The National Debt as a strategic game fascinates me in a way that only the best strategy games, such as Sid Meyer's Civilization series do. While sitting alone all night, I have been in the habit of playing Free Cell. I am not the world's best Free Cell player, but I am good enough not to back myself into an obvious dead end. So often I back myself into non-obvious dead ends, where I can shift cards around indefinetly, but can not clear the board.
When I study the current state of the United States National Debt, I get the feeling that it has reached about that point. At 7.1 trillion dollars as of this writing, with an annual interest rate of 150 billion and an annual deficit of 500 billion dollars, the budget soon runs the risk of collapsing under its own weight. According to the administration's estimates (which are probably biased), the debt will total 10 trillion by the end of a second Bush administration.
The United States has a 225 year history of financial solvency. That is why people are willing to continue to buy the Federal Government's debt, because they can be reasonably assured that their investments will be returned. However, if the government continues to keep on borrowing money to pay back the money it borrowed, along with interest, it will do two things: first, it will drain too much money out of the economy, cutting down the money supply, and driving up interest rates; and second, it will eventually ruin people's trust. Although it is hard to compare microeconomic to macroeconomic states, I personally wouldn't loan money to someone so they could pay off the money they owed me.
So, what can the government do? There are about three or four basic salutions, of both dubious effectiveness and high political and economic cost.
- Raise taxes and cut spending: The current administration will not do either one of these things, mostly because of the fact that there is no way to cut out from the ongoing state of war that requires so much money, and the ideological and political costs of raising taxes. An alternative administration would also have a hard time doing the second, although they will almost certainly raise taxes.
Economic and political costs: With the economy already in a fragile state, raising taxes too high will probably force the economy back into a recession at least temporarily. Cutting the budget will cause people to further doubt the political strength of the United States.
Chances of success: Although it will take a long time to actually bring the deficit, let alone the debt, under control with any realistic tax increase\budget cutting, it would be fairly easy to stop the budget from going into a tailspin with this plan.
- Just don't pay: The United States hasn't defaulted on a debt in its history. But there is a first time for everything. When it comes time to pay a debt, the administration can just have a friend answer the phone and say that the Secretary of the Treasury had to go out of town to visit his sick grandma and will be back after the weekend to mail you your check. The government can write checks, but tear off the little coded part in the lower right corner so that it can't be cleared mechanically.
Political and economic costs: This would ruin people's faith in the United States Government, and they couldn't easily borrow money for at least a decade. It would cause the US and world economy to panic. When the US defaults on a debt, it would probably cause a domino effect of defaults. National pride would be crushed.
Chances of success: None. But then, there isn't that much of a chance of this happening, either.
- Print more dough!: The United States can always follow the path of Weimar Germany, the KMT and many Latin American states, and just pay our debts by printing more money. We are a sovereign nation, we can do this. However, this is really no different from Option #2. People want their money to actually mean anything, and if we pay them back with dollars that aren't worth as much as they are supposed to, it isn't that much difference from not paying them at all. Inflation also generally causes economic insecurity and confusion.
Political and Economic Costs: Depending on just about how much money the government wishes to print, this could be barely noticable or it could cause economic chaos.
Chances of success: If the situation ever became too dire, this may be a short term way of avoiding the truly disastrous Option #2, however, it is not exactly a long term stable policy.
Don't do anything and hope for a recovery that stabilizes the economy and increases revenue: Well, we can always hope. There is a good chance that if the geopolitical and economic situation stabilize, the economy can pull into a strong enough recovery that the National Debt will go back to being a nuisance from a threat. This certainly isn't unheard of, this happened in the Clinton years, although he did also have higher taxes than we currently have.
Political and economic costs: None! Everyone is happy!
Chances of success:Actually, not terribly low, but not at all something I would depend on.
That concludes our list of short ways to deal with the debt. My personal advice is to store up on non-perishable foods and gold coins.
White House Budget Figures: