Rant: The U.S. facing the largest financial collapse ever

Tim May tcmay at got.net
Fri Jul 12 13:32:23 PDT 2002


On Friday, July 12, 2002, at 12:13  PM, Adam Back wrote:

> Tim describes how US national debt may be as high as US$200k /
> household.
>
> Now some interesting question related questions are:
>
> - who is that debt owed to?

A partial list (not in any particular order, especially not necessarily 
in order of amount of overall indebtness):

* holders of U.S. Treasury bonds, T-bills, and other U.S. 
Treasury-backed instruments

* pensions for government employees (other than the parts of government 
which opted out, a provision not offered to any non-government folks!). 
Notably, military pensions, which have been getting more and more 
lucrative.

* the "default fraction" (estimated) of loan guarantees and loan 
insurance for programs like the Student Loan Guaranty program, mortgages 
for vets and other favored persons, etc. (Note that we are _not_ 
including the overall loan amount, only the fraction that is very likely 
to be a debt to the government...actuarial and risk assessors have 
pretty good models.)

(By the way, as an aside, this practice of co-signing for a loan, of 
agreeing to be the repayer of last resort, is humorously called "suicide 
with a fountain pen.")

* Social Security. A massive overhang, not carried on the books.

* promises made to other governments to keep their coffers full in 
exchange for siding with the U.S., or not blowing up as many of our 
airliners, or not launching rusting nukes at us, or not sending millions 
of immigrants to our shores

(These promises could in fact be broken. And they should be. The U.S. 
should pull its troops out of Europe--57 years after the end of WW 
II--and out of South Korea and of course out of the Mideast. Israel, 
Egypt, Jordan, and all of the other basket cases should be cut off. If 
Jews in America want to keep bailing out Israel's economy, fine. But 
none of my money or anyone else's should be coerced out of them.)

>
> - what proportion of current year US tax revenues go to service that
> debt?

Between 20 and 35 %, depending on the cost of money, smoothed over 
several years.

This is only for the officially counted part of the debt.

>
> some of the debt may not be being serviced (no interest paid and just
> left to increase -- eg pensions etc, but this just makes the problem
> worse as the future debt will grow faster with no interest paid).

This is the same reason to vote against _most_ bond issues. While there 
are legitimate uses of debt, and for spreading repayments over the 
useful lifetime of a school, prison, or whatever, too often a bond issue 
is advertised as not costing the taxpayer. This results in building that 
is not needed, or in outright fraud. (As in many countries, where bonds 
and lotteries are set up to build nuclear reactors in the jungle that 
are never really intended to be started up.)

>
> Some completely back of the envelope calculation: if the average US
> household has an annual income of US$50k, and the interest rate on the
> US national debt is 5%, that interest payments represent 20% of the
> average US households gross income.  But isn't 20% fairly close to
> what the average household's direct tax rate?

Don't forget corporate taxes.

The official national debt is $67K per household (100 million 
households). 5% of that is $3350, which is about 6.7% of the $50K per 
year figure you cite. Which is about 33% of the 20% tax figure you cite.

If one computes the _true_ national debt, the one I talked about, then 
the numbers are roughly as you describe.

The actual national debt is as if every household were paying for a 
second $200K house on top of the one they now live in or rent. (And 
despite the figures on current home prices, which are at the margin, the 
average household does not pay for a $200K mortgage.)

Looking at the demographics of the work force, as the "pig in the 
python" of the Boomers move into retirement, their earning contribution 
to income taxes will drop sharply. Will it be made up by having skilled 
younger people, Hispanics, Taiwanese, Indians, etc. paying these costs?

Personally, I doubt it. I don't think the 20-year-old kids of today are 
going to have the job skills to make the backbreaking payments 
necessary. Nor should they. Why should they be indentured servants to a 
generation which just said "Charge it!"


>
> How close is the US to reaching a standstill where 100% of collectible
> tax revenue goes to fund debt service, and all current spending comes
> from increased future debt?

If unfunded liabilities are counted, which they should be, we are 
approaching that point now.

(By not counting them, we are setting up a future where those 
20-year-olds are paying 80% of their income in taxes. I don't think 
that's viable, for multiple reasons.)

By the way, there are already many countries in the world already in the 
situation where all of the tax revenues go into servicing the national 
debt, and where that debt is still compounding annually.


--Tim May

"How we burned in the prison camps later thinking: What would things 
have been like if every security operative, when he went out at night to 
make an arrest, had been uncertain whether he would return alive?" 
--Alexander Solzhenitzyn, Gulag Archipelago





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