Debt, Deficit, What's the Difference?

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Blog 25
The  "Balanced Budget." Does Nobody Know the Difference Between Debt and Deficit?






First, let me introduce what has exuberantly been called "the miracle of compound interest." Here is a true story to illustrate it.

In 1974 a nation-state, which we will not name but call Nation X, had accumulated a national debt of about $20 billion. Debt means money you owe. On money you owe, you have to pay interest. So one item in their budget that year was "Interest on Debt".

Over the next 20 years, they had a small number of annual deficits that rang up another $30 billion in debt. That is, in those years the government spent $30 billion more than it took in. That is the definition of deficit; spending more than you take in. To pay the bills in the deficit years, the government borrowed enough to balance the books for the year.

So in the year 1994 the total national debt of Nation X was roughly $600 billion.

Let's look at that.

Debt at start, 1974............................20 billion
Deficits added 1974-1994................30 billion
        Total Debt 1994.....................600 billion

How's that? Did I get it right? You say 20 plus 30 does not equal 600? But it did. And by what is called "the miracle of compound interest."
I should note that only lenders call it the miracle of compound interest. Borrowers, like the government of Nation X, are entitled to call it the curse of compound interest.

The circumstances in the 1980's were, admittedly, unusual. Interest rates rose to over 18%. So the compounding of interest - that is, interest on the non-payment of interest on accumulated interest, on accumulated interest, on accumulated interest, year after year, made a small addition to the national debt for Nation X of $550 billion.

In short, for 50 billion borrowed, Nation X is on the hook for about 12 times that amount. How was that made to happen?

Well, in they mid-1970's, unbeknown to most people, the lending class had become unhappy with "negative interest rates". (Negative interest rate means that the rate of inflation is higher than the rate of interest of, say, government bonds.) Thus inflation eats up a lender's profits. So a concerted effort was made, starting in the US, but engaging major lenders everywhere, to teach the national states a lesson. Interest rates were ramped up. Lenders loved it. (That includes lenders in Nation X.)

The point of looking at these figures now in late 2015 is that conditions today are eerily similar. Inflation and interest rates are close to equal and have been for some time.

To calculate what a new twenty years of deficits, high interest rates and debt-building would do for Nation X's little $600 billion debt -- well, let's just say that it's beyond your poor blogger's computing skills. But $600 billion times 12, I think, is a mere $7,200,000,000,000. Boggles the intellect, doesn't it?

Poor Greece. Poor Nation X. Who's next?

We can't move in there, Dad.It's going to collapse.

Afraid so, son.

So why do "democratic" politicians only talk about deficit-vs-balanced budget, and never mention the accumulated gross debt? Because it is too complicated for the people to understand, they say.

Bah, humbug! We are smarter than they think.

Maybe it's just too difficult for some politicians to understand. Some certainly do. But I think they may be quietly muzzled- "because it is too complicated for the people to understand." 

 Feel free to copy this blog and send it to your local representative.