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Hey the budget is a mess.  It don't matter what side of the aisle your on or even what room, it is messed up.  Some of the problem is that math says we can't keep doing what has been done.  No matter how much we want, we can't keep spending more than we bring in.

Now the real trick is how long can that go on.  (longer than I can, that is for sure).

We know that under the "sequester" $85 billion has be cut from what is to be spent by the Fed Gov.  Tours, Tuition Assistance, pre-k, etc all have been cut. But not pork projects of course.  At the same time the politicians go on and on about how Social Security and Medicare are going broke, etc so they have to gut them too.

But no one, GOP or Dem, talk about the interest on the national debt.  This is the fourth largest part of the budget, last year was over $360 billion.  So why not look at this cost after the fold.

First lets explain the debt.  The debt is all the money borrowed by the Fed Gov to fund the difference between the spending ordered by Congress and the taxes collected.  That difference for each year's budget is called the "deficit".  So the "Debt" is the total amount of "deficit" spending. (since like Eisenhower).

So all that borrowed money is really a promise to tax citizens and businesses at a later time to pay back that money at the agreed on interest.  Really, it is that simple, the Fed Gov wants to spend $150 but is only bringing in $100, so it borrows $50 at X% for 10 years and promises to pay it back from the taxes collected in 2023.  So either the Fed Gov expects to get that money from new taxes or to have reduced spending to a point that they can cover the loan with out raising taxes (or lowering them).

No other way to cover the cost of borrowing than to raise taxes or refuse to lower them later.  (so in reality, democrats are more honest about this, in that they want to raise taxes to pay for things now, rather than the GOP which wants to pay for things later and raise taxes then)

So who "owns" the debt?  We get told China and other foreigners which is true to a point, but not as much.  The other thing we are told is it is owned by little old ladies who bought Savings Bonds. Again true to a point.  China and little old ladies own about $6,000 billion in government debt. ($6 trillion).

So who "owns" the remaining amount of the current $16,000 billion debt?  The Fed Gov.

Oh, what?  Yes, the Fed Gov has several programs that collect taxes that are dedicated to specific spending.  Meaning they can only be spent on what they were collected for. Take your gas tax. it is not just dumped into the general fund to be spent as they want, it is only for transportation use. In the 1990's under Clinton, he raised the tax and started running a surplus in the funds beyond what was spent. Well Congress can't spend that money any place else with out changing the law (they don't want that), and Congress can't stand to see money just sitting their not being spent either.  But luckily for Congress, they can borrow the surplus and then spend it. (and promise to pay it back with tax money collected some time in the future).

They do the same thing with that big pot of money called the Social Security Trust Fund.  This allows Congress to claim that SS is broke (because there is no money there, just bonds -IOU's) at the same time to claim that SS is fully funded (because the bonds pay interest and will be paid back).  Both are true statements.  So, no, Social Security does not have to borrow money to pay benefits. They sell the bonds Congress made them buy back to Congress.  Congress, to come up with the money to pay the bonds has to borrow to cover the cost of the original money borrowed and the interest.

This vast fund came into being because the GOP's own hero "saved" Social Security from the pending (in 30 years) crisis of the baby boomers retiring.  Prior to Ronald Reagan, Social Security was a pay as you go plan.  They made an 'estimate' of what would be needed to cover benefits and then set a tax rate to cover that.  But the numbers were clear, the Baby Boomers would require tax rates in the 20 to 30% range...unless a way was found to get them to pre-pay for benefits.  

So Mr. Reagan raised the FICA tax rate to build up a surplus fund that would help keep the FICA tax rate low while the Baby Boomers retired.  (Really, not a bad idea) But you can't have all that money just sitting there right next to Congress.  Might as well leave a six pack of beer unattended at a frat party.

So what is the suggestion?  

Simple, the Fed Gov "owes" $10,000 billion to the Fed Gov with interest.  Ruffly $222 billion a year of the interest on the debt is money the Fed Gov owes to the Fed Gov.

It is time to "re-fi" the loan.  The Fed Gov will re-borrow the money it owes the Fed Gov but now at a 0% interest rate.  Bing! we just cut $200 billion out of the budget! The tea party should be ecstatic! The GOP would get to keep its military and wars overseas (another $150 billion we could save by ending now also) and we would not have gut other programs.

But we can't do that, because the Fed Gov would lose money if it re-did the loan it made with the Fed Gov.

Originally posted to Drill Sgt K on Mon Mar 11, 2013 at 10:27 AM PDT.

Also republished by Social Security Defenders.

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Comment Preferences

  •  Tip Jar (2+ / 0-)
    Recommended by:
    HeyMikey, kevinpdx

    Stupid question hour starts now and ends in five minutes.

    by DrillSgtK on Mon Mar 11, 2013 at 10:27:29 AM PDT

  •  Public Debt = Debt Held by Public + Intragovernmen (0+ / 0-)

    Debt to the Penny web application
    http://www.treasurydirect.gov/...

    Intragovernmental Holdings, which includes Social Security and Medicare Trust Funds and the Federal Highway Trust Funds and others total $5 trillion. Debt Held by the Public, which includes China and little old ladies, totals $11.8 trillion. So the figures in the post seem reversed.

    EXCEPT. Debt Held by the Public also includes the roughly $1.7 trillion in Treasuries held by the Federal Reserve directly, plus other amounts held in mandated reserves by Fed member banks. So maybe all that should be added back and included with Intragovernmental Holdings which would sort of split the difference.

    Major Foreign Holders of Treasuries
    http://www.treasury.gov/...
    As of Dec 2012 Treasury estimated Chinese holdings of US Treasuries at $1.2 trillion. Or just over 10% of Debt Held by the Public and about 7.5% of total U.S. Public Debt. On the other hand this amount does not include Hong Kong or any holdings by Chinese individuals or entities in off shore banking centers (Channel Islands included under G.B, 'Caribbean Banking Centers', Luxembourg) meaning that the totality of Chinese holdings defined broadly is probably unknown with that 10%/7.5% being a floor.

    Oh and Ronald Reagan did not establish the Trust Fund nor was SS totally Pay as you Go prior to 1983. The reality is more complicated, SS only really being pure Pay-Go from around 1964-1971.

    On the whole I really like the overall thrust of the diary, the bigger picture is great. But all the individual pieces aren't quite right.

    socialsecuritydefender.blogspot.com - SocSec.Defender at gmail.com - founder DK Social Security Defenders group - (hmm is there a theme emerging here?)

    by Bruce Webb on Mon Mar 11, 2013 at 12:23:34 PM PDT

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