US debt spiral

By the year 2020, the United States is expected to have a total national debt load of approximately $20 trillion dollars. The cost to service the public portion of that debt is expected to be nearly $800 billion per year, and that's assuming that we don't encounter significantly higher interest rates.

  

• The combination of high debt, mounting spending pressures from population aging, and moderate growth pose the risk of fiscal/financial crisis – a low probability event but one with potentially enormous costs for the U.S. and global economies. 
• To reduce that risk, the US Administration and Congress should restore the health of the country's public finances through gradual but sustained further reductions in the deficit.
• Economic growth is vital for a nation's ability to sustain its public debt. Many debt crises in emerging economies have been caused by declines in growth. In advanced economies, the largest increases in debt ratios occurred when policymakers mistook a prolonged decline in growth for a temporary recession, and failed to cut spending or increase taxes. 
• Economic growth is key because when growth declines, revenues decline commensurately, and governments are reluctant to cut spending in response, so that more debt accumulates.
• Living with high debt is living dangerously. As larger deficits are financed, the debt also swells.
• An interest-debt spiral is inconceivable for the United States, long considered a safe haven and benefiting from the "exorbitant privilege" stemming from the dollar's role as a reserve currency. A country's status as a safe haven is ultimately based on investors' perceptions, which can change abruptly. With privilege comes responsibility, and preserving the credibility of the U.S. public finances is vital not only for its citizens but also for the stability of the international financial system.
• If it were possible to sustain high inflation and low interest rates, investors would take their funds abroad. That rules out the "financial repression" strategy. Alternative approaches such as outright default would be even more disruptive. To avoid spooking investors, candidates should not suggest inflation or default as potential means of slashing the debt. That leaves old-fashioned fiscal adjustment through spending cuts – which are increasingly difficult as population aging adds pressures on entitlement programs – and revenue increases. The pace of adjustment should be gradual, in order not to disrupt the global recovery. The U.S. debt ratio may thus be expected, at best, to decline slowly. 
• Imposing statutory caps on domestic and military spending will definitely temper the deficit but will get swamped by healthcare and social security spending that will rise with aging population. Also Trump wants to spend $1 trillion on infrastructure in 10 years, surge in military spending and large tax cuts for individuals and corporations which will only increase overall debt.
• Deficits are helpful when economies are in recession. But when they are in near full employment , as US economy is now, deficits should be kept below 3% to avoid drag on investment or worse a financial crisis.
• The share of public debt is expected to reach 89% of GDP by 2027, increasing the risk of financial crisis and raise possibility that investors will become skittish about financing government's borrowing, although many countries have far higher debt levels.
• Besides deficit, tepid economic growth is also a concern. Over next 10 years real economic growth may not exceed 1.9% per annum. The steadily growing economy appears to be giving policy makers more time.
• Prepare to live dangerously for several more years.

Any person or corporation or state or nation, which can't repay smaller debt today will certainly can't repay bigger debt in future. So it is in the interest of lenders to stop restructuring of loans, that has very poor track record (1 in 100 success rate or even less), and stop dealing with such over spending entities after few warnings. Eventually, such debts will get written off in some form or other. But lenders are also helpless about parking their earnings or trade surpluses safely. Balance is the key! Every one must learn to balance income & expenditure, imports & exports so on on real time basis. Not doing so is recklessness or irresponsibility or both. Stay away from such people.

The Gold Standard is Right

• Gold is the primary global currency that has an intrinsic value. Credit instruments and fiat currency depend on the credit worthiness and signature of a counter party. No one refuses gold as payment to discharge an obligation. It has always been that way. No one questions its value, first coined in Asia Minor in 600 BC.
• The gold standard was operating at its peak in the late 19th and early 20th centuries, a period of extraordinary global prosperity, characterized by firming productivity growth and very little inflation. 
• Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. That is the reason for the statists' antagonism toward the gold standard.
• World War I disabled the fixed exchange rate parities.With different degree of war and economic destruction from country to country, the desire to return to pre-war exchange parities was wholly unrealistic. It wasn’t the gold standard that failed; it was politics.

