the government should stop throwing money after failing industries and just let them fail. better to spend that money on healthcare, education and unemployment assistance.

But once all that money printing does its trick, and it always has before, we need to reel in the growth so as not to have too high inflation. I do think we will have (and want) moderate inflation which people can tolerate since it is possible to plan and budget for 5% inflation. And it helps devalue the dollar over time reducing the burden of Treasury debt (again, I would not be buying long term Treasuries right here as they are sure to devalue). There is nothing wrong with devaluing the dollar slowly so people tolerate it.

Money is just a symbol on a piece of paper. There is nothing magical about $1. When I was ten years old, it was 10 candy bars. Today it may represent one candy bar. In 40 years it may represent a piece of bubble gum. Who cares as long as income rises as fast as inflation? Buffett agreed with the reality of this scenario in his CNBC interviews on Monday, without giving a particular number for inflation. If inflation gets out of control, we already know the recipe to fix it: jack up interest rates above the rate of inflation and squeeze it out of the economy. I was there in 1980 when we did that and it wasn’t too bad. I even found my first job in 1982, at the bottom of the deep recession caused by high interest rates. You just had to buy 15% 20 year Treasury bonds at the top and you did quite well.

I think the wealthier segment of the population will bear a bigger burden for many years. That was bound to happen with or without a Dem Congress and Admin. The best way to solve the retirement entitlement problem is to limit distributions above a certain income or tax benefits higher to return payouts to the Treasury. Social Security (the second word is security, not guaranteeed pension) will not be worth much for the top 10-20% of wealth in America.

One thing I know for sure, every time the economy gets in a big bind, the dooms-dayers come out of the woodwork. It happened in the 1930s and again in the late 1970s (which I personally remember). But we always find our way through. Really, the ingenuity and productivity of 300 million people can not be discounted. We do make things difficult for ourselves in a market based economy (ruled by greed and fear), but we always find our way. I gave the ways we have done it in the past (a little inflation, a little belt tightening, more immigration to add to our workforce / taxpayer base, a little more taxes until we start running a surplus like in 1999). We will get through this and I am still buying stock.c

By the numbers, perhaps it could be analogous to a man who makes $48,000 per year, and has a $222,000 mortgage. At an average interest rate of 4.15% (not sure what the actual rates are) he would be paying about $9,100 in interest for the year. A 25 year mortgage at these numbers would have a monthy payment of $1,185 ($14,222 for the year). He’d be making progress if he kept making his monthly payments, however, he isn’t. He is actually going to pay only the interest for 2009. (In fact, the government is going spend an additional $5,700. I’m not sure if that is borrowed or printed.) Now I’m not really sure how taxes play into the GDP, but it’s stated as 28.3 % of GDP on Wikipedia. So would that mean the man in our analogy is paying around $13,500 in taxes? If so, that would give him about $25,400 of disposable income after taxes and interest payments. If he makes payments on the debt that would bring his disposable income to $11,178.

It seems paying off the debt would require printing more money, which would cause massive inflation. Or it would require increasing taxes, which would hurt the economy and make people’s lives difficult. Alternatively, they could cut government survices which would no doubt cause civil unrest, or at very least some very difficult times for the citizens. Of course, there is the third uption presented in this article. That is, the government just keeps doing what it’s doing until it can no longer pay it’s obligations and goes into default, experiencing all the problems that go with it.

Now I’m sure this is highly over simplified, but it doesn’t look to optimistic to me. Perhaps the world will not end, but as you say, it would be very difficult times and I am not so certain it won’t spell the changes mentioned in this article.

To answer your question, Kevin: consider that when you buy a house, you take on more debt than your annual income. You pay off the debt over 30 years, a little at a time, with interest. And hopefully for the person borrowing money, the money gets cheaper over time due to some inflation (at least that is the way it has always worked in America).

I propose it is the same way for the government debt: it will take years to pay off, and some of the pain will be relieved by inflation that cheapens the dollar. Those buying 30 year Treasuries right now, will not get back the value of what they put in (who would buy a 30 year Treasury at 3.5% interest? Are they crazy? but they do)

There is also some percentage of government debt that is backed by assets taken back from businesses (TARP, TALF, etc) Those debts will be paid back by the business that did the borrowing, or the government will (hopefully) be able to sell those assets at a future date. That will also reduce national debt.

But as you point out, the biggest percent of national debt are the accrued value of future social welfare payments (Social Security, Medicare, Medicaid, Welfare) and those will require future tax revenues. Those payments are also indexed to inflation and so won’t be reduced by a cheaper dollar. But the economy will also grow over the next 30 years (hopefully), so as a percent of the economy, it will not appear quite so intimidating at that future date.

We will all pay higher taxes and experience a less ebullient economy than the past 20 years, to pay for all of this. But the world will not come to an end, nor America.