There is a ton of low-hanging fruit that could lower the debt that would result in little to no austerity. Carried interest/corporate tax avoidance, means-test social security, remove needless subsidies for fossil fuels or corn/sugar that add to health costs, or eliminate PBM formularies and enable medicare drug negotiation and fraud reduction. Maybe a few hundred billion right there.
Long term reforms to make education and healthcare outcomes focused, punishing administrative overhead and rewarding performance. Similarly defense could be massively downsized IMO to just expendable drones and submarine based nuclear deterrence, we don't need a 'triad' - one ballistic sub can basically end the world. Replace defense contracts with guaranteed purchase orders and let the private markets figure out how to do hypersonics or missile defense.
It makes much more sense to just raise the social security tax cap than to means-test it. Means testing social programs tends to just add needless bureaucracy to them while also weakening support for them by adding an us vs them line of who benefits.
Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
You don't even have to raise the cap by very much to fix every foreseeable funding issue Social Security has
Means testing is one of this things that fools people - it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
Beyond the bureaucracy dimension - means testing puts up a barrier, not at the top, but everywhere.
Adding “one more thing” to people who are already struggling can be disproportionally difficult for them to meet, and therefore cause them to miss out on benefits they are completely entitled to.
Additionally, it can create incentives for behavior you would otherwise be completely pathological, such as divorcing your sick spouse because as a couple you don’t qualify for support, but individually they do.
Yeah the UK seems to be sprinting towards becoming a third world country with massive inequality just to protect the government's own spending power and of course completely accidentally, the wealth of the rich.
There's "Gary's economics" discussing it, even though the usual economic comment somehow seems to escape him.
(that would be "what about creative destruction" btw)
> Means testing is one of this things that fools people - it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
These non-specific appeals to emotion aren’t very convincing when we’re discussing a topic where we’re already collecting tax returns for the same people collecting social security.
> incentives for behavior you would otherwise be completely pathological, such as divorcing your sick spouse
We do live in the only country in the developed world where “deathbed divorce” is a thing to try to ensure your surviving spouse doesn’t get crippled by medical debt, so there is that…
> Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
Very few people earn that kind of money as taxable _income_. More people earn that kind of money as unrealized _capital gains_. Social security is paid for with a payroll tax and what amounts to an income tax. Once you're earning several times the cap you stop caring about it. If you earn 5x or 10x the cap then you will probably not be counting on social security, so there's no us-vs-them dynamic likely there. The problem is that to make this make a big different you'll have to hit hard those who earn only 1.5x or 2x the cap, and that's how you'd get an us-vs-them dynamic.
Instead you can increase the retirement age, increase the cap, increase the tax rates, lower the COLAs, etc., and that's what we've seen so far.
Very few people make a lot of money, it those who do make a shockingly large amount of it.
There’s two drivers to the actual problem here… one is that wage growth slowed a lot since wage indexing and the yield on those taxes is lower in real terms. People who are making more make a lot more, and frankly that’s a well that needs to be tapped.
The other is less popular… but we’re in wind down of nearly 25 years of conflict. The events of 9/11 were engineered to and succeeded in created the same type of economic attrition the US ultimately inflicted on the Soviets.
We’re at a tipping point… our social insurance is approaching entirely avoidable cash flow insolvency. 25 years of war means that the military is worn out and needs trillions of investment to maintain parity. Ignoring the problems our strategies created brought us with a reactionary buffoon destroying the government and a fairly dim decade ahead.
I think younger generations are tired of getting a worse deal than older generations. If you means-test, some old people get less social security. If you increase the cap, working people pay more tax.
The vast majority of working people wouldn't pay a penny more if the cap was lifted and the people who would be affected would still continue to enjoy a standard of living most can only dream of.
> Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
You say this as it's some sort of injustice. But the guy who makes 10 million will collect the same benefit in retirement as the guy who makes $176,100. Or are you proposing that the guy who make $10 MM should pay more, but get their benefit capped? Because if that's what you are proposing, I don't see how that is just or fair. Except maybe following the argument along the lines "screw the rich, they can afford it".
Social security is not a pension. It's more like insurance. It is designed to make life as a senior more equitable, not to stoke the egos of the wealthiest by ensuring they do not feel slighted by payments scaling to be larger than benefits above some certain income level.
It is absolutely a "fair" and "just" thing for a society to do to itself.
So unemployment insurance should cost more if you earn more. What about health insurance? Car insurance? Starbucks latte? All goods and services? Would it not be just and fair if all prices were relative to income rather than absolute?
... you'll notice that taken to absurdity this is the same statement as "everyone should be paid the same". And that's been tried.
Government programs are not the same as commercial products. I have no issue with unemployment or health insurance costing a percentage of one's income.
Let's also add fines and traffic tickets to the list of things that ought be more expensive as one becomes wealthier please.
Why not? California been trying to implement income based pricing for privately operated utilities like PG&E for years. It is already partially implemented for electricity.
It seems to me like government programs is a poor delineation, as government can pass a law to extend its own scope.
TANF and SNAP are very different than what I am discussing. That are wealth transfers from general taxes to those in need. Very different than wanking into a public grocery store and seeing different prices based on your income.
Where I am, most grocery stores have two prices for items on the shelves. One "regular" price, and a second, lower price that only applies if one is paying with SNAP.
That taken to an extreme, this idea is the same as "from everyone according to their ability, to everyone according to their needs". Which sounds great, until you realize that this incentivizes needs and disincentivizes abilities.
It really is not. To see why not, imagine how you'd feel if you had a coworker who would come to work drunk (if they came at all). They would still be paid the same as you. Your only recourse would be to talk to this person as a "meeting of the peers", which they would proceed to ignore.
This was reality under the Soviet system, and was one of the main reasons it failed.
Now, I understand why I am getting all the cheeky responses and the downvotes. People are hurting. Capitalism in the US is currently failing under a different failure mode. The capitalists are relentless optimizers, even past the point where optimizing their metrics stops making sense. Their metric is "extract as much wealth from the populace as possible", and it's gotten to the point where the people are disillusioned, and very soon there will be nothing left to take.
I think you are confusing your wishes with reality.
It is in no way like insurance today, and never has been. It has always paid out independent of circumstance. It was never about equity either - The poor get less, and the very poorest get none. Again, this is the way it has been since conception.
It is a state mandated pension with low returns and a progressive fee. Noting more.
I think you misread. There's no "confusion of wishes with reality", we were explicitly discussing the not-reality that is wealthier people paying more and receiving less, and whether that is fair or just.
My analogy to insurance was more about whether you pay into "your" account with your name on it or if you pay into a big fund directly pays out to recipients, and nothing is held aside for you.
I see. I think there is a lot of baggage with the insurance analogy, like probability and conditional payout which are absent.
The money isnt held in a dedicated account with your name on it. However, how much you pay in is rigorously tracked and used to directly to determine how much you get.
The closest thing is a pension. Like a pension, SS pays out X% of your taxable salary. X is progressive with high earners heavily subsidizing low earners.
SS starts by paying out 90% of taxable salary in the lowest bracket. As income goes up, this reduces to paying out 15% in the top bracket. The brackets are referred to SS bend points.
> Or are you proposing that the guy who make $10 MM should pay more, but get their benefit capped? Because if that's what you are proposing, I don't see how that is just or fair.
You get to live in a stable society, in relative order, safety, and peace. Your life is (financially) richer than 99.99999% of people in the world. All of this in exchange for a small portion of your wealth, and yet you STILL want to complain about the unfairness of this arrangement?
Push it too far, and the only alternative you're going to get is having to look over your shoulder everywhere you go, living in constant fear that someone will pillage your property and threaten your personal safety.
> Push it too far, and the only alternative you're going to get is having to look over your shoulder everywhere you go, living in constant fear that someone will pillage your property and threaten your personal safety.
But that's the thing: is Social Security a safety net or is it welfare? If it's a safety net, means testing (can at least in principle) preserve the safety net aspect.
If it's welfare, you're transferring wealth from people currently working to those retired, many of whom are much more comfortable than those paying the tax. Why are we transferring wealth to those with more from those who must work?
So, just to be perfectly clear: are you advocating that there should be no cap in the contributions to Social Security, while the cap on the benefits should stay in place?
And the argument is that if you are rich you can afford it.
But why increase the tax on the rich in an obfuscated way via this Social Security trick? Because you think they won't notice it? Or because you think you can stoke some proletariat fury by claiming that the cap is injust? It's ok to stoke that fury if the injustice is there, but in this case it is not.
> are you really getting screwed though, if you can't feel it?
Also: "Why not? The rich have been screwing everyone else since the invention of rich people." :shrug:
I say this kinda-sorta in jest, but in truth, there's a somewhat huge contingent of the ultra-richest of the ultra-rich who are absolutely guilty of such "Screw the poors." behavior. The ongoing and worsening effects of this specific outta-control inequality speak for themselves. Worst part of it is that the things they're doing these days aren't only going to harm just some of humanity, but rather all of humanity, as well as most all other life on Earth.
They could choose to spend the money they've spent doing outright "evil" (bad things that harm everyone) doing good instead, and cemented their places in the history books among many other great humans who made the world a better place during their time here on Earth, but instead they actively choose to do harm, many of them full-well knowing they're doing harm.
It's not and it doesn't need to be. If I make 10 million dollars a year, I don't need social security period. I'm going to be fine no matter what. I personally would not mind, at all, giving up a portion of my income to other people who are not so fortunate.
It's like giving the fat king and the starving orphan both one slice of bread. Sure, it's fair, but does the king need the bread? Who cares about fairness when the playing field is already so skewed in favor one side?
Also: the reality here is that rich people pay WAY less taxes proportionally compared to the poor. If we want to talk fairness, we have to start there. Poor people are spending 100% of their income on consumption, it's going straight into the economy. It's getting income taxed and it's getting sales taxed.
If rich people had to pay anywhere close to the amount of taxes the working class or the poor do, they would turn to dust. I'm sure they're fine in their already extremely favorable position. In short - give me a fucking break.
If the purpose of society is for people to work together for the common good, then I don't see why it's unjust for people who are better able to contribute to do so.
I mean, in the period of history from the 1980s to now, in contrast to other periods, wealth disparity increased as a direct result of laws being changed, policies being amended, and which regulations the government chose to enforce or not enforce.
It's hard for me to look at the idea of "law, policy and regulation should now move the needle in the other direction" and see that as grossly unjust. We can debate whether social security is the right place to do it, but it seems like one of the top options to me, considering the huge wave of people who are going to be jobless, old, poor and alone, and therefore vulnerable, as the Millennials age.
The argument is indeed “they can afford it.” The addition of “screw the rich” is some bullshit that makes it sound like someone making $10 million and paying $5 million in taxes is worse off than someone making $10,000 and paying $0 in taxes.
Yeah, people who make more money should pay more to fund the government. Apparently this is a wild concept for some.
The problem with means-testing Social Security is that the government's promised some people "Social Security will be there for you" when they were in their 20's and 30's, and now you're taking it away in their 50's or 60's, when they can't go back and adjust life / retirement plans that were made taking into account "SS will be there for you."
In my humble opinion, this kind of broken promise borders on "the government defrauding the people".
It would be more legitimate to say "SS won't be there for you if you make too much" to those in their teens and 20's just entering the workforce -- but that won't have a major effect on cash outflow needed to satisfy SS obligations for 40-ish years (except for the small fraction of rich unfortunates who get SS because they become unable to work at a young age.)
You might also argue that the level of prying into people's finances implied by "means testing" is a form of illegitimate government overreach. If you believe this, in theory you should, for consistency, also believe that individual income tax ought to be eliminated (which many people consider a radical proposition).
All those promises are "parchment guarantees", to use Madison's term. For example, social security distributions were promised to be tax exempt, and they were from the institution of the program in 1935 up until 1983 - talk about reliance interest!
But SS isn't a tax like the rest of our general taxes. I pay a specific SS tax on my payroll so that when I retire I'm entitled to a payout. If you take away the payout you need to take away the tax. Once you means test SS it becomes more like a welfare program for seniors and ought to be paid for out of the general tax pool like other welfare programs.
I'm not necessarily opposed to social security being switched to a more conventional tax (assuming that the new tax was at least equally progressive and raised at least as much revenue). However, I also don't see how that makes much of a difference. Social security is a welfare program, it always has been.
Explicit fuel subsidies are only $3 billion: https://www.eesi.org/papers/view/fact-sheet-proposals-to-red.... (Implicit subsidies are arguably much more, but anything that would make energy more expensive is an economy killer and would tank revenue.) What’s lost to corporate tax havens?
> Social security is self-funded. It has literally no impact on the deficit or our ability to pay off debt. By statute.
There is a very real problem that social security is project to be no longer solvent in 2035. (see here: https://www.congress.gov/crs-product/RL33028) It may require either transfers from the general budget or structural changes to remain solvent.
To be fair, republicans have been saying SS will go insolvent from the moment it was written into law. It's been almost a century. After a certain point, we have to call a spade a spade and just admit there's a lot of people ideologically opposed to SS and that's it.
> To be fair, republicans have been saying SS will go insolvent from the moment it was written into law. It's been almost a century. After a certain point, we have to call a spade a spade and just admit there's a lot of people ideologically opposed to SS and that's it.
Actually, SS was going to go insolvent when it was first written. The benefits were far too generous for what was affordable, even with the population pyramid at the time.
Then it actually was going to go bankrupt and the benefits were reduced in real dollars, because it turned out at one point we were dramatically overestimating inflation, and we couldn't afford it.
If social security was an actual insurance or pension plan, it would have been shut down by a state regulator or the PBGC. It's a horrifyingly bad plan for the simple reason that it's structurally insolvent. Even the concept of "uncap the tax" just kicks the can down the road: you now need to pay those people benefits.
The issue is we don't actually know what we want from it, which I alluded to in another comment. If we want some sort of "social insurance" plan where you just get back a portion of what you pay in, we have it and it's functionally in default. If we want a social safety net, we need to have a serious discussion about means testing.
Maybe you're right. But then I'll be telling anyone who will listen that they're being sold up the river to finance the military and the wealthy against all reason.
It does have an impact on intergovernmental debt. Here's a good explanation from GAO[1]:
> Intragovernmental debt holdings represent federal debt owed by Treasury to federal government accounts—primarily federal trust funds such as those established for Social Security and Medicare—that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.
> Debt held by the public represents a claim on today’s taxpayers and absorbs resources from today’s economy, meaning that when an investor buys Treasury securities it is not investing that money elsewhere in the economy.
> Intragovernmental debt holdings reflect a claim on taxpayers and the economy in the future. Specifically, when federal government accounts redeem Treasury securities to obtain cash to fund expenditures, Treasury usually borrows from the public to finance these redemptions.
From memory I believe we're at ~100% publicly held debt to GDP and ~122% gross debt to GDP.
I don't understand why this is being discussed rationally. The motivation to remove social security isn't economic or rational, it's political and psychological.
A small group of people considers itself superior to the rest of the population. As a group it is convinced it deserves every break, benefit, privilege, and handout, while the second group is only worthy of intrusive oversight, abuse, exploitation, and punishment.
This isn't hyperbole. This is the political belief system that drives the rhetoric about the government spending and debt.
The proof is simple - government debt always increases when the first group is in power.
Always.
This wouldn't happen if it was really about the deficit.
> The motivation to remove social security isn't economic or rational, it's political and psychological.
Yes this is it and this is all it ever was. The second the pen was put to paper and SS was made law it has been under attack. People have been proclaiming it'll go insolvent any day now for almost a century.
It's an ideological attack and we shouldn't even humor these people. The idea of essentially retirement insurance feels unfair to a ton of people and that's that.
The Social Security surplus is used to fund general government operations and the Social Security Administration gets an IOU (Treasury security) in return. So it's still money the government didn't have before that it uses to fund its operations that it borrowed from a different self-funded program that had an excess, and it still needs to pay it back with interest. Usually the Treasury doesn't have enough tax dollars to pay it back, so they auction more bonds to the public and it gets added to the public debt at that point. However, if effective tax rates go up or spending is cut elsewhere then it can pay it back without adding to publicly held debt.
So you're right that it's not the same as publicly held debt. Rather intragovernmental debt is deferring the decision of how to pay for some governmental services to a later time, although usually it becomes publicly held debt. One way or another, the tax payer is on the hook for this spending which is part of the gross national debt, just like they're on the hook for publicly held debt.
Well, perhaps you're right. I am not a finance guy and it seems to me you can probably pull debt out of any kind of relationship if you squint right. But it certainly is not to blame for our inability to balance the budget, which seems easiest to explain with nearly sixty straight years of cutting marginal tax rates while claiming to be fiscally conservative.
> you can probably pull debt out of any kind of relationship if you squint right.
No, this is pretty explicit. To rephrase what the GAO said when the Social Security Administration takes in more than it sends out it invests the difference in special Treasury securities (that's the trust fund(s)). The money the Treasury gets is spent on general government operations (education, healthcare, etc). The treasure must pay this money back, with interest.
> But it certainly is not to blame for our inability to balance the budget
When the Treasury pays the principal and interest it needs to either have enough tax dollars (higher tax rates or spending cuts) or issue debt to the public. So yes, it does factor into a balanced budget. It still must be paid back and the taxpayer will foot the bill one way or another, now or in the future.
> which seems easiest to explain with nearly sixty straight years of cutting marginal tax rates while claiming to be fiscally conservative.
This is a gross oversimplification. If you think just one side is the issue you're not going to be able to fix the problem.
Tax rates aren't everything as those affect the size of the economy. Since the end of WW2 the federal government has received ~17.5% of GDP in taxes[1] (+/- ~2.5%). You can decrease effective tax rates, end up with a larger economy, and have a higher absolute value of tax revenue than you did with higher tax rates. So it's more complicated than "lower tax rates => less tax receipts".
If we restrict our view to programs like Social Security or Medicaid we see that demographics are also straining the system. For instance I believe the number of people contributing to Social Security vs the number of people receiving benefits in the 70s was around 3.7 (payer/beneficiary), we're currently around 2.6 and in 10 years that will go down to 2.1. Put simply we're unhealthy, we're getting older, and we're not having enough kids to contribute to these programs that pay for all of these old, sick, childless people to retire and have healthcare.
From a philosophic point of view I would say the fact that about half of the electorate do not want higher taxes while the other half wants more government services should mean that these extra services are non-viable politically. What we've essentially done instead is "compromised" by not having higher taxes but still expanding government services which is contributing to our debt issues. We simply can't have it both ways, but that's exactly what the people voted for through their representatives.
