Author Topic: Rising National Debt going to throw a wrench in our early retirement plans??  (Read 4037 times)

Radioherd88

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https://www.npr.org/2019/02/13/694199256/u-s-national-debt-hits-22-trillion-a-new-record-thats-predicted-to-fall

I attended a "changing word of retirement" seminar last night which started by emphasizing how our nations debt continues to rise because each administration continues to "kick the can down the road". The conclusion was that, at some point, something has to give to pay this off, and that something, is giant tax hikes in the future (referenced 1960's levels being 35-80% tax rates for a few years and that history tends to repeat itself).

Obviously, even far less serious tax hikes in the future would have an impact on our tax deferred accounts (as we are planning on paying less tax in the future, not more), so interested in your thoughts on here to protect against that?

And I couldn't help but think that eventually this national debt situation must pop some sort of bubble with the stock market - like at some point, does the rest of the planet think, "shit USA owes us all money, so lets shut down trade etc until we get it back" (very simplistic idea here but you know where I'm going), but then i cheked the rest of the planets' national debt to find USA is only the "8th worst";

http://worldpopulationreview.com/countries/countries-by-national-debt/

So in that regard, this debt can just continue to rise forever with no real impact to stocks or taxes? Or eventually are the nations that are managing this eventually going to bust out and take over industry and trade?


reeshau

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I think whatever bad metric you find (debt to GDP, aging population, hostility to immigration, entitlements) you will find a number of countries "ahead" of us in one or more.  I personally think it will take some sort of implosion / crisis in one of them to open our eyes.

In terms of taxes, who is to say what will happen?  To me, the best defense is tax diversification.  If rates go up, then demand will go down, and my Roth dollars will be more valuable because I can easily deploy them.  I have some pre-tax, post-tax (Roth) and taxable:  I have them to manage my expenses prior to 59 1/2, but a side effect is that I can adjust to tax changes as need be.  (This doesn't mean with no impact to me; it just won't sink me, or at least will hurt me less than others who don't have the flexibility)

As for the debt, though, you aren't thinking like a sovereign country.  Unlike a US state or the PIIGS of the EU, the US could pay back all its debt tomorrow:  "Hey, Mnuchin.  Print up 19 trillion dollars, OK?"  That would end our status as the world's reserve currency, but it would be an entirely legal way to resolve the debt.  Many countries have done this.  Some, multiple times.  It would also take any cash we have down the toilet.

(As an aside, an acquaintance from Russia told me about their devaluation in the 90's.  Her parents had saved enough to by a dacha for retirement vacations.  After the devaluation, it was about enough to buy a 2 liter of Coke)

That's a good reason to keep real assets: real estate, or stocks.  Money may go away, but people need food, shelter, etc.  So again you can come out of calamity better than your neighbor.

There is a tenant of "modern economic theory" that the debt can keep growing, as long as it doesn't grow faster than GDP.  Until someone calls our bluff, though, the status quo continues.  What else is the world going to price oil / price gold / hold in reserve?  The Euro?  RMB?  Sterling?  Again, the alternatives aren't better, so we stay in our position.

Radioherd88

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As for the debt, though, you aren't thinking like a sovereign country.  Unlike a US state or the PIIGS of the EU, the US could pay back all its debt tomorrow:  "Hey, Mnuchin.  Print up 19 trillion dollars, OK?"  That would end our status as the world's reserve currency, but it would be an entirely legal way to resolve the debt.  Many countries have done this.  Some, multiple times.  It would also take any cash we have down the toilet.

So who has done this in the past, and what were the reasons for doing it/consequences?

Tass

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Most of the national debt isn't owed to other countries, it's owed to ourselves. If you have any federal savings bonds, you own some US national debt.

https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124

FIPurpose

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The current fed bond rates are at 1.75%. Inflation is currently around 2.25% - 2.5%.

So even just using that standard metric our effective borrow rate is around 0.5-0.75%. This means that the value of money that people are lending the government is devaluing at practically the same pace as the interest on the bond. Imagine if inflation 5-10 years from now jumped back up to 4-5%. These 30 year bonds that are being sold now would be relatively worthless. They would be at an effective rate of -3%. Which over the course of 30 years would mean that the effective value of that bond decreased 60%.

This doesn't mean that the government should willy-nilly just spend on whatever, but the amount of money being thrown at the US is by far from being a bad deal, even long-term. I do however agree that we should be working towards a balanced budget, but the debt is not anything to become too worried about at these levels.

maizefolk

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As for the debt, though, you aren't thinking like a sovereign country.  Unlike a US state or the PIIGS of the EU, the US could pay back all its debt tomorrow:  "Hey, Mnuchin.  Print up 19 trillion dollars, OK?"  That would end our status as the world's reserve currency, but it would be an entirely legal way to resolve the debt.  Many countries have done this.  Some, multiple times.  It would also take any cash we have down the toilet.

So who has done this in the past, and what were the reasons for doing it/consequences?

