Comment by nhaehnle | Hacker News Reader

Comment by nhaehnle | Hacker News Reader

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This whole discussion is very depressing, because it highlights how uninformed the people are about what government debt represents. At least that is what a poll with 70% against raising the debt ceiling tells me.

Government debt equals private assets, and so being against government debt is being against (at least one form of) private assets.

If you are against the accumulation of private assets for whatever reason (for example, because you're a communist - see what I did there?), there are still better ways of preventing that than making the government commit economic suicide.

Honestly, the US should just get rid of the debt ceiling altogether, and recognize that the size of the budget deficit needs to be benchmarked not against pseudo-religious standards, but against how much productive capacity is available in the real economy - because that is what you need to look at to prevent inflation (which is the only possible negative economic outcome from a budget deficit that is too large).

Edit: I would appreciate some feedback on why people vote me down. I try to reply to questions and criticism as to the contents of what I write in a calm and clear fashion. I hope people don't just vote me down because they disagree with something that I write, or find it politically uncomfortable.

Why does government debt equal private assets?

and another question: why does a huge thing like a country need debt at all, shouldn't it (on average) be debt free?

> Why does government debt equal private assets?

Not that I fully agree with his assertion, but: Gov't debt usually takes form of `bonds'. Such bonds are issued for fixed terms and traded on free market. Both private and institutional investors (including other countries) invest in bonds, thus some of gov't debt will normally be in hands of private investors.

Government bonds are considered highly secure and reliable means of investment, if somewhat low-yield. That allows the issuing country to rely on bonds for matching income to expenditures any time it needs to, at rather low cost. Should a country declare bankruptcy, or just near it, this instrument is much harder to use for the govt.

Consider having a look at http://en.wikipedia.org/wiki/The_ascent_of_money which covers the topic pretty well.

> why does a huge thing like a country need debt at all, shouldn't it (on average) be debt free?

Axiomatically, if you sum up over all worldwide assets and liabilities, they sum to zero. That is a fact that simply follows from accounting. So the world as a whole is (net) debt free (until we start trading with extraterrestrials, then things might change).

The US probably is roughly net debt free on average, summing over all domestic private and government assets and liabilities. I don't have time to run the numbers right now. Certainly, even if the US is not debt free on average, its net debt towards foreigners is much less than the government debt, and also less than the sum of government debt held by foreigners.

If people just stopped looking only on one side of the coin, they would realize that and chill out over the government debt.

It is not that simple. Have you ever wandered why counties do not have to issue balance sheets at the end of every fiscal year( or at least before every election) ?

Do you understand how easy it would be to judge how a government performed by comparing two of these? And ask all the right questions, exactly as MS investors do with the "developers, developers, developers" CEO?

Thats just because they dont want to share the information transparently. New Zealand started issuing a real balance sheet quite some time back, and it is very interesting. It is hard to do as you need to estimate long term liabilities etc.

Here is a summary position and you can find the rest on the site http://www.treasury.govt.nz/government/longterm/fiscalpositi...

All governments should do this....

This is excellent. What prompted them to do this?

I forget the original reasons, it was some time back. There is a statement here: http://www.treasury.govt.nz/budget/2010/is/04.htm

I seem to remember it was partly prompted by a new government wanting to prove they were fiscally responsible, but also I think there has always been quite an awareness as there is a huge earthquake reconstruction fund (now entirely in external assets) in case of disaster, which would prompt some thinking about assets and liabilities.

This is excellent indeed.

Actually, it might come as a surprise but Greece seems to have a lot of public assets which would give it a much better clear position than many other countries in Europe if they were to be compared.

However of course, it is no secret nowadays that even with a great clear position, if cash flow is not positive you may easily go under.

Of course this government debt needs to be paid with interest. The ones who pay it are the taxpayers. So government debt is a way of taking from the poor, middle classes, the vast majority, and giving to the rich, or a tiny minority.