> Don't worry, I gave up on this country's ability to fix any problem a long time ago.
While we are likely on opposite ends of the political spectrum, I can agree that I don't see us actually fixing this problem. I made a comment elsewhere in this thread discussing the fact that Congressional Republicans appear to be going for lower taxes and higher deficits right now while the Democrats are in disarray and not particularly focused on this problem. The unfortunate fact is that this problem is going to get worse and the solutions will get more painful over time. Congress as a whole has really dropped the ball here.
Social security is funded with a social security tax. 6% of your paycheck is paid by you, 6% by your employer. (Or 12% by you if you are self-employed.)That by law can only go to fund social security and nothing else. Similarly, the fund is by statute guaranteed to only fund social security payments. It is completely separate from the rest of the federal budget.
> That by law can only go to fund social security and nothing else.
Eh, that's partly true. The true statement is that social security tax revenue must eventually go to fund social security.
Before it's needed (i.e. while tax revenue exceeds benefits), it has been used to buy US treasuries -- the funds used to do so then appeared for Congress' general use.
The treasuries are effectively zero-risk assets to the trust fund and they also pay interest. Just having the fund sit the on cash would not be efficient.
The money goes to the trust fund, the trust fund buys treasuries and meets it's outlays using the maturing treasuries.
Creating a debt obligation with yourself isn't typically the definition of zero risk. ;)
Or to put it another way, buying special issue treasuries isn't functionally different than Congress directly spending excess money in the trust fund and guaranteeing to pay more back later.
Just with additional steps and a thin veneer of impartiality and financial standards.
Ok, let's chalk the "self-funded" part up to semantics.
> It has literally no impact on the deficit or our ability to pay off debt. By statute.
This however is wrong.
As a simple proof: let's just up social security payments by 3000x... social security is still "self-funded" and "separate" but that would be an untenable debt and the US would immediately default on that obligation. The amount and structure of social security debt matters to the US' ability to pay.
Social security is a promise to pay an amount of money in the future and it is backed by the "full faith and credit" of the US government. The bigger it is, the bigger the debt, the hard it is to pay off. It's a big impact.
Just because it's specifically funded and tied to a precise specific tax does not make it immune from debt considerations.
Cash money from payroll tax is sitting there collecting interest and being drawn down by Social Security disbursements.
So we pay taxes, that revenue holds a gun to Congress and forces them to buy another aircraft carrier... That's semantics for you.
Sorry. The aircraft carrier thing is bitter sarcasm on my part. But I'm put off by dismissing the funded nature of Social Security as the root cause of the Federal debt.
not entirely true, American social security is paid for by the current generation.
They'yr not paying for their own, they're paying for the receivers of it. The debt has already accrued. and worse yet, those that did not pay for the social security they're receiving are now living longer and costing more. Its like a "life interest".
Maybe for now, but it's eventually going to run out of money, and what do you think is going to happen? You think all current and future retirees are just going to shrug and say "oh well, it was good while it was lasted", and not lobby their politicians?
It will have depleted it's reserves in approximately 10 years. Expenditures exceed revenue, but only by about 15-20% by then. So either there's going to be a cut in benefits and/or the retirement age will be bumped up, just like we did in 1983[1], and as originally intended when designed. Most likely the latter, but it seems legislators are too chicken to do it until their backs are up against the wall. And conservative legislatures are probably content to wait until it's an exigent crisis to maximize their chance at selling privatization.
[1] We only recently just reached the tail-end of the 1983 reforms' gradual shift in retirement age.
> So either there's going to be a cut in benefits and/or the retirement age will be bumped up
Or...raise the contribution limit which fixes the whole thing easily without having to screw over the people that paid in and just want to get back what they were promised.
Raise the retirement age? Really? All this advancement to make our lives better and more efficient, and we're going to conclude that we all need to to work more?
And meanwhile we can piss away cash by the trillion but when it comes to social security suddenly there's no money to be found anywhere.
They've fooled everyone into believing "the fund will be depleted" in x years. Then put some more money in assholes.
>Without legislative changes, trust fund reserves are projected to be depleted in 2033 for the OASI fund.[16] Should depletion occur, incoming payroll tax and other revenue would be sufficient to pay 77 percent of OASI benefits starting in 2035.
Really no. As much as deficit nuts want to grasp at this as a confirmation of priors, this is absolutely 100% not at all about "The Debt". (In point of fact outstanding[1] debt as a fraction of GDP isn't even all that large, historically; it was much higher in the 80's and literally every one of those bonds is now paid off!)
We could magically pay it off right now and the US would still look like a credit risk. It's all about trade policy right now, and the general existential risk that we blow it all up. The treasury rate spike in April (likely but inconclusively due to strategic dumping) continues to have everyone spooked, and fiscal restraint, tax policy, austerity, etc... don't speak to that concern at all.
> In point of fact outstanding debt as a fraction of GDP isn't even all that large, historically; it was much higher in the 80's and literally every one of those bonds is now paid off!
This[1] shows in the 80s the total debt to GDP ratio started at 31% and ended at 51%. We are currently at about 122% according to the same chart. I'm not sure what numbers you're referring to, could you provide a source?
In terms of the bonds being paid off that's true, but they were paid off by selling even more bonds to cover new spending and old, i.e. total debt grew even if individual bonds matured.
>In point of fact outstanding debt as a fraction of GDP isn't even all that large, historically; it was much higher in the 80's and literally every one of those bonds is now paid off
I did indeed say that wrong, the nominal debt was lower but the cost to service it was much higher (borrowing in the 80's was done at interest rates into the double digits!):
Again, if the debtpocalypse didn't happen then it's clearly not happening now. This is simply not about fiscal policy. Period. It's about institutional trust in the government's ability to manage payments.
The double digit rates were because of the inflation following the dollar being de-pegged from gold in 1971. It was easy to pay the massive interest rates because the point of the high rates was to bring inflation down. The idea was that people did not want to hold US debt exactly because the inflation was a de facto partial default.
I don't follow that economics. How does interest rates being high make bonds easier to pay? And how to I get some of that action, that sounds pretty magic to me. :)
(No, that's not correct. Borrowing in the 80's was more expensive. Period.)
I see your point. I suppose my only response is that a significant amount of our debt is being rolled over annually. It’s currently being rolled over from extremely low interest rates to non-trivially high interest rates. We should expect the spike on the left side of the graph to keep increasing unless rates decline significantly, soon.
Paying off the debt is cheaper (significantly so) than it was then, and we had no trouble then. So yes, if it didn't happen then it won't happen now, at least not for the same reason. You can construct a double/triple-failure situation, sure, but any argument of the form "We can't sustain this level of financing" is simply wrong by counterexample. We already did.
No one guarantees current rates further down the road, that’s a tricky thing. There is some chance inflation will be keep increasing because of a lot of printed moneys in last decade or so, and then fed will be forced to increase rates even further which will make it much harder to pay federal debt, much harder than in 80s perhaps.
> There is some chance inflation will be keep increasing
So what? Inflation is GOOD for the debt, which is dollar-valued and not inflation-indexed! If you inflate the currency by 20% the real value of the outstanding debt drops by 20%.
That's always been the joke about federal borrowing, if we ever get in trouble we just print money to pay all the bonds and poof, no debt. Inflation being high makes borrowing cheaper, not more expensive.
The discourse about the subject is cursed. Everyone projects their own (largely political) priors onto it, everyone thinks macroeconomics works like checkbooks. It's just one bad idea after another.
(I think what you're trying to say is that interest rates being high makes borrowing expensive, and that high interest rates are a natural policy response to high inflation. But you have the causality backwards. In fact one reason borrowing doesn't care about inflation is that the fed moves the levers to keep the impact roughly constant.)
> Inflation is GOOD for the debt, which is dollar-valued and not inflation-indexed! If you inflate the currency by 20% the real value of the outstanding debt drops by 20%.
Unfortunately GDP is also dollar-valued, so debt:gdp ratio wouldn't change with inflation.
Inflation wouldn't only destroy debt (which is good) it will also destroy currency and to some extent the economy. In the very end it's part of FED mandate - to keep inflation in bay.
> The discourse about the subject is cursed.
I think macroeconomics is very complicated subject, with a lot of uncertainty of how things will unfold.
Your initial claim was that servicing our debt was much harder in 80s, so it's actually not as bad (or at least not worse) these days. What I'm trying to say we can all of sudden end up in a world where interest rates are back to 80s levels, while debt:gdp ratio (which is the real amount of debt in a way) is way higher. And this would be much more complicated problem to solve. Or we would not, because it's hard to predict a) where inflation goes from now on and b) what will FED do in the same kind of scenario to 80s.
But actually scratch it, it is already bigger problem than it was back then:
US needs to refinance/issue $9.2 trillion of debt this year. Current USG 10Y is ~4.5%, current GDP is 27.72 trillions. Which means after this year we will add 0.015 to the interest/gdp ratio (assuming very low current cost of the debt which is being refinanced, from https://fred.stlouisfed.org/graph/?g=iEiV). It will bring us above the level in 80s this year! Just this year of debt will bring the cost of servicing the debt above than it was back then. That's where huge issue is, unfortunately. And unless rates will go down it will be getting worse and worse really fast.
It... what? Good grief. If I buy a candy bar for $1, it counts to the GDP as $1. If it inflates and I have to pay $1.20 for the next one, you're saying that the GDP magically knows to adjust the accounting for how much it used to cost?! No, this is ridiculous. GDP counts currency.
The amount of bad economics being deployed in support of baldly political positions on HN is just astounding.
I like where your head is at on a lot of this and there's a ton of waste to cut within the military itself, but we don't want to scale it down that far. It's still good to be able to effectively put boots on the ground in other parts of the world and back them with the most effective logistics infrastructure in the world, not to mention we want deterrence options other than a nuclear holocaust.
I think you're directionally correct that military spending could be much lower and more effective but the notion of relying on a single sub as a deterrent is far too extreme. In that scenario an enemy only needs to compromise a single sub and your entire deterrent is gone. That's not a stable equilibrium.
The whole principle of a triad is based on the expectation that an adversary could compromise your retaliatory ability to a high degree so you need to mantain robust options.
This is the biggest argument I have against DOGE. There are easy wins you could make when it comes to government spending and efficiency and they are doing none of it.
I do not know about the US, but have have worked for a state admin. To be honest, there is a lot of inefficiencies, but the large majority of those exist to _prevent_ fraud. I could once again describe why, but the details aren't really important: i swear all waste and inefficiencies i've seen not caused by out-of-date software are in place to avoid fraud from low to mid-level employees.
From that you have a choice: either you allow low level government employees to partake in the corruption and remove a lot of rules, or you leave those rules which makes running the admin cost more. I think the second solution is better even if it were to cost more (i'm not sure it does, corruption is expensive), because once government low level employees start to accept bribes, your country is fucked.
Remember way back in Feb 2025 when a bunch of people were claiming that Elon and Doge were going to fix the national debt?! I recall a lot of skepticism from some to the notion that Elon had zero interest in reducing the defecit and wasn't even trying.
> Moody’s said it expected federal deficits to widen to almost 9 per cent of GDP by 2035, up from 6.4 per cent last year, owing to increased interest payments on debt, entitlement spending and “relatively low revenue generation”.
Yes, and this was extremely predictable. Hopefully once the disaster gets a bit more clear more people will see what's happening.
Thing is, Musk actually did find some savings. It’s just the admin plans to pass massive unfunded tax cuts that will make those savings a drop in the ocean.
It’s almost like destroying state capacity for “woke” causes like foreign aid and science was the actual goal, rather than getting the budget under control.
People don't seem very good at that stuff these days. Back when Bill Clinton was president they did a pretty good job at reducing bureaucracy and bringing down the deficit but now it seems all clown show.
I'm a fan but Bill Clinton was sweeping away a lot of cold war apparatus that no longer seemed necessary. It's going to be a lot harder to do anything sustainable or worthwhile with our current system without entitlement reform.
I remember Bill Clinton made some significant changes to entitlements in terms of unemployment benefits. At the time it was kind of low hanging fruit. I'm not sure what you'd go for these days but the US medical system seems massively expensive and somewhat inefficient.
Or, you know, we could roll back the massive tax cuts passed since his presidency.
In the last half century, every Republican administration (except George Bush Sr.) passed huge tax cut bills, and for some reason, everyone here acts as if they are some edicts from above that cannot be touched.
It's like the federal government quit its tech job to go work fast food and became convinced the only solution to its debt is to start living in a tent under a nearby bridge rather than try getting the tech job back. The current administration's policies are similar to selling off the tent and using a newspaper for cover because it would rather start panhandling than continue working a real job.
People forget that every transaction has two parties. Someone's debt is another's asset. The national debt is mostly owned by Americans. That means the national debt is an asset to the private sector. This is the way all money works because money IS debt.
The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government. The only reason to downgrade is if there is a real risk the US government will collapse and cease to exist for political reasons. There is no fiscal risk.
The deficit hawks don't understand how money works. The real concern is private debts, not government debts. But you never hear about that in the media.
> The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts.
Right, but it isn't like the government controlling the money supply is some sort of get out of jail free card. If it was, why would the government even have debts? US could just pay off all the debt right now.
If the government starts printing money to pay interest on or pay off our $35+ trillion dollar debt, that will cause inflation, which is like a regressive tax. If the government doesn't start printing money, then a greater and greater share of our tax revenues go towards paying the interest. Neither of those outcomes seem particularly good to me.
Debts in the private sector have other downside like economic instability, but it seems to me that private sector lending is responsible for a lot of great economic developments (of course including our little VC funded corner of the world).
The government doesn't need to sell bonds, but does for practical reasons. It provides a safe asset for wealthy people and organizations. If you haven't realized, but banks only insure accounts up to $250k. There needs to be a safe mechanism to store more and treasuries serve that purpose. Also bonds help drain bank reserves! Selling bonds actually slows down bank lending and reduces risk taking in the banking sector. Also too many reserves make monetary policy from fed ineffective.
The national debt is simply all the money the government created minus the money it destroyed from taxes. Another way of thinking about it is it's national savings.
The boom and bust cycles happen because of private sector debt cycles not government debt.
So is it your assertion that if the government decided to stop selling bonds (because let's say it no longer cared about those "practical reasons") and just paid off all the debt by printing money, that doing so would NOT cause high levels of inflation? Or that it would, but that high inflation is not a problem? Or that the status quo of ~20% of tax revenues going to interest payments is not a problem?
I guess I don't see the great societal benefit of the super wealthy a safe asset to park their wealth in, but I do see the societal harms of government borrowing (mentioned above).
Bonds are just money that pays interest. If you exchange interest bearing money with money that doesn't return interest, you tell me what you think will happen.
It’s extremely well known what happens in this scenario: When governments start printing money like nothing matters and there are no consequence, the currency collapse into a hyper inflationary death spiral.
You act like that interest payment is just a technicality or something. It’s not. It’s a market rate that reflects the world’s belief in the soundness of the currency and government.
Throw that away and it all comes crashing down.
The US doesn’t exist in global isolation. We still buy things internationally as inputs to our factories and to make everything work. If we start a hyper inflationary currency death spiral where the government prints money out of thin air as a solution to spending problems, the value of our dollars becomes progressively less, hence the inflation. Then we all, including the government, have to spend more of those dollars, so the printing increases, and it becomes a self-reinforcing cycle.
This entire line of thinking that it doesn’t matter is basically quackery. It has been tried. It does not work.
Interest rates will fall but beyond that it's very non-obvious what will happen. Money becomes a hot potato? Cashflow-generating assets get bid up to extreme valuations? Speculative assets like crypto gets carried along for the ride? An increase in private borrowing, the money supply, the velocity of money, and inflation?
On the other hand, the government debt interest burden goes down, which means a slowdown in the growth of the base money supply (even while borrowed money increases). Perhaps this slows long-term inflation, but that in turn might mean inflation driven by growing private debt and speculative malinvestment swings well past equilibrium and turns into a bubble that pops into eventual deflation.
How would swapping interest bearing money for non interest bearing money cause inflation? If anything it would force people to chase yields and you will get a boom in prices for other assets. But that money isn't going to be used to buy t-shirts, electronics, and cars because it's mostly owned by rich people and organizations.
> The national debt is simply all the money the government created minus the money it destroyed from taxes. Another way of thinking about it is it's national savings.
The national debt is all the money spent minus money collected via taxes
If a government starts printing money like nothing matters, we already know what happens: Hyperinflationary death spiral. The government gets money to spend, but it crushes the value of the currency in the process. In crushing the value of the currency, they then need to print more money for the next round of spending, which further devalues the currency, which accelerates the cycle.
It's not "just 250k." There are different classifications that the insurance covers. For example, a trust account (considered any account with a beneficiary listed) should cover 250k + 250k per beneficiary, with a cap (might not be implemented yet) of 1.25m.
In addition to that, most FIs purchase some form of excess share insurance to cover deposits beyond the 250k.
You would need a very large amount of deposits at a single institution to run up against the insured limits. If you are ever concerned about that, you can reach out to your financial institution(s) and ask them if you have any uninsured deposits.
> Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government.
> The deficit hawks don't understand how money works.
I’m afraid it’s you who doesn’t understand how national debt works. The US government doesn’t have infinite leverage to do whatever it wants with its currency with no consequences. We have to sell our debt on the public market. If we start acting like we’re going to pull currency tricks as the way to fight the debt, the interest rate we have to pay on the debt goes up quickly.
As it goes up, we have to pay more every year to service the interest on that debt. If we’re in a situation of high budget deficits the only way to service that additional interest charge is by issuing more debt, which turns into a debt spiral.
Waving it all away as a non-issue is a severe misunderstanding of the threat.
If you were to just erase private sector debt, not much happens on a socio-economic scale. If a company is owed money, but at the same time owes people money, the debt on either side is cancelled out.
With government being the actual source of money, if it owes a lot of money, it has to "print" it, which is exactly how you historically get inflation, which then causes rising prices. This literally happened during Covid.
Lets also not pretend that the current administration actually understands anything about economy either.
>There is zero risk the government couldn't pay it's dollar debts if there is still a US government.
The real concern is not that the government cant pay it, it is that the government has to pay it out of revenue alongside obligations, leading to runaway inflation and economic damage.