Devaluating away debt by printing up money? All sorts of countries. In the short to medium term it's not a lot of fun. Weimar Germany, Austria, and Hungary between the two world wars are good historical examples where there is a lot written in english about both the causes and the experience of living through them but it was an awful long time ago.

More recent cases (last 30-40 years) in Latin America are places like Peru, Bolivia, Brazil, Argentina, and Venezuela. 

The cause is always the same when you get right now to it: the government doesn't have enough money to meet its obligations (spending + debt repayment) and can not or will not raise the extra money in taxes or further borrowing. They're faced with the choice of either closing up shop or printing money to pay their bills and debts.

I don't think the current US government or any that seems likely to be elected in today's political climate has the stomach for the tax increases and spending cuts to generate a surplus of tax revenue large enough to pay back $23 trillion or even just to close the current annual deficit. 

So it seems well within the realm of possibility that sooner or later our country will end up having to go the other route.

When (or if) that happens it won't be much fun for any of us for a number of years, but it will be much better to be holding real assets (like stocks or real estate) and either money in the bank or dollar denominated debt (i.e. bonds). Folks primary holding cash, bank account savings, or bonds could end up like reeshau's acquaintance's parents' savings in Russia.

maizefolk

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The current fed bond rates are at 1.75%. Inflation is currently around 2.25% - 2.5%.

So even just using that standard metric our effective borrow rate is around 0.5-0.75%. This means that the value of money that people are lending the government is devaluing at practically the same pace as the interest on the bond. Imagine if inflation 5-10 years from now jumped back up to 4-5%. These 30 year bonds that are being sold now would be relatively worthless. They would be at an effective rate of -3%. Which over the course of 30 years would mean that the effective value of that bond decreased 60%.

This doesn't mean that the government should willy-nilly just spend on whatever, but the amount of money being thrown at the US is by far from being a bad deal, even long-term. I do however agree that we should be working towards a balanced budget, but the debt is not anything to become too worried about at these levels.

If our government were borrowing money in invest in infrastructure or R&D or climate change adaption or mitigation (anything that would continue to provide long term benefits well after the money was spent) I would agree with you that it could make a lot of sense to borrow money at today's low interest rates to invest in our country's future.

But our government is not doing any of those things. Instead it is borrowing money just to fund day to day operations -- as well as huge and unnecessary tax cuts -- on a scale that is growing the national debt faster than the overall growth of the economy.

FIPurpose

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The current fed bond rates are at 1.75%. Inflation is currently around 2.25% - 2.5%.

So even just using that standard metric our effective borrow rate is around 0.5-0.75%. This means that the value of money that people are lending the government is devaluing at practically the same pace as the interest on the bond. Imagine if inflation 5-10 years from now jumped back up to 4-5%. These 30 year bonds that are being sold now would be relatively worthless. They would be at an effective rate of -3%. Which over the course of 30 years would mean that the effective value of that bond decreased 60%.

This doesn't mean that the government should willy-nilly just spend on whatever, but the amount of money being thrown at the US is by far from being a bad deal, even long-term. I do however agree that we should be working towards a balanced budget, but the debt is not anything to become too worried about at these levels.

If our government were borrowing money in invest in infrastructure or R&D or climate change adaption or mitigation (anything that would continue to provide long term benefits well after the money was spent) I would agree with you that it could make a lot of sense to borrow money at today's low interest rates to invest in our country's future.

But our government is not doing any of those things. Instead it is borrowing money just to fund day to day operations -- as well as huge and unnecessary tax cuts -- on a scale that is growing the national debt faster than the overall growth of the economy.

I completely agree.

Radioherd88

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So it seems well within the realm of possibility that sooner or later our country will end up having to go the other route.


And what route is this exactly?

https://www.powerofzero.com/books I recently read the power of zero - and the whole argument is that the US has 2 choices - either default on it's debt, or scrap social security, medicare, and hike taxes way beyond today's levels to try and pay it off - none of those are great for the long term stability of any retirement assets surely? If the US defaults, stock prices would permanently crash no?

The over arching story is pay taxes now and invest in roth accounts to take advantage of the historically low taxes we have until 2026 - and it is extremely likely taxes will be higher in the future because of this rising debt. Makes sense, but are we not all too casual about the elephant in the room that is how this national debt can bring it all crashing down?

MustacheAndaHalf

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I looked over that top 10 list of countries with the most debt, and it's a list you do not want to be on!  I would agree the U.S. is only #8... but it's on a list with Japan, Greece and Italy...

#1 is Japan.  iShares MSCI Japan ETF (EWJ) was created almost 25 years ago, in 1996.  It's annual return since inception is +0.45% according to morningstar.
#2 Greece almost defaulted, implemented austerity measures and other things I probably didn't follow.  Did youth unemployment reach 50%?  I hope that wasn't overall unemployment.
#3 Portugal I don't actually know anything about.
#4 Italy narrowly missed having it's bonds declared "junk bonds" by rating agencies this week.  That would dramatically increase the cost of it's debt, since many investors refuse to purchase bonds that are below investment grade.
...
#8 U.S., which spent $4.5 trillion last year, and half a year's budget fighting COVID-19.  I'm guessing the U.S. has moved up given it's recent spending.

maizefolk

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I recently read the power of zero - and the whole argument is that the US has 2 choices - either default on it's debt, or scrap social security, medicare, and hike taxes way beyond today's levels to try and pay it off - none of those are great for the long term stability of any retirement assets surely?

