What If We Paid Off The Debt? The Secret Government Report
npr.org
npr.org
By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD. Just set the risk free return to zero and you can use all of your old formulas. Yes several bank departments would not be able to make money for absolutely zero risk as they do now. Oh well, I suppose the banks would have to do what they are supposed to do, i.e., calculate risk properly.
But of course it is all academic now. Because it is unlikely to ever happen. Paying off the debt means doing something to help the future generations of Americans and it is doubtful any president would do such a thing, and if he did he would probably have to face a lot of angry voters who do not give a shit about the future generations as happened with Al Gore.
http://research.stlouisfed.org/fred2/graph/?id=FYGFD
We were merely reducing one kind of debt, namely debt held by the public. Total debt continued to increase.
The debt wasn't being paid off at a great rate but it was being paid off and the person's main point that you responded to is correct. We were well off financially until some very irresponsible actions by the Bush administration.
I disagree with the point about us never being able to pay off the debt. It can be done and there are historical examples of countries with higher debt/GDP ratios that were paid off.
Note: When talking about debt of a country people generally mean the debt of the government. There was a budget surplus at the end of the Clinton presidency and this is what people usually mean when they claim a government was/is "paying off the debt".
DATE VALUE
1990-09-30 3206.3
1991-09-30 3598.2
1992-09-30 4001.8
1993-09-30 4351.0
1994-09-30 4643.3
1995-09-30 4920.6
1996-09-30 5181.5
1997-09-30 5369.2
1998-09-30 5478.2
1999-09-30 5605.5
2000-09-30 5628.7
2001-09-30 5769.9
2002-09-30 6198.4
http://www.cbo.gov/budget/data/historical.pdf
According to the PDF there was a decrease in public debt for a number of years during the Clinton administration.
NOTE: I think the chart you linked to includes private debt and isn't just federal debt.
Your note is also incorrect. From my link:
Title: Gross Federal DebtIf the government borrows from Social Security, it takes that money out of itself and spends it out in the economy. SS and the government has a smaller pile of cash, and the government owes itself. When the money is put back, it's with funds that could either be used to buy bullets or put back in SS.
What cost $5605.5 in 1999 would cost $5796.09 in 2000. http://www.westegg.com/inflation/infl.cgi and 5769.9 is less than $5796.09.
Edit: I have seen the same argument vs infrastructure or GPD. But I think inflation is probably the safest measurement, because GDP can drop.
The question in my mind is - if a country like the US has the ability to print the world's reserve currency, isn't it beneficial to run a small deficit to increase GDP? I don't see any problems running small deficits, of course large amounts of public debt are rarely ever a good idea.
A look at sectoral balances helps to analyze this: the government's budget deficit is equal to the non-government's (private plus external sector) budget surplus. That's just a basic accounting fact.
So if the non-government sector desires to be in surplus (as it usually does), then the government must run a deficit. If it tries to run a surplus despite the non-government desires, there is a conflict, and someone will have to budge. Usually, the first ones forced to budge are those with the least economic clout. The result tends to be large scale unemployment.
There is nothing inherently bad or good about government deficits (I dislike the sentiment that is so often voiced by politicians, who frame the deficit and debt as a moral issue - those are just numbers in computers, for Bob's sake! Unemployment, poverty, those are issues where morals come into play). It's simply that given the typical long-term private sector behavior, a long-term government deficit is the pragmatic and economically responsible thing to have.
Mr. Greenspan said he was concerned that if the government did not begin to curtail its revenue, it would have more money than it needed when most of its debts were paid, leading to an accumulation of cash that he opposed. He said the government needed to start planning soon because there was $750 billion of debt that would not mature by 2011, so cash accumulation would begin by then, based on current projections, even though some of the debt would remain unpaid.
Source: http://www.nytimes.com/2001/01/26/news/26iht-fed.2.t_1.html
The Bush Administration figured out a couple different solutions to this problem.
The distinction between gross and public-held debt is also not very useful. The difference between them is government debt held by parts of the government, which is money that the government owes to itself. Public-held debt was decreasing even more: http://research.stlouisfed.org/fred2/graph/?g=2TI
So the graph is misleading in the sense that some people may draw the conclusion that government has used austerity measures, run surpluses, to reduce its debt. In fact, the government did not run surpluses during those periods in which the debt-to-GDP ratio was reduced so drastically. It ran deficits, which helped an already growing economy further along.
Implementing austerity is not going to start a sudden and drastic drop of debt-to-GDP measures in the current economic climate. If you honestly care about debt-to-GDP (why, btw?), you'd do better to stimulate the hell out of the economy.
I hate to trot this link out again, but: http://internationalecon.com/Finance/Fch5/F5-9.php
>We were merely reducing one kind of debt, namely debt held by the public. Total debt continued to increase.
