Episode 9: The U.S. Government's $18 Trillion Debt Problem

the US economics reporter in DC with Bloomberg News. I'm with my colleagues inco hosts Dan Moss, our executive editor for International Economics here in d C with me and Akiedo, our editor for Benchmark in San Francisco. Hello, Tory, how's it going. It's going. You know, it's pretty it's pretty miserable weather here and just waiting for a debt deal to come down, so you know the usual. Well, this has been another very exciting week in the global economy. Um, Dan,

what's cut your eye over the past week? I was looking at the Ali Baba earnings released yesterday. The general nar clity of was that Ali Barbera hit it out of the park. Sales were up by almost a third despite a slowing Chinese economy, Defying the slowdown overcoming the slowdown. And yes it's true China's headline GDP is slowing, but the mix of what's driving Chinese growth has changed dramatically

in recent years. Services now accounts for more than half consumption, which is what Ali Barbera is is doing pretty well, getting stronger, exports getting weaker, manufacturing getting weaker, fixed their sets, investment getting weaker. So it's not that Ali Barbera overcame

the slowdown. Ali barber is the Chinese economy. Yeah, that's a great point, and that's also a great plug for our second episode on the Chinese financial market crisis for people who haven't digging to listen to that show yet, which I get out tor, what's been interesting for you? Yeah?

I want to share from services to goods. We got the Advanced Trade report this morning, so that be Wednesday morning, and before your eyes glaze over, I swear it's interesting the US merchandise trade deficits, so for goods it actually shrank um and that was due to higher exports. Shipments of goods to overseas customers climbed two point four percent,

which is the biggest increase since March. And this is great news because you know, we've talked in many episodes about there being a strong dollar and that being bad for manufacturers here because it makes them goods more expensive to foreign customers. Some of that may be starting to abate, which would be excellent news for our economy. Well, you, guys, I wanted to talk about the deal that the White

House made with Republicans. They reached this deal late Monday night to raise the eighteen point one trillion dollar debt ceiling and thus prevent the US government from de fall thing on its debt. So yeah, the government was able to avoid a lot of potential chaos with with the steal. But first let's introduce our guests. John Steel Gordon, a historian and author of the book Hamilton's Blessing, The Extraordinary

Life and Times of our National Debt. Hello John, Hello, I'm glad to be here for people who are listening and are like I know that the death ceiling is a big deal, but I don't quite know what it is. Tori. Can you can you give a quick explainer on what exactly this mysterious term is. Yes, I will do you one better. I will define a couple of terms. So we have all our ducks in our own. So the debt is just the total of federal budget deficits you

know throughout history, minus federal budget surpluses. That's all of them put together. Now, the deficit is just how much spending exceeds revenues in one given fiscal year. And that's that's sort of easy to imagine as a consumer, how much you're spending versus how much you're getting in. So you can have a surplus and it's still to exactly for for one year. You can have a surplus and they're still debt exactly. UM. Now, the debt ceiling is the legal limit on how much total debt the government

can issue. And that's not just the amounts borrowed in credit markets, but also insecurities treasuries issued to UM other parts of the government for example, John, how many countries have a debt ceiling? Is this a unique situation here?

It's it's the only one that I know of, UM, And that may be because we have a presidential um form of government as opposed to a parliamentary form of government where the where the government and the parliament are essentially one and the same, and so they don't need a debt ceiling. Why do we have it in the first place, and what are the pros and cons of it? Well, the death ceiling. Before nineteen seventeen, Congress authorized all issue

of debt. If the Treasury wanted to issue you know, a billion dollars worth of treasury bonds, that Congress had to say, Okay, you can spend it on building bridges or whatever. And then in nineteen seventeen they put a limit on the various forms of debt. I mean, how many Treasury bills, how many Treasury notes, how many Treasury

bonds um the Treasury could issue. And then in nineteen thirty nine they established the debt ceiling, and you know, the total debt cannot exceed this number without Congressional permission. This seems like it was just kind of a control measure, like Congress wanting some measure of control over what the Treasury is doing. Yes, um, that's that's the point of it. But of course, if Congress appropriates money to spend um, and then it has to provide the money to do

the spending. And if you don't don't have the you know, tax revenues coming in, and you have no choice but to borrow the money. So it's kind of a you know, dog chasing its tail kind of a thing. John, Was it always this contentious, No, not usually. It's in the last UMF twenty years that has really gotten heated, and especially under Obama. How do you account for that? Well, I've I think partly it's the American politics is polarizing.