• As per the above chart, bottom 90% of US earners income was far more than top 1% earners until Nixon ended the US Gold Standard, in August 1971, unleashing an unprecedented increase in US debt, and the stagnation of real incomes and net worth for all but the "top 1% of earners." 
• It is no wonder that the 1% hates the gold standard, including their protectors in the developed market central banking system, their economist lackeys, their purchased politicians and their captured media outlets, the topic of a return to a gold standard is the biggest threat conceivable.
• Everything changed a few decades later in the late 1980s onwards, instead of applying the above wisdom, central bank intervening in every crisis, creating new currency with abandon, and debt soared. Prevention of regulation of credit default swaps and other derivatives had nearly blew up the system in 2008.
• The growth has continued despite adversity, is due to the new financial instruments unbundling risks. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. The product and asset price signals enable entrepreneurs to finely allocate real capital facilities to produce those goods and services most valued by consumers, a process that has undoubtedly improved national productivity growth and standards of living.
• In the aftermath of the dot com crisis interest rate cuts to near-zero in the early 2000s, ignited the housing bubble, which no one at the Fed was able to detect along the way. 
• The leveraged speculating community learned that no risk was too egregious and no profit too large, because government - that is, the Fed - had eliminated all the worst-case scenarios. Put another way, under this regime profit was privatized but loss was socialized.
• One of the nice things about the information age is that public figures leave long paper trails and can't therefore easily escape their pasts. 
• The risk of inflation is beginning to rise. Significant increases in inflation will ultimately increase the price of gold. Investment in gold is insurance, not for short-term gain, but for long-term protection.
• Gold standard would have helped mitigate risks of an unstable fiscal system like the one we have today.
• Going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today, we would not have reached the situation in which we now find ourselves. There is a widespread view that the 19th Century gold standard didn’t work. It wasn’t the gold standard that failed; it was politics.
• Protracted period of stagnant productivity growth, particularly in the developed world and social benefits crowded out gross domestic savings, the primary source for funding investment. The decline in gross domestic savings has suppressed capital investment and is reflected proportionately in the people’s standard of living. 
• As productivity growth slows down, the whole economic system slows down provoking despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, it is a cry of pain by the people.
• At the same time, the risk of inflation is beginning to rise. In the United States, the unemployment rate is below 5%, putting upward pressure on wages. Demand is picking up, as manifested by broad increase in the money supply stoking inflationary pressures. Impose inflation on stagnation, you get stagflation.
• Today, we cannot afford to spend on infrastructure in the way that we should. Much such infrastructure would have to be funded with government debt. We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.

My View:
The above contents are largely the experiences of USA during the longest tenure of its Fed Reserve's Chairman Alan Greenspan (1987 thro 2006). India following the more or less same principles is also suffering with inflation, budget deficits, large borrowings, reckless spending, crony capitalists, and above all unbridled corruption by politicians, bureaucrats and businessmen, who work hand in hand, to loot the nation. While the rich & educated became super rich, poor remained poor only. Inflation and low bank interest rates hurting the savers especially old people who live on interest income on the fixed deposits. Today India ratings are just a notch above junk status and ratings upgrade in next two years is unlikely. Banking system is on the verge of collapse with NPAs trebling in the past two years. Tax evasion and black money is restricting our economical growth. Agriculture that provides livelihood for 65% of people, who are largely poor, uneducated & unskilled and rural based, has been made unprofitable by successive governments. Modi's recent demonetization, publicized as surgical strike on black money hoarders and corrupt people turned out to be least thought, politically motivated, poorly executed man made economic disaster unprecedented in independent India destroying livelihoods of poor & lower classes and recovery to its pre-demonetization levels is expected only after two years. Despite all ills, India with large masses of consumption and production has resilience to survive and grow.