Questionofthe Month June2012

							                          Questions of the Month
                                June, 2012
Question:
We hear a lot about debt levels of $15+ trillion but the disinformation put out by
both sides is hampering my ability to understand the scope of the crisis. China, as
I understand it only holds $1 trillion, the largest amount of our debt by foreign
nations, but I keep hearing that the U S Treasury holds $10 trillion. I am a bit
confused by the whole thing, so could you clear up the facts for me?
Does the US Treasury hold $10 trillion of our debt? If so, can't we just write it off?
Or is there something I'm missing? Is the debt a huge problem as Republicans
suggest or is it a minor issue like the Democrats assert due to our government
holding the bulk of it? Why do Progressives both in Congress and the economists
like Paul Krugman scoff at the notion of our sovereign debt and call for more
spending? I keep hearing that at some point the world will just forgive all the debt
from each other and start from scratch (sounds crazy but you hear it).

Answer:
A government that indicates in any way that it will not be able to pay its debt, or
will not make interest payments on its debt, or won’t be able to repay money
borrowed from the Social Security Trust Fund, is a government that would crash
the stock market and economy overnight. Therefore, no government—least of all
the US government—is going to “just forget” about its debt. The US will try to
maintain credibility for as long as it can by making interest payments for as long
as it can (unfortunately, by borrowing and printing more money, which will only
make things worse later).
Krugman and others have a point: austerity does generally lead to recession,
whereas deficit spending can mitigate a recession. The problem is, if you're going
to spend your way out of a recession, you have to pay down the debt when times
are good. This hasn't happened, instead the debt has grown. And eventually when
things take a turn for the worse, the additional mounting debt becomes a very
major problem. (Think of someone who has run up a huge credit card debt and
then suddenly faces a big pay cut.) Although, they don’t say it as such, Krugman
and others believe the money the government is borrowing or printing is
essentially money from heaven.
On the other side, the people who say the debt is our fundamental problem are
missing an even bigger part of the story. It is not the debt itself, but our inability
to repay the debt that is the problem. As any business or family knows, borrowing
money to make money is fine, while borrowing money to lose money is not. We
did not and are not doing much to boost real productivity in the United States,
which would have given us the real economic growth we need and grow real
wealth (not Bubble Economy wealth). Productivity growth is the core problem.
Back to your questions about the debt… Here are some numbers that might help:
•We now have about $11 trillion in public debt
•Add to that another $4.7 trillion in intra-government debt, of which the Social
Security Trust Fund is owed about $2.65 trillion
•That give us a sum of $15.7 trillion in total real debt
We will pay on this right up until we can no longer do it. At that point, all the
bubbles will pop.

Question:
I continue to hear and read articles that one should wait until 70 years old before
beginning to collect Social Security. With the impending debt problem and how
the government will need to address it, it seems to me one should start taking
benefits when they are 62. Your thoughts?

Answer:
In the past, it made very good sense to not take social security at 62, unless there
was an issue of poor health, because the payments are greater the longer you
wait to collect. However, now we generally suggest taking Social Security
payments earlier. Approaching and during the Aftershock, rising inflation will
mean that your Social Security payments – in inflation adjusted dollars – will
decline in value. In addition, these benefits will likely become means-tested,
which could disqualify you. And there are also the usual time risks: the longer you
wait to receive something, the great the risk of not living long enough to get it. So,
with all that in mind, taking Social Security payments earlier is generally a good
move.