Do We Really Need to Reduce US Debt

1
Do We Really Need to Reduce US Debt ?
2
A question I have been pondering for some time
now .... out of which I came to the conclusion
that under the current global financial regime,
it's patently impossible and provably undesirable
to actually reduce the US national debt. In
fact, anyone who tells you otherwise has very
little understanding of global finance and is
operating under a delusionally gross
mischaracterization of government debt. The
current financial system treats it like a
completely different asset class than traditional
loans.
3
The US national debt would only foreseeably be
reduced if the entire global economic paradigm
underwent a tectonic shift due to new technology,
and it would have to be something along the lines
of universally cheap energy, energy-matter
conversion, interstellar FTL travel, or
teleportation. Either that, or WWIII causes the
downfall of the US government and reorganization
of the global financial system around the next
superpower, which would likely undergo the same
cycle of debt. I am afraid we are already moving
in this direction.
4
So any other way of looking at this issue? I
guess one first needs to understand the
difference between real and nominal numbers. 17
trillion sounds like a scary number, and it makes
for some eye catching headlines, but in real
(adjusted for inflation) terms it is not
unprecedented. The better way to view our debt
is not as a number in a vacuum but rather as a
percentage of GDP.  If our debt is growing slower
than GDP is growing then our real debt is
shrinking. The number could theoretically stay
at 17 trillion forever and we would be paying
the real balance down at a clip of a few
percentages a year.
5
So do we really need to reduce our debt?   When
the SP downgraded US debt in 2011 they
specifically said that they were not downgrading
us because of a financial concern but rather
because of political concerns. That means that
they weren't worried about our ability to pay it
back, but rather our willingness to do
so. Currently our debt situation isn't really
that bad when you consider the interest rates
involved. A nice little side effect of the
quantitative easing regimen the Federal Reserve
pursued is significantly lower interest rates on
long term federal debt. 
6
If the federal government was able to borrow at
2 and our economy is inflating at 3 (most
recent measure was 4) they are essentially
getting a real gain from every dollar of debt
they put out there. So, if one is asking what is
the most effective way to pay down our debt, I
would argue that going with fiscal policy
(reducing spending, raising taxes) is not
particularly effective since Congress can't even
agree on what to name a post office, let alone a
way to balance the budget. Rather, monetary
policy is how we will reduce our debt which is
exactly what we did the last time it ran up in
WWII. We inflated our way out of debt. 
7
The number stayed essentially the same, it just
came to be less and less scary as time went by
because it was denominated in dollars and over
time the dollar was worth less and less. Think
about it this way, with a 3.5 rate of inflation
the dollar loses half its value every twenty
years or so. If we stop adding to our debt today
then over the next 40 years (1945 to 1985 for
comparison) our 17 trillion would turn into an
inflation adjusted 4.25 trillion. Personal
recommendations 1. Keep interest rates low,
i.e., increase trustworthiness of the US Public
Debt.
8
Avoiding fights in the Congress about the Debt
Ceiling  may help a bit. Low interest rate is the
beginning of any debt repayment plan. 2. Go for
Economic Growth. Any new debt should be raised to
fund growth and  not fund US Entitlement
Programs. Entitlement programs must be fully
funded by US Taxes. Either increase tax revenue
or cut the entitlement spending. 3. More
Economic Growth. Any additional debt must result
in an additional economic growth, and the growth
must be sufficiently high to cover the interest
as well as the principal of the debt over the
long term.
9
As an example if a new infrastructure project
which costs 1B, it should result in additional
growth of about 150M in GDP.  The additional
taxes on additional 150M would cover the debt
repayment of 1B in 30 years. This is a high bar,
but easily met by infrastructure projects. 4.
Get healthcare spending under control. The US
spends about 17 of GDP on healthcare, the rest
of the world spends around 10. (and often have
better healthcare). Imagine the growth that this
would unleash. And you don't need to go Canadian
- why don't you try going Singaporean who only
spend 5 of GDP (less than 5 actually)
10
5. Tolerating some inflation. Inflation actually
decreases the net interest rate (i.e., inflation
adjusted) a bit, which helps the debt
repayment. 6. Make the US Dollar fall. The US is
in fact the only country with most of its debt in
its own currency. This privilege is not available
to most countries. Step 5 and 6 actually feed
each other.Share your thoughts. Thank you,
Have a Great Day