grows, but the inflation adjust value of our debt is about the same, so the budget is effectively balanced.

    Thoughts?
     
  2. Iriemon

    Iriemon Well-Known Member Past Donor

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    What is ultimately relevant is the size of the debt to GDP. GDP is now about $18 trillion. At a 4% growth rate, if the debt grows less than $720 billion, it will fall relative to GDP.
     
  3. wgabrie

    wgabrie Well-Known Member Donor

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    I don't know anything about inflation tricks obliterating the deficit. That's beyond me.

    I just go by the dollar amounts. And we're still not there yet about balancing the budget.
     
  4. Iriemon

    Iriemon Well-Known Member Past Donor

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    It affects the relative size of the debt.

    Dollar amounts don't tell the whole story.

    In a $1 trillion economy, a $10 trillion debt would be devastating.

    In a $100 trillion economy, a $10 trillion debt would be nothing.
     
  5. Ndividual

    Ndividual Well-Known Member

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    So if we can raise the inflation rate to double digits the Federal government could begin to have a surplus and pay off the existing debt?
     
  6. Iriemon

    Iriemon Well-Known Member Past Donor

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    Not necessarily, because inflation would affect expenditures as well.

    However, if we had a balanced budget, with double digit inflation (assuming no effect on the economy) you'd see the relative size of the debt (to the economy) shrinking rapidly. With 10% inflation and a balanced budget, the relative size of the debt would shrink by half in just 7 years.

    It would be the same for individuals owing debt. After 7 years your income would be doubled (all other things being steady) making the relative cost and size of a mortgage cut by half.
     
  7. Battle3

    Battle3 Well-Known Member

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    Not quite correct.

    What you hint at is called monetizing the debt, its dishonest, and countries that loan don't like it. What happens is a country borrows money, inflates the money supply which devalues the currency, and repays the loan with currency that has less value than the original borrowed currency. Its theft.

    Last year China wanted assurances from the US that the US would not continue monetizing the debt, of course the US said it would not do such a sneaky thing, and of course the US continues monetizing the debt and China knows it.
     
  8. Battle3

    Battle3 Well-Known Member

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    That level of inflation will destroy the economy, particularly when interest rates are kept below the level of inflation. Everyone living on a fixed income or savings (such as retired people) will be wiped out and dumped into poverty.

    If inflation is too high, people wont save money, people wont loan money, but a lot of money will be spent.

    The other edge of your razor is interest rates, high interest rates will defeat your strategy. In a free economy, rates will try to compensate for inflation. If people think inflation will increase next year, then they charge a higher interest rate for loans to try to offset the loss of value of the currency. When rates go up, the debt payments will go up, requiring the govt to borrow even more just to pay the payments.

    That's why the govt is keeping rates artificially low, and is understating inflation.
     
  9. sunnyside

    sunnyside Well-Known Member

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    I'd consider that also an important metric and I can see how it's rather similar, but that's different. Maybe that's more important though.

    The fact people are calling it a "sneaky thing" or "theft" should give you some indication of efficacy.

    I might be inclined to agree if we were pushing inflation into the double digits or something. However nobody can claim they didn't know about inflation, you can look up inflation rates going back a hundred years. Our inflation rates haven't even been high, we've actually been below our historic average.

    No, people know the deal when they get those T-bills, if you'd rather loan to Greece or get some stock in a solar highway startup for a better rate then go ahead.

    For the most point Iriemon is right about costs just rising as well, and the only "advantage" being that our existing debt becomes effectively smaller even though it, numerically, may be growing even faster.

    Except, as Battle3 points out:

    So on that front our government could begin to balance the budget by effectively cutting spending on entitlement programs and such without having to actually pass a bill to cut them. Now, many entitlement programs have various clauses meant to compensate for inflation...however there are big fights going on right now about how to calculate those.

    This will be a big deal going forward, because in addition to our current debt, we also have massive unfunded liabilities that the baby boomers voted for themselves as they retire. In principle restructuring the programs would be the best solution, but I doubt any politician will be able to go after those sacred cows, so inflation may be our best practical option.

    But as mentioned if you let inflation get too high then you start taking risks with your economic engine.
     
  10. Ndividual

    Ndividual Well-Known Member

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    What should we be calling a $17.8 trillion economy, with an $18.2 trillion debt?
    You might also take into consideration the existence of about $4 trillion of actual fiat currency, with the Federal government collecting tax revenues amounting to just over $3 trillion, while spending about $3.5 trillion.
     
