I think the collapse will be steadier for the USD, because many more eyes are on us and our financial data. So the market will smoothly devalue it, at least compared to collapses like Argentina.

I didn't expect it for another 5-10 years, but I worry that its starting now, thanks to the bush stupidity. The dollar lost 13% against the Euro last year.

My big concern is more of a social one - when we get to the point where, in order to pay what we owe, we will have to tax people for more than a generation, who is going to sign up to be generation taxed? So, for social reasons alone, once we hit some particular debt level, I'm pretty sure that we will *never* pay it back, barring some majorly huge influx of capital and/or some really strange geopolitical circumstances (i.e. WWII and the 160% debt level).

I wonder if/when we will hit that point. I don't think we are there yet, but I do think we are close. My personal share of that debt is already more than I make in a year. What happens when that is true for the people with the median income?

Glad to see you getting in there and crunching some numbers! I definitely agree that debt as a percentage of GDP is an important statistic. Also "interest on debt" as a %age of GDP, and as a %age of gov. spending. I think this method of normalizing debt is very meaningful.

I used the debt figures from www.publicdebt.treas.gov/opd/opd.htm, *without* adjusting by CPI (ie assuming they were adjusted), along with inflation-adjusted GDPs, and I got similar percentages as you. But if you used the same debt figures and adjusted them for CPI, we should get dramatically different results for earlier years. This suggests that either you used a different data set (which was un-adjusted and so your adjustment was correct), or that you somehow didn't use CPI.

As an example, in 1930, this data says debt was 16,185,309,831.43. US BEA says GDP was 91.2 billion. If we assume the treasury number is inflation-adjusted, we get a ratio of 17.7%. If we use the CPI factor for 1930->2000 of 0.097, then the debt becomes 183%(!) So I suspect those numbers are already adjusted.

Anyway, I don't see why our current debt is not "out of the norm". Try slicing it by decade:

Decade / Debt / GDP / Ratio
90 4406.304007 7340.06 60.0%
80 1811.09698 4065.36 44.5%
70 580.8609471 1663.91 34.9%
60 323.828355 717.21 45.2%
50 274.0330213 403.84 67.9%
40 179.3504173 203.45 88.2%
30 27.85737303 77.61 35.9%

I wish I could find GDP data pre-1929, as I'm pretty sure that the debt ratio is < 50% (despite an uptick for WWI). Anyway, you can see that our current ratio is higher than at any time this century except during the period surrounding WWII, and without a genuine world crisis to justify it. (Doesn't it seem like Americans in the 50's were much happier to pay off debt incurred for WWII than Americans in the 2010's will be to pay off debt incurred for the "War on Terror"?)

Additionally, there are many future financial commitments which do not take the form of treasury securities, but which still count when talking about the future solvency of the USA. These commitments are much larger now than they were during WWII. Most significantly, Medicare/Medicaid, whose costs are significant compared to servicing the entire national debt.

There is an important difference between the individual and federal debt/income ratios. All of the money which you spend goes towards doing things which you value. Money spent by the federal government is often spent inefficiently, used to benefit special interests, and so forth. This is equally true of money you and the feds have borrowed. Otherwise, you would be indifferent between these scenarios:

1) You borrow a years salary, spend it how you want, and you have to pay 10% of your salary for 20 years to pay it off.
2) The Feds borrow a years salary, spend it how they want, and you have to pay 10% of your salary for 20 years to pay it off.

I think the average preference is way in favor of option 1. In fact I think you'd have to crank the payment in option 2 down to a couple percent to make people indifferent. Therefore people are willing to tolerate a much higher personal debt ratio than government debt ratio, except on rare occasions like WWII when they believed government spending directly contributed to their well-being.

Remember that its not just a question of what debt level we can sustain, in the sense of being able to meet payments. Its a question of what debt level will start the feedback cascade.

As for the predictions of dire consequences, I find them dubious, in a qualified manner (there will be consequences, but their catastrophic nature is greatly exagerated, I hope). Ross Perot said of the Y2K scare (paraphrased) 'I've never been hit by a bus I saw coming three blocks away' I think this principal applies with this situation. The collapse of the dollar would (I presume?) suck for pretty much all of America, including the rich and powerful, those positioned to effect change. Currently, they are playing the game to their own short term benefit. But when the time comes, they will effect policy change that will prevent the wholesale collapse of the American dollar, economy, etc. The real question is if they're smart enough to do this in time and not let things get out of control.


One thing to remember is that organizations display different behavior than individuals. It may be true that an individual is unlikely to be hit by an easily seen bus. But imagine if various souls take turns possessing the body for a few seconds at a time. The earlier souls might simply not care about avoiding the bus because they won't be around when it hits. Similarly, each administration has a great deal of incentive to mortgage the future in order to gain/maintain political power today.

The administration that stops playing the game for short term benefit becomes the bearer of bad tidings, the messenger that gets shot for havng an unpopular message. This places a lot of pressure on them to postpone and spin, rather than taking the immediately unpleasant steps necessary to prevent future catastrophe. Doesn't it make sense that this sort of behavior could result in a really ugly and abrupt failure mode?

Remember that exporters gain from a weakened dollar, so its not like everyone would be against a collapse.

! & 2 of your scenario could happen. Perhaps it will. My worry is that during step 2, there is a capital and brain drain which results in tax revenues going down so they can't pay off the debt. Don't forget that its a dynamic system. If it was just the debt, I wouldn't be so worried. Its the long-term trends that exacerbate the problem: social security / medicare, more competition from the rapidly modernizing globe (ie Bangladesh now has more techies than Silicon Valley), etc.

3 is extremely unlikely. The empirical evidence of the 20th century suggests that government bloating is an extremely robust phenomenon. But I'd love nothing more than to see that problem solved...

Apologize for the lack of cut - doesn't appear to be working.

I agree with you about the shell game of creating money. As I said:

But I don't think the US is going to actually default. Why would a fiat currency nation ever default? Just inflate the currency and pay your debtors back with worthless dollars.

The basic answer is just "because less people like the dollar".

One fundamental factor is that interest rates are higher in the Euro zone than the dollar zone. This makes euro-denominated investments more popular than dollar-denominated ones. The interest rate difference reflects the current relative states of the region's economies.

Additionally, the dollar may be inflating relative to the euro, which reduces its relative value.

But its a pretty complicated issue, and I am far from fully understanding it.

The current downward trend is quite rapid. My predictions were not based solely on the current relative value of the dollar and euro, that was but one element. The important thing is that there are feedback effects having to do with the most popular world currency. (also the popularity of our governments bonds). The recent drop moves us closer to the danger zone. The Bush budget does also. And in a decade or so, SS will start doing the same.

My claim is that the combination of these factors may produce a feedback effect where, because we are no longer the most popular currency or most trusted borrower, the value of the dollar drops precipitously.