In theory, governments can run on new printed money. It just makes for a terrible market to conduct business.
High inflation wipes out currency denominated debt holders and creates a terrible environment for investment and contracting.
It increases transaction costs to a level that is often prohibitive.
> In theory, governments can run on new printed money.
Anyone who thinks this is an infinite money glitch for governments should see what has happened when other governments have tried it. Hint: Search for “hyperinflation”
If you just start printing money to spend it, the currency crashes in value, which necessitates printing even more money to maintain the same level of purchasing power, which crashes the currency even further. It’s how you end up with people paying for bread with trillion dollar bills. Sure you can keep printing that money, but acting like it’s a cheat code or even a positive thing is to ignore all of economic history.
Yep, I have lived in a country during such a hyperinflation, when all the ordinary people, including myself and my family, have lost their entire lifetime savings.
Initially, my salary as an engineer has decreased quickly in value to the equivalent of $2 per day. Then, for a long time, my salary has been approximately doubled every month, so that by the beginning of the month it was worth the equivalent of about $2 per day, but by the end of the month it was worth only the equivalent of about $1 per day.
Before the hyperinflation started, I had saved all the money for buying a new car. Unfortunately, I had not predicted what would happen, so I have not closed a deal quick enough. In a few weeks you could no longer buy even a TV-set with that money. A short time later, you could barely buy some decent food with it.
Buying some electronics or programming book could require the salary for 2 months. Funny times.
Inflation only correlates with money supply growth if there are real resource constraints, otherwise you just get new businesses and services. Also people also tend to save more when they can, which takes money out of circulation.
When there is inflation, nobody can save anything, because the value of any savings decreases too quickly.
Everybody who has made prior savings loses them, unless they predict the inflation and buy something valuable, like real estate, with all the money they had.
As long as there is excessive inflation, any money earned must be spent immediately, before losing too much value. For ordinary people and small businesses this makes it very difficult to buy expensive things, because it is hard to save money for that and credits may become too risky.
That's one possibility, but it depends a lot on where the money gets injected and where the inflation happens. If it balloons real estate prices before wages catch up, you don't necessarily get that growth of investment into productive areas. Instead it gets more expensive and riskier to start a business, with higher rent payments, and meanwhile a lot of asset-owners retire on their newfound wealth. It gets harder to convince lenders and investers to put money into real production when speculating on land and collecting rents starts getting such good consistent returns.
What about the labor market? Where are you getting more workers given unemployment is extremely low and the current administration is against immigration?
That should lead to salary increases which could lead to inflation.
It's funny when I see people laugh at the abject failure of credit rating agencies to properly forecast the real estate credit bubble of 2007, then when the political stars align, they go all in with "the credit rating agencies said it so it must be true".
The two theories that are competing right now are the:
* Dollar "Milkshake" Theory: the dollar (and treasuries) are so in demand that it kind of doesn't matter how far into debt we go, because the point is that treasuries are mostly used for financial collateral, not for earning interest payments. So whenever there is a crisis, there will be a rush to the dollar, not away from it.
* Traditional Fixed Income valuation: that fixed income buyers care about real returns, and will penalize nations that get themselves into situations where they must either default in actuality, by refusing to pay their debts, or by effectively defaulting (in real terms) by inflating their currencies to the point of writing off their debts.
I understand the argument from both perspectives, and I understand that politics can easily lead to defaults that don't technically need to happen. I still have no idea which of these two theories will prove more accurate going forward. I generally consider myself pretty fiscally conservative, so I tend to lean toward traditional theories of fixed income.
The biggest thing supporting the US market (debt and securities) is that there is nowhere for that money to go, absent absurdly large changes.
If this happens (50/50 I think over the next twenty years) then it will be slow, and then sudden. I suspect a lot of high income US citizens will start caring a lot more about Social Security at that point.
I mean, alternatives already exist to the SWIFT network: CIPS (China), SFMS (India), even the INSTEX (Europe) system is in place if a European system were needed quickly.
Insofar as "where the money goes," the sovereign bond market is huge, and if the milkshake theory is to be believed, finding and alternative is just a coordination problem that could be effectively solved by a few large actors.
If the traditional theory is to be believed, downgrades from ratings agencies should simply facilitate the movement of folks leaving treasuries as a risk-free rate. This does introduce currency risk (though it existed already), but we may simply move to baskets of securities of we don't end up on a single currency to carry bonds in general. There is also the "store of value" vs "transactional" aspects to currencies, and the dollar may become more and more transactional and less useful as a store of value and/or collateral. If that's the case, I wouldn't be surprised if there were not more "asset inflation" if that's even a useful term.
I agree with you that it should be slowly and then all at once, because if the US is going to default or debase, nobody wants to be the greater fool.
Remarkable how quickly they were able to break that historical invariant.
Meanwhile Fox News posted that akshually Trump had a cunning plan to lower interest rates by tanking the stock market temporarily so that the bond refinance this year would be more affordable.
White House communications director Steven Cheung reacted to the downgrade via a social media post, singling out Moody's economist, Mark Zandi, for criticism. He called Zandi a political opponent of Trump.
I'd wager that's a significant portion of the reason Moody's tried to spread the blame across multiple administrations: They know the current one is thin-skinned and prone to illegal retaliation.
I think the real reason is a Walmart heir put out an ad encouraging people to be civically responsible which Trump admin saw as defiance to him. Plus I assume they aren't bribing Trump like the tech bros are.
The elephant in the room is that the US had been operating as the chief architect and manager of the global economy for the last 80 years, a role that made it the wealthiest and most powerful and most technologically advanced nation on the planet. Under Trump the US has voluntarily relinquished that role, and we're seeing lots of these little adjustments as the system flails as it adapts to it's previously steadfast leadership contorting erratically. But the real damage done isn't about credit ratings or trade agreements or Trump's ridiculous kidding-not-kidding tariffs. It's about a different power settling into the role as the indispensable trading nation, and one that prides itself on its stability and unopinionated economic cooperation. In other words, we're hosed.
Tragically hilarious from an outside perspective that a leader sees all the expense of the soft-power the US has paid so much for as "freeloading". Either you are the world leader and invest to stay in that position, or you're just one of the pack.
> Under Trump the US has voluntarily relinquished that role
I would argue the process was started under Obama, and continued under Trump and Biden. What caused that shift is an interesting question in itself. My theory is that once Obama won on the platform of limiting US foreign involvement, the writing was on the wall and the politicians after him all became isolationist as that seemed to win elections.
The difference is that Trump, an incompetent populist he is, doubled down on the process so much that it became a very conspicuous mess.
I suspect we'd be living in a completely different world if John McCain was elected in 2008.
Incompotent populist is certainly right for this group since none of his policies are actually for the population but for the very elite group he protects who stand to benefit the most from his policies.
For Moody's or any other agency, do they have any real insight on credit worthiness?
I would have just assumed that if you're another big financial institution you're doing your own research.
Is it that orgs below a certain size need these people to help tell them what's going on?
I would have also assumed anyone who holds an important amount of US treasuries does their own research and doesn't need to listen to any of these agencies?
What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?)
> these were the same people that were reporting A+ on junk bonds back then, weren't they?
Fun fact: those AAA securities paid out. We have obvious endogeneity issues with the bailouts. But the evidence is strong that even absent the bailouts, those senior tranches would pay out.
The problem was that most AAA securities are both highly solvent and high liquid. But these proved solvent but illiquid. That caused issues when their owners tried to dump them. But Moody’s rated solvency, not liquidity.
It was honestly a shocking finding at the time. But loss ratios (2.3%) were just within historic norms for what someone buying something rated AAA would expect [1], and to my knowledge, the losses presented as restructurings not outright defaults as is commonly imagined in popular retelling of the financial crisis.
Wow this is truly amazing. Unfortunately I suspect this will never become common knowledge, the conventional narrative just "feels" so correct. Thanks for the link!
There's a huge trend here, and in general comment sections online, where if you made a mistake, even a catastrophic one, then as an organization you are useless.
Moody's has been in this game a long time, I'm sure they're not perfect, but also being wrong once doesn't mean you're always wrong.
Doesn't anyone here think the US recent economic instability merits a reduction in credit rating? We have a massive amount of debt (we borrowed to pay something like $800 billion in interest on our debt last year) and are essentially betting on our rocketship economy to offset our enormous debt in the future. The latest economic turmoil does cast a bit of doubt on that ability to pay off this huge debt later on no? I mean, isn't that a reasonable conclusion, regardless of whether you hate Moody's or think they are stupid?
I mean everyone has opinions, but isn't it actually verifiable that in aggregate Moody's gives accurate ratings (not just for US treasuries)? If not, why would anyone use them?
“Cover your ass” as a service. For example, when all those taxpayer funded defined benefit pensions invested in risky subprime mortgages, they can throw their hands up and say “but the credit rating agencies said they were well rated”.
Of course, they were kind of right because a federal government bailout was waiting in the wings.
They are grandfathered in as an oligopoly because by law many large funds are prohibited from investing in securities below a certain credit rating.
Additionally, if you are on the other end (the one getting the rating), you pay the credit agencies for a rating so that buyers of debt will buy it. It's basically required that you have a rating if you want to issue debt.
It's a racket in some ways with a ton of bad incentives and inefficiency.
> do they have any real insight on credit worthiness?
Yes. You can look at default rates by initial and proximate rating and see clear information.
> in light of the housing crisis proving they weren't providing any value at all?
Name me one AAA-rated security that defaulted. They were downgraded. They lost paper value. But to my knowledge, they didn’t default. (Those who held them did well [1].)
> What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?)
A significant amount of retail and institutional investment still use these ratings as a guiding indicator.
Not everyone does due diligence. If you have ever worked for a corporation, you know that they love cutting corners. And one corner they'd happily cut is time on due diligence - even if it causes a crash later on. It is not a problem for this quarter.
I don't think it makes sense for every single person or company considering investing in Company XYZ to do their own, separate due diligence on XYZ. The information they each would uncover is the same.
It's a lot more efficient to pay a ratings agency to rate XYZ once. The tricky part is getting the incentives right so that the ratings the ratings agency produces are accurate. (There already is a reputational risk incentive pushing towards doing this the right way, but as we saw in 2008, there are other incentives pushing the other way, and they might often be stronger.)
Another way to ask the question is how wrong would they have to get it before people stopped relying on them?
The interesting aspect to me is that they are not a government department- they make these ratings as part of a profitable business model. It's not like they keep chugging along no matter what.
It just seemed like that during the housing crisis the businesses seen to be putting their "ok" stamp on everything would have been the first to go down.
There’s actually a ton of places that rely on those ratings - like insurance companies need at least a certain rating in order to write in certain states.
Didn't we lose this about a decade ago during the 2013 government shut down where the Republicans were threatening to miss payments and we got knocked down to AA-? I was wondering if we ever got it back to AAA.
Not to be overly pedantic but there are more than 3. It's just 3 that are commonly used in asset management (S&P, Moody's, Fitch). Others include Morningstar DBRS (Dominion Bond Rating Services - rates primary Canadian debt issuers). Kroll is another one (used to be Duff & Phelps).
I wonder if this will trigger a sell of in bonds, there's a common story that some investors are only allowed to invest in triple A bonds, and AFAIK this was the last of the big three still holding it for the US.
> some investors are only allowed to invest in triple A bonds
The usual language is two out of three. So any investor who had that language and hadn’t gotten around to amending it to exempt Treasuries had already been forced to sell on the second downgrade.
The reality is that the current trajectory is not exactly sustainable. So, for once, Moody seems to be doing its job. As to where they were for the past decade or so ( lets charitably say they were still trying to figure out where things land post 9/11 ), when all those issues were allowed to fester, is not exactly a big secret.
The simple reality is that US will need to go through a period of pain to correct some of those excesses. It will not be fun for anyone, which is why there is so much effort put forth to kick can down the road.
And the part that really gets me is that congress is discussing cutting taxes, fed is being pressured to lower rates.. as if all those things were not at least a factor in the mess we are in now.
The reality is taxes must go up, and the bond market will force it to happen. You can’t keep issuing debt forever to steal from the future for today when all of the evidence points to lower future growth.
Voters might be unsophisticated, but the bond market is not.
> Bond vigilantes, who can bring fiscally irresponsible politicians to heel by unloading a country’s debt, may rear their head if Congress doesn’t show any appetite to bring the federal deficit under control.
<< Bond vigilantes, who can bring fiscally irresponsible politicians to heel
I don't want to give people ideas, but at the same time this is not exactly new to anyone following that set of news. During last EU fiscal crisis, EU came up with a novel approach to handling bond issues. Haircut[1].
Treasuries only receive the favorable yields they do because they were considered the safest asset in the world. Any indicator of potential haircut is going to cause a rapid (further) loss in confidence and a spike in yields, leading to a debt spiral. This is why there was a fear of the implications of DOGE controlling the Treasury payment system (BFS), potentially leading to non payment and default. The capital markets are built on a foundation of trust. If you want continued access to capital (and with debt at ~123% GDP, it should be obvious that the US has no choice but to have continued access to the bond market), you must respect the trust relationship.
I will admit that, at the time, I did not see EU debt holders accept it, but accept they did. I know that cultural differences in US may require a different approach that go beyond PR spin ala 'temporary refund adjustment' since there is money on the line, but I can't help but wonder if it is not coming anyway.
Taxes must go up, on our shrinking young population (right as we deport more and more immigrants and dissuade new ones from coming here). Great, Japan here we come
“For reference, the total net worth of all U.S. households is close to $160 trillion. The rich half (top 50%) own about $156 trillion (or about 98% of it). The poorer half only own about $4 trillion. Breaking down that top half even further, the top 1% (1.3 million families) owns about $49 trillion (or about one-third of the total share) by themselves. And going even further, about half of that $49 trillion is owned by the top 0.1%. That’s only around 136,000 households and includes all of America’s wealthiest people.”
Tax wealth, not work, roughly speaking. With that said, stagnation is inevitable due to demographic dynamics. Historical economic prosperity was because of a demographic dividend that won’t be repeated in our lifetimes.
The logistics can be argued elsewhere, I’m simply saying that is where you can tax; there is nowhere else of material value to. The majority of US households can’t even afford to survive, let alone face a tax burden.
> For the bottom 60% of U.S. households, a "minimal quality of life" is out of reach, according to the group, a research organization focused on improving lower earners' economic well-being.
Some countries have a net-worth tax. Here are Switzerland's rules and tax rates.[1] There are few exemptions. The canton of Geneva charges about 0.9% of net worth per year.
We have the worst possible people in government for the financial environment the US is in.
Not only are we already in a bad place with government spending/debt given the new world of high interest rates. We’re just going to blow many trillions of dollars worth of new holes in the budget.
Then throw in the endless tariff stupidity and it’s all just bad, bad, bad.
Why is the phrase "reduce spending" never anywhere to be seen with these awful takes?
The only solution is for the Gov to stop spending money it doesn't have. I don't know how you can insinuate that de-industrialization and taxes are a viable strategy without addressing the root of the problem. It would be like telling someone with a gambling problem that spending more time at the casino and less time at work would improve their finances.
Because the major categories are very hard to cut:
Social Security: 22%
Interest on the Debt: 14%
Medicaid: 14%
Medicare: 14%
National Defense: 13%
That's 77% of the budget in those categories.
Everything else is 23%. The Federal deficit is ~25% of receipts.
You could cut each and every function of the government other than the above and still be left with a deficit. And there isn't a lot of room to cut everything else, as they've already been squeezed for decades.
Everyone has their pet projects is a part of it. I tried saying that we will need to raise taxes AND reduce spending and lemme tell you, it did not go over very well. Hell, in my home state of Illinois, in the face of federal cuts, our brave leaders tell us we should brace for increases to offset those 'losses'.
Both need to happen, and people hate both.
The data makes it clear though, taxes are low, spending is high both in comparison to GDP.
Any argument you can do one and not the other is insane.
> Any argument you can do one and not the other is insane.
Challenge accepted :).
The argument for lowering spending and lowering taxes is that the size of the economy and the tax base are inherently tied to tax rates and economic growth. Historically, federal tax receipts have hovered around 17 to 18% of GDP since the end of WWII, regardless of the tax rate[1]. Deep spending cuts paired with high taxes might increase the percentage, but it would be of a smaller economy, shrinking the overall tax base and making the debt ratio worse.
I don't know if that's true and I don't think we'll find out because the Republicans in Congress appear to be going for option C, lower taxes and larger deficits. The Democrats are in disarray and reflexively taking a contrary position, but even if they were in power I don't think this would be much of a priority. I think we get to see how far we can go. Maybe we'll beat Japan's debt to GDP ratio or maybe a failed auction or some debasement. The future has a lot of exciting possibilities.
Republicans (and probably most Democrats) will never allow the Pentagon's budget to be cut. Much of what's left are various social programs. Average Americans are already barely hanging on, if you cut the social programs then people will get (even more) desperate which tends not to lead to positive outcomes.
No one is insulated. If it isn’t taken from people directly, then people feel the spending in price inflation. Every time the government spends, they issue a treasury. That treasury is then used as the backing for loans from the FedRes to members banks. Those banks then lend a multiple of that.
The real issue with spending cuts is that the public will not accept any reductions to entitlements, the poor won’t accept cuts to welfare programs, and the donor class won’t accept cuts to military spending. This means there’s zero political will to fix the situation.
Most people are quite isolated because things like inflation are indirect. Seeing the link between inflation and spending is hard when it's easier for the average person to just see covid or greed or trade wars or simply fed policy and assign blame there.
The direct link between spending and taxes is far easier for people to understand.
So instead, raise taxes by 20+%. Setup automatic tax adjustments to cover spending changes to ensure the debt shrinks every decade.
I think you have it backwards. An average taxpayer has no reason to not be in favor in spending cuts as increases in that category translate to higher taxes. In other words, they don't need convincing. Your premise seems flawed.
because "reduce spending" sounds nice in a vacuum (sure, there are a lot of things our government spends money on that i don't agree with) but in reality it usually plays out as a cynical ideologically-driven misdirection with little basis in the needs of the country and the people inside it.
spending is a good thing. roads, schools, healthcare, research funding - we need these things in order for america and its people to thrive.
our representation just has this awful aversion to increasing taxes on those who can actually afford to bear the increases.
Research, roads, and schools do not make up a meaningful percentage of the federal budget at all. Healthcare makes a decent chuck with Medicare and Medicaid, and those badly need reform as many people receive aid who are fully capable of paying costs themselves. Social Security, defense spending, and debt service are the other big ones.