If the US were Greece, or some other member the the EU that couldn't control its currency I'd agree those were the only two options. However, since we print our own currency, we have the third option of inflating away our debt. If we choose neither to default, nor pay off the debt with newly created money, we will likely need to significantly increase taxes OR cut social security and medicare (which together account for well more than half of total government spending).

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If the US defaults, stock prices would permanently crash no?

Not even close. Default obviously isn't good for the economy in the short or medium term, but short of the civilizational collapse, the stock market is unlikely to permanently crash.

Consider the case of Argentina which defaulted on bonds equal to 84% of GDP at the end of 2001.

Things got quite hairy down there for a while and I certainly wouldn't have wanted to live in Argentina through their financial crisis, but does this look like a stock market that has permanently crashed?



A lot more volatility than I'd like, but even with the latest big crash over the last two years, their stock market has produced a Compound Annual Growth Rate of ~10.1% since the depths of the 2002 crash, and about 4% per year based on pre-defaulting on the national debt prices. The latter isn't great* but it is still a far cry from a permanent crash.

I'm showing the index in US dollar terms to avoid the confounding effect of the inflation when Argentina stopped trying to peg its currency to the dollar. The raw index, priced in Argentine pesos shows much higher growth.

*For context the S&P 500 had a CAGR of 3.4% over the last 20 years at the moment (not considering dividends, but I don't think the data I found for Argentina accounts for dividends either). However, that's a window that just happens to start right before a big crash (2000 tech stock crash) and ends in the middle of a new bear market. 

Radioherd88

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I looked over that top 10 list of countries with the most debt, and it's a list you do not want to be on!  I would agree the U.S. is only #8... but it's on a list with Japan, Greece and Italy...

#1 is Japan.  iShares MSCI Japan ETF (EWJ) was created almost 25 years ago, in 1996.  It's annual return since inception is +0.45% according to morningstar.
#2 Greece almost defaulted, implemented austerity measures and other things I probably didn't follow.  Did youth unemployment reach 50%?  I hope that wasn't overall unemployment.
#3 Portugal I don't actually know anything about.
#4 Italy narrowly missed having it's bonds declared "junk bonds" by rating agencies this week.  That would dramatically increase the cost of it's debt, since many investors refuse to purchase bonds that are below investment grade.
...
#8 U.S., which spent $4.5 trillion last year, and half a year's budget fighting COVID-19.  I'm guessing the U.S. has moved up given it's recent spending.

Right? Not a great list - at some point, there have to be consequences, and the most likely consequences are tax increases as at least a part of dealing with the situation that multiple administrations have continued to kick down the road?

Radioherd88

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I recently read the power of zero - and the whole argument is that the US has 2 choices - either default on it's debt, or scrap social security, medicare, and hike taxes way beyond today's levels to try and pay it off - none of those are great for the long term stability of any retirement assets surely?

If the US were Greece, or some other member the the EU that couldn't control its currency I'd agree those were the only two options. However, since we print our own currency, we have the third option of inflating away our debt. If we choose neither to default, nor pay off the debt with newly created money, we will likely need to significantly increase taxes OR cut social security and medicare (which together account for well more than half of total government spending).

Right - or a combination of the two - meaning chances of taxes being higher that what they are right now are high, and thus roth is the way to go to guard against impact on our retirement funds?


Not even close. Default obviously isn't good for the economy in the short or medium term, but short of the civilizational collapse, the stock market is unlikely to permanently crash.

Consider the case of Argentina which defaulted on bonds equal to 84% of GDP at the end of 2001.

Things got quite hairy down there for a while and I certainly wouldn't have wanted to live in Argentina through their financial crisis, but does this look like a stock market that has permanently crashed?



A lot more volatility than I'd like, but even with the latest big crash over the last two years, their stock market has produced a Compound Annual Growth Rate of ~10.1% since the depths of the 2002 crash, and about 4% per year based on pre-defaulting on the national debt prices. The latter isn't great* but it is still a far cry from a permanent crash.

I'm showing the index in US dollar terms to avoid the confounding effect of the inflation when Argentina stopped trying to peg its currency to the dollar. The raw index, priced in Argentine pesos shows much higher growth.

*For context the S&P 500 had a CAGR of 3.4% over the last 20 years at the moment (not considering dividends, but I don't think the data I found for Argentina accounts for dividends either). However, that's a window that just happens to start right before a big crash (2000 tech stock crash) and ends in the middle of a new bear market.

