After observing a very high-level government official make the remark in early 2009 that the current administration would cut the federal deficit in half within a few short years, I was initially incredulous! I considered several factors that immediately jumped to mind. For better or worse the war effort in Iraq would likely be cut back, allowing the administration to realize savings. There were likely to be few if any new and expensive Pentagon weapons programs, in fact the White House directed 10% across-the-board budget cuts there and this was likely to force the elimination or delay of several programs. Even so, cuts at the Defense Department (from about $567B to $527B) would be overwhelmed by enormous increases in spending in budget year 2009 with what was certain to be dwindling tax revenue due to the 2008-2009 recession; along with promised increases in future years for both federal spending and federal taxes, the remark seemed blatantly untrue on its face.
After a moment I stopped myself and instead of assuming administration officials just didn’t understand basic market economics, I considered ways this magical deficit reduction just might be possible. Budget deficits don’t just go away because you want them to go away. Or do they?
In order to discover if magical deficit reduction might occur, we have to understand just a few basic truths about budgets, interest, and finance. A better way of saying this might be that we need to remember the basic truths because most of us learned these things as a child and surprisingly these basic truths don’t really change much. If you’re familiar with basic economics, you might wish to skip the following several pages and go straight to The Math. Otherwise we’ll first start with budgeting.
You have income (probably). You have expenses (certainly). If you itemize the sources of your income (the government calls their income “receipts”) and expenses (the government calls their expenses “outlays”) and write them down together, you have what amounts to a cash flow statement. If you write down your projected itemized income and expenses with a mind to use that projection as a plan you have a budget. It doesn’t matter whether you utilize double-entry bookkeeping or not, but we’ll illustrate our example if/where necessary by single-entry examples.
How does budgeting work and what do some of these terms mean? As mentioned, your budget is your plan for the way you collect and spend your money. If you are a corporation your budget probably guides your expenditures to the extent you were correct about your inflows. If you are a government your budgeting process, tax collection, bond sales, and purchases may all be regulated by law, forcing you to perform your fiscal responsibilities in a prescribed manner.
If your projected income is $50,000.00 and your projected expenses are $50,000.00 we say your budget is balanced. You plan to expend exactly the amount you take in. This is sort of an ideal situation, and in days of old usually this was the type of budget you designed for the upcoming year; at the end of the year we would say we zeroed out our budget, meaning at the end of our fiscal year we would hopefully have realized income exactly the way we expected and we spent exactly what we’d planned. At the close of business on the final day of the fiscal year we’d tally up our receipts and at that last moment our expenses subtracted from our income should exactly equal zero. The reality, of course, is that things almost always change: Sales might have been slower one month and extremely good four months later or vice versa. You may have been hit with an unexpected medical expense or a severe storm may have caused unexpected damage for which you were not insured. But there is no realistic way to account for all contingencies. Most of us try to do the best we can at planning; we can create an expected-case scenario and compare that to one that uses conservative estimates for income and slightly exaggerated expenses. We purchase insurance policies to cover the remainder of the unknowns (and hope the insurance company doesn’t over-leverage itself the way parts of American Insurance Group (AIG) did until 2008). For the most part, governments and sometimes non-profit organizations should (or legally must) plan their budgets to be balanced at the end of their fiscal years. That explains the balanced budget case, a perfect plan that almost never works after the first couple days of the fiscal year, but which remains a decent plan. But what if you create a plan for something other than a balanced budget?
All other things being equal, if you cannot plan to have a balanced budget, it’s likely that you want to plan to have your income exceed your expenses so you ensure you have money to pay for everything. There are times this might not be the case but overall this is a smart way of doing business. Therefore, in this case if you subtract your projected expenses from your projected income and come up with a positive number, you have a budget surplus. If your projected income is $50,000.00 and your projected expenses are $48,000.00 you have a projected surplus of $2,000.00. If you’re a private individual, you can plan to do with that $2,000.00 whatever you like: Make additional purchases, save the money, invest the money, gamble the money, give the money to a family member or charity, throw a party, or possibly even do nothing. If you’re a corporation you can plan to re-invest the money in your company, give bonuses to employees, give the money to charity, hold a company picnic, or disburse the money to shareholders as dividends. If you’re the government you might be able to plan to keep the money; otherwise you must either redirect it to other expenditures in the budget or plan to redistribute it, typically back to taxpayers. If the fiscal year goes as planned (or nearly as-planned or better-than-planned) and you do in fact realize greater income than expenditures, you have an actual surplus and you get to execute your subsequent plan for dealing with the extra cash. This is really the preferred situation for individuals, families, and businesses. The less-preferred budget outcome is the opposite of the surplus, the deficit.
If your projected income is $50,000.00 and your projected expenses are $52,000.00 you have a projected deficit of $2,000.00. This situation may not be ideal but it can sometimes be manageable. There are few situations where anyone, private, business, or government should really plan this way. There are a couple points to keep in mind, however. Remember, a budget is a plan, and as we saw in the case of the balanced budget fiscal reality rarely matches the plan. If you have reason to believe you can successfully deal with a plan in which you spend more than you earn, a budget deficit could be manageable. One extremely important point about budgets is this: Just because you’ve delineated an expense in your plan does not necessarily mean that you will be required to fund the expense! This concept will be crucial to remember later once we understand the national debt. An example of this concept would be that perhaps you planned in your budget to purchase a new car for $20,000.00 during your fiscal year but you ultimately decide to forego the purchase or delay the purchase until the next year. In the case of the $52,000.00 budget: Assuming all other incomes were collected and you brought in $50,000.00 and your expenses were realized as planned with the exception of the new car, you only actually spend $32,000.00; your budget deficit was $2,000.00 but in reality you realized a surplus of $18,000.00! The unfortunate thing is that this works in reverse. You might have planned as above to have $48,000.00 in expenses but you actually spend $52,000.00. You began with a budget surplus but realized a deficit; you may or may not have had an actual loss and you may now be in debt.
Another point to keep in mind about budget deficits is that typically we set budgets for a period of one fiscal year. You may have advanced knowledge that a perfectly reliable customer will be receiving a shipment of goods from your factory right at the end of your fiscal year and their payment will not arrive in your bank account until early in the following year, for example. In your case you may know that you will have expenditures that must be paid or purchases that must be made not later than the end of your fiscal year. This is one case where you might need to plan to have a budget deficit. Just ensure you let your shareholders know ahead of time! More importantly, you’ll need to make sure you have either savings (assets) on hand to cover the expense or you have credit to make up for the deficit. An additional unfortunate thing that occurs, especially within government, is that sometimes long-term economic reality does not match predictions from several years ago. Therefore when the government plans a budget deficit for the following fiscal year they’re banking on good economic performance in the medium-term (2-5 years out). If the economy does not grow, helping government realize greater income, it will have to 1) Cut spending, 2) Raise taxes, 3) Continue deficit spending (much more on this later), 4) Sell assets, or 5) A combination of these. The tendency in this decade has primarily been to use the third option. How can the government do this?
The keys to dealing with a budget deficit then are having one or both of two things: Assets or credit. Having sufficient assets means having anything that has some market value that can be sold to cover whatever expenses exceed your income. These assets can be in the form of cash, savings, bonds, mutual funds, real estate, commodities, intellectual property, or other forms. The key is it has to be acceptable as a method of payment to cover expenses. In today’s economy, cash is the most accepted mode of exchange; in former days it was gold, in antiquity it was barter goods like bushels of grain or chickens. Having assets on hand to cover expenses is usually the best way to handle a deficit. If you don’t have assets on hand, what can you do?
The next way to cover a deficit is to have credit. When I use the term credit I don’t mean it exactly the way the term is used in double-entry bookkeeping, I use it in the sense the typical private consumer does; although the terms are basically similar and an accountant might be able to go into more detail what we really mean when we say “Credit.” To the average consumer, “Credit” is used in terms like “In-store credit,” “Credit card,” or “Line of credit.” It basically means you have access to money that was not normal income. You know you’ll have to pay back money that was extended to you as credit at some point in the future. This is true for individuals, businesses, and the government.
Now, what happens when deficits (and subsequent losses) continue to the point assets are completely depleted? Individuals may be able to make purchases on credit cards, get loans from banks, obtain home equity lines of credit, or receive a stipend or allowance from family or friends. Given sufficient resources and goodwill of family and friends or a sufficiently large trust fund with assets that produce passive income (think of the heirs of Ford, Rockefeller, Hilton, etc), one could theoretically live with budget and actual deficits their entire lives. In reality, over 99% of us cannot live very long with continual deficits. The eventual financial solution for individuals and businesses is often bankruptcy, which is sort of like prison in a metaphysical sense inasmuch as incarceration is society admitting you are not compatible with it; bankruptcy is like the financial world admitting you are not compatible with it. Businesses have the additional option of liquidation if their product or service is no longer needed. Businesses that produce necessary goods or services may be restructured in some types of bankruptcy, which may be a fancy way of saying “It gets a do-over.” One possible and cynical way to ensure you get restructured instead of liquidated is to produce a valuable good or service and then grow to become “Too big to fail.” Government is in a slightly different position than business. Local governments can declare bankruptcy but must usually continue operations; they must issue bonds (or bills, notes; any item commonly understood to be an instrument of debt), lay off workers, or raise taxes or fees, or deploy more police to issue infraction fines. National governments can do these things as well. It can also levy tariffs (unless proscribed by treaty, as has recently been the trend with free trade agreements), or they can have their central banks (the Federal Reserve Bank in the U.S.) print additional money. The federal government has done all these things at various times. Everyone generally understands revenue from fees and fines and especially from taxes. Everyone also generally understands that reducing government workers reduces the government payroll and saves the government money. Governments can do a little to influence trade, but (in the words of Dr James Chase) ultimately governments do not trade, people do; government profits from the transaction in the form of fees or tariffs. The key to understanding our current predicament in the U.S. and the way it may to an extent be solved automatically is to understand how the debt the government owes is structured. From this point forward we’ll concentrate on the federal government and its debts.
The massive and growing federal debt is a major public concern in the United States today. We’ve discussed some of the negative effects this of runaway debt caused by continual deficits. Some of these negative effects are likely to be realized in the future if nothing else is done. To understand the big picture we need to understand how we use debt instruments to accumulate debt and the interest incurred by these debt instruments and its effects on debt. Let’s start with debt instruments.
Debt Instruments, Debt, and Interest
We already mentioned that in order to spend more than your income you have to have credit in some way, shape, or form. In order for the government to spend more than its income, it issues debt instruments in the form of bonds, Treasury bills, Treasury notes, and a few others. In the example where the income was $50,000.00 and the expenditures were $52,000.00, in the government’s case in order to obtain the extra $2,000.00 it would have to issue $2,000.00 in debt instruments. The government issues several types of securities. Treasury bills are short-term government securities with maturities ranging from a few days to 52 weeks. Bills are sold at a discount from their face value. Treasury notes are government securities that are issued with maturities of 2, 3, 5, 7, and 10 years and pay interest every six months. Treasury bonds pay interest every six months and mature in 30 years. Other instruments include I and EE/E savings bonds, TIPS (Treasury Inflation-Protected Securities), bearer bonds, and a few more. For the remainder of the discussion we’ll refer to these as either generic “Government securities” or “bonds,” especially because the 30-year bond will figure prominently in the analysis. It all sounds simple enough, right?
In actuality there are many considerations. Some considerations are the bond market, the interest rate environment, and the future ability to redeem the bonds and pay interest on them. U.S. government bonds are considered safe investments since the U.S. government is perceived to be unlikely to fail. This gives the government a certain advantage in that it can offer a lower interest rate than other debt issuers because the market for government bonds tends to be people who are either conservative investors or savers. Many people who are in or are nearing retirement have to be conservative with their investments but they may not have a very long time horizon, they may perceive that they will need access to their money to pay for medical expenses or living expenses and will not wish to invest in anything that matures in over 10 years; families saving in order to send children to college may also fit into this category. Other people may be younger but conservative investors who have longer time-horizons and do not mind having their money tied up for over 10 years. In general, people come to the government securities market seeking safety and a modest return on their investment. So from this we know that the government, in order to issue securities that meet demand, will offer securities with different par values (Par value is the “Face value” of the bond) and different maturity dates. Many of these are then offered for sale as is the case with Savings bonds or at auction as is the case with many bills and notes.
An additional factor to consider is the demand for U.S. bonds by foreign governments, which can also purchase government securities; in fact China and Japan are some of the largest purchasers of U.S. debt. The purchase and disposition dynamics are considerably different (in part due to the international relations issues and currency exchanges that accompany the transactions) but the result in the U.S. is that the government is then able to spend money it would not have otherwise received, and we will only consider this in the sense that these debts to foreign governments are tallied up in the national debt. Suffice it to say that to a certain extent, a market for government bonds will always exist. The demand for bonds, if handled smartly, would mean that the government could have a perpetual debt to its citizens. Handling the debt intelligently is what becomes problematic. Figure 1 shows the growth of U.S. debt over time.
Figure 1: Debt Held by Public from 1969-2008 (Data From the Congressional Budget Office)
As we just mentioned, government securities mature at different dates. If the government were to issue just enough securities to meet demand for them, assuming a modest demand for them, this could be considered the sustainable level of national debt that could exist in perpetuity. In a pure market economy, I cannot think of a case where demand for government debt instruments would be so high that the government could not meet the demand without amassing an unredeemable amount of debt. But this brings up the question how the debt could become irredeemably high. In order to explain that we need to bring the third variable in the securities equation, interest rates, to add to the analysis.
Interest rates primarily account for the time value of money. They offer an incentive for consumers to make the decision to purchase or invest in securities, otherwise buying bonds is no more advantageous than leaving cash stashed under your mattress. Interest rates are generally set by the nation’s central bank in response to a host of market-driven data too numerous to mention here, the U.S. Federal Reserve Bank (“The Fed”) exercises control over interest rates largely to influence the U.S. economy by either raising interest rates to combat inflation or by lowering interest rates to stimulate spending. The details of rationale for the Fed’s actions are the subject of macroeconomics, which we will not cover in this work. For our purposes it is just important to know that the Fed changes interest rates based on the external stimulus of the U.S. economy in order to try to keep it growing at anywhere from a slow rate (politically speaking it’s best to grow even at a snail’s pace rather than contract), to a brisk pace while minimizing inflation. It is useful to know also that other banks and the federal government then set their interest rates relative to central bank rates. In simplified terms, the interest rates the government offers are generally slightly higher than the inflation rate but lower than the rate of return achievable by investing in businesses (regardless whether the investment in business is direct through ownership or venture capital infusion or through stock ownership or bond purchases), although they could be competitive with the rates offered by banks for savings, money markets, or certificates of deposit. In practice, the actual interest rates bond investors realize fluctuates depending on the time of purchase and amount of purchase of the bond, but that too is beyond the scope of discussion. We now know that the government offers an interest rate associated with its securities, what is the effect then of the interest rate on the national debt? Let’s start with a simplified example and work in the vagaries as we progress.
From the example above, imagine the government just issues $2,000.00 in securities to cover its expenses. If it offered two-hundred $10.00 bonds at zero interest with a maturity date of five years, the government would simply have to adjust its budget five years in the future to account for the $2,000.00 it would have to pay back to the bond holders. If the government did this just once, then its national debt would be $2,000.00. Of course if the government did this for five consecutive years, the national debt would eventually amount to $10,000.00. Additionally, if the persistent demand for government securities from the market were $2,000.00 per year, the government could adjust its budget in order to meet the $2,000.00 per year redemptions beginning in the fifth year (or depending on legal issues it might be able to raise revenues to $50,400.00 per year and hold the $400.00 per year in reserve for the first five years then raise revenues to $52,000.00 per year thereafter to account for the constant demand. Again, this is an over-simplified case. In reality everything fluctuates: Revenues come in high or low depending on the overall economy, a good year in the stock market coupled with low interest rates may drive demand for bonds down, and so on. The real trouble with the over-simplified case is that there is no interest, and without interest it is unlikely that there would be a demand for the securities at all. In other words, the government would not be able to find anyone who would extend it credit by purchasing its debt. So the government must offer interest payments on the money it borrows in the same way that you and I must pay interest on money lent to us by banks or credit unions. One present danger for the U.S. economy is that interest rates are at historic lows, this has been done to try to stimulate borrowing (other policies have been enacted to try to boost lending, all in order to increase spending) due to the 2008-2009 recession and it has yet to take effect. Interest rates are not quite zero percent, but they are so low that the only thing that makes current-issue government securities investment-quality assets is the perceived guaranteed return.
Now, as mentioned, in order to entice people to purchase these government securities, the government can offer interest payments, they can sell the securities at a discount relative to their par value, or both. Bills are typically sold from the government at a discount (although there was a brief time in 2008 when Treasury Bills were sold at auction for not only more than their par value but for more than their par plus interest, meaning people were paying the government to hold their money for them). Notes and bonds are sold at auction and pay interest every six months. Continuing our example from above, let’s say the government decides to plan to spend $2,000.00 more than their total revenue in the year 2011 and “sell” their $2,000.00 debt as two $1,000.00 Treasury Notes that mature in 10 years and offers a 6% interest rate. One note’s owner will receive $60.00 per year for ten years. Note that government bonds pay out interest twice per year and since there is no reinvestment option, the bond- or note-holder is simply paid the cash (formerly via a coupon) at predetermined dates. Therefore we can see that the government is on the hook to pay $120.00 per year on its debt for ten years. To continue the example, what if the government wishes to spend on a deficit in the amount of $3,000.00 the following year? In order to facilitate this they offer three notes in the year 2012 at par value of $1,000.00 each that mature in ten years at 5% interest. The government will then pay $150.00 per year for the subsequent ten years. Don’t forget the government is still paying $120.00 per year on the notes issued the prior year, 20X1. Therefore through the year 2021 the government will be paying $120.00 for the first notes plus $150.00 for the second notes, and therefore $270.00 per year in interest. Now, $270 per year out of a budget of $48,000-$52,000 doesn’t sound like very much, on the surface. Multiply the number of notes issued (and therefore the dollar amounts of the notes issued) by one million to one billion. Even at the low interest rates we’ve been experiencing, a million $10.00 annual payouts would amount to $10 million annually. Interest rates are low right now, but thirty years ago they were quite high, but we’ll get to that later. The main thing to remember right now is that if the government continues to spend on deficits, this interest payment obligation grows.
One thing to keep in mind from the example is that the debt may have been sold based on a projected budget deficit of $2,000.00 in 2011. If revenues collected actually covered spending and no actual deficit occurred, the government is still obligated to pay interest on its debt; it could theoretically save the money until the bonds matured and pay back the bondholder with his own principal. It is more likely the government would either find another program on which it could spend the windfall money or it might offer tax rebates. In any case, deficit budgeting and spending has been the rule for the U.S. rather than the exception.
