#75 S2N: Is the Debt Too Big?

S2N Spotlight

I have been wanting to address the subject of US debt for a week but kept getting distracted.

Everyone talks about the US total Federal debt. So let me start with the elephant in the room. Maybe it is appropriate to say the dinosaur. It is clear the debt has exploded into the trillions, currently sitting at $35 trillion. But this is not the complete story, as much as I don’t wish to admit it.

It is important that we look beyond the noise of the fiscal irresponsibility that I and others have been bleating ad nauseum. The picture you see below is quite healthy if you look at it from the lens of a businessman.

What you see is that despite a big increase lately in interest expenses of over $1 trillion, you see a very impressive $5 trillion in tax receipts (income).

For a little bit of further analysis, we can look at what the percentage of interest payments as a percentage of receipts has been over time. It is certainly not nearly as bad as it has been in the past.

My final point on this subject, which is directed mostly at me. The US debt market is not going to collapse anytime soon. If you look at the US Fed’s holdings of public debt versus the rest of the world, you can see it is in a good place, relatively speaking. If there is a need for the US government to borrow more and more funds, the Fed has plenty of firepower, and the Treasury has plenty of income to cover the interest.

This is not the final picture; as we know, the US runs a major fiscal deficit, so we need to address this before giving the US economy the all-clear.

S2N Observations

Adam Smith the economist famously said, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” This is from “An Inquiry into the Nature and Causes of the Wealth of Nations.”

What he is saying is that people are driven by self interest. This is not necessarily a bad thing, as we can see in his example above that through a profit motive, we get a good meal, but the insight is deep and profound.

Over the last 3 nights, I have been watching a movie on Netflix called Atlas. It is not a series; it is just that I keep falling asleep, so it has taken me a few attempts to complete it. The movie is about an AI robot that goes rogue and is set on destroying the world, with a few complexities to the plot. My wife asked me if I thought this was possible in real life, and my immediate answer was yes.

In today’s Wall Street Journal, there is a timely article on the dangers of AI because people who work on these projects sign comprehensive non-disclosure agreements, effectively muting them from being whistle-blowers, and talking publicly about ethical or other concerns.

Philosophically speaking, I am from the school of thought that believes that for everything positive in life, there is also an equally negative force. Its a complex subject and beyond the scope of today’s letter. In short, I believe AI has the ability to do tremendous good, but it also has the potential to do tremendous bad.

If you were wondering what the point of the Adam Smith quote was, there is, in fact, a point. We are programmed to act with self-interest at our core. The same applies to an AI robot. To function, it has to have a purpose, a task, or a goal. The smarter the robots become, the more they are relying on their primary purpose. Let me adapt a “self interest” from the movie Atlas and use it to make my point.

A robot has been programmed to ensure the survival of planet earth. It is programmed to achieve this goal at all costs. The robot discovers that man is a primary destroyer of the earth through fossil fuel emissions and deforestation. The mission is to ensure the earth’s survival at all costs, so the robot turns rogue and starts killing mankind. This may seem far-fetched and extreme, but I can think of so many examples where a brilliant bad actor can do irreparable harm to society. So what am I proposing?

I am a great believer in AI and its ability to advance mankind. It is going to come with certain costs. Economics is the science of trade-offs. On the one hand, I am tempted to want more regulatory oversight to prevent bad things. The problem is that I am a libertarian and therefore believe in less regulatory oversight. This is a big subject, and I am oversimplifying, but in the spirit of Adam Smith, I am a believer in letting the self-interests of the market compete, and hopefully the end result will be that good triumphs over bad. Talk about being a betting man.

Oil has broken below an important trendline and looks pretty weak.

India’s ruling party won power yesterday, but not with a majority. So Nifty had a Shitty with a 6% drop on the day.

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