Ok yes permanent crash was the incorrect wording then - but chances of a crash hitting right in the middle of our retirement plan are high (next 50+ years) - i know crashes are inevitable, but i figured this one may be slower to recover. I take comfort in your data that perhaps not, and keeping it all long term is still the only way to go...

Kyle Schuant

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But our government is not doing any of those things. Instead it is borrowing money just to fund day to day operations -- as well as huge and unnecessary tax cuts -- on a scale that is growing the national debt faster than the overall growth of the economy.
If I were spending money on my business, and the spending was greater than the rise in revenue I got from it, I would... stop spending, and come out ahead :)

maizefolk

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@Radioherd88 I'm happy to hear the Argentina example helped! Yes it'd be bad. It just wouldn't necessarily be the end of the world as we know it forever.

As for tax increases/spending cuts, you say increases and cuts, I say increases or cuts. I'm more than happy to meet you in the middle and say tax increases and/or spending cuts. ;-)

elysianfields

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I recently read the power of zero - and the whole argument is that the US has 2 choices - either default on it's debt, or scrap social security, medicare, and hike taxes way beyond today's levels to try and pay it off - none of those are great for the long term stability of any retirement assets surely?

As @maizeman points out, you're presenting a false dichotomy.  The US has plenty of other options besides this incomplete binary arrangement.  The US has carried debt almost continually since the Constitution came into effect (only a short interruption occurred in 1835-36), and for most of the nation's history ran annual budget deficits.

Politicians of a certain stripe, of course, love your dichotomy because it provides the ammunition with which they can destroy social programs.  Budget deficits don't seem to matter when one party is in power, but as soon as the other one takes over, reducing deficits becomes the nation's highest priority.  </political derail>

The US issues its own currency, serves as the world's reserve currency, and Treasuries (US debt) are seen as among the safest securities on the planet - so safe that investors will pay the US to take their money (interest rates are negative).  Most of the debt is money US citizens owe themselves.  And foreigners love all the little green pieces of paper the US prints!  They export lots of goods to the US in exchange for these little green pieces of paper, which they exchange for US Treasuries, for example.

The problem isn't that the US is issuing debt like a drunken sailor, it's that much of the debt issued in 2017-2019 - the good old days - was simply handed over to rich people who didn't need it.  If instead the US were using that debt to improve infrastructure, the way it did in the immediate post-WW II period, that would provide lots of productivity gains in the coming years.

Right now, the US is just trying to get the economy going again so that people can retain their jobs or find new ones fast, also a good reason to issue debt.

As long as investors are willing to give the US financing, it's all good.

In the long run, we're all dead!

Radioherd88

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In the long run, we're all dead!

Well that escalated quickly....

Ok so conclusion - no one is worried that there is a point where the system breaks, because it hasn't before, and we can keep adding to the debt forever and ever as long as there are good reasons to do so?

And none of us are rushing to invest in Roth over Traditional as a result?

maizefolk

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Ok so conclusion - no one is worried that there is a point where the system breaks, because it hasn't before, and we can keep adding to the debt forever and ever as long as there are good reasons to do so?

And none of us are rushing to invest in Roth over Traditional as a result?

I think that is a pretty big mischaracterization of the responses you've gotten to your post.

The system could well break. After all it has in other countries. If we look at how it has broken in other countries, we tend to be lots of inflation and/or a reduction in government services and social safety nets.

Off the top of my head, I cannot think of an example where a country that controls its own currency and borrows in its own currency has responded to a debt crisis by just ratcheting up taxes while cutting spending and trying to pay back the debt. That's is what happened in Greece, but they didn't control their own currency, and even if they'd switched back to the drachma, most of their debts would have been denominated in euros.

So I avoid having too much of my net worth in bonds or other fixed income assets (bad for significant increases in inflation). I haven't paid off my mortgage even though I could afford to because in most historical time periods that's the optimal outcome, and it's particularly beneficial if we do move from a period of low inflation to high inflation. I do try to save up enough money I'd be resilient to job loss without having to depend on a social safety net that might not be there when I need it. The nice thing about all three of these strategies that they both provide benefits in good times (higher expected returns and financial independence) AND in bad times (less losses if we ever were to experience high inflation, hopefully less losing sleep at night over paying my bills in I lose my job).

I don't skew my traditional/Roth ratio from what would otherwise be optimal for my situation just to hedge against the chance that taxes with rise. That would be detrimental to me if taxes go down OR taxes stay the same OR taxes rise but not enough to compensate for the fact that, as a mustachian, I'm in a much higher marginal tax bracket now in my earning years than I would need to be just to meet my annual expenses.

MustacheAndaHalf

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In the long run, we're all dead!
Well that escalated quickly....
The phrase mentioned by elysianfields is one I've heard many times before, and I viewed it as humor.

Radioherd88

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I don't skew my traditional/Roth ratio from what would otherwise be optimal for my situation just to hedge against the chance that taxes with rise. That would be detrimental to me if taxes go down OR taxes stay the same OR taxes rise but not enough to compensate for the fact that, as a mustachian, I'm in a much higher marginal tax bracket now in my earning years than I would need to be just to meet my annual expenses.

