But... but... I read this report!

Yesterday I mentioned that Moody's just made a fool of themselves by mentioning the possibility of the U.S. defaulting on the federal debt. At which point you might start nattering, "but ... I read this report where the *interest* on the federal debt was going to be 50% of U.S. GDP in 2050!"

Yeah, I've read some of those reports too, and get laughs and giggles out of them. These sorts of scare reports make various assumptions that are pure asshattery:

1) They assume that Medicare spending will continue going up and up and up until it consumes half the GDP of the country. That's as ludicrous as the notion in 2005, expressed to me by a supposedly sane real estate loan officer, that real estate prices would just keep going up and up and up because "everybody needs a house!" so he didn't have to worry about morons who could not pay back liar loans, he'd just foreclose on their house and flip it for 20% more than he originally loaned out. Clearly that was not true, and the same is true for Medicare spending -- at some point, the majority are going to say, "Enough, we simply will not allow Medicare to consume more GDP", just as the majority eventually said, "enough, we simply are NOT going to continue buying overpriced houses!" Medicare spending simply cannot continue going up forever any more than real estate prices could.

2) They assume that current tax policies in the United States will continue into perpetuity. In reality the United States has the lowest taxes of any major OECD economy and its current tax policies cannot and will not continue into perpetuity, at some point U.S. taxes will have to rise towards the OECD mean if the U.S. is to continue to be a major economy rather than a Mexico North with a broken infrastructure and a broken government.

3) They assume that there will be no (zero) GDP growth for the foreseeable future and that the current economic downturn will never end. Reality is that the current economic downturn is unlikely to last more than a few years and there WILL be GDP growth, if only because U.S. population is still growing and per-capita productivity is still improving.

4) They assume that inflation will remain at 0% and thus the current debt will not get deflated by inflation. Reality is that the U.S. has often in the past deliberately inflated its currency in order to deflate its debt load, though rarely openly doing so.

5) They assume that the U.S. government will not outright monetize some of this debt. Remember that GDP growth is going to require a growth in the monetary base in the first place in order to prevent deflation (see Milton Friedman, monetarism, school of). The general way this is done is for the Federal Reserve to, err, monetize federal debt by buying Treasuries.

In short, there's a lot of ASSumptions that these kinds of scare reports make, and if all those assumptions come true, federal debt is the *last* thing we should worry about because if all those assumptions come true, millions of Americans will be starving in the streets, all government services will have collapsed, chaos will reign, and the U.S. will have effectively ceased to exist as a viable entity. At that point the interest on the federal debt becomes the *least* of our worries...

In the end, these reports are fiction, of the sort of "if this keeps on" vein as the science fiction future histories of Ray Bradbury and Larry Niven. Like all science fiction they're useful as reminders that what we are doing now can't be sustained, but we already knew that. As predictions of the future, however, they are likely about as accurate as George Orwell's 1984 was -- funny, I don't seem to be living in some grey dreary impoverished tyranny as predicted by Orwell, what about you?

-- Badtux the Fiscal Penguin