Do We Really, Really Want To Pay Off Our Debts?

November 30, 2010


Last year America spent $3.5 trillion, collected $ 2.3 in taxes, giving us a deficit of $1.1 trillion for the year. We are currently projected to have another $1.2 trillion dollar budget deficit in 2011 and for many years to come.

Our current “public” debt (amount the Treasury owes through note and bond sales) is $13.7 trillion (with a vote to raise this amount coming in the next few months.)

To pay off our debts, we would have to balance the budget (cut spending to the amount we receive in taxes) which would require cutting the current budget by $1.2 trillion or 31%; plus, $1 billion more to begin to make payments on the debt of $1 billion per year.

At a repayment rate of $1 billion per year (and maintain a balanced budget), we could pay off $1 trillion of the debt in only 1,000 years and the entire debt in only 14,000 years. (with a budget surplus of $1 billion per year)

I know this is simple math and doesn’t take into account the drop in GDP that would result from a drop in government spending or any reductions in taxes, or new wars or?

If we chose to pay off the debts by raising taxes, we would have to move all tax rates up by 48% if we adhered to budget projections. For example, the lowest tax rate, 10%, (income up to $16,750) would go to 58% and the top tax rate, 35% (income over $373,650) would have to move up to 83%. Assuming everyone paid, that would cover the deficit.

Here are three other possible choices we have:

1.Default (government reduces value of dollar significantly)
2.Inflate our way out of our debt (keep printing dollars, like we are doing now) until we can pay back the debt in near worthless dollars
3.Grow our way out of this problem by rapid GDP growth (but we would have to go back to a capitalist economy to get entrepreneurs, technology and productivity going again.)

Which choice do you think we will end up taking? Which choice are you preparing for?