  11. Ndividual

    Ndividual Well-Known Member

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    Here's some historical data for you to use to prove your point.
    Year 1900, GDP $20.7B, Fed Debt $2.1B, Fed Budget $629M
    Year 1925, GDP $91.4B, Fed Debt $20.5B, Fed Budget $3.6B
    Year 1950, GDP $300.2B, Fed Debt $257.3B, Fed Budget $44.8B
    Year 1975, GDP $1.69T, Fed Debt $533.2B, Fed Budget $332.3B
    Year 2000, GDP $10.28T, Fed Debt $5.6T, Fed Budget $1.79T
    Year 2014, GDP $17.8T, Fed Debt $18.2T, Fed Budget $3.5T
     
  12. Ndividual

    Ndividual Well-Known Member

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    I agree, which is why I posted a question and NOT a proposal.

    Based on the OP and post #6 response, relative to the figures I presented in my post #11, in 2014 with a GDP of $17.8T our Federal debt should have been about $1.8T with a Federal budget of about $541B equivalent to a Federal government cost to each citizen, man, woman and child of about $1,695 per year instead of nearly $1,000 per month.
     
  13. Ndividual

    Ndividual Well-Known Member

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    In response to the OP question, the answer is 'NO', the budget is not actually balanced. A 'balanced' budget is when spending is no greater than the income. While the interest being paid on the debt held by our Federal government is being paid wifth dollars less valuable than the dollars which were spent acquiring that debt, we are not reducing the debt owed at all. Debt interest for 2014 amounted to $430B or a rate of about 2.4% while historically it has averaged between 4% and 6%. If, or more likely when, interest rates rise our debt interest payment could become the largest budget item, unless of course government increases spending in other areas by taking on new debt.
     
  14. Battle3

    Battle3 Well-Known Member

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    You assume the inflation calculation is accurate. It is not, and you touch on one main reason why it is not - cost of living adjustments for social security, military retirement, and other programs are tied to inflation (the CPI). The government has a strong vested interest in under-reporting the CPI.

    The CPI calculation has been "modified" multiple times starting in the 1980s, each time the claim was that the CPI calculation was inaccurate and overstated the true CPI, and was "costing" the government a lot of money. There are some web sites that calculate the CPI using the various old methods, here is one http://www.shadowstats.com/alternate_data/inflation-charts

    Every time the CPI is adjusted, it produces a lower CPI than the previous CPI calculation. Even a small reduction in the calculated CPI makes a huge difference over time due to the compounding of the rate.

    The latest attempt was in the Simpson-Boles commission report on balancing the budget, the so-called chained CPI will reduce the CPI again.

    And what does your real world experience tell you? Do you go to the grocery, buy clothes, school supplies? Do you really believe that the CPI is less than 2% since 2012? That means if a pound of chicken (for example) cost $5 in 2012 it costs $5.20 today - does that match your real world shopping experience?
     
  15. Battle3

    Battle3 Well-Known Member

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    You cannot treat inflation in isolation, you must consider interest rates as well. And the true inflation and interest rate must be used.

    In a free system, interest rates balance the inflation rate, in fact interest rates are intentionally set to exceed the inflation rate so the loaner can make a profit. Your entire thesis fails for that simple reason. If the govt raises inflation, then interest rates will increase accordingly. If people expect the govt to inflate the money supply, then they will increase interest rates in anticipation of the inflation. If the govt insists on going down that path then the result is hyperinflation and that is a total disaster.

    Your concept is a non-starter unless the govt artificially manipulates the economy in a fundamental way, and that always leads to disaster (as we are once again learning today).
     
  16. Ndividual

    Ndividual Well-Known Member

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    Are you actually trying to respond to something I've posted?
     
  17. Battle3

    Battle3 Well-Known Member

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    Yes. Your very simple calculations only consider inflation, which is wrong. Your entire premise is wrong.
     
  18. Ndividual

    Ndividual Well-Known Member

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    I'm uncertain what it is you think is my premise. All I'm saying is that contrary to the OP claim, "i.e. our number of dollars of debt grows, but the inflation adjust value of our debt is about the same, so the budget is effectively balanced.", if our debt is growing inflation does not balance our budget. A balanced budget would be the result of tax revenues equal to or greater than the spending by government, with the debt owed NOT increasing regardless of inflation.

    ....................................................................................................................................................... Debt as.....Budget as
    ............................................................................................................compared to previous Yr.....% of GDP...% of GDP
    Year 1900, GDP $20.7B....Fed Debt $2.1B......Fed Budget $629M .................................................10.1%........3.0%
    Year 1925, GDP $91.4B....Fed Debt $20.5B....Fed Budget $3.6B.......4.4x.....9.8x.....5.7x...............22.4%.......3.9%
    Year 1950, GDP $300.2B..Fed Debt $257.3B..Fed Budget $44.8B.....3.3x...12.6x...12.4x...............85.7%......14.9%
    Year 1975, GDP $1.69T.....Fed Debt $533.2B..Fed Budget $332.3B...5.6x.....2.1x.....7.4x...............31.6%......19.7%
    Year 2000, GDP $10.28T...Fed Debt $5.6T......Fed Budget $1.79T......6.1x...10.5x.....5.4x...............54.5%......17.4%
    Year 2014, GDP $17.8T.....Fed Debt $18.2T....Fed Budget $3.5T........1.7x.....3.3x.....2.0x.............102.2%......19.7%
    1900-2014.........................................................................................859.9x 8666.7x 5564.4x

    If you agree with the OP that inflation effectively balances our budget, please elaborate.
     
  19. Battle3

    Battle3 Well-Known Member

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    I have to laugh and apologize, I have you and another confused. I took a moment and read the entire thread, its interesting to me how I made that jump, but it was my mistake. You and I are in agreement on the OP's premise.
     
  20. Ndividual

    Ndividual Well-Known Member

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    I kind of suspected that to be the case, but thank you for confirming it.

    Excellent signature, by the way.
     
  21. Iriemon

    Iriemon Well-Known Member Past Donor

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    This chart more clearly shows the relationship between the total debt and GDP:

    Year - Debt:GDP
    1945 113.1%
    1946 118.1%
    1947 103.2%
    1948 91.7%
    1949 92.7%
    1950 85.6%
    1951 73.4%
    1952 70.4%
    1953 68.3%
    1954 71.3%
    1955 65.9%
    1956 61.5%
    1957 57.9%
    1958 58.5%
    1959 55.5%
    1960 53.4%
    1961 52.5%
    1962 50.1%
    1963 48.4%
    1964 46.2%
    1965 43.2%
    1966 40.4%
    1967 40.0%
    1968 38.0%
    1969 36.1%
    1970 36.2%
    1971 36.3%
    1972 35.0%
    1973 32.9%
    1974 31.8%
    1975 34.2%
    1976 34.8%
    1977 34.5%
    1978 33.5%
    1979 32.1%
    1980 32.5%
    1981 32.0%
    1982 35.8%
    1983 38.8%
    1984 41.2%
    1985 44.8%
    1986 46.3%
    1987 48.3%
    1988 49.5%
    1989 50.5%
    1990 54.1%
    1991 59.4%
    1992 62.2%
    1993 64.1%
    1994 64.2%
    1995 64.9%
    1996 64.5%
    1997 62.9%
    1998 60.8%
    1999 58.5%
    2000 55.2%
    2001 54.7%
    2002 56.7%
    2003 58.9%
    2004 60.1%
    2005 60.6%
    2006 61.4%
    2007 62.2%
    2008 68.1%
    2009 82.6%
    2010 90.6%
    2011 95.3%
    2012 99.4%
    2013 100.4%
    2014 102.3%

    Following WWII, we had a massive debt. The "Greatest Generation" however, with a combination of higher tax rates (94% top income tax rate!) and controlled spending brought the debt:GDP ration down from 113% to just 33%.

    Starting in 1981, however, a combination of tax cuts and increased spending started pushing that ratio up. It started falling again in the late 90s as a combination of a tax increase and controlled spending got us from then record deficits in 1992 to a surplus budget in 2000.

    In the early 2000s, big tax cuts and big spending increases again pushed the ratio upwards. The extra spending brought on by the GR, combined with Stimulus tax cuts and a recession, shot the number up. Now, with austerity spending constraints combined with a tax increase, the increase has slowed dramatically.

    Will our representatives summon the political courage to compromise on tax increases and spending limitations to bring the debt:GDP ration down?

    Or will the ideologues and special interests prevail and the politicians pander to them?

    I'm not entirely hopeful.
     
  22. Iriemon

    Iriemon Well-Known Member Past Donor

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    I'd call it relatively bigger than a $10T debt in an $100T economy and relatively smaller than a $10T debt in a $1T economy.

    What about it?
     
  23. Iriemon

    Iriemon Well-Known Member Past Donor

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    The CPI index is modified reguarly to reflect a current basket of goods. The price of an 8-track tape player, for example, is not very relevant in calculating inflation.

    Could you link to the source where the claim was made that the CPI was being adjusted because "he claim was that the CPI calculation was inaccurate and overstated the true CPI"

     
  24. Battle3

    Battle3 Well-Known Member

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    The latest was from Simpson-Bowles who proposed a new CPI calculation (chained CPI), here is a letter from Simpson & Bowles to the Social Security subcommittee http://www.momentoftruthproject.org...e-ways-and-means-social-security-subcommittee

    Here is an excerpt:

    The recent discussion draft you presented on adopting the chained CPI for Social Security is a very important contribution to the debate. We were encouraged that your subcommittee recognizes the importance of measuring inflation accurately while providing benefit enhancements for the very elderly. Eliminating the unjustified increases in spending and reduced revenues from the current inaccurate measure of inflation should be a priority for any comprehensive deficit reduction plan. All major bipartisan fiscal plans would adopt the chained CPI – which experts agree is a more accurate measure of inflation -- in place of current CPI measures for all parts of the budget indexed to inflation, while providing targeted benefit enhancements to the very elderly and those in poverty.