Ultimately, no idea what will happen when debt services consumes all tax revenues. This will come in the mid-2030s at the current rate. I figure that the Fed will just suspend the requirement of Treasuries and debt payments, print like crazy, and the USA will look like Zimbabwe.
The actual problem with healthcare is not that the wrong people receive it for free, but that it costs about 20 times as much as it should. Fix that, and they can easily afford to give it to everyone for free.
If the government stops spending money on programs, it looks bad.
If the government raises taxes, it looks bad.
Essentially people don't understand this, which is why grifters like Trump got elected who promise the impossible, make the economy seem good for 4 years then once shit starts going down the Dems win and have to deal with the outcome, which then they get shit for not being able to fix.
I take this as a signal they think there’s no way the other two are going to raise theirs again, and are maybe worried one of those will downgrade another step in the near future while Moody’s rating is still high, which might look bad for them.
Note how Moody's says directly that Trump's policies will increase government spending (by a lot, I might add). They also's directly state it's Trump's tax policy. Not anything else. Trump is the direct reason the US' credit rating drops. Yet another reason to state the obvious: Republicans, and definitely not Trump, care about the US's debt or low taxes.
This should be no surprise. They've been talking about "balanced budgets", but ever since Clinton actually balanced the budget, they yell about balanced budgets in Democratic presidencies (which reduce the deficits), and then in Republican presidencies they cut taxes without reducing revenue.
Yeah but it's still amazing just how much Trump wants to give to himself and the rich. The "tax cuts" (which aren't tax cuts, they're entirely debt financed, which republicans keep telling me isn't a tax cut) he already did in 2016 were, per year, slightly less than social security + medicaid. If this Moody's report is to be believed the now-planned tax cuts will be more than social security + medicaid.
So Trump wants to TRIPLE social security and medicaid expenses ... with just 2/3 going to him and the rich.
the corporate credit rating scale is different from the sovereign one. That said, msft credit has traded through govt bonds multiple times. So arguably the market-based rating system agrees with you (even though the ratings agencies dont neccessarily)
A direct, easily defined consequence is that you pay more taxes because the US must pay higher interest rates on vast amounts of money it borrows.
It also creates instability generally - in the economy, business, socially, politically - because unreliable US government finances can destroy all those things.
It means US instruments of debt are to be considered a little less trustworthy. This affects their price, value and attractiveness versus alternatives.
The US can issue currency to cover debt obligations. There should never be a situation where debts wouldn't be paid, the problem can just be printed away. The idea that the people who can print more money and pay the interest just wouldn't do it, out of what, spite? Incompetence? Seems pretty bad.
The fact that one party is always behind this financial profligacy, and the US keeps putting it in charge, probably means that the US' debt rating is still much too high.
> “This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” the agency wrote.
If you issue currency you invite inflation (at least according to most economists), and there's an argument that it's better to screw foreign debt owners rather than make people who elect you unhappy.
Not all of them. There are TIPS which are inflation linked US treasuries. About 7%-10% of the total issuance, apparently. It would be higher but for unfavourable tax treatment.
From my basic understanding, this is indeed true. At the cost of rampant inflation, the US can simply print more currency, inflate away historical debts, and not have to default.
If the Moody's credit rating is a measure of the stability of the asset, then a downgrade makes sense. If its to measure the likelihood of a default -- it does seem unlikely the US would simply default.
What you are missing is fairly straightforward. Inflating away debt is a form of default. People don't want to lend you money when that is how you plan to pay it back -- same outcome as a default. I guess you could do it once but only if you plan to not borrow again.
Then you see the collapse of the global economic system as credit crashes and nobody can effectively transact business.
If you cant trust a currency, you have to revert to much more cumbersome and limiting contracts. e.g. loaning cash today to be repaid in gold tomorrow.
Furthermore, the undesirability of a currency severely limits the ability of governments to maintain economic stability.
It's true. Maybe, the consequences of doing so are so drastic and would ripple throughout the globe such that getting pennies on the dollar for debt obligations may be a more attractive approach but still a loss for creditors?
The bonds have a face value and a rate. That is what has to be paid. The fact that the money being used to make the payments might not be worth anything is a risk borne by the bond holders, but there will be no default.
However, if this becomes apparent, it will become increasingly difficult to find buyers for new bond issues.
Heh. You have a point on a technicality, but I can assure you that people, who lend other people money would likely be a lot less technical about it. In other words, the default may be a shorthand for 'immediately unable to borrow more at the previous rate', but I suppose it is not as catchy.
At the end of the day we either reign in the debt or the currency collapses and we're forced to reign in the debt. On a long timeline there is no way to not reign in the debt.
The US is effectively the world's bank. Everyone saying the US needs to cut its debt is basically saying, "The most successful bank in town needs to stop taking deposits," which seems like bad business for a bank. The debt is just the sum of deposits.
The problem isn't the debt, the problem is a lack of imagination/ambition in finding good investments for the capital that's being handed to the US. Saying the debt should be cut is saying "We're terrible at business, don't have good ideas, you all need to find smarter and more responsible people to entrust with your capital. We plan to underachieve."
Here's an example of how the government invests: the government uses the revenue from bonds to build a bridge. That bridge delivers returns on the investment in the form of tolls. These pay back the bonds with interest and continue to pay dividends to the government.
Another: the government uses bonds to build core infrastructure for a city. That infrastructure allows businesses to set up shop in the city. The business activity yields tax revenues, which pay back the bonds with interest and continue to pay dividends long term.
Multiply that by hundreds of thousands to millions of investments in infrastructure, people, services, etc.
That is common misconception, and far from the norm. Financially productive investments are a negligible part of the budget.
22% Social Security
14% Debt interest.
13% General Health
13% Medicare
13% National Defense
11% income security
5% Veterans Benefits
3% Education
2% Transportation
Most is a cost center, not revenue center. Keeping grandma alive isnt an investment. In fact, it incurs even more costs outside the budget.
Government spending = investment is a very poor heuristic. Most is simple consumption, the way buying a nice dinner is consumption, not an investment. That isn't to say it cant or shouldn't be done. The point of having money it so be able to enjoy nice things.
It is just important to not get lost in the sauce and forget the difference. Someone is always ready to argue a nice dinner is an investment because you cant work tomorrow without food. That makes it an expense.
(Nitpick: Bond revenues don't pay Social Security, Social Security pays Social Security. Bonds are actually bought with Social Security revenues.)
The rest of these investments in the citizenry do pay dividends. Not every investment is a simple matter of buying something which spits out money immediately. Spending on health and education is a long-term investment which returns higher tax revenues. Paying for national defense and caring for veterans is simply paying ourselves, that money continues circulating and yielding tax revenues. Even debt interest is paying ourselves! Most of the debt is internal, which just circulates the money around in the economy. Only something like 20% of debt is foreign owned, and that revenue still often comes back to us in to form of rolled-over bond purchases and trade.
In closing, the national debt is only a problem when we stop circulating currency. We can make the debt a huge problem by suddenly slashing productive investments in the deluded belief that we're a poor family which has racked up a big credit card bill.
RE SS: Social security has already crossed the point where SS expenses exceed SS tax revenue [1]. Interest on bonds purchased with SS tax revenue are paid out of general tax revenue.
I see two issues with what you said. First, what matters is the expected return and whether it's prositive. I can sell you an "investment" that pays dividends and raises revenues, but that doesn't mean it is net positive economically. I can spend $100 to raise revenue by $0.01 for 10 years. Is that an investment simply because some nonzero level of return?
Second, waving away debt as internal ignores the fact that interest recipients and payers are different. A family with a big credit card bill is also domestic debt and circulation. That is little consolation for the family spending an increasing portion of their budget servicing the debt, nor is it consolation that the money is being circulated by their banker paying their housekeeper. The internal "who" matters, especially when some people can run up the credit and check out before the bill comes do.
While I do not agree with it the common argument against indiscriminate money printing is inflation. Given that we are exiting an inflationary period and likely entering another it will be interesting to see what they say this time.
All the talks about US national debt being "unsustainable" rings hollow, when you consider that Trump did everything to tell debtors that the US government is no longer a trustable entity and lending it money might be a bad idea.
In other words, Trump made sure that the US debt situation is unsustainable. I don't know if it was sustainable before Trump (seemed pretty stable to me), but whatever the situation was, Trump made it infinitely worse.
To me this is just another example of Republicans saying the government is broken, when what they really mean is "because we will make it so."
Guys, we have predictable problems -- namely deficit. And "unpredictable" problems (such as covid and the great financial crisis). So I think US cannot even control the predictable problems that are within our control. What do you think will happen when the next unforseen crisis hits? Sadly, the government's main responsibility is to minimize the likelihood and cost of so-called "unpredictable" problems, yet through the actions of DOGE and similar regulation cutting zeal we're only increasing their likelihood and making the outcomes worse. Moody's is doing us a favor by calling our debt A- (or whatever), it's in fact junk at this point. We're one crisis away from complete bankruptcy, which is bound to happen thanks to reckless governance.
PS: See how Clinton/Bush Jr's deregulatory policies were a major contributor to the great financial crisis. See how Trump took over a pandemic playbook and office from Obama, only to disband it upon arrival. If the federal government won't even try to protect us from systemic risk, who will?
Moody's is in what is, currently, a hazardous line of business. Whatever their accuracy (their performance leading up to the financial crisis in 2008 didn't particularly lend them any credit) the reality is that they are certainly likely to be the target of informal (browbeaten in the media) and formal (investigations undertake by various agencies) actions in the short-term. They've unleashed a shit storm upon themselves the likes that they have probably never seen before. Some late night posts on Truth Social are likely to be imminent.
I don't believe that either Standard & Poor's or Fitch downgraded the U.S of its triple-A credit rating during the current administration so they're relatively immune to any attack. Moody's is a "victim" of bad timing.
Worse credit rating is bad economic news. When there's bad economic news, the market tends to 'flee towards safety', and that means selling risky investments and buying treasuries. When the market is moving capital to treasuries, borrowing costs are reduced.
(Doesn't always happen like this, and may not have happened like this last time, but it's not uncommon)
> SPY around 455 fell to 433 from August 1 to August 18
> By October 27th SPY bottomed around 410 (-10%)
> From August 1 to October 23, US 10y yield went from 3.9% to 5%
Stocks went down and bond yields went up last time. The Federal Reserve raised the federal funds rate from 5-5.25% to 5.25-5.50% during the same time period.
You seriously think a reduced credit rating is good news? Or is it another flip attempt to ignore consequences, like a teenager who survived DUI - 'I got there even faster, so it worked pretty well'.
https://archive.md/dnJ7Q
There is a ton of low-hanging fruit that could lower the debt that would result in little to no austerity. Carried interest/corporate tax avoidance, means-test social security, remove needless subsidies for fossil fuels or corn/sugar that add to health costs, or eliminate PBM formularies and enable medicare drug negotiation and fraud reduction. Maybe a few hundred billion right there.
Long term reforms to make education and healthcare outcomes focused, punishing administrative overhead and rewarding performance. Similarly defense could be massively downsized IMO to just expendable drones and submarine based nuclear deterrence, we don't need a 'triad' - one ballistic sub can basically end the world. Replace defense contracts with guaranteed purchase orders and let the private markets figure out how to do hypersonics or missile defense.
It makes much more sense to just raise the social security tax cap than to means-test it. Means testing social programs tends to just add needless bureaucracy to them while also weakening support for them by adding an us vs them line of who benefits.
Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
You don't even have to raise the cap by very much to fix every foreseeable funding issue Social Security has
Yup.
Means testing is one of this things that fools people - it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
Beyond the bureaucracy dimension - means testing puts up a barrier, not at the top, but everywhere.
Adding “one more thing” to people who are already struggling can be disproportionally difficult for them to meet, and therefore cause them to miss out on benefits they are completely entitled to.
Additionally, it can create incentives for behavior you would otherwise be completely pathological, such as divorcing your sick spouse because as a couple you don’t qualify for support, but individually they do.
> it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
The UK's DWP is a good example (and I'd suggest they crossed the border a long time ago into evil.)
* https://www.bbc.co.uk/news/uk-england-merseyside-68727007
* https://www.bbc.co.uk/news/articles/c20nrv02vz1o
* https://www.bbc.co.uk/news/uk-england-leicestershire-6770464...
* https://www.bbc.co.uk/news/uk-england-nottinghamshire-525003...
* https://www.bbc.co.uk/news/business-51756783
That's just a simple BBC search - going through Private Eye, for example, would bring up a lot more.
Yeah the UK seems to be sprinting towards becoming a third world country with massive inequality just to protect the government's own spending power and of course completely accidentally, the wealth of the rich.
There's "Gary's economics" discussing it, even though the usual economic comment somehow seems to escape him.
(that would be "what about creative destruction" btw)
> Means testing is one of this things that fools people - it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
These non-specific appeals to emotion aren’t very convincing when we’re discussing a topic where we’re already collecting tax returns for the same people collecting social security.
> incentives for behavior you would otherwise be completely pathological, such as divorcing your sick spouse
We do live in the only country in the developed world where “deathbed divorce” is a thing to try to ensure your surviving spouse doesn’t get crippled by medical debt, so there is that…
> Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
Very few people earn that kind of money as taxable _income_. More people earn that kind of money as unrealized _capital gains_. Social security is paid for with a payroll tax and what amounts to an income tax. Once you're earning several times the cap you stop caring about it. If you earn 5x or 10x the cap then you will probably not be counting on social security, so there's no us-vs-them dynamic likely there. The problem is that to make this make a big different you'll have to hit hard those who earn only 1.5x or 2x the cap, and that's how you'd get an us-vs-them dynamic.
Instead you can increase the retirement age, increase the cap, increase the tax rates, lower the COLAs, etc., and that's what we've seen so far.
Very few people make a lot of money, it those who do make a shockingly large amount of it.
There’s two drivers to the actual problem here… one is that wage growth slowed a lot since wage indexing and the yield on those taxes is lower in real terms. People who are making more make a lot more, and frankly that’s a well that needs to be tapped.
The other is less popular… but we’re in wind down of nearly 25 years of conflict. The events of 9/11 were engineered to and succeeded in created the same type of economic attrition the US ultimately inflicted on the Soviets.
We’re at a tipping point… our social insurance is approaching entirely avoidable cash flow insolvency. 25 years of war means that the military is worn out and needs trillions of investment to maintain parity. Ignoring the problems our strategies created brought us with a reactionary buffoon destroying the government and a fairly dim decade ahead.
I think younger generations are tired of getting a worse deal than older generations. If you means-test, some old people get less social security. If you increase the cap, working people pay more tax.
"Working people"
i.e. people that are not retired and are doing a job to make a living.
The vast majority of working people wouldn't pay a penny more if the cap was lifted and the people who would be affected would still continue to enjoy a standard of living most can only dream of.
> Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
You say this as it's some sort of injustice. But the guy who makes 10 million will collect the same benefit in retirement as the guy who makes $176,100. Or are you proposing that the guy who make $10 MM should pay more, but get their benefit capped? Because if that's what you are proposing, I don't see how that is just or fair. Except maybe following the argument along the lines "screw the rich, they can afford it".
Social security is not a pension. It's more like insurance. It is designed to make life as a senior more equitable, not to stoke the egos of the wealthiest by ensuring they do not feel slighted by payments scaling to be larger than benefits above some certain income level.
It is absolutely a "fair" and "just" thing for a society to do to itself.
So unemployment insurance should cost more if you earn more. What about health insurance? Car insurance? Starbucks latte? All goods and services? Would it not be just and fair if all prices were relative to income rather than absolute?
... you'll notice that taken to absurdity this is the same statement as "everyone should be paid the same". And that's been tried.
Government programs are not the same as commercial products. I have no issue with unemployment or health insurance costing a percentage of one's income.
Let's also add fines and traffic tickets to the list of things that ought be more expensive as one becomes wealthier please.
Why not? California been trying to implement income based pricing for privately operated utilities like PG&E for years. It is already partially implemented for electricity.
It seems to me like government programs is a poor delineation, as government can pass a law to extend its own scope.
Why not groceries or clothes?
> Why not groceries or clothes?
Well, programs like TANF and SNAP exist, which I think are great and their greatest problems are they are not easy enough for people to make use of.
So, fair point, when looking at the most impoverished among us I do not think we should stop at governmental services.
TANF and SNAP are very different than what I am discussing. That are wealth transfers from general taxes to those in need. Very different than wanking into a public grocery store and seeing different prices based on your income.
Where I am, most grocery stores have two prices for items on the shelves. One "regular" price, and a second, lower price that only applies if one is paying with SNAP.
Feels like we're splitting hairs a bit here.
Maybe, I have never seen such dual prices. Are they state mandated?
I guess im still looking for some limiting principle. Why not just mandate that all goods are sold proportional to income.
What are you so afraid of?
That taken to an extreme, this idea is the same as "from everyone according to their ability, to everyone according to their needs". Which sounds great, until you realize that this incentivizes needs and disincentivizes abilities.
Which really is just a manifestation of "when a metric becomes a target, it ceases to be a useful metric".
There are ways to disentangle the undesirable incentives. The Nordic countries in particular have done a great job of this.
Inability to work and create for my own benefit and that of my family. Collectivization and theft of my labor value.
Good idea!
It really is not. To see why not, imagine how you'd feel if you had a coworker who would come to work drunk (if they came at all). They would still be paid the same as you. Your only recourse would be to talk to this person as a "meeting of the peers", which they would proceed to ignore.
This was reality under the Soviet system, and was one of the main reasons it failed.
Now, I understand why I am getting all the cheeky responses and the downvotes. People are hurting. Capitalism in the US is currently failing under a different failure mode. The capitalists are relentless optimizers, even past the point where optimizing their metrics stops making sense. Their metric is "extract as much wealth from the populace as possible", and it's gotten to the point where the people are disillusioned, and very soon there will be nothing left to take.
I think you are confusing your wishes with reality.
It is in no way like insurance today, and never has been. It has always paid out independent of circumstance. It was never about equity either - The poor get less, and the very poorest get none. Again, this is the way it has been since conception.
It is a state mandated pension with low returns and a progressive fee. Noting more.
I think you misread. There's no "confusion of wishes with reality", we were explicitly discussing the not-reality that is wealthier people paying more and receiving less, and whether that is fair or just.
