Paying down the debt is not mathematically possible

[MicroBalrog]

The way the math works out looks exactly like weimar republic or zimbabwe inflation.

All fiat money eventually ends on an exponential inflationary curve.

We are beyond the event horizon on this one.

All money, period, unless you:

1. Have free banking (not politically feasible)

2. Issue literal bits of gold as money (and even then inflation is possible.)

[Headless Thompson Gunner]

How does that work? Seriously, I don't understand it.

Use small words and big pictures; I went to public school.

How about a historical example?

Our national debt after WWII was $270 billion, and our GDP was $230 billion.  Debt to GDP (the ratio that determines your level of indebtedness) was therefore about 117%, which is huge.  Over the last 70 years, growth and inflation have all but eliminated that debt.  

Even if we'd never paid off a penny of that debt, today it would only be 1.6% of GDP ($270 billion debt vs $16.8 trillion GDP).

First, the effects of inflation:  That $270 billion in 1945 dollars was a big deal at the time, that's the equivalent of $3.5 trillion in today's dollars.  But debt doesn't index to inflation, that debt is still $270 billion today even though $270 billion isn't what it used to be.

Second, growth:   The economy is a lot bigger today.  Our ability to generate a spare $270 billion is a lot better today than it was back then.  Back then it would take everyone in the country laboring for more than a year to generate that much value.  Today we can do it in less than a week.  

The math is such that old debt shrinks by the sum of growth plus inflation.  Higher inflation means debt shrinks faster, which is why I suggested 2% annual inflation as a cautious assumption.  If actual inflation is higher, as Balog wants to believe, then it works out even better for retiring old debt, the debt shrinks faster.  Ditto for annual GDP growth, it's historically been more than 2% per year, too, so again I assumed a cautious 2%.

[tokugawa]

How about a historical example?

Our national debt after WWII was $270 billion, and our GDP was $230 billion.  Debt to GDP (the ratio that determines your level of indebtedness) was therefore about 117%, which is huge.  Over the last 70 years, growth and inflation have all but eliminated that debt.  

Even if we'd never paid off a penny of that debt, today it would only be 1.6% of GDP ($270 billion debt vs $16.8 trillion GDP).
   So magically the debt incurs no interest?

First, the effects of inflation:  That $270 billion in 1945 dollars was a big deal at the time, that's the equivalent of $3.5 trillion in today's dollars. But debt doesn't index to inflation, that debt is still $270 billion today even though $270 billion isn't what it used to be

Second, growth:   The economy is a lot bigger today.  Our ability to generate a spare $270 billion is a lot better today than it was back then.  Back then it would take everyone in the country laboring for more than a year to generate that much value.  Today we can do it in less than a week.
 
  This statement is baffling- the debt then compared to todays economy is completely irrelevant- if you want to try  this at least correct for inflation, as a stand in for interest. That would be about 3.5 trillion in today's dollars by "official" figures. Others put it as much as four times higher. this is without the extra interest on it necessary to make it purchasable by bond buyers..

The math is such that old debt shrinks by the sum of growth plus inflation.  Higher inflation means debt shrinks faster, which is why I suggested 2% annual inflation as a cautious assumption.  If actual inflation is higher, as Balog wants to believe, than it works out even better for retiring old debt.  Debt shrinks faster.  Ditto for annual GDP growth, it's historically been more than 2% per year, too, so again I assumed a cautious 2%.

 The statement that the debt is fixed is incorrect. The debt is rolled over , and each time new bonds are issued a new rate applies. That rate is subject to market forces. It is not fixed.  That is why the feds are desperate to keep interest rates low, and why the fed itself through sleight of hand is buying most of the bonds-  but the fundamental error is suggesting interest rates and inflation would be the same- this is not possible in a free market- there has to be a net gain or no investor would buy the bonds- see above about the fed.

 Most of the supposed growth in the economy has been purchased with debt, cheap money issued by the government, no different than a HELOC someone used to buy a Ferrari and call themselves rich, even though one missed payment and they will be living under a bridge somewhere.  The rest is because in spite of all the obstacles thrown our way by the gov, technology still has been able to increase efficiency of production and quality of manufacture, as well as developing cool new stuff.
  The natural evolution of progress is DEFLATION, as technical development makes things more available and less expensive.

 Comparisons with the decades following WW2 are misleading for many ,many reasons- too many to go into now.
 
 Historically, the path our government is on, leads to ruin of the currency and sometimes of the entire system.

[MechAg94]

The inflation example Has two requirements.

