Re: The Debt Trap

On 8/24/2026 2:42 PM, Dude wrote:
> 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.
>
 >
The obvious solution to the debt crises is to accelerate economic 
growth. We studied this in school - 5th grade.

Hope this helps.
 >

   >
> 
>>> 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
>