You know. It used to be used to have liberal Democrats and conservative Democrats and liberal Republicans and conservative Republicans. You don't anymore. Old Democrats are liberal, Republicans are conservative. Yeah, And for our listeners, let's just sort of establish where we are in the In the debt ceiling talks in Washington, UM, the Republicans and the White House came to agreement, az Aki said, And so now it's got to pass both

the House and the Senate. UM. Our congressional reporters say that will probably happen in the House sometime Wednesday today, the day we're recording, and then it'll have to go to the Senate for approval as well. And they have until November three is our deadline. Basically, that's before the US gets very close to defaulting on its obligations, which would be an extraordinarily bad scenario. Let's back up a

little bit here. When I first learned what the debt ceiling was, I was astonished, because every year Congress decides on the budget, you know, it decides on how much it wants to spend and how much approximately it's going to take in and revenue, and then decides, uh, these are the bonds that we have to issue in order to borrow enough to actually be able to spend that

amount of money. So they already decide on all of this, and then later they also have to go through this thing where they authorize the amount that the of the total total debt of the government. And it just seems like this very weird thing where you already say that you're going to spend this amount and you already decide on it, but then you have to go through this separate process of then getting approval to do all of that all over again. It's so confusing to me, very bizarre.

Probably has something to do with getting good headlines the next morning you can spending John, do you think things would be better if we just got rid of this debt ceiling altogether or if we just kind of tried to meld it in together with the budget making process. Yes, I do, because I think it's now become a political football, um, and it doesn't serve any purpose other than to get politicians to get good headlines the next morning, which is

of course half of politics. I guess every every year when this issue comes up, it does give us a good chance, though, to reflect on how much the US government owes to everyone else, both US citizens and US businesses and companies and individuals around the world. Tori, do you want to give us a quick primer on what this debt looks like? Now? Yes, sell debt comes in many different shades, and there's many different labels for the different kinds of debt. So I'll walk through a couple

of them. So, the US public debt subject to limit, which includes um even debt that is accumulated when parts of the government borrow or lend from or to other parts of the government. So that amount right there is eighteen point one trillion dollars right now, and that's right at the limit that is the debt ceiling right there. That's a lot of money. Yeah. Then we have the US public debt held by the public, and this is uh, this is more often used by economists. This is what

people are really concerned about. And this is thirteen trillion dollars um. To give you some context, before the recession um in December two thousand seven, that number was five point one trillion dollars. So we've we've more than doubled that level since then, and you know that has to do with revenues decreasing during the recession. Also, you know we spent to try to get the economy going back

up again, so we've definitely seen debt balloon recently. Let's put these numbers into some kind of perspective, because taken in and of themselves, they sound stratus eric. But how is the US doing relative to other major economies? Is that a lot of debt? Is it average? Is it not very much? It's well above average. We're currently about a hundred and three hundred four percent of g d P.

There are countries in worthshape. Greece is a hundred and fifty eight percent, Japan is about a hundred and seventy four percent. But Japan, the Japanese are very thrifty people, and the Japanese national debt is almost entirely internally held. The UK is around ninety percent, Frances around eighty six percent. These numbers have all been getting steadily worse over the last um several decades, and it's important to look at these debt to GDP ratios instead of just the absolute

amount in trillions of dollars. Because your economy produces a lot every year and you have some amount of debt, that's totally fine. But if your economy doesn't produce a whole lot, but the debt size is actually a lot, that's when you're kind of in trouble. But on Japan and Act, you may also be able to provide some perspective of this. Shouldn't it to GDP of the magnitude that John does just described If you believe half of what's said about the US debt, shouldn't that be leading

to a catastrophe in Japan? Yet Japanese bonds are in more demand than ever. The country is not falling apart. Why is it such a big deal. So part of the reason why people aren't panicked about Japan right now is because, like John said, most of the debt is actually owed to its own citizens, its own companies. So when the death's kind of internal like that, you're just it's kind of like you're pushing money around within the

same country, it's not that big of a deal. Whereas when you have foreign investors, that's when things get a little bit more worrying. That was the case for Greece, that was the case for Spain, etcetera during the European sovereign debt crisis. UM. But at the end of the day,

this is really about market psychology. You know, investors can really wake up tomorrow and decide that the US or Japan or any of these other countries just aren't trustworthy anymore, and that's when interest rates go up very quickly and you quickly tumble into a financial crisis. I suppose they could. But don't you think comparisons with Greece and Spain are somewhat exaggerated. I mean, here in the US, we or you do actually control your own currency. That's not the

case in Greece and not the case in Spain. John, what do you think of those comparisons, Well, I think that's perfectly true. I mean, we are the reserve currency and that is a huge economic advantage for US UM and there's no other country that really could provide the reserve currency at this point, so we're very lucky in that regard. So we're okay for now. Well, we can afford the debt right now because interest rates are extraordinarily

low and have been for several years. But if they go back up to normal rates, suddenly the interest on the debt is going to be eating up an awful lot of tax revenue. How worried should we be about the size of the US debt? I think we should be moderately worried about it. It's not a crisis, but it can quickly become one. And what are we borrowing this money for. In the nineteenth century, we use the

