From: nagle@netcom.com (John Nagle)
Subject: Re: Perot's plan and the debt
Organization: Netcom - Online Communication Services  (408 241-9760 guest) 
Distribution: usa
Date: Sun, 24 Jan 1993 18:13:15 GMT

millerm@CS.ColoState.EDU (mark miller) writes:
>Then there is the meaty part that explains the debt in plain numbers.
>In the fiscal year 1992, the government, by official Office and
>Management and Budget estimate, expected to get about $1.075 trillion
>in tax revenues.  Here is the way it all lays out:

>(1) Social Security & Medicare -   $411,000,000,000  
>(2) Defense costs -                $308,000,000,000
>(3) Interest on debt -             $200,000,000,000 
>(4) Pay depositors of failed S&L's- $80,000,000,000
>(5) Pensions for Federal retirees - $78,000,000,000
>(6) Benefits for veterans -         $34,000,000,000
>(7) Operational costs of govt. -    $25,000,000,000

      Yes, that's the budget.  

      The current deficit is between $200 and $400 billion, depending on
whose figures you believe.  Each year there's a deficit, the "interest on
debt" number notches up.  This works just like a credit card.  About 22% of 
tax revenues go to paying interest right now.  Interest rates are low, 
and if they go up, so does that number.  The average maturity on the debt 
is between five and six years, so rising interest rates take a few years 
to have an impact.

      The basic thing to remember about the national debt is that the 
interest is paid with real money.  Works just like a credit card; buy now,
pay later or pay interest forever.

      So what are the options?

      1) Cut defense way down.
      2) Tell old people "it's time to die".
      3) Don't pay the debt.
      4) Inflate the debt away.

Those are the options.  

If nothing is done, the day will come when the government won't be able to
make the payments on the debt.  Figgie, in "Bankruptcy 1995" claims this
point will be reached in 1995.  His book has been heavily criticized, but
criticism assumes that something will be done about the deficit between
now and 1995.  So far, that hasn't happened.

About half the national debt is owned by Americans, mostly banks, pension
funds, insurance companies, and retirees.  That's what savings bonds and
T-bills are used for.  The other half is owned by foreigners, mostly
foreign banks, etc.

It's possible to stiff your foreign creditors.  Third World countries do
it all the time.  You can only get away with it once, of course, and you're
not a financial power afterward for a long, long time.  Still, Germany did
it after WWI.  It tends to cause runaway inflation (nobody wants your
currency).  It's hard to stiff just the foreign creditors, because debt
instruments can be resold.

Inflation is an option.  This is the usual escape for Third World countries.
The US is in a good position, because its debt is all in dollars.  (If it
were, say, in yen and marks, inflation wouldn't help.)  The US would need
to inflate at least 2:1 over 3-4 years to get the debt down.  Too slowly,
remember, and the old T-bills mature and have to be refinanced at higher
rates.  This is probably what will happen.  30% inflation per year is big
by US historical standards, but countries have survived it.  But it will hurt,
and the dollar won't be the world's currency when it's over.

Telling old people "it's time to die" is coming, too.  There's talk of
raising the retirement age to 67.  We'll probably see more cost controls
on Medicare, more of those "you have 24 hours to get out of the hospital
before we stop paying" letters, longer waiting lists, and age ceilings on
expensive procedures.  

Cutting defense is going to look very attractive.  We've already seen
big cuts in aerospace (noticed how thin Aviation Week has become?) and
we will see more.  But we seem to be headed for Iraq, Round 2, which
will be expensive.  

It's worth noting, by the way, that Government estimates of the deficit don't
include any provision for "extraordinary items".  Things like the big
hurricanes last year, the SF earthquake, the LA riots, and the Somalia
expedition aren't provided for.  And there's a few big-ticket items like
that every year.  During the '90s, we can expect more urban riots (the
FBI officially predicts this in their "FBI Law Enforcement Bulletin"),
there's a good chance of an infectious disease epidemic (TB, AIDS,
hepatitis, drug abuse, and homelessness have provided a pool of people
with weak immune systems suitable for supporting a real infectious disease,
like the lethal flu epidemic of the 1920s), we'll probably see a big war
between some former part of the USSR and somebody else, most likely a 
neighboring Islamic country, and the NAFTA will drive wages down, reducing
tax revenues and increasing social costs.  All of these will cause
expenditures not currently budgeted.

So now what?

					John Nagle


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