Right - that's ultimately where I'm at - I think "the power of zero" is making the assumption (as most retirement books do) that people are planning to retire at the usual retirement age, and with the usual retirement lifestyle that is going to put them in a bigger tax bracket and have a bigger impact with RMDs and provisional income etc as they have a massive portfolio.

As mustachians, we are not planning to be in the higher tax brackets, and our portfolios are generally being withdrawn from much earlier to combat the RMD issue

Radioherd88

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In the long run, we're all dead!
Well that escalated quickly....
The phrase mentioned by elysianfields is one I've heard many times before, and I viewed it as humor.

As did I?

My retort was also humor, but I assume not recognized by you?

elysianfields

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In the long run, we're all dead!
Well that escalated quickly....
The phrase mentioned by elysianfields is one I've heard many times before, and I viewed it as humor.
As did I?

My retort was also humor, but I assume not recognized by you?
I was quoting John Maynard Keynes out of context (cf. https://equitablegrowth.org/a-note-on-niall-ferguson-why-did-keynes-write-in-the-long-run-we-are-all-dead/) for a bit of humor.  I could just as easily have quoted Sen. Everett Dirksen,

Quote from: Senator Everett Dirksen
A billion here, a billion there, and pretty soon you're talking real money.

But I don't really share Dirksen's POV on this.

Back on topic, let's see how the USG's sale of $3 Trillion in borrowings goes... (cf. https://www.washingtonpost.com/us-policy/2020/05/04/treasury-coronavirus-debt-borrowing/).

MustacheAndaHalf

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Radiohead - Right, "that escalated quickly" sounded more like an overreaction than a joke.

While a Presidential candidates opinions aren't law (let alone proposed legislation that hasn't passed Congress), Joe Biden's CNBC interview today set expectations for where he plans to raise taxes.  My overall impression was that taxes would be raised on those earning over $400k per year.  It sounds like he's targetting the 20% long-term capital gains tax rate for an increase, while keeping the 15% bracket unchanged.  Similarly for "Trump tax cuts" and Amazon not paying zero taxes - the taxes as described wouldn't impact early retirement people earning under $400k/year.
https://www.cnbc.com/2020/05/22/economic-recovery-from-coronavirus-is-a-long-way-away-joe-biden-says.html

Radioherd88

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Radiohead - Right, "that escalated quickly" sounded more like an overreaction than a joke.

While a Presidential candidates opinions aren't law (let alone proposed legislation that hasn't passed Congress), Joe Biden's CNBC interview today set expectations for where he plans to raise taxes.  My overall impression was that taxes would be raised on those earning over $400k per year.  It sounds like he's targetting the 20% long-term capital gains tax rate for an increase, while keeping the 15% bracket unchanged.  Similarly for "Trump tax cuts" and Amazon not paying zero taxes - the taxes as described wouldn't impact early retirement people earning under $400k/year.
https://www.cnbc.com/2020/05/22/economic-recovery-from-coronavirus-is-a-long-way-away-joe-biden-says.html

Yes I agree as is the norm, this seminar really doesn't consider that people like us exist and want to exist in the lower tax brackets once we FIRE :)

Sid Hoffman

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Treasuries (US debt) are seen as among the safest securities on the planet - so safe that investors will pay the US to take their money (interest rates are negative).

Wrong country. Every US treasury pays a yield, see for yourself here:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

They range from 0.07% for the 1 month to 1.65% for the 30 year.

Meanwhile in Germany:

http://www.worldgovernmentbonds.com/country/germany/

Looks like every bond rate from 1 to 30 years is negative yield with a range from -0.159% for the 30 year to -0.756% for the 3 year.

Meanwhile in France:

http://www.worldgovernmentbonds.com/country/france/

-0.688% for the 3 year and all negative until you hit the 20 year bonds when they finally go slightly positive with the best yield being a 50 year treasury at 0.483%. You really think that's the smartest place to park money for half a century while getting 0.483% yield? Well obviously whoever is required to buy those treasuries does it anyway.

Japan is also negative up until you hit the 10 year bonds. Bottom line: whatever you think of the US debt, take a look at Germany, France, and Japan and the fact they have had to manipulate their treasury markets into negative rates in order to afford to keep up their own debt levels. Those are countries where you should be really concerned, especially Germany and Japan, which are tied as the two oldest age countries in the world (ignoring Monaco, which is a city-state). The US does not have negative rates and is still growing in population, unlike Germany and Japan.

Mr. Green

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Why does the debt have to ever be paid off? We thought interest rates couldn't go below zero either but they already have in some areas. It's illogical but as long as the dollar remains a stable value store there's not really anything that requires the debt ever be paid off.

Sid Hoffman

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Why does the debt have to ever be paid off? We thought interest rates couldn't go below zero either but they already have in some areas. It's illogical but as long as the dollar remains a stable value store there's not really anything that requires the debt ever be paid off.

You don't have to pay it off, but it's basically a matter of "taxes now or taxes later." You'd have to raise taxes now in order to lower them later, and the reason you'd be able to lower them later is because today, as it stands about 8.5% of annual federal spending is interest payments on the debt. If you get the debt paid off over the next, say, 50 years then at the conclusion of that 50 years, everyone gets an 8.5% tax cut. However we don't do that because it means having to raise taxes today, and nobody wants to raise taxes now if they can make somebody else in the future pay the required taxes instead.

ctuser1

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US has a much better chance of resolving the "debt" issue than many people realize.

Assumptions:
1. No "fixes" will be implemented except for an imminent crisis.
2. Budget deficits are driven primarily by social security and medicare (with medicaid driving some state level issues).

I don't have exact, detailed data for #2 right now, but I vaguely remember reading that the broad "healthcare" category drives more than 2/3rds of the deficit problem, with social security and some other things (military spending?) causing the rest. A newspaper article I googled up (https://www.usatoday.com/story/opinion/2018/08/15/national-debt-growing-social-security-medicare-entitlement-reform-column/914488002/) offers some details, but not exact and detailed breakdown of all the data.

There are a couple of crisis points coming in the next 20 years. In 2026, Medicare trust funds will run dry, and in 2034 Social Security will go the same route. This is from the 2018 article above, not sure if that has changed due to the COVID crisis. Both of these crisis points will appear massive, but both has very feasible and practical resolutions.

For social security, there are many fixes - simply pay prorated amount based on tax receipts, tax donut, change inflation calculations to Chained CPI etc. etc. The reason it is stuck is because of political logjam in DC. A real crisis (and retirees not getting their checks will be such a crisis) will force action because politicians like to survive.

For Medicare, and broad healthcare, consider that we spend more than double compared to almost all industrialized countries and get worse outcome. When real crisis hits, I'm confident that the politicians will find some way to change this equation. What do you think happens to the deficit when a large part, or even most of that overspending is captured back as savings?

This entire process of crisis driven structural change will be very disruptive - but I don't think there is a risk of default, or hyper-inflation or any such catastrophic scenarios.

As a caveat, the assumption about politicians actually doing something in a crisis goes out of the window when ideology takes over politics. Ideology has already infested the rightwing politics. I am hoping they will gradually lose their grip over power due to the sheer demographic headwind by the time these crises are ripe for effecting structural changes. If this assumption does not hold, then we may be in for a nasty surprise.

(Now I need to slink back to bed before the kids wake up and wonder why I am up so late and wearing a Santa hat).

elysianfields

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Treasuries (US debt) are seen as among the safest securities on the planet - so safe that investors will pay the US to take their money (interest rates are negative).

Wrong country. Every US treasury pays a yield, see for yourself here:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

They range from 0.07% for the 1 month to 1.65% for the 30 year.


I meant to say that real interest rates are negative.  Apologies for the error.

ender

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It's worth pointing out that a large percentage of national debt isn't owed to foreign entities.

The overwhelming amount is intergovernmental debt or obligations to the public.

I don't skew my traditional/Roth ratio from what would otherwise be optimal for my situation just to hedge against the chance that taxes with rise. That would be detrimental to me if taxes go down OR taxes stay the same OR taxes rise but not enough to compensate for the fact that, as a mustachian, I'm in a much higher marginal tax bracket now in my earning years than I would need to be just to meet my annual expenses.

Something many people seem to not consider is the number of situations I can imagine Roth accounts being taxed -- either directly or more likely, indirectly.

It would surprise me if Roth gains got directly taxed, even at a small rate.

It would not surprise me if social security taxation rules or ACA subsidies began considering Roth withdrawals.

dcheesi

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Well since we seem to be reviving this thread: did anyone else John Oliver's recent piece on the national debt? Thoughts?

video link: https://www.youtube.com/watch?v=yq_E3HquRJY

Sid Hoffman

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Something many people seem to not consider is the number of situations I can imagine Roth accounts being taxed -- either directly or more likely, indirectly.

It would surprise me if Roth gains got directly taxed, even at a small rate.

It would not surprise me if social security taxation rules or ACA subsidies began considering Roth withdrawals.

While that would make me and many others sad, I think the only way they could get away with that is by targeting the highest income levels first. Like start it off saying "OK so we promised you'd never pay taxes on Roth distributions but... instead we're going to count distributions above $250,000/year as ordinary income, the rest below $250k is exempt" and then go from there. The easiest way to keep voter support is to adopt policies that hardly affect any voters while still generating a good amount of revenue. That generally means raising taxes on the small number of very wealthy people.

RWD

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Well since we seem to be reviving this thread: did anyone else John Oliver's recent piece on the national debt? Thoughts?

video link: https://www.youtube.com/watch?v=yq_E3HquRJY

I did see that. I wish they had talked a bit more about how the US is different from the Greece situation (e.g. control over monetary policy because US prints its own money). But overall a pretty good video.

maizefolk

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While that would make me and many others sad, I think the only way they could get away with that is by targeting the highest income levels first. Like start it off saying "OK so we promised you'd never pay taxes on Roth distributions but... instead we're going to count distributions above $250,000/year as ordinary income, the rest below $250k is exempt" and then go from there. The easiest way to keep voter support is to adopt policies that hardly affect any voters while still generating a good amount of revenue. That generally means raising taxes on the small number of very wealthy people.

Without doing some Romney level trickery it seems like it would be extremely hard for even the super wealthy to end up with enough money in their Roths to support $250k/year in withdrawals. If a person made the maximum contributions to their IRA and to a Roth 401k every year for 40 years and earned the long term CGAR of the stock market, they'd end up with about $5M in their Roth which would let them pull out and spend 5% a year without any of it counting at the threshold you're looking at.

The problem is that -- at the scale of national budgets -- there just aren't enough very wealthy people for this to move the needle a lot. Sure you can find money for pet program X or Y by taxing the super wealthy in one way or another. But in terms of the extra hundreds of billions of dollars a year our government needs? ... you really have to be willing to raise taxes on people in at least the top 10-20%* not just the top 0.1% or 1%.

*Disclaimer, I'm in this group myself so not doing the thing of saying "everyone who makes more money than me should be paying more taxes".

Sid Hoffman

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They might backdoor tax Roth IRAs by doing the wealth tax then. Sure, in the 2020 campaign we were promised that wealth taxes will only apply to the people with $50 million in assets, or similar numbers depending on the speech and audience they were speaking to, but the same was the story with income taxes. When the USA finally decided to do income taxes permanently, they too only applied to a very small percentage of the very wealthiest Americans. Now they apply to everyone and starting at 10% and going up from there.

If wealth taxes are the next to hit us, then that's how they'll tax your Roth IRA. Maybe wealth taxes start at $50 million in 2022, but then come down to $25 million by 2026, then maybe $10 million by 2030, and perhaps even down to $1 million by 2034 or something to throw out random years. So everything you own: your house, stocks, HSA, retirement accounts could potentially be fair game since anybody with such a massive sum of wealth as a million dollars clearly needs to start paying their fair share. That's how the income tax started and could be how the wealth tax goes as well.

I just don't see them singling out Roth IRAs in specific for taxation though, not unless they are part of a larger wealth tax or only apply to extremely large distributions. Otherwise their whole purpose is made largely invalid. If you're getting taxed anyway then you may as well just put the money in regular brokerage accounts where you aren't subject to age-restricted withdrawal rules the way you are with a Roth.

elysianfields

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They might backdoor tax Roth IRAs by doing the wealth tax then. Sure, in the 2020 campaign we were promised that wealth taxes will only apply to the people with $50 million in assets, or similar numbers depending on the speech and audience they were speaking to, but the same was the story with income taxes. When the USA finally decided to do income taxes permanently, they too only applied to a very small percentage of the very wealthiest Americans. Now they apply to everyone and starting at 10% and going up from there.

If wealth taxes are the next to hit us, then that's how they'll tax your Roth IRA. Maybe wealth taxes start at $50 million in 2022, but then come down to $25 million by 2026, then maybe $10 million by 2030, and perhaps even down to $1 million by 2034 or something to throw out random years. So everything you own: your house, stocks, HSA, retirement accounts could potentially be fair game since anybody with such a massive sum of wealth as a million dollars clearly needs to start paying their fair share. That's how the income tax started and could be how the wealth tax goes as well.

I just don't see them singling out Roth IRAs in specific for taxation though, not unless they are part of a larger wealth tax or only apply to extremely large distributions. Otherwise their whole purpose is made largely invalid. If you're getting taxed anyway then you may as well just put the money in regular brokerage accounts where you aren't subject to age-restricted withdrawal rules the way you are with a Roth.

Wealth taxes seem to have too many problems to become feasible in the U.S.  First of all, they're probably not Constitutional currently.  Secondly, wealthy people in countries with wealth taxes become adept at hiding & transferring their wealth, and the tax court would have to decide valuation questions for lots of assets which aren't traded on a market with exact price signals (think: real estate - how often do people disagree on tax assessments? - or art).  I don't see it working very realistically.

Although regressive, a VAT would be so much more easily managed.

If the US needs more revenue, there's plenty of tax-loop closing to be had around Estate and Income tax law, in addition to the business loopholes Uncle Joe is trying to close as part of the infrastructure bill.

Well since we seem to be reviving this thread: did anyone else John Oliver's recent piece on the national debt? Thoughts?

video link: https://www.youtube.com/watch?v=yq_E3HquRJY

I did see that. I wish they had talked a bit more about how the US is different from the Greece situation (e.g. control over monetary policy because US prints its own money). But overall a pretty good video.

I agree - the fact that much of Europe is essentially on a gold standard as a result of joining the Euro makes the Greece story much different from ours.

