Re: The Debt Trap

Julian <[email protected]> wrote:
> On 15/08/2026 21:06, Tara wrote:
>> On Aug 15, 2026 at 3:36:22 PM EDT, "Tara" <[email protected]> wrote:
>> 
>>> On Aug 15, 2026 at 2:44:21 PM EDT, "Julian" <[email protected]> wrote:
>>> 
>>>> On 15/08/2026 18:34, Wilson wrote:
>>>>> We're caught in a trap
>>>>> I can't walk out
>>>>> Because I love you too much, baby
>>>>> Why can't you see
>>>>> What you're doing to me
>>>>> When you don't believe a word I say?
>>>>> -Suspicious Minds, Elvis Presley, 1969
>>>>> 
>>>>> Elvis Presley’s rendition of Suspicious Minds topped the record charts
>>>>> in 1969. The lyrics portray a romance that couldn’t work, but was also
>>>>> impossible to escape. That’s also a good way to describe our
>>>>> relationship with government debt. We know it can’t last, but we can’t
>>>>> walk out. We love government spending and its benefits (like Medicare,
>>>>> Social Security, and unemployment insurance) too much.
>>>>> 
>>>>> In other words, we are in a debt trap. Our political process can’t
>>>>> reduce spending and/or raise taxes enough to balance the budget, so the
>>>>> debt grows and grows. As it does, paying the interest plus the
>>>>> accumulated debt load pulls more capital away from more productive uses.
>>>>> This depresses economic growth, thereby generating even more spending
>>>>> and debt.
>>>>> 
>>>>> This has to end, and I think it will do so in the event I’ve called The
>>>>> Great Reset. When I first started talking about The Great Reset, we
>>>>> weren’t in the debt trap. We were “merely” in a situation with only bad
>>>>> choices. I didn’t think we would make them. Thus the underlying
>>>>> presumption was that we would end up in a debt trap.
>>>>> 
>>>>> The Great Reset will be our escape from the debt trap. It won’t be fun
>>>>> for anyone, as taxes will go up and government spending of all types cut.
>>>>> 
>>>>> Diverted Capital
>>>>> 
>>>>> Each additional dollar of debt in 1980 generated a rise in GDP of 60
>>>>> cents, up from 54 cents in 1940. The 1980s was the last decade for the
>>>>> productivity of debt to rise. Since then, this ratio has dropped
>>>>> sharply, from 42 cents in 1989 to 27 cents in 2019.
>>>>> 
>>>>> Let’s unpack this. Debt, even government debt, isn’t necessarily bad. It
>>>>> can actually be positive depending on how it is used. Borrowing to build
>>>>> a productive asset can make sense, if its output is sufficient to repay
>>>>> the debt and then produce even more.
>>>>> 
>>>>> Like many temptations, debt can be good in moderation but destructive if
>>>>> abused. Some infrastructure spending doesn’t have a direct payoff, but
>>>>> clearly helps the overall economy, like the US interstate highway system.
>>>>> 
>>>>> Let me offer a few illustrations. It seems that every congressional
>>>>> representative gives lip service to the concept of “infrastructure
>>>>> spending.” And they never really get around to doing it in any
>>>>> sufficient quantity. Airports are necessary infrastructure and are
>>>>> typically paid for by landing fees. That’s productive debt.
>>>>> 
>>>>> I have read that much of the US loses up to 20% of the water our water
>>>>> systems produce due to leaky pipes. To rebuild the national water system
>>>>> would take hundreds of billions if not over $1 trillion. Congress can
>>>>> easily allow the formation of a public-private partnership and guarantee
>>>>> the bonds so the Federal Reserve could buy them. Cities could access
>>>>> those bonds and raise the cost of water by 1% or so to pay for the
>>>>> bonds. Consumer water bills should still drop since we would be saving
>>>>> the lost water.
>>>>> 
>>>>> Everyone knows this. Congress does nothing. The same could be done with
>>>>> electric power. A smart grid could pay for itself even with debt costs.
>>>>> And consumer power prices would likely go down. I could go on and on.