My analogy to insurance was more about whether you pay into "your" account with your name on it or if you pay into a big fund directly pays out to recipients, and nothing is held aside for you.
I see. I think there is a lot of baggage with the insurance analogy, like probability and conditional payout which are absent.
The money isnt held in a dedicated account with your name on it. However, how much you pay in is rigorously tracked and used to directly to determine how much you get.
The closest thing is a pension. Like a pension, SS pays out X% of your taxable salary. X is progressive with high earners heavily subsidizing low earners.
SS starts by paying out 90% of taxable salary in the lowest bracket. As income goes up, this reduces to paying out 15% in the top bracket. The brackets are referred to SS bend points.
> I think there is a lot of baggage with the insurance analogy, like probability and conditional payout which are absent.
I agree; it was a poor choice of analogy on my part.
The disability part of Social Security is very much like insurance…
> Or are you proposing that the guy who make $10 MM should pay more, but get their benefit capped? Because if that's what you are proposing, I don't see how that is just or fair.
You get to live in a stable society, in relative order, safety, and peace. Your life is (financially) richer than 99.99999% of people in the world. All of this in exchange for a small portion of your wealth, and yet you STILL want to complain about the unfairness of this arrangement?
Push it too far, and the only alternative you're going to get is having to look over your shoulder everywhere you go, living in constant fear that someone will pillage your property and threaten your personal safety.
> Push it too far, and the only alternative you're going to get is having to look over your shoulder everywhere you go, living in constant fear that someone will pillage your property and threaten your personal safety.
But that's the thing: is Social Security a safety net or is it welfare? If it's a safety net, means testing (can at least in principle) preserve the safety net aspect.
If it's welfare, you're transferring wealth from people currently working to those retired, many of whom are much more comfortable than those paying the tax. Why are we transferring wealth to those with more from those who must work?
So, just to be perfectly clear: are you advocating that there should be no cap in the contributions to Social Security, while the cap on the benefits should stay in place?
And the argument is that if you are rich you can afford it.
But why increase the tax on the rich in an obfuscated way via this Social Security trick? Because you think they won't notice it? Or because you think you can stoke some proletariat fury by claiming that the cap is injust? It's ok to stoke that fury if the injustice is there, but in this case it is not.
The rich are rich because they live in a modern just society. They get more benefit from that society as they have more wealth backed by that society.
>"screw the rich, they can afford it".
are you really getting screwed though, if you can't feel it?
>"screw the rich, they can afford it".
Also: "Why not? The rich have been screwing everyone else since the invention of rich people." :shrug:I say this kinda-sorta in jest, but in truth, there's a somewhat huge contingent of the ultra-richest of the ultra-rich who are absolutely guilty of such "Screw the poors." behavior. The ongoing and worsening effects of this specific outta-control inequality speak for themselves. Worst part of it is that the things they're doing these days aren't only going to harm just some of humanity, but rather all of humanity, as well as most all other life on Earth.
They could choose to spend the money they've spent doing outright "evil" (bad things that harm everyone) doing good instead, and cemented their places in the history books among many other great humans who made the world a better place during their time here on Earth, but instead they actively choose to do harm, many of them full-well knowing they're doing harm.
> I don't see how that is just or fair
It's not and it doesn't need to be. If I make 10 million dollars a year, I don't need social security period. I'm going to be fine no matter what. I personally would not mind, at all, giving up a portion of my income to other people who are not so fortunate.
It's like giving the fat king and the starving orphan both one slice of bread. Sure, it's fair, but does the king need the bread? Who cares about fairness when the playing field is already so skewed in favor one side?
Also: the reality here is that rich people pay WAY less taxes proportionally compared to the poor. If we want to talk fairness, we have to start there. Poor people are spending 100% of their income on consumption, it's going straight into the economy. It's getting income taxed and it's getting sales taxed.
If rich people had to pay anywhere close to the amount of taxes the working class or the poor do, they would turn to dust. I'm sure they're fine in their already extremely favorable position. In short - give me a fucking break.
If the purpose of society is for people to work together for the common good, then I don't see why it's unjust for people who are better able to contribute to do so.
They can afford it. It's fine.
Screw the rich, they can afford it.
I mean, in the period of history from the 1980s to now, in contrast to other periods, wealth disparity increased as a direct result of laws being changed, policies being amended, and which regulations the government chose to enforce or not enforce.
It's hard for me to look at the idea of "law, policy and regulation should now move the needle in the other direction" and see that as grossly unjust. We can debate whether social security is the right place to do it, but it seems like one of the top options to me, considering the huge wave of people who are going to be jobless, old, poor and alone, and therefore vulnerable, as the Millennials age.
The argument is indeed “they can afford it.” The addition of “screw the rich” is some bullshit that makes it sound like someone making $10 million and paying $5 million in taxes is worse off than someone making $10,000 and paying $0 in taxes.
Yeah, people who make more money should pay more to fund the government. Apparently this is a wild concept for some.
The problem with means-testing Social Security is that the government's promised some people "Social Security will be there for you" when they were in their 20's and 30's, and now you're taking it away in their 50's or 60's, when they can't go back and adjust life / retirement plans that were made taking into account "SS will be there for you."
In my humble opinion, this kind of broken promise borders on "the government defrauding the people".
It would be more legitimate to say "SS won't be there for you if you make too much" to those in their teens and 20's just entering the workforce -- but that won't have a major effect on cash outflow needed to satisfy SS obligations for 40-ish years (except for the small fraction of rich unfortunates who get SS because they become unable to work at a young age.)
You might also argue that the level of prying into people's finances implied by "means testing" is a form of illegitimate government overreach. If you believe this, in theory you should, for consistency, also believe that individual income tax ought to be eliminated (which many people consider a radical proposition).
All those promises are "parchment guarantees", to use Madison's term. For example, social security distributions were promised to be tax exempt, and they were from the institution of the program in 1935 up until 1983 - talk about reliance interest!
I give it even odds that they'll be taxing at least some Roth distributions by the time I retire.
And presumably they’d take away my social security tax, too, right? If I was not going to get it? Right, right?
You don't see the problem with funding things like social security or food stamps purely from the people relying most on those services?
But SS isn't a tax like the rest of our general taxes. I pay a specific SS tax on my payroll so that when I retire I'm entitled to a payout. If you take away the payout you need to take away the tax. Once you means test SS it becomes more like a welfare program for seniors and ought to be paid for out of the general tax pool like other welfare programs.
I'm happy to vote for rearranging the labels of what the things are called if that's what the sticking point is for you.
I'm not necessarily opposed to social security being switched to a more conventional tax (assuming that the new tax was at least equally progressive and raised at least as much revenue). However, I also don't see how that makes much of a difference. Social security is a welfare program, it always has been.
If SS tax was repealed, and income tax was adjusted to increase by exactly the same amount, would you be happy with it?
Our deficit is $1.8 trillion last year. Closing the carried interest loophole would only save $1-2 billion annually. https://taxpolicycenter.org/fiscal-facts/tax-treatment-carri...
Explicit fuel subsidies are only $3 billion: https://www.eesi.org/papers/view/fact-sheet-proposals-to-red.... (Implicit subsidies are arguably much more, but anything that would make energy more expensive is an economy killer and would tank revenue.) What’s lost to corporate tax havens?
Social security is self-funded. It has literally no impact on the deficit or our ability to pay off debt. By statute.
Edit: i am flabbergasted at how low literacy is about how our government works.
> Social security is self-funded. It has literally no impact on the deficit or our ability to pay off debt. By statute.
There is a very real problem that social security is project to be no longer solvent in 2035. (see here: https://www.congress.gov/crs-product/RL33028) It may require either transfers from the general budget or structural changes to remain solvent.
To be fair, republicans have been saying SS will go insolvent from the moment it was written into law. It's been almost a century. After a certain point, we have to call a spade a spade and just admit there's a lot of people ideologically opposed to SS and that's it.
> To be fair, republicans have been saying SS will go insolvent from the moment it was written into law. It's been almost a century. After a certain point, we have to call a spade a spade and just admit there's a lot of people ideologically opposed to SS and that's it.
Actually, SS was going to go insolvent when it was first written. The benefits were far too generous for what was affordable, even with the population pyramid at the time.
Then it actually was going to go bankrupt and the benefits were reduced in real dollars, because it turned out at one point we were dramatically overestimating inflation, and we couldn't afford it.
If social security was an actual insurance or pension plan, it would have been shut down by a state regulator or the PBGC. It's a horrifyingly bad plan for the simple reason that it's structurally insolvent. Even the concept of "uncap the tax" just kicks the can down the road: you now need to pay those people benefits.
The issue is we don't actually know what we want from it, which I alluded to in another comment. If we want some sort of "social insurance" plan where you just get back a portion of what you pay in, we have it and it's functionally in default. If we want a social safety net, we need to have a serious discussion about means testing.
> Social security is self-funded. It has literally no impact on the deficit or our ability to pay off debt
Technically, yes. Practically, it’s a pair of income and expense streams. Slashing social security payouts to pay for some nonsense is tempting.
Sure, practically I can also rob people at gunpoint.
Material difference when we’re discussing what a legislative body would and would not do!
My guess is we’ll stick it to Gen X.
Maybe you're right. But then I'll be telling anyone who will listen that they're being sold up the river to finance the military and the wealthy against all reason.
> I'll be telling anyone who will listen that they're being sold up the river to finance the military and the wealthy against all reason.
My cat's incredibly convinced of a global scheme against his caviar budget, that doesn't really cause any consequence.
It does have an impact on intergovernmental debt. Here's a good explanation from GAO[1]:
> Intragovernmental debt holdings represent federal debt owed by Treasury to federal government accounts—primarily federal trust funds such as those established for Social Security and Medicare—that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.
> Debt held by the public represents a claim on today’s taxpayers and absorbs resources from today’s economy, meaning that when an investor buys Treasury securities it is not investing that money elsewhere in the economy.
> Intragovernmental debt holdings reflect a claim on taxpayers and the economy in the future. Specifically, when federal government accounts redeem Treasury securities to obtain cash to fund expenditures, Treasury usually borrows from the public to finance these redemptions.
From memory I believe we're at ~100% publicly held debt to GDP and ~122% gross debt to GDP.
[1] https://www.gao.gov/assets/gao-25-107138.pdf
> have an obligation to invest their excess ... in federal securities.
The Social Security surplus is pretty much required to purchase US bonds and other guaranteed Federal securities.
But saying that "contributes to the Federal debt" is like saying your 401k contributes to corporate debt.
I am still not convinced that Social Security causes Federal debt the way that a trillion-dollar military budget does.
I don't understand why this is being discussed rationally. The motivation to remove social security isn't economic or rational, it's political and psychological.
A small group of people considers itself superior to the rest of the population. As a group it is convinced it deserves every break, benefit, privilege, and handout, while the second group is only worthy of intrusive oversight, abuse, exploitation, and punishment.
This isn't hyperbole. This is the political belief system that drives the rhetoric about the government spending and debt.
The proof is simple - government debt always increases when the first group is in power.
Always.
This wouldn't happen if it was really about the deficit.
> The motivation to remove social security isn't economic or rational, it's political and psychological.
Yes this is it and this is all it ever was. The second the pen was put to paper and SS was made law it has been under attack. People have been proclaiming it'll go insolvent any day now for almost a century.
It's an ideological attack and we shouldn't even humor these people. The idea of essentially retirement insurance feels unfair to a ton of people and that's that.
The Social Security surplus is used to fund general government operations and the Social Security Administration gets an IOU (Treasury security) in return. So it's still money the government didn't have before that it uses to fund its operations that it borrowed from a different self-funded program that had an excess, and it still needs to pay it back with interest. Usually the Treasury doesn't have enough tax dollars to pay it back, so they auction more bonds to the public and it gets added to the public debt at that point. However, if effective tax rates go up or spending is cut elsewhere then it can pay it back without adding to publicly held debt.
So you're right that it's not the same as publicly held debt. Rather intragovernmental debt is deferring the decision of how to pay for some governmental services to a later time, although usually it becomes publicly held debt. One way or another, the tax payer is on the hook for this spending which is part of the gross national debt, just like they're on the hook for publicly held debt.
Well, perhaps you're right. I am not a finance guy and it seems to me you can probably pull debt out of any kind of relationship if you squint right. But it certainly is not to blame for our inability to balance the budget, which seems easiest to explain with nearly sixty straight years of cutting marginal tax rates while claiming to be fiscally conservative.
> you can probably pull debt out of any kind of relationship if you squint right.
No, this is pretty explicit. To rephrase what the GAO said when the Social Security Administration takes in more than it sends out it invests the difference in special Treasury securities (that's the trust fund(s)). The money the Treasury gets is spent on general government operations (education, healthcare, etc). The treasure must pay this money back, with interest.
> But it certainly is not to blame for our inability to balance the budget
When the Treasury pays the principal and interest it needs to either have enough tax dollars (higher tax rates or spending cuts) or issue debt to the public. So yes, it does factor into a balanced budget. It still must be paid back and the taxpayer will foot the bill one way or another, now or in the future.
> which seems easiest to explain with nearly sixty straight years of cutting marginal tax rates while claiming to be fiscally conservative.
This is a gross oversimplification. If you think just one side is the issue you're not going to be able to fix the problem.
> This is a gross oversimplification. If you think just one side is the issue you're not going to be able to fix the problem.
And what is the other side, pray tell?
Don't worry, I gave up on this country's ability to fix any problem a long time ago.
Tax rates aren't everything as those affect the size of the economy. Since the end of WW2 the federal government has received ~17.5% of GDP in taxes[1] (+/- ~2.5%). You can decrease effective tax rates, end up with a larger economy, and have a higher absolute value of tax revenue than you did with higher tax rates. So it's more complicated than "lower tax rates => less tax receipts".
If we restrict our view to programs like Social Security or Medicaid we see that demographics are also straining the system. For instance I believe the number of people contributing to Social Security vs the number of people receiving benefits in the 70s was around 3.7 (payer/beneficiary), we're currently around 2.6 and in 10 years that will go down to 2.1. Put simply we're unhealthy, we're getting older, and we're not having enough kids to contribute to these programs that pay for all of these old, sick, childless people to retire and have healthcare.
From a philosophic point of view I would say the fact that about half of the electorate do not want higher taxes while the other half wants more government services should mean that these extra services are non-viable politically. What we've essentially done instead is "compromised" by not having higher taxes but still expanding government services which is contributing to our debt issues. We simply can't have it both ways, but that's exactly what the people voted for through their representatives.
> Don't worry, I gave up on this country's ability to fix any problem a long time ago.
While we are likely on opposite ends of the political spectrum, I can agree that I don't see us actually fixing this problem. I made a comment elsewhere in this thread discussing the fact that Congressional Republicans appear to be going for lower taxes and higher deficits right now while the Democrats are in disarray and not particularly focused on this problem. The unfortunate fact is that this problem is going to get worse and the solutions will get more painful over time. Congress as a whole has really dropped the ball here.
[1] https://fred.stlouisfed.org/series/FYFRGDA188S
>While we are likely on opposite ends of the political spectrum, I can agree that I don't see us actually fixing this problem.
Eventually reality comes calling and problems resolve themselves. You just might not like the resolution.
If you fail to proactively address a cancerous growth, health problems compound but eventually disappear entirely.
? Self-funded to me means an entity or process that itself takes in income sufficient to fund all of its operations.
Social security itself does not take in any income whatsoever.
Social security is a debt. Therefore it itself directly affects the US' ability to pay off it's debts.
Social security is funded with a social security tax. 6% of your paycheck is paid by you, 6% by your employer. (Or 12% by you if you are self-employed.)That by law can only go to fund social security and nothing else. Similarly, the fund is by statute guaranteed to only fund social security payments. It is completely separate from the rest of the federal budget.
> That by law can only go to fund social security and nothing else.
Eh, that's partly true. The true statement is that social security tax revenue must eventually go to fund social security.
Before it's needed (i.e. while tax revenue exceeds benefits), it has been used to buy US treasuries -- the funds used to do so then appeared for Congress' general use.
You can see the US treasures the social security trust fund is currently holding here: https://www.ssa.gov/OACT/ProgData/investheld.html
The treasuries are effectively zero-risk assets to the trust fund and they also pay interest. Just having the fund sit the on cash would not be efficient.
The money goes to the trust fund, the trust fund buys treasuries and meets it's outlays using the maturing treasuries.
Creating a debt obligation with yourself isn't typically the definition of zero risk. ;)
Or to put it another way, buying special issue treasuries isn't functionally different than Congress directly spending excess money in the trust fund and guaranteeing to pay more back later.
Just with additional steps and a thin veneer of impartiality and financial standards.
Ok, let's chalk the "self-funded" part up to semantics.
> It has literally no impact on the deficit or our ability to pay off debt. By statute.
This however is wrong.
As a simple proof: let's just up social security payments by 3000x... social security is still "self-funded" and "separate" but that would be an untenable debt and the US would immediately default on that obligation. The amount and structure of social security debt matters to the US' ability to pay.
Social security is a promise to pay an amount of money in the future and it is backed by the "full faith and credit" of the US government. The bigger it is, the bigger the debt, the hard it is to pay off. It's a big impact.
Just because it's specifically funded and tied to a precise specific tax does not make it immune from debt considerations.
It says here [0] that the Social Security Trust currently holds about $2.6 trillion is US Federal securities.
https://www.ssa.gov/cgi-bin/investheld.cgi
Cash money from payroll tax is sitting there collecting interest and being drawn down by Social Security disbursements.
So we pay taxes, that revenue holds a gun to Congress and forces them to buy another aircraft carrier... That's semantics for you.
Sorry. The aircraft carrier thing is bitter sarcasm on my part. But I'm put off by dismissing the funded nature of Social Security as the root cause of the Federal debt.
The root cause is deficit spending.
It's actually not, most retirees receive more in benefits than they've contributed.
How does that contradict anything I said?
If you have issues with what it is, that's fine. But it still doesn't impact our deficit or ability to pay off debt.
Isn't that expected due to some people dying before retiring?
Right, and of course, growth. The same is true for a 401K - you're going to get a lot more out than you contributed.
not entirely true, American social security is paid for by the current generation.
They'yr not paying for their own, they're paying for the receivers of it. The debt has already accrued. and worse yet, those that did not pay for the social security they're receiving are now living longer and costing more. Its like a "life interest".
