One of the more common reactions I get whenever I point out that we could just keep rolling the debt over and over—harmlessly—is the "home mortgage" analogy:
But Steve, homeowners eventually have to pay off the principal on the mortgage. That’s why almost all mortgage payments have both the principal and interest built into them—to be sure the principal is paid down after, say, 30 years. Same thing with our national debt: future generations will eventually have to pay it off.
It’s a flawed analogy, though, because it focuses on one individual paying off a home mortgage within that individual’s lifespan. But a country isn’t like one individual with a finite lifespan, it’s a large collection of individuals with an indefinite lifespan.
A better analogy would be a family’s mortgage debt, and my family would be as good an example as any. Way back in 1925, my grandfather borrowed $5000 to purchase a house. Every month, even through the depression, he’d somehow scrape together the interest and principal that was due, gradually paying the principal down a little at a time. After a few decades, the principal was paid off. At last, no more mortgage debt... right?
Wrong. Something else had been happening during those decades. His family had been growing—and those offspring, one generation after another, had been following his example: they took out mortgages on houses, and signed up for decades of principal and interest payments. Over the years, as soon as one mortgage was being paid off, it seemed like two more new ones were being created somewhere else in the growing family. And the net effect was that the total debt the family owed for mortgages was growing steadily—because not only was the total family growing, but the total of all family incomes was growing.
Bankers don’t mind that a bit, by the way. They don’t mind lending mortgage money to a group of people whose aggregate income keeps growing. They’re more than happy to keep rolling over the old mortgages into new mortgages, and adding new loans on top of those already outstanding. Everybody’s happy, in the aggregate; the family members are enjoying their housing, and the bankers are enjoying their interest income.
Now let’s stretch the family concept to include all households in the USA. The Federal Reserve keeps track of that “family’s” mortgage debt, by the way. Here it is, on a chart that also shows the national debt and the GDP.
Click to enlarge.
And here’s a thumbnail showing the Fed’s data for household mortgages (click to enlarge):
That “family” isn’t “paying off its mortgage” is it? No, it’s increasing its outstanding mortgage debt. So the home mortgage analogy doesn’t contradict what’s happening with the national debt, it parallels it. The lenders in both cases have no problem rolling the outstanding debt over and over, and they don’t mind lending more and more on top of that—as long as our incomes keep growing such that it is no problem making the interest payments on that growing debt. (Could it be that mortgage debt growth these days is outpacing income growth? Maybe, maybe not.)
In any case, Uncle Sam's lenders have confidence in the future of our country—a lot more confidence, by the way, than those who keep telling us bankruptcy is just around the corner because of all that outstanding principal.
Think of it this way: If the lenders (i.e., T-bond buyers including you, me, and a few Asians) were as pessimistic as all those doomsters are, they’d be demanding a much higher interest rate than 5%, wouldn’t they? But they aren’t. Why not?
Might it be that doomsday is a lot less likely than some people would like us to believe? Might it be that debt rollover is a superior financial strategy to debt payoff? Might it be that we should stop whining about the debt and start worrying a lot more about how to enhance the economy's growth rate?
