Federal Debt Visualized

From a bunch of emailers, this is a fun set of graphics.

  • KD

    First of all I wanted to say I really enjoy your blog and writing. I just disagree on how the US government spends and taxes so I wanted to comment.

    On the other hand the debt could comfortably fit in the space it took to write this comment (15,000,000,000,000). If we were still gold-standard based these sorts of visuals might be more than curiosities, but dollars, as well as pounds, yen and Swiss francs) these days derive their value from the government's ability to tax. If the government's finances were anything like a family or company, then the debt would be a concern. As it stands the government never has or doesn't have dollars and they have no need to borrow in order to spend or pay back any debt. It's as ridiculous as saying that United Airlines has a huge frequent flyer mile debt or that they need to borrow miles in order to pay them out. EU countries have given up their currency sovereignty so they are a different story.

    Clearly the government can overspend and giving each citizen 1 billions dollars tomorrow would cause hyperinflation, but we're a long way from that point right now. Federal taxes extinguish currency and deficits fund savings. Where do dollars came from in the first place- there's no money tree that sprouted them all 250 years ago. Think about how you would start a new currency tomorrow if you suddenly became supreme ruler of America. If we wanted everybody to pay in Coyotebucks, the government would first have to spend them for people to have any to spend themselves. Then the only way you could give them value would be to require them back at the end of the year. Otherwise they'd just be pieces of paper. If you wanted people to spend at all you'd have to run a deficit. That's extremely simple, but it's basically how these things function in real life.

    Governments tax in order to carve out room for themselves to spend and not cause inflation. Reasonable people can disagree on the level of government we need, but that's a political argument. The economics of it is that a currency issuer like the US can never run out of money and with todays unemployment rate and capacity utilization rate as awful as they are, there's lots of room for extra spending. My preference would be for a complete payroll tax holiday on both sides until the economy starts showing signs of life, but again reasonable people can disagree.

  • peter

    KD
    I disagree with you on the way currency is created. It is not a simple matter of a new government prints it and the people will use it. It has to be accepted by the people as a place holder for something of real value. In the beginning when we were on the gold standard the government got people to accept paper currency by guaranteeing them a known weight of gold for every dollar issued. You go farther back and it was the people themselves that created the original currencies. Tokens were used by traders to indicate the number of cows or goats that could be collected at a separate location because it was a lot easier to go to the market with a bag full of tokens that it was to bring your herd of cows. My point is that currency is created by the people not the government. While the government might be able to use force to collect taxes from you they can not force you to be in possession of their state issued tokens at the time they come collecting. There is nothing the government can do to set the value of their tokens other than limiting the number of tokens issued. It is the people that decide if their chicken is going to be traded for one dollar or ten. And that price will never be disconnected from the value of the other farmers cow. When the people refuse to use the state issued currency the government is forced with what is now hopefully a tough decision: to ignore the tax on the bartered trades or to imprison the people. After all when your bartering for food there is nothing else left to collect but the persons life or liberty.
    In regards to your coyotebucks, If you became supreme ruler of america tomorrow and printed all of these coyotebucks and then wanted to build a bridge it would take the consent of the contractor to start accepting coyotebucks in place of a more familiar currency. If they refuse to work for coyotebucks what is the government going to do? enslave them?
    I believe that we got off of the gold standard for one purpose: so that the government could have more control over inflating the economy. When gold was backing the dollar inflation was limited to the rate that gold could be extracted from the ground. If the government overspent it was a long slog to get out of debt. Without that standard inflation is just a matter of policy. The government and other debtors are the only beneficiaries of an inflationary economy. The government being the biggest debtor has the most to gain by inflation. By being both the debtor and the controller of inflation the government has the benefit of being able to pay 50 cents worth of value for every dollar of value the private sector was providing. The only protection the people have from the government inflating to the point of getting a lot of value for very little in return is by charging interest to the government. After all people will no longer work for the government if the currency being paid is worthless. In order to avoid the contractors setting the interest rate the government has to pay them, the government issues bonds at set interest rates. As long as people are willing to buy these bonds the government has the money to pay the contractors before the contractors charge interest. When the people tell the government that they can issue no more bonds (ie the debt limit) then the government is limited to two choices. Cut their spending to live within their means or "print" money to pay debts. The latter of course leads to rapid inflation which has historically toppled governments. Now if the people didn't limit the amount of bonds to be issued there is the same problem when nobody wants to buy the bonds being issued.

