Hi,
Let me recap your premises:
Canadian debt 600 billion
Interest on debt 7.5% per year
Inflation 2% per year
Affordable principle reduction 2 billion per year
Did I get those figures right? If so, I did a few simple calculations and what I came up with were the following four scenarios:
EDIT, added a few points to clarify the scenarios.
1) No debt pay down, pay 45 billion a year in interest: At the end of 35 years, the debt still stands at 600 billion, but it is worth less because of inflation. Considering all the payments and the balance, correct to 2003 dollars the cost for this scenario is 1414 billion. Your expenditures have bought you nothing other than what 2 billion a year spent on programs could produce in the economy. Given that the cost of the debt is 45 billion a year, I would guess that the budget is of the order of 200 billion a year, so a one percent difference probably doesn't do much.
2) Pay debt down at the rate of 2 billion over interest (47 billion total first year, less each following year as the principle decreases): At the end of 35 years, the debt stands at 530 billion. The adjusted cost of the principle and payments is 1373 billion. Not that much better, but at least some progress is being made. And a bonus is that after year 12, the cost for paying down the debt (in uncorrected dollars) is less than the present cost of servicing the debt.
3) Pay the debt down at a constant expenditure of 47 billion per year (total of interest and pay down): After all, as time goes by, that 47 billion gets cheaper. At the end of the 35 years, the debt stands at 291 billion. The total expenditure in 2003 dollars is 1311 billion and that has more than halved your debt.
4) Pay the debt down by an annual amount of 47 billion adjusted for inflation (again, total of interest and pay down): After all, the income for the government, the GNP, the budget, etc. all are adjusted. This would keep the amount spent on the debt roughly a constant fraction of the budget. Now this one is a real kicker. It doesn't run out to 35 years, because the debt is totally retired in 23! And the total cost is 1059 billion in 2003 dollars.
So, explain to me again how keeping a debt puts a nation ahead? Saving 1% of its budget to do what? Stimulate the economy? That's like stimulating an elephant with a gnat.
--Pete
PS, If you want to play around with the numbers, e-mail me and I'll send you a simple XL spreadsheet.
Let me recap your premises:
Canadian debt 600 billion
Interest on debt 7.5% per year
Inflation 2% per year
Affordable principle reduction 2 billion per year
Did I get those figures right? If so, I did a few simple calculations and what I came up with were the following four scenarios:
EDIT, added a few points to clarify the scenarios.
1) No debt pay down, pay 45 billion a year in interest: At the end of 35 years, the debt still stands at 600 billion, but it is worth less because of inflation. Considering all the payments and the balance, correct to 2003 dollars the cost for this scenario is 1414 billion. Your expenditures have bought you nothing other than what 2 billion a year spent on programs could produce in the economy. Given that the cost of the debt is 45 billion a year, I would guess that the budget is of the order of 200 billion a year, so a one percent difference probably doesn't do much.
2) Pay debt down at the rate of 2 billion over interest (47 billion total first year, less each following year as the principle decreases): At the end of 35 years, the debt stands at 530 billion. The adjusted cost of the principle and payments is 1373 billion. Not that much better, but at least some progress is being made. And a bonus is that after year 12, the cost for paying down the debt (in uncorrected dollars) is less than the present cost of servicing the debt.
3) Pay the debt down at a constant expenditure of 47 billion per year (total of interest and pay down): After all, as time goes by, that 47 billion gets cheaper. At the end of the 35 years, the debt stands at 291 billion. The total expenditure in 2003 dollars is 1311 billion and that has more than halved your debt.
4) Pay the debt down by an annual amount of 47 billion adjusted for inflation (again, total of interest and pay down): After all, the income for the government, the GNP, the budget, etc. all are adjusted. This would keep the amount spent on the debt roughly a constant fraction of the budget. Now this one is a real kicker. It doesn't run out to 35 years, because the debt is totally retired in 23! And the total cost is 1059 billion in 2003 dollars.
So, explain to me again how keeping a debt puts a nation ahead? Saving 1% of its budget to do what? Stimulate the economy? That's like stimulating an elephant with a gnat.
--Pete
PS, If you want to play around with the numbers, e-mail me and I'll send you a simple XL spreadsheet.
How big was the aquarium in Noah's ark?