"Amazingly enough, the U.S. can still grow its way out of the massive debt we’ve taken on. I know … hard to believe. But it’s true. The power of compounding is truly inexorable, and it’s amazing what a steady 3.5% growth rate on a huge economic base can do to make manageable even trillions of dollars in debt."
Oh, the irony. In an outstanding article about the dangers of magical thinking, the author slips into magical thinking. The power of compounding is indeed truly inexorable. It's also exponential. It doesn't matter how big the economic base is - a 3.5% compound growth rate will always be defeated by a 7% compound interest rate on borrowed money. Or a 5% one. Or even a 4% one. Always. It's just mathematics. The higher rate will always run away from the lower one. At a certain inevitable point, the unit time growth in the higher rate will exceed the growth of the lower rate. In economic terms, that's when all your output goes just to interest payments.
Someone made a really interesting point a while back, I don't remember who - that the economy needs deficit spending, because it creates those T-bills. They're the safe investment of last resort. Think of the triangle of risk/liquidity/return - US bonds are the lowest risk except for actual cash, with very high liquidity. If US Bonds fail, it's because the entire economy collapsed. The dollar would be worthless, the government no longer in control. If you don't trust stocks, real estate, gold, etc, then T-bills are for you.
Take away the deficit spending, and you take away the safe haven for money to retreat when things start destabilizing in the higher-risk categories. So all the "magical thinking" economics that starts with the assumption that deficit spending is evil and we should have zero deficit? There are consequences beyond the taxpayers paying interest here.
Not to mention, the social security surplus is entirely invested in those bonds and has been for 80 years or whatever. They'd have to figure something else out if there were none for sale.
More like 1%. Sometimes the rate is higher than inflation, since 2008 it's been lower.
The point is that SS administrators would rather lose a small amount of value than put that giant-ass lump of money into the market. It creates risk, and more importantly, creates a situation where the government is manipulating stock prices with their picks due to the massive size of the trust fund.
No, but keeping the economy working is part of Congress' mandate. If zero deficit would actually harm the economy, then it's irresponsible to push for it.
Oh, the irony. In an outstanding article about the dangers of magical thinking, the author slips into magical thinking. The power of compounding is indeed truly inexorable. It's also exponential. It doesn't matter how big the economic base is - a 3.5% compound growth rate will always be defeated by a 7% compound interest rate on borrowed money. Or a 5% one. Or even a 4% one. Always. It's just mathematics. The higher rate will always run away from the lower one. At a certain inevitable point, the unit time growth in the higher rate will exceed the growth of the lower rate. In economic terms, that's when all your output goes just to interest payments.
That's not very manageable.