1.  You continue to pay interest each year.
2.  You STOP adding to the debt. 

We might continue #1, but #2 is politically impossible right now. 

[Fly320s]

HTG's example leads to other questions:

1. If inflation leads to reduced debt load, why is inflation such a worry.

2. If the debt problem is so easily solved, why is there a federal debt ceiling?

[Headless Thompson Gunner]

 The statement that the debt is fixed is incorrect. The debt is rolled over , and each time new bonds are issued a new rate applies. That rate is subject to market forces. It is not fixed.  That is why the feds are desperate to keep interest rates low, and why the fed itself through sleight of hand is buying most of the bonds-  but the fundamental error is suggesting interest rates and inflation would be the same- this is not possible in a free market- there has to be a net gain or no investor would buy the bonds- see above about the fed.

 Most of the supposed growth in the economy has been purchased with debt, cheap money issued by the government, no different than a HELOC someone used to buy a Ferrari and call themselves rich, even though one missed payment and they will be living under a bridge somewhere.  The rest is because in spite of all the obstacles thrown our way by the gov, technology still has been able to increase efficiency of production and quality of manufacture, as well as developing cool new stuff.
  The natural evolution of progress is DEFLATION, as technical development makes things more available and less expensive.

 Comparisons with the decades following WW2 are misleading for many ,many reasons- too many to go into now.
 
 Historically, the path our government is on, leads to ruin of the currency and sometimes of the entire system.

Don't misunderstand me.  I'm not saying that debt is good or OK, or that our national situation hasn't become more tenuous since we've shot up the debt these past 6-8 years.  I'm just explaining the mechanics of how giant national debts are cleared over time.  It isn't because the government takes in enough tax revenue to pay it down, as Balog's article suggests.  It's because the government outlasts the debt.

Yes, you have to pay interest on the debt over the years, but that's substantially easier than paying down a debt equal to your annual GDP.

It's debatable that the path we're on leads to ruin.  We've been here before and survived.  So have most of the world's other developed western democracies.  The point is not that things are good, it's just to refute the false premise that there's no safe way out.

The inflation example Has two requirements.

1.  You continue to pay interest each year.
2.  You STOP adding to the debt.  

We might continue #1, but #2 is politically impossible right now.  

Yes, on both counts.  Technically you don't have to completely stop adding to the debt, you just have to reduce the addition of new debt to below the annual erosion rate.  But basically, yes.

Yeah, politically, I don't see our nation stopping the new debt now, and probably not until after the 2016 elections at least.  But it is possible some day.  We've done it before.  It doesn't require radical political action, just reasonable action.  

HTG's example leads to other questions:

1. If inflation leads to reduced debt load, why is inflation such a worry.

2. If the debt problem is so easily solved, why is there a federal debt ceiling?

1. Is inflation such a worry?  Inflation is good for debtors, obviously.  Bad for savers, but if it's kept small and consistent/predictable, not too bad.  Small and consistent inflation beats the likely alternatives.

2. It's not easy to solve.  It takes a long, long time.  And the whole while you're paying interest on that debt.  So it's not good.  But its also far from impossible, which is all I'm trying to demonstrate.  

[Hawkmoon]

So could we actually pay the debt we owe other countries and sit on what we owe ourselves?

Why don't we start by collecting the debts other countries owe us? Or have we officially forgiven all of them?

[brimic]

It's because the government outlasts the debt.

Heh.
You are saying that as if it were a good thing.
Our government has morphed into a surveillance/welfare state with a unending thirst for war. We are not at a police state/political purge state yet, but we are certainly moving in that direction at an alarming rate.

[Northwoods]

The problem with HTG's analysis is that after WWII there was a big reduction in federal spending.  After all the war was over, so there wasn't the need to buy all the planes, tanks, ammo, fuel, etc, nor so many soldier's salaries to pay.    Today, even though the debt/GDP ratio is about the same, we're not substantially reducing spending to allow that inflation+GDP growth to work that "magic" and make said debt manageable.  What we're doing instead is accelerating that spending to ever greater levels of absurdity without even the pretense of worrying about paying for it.

[MechAg94]

The problem with HTG's analysis is that after WWII there was a big reduction in federal spending.  After all the war was over, so there wasn't the need to buy all the planes, tanks, ammo, fuel, etc, nor so many soldier's salaries to pay.    Today, even though the debt/GDP ratio is about the same, we're not substantially reducing spending to allow that inflation+GDP growth to work that "magic" and make said debt manageable.  What we're doing instead is accelerating that spending to ever greater levels of absurdity without even the pretense of worrying about paying for it.