One other brief complication is that securities are sold at auction and depending on demand, they may sell for less than par value. This is good for the investor because the actual profit on the bond is not just the interest payment but the difference between the bond’s redemption price and its sale price. The problem for the government is that it may have to issue more securities in order to ensure enough cash is raised from the sale to cover its deficits, and it is still obligated to pay the face value of the security at maturity. This could be a serious pitfall if the government is determined to spend more than its revenues but cannot otherwise sell its debt, and the potentially catastrophic consequences are like a time bomb set to go off at the maturity date, unless the government can bolster its revenue or cut its spending.
Another pitfall occurs when the government runs frequent consecutive deficits and amasses massive debts, people are likely to worry that the government will eventually be unable to pay. In a market economy this should not be very likely to occur. As the debt gets larger and larger, interest payments on the debt take up more and more of the federal budget. As a matter of fiscal survival the government must ensure interest rates are as close to zero as possible in order to ensure interest payments on the national debt are minimized. This of course acts as a disincentive for anyone to purchase the debt. If the government cannot sell its debt, it cannot spend money it cannot obtain, and in a free political system the government would simply be forced to stop excessive spending. The government’s other option would be to resort to totalitarian methods of revenue collecting. If that were to become the case, then you would no longer be dealing with a free political system any longer and I would offer you then have a much more serious problem than a bankrupt government.
Another method the government could use to cope with high debt would be to simply and suddenly begin to print more money. As a greater supply of money entered the system of commerce, more cash would suddenly be available to pay back debts. Of course, when more people have more money to spend on scarce goods (and in economics, all goods are scarce) prices rise, or in other words inflation rises. One theoretical advantage to this is that as I alluded when you have more money you can pay your debts easier, so sudden inflation helps those in debt. This seems to work in theory but in practice it is fraught with peril. The most notorious example of this occurred in the 1920s and early 1930s when the German Weimar Republic, saddled with enormous reparations debts from World War I, began to rampantly print money. It essentially collapsed after a period of hyperinflation; the Weimar Republic of course was replaced by Adolf Hitler and the Nazi Third Reich. Today the U.S. has saddled itself with enormous debts and has begun to print money. Why will the U.S. case probably not ultimately look like the Weimar case? How will the U.S. be able to reduce its deficits soon in order to stop piling on the burgeoning national debt? We’ll answer that question and substantiate the answer with some math.
In the late 1970s during the Carter administration, faced with both rising unemployment and rising commodities prices (especially oil and petroleum products but also gold), the U.S. began to experience a period of “Stagflation,” or a non-growing stagnant economy in which prices for goods continued to rise. The Fed under Paul Volcker decided to fight the rising inflation by keeping interest rates high. The newly-elected president Ronald Reagan insisted on increasing federal expenditures on the military as part of his strategy to start winning the Cold War against the former Soviet Union while cutting taxes in order to increase productivity and stimulate spending. The democratically controlled Congress was reluctant to cut spending on many government programs. As a result of the increased government spending and high interest rate environment of the period 1979-1984, government securities carried significantly high interest rates. Interest rates on Treasury Bonds reached a peak in June 1985 of 11.039% (See Figure 2 below)! In time, interest rates went down, but the government obtained an appetite for spending which seemed unquenchable. As a result, deficits have been the rule rather than the exception since the 1980s (Figure 1 above shows this in that total debt grew year-over year except from about 1997-2001). The result has been higher debt and more interest payments required (again excepting the period 1997-2001); in 2008 interest payments on the debt reached historic highs, but will this trend continue or can it be reversed?