Maybe for now, but it's eventually going to run out of money, and what do you think is going to happen? You think all current and future retirees are just going to shrug and say "oh well, it was good while it was lasted", and not lobby their politicians?
https://en.wikipedia.org/wiki/Social_Security_(United_States...
It will have depleted it's reserves in approximately 10 years. Expenditures exceed revenue, but only by about 15-20% by then. So either there's going to be a cut in benefits and/or the retirement age will be bumped up, just like we did in 1983[1], and as originally intended when designed. Most likely the latter, but it seems legislators are too chicken to do it until their backs are up against the wall. And conservative legislatures are probably content to wait until it's an exigent crisis to maximize their chance at selling privatization.
[1] We only recently just reached the tail-end of the 1983 reforms' gradual shift in retirement age.
> So either there's going to be a cut in benefits and/or the retirement age will be bumped up
Or...raise the contribution limit which fixes the whole thing easily without having to screw over the people that paid in and just want to get back what they were promised.
Raise the retirement age? Really? All this advancement to make our lives better and more efficient, and we're going to conclude that we all need to to work more?
And meanwhile we can piss away cash by the trillion but when it comes to social security suddenly there's no money to be found anywhere.
They've fooled everyone into believing "the fund will be depleted" in x years. Then put some more money in assholes.
No, the SURPLUS will run out. The fund will not.
This is a silly argument. It's like saying if you can pay 95% of your mortgage, you can pay your mortgage. That's not really how it works.
Social security isn't analogous to a mortgage. It's a rolling payout to the current population.
From wikipedia:
>Without legislative changes, trust fund reserves are projected to be depleted in 2033 for the OASI fund.[16] Should depletion occur, incoming payroll tax and other revenue would be sufficient to pay 77 percent of OASI benefits starting in 2035.
Paying out 77% of benefits is not the same as running out of funds. You are still guaranteed payments while anyone in this country is making income.
Try paying only 77% of your mortgage and let me know if the bank thinks that you're not in default.
Whyy means test when you can use income tax to claw it back? Instead we have politicians giving away benefits to people who opted out.
> that could lower the debt that would result in little to no austerity.
I like your ideas, but I'm not sure this is possible without austerity or major tax reform. The deficit is massive.
If I was King, I'd choose tax reform and go with a land value tax. It's what economists agree is the least bad tax.
> It's what economists agree is the least bad tax.
9/10 of economists agree!
Really no. As much as deficit nuts want to grasp at this as a confirmation of priors, this is absolutely 100% not at all about "The Debt". (In point of fact outstanding[1] debt as a fraction of GDP isn't even all that large, historically; it was much higher in the 80's and literally every one of those bonds is now paid off!)
We could magically pay it off right now and the US would still look like a credit risk. It's all about trade policy right now, and the general existential risk that we blow it all up. The treasury rate spike in April (likely but inconclusively due to strategic dumping) continues to have everyone spooked, and fiscal restraint, tax policy, austerity, etc... don't speak to that concern at all.
[1] Corrected: service cost of the debt
> In point of fact outstanding debt as a fraction of GDP isn't even all that large, historically; it was much higher in the 80's and literally every one of those bonds is now paid off!
This[1] shows in the 80s the total debt to GDP ratio started at 31% and ended at 51%. We are currently at about 122% according to the same chart. I'm not sure what numbers you're referring to, could you provide a source?
In terms of the bonds being paid off that's true, but they were paid off by selling even more bonds to cover new spending and old, i.e. total debt grew even if individual bonds matured.
[1] https://fred.stlouisfed.org/series/gfdegdq188S
>In point of fact outstanding debt as a fraction of GDP isn't even all that large, historically; it was much higher in the 80's and literally every one of those bonds is now paid off
I think you are very much mistaken: https://fred.stlouisfed.org/series/gfdegdq188S
I did indeed say that wrong, the nominal debt was lower but the cost to service it was much higher (borrowing in the 80's was done at interest rates into the double digits!):
https://fred.stlouisfed.org/graph/?g=iEiV
Again, if the debtpocalypse didn't happen then it's clearly not happening now. This is simply not about fiscal policy. Period. It's about institutional trust in the government's ability to manage payments.
The double digit rates were because of the inflation following the dollar being de-pegged from gold in 1971. It was easy to pay the massive interest rates because the point of the high rates was to bring inflation down. The idea was that people did not want to hold US debt exactly because the inflation was a de facto partial default.
I don't follow that economics. How does interest rates being high make bonds easier to pay? And how to I get some of that action, that sounds pretty magic to me. :)
(No, that's not correct. Borrowing in the 80's was more expensive. Period.)
You’re mistaking rate vs outstanding debt.
If I have a $1M mortgage at 6%, and a $1000 credit card debt at 25%, which is harder for me to pay off, assuming I make $100K per year?
Click on the link. I assure you I am not.
I see your point. I suppose my only response is that a significant amount of our debt is being rolled over annually. It’s currently being rolled over from extremely low interest rates to non-trivially high interest rates. We should expect the spike on the left side of the graph to keep increasing unless rates decline significantly, soon.
If it didn’t happen then it can’t happen now?
Paying off the debt is cheaper (significantly so) than it was then, and we had no trouble then. So yes, if it didn't happen then it won't happen now, at least not for the same reason. You can construct a double/triple-failure situation, sure, but any argument of the form "We can't sustain this level of financing" is simply wrong by counterexample. We already did.
No one guarantees current rates further down the road, that’s a tricky thing. There is some chance inflation will be keep increasing because of a lot of printed moneys in last decade or so, and then fed will be forced to increase rates even further which will make it much harder to pay federal debt, much harder than in 80s perhaps.
> There is some chance inflation will be keep increasing
So what? Inflation is GOOD for the debt, which is dollar-valued and not inflation-indexed! If you inflate the currency by 20% the real value of the outstanding debt drops by 20%. That's always been the joke about federal borrowing, if we ever get in trouble we just print money to pay all the bonds and poof, no debt. Inflation being high makes borrowing cheaper, not more expensive.
The discourse about the subject is cursed. Everyone projects their own (largely political) priors onto it, everyone thinks macroeconomics works like checkbooks. It's just one bad idea after another.
(I think what you're trying to say is that interest rates being high makes borrowing expensive, and that high interest rates are a natural policy response to high inflation. But you have the causality backwards. In fact one reason borrowing doesn't care about inflation is that the fed moves the levers to keep the impact roughly constant.)
> Inflation is GOOD for the debt, which is dollar-valued and not inflation-indexed! If you inflate the currency by 20% the real value of the outstanding debt drops by 20%.
Unfortunately GDP is also dollar-valued, so debt:gdp ratio wouldn't change with inflation. Inflation wouldn't only destroy debt (which is good) it will also destroy currency and to some extent the economy. In the very end it's part of FED mandate - to keep inflation in bay.
> The discourse about the subject is cursed.
I think macroeconomics is very complicated subject, with a lot of uncertainty of how things will unfold.
Your initial claim was that servicing our debt was much harder in 80s, so it's actually not as bad (or at least not worse) these days. What I'm trying to say we can all of sudden end up in a world where interest rates are back to 80s levels, while debt:gdp ratio (which is the real amount of debt in a way) is way higher. And this would be much more complicated problem to solve. Or we would not, because it's hard to predict a) where inflation goes from now on and b) what will FED do in the same kind of scenario to 80s.
But actually scratch it, it is already bigger problem than it was back then: US needs to refinance/issue $9.2 trillion of debt this year. Current USG 10Y is ~4.5%, current GDP is 27.72 trillions. Which means after this year we will add 0.015 to the interest/gdp ratio (assuming very low current cost of the debt which is being refinanced, from https://fred.stlouisfed.org/graph/?g=iEiV). It will bring us above the level in 80s this year! Just this year of debt will bring the cost of servicing the debt above than it was back then. That's where huge issue is, unfortunately. And unless rates will go down it will be getting worse and worse really fast.
> Unfortunately GDP is also dollar-valued
It... what? Good grief. If I buy a candy bar for $1, it counts to the GDP as $1. If it inflates and I have to pay $1.20 for the next one, you're saying that the GDP magically knows to adjust the accounting for how much it used to cost?! No, this is ridiculous. GDP counts currency.
The amount of bad economics being deployed in support of baldly political positions on HN is just astounding.
> Maybe a few hundred billion right there.
Source that such reforms add up to this much? What do the reforms look like in concrete terms?
I like where your head is at on a lot of this and there's a ton of waste to cut within the military itself, but we don't want to scale it down that far. It's still good to be able to effectively put boots on the ground in other parts of the world and back them with the most effective logistics infrastructure in the world, not to mention we want deterrence options other than a nuclear holocaust.
I think you're directionally correct that military spending could be much lower and more effective but the notion of relying on a single sub as a deterrent is far too extreme. In that scenario an enemy only needs to compromise a single sub and your entire deterrent is gone. That's not a stable equilibrium.
The whole principle of a triad is based on the expectation that an adversary could compromise your retaliatory ability to a high degree so you need to mantain robust options.
How would you propose to means-test Social Security?
By adding even more bureaucracy, current SSA administration overhead is already close to $15 billion year.
Which is, checks notes, 1% of the social security budget. While not nothing it’s quite competitive given the scale and impact.
This is the biggest argument I have against DOGE. There are easy wins you could make when it comes to government spending and efficiency and they are doing none of it.
I have yet to hear a convincing argument that DOGE is anything less than a poorly camouflaged data grab.
Hopefully everyone involved goes to jail, once the government changes and starts charging people who break the law again.
DOGE is a poorly camouflaged ideological purge.
It takes a super special type of incompetence to fail to find any provable fraud, waste or abuse in US government spending.
I do not know about the US, but have have worked for a state admin. To be honest, there is a lot of inefficiencies, but the large majority of those exist to _prevent_ fraud. I could once again describe why, but the details aren't really important: i swear all waste and inefficiencies i've seen not caused by out-of-date software are in place to avoid fraud from low to mid-level employees.
From that you have a choice: either you allow low level government employees to partake in the corruption and remove a lot of rules, or you leave those rules which makes running the admin cost more. I think the second solution is better even if it were to cost more (i'm not sure it does, corruption is expensive), because once government low level employees start to accept bribes, your country is fucked.
The idea is that if you repeat "fraud, waste or abuse" it wont matter whether it is teue or not.
And to be fair, the tactic of repeating lie worked of conservatives wery well in the long term.
>> means-test social security
Why would you means-test insurance? A means-test is for something like welfare, not insurance.
Remember way back in Feb 2025 when a bunch of people were claiming that Elon and Doge were going to fix the national debt?! I recall a lot of skepticism from some to the notion that Elon had zero interest in reducing the defecit and wasn't even trying.
> Moody’s said it expected federal deficits to widen to almost 9 per cent of GDP by 2035, up from 6.4 per cent last year, owing to increased interest payments on debt, entitlement spending and “relatively low revenue generation”.
Yes, and this was extremely predictable. Hopefully once the disaster gets a bit more clear more people will see what's happening.
Thing is, Musk actually did find some savings. It’s just the admin plans to pass massive unfunded tax cuts that will make those savings a drop in the ocean.
It’s almost like destroying state capacity for “woke” causes like foreign aid and science was the actual goal, rather than getting the budget under control.
Source this. What savings did he find that were savings and not just cutting programs ideologically?
People don't seem very good at that stuff these days. Back when Bill Clinton was president they did a pretty good job at reducing bureaucracy and bringing down the deficit but now it seems all clown show.
I'm a fan but Bill Clinton was sweeping away a lot of cold war apparatus that no longer seemed necessary. It's going to be a lot harder to do anything sustainable or worthwhile with our current system without entitlement reform.
I remember Bill Clinton made some significant changes to entitlements in terms of unemployment benefits. At the time it was kind of low hanging fruit. I'm not sure what you'd go for these days but the US medical system seems massively expensive and somewhat inefficient.
Or, you know, we could roll back the massive tax cuts passed since his presidency.
In the last half century, every Republican administration (except George Bush Sr.) passed huge tax cut bills, and for some reason, everyone here acts as if they are some edicts from above that cannot be touched.
It's like the federal government quit its tech job to go work fast food and became convinced the only solution to its debt is to start living in a tent under a nearby bridge rather than try getting the tech job back. The current administration's policies are similar to selling off the tent and using a newspaper for cover because it would rather start panhandling than continue working a real job.
People forget that every transaction has two parties. Someone's debt is another's asset. The national debt is mostly owned by Americans. That means the national debt is an asset to the private sector. This is the way all money works because money IS debt.
The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government. The only reason to downgrade is if there is a real risk the US government will collapse and cease to exist for political reasons. There is no fiscal risk.
The deficit hawks don't understand how money works. The real concern is private debts, not government debts. But you never hear about that in the media.
> The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts.
Right, but it isn't like the government controlling the money supply is some sort of get out of jail free card. If it was, why would the government even have debts? US could just pay off all the debt right now.
If the government starts printing money to pay interest on or pay off our $35+ trillion dollar debt, that will cause inflation, which is like a regressive tax. If the government doesn't start printing money, then a greater and greater share of our tax revenues go towards paying the interest. Neither of those outcomes seem particularly good to me.
Debts in the private sector have other downside like economic instability, but it seems to me that private sector lending is responsible for a lot of great economic developments (of course including our little VC funded corner of the world).
The government doesn't need to sell bonds, but does for practical reasons. It provides a safe asset for wealthy people and organizations. If you haven't realized, but banks only insure accounts up to $250k. There needs to be a safe mechanism to store more and treasuries serve that purpose. Also bonds help drain bank reserves! Selling bonds actually slows down bank lending and reduces risk taking in the banking sector. Also too many reserves make monetary policy from fed ineffective.
The national debt is simply all the money the government created minus the money it destroyed from taxes. Another way of thinking about it is it's national savings.
The boom and bust cycles happen because of private sector debt cycles not government debt.
So is it your assertion that if the government decided to stop selling bonds (because let's say it no longer cared about those "practical reasons") and just paid off all the debt by printing money, that doing so would NOT cause high levels of inflation? Or that it would, but that high inflation is not a problem? Or that the status quo of ~20% of tax revenues going to interest payments is not a problem?
I guess I don't see the great societal benefit of the super wealthy a safe asset to park their wealth in, but I do see the societal harms of government borrowing (mentioned above).
Bonds are just money that pays interest. If you exchange interest bearing money with money that doesn't return interest, you tell me what you think will happen.
It’s extremely well known what happens in this scenario: When governments start printing money like nothing matters and there are no consequence, the currency collapse into a hyper inflationary death spiral.
You act like that interest payment is just a technicality or something. It’s not. It’s a market rate that reflects the world’s belief in the soundness of the currency and government.
Throw that away and it all comes crashing down.
The US doesn’t exist in global isolation. We still buy things internationally as inputs to our factories and to make everything work. If we start a hyper inflationary currency death spiral where the government prints money out of thin air as a solution to spending problems, the value of our dollars becomes progressively less, hence the inflation. Then we all, including the government, have to spend more of those dollars, so the printing increases, and it becomes a self-reinforcing cycle.
This entire line of thinking that it doesn’t matter is basically quackery. It has been tried. It does not work.
Interest rates will fall but beyond that it's very non-obvious what will happen. Money becomes a hot potato? Cashflow-generating assets get bid up to extreme valuations? Speculative assets like crypto gets carried along for the ride? An increase in private borrowing, the money supply, the velocity of money, and inflation?
On the other hand, the government debt interest burden goes down, which means a slowdown in the growth of the base money supply (even while borrowed money increases). Perhaps this slows long-term inflation, but that in turn might mean inflation driven by growing private debt and speculative malinvestment swings well past equilibrium and turns into a bubble that pops into eventual deflation.
I've already outlined that in both my posts above: inflation. You don't think so?
How would swapping interest bearing money for non interest bearing money cause inflation? If anything it would force people to chase yields and you will get a boom in prices for other assets. But that money isn't going to be used to buy t-shirts, electronics, and cars because it's mostly owned by rich people and organizations.
> The national debt is simply all the money the government created minus the money it destroyed from taxes. Another way of thinking about it is it's national savings.
The national debt is all the money spent minus money collected via taxes
If a government starts printing money like nothing matters, we already know what happens: Hyperinflationary death spiral. The government gets money to spend, but it crushes the value of the currency in the process. In crushing the value of the currency, they then need to print more money for the next round of spending, which further devalues the currency, which accelerates the cycle.
> If you haven't realized, but banks only insure accounts up to $250k.
If your bank isn’t politically connected enough. See Silicon Valley bank failure.
If your money is at BoA/JPM/Wells Fargo/Citi/US Bank/etc, I’d bet the $250k limit turns out to be fictitious and all depositors get bailed out.
It's not "just 250k." There are different classifications that the insurance covers. For example, a trust account (considered any account with a beneficiary listed) should cover 250k + 250k per beneficiary, with a cap (might not be implemented yet) of 1.25m.
In addition to that, most FIs purchase some form of excess share insurance to cover deposits beyond the 250k.
You would need a very large amount of deposits at a single institution to run up against the insured limits. If you are ever concerned about that, you can reach out to your financial institution(s) and ask them if you have any uninsured deposits.
> Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government.
> The deficit hawks don't understand how money works.
I’m afraid it’s you who doesn’t understand how national debt works. The US government doesn’t have infinite leverage to do whatever it wants with its currency with no consequences. We have to sell our debt on the public market. If we start acting like we’re going to pull currency tricks as the way to fight the debt, the interest rate we have to pay on the debt goes up quickly.
As it goes up, we have to pay more every year to service the interest on that debt. If we’re in a situation of high budget deficits the only way to service that additional interest charge is by issuing more debt, which turns into a debt spiral.
Waving it all away as a non-issue is a severe misunderstanding of the threat.
Anyone who has played a Paradox economic/war sim understands this. Lol
This is really weird take.
If you were to just erase private sector debt, not much happens on a socio-economic scale. If a company is owed money, but at the same time owes people money, the debt on either side is cancelled out.
With government being the actual source of money, if it owes a lot of money, it has to "print" it, which is exactly how you historically get inflation, which then causes rising prices. This literally happened during Covid.
Lets also not pretend that the current administration actually understands anything about economy either.
>There is zero risk the government couldn't pay it's dollar debts if there is still a US government.
The real concern is not that the government cant pay it, it is that the government has to pay it out of revenue alongside obligations, leading to runaway inflation and economic damage.
