A $34T question or 34T $1 questions

As I understand the national debt it is a record of the money that the Fed and the Treasury have created and infused into the economy. It is already spent. Companies have it; people have it; countries have it. To reduce the national debt, balancing the budget on an annual basis won’t do anything about the national debt. The only way to eliminate that $34T debt is to take $34T out of the economy.

Where are you going to pull that money out of the economy? Remember that the US GDP is about $28T.

They figured that out in the late 90s: a Federal budget surplus, with a booming economy, a strong dollar, and very low unemployment, Multiple tax cuts for the “JCs” and made up wars, ended that happy state of affairs, and gave us a national debt far larger than it was 25 years ago.


As with all debt, the bonds/bills/notes have a finite lifetime, from 3 months to 30 years. If the budget were balanced then there would be little need to borrow money. The debt would be paid off over time rather than continually being rolled over.



There are two aspects to debt: deficit spending and accumulated debt.

Since World War 2, the two great pulses of deficit spending (as a percent of GDP) were in response to the 2008 financial crisis and the Covid epidemic. Some economists think that the “Great Recession” – the slow recovery from the 2008 financial crisis – was due to inadequate federal spending because of concerns about the deficit. There’s no question that the very large, rapid response of both Congress and the Federal Reserve in 2020 - 2021 resulted in the rapid recovery of the economy (and also inflation). Since that emergency spending the deficit has declined to a more normal level.

As a result of continuous deficit spending the total public debt has increased to a level unprecedented in U.S. history.

Like all debt, the cost of maintaining this deficit is the interest payments. The government pays interest out of taxes. Interest payments are so important that Congress is willing to literally shut down the government from time to time but Treasury will never miss an interest payment or the bond market would respond by increasing interest rates on Treasury debt.

Every single bill, note and bond has a finite lifetime. The majority of federal debt is short-term. If Congress didn’t allocate the spending the bills would roll off (mature and disappear) within a year. The level of debt would plunge almost immediately.

The Federal Reserve bought a tremendous amount of federal debt during the aforementioned crises (Quantitative Easing). They are gradually allowing their Treasury and mortgage debt to roll off.

As long as investors (domestic and international) are willing to continue to buy Treasury debt the economy will support the deficit spending. Sensitive measures of this are the Treasury yield curve and financial stress.

As long as the bond market trusts the government to pay interest on the debt there will continue to be low interest rates and low stress. However, the payments do take money out of the economy. Federal deficit spending crowds out productive corporate borrowing as long as the Federal Reserve is not creating money out of thin air to supply the need.


Everything is relative.

There is a significant increase in the slope of the curve of increasing debt during the 80s, when the US embraced deficits to finance tax cuts for the “JCs”.

The slope of the debt curve was reduced in the 90s.

The slope increased again in the early 2000s, increasing at a higher rate than in the 80s, to finance more tax cuts for the “JCs”, and made up wars.

Then the slope increased more to stimulate the economy out of the 08 financial collapse, and even more to stimulate the economy out of the plague shut-down.

Over the last few years, the slope of the curve has been reduced.

If the present trend of slope reduction was maintained, we might have a chance of seeing a balanced budget, some day. Or, we could see another wave of “pro-growth” tax cuts for the “JCs” that will accelerate growth in the debt, as “JC” tax cuts always have in the past.


I don’t think this is strictly true. Banks are awash in money. That’s because all the money the government is printing winds up in banks. The problem isn’t that government borrowing is crowding out private borrowing, the problem is banks can’t can’t find enough borrowers.

It is over 6% of GDP, higher than only six years since WW2 (75 years ago). I wouldn’t consider that anywhere near “normal”.


Instead of productive lending to stimulate the economy, the banks have invested much of the money created by the Federal Reserve. That led to a bubble in all asset prices (stocks, bonds, real estate).


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What is the difference between inflation in the consumer economy and a bubble in the investor economy?

Consumers hate consumer price inflation. Investors love asset price inflation.


And investors pay a favorable tax rate on gains from asset price inflation.



But they don’t! Part of the problem is that every penny of interest is being refinanced into new issues of debt. AND, all the new deficit spending is also being financed by new debt. So, whenever a bill matures, the principal and the interest are refinanced into a new bill. This happens twice every week in the Tuesday and Thursday auctions. The same applies to notes and bonds, but not weekly.

Ayup. Like my dad: paying the minimum payment on a credit card bill, by taking a cash advance against another credit card.