What do all these trillions mean?

Reading the recent Congressional Budget Office analysis of the proposed federal budget, two things become immediately clear. First, the Obama administration - while nowhere near as guilty as the Bush administration - is padding budget assumptions in order to make new government spending look cheaper than it actually will be. The second is that the deficit and ever-increasing national debt have become so huge that it’s difficult to understand what the numbers even mean.

It’s important to wrap our feeble brains around them, though, because underestimating budget deficits by $2.3 trillion, or causing debt to rise by $9.8 trillion, may seem like numbers you’d hear about a country like Zimbabwe, increasing debt has real effects on Americans. And numbers this high will have substantial, noticeable effects on you.

More than pocket change we can believe in

First things first. The Congressional Budget Office report issued this week is the real deal. The CBO is one of the most independent parts of the federal government, with a long-standing reputation for calling it like it is, president or party be damned. They slammed Bush for his finagling, and now they’re slamming Obama the same way, saying his staff’s budget assumptions are $2.3 trillion too rosy, among other things. Here are the main points:

1. The 2009-2010 budget likely understates the deficit by $400 billion
2. Over the next 10 years, the administration’s new programs will result in an additional $4.8 trillion deficit over what it would be without them
3. That means that by 2019, the total deficit will likely increase by about $9.8 trillion, instead of the still unbelievably high $4.4 trillion it would be without these programs

I, for one, am a little worried I may not get my 10 trillion dollars worth.

So what’s 10 trillion dollars between friends?

What’s important to keep in mind is that the deficit is an addition to the already existing national debt. And the buck stops at the government. They can choose to pay off everyone’s mortgage if they want to, but they can’t pass the national debt off to anyone else. That means they actually need to follow the rules of math, unlike what the rest of the country has been doing for the last 15 years.

Look at it this way. When Joe Boomer borrows $2,000 for season tickets to see his favorite NFL team, he needs to pay his loan shark a certain amount every month in interest and principal, or he’ll get his legs broke. Let’s say that payment is $100. That means Joe has $100 less to spend on cocaine every month, whether he likes it or not.

Similarly, when the government borrows an additional $10 trillion, they’ve got to make regular payments on it every year. That’s money that can’t be spent on health care, or education, or the environment, or bribes to oil industry executives, or anything else. It reduces the ability to provide future programs to buy programs now.

“Sure,” you say, “but those programs we’re buying today have real benefits (for baby boomers), so when we (Gen X and Y) pay them off later, the overall benefit will be the same.” And (except for the giant intergenerational transfer of wealth) you’re right…as far as the principal amount borrowed goes.

What gets “wasted” (i.e., produces no economic, social or environmental good) are the interest payments. Whatever the government pays in interest is money that could otherwise go to other programs (if you’re liberal), or tax breaks (if you’re conservative), or free psychiatric treatments (if you’re Ann Coulter). Because of this, the taxpaying public will be paying a certain amount of their tax bill each year that will return absolutely nothing to them whatsoever.

Flushing it down the toilet

Again, you say “Who cares? I need my government programs NOW!”

Fine, let’s assume for the sake of argument that everything in the budget is “worth it”. We’ll all set our respective political perspectives aside, lock the folks at Fox and MSNBC together in a dark room with limited air and watch them suffocate live on YouTube, and agree that every program on the table will provide 120% as much value to society as it promises to. This is some good shit.

Is it worth it, then, even with these guarantees? Well, it still depends on whether you’re planning on dying in the next 10 years or not. That’s because the interest payments on the national debt, if increased by this amount, threaten to create a situation where our future government can’t provide programs or services at all, because all it will be able to do is spend money paying off our national loan shark (China.) And that means hyperinflation. And that means Zimbabwe.

Again, figures from the CBO forecast:

1. The debt in 2008 was equal to 41% of GDP
2. The debt in 2010 will increase to 57% of GDP this year
3. By 2019, the debt will hit 89% of GDP

That means that by 2019, if we took about 90% of the entire economic output of every man, woman, illegal alien, and illegally employed child laborer in this entire nation and used it for the sole purpose of paying off the national debt, we could do it.

And then we’d all die. Remember, GDP includes the economic benefits of your labor, not just your salary. It would require much more than 100% of everyone’s salary to pay this giant turd off.

Viva la Recession!

Of course, we’d never try to pay off the debt in one year. Like every one of us in today’s economic times, the government is going to pay off the minimum balance. So what the hell does that mean?

This is going to be a rough analysis, since the government pays its bills differently than you or I. For simplicity, I’m going to assume it pays them the way you would on a mortgage. It’s not exact, mostly because of when things get paid off…but even a rough estimate is enough to prove my point.

Since we’re talking ten years here, let’s say the government sells its debt at through ten year treasury notes paying 6% interest. Since the government pays the principal at the end, that 6% stays constant. And let’s say China still thinks we’re worth it and keeps buying it.

On a total debt load of $18.69 trillion (roughly the CBO forecast for 2019), annual interest payments would be about $1.12 trillion. That’s $1.12 trillion that can’t be given back to taxpayers with tax cuts, or used to buy universal health care, or get Nancy Pelosi and Mitch McConnell better clothes, or anything else.

Put another way, it’s like giving away about as much money as we’re spending to nationalize our entire banking system this year…only we’ll doing it every year for ten years, and we still have to pay off the entire original principal balance at the end of the loan! And every year we do that, we’ll improve conditions in this country by exactly zilch.

Here’s yet another way to think about it. 6% of GDP spent servicing debt is like taking 6% out of the government’s “salary”, or ability to work. In 2009, America’s GDP is projected to decrease by 1.5%. How’s that percent and a half treating you? Like shit? Right. Now what if your miserable situation was four times worse? That’s how much 6% debt service will affect the government’s ability to provide for its “family.”

Inflation is the answer!

The way out of record debt loads like this is simple, and it happens all the time. Just ask Argentina. It’s our good friend inflation! As the government borrows more and more, our dollar becomes more and more worthless. Just like Joe Boomer when he’s all coked up - you know he’s just never going to pay you back. His money’s no good to you.

That inflation means higher prices for food, gas, clothing, rent, mortgages - you name it. There’s a range of guesses about how much increasing national debt affects interest rates, but the numbers often say about .25% for every 1% of GDP we borrow.

Moving from 41% to 89% is a 48% increase….which means interest rates would rise by about 12%. Remember those 18% mortgages in the 1970s? Yeah. Good stuff.

Countries like Argentina and Zimbabwe learn this kind of stuff the hard way. There’s nothing stable or important about them. It’s easy in a smaller country for governments to spend way beyond their means. The death spiral of inflation and debt can get out of hand quickly.

The U.S. is huge. Our economy is still the world’s largest (at least this year.) Getting into a state of hyperinflation is tough here, especially when everyone is out of work and everything sucks, which keeps inflation down.

We’re not going to see the dollar become worthless in a year.

But maybe we will in ten.

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