>>>>> 
>>>>> But the debt we are accumulating today is not productive in that way. We
>>>>> use it to finance current expenditures like Medicare and Social
>>>>> Security. Necessary? Absolutely. But not the economic definition of
>>>>> productive debt.
>>>>> 
>>>>> Problems arise when debt becomes excessive, relative to the output it
>>>>> will produce. The cost of repaying it diverts capital from other uses,
>>>>> leaving less capital available for productive investment. You start
>>>>> needing more debt to generate the same amount of production. Or, said
>>>>> another way, each additional dollar of debt produces less benefit.
>>>>> 
>>>>> Debt service comes from taxation and even more borrowing (which is the
>>>>> definition of a Ponzi scheme), which leaves businesses and families with
>>>>> less money to spend on other things. This results in lower economic
>>>>> growth, more inflation, and higher interest rates.
>>>>> 
>>>>> Why is it a trap? Here’s where I have to get political.
>>>>> 
>>>>> Fiscal Futility
>>>>> 
>>>>> To those on the conservative side, the problem is simple. We have
>>>>> excessively high taxes and debt because the government spends too much.
>>>>> 
>>>>> That’s easy to say but gets a lot more difficult when you talk specifics
>>>>> — particularly if you are a member of Congress who must answer to
>>>>> voters. Exactly which government spending would you like to cut? What
>>>>> programs, departments, and agencies would you eliminate? Every dollar
>>>>> the government spends has a constituency — people who benefit from it
>>>>> and will fight to preserve it.
>>>>> 
>>>>> Large amounts of spending are essentially on autopilot: Social Security,
>>>>> Medicare, assorted social programs, interest on the debt. These
>>>>> “mandatory” expenditures happen automatically, no matter the amounts,
>>>>> without Congress acting at all. The simple fact is that this mandatory
>>>>> spending plus defense spending is now consuming all tax revenue before
>>>>> any other government services are paid for on the federal level.
>>>>> 
>>>>> The so-called “discretionary” budget that Congress votes on (defense and
>>>>> all the assorted departments and agencies) is relatively minor. You
>>>>> could cut it all in half and we would still have a serious problem.
>>>>> 
>>>>> When Trump first entered office the US deficit as percentage of GDP was
>>>>> less than 5%. That pandemic-year deficit peaked at 16% of GDP, or $3.1
>>>>> trillion. Fast-forward to today: the FY2025 deficit came in at $1.8
>>>>> trillion — 5.9% of GDP, well below the pandemic peak but still about 55%
>>>>> above the 50-year historical average of 3.8% of GDP. And it’s headed the
>>>>> wrong way again. The CBO’s latest FY2026 estimate is $2.1 trillion, up
>>>>> from $1.9 trillion projected back in February, after the Supreme Court
>>>>> struck down the IEEPA tariffs in February 2026 and blew a roughly $200
>>>>> billion hole in expected tariff revenue. Whoever is in the White House,
>>>>> the deficit keeps landing in roughly the same trap.
>>>>> 
>>>>> Sad to say, government spending just keeps growing no matter which party
>>>>> is in power. We have crossed a form of political Rubicon where past
>>>>> performance is not indicative of future results. The few serious fiscal
>>>>> conservatives are now gone after finding the Republican Party under
>>>>> Trump spends differently than Democrats would, but has no desire to
>>>>> spend less.
>>>>> 
>>>>> And that’s the real problem: Voters like all this spending. They differ
>>>>> on priorities, but no one really wants to balance the budget. There is
>>>>> no desire to make the sacrifices and endure the pain it would take to
>>>>> change the course we are on. So, it won’t change, and debt will keep
>>>>> piling up.
>>>>> 
>>>>> Jaws of the Trap
>>>>> 
>>>>> Debt, as I have said many times, is future consumption pulled forward in
>>>>> time. It lets us consume more today by consuming less in the future.
>>>>> There is a school of thought which says this doesn’t matter because we
>>>>> can always just keep pushing the due date further out. I disagree, and
>>>>> Lacy Hunt’s research explains why.