The good news is that the higher-interest rate 30-year Treasury Bills have started to mature. The Federal government has already begun redeeming these securities; around November 2012 it will start redeeming the 30-year bonds that were paying over 10% interest. Their new offerings will be at extremely low interest rates, and one can reasonably expect that those who receive their investment in these high-rate bonds back will largely be unlikely to use that money to purchase newer low-interest rate bonds. This will have the overarching effect of removing from the federal budget that portion that has for the past thirty years been dedicated to making the comparatively high interest rates on those Bills. It will also mean a reduced demand for government bonds due to the current low interest rates, which may act to prevent deficit spending in the future, although that is uncertain. Just to highlight the amounts the U.S. government must spend right now, I took the data from 1985, the year that average interest rates appear to have peaked on bonds (some data indicates the coupon peak occurred in 1983-1984). The 30-year bonds issued in February were offered at 11.250%. At 11.250%, that’s $1,125.00 per year for each $1,000.00 in bonds! There were over $12.6 billion of 30-year Bonds issued that month at a stated rate of 11.250%. This equates to approximately $1.425 billion per year in interest on the bonds from that issue alone! Similarly, the government is paying $593 million in interest on the bonds issued in May 1984, $548 million on bonds issued in August 1984, $589 million on the November 1984 issues; then $427 million for the August 1985 issues, and interest payments remain in the $400-$600 million range until May 1986, when purchases jumped 300%. If we tally up interest payments on the 30-year bonds from May 1984-May 1985, we obtain a figure of about $3.155 billion. While this is a considerable sum, it’s still less than 1% of the proposed 2010 defense budget. Even compared to the overall annual interest payments, $3.155 billion is relatively small. Figure 3 shows annual total interest payments. Figure 3
Figure 3: Annual Net Interest Payments (billions of dollars)
One critical assumption in this theory is that the high-interest Treasury Bonds have not been called already. If the U.S. were paying down debt early by calling the bonds, it may have been possible to call the high-interest bonds and retire that debt to avoid the high interest payments that those securities require. Indeed, it would be a sensible move from the government’s point of view if it was legal to do so. As of February 2008 (with seven years to go until maturity) $2.148 billion of these bonds had been retired, leaving $10.52 billion outstanding. This data has not changed through March 2009. So the majority of the debt is still out there, causing an interest charge to the U.S. government.
We’ve seen examples and charts of the amount of high-interest debt the U.S. government bears from the late 1970s through the 1980s. We also know that the longest-term debts from this period will begin to be paid off and that that debt was subsequently replaced with lower-interest debt. Now I will conclude this theoretical treatise on the way the U.S. debt, interest payments on that debt, and therefore deficits might be reduced with no political effort.
My goal for this study was to shown that when the current administration says that they will reduce the deficit that it will in fact be possible for this to occur. I suspected that the retirement of a substantial number of high-interest rate 30-year bonds would automatically shrink the deficit. After studying the Treasury tables and realizing that while in the early- to mid-1980s the interest rates paid on 30-year bonds were at historic highs, interest rates did not drop precipitously after the 1980s, they gradually went down to below 5.0% over the course of a decade. Additionally, while bond purchases hit a record high in February 1985, new highs occurred in 1986, 1989, and 1991 (1991 is still the record number of issues, with annual interest payments at 8% of $2.45 billion). There will not realistically be any relief to the federal deficit by virtue of retirement of high-interest debt.
The federal deficit, if it is indeed to be halved, will require severe budget cuts or increased tax or other revenues, or both. Given the probable passage of a $3.5 trillion dollar budget for 2010, unless revenues spike far above the 2007 level, I do not see how the deficit can be reduced other than through massive cuts in federal outlays, which means the government will have to not spend a significant percentage of its budget.
The conclusion I had hoped to see was that the federal deficit would be reduced automatically. After having studied the numbers, I have to conclude that the only way to halve the Federal deficit will be to raise revenues (taxes) substantially or to cut spending.
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 It may be instructive to remember history: The word “Nazi” came from the phonetic sound (when pronounced in German) of the party’s acronym NSDAP, or Nationalsozialistische Deutsche Arbeiterpartei (National Socialist German Workers’ Party). In economic practice the means of production in Germany were privately-held but state-controlled for the sake of German socialism.
 One interesting thing the government did was to pass a law restricting the total amount of securities paying over 4.25% interest to $250 million total. This may explain why sales of high-interest bonds peaked in early 1985 and declined afterward, although perhaps as interest rates declined, enthusiasm for the bonds waned