Re: The Debt Trap

On 8/15/2026 2:55 PM, Noah Sombrero wrote:
> On Sat, 15 Aug 2026 13:34:32 -0400, Wilson <[email protected]>
> 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.
>
Top Post Alert!
> The attempt is to say that the finances of a nation are not different
> from the finances of an individual.  Simplistic answers are best
> because we can at least understand them.  It is not necessary for them
> to be correct, but let us escape when we can't comprehend a solution
> to the problems we face.  And a good old elvis song will make us feel
> better every time.
>
We are caught in a money trap because we can't walk away from government 
spending because we love it so much. Spending on what?

This is the plain reality:

Over 47% of US government spending is on some form of welfare. Only 8% 
is on defense. This must be reversed. Otherwise we will go the way of 
Rome. YMMV.
 >

>> 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 a
>> 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