In theory, governments can run on new printed money. It just makes for a terrible market to conduct business.
High inflation wipes out currency denominated debt holders and creates a terrible environment for investment and contracting.
It increases transaction costs to a level that is often prohibitive.
> In theory, governments can run on new printed money.
Anyone who thinks this is an infinite money glitch for governments should see what has happened when other governments have tried it. Hint: Search for “hyperinflation”
If you just start printing money to spend it, the currency crashes in value, which necessitates printing even more money to maintain the same level of purchasing power, which crashes the currency even further. It’s how you end up with people paying for bread with trillion dollar bills. Sure you can keep printing that money, but acting like it’s a cheat code or even a positive thing is to ignore all of economic history.
Yep, I have lived in a country during such a hyperinflation, when all the ordinary people, including myself and my family, have lost their entire lifetime savings.
Initially, my salary as an engineer has decreased quickly in value to the equivalent of $2 per day. Then, for a long time, my salary has been approximately doubled every month, so that by the beginning of the month it was worth the equivalent of about $2 per day, but by the end of the month it was worth only the equivalent of about $1 per day.
Before the hyperinflation started, I had saved all the money for buying a new car. Unfortunately, I had not predicted what would happen, so I have not closed a deal quick enough. In a few weeks you could no longer buy even a TV-set with that money. A short time later, you could barely buy some decent food with it.
Buying some electronics or programming book could require the salary for 2 months. Funny times.
I think that was clear from my post. I never said it was a cheat code, I specifically discussed the consequences.
Inflation only correlates with money supply growth if there are real resource constraints, otherwise you just get new businesses and services. Also people also tend to save more when they can, which takes money out of circulation.
I am not sure what you mean about saving money.
When there is inflation, nobody can save anything, because the value of any savings decreases too quickly.
Everybody who has made prior savings loses them, unless they predict the inflation and buy something valuable, like real estate, with all the money they had.
As long as there is excessive inflation, any money earned must be spent immediately, before losing too much value. For ordinary people and small businesses this makes it very difficult to buy expensive things, because it is hard to save money for that and credits may become too risky.
That's one possibility, but it depends a lot on where the money gets injected and where the inflation happens. If it balloons real estate prices before wages catch up, you don't necessarily get that growth of investment into productive areas. Instead it gets more expensive and riskier to start a business, with higher rent payments, and meanwhile a lot of asset-owners retire on their newfound wealth. It gets harder to convince lenders and investers to put money into real production when speculating on land and collecting rents starts getting such good consistent returns.
What about the labor market? Where are you getting more workers given unemployment is extremely low and the current administration is against immigration?
That should lead to salary increases which could lead to inflation.
It's funny when I see people laugh at the abject failure of credit rating agencies to properly forecast the real estate credit bubble of 2007, then when the political stars align, they go all in with "the credit rating agencies said it so it must be true".
The two theories that are competing right now are the:
* Dollar "Milkshake" Theory: the dollar (and treasuries) are so in demand that it kind of doesn't matter how far into debt we go, because the point is that treasuries are mostly used for financial collateral, not for earning interest payments. So whenever there is a crisis, there will be a rush to the dollar, not away from it.
* Traditional Fixed Income valuation: that fixed income buyers care about real returns, and will penalize nations that get themselves into situations where they must either default in actuality, by refusing to pay their debts, or by effectively defaulting (in real terms) by inflating their currencies to the point of writing off their debts.
I understand the argument from both perspectives, and I understand that politics can easily lead to defaults that don't technically need to happen. I still have no idea which of these two theories will prove more accurate going forward. I generally consider myself pretty fiscally conservative, so I tend to lean toward traditional theories of fixed income.
The biggest thing supporting the US market (debt and securities) is that there is nowhere for that money to go, absent absurdly large changes.
If this happens (50/50 I think over the next twenty years) then it will be slow, and then sudden. I suspect a lot of high income US citizens will start caring a lot more about Social Security at that point.
I mean, alternatives already exist to the SWIFT network: CIPS (China), SFMS (India), even the INSTEX (Europe) system is in place if a European system were needed quickly.
Insofar as "where the money goes," the sovereign bond market is huge, and if the milkshake theory is to be believed, finding and alternative is just a coordination problem that could be effectively solved by a few large actors.
If the traditional theory is to be believed, downgrades from ratings agencies should simply facilitate the movement of folks leaving treasuries as a risk-free rate. This does introduce currency risk (though it existed already), but we may simply move to baskets of securities of we don't end up on a single currency to carry bonds in general. There is also the "store of value" vs "transactional" aspects to currencies, and the dollar may become more and more transactional and less useful as a store of value and/or collateral. If that's the case, I wouldn't be surprised if there were not more "asset inflation" if that's even a useful term.
I agree with you that it should be slowly and then all at once, because if the US is going to default or debase, nobody wants to be the greater fool.
> whenever there is a crisis, there will be a rush to the dollar, not away from it.
And yet during the current crisis there was a rush away from the dollar.
Remarkable how quickly they were able to break that historical invariant.
Meanwhile Fox News posted that akshually Trump had a cunning plan to lower interest rates by tanking the stock market temporarily so that the bond refinance this year would be more affordable.
This is “hold my beer” economics in action.
It's always someone else's fault.
I was wondering how long it would take before Trump targeted Moody.
I'd wager that's a significant portion of the reason Moody's tried to spread the blame across multiple administrations: They know the current one is thin-skinned and prone to illegal retaliation.
Lol he attacked Walmart because Walmart said they're raising prices in response to the tariffs.
I think the real reason is a Walmart heir put out an ad encouraging people to be civically responsible which Trump admin saw as defiance to him. Plus I assume they aren't bribing Trump like the tech bros are.
They weren’t in the front row at the inauguration. But I think they’re much less vulnerable than tech companies.
The elephant in the room is that the US had been operating as the chief architect and manager of the global economy for the last 80 years, a role that made it the wealthiest and most powerful and most technologically advanced nation on the planet. Under Trump the US has voluntarily relinquished that role, and we're seeing lots of these little adjustments as the system flails as it adapts to it's previously steadfast leadership contorting erratically. But the real damage done isn't about credit ratings or trade agreements or Trump's ridiculous kidding-not-kidding tariffs. It's about a different power settling into the role as the indispensable trading nation, and one that prides itself on its stability and unopinionated economic cooperation. In other words, we're hosed.
Tragically hilarious from an outside perspective that a leader sees all the expense of the soft-power the US has paid so much for as "freeloading". Either you are the world leader and invest to stay in that position, or you're just one of the pack.
Only a few idiots and fraudsters in the US see it like that.
I've seen multiple people even on Hacker News agree with that position since the start of February.
This is one of those topics where people like to sound smart.
Economics and global financial systems are ridiculously complicated. Anyone claiming to predict the future is full of it.
And right now they're magnetically clustering to the top.
Takes only 1 driver to crash a bus full of people.
77,302,580 of them it turns out.
They just VOTED your guy in, can't be that few.
And they voted him in twice
> Under Trump the US has voluntarily relinquished that role
I would argue the process was started under Obama, and continued under Trump and Biden. What caused that shift is an interesting question in itself. My theory is that once Obama won on the platform of limiting US foreign involvement, the writing was on the wall and the politicians after him all became isolationist as that seemed to win elections.
The difference is that Trump, an incompetent populist he is, doubled down on the process so much that it became a very conspicuous mess.
I suspect we'd be living in a completely different world if John McCain was elected in 2008.
Incompotent populist is certainly right for this group since none of his policies are actually for the population but for the very elite group he protects who stand to benefit the most from his policies.
For Moody's or any other agency, do they have any real insight on credit worthiness?
I would have just assumed that if you're another big financial institution you're doing your own research.
Is it that orgs below a certain size need these people to help tell them what's going on?
I would have also assumed anyone who holds an important amount of US treasuries does their own research and doesn't need to listen to any of these agencies?
What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?)
Indeed, these were the same people that were reporting A+ on junk bonds back then, weren't they? Why are they even still around?
https://www.theguardian.com/business/2017/jan/14/moodys-864m...
> these were the same people that were reporting A+ on junk bonds back then, weren't they?
Fun fact: those AAA securities paid out. We have obvious endogeneity issues with the bailouts. But the evidence is strong that even absent the bailouts, those senior tranches would pay out.
The problem was that most AAA securities are both highly solvent and high liquid. But these proved solvent but illiquid. That caused issues when their owners tried to dump them. But Moody’s rated solvency, not liquidity.
Wow this is a fun fact, and you seem to have a lot of knowledge in this space! Where could I learn more about this?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3159552
It was honestly a shocking finding at the time. But loss ratios (2.3%) were just within historic norms for what someone buying something rated AAA would expect [1], and to my knowledge, the losses presented as restructurings not outright defaults as is commonly imagined in popular retelling of the financial crisis.
[1] https://www.federalreserve.gov/publications/april-2021-dodd-...
Wow this is truly amazing. Unfortunately I suspect this will never become common knowledge, the conventional narrative just "feels" so correct. Thanks for the link!
There's a huge trend here, and in general comment sections online, where if you made a mistake, even a catastrophic one, then as an organization you are useless.
Moody's has been in this game a long time, I'm sure they're not perfect, but also being wrong once doesn't mean you're always wrong.
Doesn't anyone here think the US recent economic instability merits a reduction in credit rating? We have a massive amount of debt (we borrowed to pay something like $800 billion in interest on our debt last year) and are essentially betting on our rocketship economy to offset our enormous debt in the future. The latest economic turmoil does cast a bit of doubt on that ability to pay off this huge debt later on no? I mean, isn't that a reasonable conclusion, regardless of whether you hate Moody's or think they are stupid?
I mean everyone has opinions, but isn't it actually verifiable that in aggregate Moody's gives accurate ratings (not just for US treasuries)? If not, why would anyone use them?
“Cover your ass” as a service. For example, when all those taxpayer funded defined benefit pensions invested in risky subprime mortgages, they can throw their hands up and say “but the credit rating agencies said they were well rated”.
Of course, they were kind of right because a federal government bailout was waiting in the wings.
Moody’s isn’t taking a radical position. They’re adjusting to a consensus position rather than being an outlier.
It’s no secret the USA fiscal path is unsustainable, the Fed has said the same.
They are indeed, Moody's ratings are Junk Ratings.
They are grandfathered in as an oligopoly because by law many large funds are prohibited from investing in securities below a certain credit rating.
Additionally, if you are on the other end (the one getting the rating), you pay the credit agencies for a rating so that buyers of debt will buy it. It's basically required that you have a rating if you want to issue debt.
It's a racket in some ways with a ton of bad incentives and inefficiency.
Kind of like a lot of things.
> do they have any real insight on credit worthiness?
Yes. You can look at default rates by initial and proximate rating and see clear information.
> in light of the housing crisis proving they weren't providing any value at all?
Name me one AAA-rated security that defaulted. They were downgraded. They lost paper value. But to my knowledge, they didn’t default. (Those who held them did well [1].)
[1] https://www.nber.org/digest/aug18/evaluating-role-credit-rat...
> What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?)
A significant amount of retail and institutional investment still use these ratings as a guiding indicator.
Not everyone does due diligence. If you have ever worked for a corporation, you know that they love cutting corners. And one corner they'd happily cut is time on due diligence - even if it causes a crash later on. It is not a problem for this quarter.
>Not everyone does due diligence.
I don't think it makes sense for every single person or company considering investing in Company XYZ to do their own, separate due diligence on XYZ. The information they each would uncover is the same.
It's a lot more efficient to pay a ratings agency to rate XYZ once. The tricky part is getting the incentives right so that the ratings the ratings agency produces are accurate. (There already is a reputational risk incentive pushing towards doing this the right way, but as we saw in 2008, there are other incentives pushing the other way, and they might often be stronger.)
Another way to ask the question is how wrong would they have to get it before people stopped relying on them?
The interesting aspect to me is that they are not a government department- they make these ratings as part of a profitable business model. It's not like they keep chugging along no matter what.
It just seemed like that during the housing crisis the businesses seen to be putting their "ok" stamp on everything would have been the first to go down.
Who though? Institutional would never defer to just these agencies
There’s actually a ton of places that rely on those ratings - like insurance companies need at least a certain rating in order to write in certain states.
> anyone who holds an important amount of US treasuries does their own research
Public pension funds are notoriously incompetent at such analysis.
Didn't we lose this about a decade ago during the 2013 government shut down where the Republicans were threatening to miss payments and we got knocked down to AA-? I was wondering if we ever got it back to AAA.
There are three ratings agencies and the other two downgraded but not Moody's (until now)
Not to be overly pedantic but there are more than 3. It's just 3 that are commonly used in asset management (S&P, Moody's, Fitch). Others include Morningstar DBRS (Dominion Bond Rating Services - rates primary Canadian debt issuers). Kroll is another one (used to be Duff & Phelps).
Was gonna say, I thought this already happened last year...
I wonder if this will trigger a sell of in bonds, there's a common story that some investors are only allowed to invest in triple A bonds, and AFAIK this was the last of the big three still holding it for the US.
> some investors are only allowed to invest in triple A bonds
The usual language is two out of three. So any investor who had that language and hadn’t gotten around to amending it to exempt Treasuries had already been forced to sell on the second downgrade.
TIL, thanks!
The reality is that the current trajectory is not exactly sustainable. So, for once, Moody seems to be doing its job. As to where they were for the past decade or so ( lets charitably say they were still trying to figure out where things land post 9/11 ), when all those issues were allowed to fester, is not exactly a big secret.
The simple reality is that US will need to go through a period of pain to correct some of those excesses. It will not be fun for anyone, which is why there is so much effort put forth to kick can down the road.
And the part that really gets me is that congress is discussing cutting taxes, fed is being pressured to lower rates.. as if all those things were not at least a factor in the mess we are in now.
The reality is taxes must go up, and the bond market will force it to happen. You can’t keep issuing debt forever to steal from the future for today when all of the evidence points to lower future growth.
Voters might be unsophisticated, but the bond market is not.
> Bond vigilantes, who can bring fiscally irresponsible politicians to heel by unloading a country’s debt, may rear their head if Congress doesn’t show any appetite to bring the federal deficit under control.
https://usafacts.org/government-spending/
https://finance.yahoo.com/news/bond-vigilantes-killed-trump-...
https://ghpia.com/wp-content/uploads/2024/07/Investment-Insi...
<< Bond vigilantes, who can bring fiscally irresponsible politicians to heel
I don't want to give people ideas, but at the same time this is not exactly new to anyone following that set of news. During last EU fiscal crisis, EU came up with a novel approach to handling bond issues. Haircut[1].
[1]https://www.sciencedirect.com/science/article/abs/pii/S10575...
Treasuries only receive the favorable yields they do because they were considered the safest asset in the world. Any indicator of potential haircut is going to cause a rapid (further) loss in confidence and a spike in yields, leading to a debt spiral. This is why there was a fear of the implications of DOGE controlling the Treasury payment system (BFS), potentially leading to non payment and default. The capital markets are built on a foundation of trust. If you want continued access to capital (and with debt at ~123% GDP, it should be obvious that the US has no choice but to have continued access to the bond market), you must respect the trust relationship.
https://www.cbpp.org/research/federal-budget/doge-access-to-...
I will admit that, at the time, I did not see EU debt holders accept it, but accept they did. I know that cultural differences in US may require a different approach that go beyond PR spin ala 'temporary refund adjustment' since there is money on the line, but I can't help but wonder if it is not coming anyway.
https://www.brookings.edu/articles/what-are-the-risks-of-a-r...
https://www.jpmorgan.com/insights/markets/top-market-takeawa...
https://www.pbs.org/newshour/politics/how-a-debt-default-cou...
Taxes must go up, on our shrinking young population (right as we deport more and more immigrants and dissuade new ones from coming here). Great, Japan here we come
https://www.visualcapitalist.com/a-visual-breakdown-of-who-o...
“For reference, the total net worth of all U.S. households is close to $160 trillion. The rich half (top 50%) own about $156 trillion (or about 98% of it). The poorer half only own about $4 trillion. Breaking down that top half even further, the top 1% (1.3 million families) owns about $49 trillion (or about one-third of the total share) by themselves. And going even further, about half of that $49 trillion is owned by the top 0.1%. That’s only around 136,000 households and includes all of America’s wealthiest people.”
Tax wealth, not work, roughly speaking. With that said, stagnation is inevitable due to demographic dynamics. Historical economic prosperity was because of a demographic dividend that won’t be repeated in our lifetimes.
https://news.ycombinator.com/item?id=43861997 (citations)
Wealth is taxed, there’s just a ton of loopholes.
It should be illegal to borrow with stock as collateral. This makes tax avoidance really easy for wealthy people.
Nobody needs as much wealth as the top 1%. Limits and incentives need to be put in place to essentially create a luxury tax.
Stock buybacks should be disincentivized. Companies holding so much money in cash sitting on the sidelines (Apple) don’t stimulate the economy.
The US has an embarrassing amount of money, it’s just all manipulated away from the market and the people.
> The US has an embarrassing amount of money, it’s just all manipulated away from the market and the people.
Well if the people consistently elect the wealthy to govern, would that not be the direct result of the wealthy looking after their interests?
The logistics can be argued elsewhere, I’m simply saying that is where you can tax; there is nowhere else of material value to. The majority of US households can’t even afford to survive, let alone face a tax burden.
> For the bottom 60% of U.S. households, a "minimal quality of life" is out of reach, according to the group, a research organization focused on improving lower earners' economic well-being.
https://www.cbsnews.com/news/cost-of-living-income-quality-o...
https://lisep.org/mql
Oh, I wasn’t disagreeing with you or trying to argue anything. I agree with your points.
Some countries have a net-worth tax. Here are Switzerland's rules and tax rates.[1] There are few exemptions. The canton of Geneva charges about 0.9% of net worth per year.
[1] https://fidulex.ch/en/swiss-wealth-tax/
We have the worst possible people in government for the financial environment the US is in.
Not only are we already in a bad place with government spending/debt given the new world of high interest rates. We’re just going to blow many trillions of dollars worth of new holes in the budget.
Then throw in the endless tariff stupidity and it’s all just bad, bad, bad.
Why is the phrase "reduce spending" never anywhere to be seen with these awful takes?
The only solution is for the Gov to stop spending money it doesn't have. I don't know how you can insinuate that de-industrialization and taxes are a viable strategy without addressing the root of the problem. It would be like telling someone with a gambling problem that spending more time at the casino and less time at work would improve their finances.
