An America Without Debt?

Debt, a term that is referenced negatively in our modern vernacular, we associate and view the word debt as an idea or thing we should not have or try to get rid of; but what is debt, what makes it so trivial and negative.  Well according to the Miriam-Webster definition of debt, it is “something owed, a state of owing or a common law action for the recovery of money held to be due”.  With that in mind is it a good idea for America to be in debt when debt is an action of owing someone other than oneself, is it a good idea to be in debt to other nations, is it a good idea for the American government to create more debt by spending more money on programs that is a function for our debt. These are the questions I pose to you all today, should America continue on its current path and borrow more money from other countries to fund their programs or should they scale back spending and create a balanced budget for a more stable America.  My view is that we should scale back spending so that we do not have to worry about our government owing anyone money, so that we can have a surplus and then focus on investing in programs that bring back dividends to this country instead of throwing away money into the sea, and finally if we lower the debt we can finally trust our government again to make the proper decisions.

There is no doubt that America is in debt, according the the US Treasury, the total US Public debt stands at about 15.4 trillion dollars, for which most of that is back by US Treasury bonds and securities that are sold by the federal reserve to private investors and foreign nations. 

In 2007 article called “Just who owns the U.S. national debt?” columnist John W. Schoen breaks down the debt.

The money is borrowed from buyers of Treasury securities -- which are basically a big batch of IOUs that are auctioned off every three months. As the auction date approaches, the Treasury figures out how much it will need to pay off old debt and cover the government’s latest round of overspending.

When the auction day comes, buyers submit bids in the form of the interest rate they’re willing to accept. You can choose to make a competitive bid (you ask for a specific rate) or a non-competitive bid (you agree to accept the average rate of other winning bids.) When all the bids are in, the Treasury starts at the bottom, taking the lowest bids until it has collected enough money to cover that round of borrowing.

The money flows in from all over the place: from individual investors and corporations, pension funds and governments, both in the U.S. and around the world. Basically, anyone with a large amount of cash looking for a safe place to put it is a good candidate for holding U.S. Treasury debt.

So just who are these lenders? As of last June (the latest complete breakdown available), the biggest holder of Treasury debt was the U.S. government itself, with about 52 percent of the total $8.5 trillion in paper that's out there. Most of the government’s holdings are massive savings accounts for programs like Social Security and Medicare. Just as you may prefer to keep your Individual Retirement Account in the safe Treasury bonds, the folks who manage the Social Security Trust Fund are looking for a secure investment, too.

That’s leaves a little over $4 trillion in public hands. The biggest chunk (about 25 percent of the $8.5 trillion total) is held by foreign governments. Japan tops the list (with $644 billion), followed by China ($350 billion), United Kingdom ($239 billion) and oil exporting countries ($100 billion).

Other big holders of Treasury debt include state and local governments ($467 billion); individual investors, including brokers ($423 billion); public and private pension funds (319 billion); mutual funds ($243 billion); holders of US savings bonds ($206 billion); insurance companies ($166 billion) and banks and credit unions ($117 billion.)

Once issued at auction, Treasury securities enjoy a healthy second life when they’re traded in the so-called “secondary market” (aka the “bond market.”) The prices of bonds bought on the open market go up and down as the market reacts to changes in demand and news about the economic outlook like inflation. But no matter what you pay for a bond, if you hold it until it matures, the government has to pay back the full amount that was borrowed when the debt was first auctioned and issued.

And, as of January 2011 foreigners owned $4.45 trillion of U.S. debt, or approximately 47% of the debt held by the public of $9.49 trillion and 32% of the total debt of $14.1 trillion.  The largest holders were the central banks of China, Japan, the United Kingdom and Brazil.  The share held by foreign governments has grown over time, rising from 13% of the public debt in 1988 to 25% in 2007.  The largest single holder of U.S. government debt was China, with 26 percent of all foreign-held U.S. Treasury securities.  China's holdings of government debt, as a percentage of all foreign-held government debt, have decreased a bit between 2010 and 2011, but are up significantly since 2000 when China held just 6 percent of all foreign-held U.S. Treasury securities.

So is that a good thing should we allow foreign governments and private corporations to control our national ‘public’ debt, furthermore should the government pass on the national debt to us hard working Americans.  We elected politicians into office so that they can represent our interest in government, but so far what we can tell is that there is so much bickering and infighting in Washington it is hard for the lawmakers and bureaucrats to make up a plan that can get us out of debt and continue on with spending and creating more debt for Americans in our society today.

So what can we do to get us out of this mess?

As of now there is no direct answer or solution to that question, but we can look to past examples for the answers.

Recently, I glanced across a news article; Imagine a world with U.S. Debt by Washington Post columnist Brad Plumer, that sparked my interest in the public debt debate.  In his article he goes on a narrative about a time when the United States did not have debt and that officials in Washington were wondering what they could do with the money.  He compares the scenario of today with the scenario from back in the 1990’s when:

“We’ve all heard the horror stories about what would happen if the U.S. debt burden spiraled out of control. But what if we went in the other direction and paid off our debt entirely? Back in the late 1990s, with the economy galloping and the government racking up budget surpluses, this prospect didn’t seem so implausible.”

What did they do in the past that create the surplus in the 1990’s?

REAGANOMICS

  

The answer to that question would be “Reaganomics.”  In the 1980’s following the turbulent 1970’s where America and the globe were plagued with the oil and energy crises and recessions that created a bleak outlook for the incoming president in 1981; the president along economic advisor William Niskanen, they formulated and introduced the idea of Reaganomics to America. This according to Niskanen was:

"Reaganomics" was the most serious attempt to change the course of U.S. economic policy of any administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy." Reagan's 1981 Program for Economic Recovery had four major policy objectives:

(1) Reduce the growth of government spending

(2) Reduce the marginal tax rates on income from both labor and capital

(3) Reduce regulation

(4) Reduce inflation by controlling the growth of the money supply

These major policy changes, in turn, were expected to increase saving and investment, increase economic growth, balance the budget, restore healthy financial markets, and reduce inflation and interest rates.

Reaganomics was based on supply side economics, a theory created by Friedrich Hayek, from the Austrian School of Economics who sought to create a more free market economy, where the government would not interfere and allow for businesses and private investments to grow.  While the government’s sole role was to take charge of the state and to keep the budget from defaulting.

So with Reaganomics President Reagan and successive presidents after him could enjoy an economy that was booming and a government that was lowering their debt by spending less and allowing for Americans to be controlled less by the government.  If we could only follow this model today, I believe that we can lower the national debt in a booming economy.

Now some might argue that this is a bad idea and that deregulation is the reason why America is in its current situation, and that budget cuts will lead to a loss of jobs.   Well that is true deregulation might have caused our current situation and budget cuts might lead to cutting of jobs as well; but that is economics as nothing lasts forever the economy “bears” and “bulls” continuously in it is the way of the market.

I am not arguing for Reaganomics, but I see it as a good alternative to our current situation as of now, which is to lower the current national debt, at the end of the day I see our national debt as a high priority, we need to find a way to lower it and lower it fast.  And if we cannot come up with an idea among the modern economists, well maybe we should look at past examples as to get us out of this debt problem.