Fed up with uncle Scrooge’s smugness Donald Duck decides to take his uncle and show him real wealth, so he takes him to the biggest ranch in Texas. The ranch owner starts showing them the almost Herculean dimensions of his ranch, really silly stuff, to the astonishment of Donald Duck and the indifference of uncle Scrooge who says nothing but only take notes. At the end they are shown a very small exit door, in contrast to the big entrance, where people who entered with a big head exit with a humbled disposition.
At this point Donald Duck expects his old uncle to exit humiliated at the great wealth just witnessed, instead he congratulates the rancher on his success and demands payment for the loan that the rancher took to buy the magnificent ranch; humbled by this revelation Donald exits from the small door.
Which brings us to the subject of this post: Paying off debts. There are a number of people who have been echoing, on the internet, Ron Paul’s plan of “paying off” the US national debt, which stands at $9 trillion at the moment (twelve zero’s); I have two objections to this wonderful plan: first no country has ever paid its national debt, second where do you get $9 trillion from.
Let us say, for the sake of argument, that we want to pay off the debt so we calculate an amortization table. We will use half the federal budget to pay off the debt, and let us use the latest Bush budget of $3 trillion. Let us say the average interest rate paid on the debt is the same as 2006, which is 4.5% and that this average remains constant.
Now we can expect the budget to decline as the revenues decline, because spending half the revenues on paying off debt instead of investing in the economy will mean the economy will have to run twice as fast just to stay where it is. We will set the decline at 10% per year, thus our yearly payment will decline by the same amount.
With these assumptions paying off the national debt will take 14 years and the cost would be $2.4 trillion (see graph). By then the budget would be $0.514 trillion, and if the ratio of the budget to the GDP remains the same, as now, then the GDP should be $2.3 trillion, one-sixth the amount today!
Of course if the federal government pays off the national debt, then local governments should also pay off their debt, which means a national system of ‘tax & don’t spend’ would replace the current system of ‘don’t tax & spend’. It would be a great system for the creditors of the US and its competitors: the creditors would be repaid and the empire will gracefully and timely withdraw from the stage of history and commit national suicide, leaving just enough money to pay for its funeral!
If the US had any intention of paying off its national debt it wouldn’t have spent trillions arming itself to the teeth, it wouldn’t have 14 super-carriers at the cost of a half trillion $4.5 billion per ship! We are so late into this story that there is only one course of action left: Forward at all costs! Like a crowed surging forward into an abyss: if one goes forward he falls into the abyss and if he tries to stop those behind him will crush him; doom is inevitable!
Libertarians who think that it is still possible to pay off the national debt should follow Donald Duck through the small-headed door.
I take a slightly different approach…rather then assuming a(that the economy will decline) and b(that the interest rate will stay at 4.5%) I make the assumption that as the debt is retired…all that cash must go somewhere…thus excess cash and fewer US bonds makes the bonds rise and the interest rate decline…as the process continues…
the economy has more access to cash and at lower interest rates thus creating a positive effect and people begin to notice that improvement and feel much better at having less debt..the result is that we begin to realize that having that debt has been the greatest burden to this country and without that debt we can reduce taxes and actually improve the quality of life for all….
Comment by yogi — March 8, 2008 @ 9:05 am