>>>>> 
>>>>> While debt can be a problem, private debt is also critical to economic
>>>>> growth. It finances innovation and adds to the economy’s productive
>>>>> capacity. Excessive government debt diverts resources away from
>>>>> investment, without which growth slows to a crawl. Lacy proves this
>>>>> mathematically but really, all you have to do is look at GDP growth
>>>>> around the world since 2008. Europe, Japan, and the US have all
>>>>> struggled to maintain positive growth. It was only a matter of time
>>>>> until something pushed us all underwater. The pandemic did it. By 2026
>>>>> it’s a different pressure doing the pushing — elevated-for-longer
>>>>> interest costs and a wall of AI-driven capital spending are testing the
>>>>> same limit from the other direction.
>>>>> 
>>>>> All that being said, this can continue far longer than most people
>>>>> think. Japan is now at 248.7% (2025) of debt to GDP. Eurozone debt is
>>>>> about 87.8% (2025), but that understates the true situation in most
>>>>> countries. The US, on the same gross-debt basis, was at 122.6% in early
>>>>> 2026. Europe and Japan both have low or nonexistent GDP growth. The
>>>>> explosion of US debt means the US will soon join them. The answer from
>>>>> almost every economist of any stripe about how to fix the debt problem
>>>>> is to “grow our way out of it.” The problem is we have passed the point
>>>>> of no return.
>>>>> 
>>>>> We can’t stop growing debt. That would bring down the system in a true
>>>>> greater-than-the-Great Depression crash. What do you cut? Social
>>>>> Security? Medicare? Military pensions? Education? Interest payments on
>>>>> the debt? The State Department? The only way to maintain that spending
>>>>> is to keep adding debt, which sends us further into the debt trap.
>>>>> 
>>>>> Anomalies in Paradise
>>>>> 
>>>>> At some point, this will simply stop working. That moment is when the
>>>>> world will face what I first called The Great Reset over a decade ago. I
>>>>> am often asked exactly when it will happen. I typically demur as taking
>>>>> a date is tricky. But I think we can narrow it down.
>>>>> 
>>>>> Right now, the Social Security Administration says that Social Security
>>>>> will have to be cut by roughly 22% at some point in 2033. 10 years ago
>>>>> they said 2034. Without some major changes in the economy, that will
>>>>> probably slip to 2032. It will be an election year and that will become
>>>>> the major topic.
>>>>> 
>>>>> We are now at $39.9 trillion of US [federal] debt. Interest on the debt
>>>>> is $1.1 trillion, at an interest rate of a little under 3%. That rate is
>>>>> obviously rising. Deficits are climbing over $2 trillion per year. By
>>>>> 2031, the debt will be over $50 trillion. Interest costs will run
>>>>> anywhere from an optimistically estimated low of $1.5 trillion to over
>>>>> $2 trillion. That’s assuming no recession.
>>>>> 
>>>>> We are not going to cut Social Security for the vast majority of
>>>>> recipients. The compromise will likely be some combination of raising
>>>>> the age of benefits, means testing and increasing Social Security taxes.
>>>>> But that doesn’t solve the rest of the deficit problem. Somewhere around
>>>>> that time the bond markets will finally say, “Enough, already!” Congress
>>>>> will be forced by markets to act.
>>>>> 
>>>>> Spoiler alert: We will need to completely revamp our tax code, with a
>>>>> greater percentage of GDP going to taxes than any of us want. But we’ll
>>>>> have to collect it differently and not destroy incentives as Europe and
>>>>> Japan have done. Sadly, I don’t expect a willingness to do that, at
>>>>> least political willingness, until we are already in the middle of aThe
>>>>> deep crisis. The bad news is we will get one and maybe change some things.
>>>>> 
>>>>> We built our dreams on excessive debt. Now we can’t go on together.
>>>>> We’re caught in a trap. We can’t walk out.
>>>>> 
>>>>> https://www.mauldineconomics.com/frontlinethoughts/caught-in-a-debt-trap
>>>> https://www.youtube.com/watch?v=yh18YXKM
>>> 
>>> if nothing else, I now understand how poop gets stuck in the K-bend.
>>> (Commercial :)
>> 
>> The video is good. Not that I understand a lot of it, but there
>> is something about how a brit tells it that makes it entertaining.
> 
> Patrick is Irish. :) He's a great story teller.
> 

Is he better than Melania Trump