FIPurpose

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They might backdoor tax Roth IRAs by doing the wealth tax then. Sure, in the 2020 campaign we were promised that wealth taxes will only apply to the people with $50 million in assets, or similar numbers depending on the speech and audience they were speaking to, but the same was the story with income taxes. When the USA finally decided to do income taxes permanently, they too only applied to a very small percentage of the very wealthiest Americans. Now they apply to everyone and starting at 10% and going up from there.

If wealth taxes are the next to hit us, then that's how they'll tax your Roth IRA. Maybe wealth taxes start at $50 million in 2022, but then come down to $25 million by 2026, then maybe $10 million by 2030, and perhaps even down to $1 million by 2034 or something to throw out random years. So everything you own: your house, stocks, HSA, retirement accounts could potentially be fair game since anybody with such a massive sum of wealth as a million dollars clearly needs to start paying their fair share. That's how the income tax started and could be how the wealth tax goes as well.

I just don't see them singling out Roth IRAs in specific for taxation though, not unless they are part of a larger wealth tax or only apply to extremely large distributions. Otherwise their whole purpose is made largely invalid. If you're getting taxed anyway then you may as well just put the money in regular brokerage accounts where you aren't subject to age-restricted withdrawal rules the way you are with a Roth.

Wealth taxes seem to have too many problems to become feasible in the U.S.  First of all, they're probably not Constitutional currently.  Secondly, wealthy people in countries with wealth taxes become adept at hiding & transferring their wealth, and the tax court would have to decide valuation questions for lots of assets which aren't traded on a market with exact price signals (think: real estate - how often do people disagree on tax assessments? - or art).  I don't see it working very realistically.

Although regressive, a VAT would be so much more easily managed.

If the US needs more revenue, there's plenty of tax-loop closing to be had around Estate and Income tax law, in addition to the business loopholes Uncle Joe is trying to close as part of the infrastructure bill.

Well since we seem to be reviving this thread: did anyone else John Oliver's recent piece on the national debt? Thoughts?

video link: https://www.youtube.com/watch?v=yq_E3HquRJY

I did see that. I wish they had talked a bit more about how the US is different from the Greece situation (e.g. control over monetary policy because US prints its own money). But overall a pretty good video.

I agree - the fact that much of Europe is essentially on a gold standard as a result of joining the Euro makes the Greece story much different from ours.

They could solve a big piece of this by just capping the max amount you can keep in a Roth IRA account. At the end of every year, any amount above like $1MM  must be fully withdrawn. And also put account caps on regular IRA's. If these are supposed to be retirement vehicles, then cap the accounts at a reasonable limit for 99% of people would need in retirement. We don't need another account for the wealthy to avoid taxes. So a simple $3-4MM cap on all 401k/403b/IRA/Roth accounts would cut off most abuse of these accounts.

If people already have $3-4 million in retirement accounts (and by extension probably another 3-4MM in non-retirement assets), then they are prepared for retirement and the government doesn't need to be subsidizing that anymore.

SuperSecretName

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I recently read the power of zero - and the whole argument is that the US has 2 choices - either default on it's debt, or scrap social security, medicare, and hike taxes way beyond today's levels to try and pay it off - none of those are great for the long term stability of any retirement assets surely? If the US defaults, stock prices would permanently crash no?
As others have pointed out, it's not two choices.  There is a third - inflate it away (+ a side dose of yield curve control).

It's really 1) default 2) austerity 3) inflation.  We can pretty much forget default.  No US politician is going to get elected and pass austerity bills.  So, we simply inflate it away.

Buy Bitcoin.  (for real, this is the best inflation hedge you will find.)

maizefolk

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Actually instead of inflation, it might be more relevant to talk about "nominal GDP growth". Inflation is probably the most reliable way of generating a bunch of nominal GDP growth, but inflation severe enough that is crashes the economy obviously doesn't help make the debt more manageable, and if someone found a magical way for the economy to grow 10%/year in real terms while maintaining price stability, that'd also solve the debt issue.

So usually inflation and nominal GDP growth mean the same thing, but in the edge cases where they don't, nominal GDP growth does help with the debt and inflation doesn't.

But yes, default, austerity, and inflation/nominal GDP growth. Aside from bond holders and people who hold on to way too much cash, inflation is both politically more palatable and less disruptive to the economy than default or major austerity, so you only really tend to see the latter two in cases where inflation isn't an option (e.g. austerity in Greece which didn't control its own currency, or default in Argentina which did control its own currency but had borrowed a bunch of its national debt in USD).

Sid Hoffman

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So speaking of Greece and the Euro, is there any good data on exactly how much stimulus as a percentage of GDP the US and EU have done? We've heard of a few trillion in US emergency payments and loan programs and the like, and I also know that unemployment programs were massively ramped up all over the EU. I haven't been able to find good numbers, in fact it seems much was on a country by country basis in the EU, not by any central authority. I'm curious how the two economic regions compare. Or Canada, for that matter. While much smaller than the US, Canada's economy is bigger than many nations of the EU so it's probably a good point of comparison too.