    Although the discussion draft released by the Social Security Subcommittee was limited to the Social Security program, we strongly believe that it is essential that any legislation considered by Congress switching to chained CPI should be applied government-wide on both the tax and spending side, with no exceptions, which was the approach recommended by the Fiscal Commission and other bipartisan proposals. Inflation measures should not be corrected selectively, but rather throughout our government.

    While most of the discussion regarding chained CPI has focused on the impact it would have on Social Security, the impact of switching to chained CPI to index provisions in the entire federal budget where it would be spread much more broadly, with then only one-third of the savings from switching to the chained CPI over the next decade coming from Social Security. Another third of the savings would come from new revenue and the remaining third from other spending programs and interest savings.


    This attitude has been prevalent in the govt - both R & D - for decades, its not even a secret. Here is a article from 1997 when Alan Greenspan argued the CPI calculation was wrong and produced a too high CPI, and should be "revised": http://articles.chicagotribune.com/...40_1_social-security-advisory-panel-deduction

    Federal Reserve Chairman Alan Greenspan, stepping up a campaign that would reduce cost-of-living increases for millions of Social Security recipients, on Thursday urged Congress to reduce the consumer price index.

    Greenspan told the Senate Finance Committee that Congress should set up an independent commission to periodically determine how much the index overstates inflation.
    ......
    His comments marked the most influential support so far for the recommendations of a five-member advisory panel headed by Stanford University economist Michael Boskin.

    That panel issued a report in December saying the CPI was overstating inflation by 1.1 percentage points annually. Several government programs are adjusted annually to reflect CPI movements.
    ....
    At a separate hearing, Katharine Abraham, commissioner of the Bureau of Labor Statistics, told senators not to expect her agency to change the CPI in time to solve budget problems for the coming fiscal year.​

    There have been a few of these "revisions", the first was under Carter.
     
  25. sunnyside

    sunnyside Well-Known Member

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    It's true there is both inflation and interest. However we already figure the interest into our budget numbers, whereas we don't include the inflation. If both interest and inflation were ignored we'd have about a balanced budget, depending on how the year finishes out.

    No no. That's why I mention the big fights on how it's calculated, which you reference.

    Personally, I'd like to see a "basket" that's decoupled as much as possible from exchange rates. The baskets we had made sense when 90%+ of the goods in them were produced in the US. Now that this isn't true, the baskets more track international exchange rates then internal inflation. I suppose that's what you'd want if you wished to ensure entitlement plans continued to provide the same amount of foreign goods despite a collapsing economy, but I don't think that's a good idea at all.

    See my above reply to Ndividual. But we've commonly seen interest rates below inflation. People will still buy the debt in such circumstances if they think it's their best option. The T-bills at least give some return vs just having cash and, presumably, carry much less risk than other options.

    I'm not so hopeful either. Though we do have the odd situation where much of our debt is currently owed to ourselves. Notably in the social security fund and similar. Hypothetically younger voters could rise up against having a massive debt handed down to them. If so, the government could pay that debt to itself...and then not give the money out but and instead use it to pay down the debt.

    - - - Updated - - -

    It's true there is both inflation and interest. However we already figure the interest into our budget numbers, whereas we don't include the inflation. If both interest and inflation were ignored we'd have about a balanced budget, depending on how the year finishes out.

    No no. That's why I mention the big fights on how it's calculated, which you reference.

    Personally, I'd like to see a "basket" that's decoupled as much as possible from exchange rates. The baskets we had made sense when 90%+ of the goods in them were produced in the US. Now that this isn't true, the baskets more track international exchange rates then internal inflation. I suppose that's what you'd want if you wished to ensure entitlement plans continued to provide the same amount of foreign goods despite a collapsing economy, but I don't think that's a good idea at all.

    See my above reply to Ndividual. But we've commonly seen interest rates below inflation. People will still buy the debt in such circumstances if they think it's their best option. The T-bills at least give some return vs just having cash and, presumably, carry much less risk than other options.

    I'm not so hopeful either. Though we do have the odd situation where much of our debt is currently owed to ourselves. Notably in the social security fund and similar. Hypothetically younger voters could rise up against having a massive debt handed down to them. If so, the government could pay that debt to itself...and then not give the money out but and instead use it to pay down the debt.

    I'm not incredibly hopeful for that, but I hope we'd consider it if we ever get serious about the national debt after watching enough other horror stories play out around the globe.
     

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