national debt to save the Union, you know. In the nineteen thirties we used it to save the American economy. In the nineteen four Days, we used it to save the world. What have we spent this all this money on? In nineteen seventy the national debt was of g d P. Today it's over and we've had no great war, no great depression. But we do have an aging population. We do have an aging population, but it's not as bad

as say Japan is at the moment. And so what we've basically done is we have borrowed money from our grandchildren so that we can enjoy it today. And you know, don't forget today's borrowing is necessarily tomorrow's taxes. We're taking this money from our grandchildren so that we can have a nice lifestyle. When I when I talked to an economist yesterday, John Nale over at LPL Financial, he told me that when he talks to clients UM and investors, the debt is the number one question that people have

for him. It is the thing that people are most worried about. Do you think that's why that is? It's just this whole feeling that it's getting unsustainable and it's getting out of hand, and it jeopardizes serve the U S as we know it, and just kind of curious why they would be so worried about it. Why that's the first question. Well, I think one thing is that this could this could suddenly become a crisis, very very quickly.

It's again it's psychology. I mean, in the nineteen seventies, New York City trotted on down to Wall Street and asked to borrow more money. UM and Wall Street just said, sorry, we're not lending the City of New York any more money. And suddenly it was forward the city dropped debt. Fortunately, the State of New York bailed out New York City and put it under strict control. I mean, one thing they did was required New York City to keep its

books according to generally accept at accounting principles. It would certainly help if the federal government had to do that. What they don't. You know, you know those surpluses we had in nine, two thousand, two thousand one, the national debt went up every one of those years. Now, how can you be running a surplus and yet you're debt is increasing? It was phony bookkeeping is how you do it. And the phony bookkeeping ended in two thousand and one. No,

that's when we slipped into deafic set again. Now the phony bookkeeping goes merrily on, and you know, we borrow money from the Social Security Trust Fund and we call it income. Now a corporation did something like that, the management would all be watching each other's laundry and club fed. I'm wondering. You know, this is a conversation with a lot of numbers and a lot of vocabulary. That's pretty difficult. Talking about sovereign debt is not my favorite thing in

the world, because it's so complicated. But if you're a normal person out there, if you're like a normal American citizen, Um, why should you care about the debt ceiling? And why should you care about the US debt? I think the debt ceiling is they don't care about it. Most people don't care about politics, and people who do care about politics find that absolutely incomprehensible. But ninety percent of the

American people don't like politics very much. It's sort of now they deal with it as much as they have to, sort of like nobody likes going to the dentist, but we do. Anyway, I can personally attest to that. Well, I'm wondering, John, what do you think Alexander Hamilton's would have said if there was a time machine that he teleported into modern day America and saw that the US debt is now around eighteen trillion dollars and that the

debt ceiling becomes this huge political debating point every year. Well, I mean, Alexander Hamilton's said that you know that the national debt, if it is not excessive, will be to us a national blessing, and it has many times proved to be exactly that we could not have won the Civil War without it. Now what Hamilton's who died in eighteen o four, would say about twenty fifteen, I think he'd be probably more interested in things like airplanes and

television and ray idea and what have you and snapchat. Right. There are a number of prominent economists, such as Paul Krookman, though he's not the only one who would say, with interest rates the slow ought we not be borrowing to invest? What would hamilton have made of that? Well on thing, about one third of the national debt turns over every couple of years UM, so it wouldn't be very long before if interest rates go back up to normal, when the amount of tax revenue needed to service the debt

would go straight up. And then you know, either we keep borrowing um and pretending everything's fine, or there has to be drastic tax increases which would certainly slow the economy, or there's going to have to be big government cuts which would also slow the economy. So we better to do something about his starting now. But I wouldn't hold my brand well. I want to end on a light note. Have you seen that Hamilton's and musical yet? I have not? Um, I hear it's very good hip hop. Not exactly my

kind of music. I'm more Rogers and Hamistan musical type. Um, but everybody was saying it said it was absolutely great. Yeah. I saw it a few weeks back back in August and it's it's amazing. I am going to plug it. I'm gonna say that you should watch it. The hip hop is it's very well done and uh it's hilarious to boot. So on that note, thank you so much for joining us. Thank you, and thanks to all of you for listening to Bloomberg Benchmark. We will be back

next week. You can find us on Bloomberg dot com, iTunes, Podecast, SoundCloud, Stitcher, and many other places. If you're on iTunes, please take a moment to rate and review the show. That really helps other listeners discover us and let us know what you thought of the show. You can reach us and follow us on Twitter at Daniel Mass, d C, Tori Stillwell and Akio seven. See you next week.