  • T J Sawyer

    Journalists should refrain from ever using both of the words billion and trillion in a single story. For example, "a 700 billion dollar bailout and a 1.5 trillion dollar deficit." Use of a single term, as in "a 700 billion dollar bailout and a 1500 billion dollar deficit for the current year" gives a much clearer level of understanding of such things as cause and effect!

    Of course, if the journalist's objective is to actually obfuscate and conceal ...

  • KD

    Hi Peter,

    I think you're right on in most of your points. Governments did go off the gold standard to have the power to inflate and currency in and of itself doesn't have any value without a bit (or a lot) of coercion behind it.

    That's all to say that currencies have value because the state requires them to pay taxes. Switzerland is surrounded by Euro using countries and their economy is a tiny fraction of the EU economy, but there's still a robust demand for Swiss Francs. Why?, because the government of the highly productive Swiss economy demands them as taxes. Otherwise it would make a lot more sense for companies there to just start using a foreign currency- there's a much bigger market and it would be easier for them to just use euros. Japan's debt is monstrous by any standards, but they're experiencing deflation and near 0 interest rates. So, as long as the US government is able to enforce it's taxation policies the US dollar will continue to have value. People can't just decide not to use it, so long as the tax man still comes and he has the cops behind him.

    I think you may be a bit off in how you're looking at government debt and spending though. Debt for a currency issuer doesn't mean the same as it means for a family. If I run up too big a debt there's a day of reckoning when nobody will lend me more and I'm bankrupt. That's what's happening to Greece, Ireland and the other EU countries that are currency takers. They have to have tax revenue in order to pay back their debts. The market is pretty sure they can't do it so their interest rates are soaring. The US, Japan, the UK and so on are different. They are currency issuers and so can never fail to meet any obligation denominated in their own currencies. There's no solvency risk, just inflation risk. They don't need to borrow a penny to spend and as long as they can tax, there will be demand for dollars.

    I know you understand that based on your comment on money printing, but I think the implications are where we're not on the same page. I definitely agree that the gov. can't just throw around money and give it out thoughtlessly.

    However there's a middle ground between such obvious irresponsibility and an old fashioned gold standard. Basically a government funds the private sector's desire to save. The government budget deficit equals the private sector's savings rate to the penny (with the foreign sector thrown in)- that's not theory by the way, it's basic accounting. When Clinton ran a surplus the savings rate crashed. It was simple math, it had to. Now savings is shooting up because people are both saving more and paying off debt while at the same time the deficit is going up. Again it's simple math, they have to balance each other out.

    What a good government should do (and I know that's not the kind of government we have) is to run a deficit that funds desired savings and funds full output for the economy. Right now people's desire to save and pay down debt is so large that it's causing real economic pain and a huge unemployment rate. If the government steps in to fund that savings and also allows enough consumption to let the economy grow, I'd argue that's a huge benefit for everybody. The alternative is for a massive contraction, more businesses closing, way more layoffs and a painful regrowth from a much smaller economy. In other words the government, through their unlimited ability to spend, can keep a financial crisis from taking the real economy down with it. I think the best way to fund it would be for a payroll tax holiday so people who are actually earning money now can save and spend more in the most productive ways.

    The government is currently contributing 150 billion dollars a month to the economy. If that goes away on August 2nd, we're all in pretty deep trouble.

  • Matt

    KD & Peter;

    The value of fiat currency lies not in the power to tax, but in the declaration of legal tender.

    For example, in the US the dollar is legal tender for the payment of all debts (not just taxes). This means that while your local grocer is free to accept or refuse payment in goats, gold or any other non-currency medium if he so chooses, if you offer to pay in dollars and he refuses to accept them then he has commited a crime. It is literally illegal to refuse payment made in US currency within the US.

  • Peter

    Matt;

    have you not seen those signs saying we do not take bills larger than $20. This goes against your point that they cant refuse. Just because it is illegal to refuse doesn't mean they wont. Additionally in a hyperinflation scenario whats to stop them from tying the price to the computers clock if you want to pay in dollars? That way they could program in the needed inflation rate based on the exact minute the product was sold.