That is why I was saying we would have to stop adding to the debt to pay it off or reduce it.  As long as deficit spending continues out of control, nothing will change. 

[MechAg94]

Why don't we start by collecting the debts other countries owe us? Or have we officially forgiven all of them?

How much are we owed?  I didn't think we loaned money to anyone.  I thought we just gave it away or guaranteed their loans.

[Balog]

I take it you haven't done the math yet.  Spoiler alert: higher inflation eliminates debt faster.

 

Technically true. It also destroys the value of the currency and penalizes people who have saved vs gone into debt.

[KD5NRH]

2. Issue literal bits of gold as money (and even then inflation is possible.)

Possible, but difficult as the supply of value increases while the supply of money has an upper bound. (Assuming nobody gets really good at alchemy.)  Yes, there's still unmined gold on the planet, but not likely enough to reverse the overall deflationary effect, and eventually it would all be mined or someone would figure out how much there is with enough accuracy to finish out the equation.

[MechAg94]

Technically true. It also destroys the value of the currency and penalizes people who have saved vs gone into debt.

Only if you save cash and sit on it versus investing in real assests such as property. 

[HankB]

The problem with HTG's analysis is that after WWII there was a big reduction in federal spending.  After all the war was over, so there wasn't the need to buy all the planes, tanks, ammo, fuel, etc, nor so many soldier's salaries to pay.    Today, even though the debt/GDP ratio is about the same, we're not substantially reducing spending to allow that inflation+GDP growth to work that "magic" and make said debt manageable.  What we're doing instead is accelerating that spending to ever greater levels of absurdity without even the pretense of worrying about paying for it.

We really didn't run into debt problems until Lyndon Johnson's "great society" programs took hold. Always expensive, since 2012 spending on them has topped a trillion dollars a year poured into the bottomless cesspool of means-tested entitlements with a plethora of welfare programs - the sum total of which since the late '60s is a close match to our national debt. (And this does NOT include Social Security.)

[MicroBalrog]

Possible, but difficult as the supply of value increases while the supply of money has an upper bound. (Assuming nobody gets really good at alchemy.)  Yes, there's still unmined gold on the planet, but not likely enough to reverse the overall deflationary effect, and eventually it would all be mined or someone would figure out how much there is with enough accuracy to finish out the equation.

Historically there are two ways in which inflation can occur with golds:

1. Literal physical debasing of the gold currency.

2. While the M0 (the supply of actual coinage) cannot inflate much, the supply of M1, M2, etc. (i.e. electronic money in banks, loans backed by that money, loans backed by those loans, etc.), can still inflate unless you abolish fractional-reserve banking, which you can't, if you still want an economy.

[just Warren]

The problem we're having is that we have a monopoly provider of currency. We need to go back to competing currencies and fractional-reserve banking in a free banking scheme really isn't really fractional at all.

Certainly there is not 100% gold reserves baking issued currency but there is some, it got to as low as a 2% average in Scotland with one bank getting down to 1/2% gold. However there was a feedback mechanism that kept inflation from happening in the first place and for punishing poorly run banks. Plus all banks had easily liquidable assets such bonds, stocks, annuities, promissory notes, and bills of exchange that could be sold for gold.

The feedback mechanism was the clearinghouse. Every fortnight the two dozen or so banks would get together and trade back the notes of the other banks that they had collected during the period. Since all notes traded at par it was a 1-for-1 swap. Whatever bank still had notes outstanding had to shift gold (or assets) to the other bank or banks to cover the discrepancy.

If they didn't have enough gold then they would have to shift or sell assets and if those ran out then the partners of the bank had to pony up their own personal wealth. This kept banks from over-issuing, mostly. There were still some who got out of line but there were no major crises, no panics, and things went smoothly even when a bad bank was wound-up.

And as a holder of notes in a bad bank you didn't have to worry as if the gold and asset sell off plus the selling of the partners personal wealth was not enough the other banks stood ready to buy, at par, whatever outstanding notes were left.

It was an elegant and simple process that worked for over a century at keeping money issued level with actual demand for money in the economy.

Now our ancestors in the US did not, for the most part, get the full value of this type of system. And that was because of government shenanigans. Outside of the Suffolk System for 40 years our system was choked, abused, and molested in every conceivable way by politicians, bureaucrats, and crony capitalists. Still for all that according to George Selgin depositor loses were less than 1% over the entire system/years of existence so not bad.

For this to work today states and the feds would have to keep their hands off. And sadly, you don't become a politician to leave things alone so the odds are not good that we could get a well-functioning free-banking system here.