You are right that interest payment is typically a redistribution of wealth towards the rich.

The interesting thing is that a monetarily sovereign government actually sets its own interest rate, via monetary policy: the interest paid on US treasuries is ultimately a function of the interest rate set by the central bank, i.e. it is a political choice.

This is initially unintuitive, but it follows from developing an understanding of the system from first principles, as is done by Modern Monetary Theory. You can read about it under the heading "What role does the bond market play in all of this?" in this article I already linked to elsewhere: http://pragcap.com/resources/understanding-modern-monetary-s... and also in Randall Wray's book "Understanding Modern Money".

Quite a number of economists in the MMT line of thought actually argue in favour of letting the interest rate drop to zero, and using fiscal policy instead of monetary policy for inflation targeting.

In other words, government debt does not need to be a way of taking from the poor. It is that way as a result of political choice - though I do not think that it was a conscious choice, since people have not really internalised how our monetary system works these days.

The fact that net debt is zero does not make people or countries creditworthy and able to pay.

Government debt is apparently a good thing, it encourages internal private (businesses of that country) growth. I can't find more about it, it is something worth understanding properly.

I should probably add some information on where my analysis is coming from. I am writing from a perspective of Functional Finance and Modern Monetary Theory. You can find a clear intro to the latter here: http://pragcap.com/resources/understanding-modern-monetary-s...

One of its most prolific proponent is economics professor Bill Mitchell who blogs here: http://bilbo.economicoutlook.net/blog/

See his Debriefing 101 category for more introductory posts: http://bilbo.economicoutlook.net/blog/?cat=11

Thank you! MMT was very eye opening for me.

Well I gave you an upvote for reaching the correct takeaways (public uninformed and we need to raise debt limit) but I can see a couple reasons you might be downvoted:

(1) Presenting a heterodox theory as fact or mainstream.

(2) Muddled argument. The whole "being against government debt is being against private assets" line is incredibly weak. The less forceful but less controversial version of this argument is simply that the debt is a (possible) long term problem but we have a real short term crisis that is more important. As Brad DeLong says if you have some corroded gas pipes that might explode in 10 years you'll want to fix that eventually but that doesn't mean you don't turn on the heat during a blizzard.

Why is it so good with private assets that most likely are outside the country? How does it help taxpayers?

First of all, "most likely" is false. Actual numbers can easily be found, here's a secondary source: http://en.wikipedia.org/wiki/File:Estimated_ownership_of_tre...

So less than one third is held by foreigners. This is more than for most other countries, but keep in mind that much of world trade is still run in US$ - this is what people (hopefully) mean when they say that it is a quasi-reserve currency, which naturally drives up demand for US$-denominated financial assets.

Second, the fact that so much of those assets are held by foreigners has greatly benefited US citizens up to this point in time, because the foreigners holding those assets obtained them by selling their products to the US. So the US was able to receive a lot of real, physical goods that cost actual physical resources and work to produce, in exchange for the US simply running a computer system on which accounts are managed. If you ask me, that is a very good deal.

Now, once China gets their act together and becomes able to change their economy into one that is not so export-heavy, they will sell of their assets over time. This will force the US to become a nation with net exports again.

But from the perspective of US citizens, the worst case is that the US enjoys more physical resources (than it would be able to without trade) now at the cost of enjoying less (than they would be able to without trade) in the future. And in fact, they cannot even be forced to take that full hit in the future, because they could always choose to inflate the debt away.

Now you may say that you would rather suffer a decrease in resources that you can enjoy now than suffering that decrease in the future. That is a reasonable political stance.

However, the reality is that especially China is hell-bent on sending real goods to the US in exchange for paper. Trying to cut the budget deficit or to reduce debt directly is not going to change that. In fact, it will hurt US citizens long before it will hurt China.

The only way to stop the flow of financial assets towards foreigners is via a combination of trade barriers and helping China to turn their economy into a domestic-consumption-based economy.

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