THE DEBT LIMIT

If a guy with a $250 million investment portfolio takes out a $1 million mortgage to buy a house, it’s no big deal.

If a guy with nothing borrows $1 million — call him Herb — well, ordinarily he can’t, because no one would lend it to him: it’s out of proportion to his creditworthiness.

The reason so many people continue to lend U.S. money — and at record-low interest rates — is that in their collective judgment, we are a good risk.  (So long as we don’t do something insane, like stop paying our bills.)

When George W. Bush handed Barack Obama the $1.5 trillion 2009 deficit (the 2009 fiscal year having begun October 1, 2008), the National Debt was about $10 trillion — so this huge deficit grew it a further 15%.

Now, though, with the debt about to hit $17 trillion and the deficit “only” $642 billion, the debt is growing at a much more manageable 3.8% or so.  Manageable, because it’s about in line with the 4% or so growth in the economy (2% inflation, 2% real growth).  Relative to the economy as a whole, the mostly-Republican-caused debt has stopped growing.

And unlike Herb, who is nearing retirement, the U.S. economy could be working and growing and becoming more efficient and vibrant — given the pace of technological change — for centuries.

So having a national debt roughly equal to one year’s output (like Herb having a $50,000 mortgage when his income is $50,000) is concerning but in no way devastating.  What matters is the long term trend:

> with ups and downs, is the debt gradually shrinking relative to the economy as a whole, as it did from 1946 through 1980, when it fell from 121% of GDP to just 30%?  [Useful chart; note the declines under Clinton and, now, Obama.]

> or is it gradually rising relative to the economy as a whole, as it did when Reagan, Bush, and Bush sent it soaring?

The key, many agree, is to grow the economy.  (And, one might hope, to grow it in ways that are light on the planet — if I give you $3,000 in yoga lessons, I tax the planet less than if I give you a $3,000 snowmobile.)

With that in mind you have to wonder which is more likely to lead to growth:

> an unhealthy, poorly educated citizenry working with outdated infrastructure?  cutting back on research?  discouraging the immigration of motivated young people?

> or investments in health, education, infrastructure, and research — and passage of comprehensive immigration reform that the CBO says will boost economic activity and cut the deficit?

Which is more likely to grow jobs: (a) low taxes on the best off, or (b) a thriving consumer class?  (The answer , resoundingly, is B, as explained so well by Nick Hanauer here.)

How about cutting the estate tax on billionheirs to zero, as the Republicans advocate?  Maybe inequality in America — though it has grown so much wider since Ronald Reagan changed the course of the country — is just not wide enough!

I feel a bout of sarcasm coming on, and that’s never attractive, so I will stop.  But the path forward is clear: the Speaker needs to let Congress vote on restarting the government and lifting the debt ceiling.*  Congress will vote in the affirmative.  And then it should vote to put people back to work modernizing our infrastructure.  This will ramp economic growth to a higher trajectory, which will shrink the deficit relative to the economy as a whole, and have the added virtue of building needed things that will last 100 years.

You might almost think Congress is controlled by morons, as Charles Pierce argues in Esquire, “Reign of the Morons,” here“This is what they came to Washington to do — to break the government of the United States.”

*Which is such a stupid, artificial, needlessly self-imposed thing to begin with: the debates should occur before Congress spends the money, not after the bills come in to be paid.

SELL?

Riserman:  “The shutdown; time to sell?”

☞ The shutdown is hardly news you and I share ahead of the crowd, so that alone is no reason to try to outwit the rest of the market.  Generally speaking, those who try to “time the market,” getting out before it falls, back in once it has, do worse than those who buy and hold — especially in taxable accounts, where they have to share their gains with Uncle Sam.*

John Boehner will presumably not cause the country to default . . . at which point the market — having expected that — may then go down, when the bounce some might expect fails to appear; or it may indeed bounce out of relief.  But the better question for most people is whether they have the right long-term spending/saving/investing habits.  These will lead to financial security a lot more surely than could their ability to beat the market.

As always, we face powerful bullish forces and powerful bearish ones.  The bearish:  Eventually, interest rates have to rise.  That poses a challenge to stocks.  Also, we have a deeply dysfunctional Congress.  And nuclear war could break out.  And cyber-terrorism could wreak havoc that led to Armageddon.  Etc.  The bullish:  Technology races ahead in ways that offer all but unimaginable prosperity (if we can learn to share the wealth).  We could kick the Tea Party out of Congress next year (and eventually undo the gerrymandering that has worked so insidiously to block moderate Republicans from holding office).  We have a good pope, a great president, and, potentially, a way forward with Iran and perhaps even with Russia and Syria.  Etc.

We don’t know what will happen, and in what order, so — if we are fortunate enough to have assets — we diversify.

*$1,000 left to grow untaxed at 10% becomes $17,449 (pre-tax) after 30 years . . . but only $7,612 if gains are taxed at 30% each year along the way.

 

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