> Why is the phrase "reduce spending" never anywhere to be seen with these awful takes?
Because the government was running a surplus under Clinton and then decided to cut taxes and low and behold there's been a deficit since.
Because the major categories are very hard to cut:
Social Security: 22% Interest on the Debt: 14% Medicaid: 14% Medicare: 14% National Defense: 13%
That's 77% of the budget in those categories.
Everything else is 23%. The Federal deficit is ~25% of receipts.
You could cut each and every function of the government other than the above and still be left with a deficit. And there isn't a lot of room to cut everything else, as they've already been squeezed for decades.
Everyone has their pet projects is a part of it. I tried saying that we will need to raise taxes AND reduce spending and lemme tell you, it did not go over very well. Hell, in my home state of Illinois, in the face of federal cuts, our brave leaders tell us we should brace for increases to offset those 'losses'.
Both need to happen, and people hate both. The data makes it clear though, taxes are low, spending is high both in comparison to GDP. Any argument you can do one and not the other is insane.
> Any argument you can do one and not the other is insane.
Challenge accepted :).
The argument for lowering spending and lowering taxes is that the size of the economy and the tax base are inherently tied to tax rates and economic growth. Historically, federal tax receipts have hovered around 17 to 18% of GDP since the end of WWII, regardless of the tax rate[1]. Deep spending cuts paired with high taxes might increase the percentage, but it would be of a smaller economy, shrinking the overall tax base and making the debt ratio worse.
I don't know if that's true and I don't think we'll find out because the Republicans in Congress appear to be going for option C, lower taxes and larger deficits. The Democrats are in disarray and reflexively taking a contrary position, but even if they were in power I don't think this would be much of a priority. I think we get to see how far we can go. Maybe we'll beat Japan's debt to GDP ratio or maybe a failed auction or some debasement. The future has a lot of exciting possibilities.
[1] https://fred.stlouisfed.org/series/FYFRGDA188S
One person's "spending money they don't have" is another's "failing to levy adequate taxes on the rich".
Republicans (and probably most Democrats) will never allow the Pentagon's budget to be cut. Much of what's left are various social programs. Average Americans are already barely hanging on, if you cut the social programs then people will get (even more) desperate which tends not to lead to positive outcomes.
Raising taxes to eliminate the deficit is how you convince the average person that spending cuts are required.
There's little reason for a good chunk of the US, insulated from the true cost of spending, to favor spending cuts.
No one is insulated. If it isn’t taken from people directly, then people feel the spending in price inflation. Every time the government spends, they issue a treasury. That treasury is then used as the backing for loans from the FedRes to members banks. Those banks then lend a multiple of that.
The real issue with spending cuts is that the public will not accept any reductions to entitlements, the poor won’t accept cuts to welfare programs, and the donor class won’t accept cuts to military spending. This means there’s zero political will to fix the situation.
Most people are quite isolated because things like inflation are indirect. Seeing the link between inflation and spending is hard when it's easier for the average person to just see covid or greed or trade wars or simply fed policy and assign blame there.
The direct link between spending and taxes is far easier for people to understand.
So instead, raise taxes by 20+%. Setup automatic tax adjustments to cover spending changes to ensure the debt shrinks every decade.
I think you have it backwards. An average taxpayer has no reason to not be in favor in spending cuts as increases in that category translate to higher taxes. In other words, they don't need convincing. Your premise seems flawed.
because "reduce spending" sounds nice in a vacuum (sure, there are a lot of things our government spends money on that i don't agree with) but in reality it usually plays out as a cynical ideologically-driven misdirection with little basis in the needs of the country and the people inside it.
spending is a good thing. roads, schools, healthcare, research funding - we need these things in order for america and its people to thrive.
our representation just has this awful aversion to increasing taxes on those who can actually afford to bear the increases.
Research, roads, and schools do not make up a meaningful percentage of the federal budget at all. Healthcare makes a decent chuck with Medicare and Medicaid, and those badly need reform as many people receive aid who are fully capable of paying costs themselves. Social Security, defense spending, and debt service are the other big ones.
Ultimately, no idea what will happen when debt services consumes all tax revenues. This will come in the mid-2030s at the current rate. I figure that the Fed will just suspend the requirement of Treasuries and debt payments, print like crazy, and the USA will look like Zimbabwe.
The actual problem with healthcare is not that the wrong people receive it for free, but that it costs about 20 times as much as it should. Fix that, and they can easily afford to give it to everyone for free.
Its a catch 22.
If the government stops spending money on programs, it looks bad.
If the government raises taxes, it looks bad.
Essentially people don't understand this, which is why grifters like Trump got elected who promise the impossible, make the economy seem good for 4 years then once shit starts going down the Dems win and have to deal with the outcome, which then they get shit for not being able to fix.
Standard & Poor's and Fitch downgraded US credit years ago. Moody's is late to the party.
I take this as a signal they think there’s no way the other two are going to raise theirs again, and are maybe worried one of those will downgrade another step in the near future while Moody’s rating is still high, which might look bad for them.
The rating is also a reflection of what the rest of the world believes about the future of the US government. It's not solely about the numbers.
Note how Moody's says directly that Trump's policies will increase government spending (by a lot, I might add). They also's directly state it's Trump's tax policy. Not anything else. Trump is the direct reason the US' credit rating drops. Yet another reason to state the obvious: Republicans, and definitely not Trump, care about the US's debt or low taxes.
This should be no surprise. They've been talking about "balanced budgets", but ever since Clinton actually balanced the budget, they yell about balanced budgets in Democratic presidencies (which reduce the deficits), and then in Republican presidencies they cut taxes without reducing revenue.
Yeah but it's still amazing just how much Trump wants to give to himself and the rich. The "tax cuts" (which aren't tax cuts, they're entirely debt financed, which republicans keep telling me isn't a tax cut) he already did in 2016 were, per year, slightly less than social security + medicaid. If this Moody's report is to be believed the now-planned tax cuts will be more than social security + medicaid.
So Trump wants to TRIPLE social security and medicaid expenses ... with just 2/3 going to him and the rich.
The US now has a lower credit rating than Microsoft:
> The Microsoft corporate credit rating is AAA and Aaa by Standard & Poor's Rating Services and Moody's Investors Service Inc., respectively.
https://www.microsoft.com/en-us/investor/faq
the corporate credit rating scale is different from the sovereign one. That said, msft credit has traded through govt bonds multiple times. So arguably the market-based rating system agrees with you (even though the ratings agencies dont neccessarily)
Microsoft is smarter and handles it's finances better than the US government, so fair enough
But they lack the power to raise taxes, and print money. Also an army.
Windows tax anyone?
I am going to throw copies of windows 98 disks into the Boston Harbor.
Dunno 'bout that, King William III had an army and navy in 1696 and controlled the Royal Mint that issued coin.
It's an interesting aside that the Windows tax in great part was driven by revenue loss resulting from coin clipping.
Parent did not provide a link, but apparently there was a historical tax on actual windows: https://en.wikipedia.org/wiki/Window_tax
Back in the 90’s there was an explicit “sovereign ceiling” policy at the rating agencies.
I guess they’ve that rule.
It'll be interesting to see what happens.
https://www.spglobal.com/ratings/en/research/articles/240704...
What does this mean for the laymen around here? I'm the laymen if I'm not being clear.
A direct, easily defined consequence is that you pay more taxes because the US must pay higher interest rates on vast amounts of money it borrows.
It also creates instability generally - in the economy, business, socially, politically - because unreliable US government finances can destroy all those things.
It means US instruments of debt are to be considered a little less trustworthy. This affects their price, value and attractiveness versus alternatives.
The US can issue currency to cover debt obligations. There should never be a situation where debts wouldn't be paid, the problem can just be printed away. The idea that the people who can print more money and pay the interest just wouldn't do it, out of what, spite? Incompetence? Seems pretty bad.
The fact that one party is always behind this financial profligacy, and the US keeps putting it in charge, probably means that the US' debt rating is still much too high.
> idea that the people who can print more money and pay the interest just wouldn't do it, out of what
Self preservation. Have we already forgotten what inflation does to incumbents?
Most likely the question isn’t ’can they pay’ but ‘can they be trusted to pay’
The stories only 3 paragraphs.
> “This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” the agency wrote.
It's that moody is grading on a curve.
If you issue currency you invite inflation (at least according to most economists), and there's an argument that it's better to screw foreign debt owners rather than make people who elect you unhappy.
Not all of them. There are TIPS which are inflation linked US treasuries. About 7%-10% of the total issuance, apparently. It would be higher but for unfavourable tax treatment.
Curious as to why this comment got downvoted.
From my basic understanding, this is indeed true. At the cost of rampant inflation, the US can simply print more currency, inflate away historical debts, and not have to default.
If the Moody's credit rating is a measure of the stability of the asset, then a downgrade makes sense. If its to measure the likelihood of a default -- it does seem unlikely the US would simply default.
But maybe there's something I'm missing
What you are missing is fairly straightforward. Inflating away debt is a form of default. People don't want to lend you money when that is how you plan to pay it back -- same outcome as a default. I guess you could do it once but only if you plan to not borrow again.
The second it happens all new debt will either be extremely expensive or not denominated in dollars.
Doing it is the end to the dollar backed global financial system.
Intentionally inflating a currency to pay down debt is effectively a de facto partial default, even if it's not de jure.
But what if most of the world currencies have the same issue? Will this de facto partial default as bad then?
What if? Sure, but there is little reason to expect that to happen.
Then you see the collapse of the global economic system as credit crashes and nobody can effectively transact business.
If you cant trust a currency, you have to revert to much more cumbersome and limiting contracts. e.g. loaning cash today to be repaid in gold tomorrow.
Furthermore, the undesirability of a currency severely limits the ability of governments to maintain economic stability.
It's true. Maybe, the consequences of doing so are so drastic and would ripple throughout the globe such that getting pennies on the dollar for debt obligations may be a more attractive approach but still a loss for creditors?
That's correct, but that also imply negative interests in inflation adjusted dollars. Isn't that included in this score?
Unfortunately, even in games, infinity money can only get you so far.
The bonds have a face value and a rate. That is what has to be paid. The fact that the money being used to make the payments might not be worth anything is a risk borne by the bond holders, but there will be no default.
However, if this becomes apparent, it will become increasingly difficult to find buyers for new bond issues.
<< there will be no default.
Heh. You have a point on a technicality, but I can assure you that people, who lend other people money would likely be a lot less technical about it. In other words, the default may be a shorthand for 'immediately unable to borrow more at the previous rate', but I suppose it is not as catchy.
Rollover will stop working. New debt issued to retire old debt
At the end of the day we either reign in the debt or the currency collapses and we're forced to reign in the debt. On a long timeline there is no way to not reign in the debt.
The US is effectively the world's bank. Everyone saying the US needs to cut its debt is basically saying, "The most successful bank in town needs to stop taking deposits," which seems like bad business for a bank. The debt is just the sum of deposits.
The problem isn't the debt, the problem is a lack of imagination/ambition in finding good investments for the capital that's being handed to the US. Saying the debt should be cut is saying "We're terrible at business, don't have good ideas, you all need to find smarter and more responsible people to entrust with your capital. We plan to underachieve."
banks make money on investing their on their deposits, governments do not.
The US Govt quite famously makes fuck tons of money investing on its debts
no it doesnt. Intragovernmental debt is an IOU to yourself with interest.
The remainder is an IOU to others with interest. Neither is an investment with returns.
I dont make money running up my credit card or withdrawing from my retirement and promising to pay it back later
Here's an example of how the government invests: the government uses the revenue from bonds to build a bridge. That bridge delivers returns on the investment in the form of tolls. These pay back the bonds with interest and continue to pay dividends to the government.
Another: the government uses bonds to build core infrastructure for a city. That infrastructure allows businesses to set up shop in the city. The business activity yields tax revenues, which pay back the bonds with interest and continue to pay dividends long term.
Multiply that by hundreds of thousands to millions of investments in infrastructure, people, services, etc.
That is common misconception, and far from the norm. Financially productive investments are a negligible part of the budget.
22% Social Security
14% Debt interest.
13% General Health
13% Medicare
13% National Defense
11% income security
5% Veterans Benefits
3% Education
2% Transportation
Most is a cost center, not revenue center. Keeping grandma alive isnt an investment. In fact, it incurs even more costs outside the budget.
Government spending = investment is a very poor heuristic. Most is simple consumption, the way buying a nice dinner is consumption, not an investment. That isn't to say it cant or shouldn't be done. The point of having money it so be able to enjoy nice things.
It is just important to not get lost in the sauce and forget the difference. Someone is always ready to argue a nice dinner is an investment because you cant work tomorrow without food. That makes it an expense.
(Nitpick: Bond revenues don't pay Social Security, Social Security pays Social Security. Bonds are actually bought with Social Security revenues.)
The rest of these investments in the citizenry do pay dividends. Not every investment is a simple matter of buying something which spits out money immediately. Spending on health and education is a long-term investment which returns higher tax revenues. Paying for national defense and caring for veterans is simply paying ourselves, that money continues circulating and yielding tax revenues. Even debt interest is paying ourselves! Most of the debt is internal, which just circulates the money around in the economy. Only something like 20% of debt is foreign owned, and that revenue still often comes back to us in to form of rolled-over bond purchases and trade.
In closing, the national debt is only a problem when we stop circulating currency. We can make the debt a huge problem by suddenly slashing productive investments in the deluded belief that we're a poor family which has racked up a big credit card bill.
RE SS: Social security has already crossed the point where SS expenses exceed SS tax revenue [1]. Interest on bonds purchased with SS tax revenue are paid out of general tax revenue.
I see two issues with what you said. First, what matters is the expected return and whether it's prositive. I can sell you an "investment" that pays dividends and raises revenues, but that doesn't mean it is net positive economically. I can spend $100 to raise revenue by $0.01 for 10 years. Is that an investment simply because some nonzero level of return?
Second, waving away debt as internal ignores the fact that interest recipients and payers are different. A family with a big credit card bill is also domestic debt and circulation. That is little consolation for the family spending an increasing portion of their budget servicing the debt, nor is it consolation that the money is being circulated by their banker paying their housekeeper. The internal "who" matters, especially when some people can run up the credit and check out before the bill comes do.
https://www.ssa.gov/oact/STATS/table4a3.html
While I do not agree with it the common argument against indiscriminate money printing is inflation. Given that we are exiting an inflationary period and likely entering another it will be interesting to see what they say this time.
All the talks about US national debt being "unsustainable" rings hollow, when you consider that Trump did everything to tell debtors that the US government is no longer a trustable entity and lending it money might be a bad idea.
In other words, Trump made sure that the US debt situation is unsustainable. I don't know if it was sustainable before Trump (seemed pretty stable to me), but whatever the situation was, Trump made it infinitely worse.
To me this is just another example of Republicans saying the government is broken, when what they really mean is "because we will make it so."
Guys, we have predictable problems -- namely deficit. And "unpredictable" problems (such as covid and the great financial crisis). So I think US cannot even control the predictable problems that are within our control. What do you think will happen when the next unforseen crisis hits? Sadly, the government's main responsibility is to minimize the likelihood and cost of so-called "unpredictable" problems, yet through the actions of DOGE and similar regulation cutting zeal we're only increasing their likelihood and making the outcomes worse. Moody's is doing us a favor by calling our debt A- (or whatever), it's in fact junk at this point. We're one crisis away from complete bankruptcy, which is bound to happen thanks to reckless governance.
PS: See how Clinton/Bush Jr's deregulatory policies were a major contributor to the great financial crisis. See how Trump took over a pandemic playbook and office from Obama, only to disband it upon arrival. If the federal government won't even try to protect us from systemic risk, who will?
If only this could have been prevented /s
Moody's is in what is, currently, a hazardous line of business. Whatever their accuracy (their performance leading up to the financial crisis in 2008 didn't particularly lend them any credit) the reality is that they are certainly likely to be the target of informal (browbeaten in the media) and formal (investigations undertake by various agencies) actions in the short-term. They've unleashed a shit storm upon themselves the likes that they have probably never seen before. Some late night posts on Truth Social are likely to be imminent.
Since the other 2 of the 3 major rating agencies had already made this downgrade...I guess they're all targets and all that already happened to them?
I don't believe that either Standard & Poor's or Fitch downgraded the U.S of its triple-A credit rating during the current administration so they're relatively immune to any attack. Moody's is a "victim" of bad timing.
... and if they don't give their honest assessment, they are making themselves obsolete anyway.
My only question is how high to let markets climb before buying long dated protective-puts
The US can only default on its debts in some kind of fit of self-destruction (by choice). Any amount of debt is "sustainable".
I'm not even sure why moody's bothers.
Last time around this led to reduced borrowing costs, so good news, I guess.
I would have expected that a worse credit rating would result in higher interests rates, what happened last time?
Worse credit rating is bad economic news. When there's bad economic news, the market tends to 'flee towards safety', and that means selling risky investments and buying treasuries. When the market is moving capital to treasuries, borrowing costs are reduced.
(Doesn't always happen like this, and may not have happened like this last time, but it's not uncommon)
> flee towards safety
The search term is "flight to quality", and Matt Levine was writing how it was a bit broken recently due to GOP messing around.
Incorrect.
> Fitch Downgrade August 1 2023
> SPY around 455 fell to 433 from August 1 to August 18
> By October 27th SPY bottomed around 410 (-10%)
> From August 1 to October 23, US 10y yield went from 3.9% to 5%
Stocks went down and bond yields went up last time. The Federal Reserve raised the federal funds rate from 5-5.25% to 5.25-5.50% during the same time period.
Oh, I missed 2023. Was thinking of 2011 or whenever.
The 2011 one was reported more widely since it was the first agency to downgrade Treasuries, and in that case borrowing costs did go down.
You seriously think a reduced credit rating is good news? Or is it another flip attempt to ignore consequences, like a teenager who survived DUI - 'I got there even faster, so it worked pretty well'.
People's insane desire to borrow at ridiculous rates is what got us here...
> Last time around this led to reduced borrowing costs
Last time Treasuries were unambiguously a haven asset. That correlation was broken on Trump’s liberation day.
Altogether, I’d be surprised if this downgrade has a material impact on financial markets. It’s much more interesting for the House.
This time it’s about owning the libs and making some serious money on inside trading. Everything else is secondary. So it will play out differently.