George W. Bush Al Gore
Popular vote 50,456,002 50,999,897Also, a link that works: http://www.theonion.com/articles/bush-our-long-national-nigh...
Yes, it sucks either way, but when debt is the problem, more debt is not the cure. 'Stimulating' is just borrowing future funds to try and get things going now, which, at best, just moves the problem down the road.
Many people are quick to try and string up politicians who point out the truth. Sadly this means the politicians who push the problem forwards and reassure people are the ones that get voted in. And the problem gets pushed further down the track and gets even more malignant.
Ireland is improving (hello from Cork) in relative terms because it genuinely had nowhere further south left to go. 20% of the population is on the dole, property prices are down 60% from 2007 and are still falling, mobility of potential jobseekers has been curtailed by the fact that they can't sell up and move because their mortgages are worth twice what the house is.
We also took the old government out back and swung an axe into its head in February. The party of government for 80% of the entire history of Ireland as an independent state is now polling in fourth position. Its erstwhile coalition partner is within the margin of error of zero.
You cannot but imperil private sector growth by removing massive amounts of cash from the economy all at once[1]. Public employees spend that money they're paid.
[1. Please note use of phrase 'all at once'.]
When you loan money to stimulate defense contractors, non-competitive solar manufacturers and for all sorts of other boondoggles and build bridges to nowhere, no.
The problem is that the process of spending on infrastructure rarely is positive in most places for a whole host of reasons. Therefore, austerity is better because it avoids malinvestment. Doing nothing is better than wasting capital.
If you borrow money to spend, the spending has to create more return than the cost of the borrowed money, or the money is wasted. This is true in the case of the individual, the company and the government. Individuals rarely invest money for greater returns (think : new cars), companies that last always invest for greater returns, but governments have few incentives to do so.
They would much rather make a big splash and announce jobs now, than worry about whether or not they are creating something worthwhile.
The problem, of course, is always in measuring the positive returns of large public spending. But again, in times of over-borrowing, governments should always err on the side of caution.
Austerity plans are always a tough pill to swallow, and they can cost elections - as it did to Cardoso's sucessor in 2002 - but I fail to understand what is this madness you are talking about. If it were not for the economic policy that forced a surplus in the Brazilian budget, I don't think they would be in the (calmer) situation they are today.
I do not know much about Mexico.
As for the boom that came afterwards: Lula kept the basis of the economic policy started by Cardoso. In was only in the last two years of Lula's second mandate (2009-2010) that they tried to loose a little bit on government spending (as a way to fight contagion by Housing Crisis), and inflation had shown signs on creeping up again.
And even that increase in spending was only possible due to the austerity policies from the previous 15 years that allowed the country to grow their reserves. Had they not followed the IMF rules, they would be in the same situation that Greece/Portugal/Ireland/Italy are today.
Isn't it funny how the magical IMF benefits only come about after the IMF has been kicked out of the country.
GDP in dollars fell in 1998 due to changes in the exchange rate. The price of the dollar went from BRL 1.2 to 1.98 in a matter of a week.
Further, the spike that you see in your chart after 2002 was due to the dollar hitting an all-time high of BRL 4.00 when Lula was elected, and there was huge speculation in the market. After he took office and kept the monetary policy, the market calmed down and the BRL has been rising in value since.
Had the price of the dollar kept stable during these years, you would see a curve that shows exactly the numbers I mentioned before.
The IMF has not been kicked out of the country. Debts with the IMF were paid, but the monetary and economic policy is still there. The Brazilian Central Bank still recommends austerity policies for government spending. They still have the highest interest (inflation adjusted) rate in the world. Your cute chart does not prove anything.
P.S: It's in times like these that I really hate voting in discussion forums, and makes me even less of a believer in "the rule of the mob". You are completely wrong, but your cheap jab managed to convince a couple of uninformed people that what I said is worthy of a down vote.
But the only way to meaningfully measure GDP is to measure it against a single unchanging metric, and that's what they did here. Otherwise a country could double its GDP by simply devaluing its currency by half.
More importantly, it looks like it works the other way around. If you are devaluing your currency in half, your GDP in dollars (or whatever means of comparison you use) will be cut in half, not double. This is what your chart is showing. It will be a bigger number in the domestic currency, but then it doesn't mean anything because you are just changing the scale.
Anyway, we are arguing over details. The larger point is that the economic policy mandated by the IMF is still largely in place, and whenever the Brazilian government tried to increase government spending, a short growth burst was experienced with a very long bust.
Lula gave a 1001 speeches saying that "they were breaking free from the IMF", but in the end it is just political bullshit: interest rates are still high and it is the only instrument the Central Bank is able to use to keep inflation under control. This is pretty much the IMF "formula".
Update: looks like you are correct that they use current dollars. It still seems a misleading chart. Take a look at http://goo.gl/BCNIo and you can see the numbers I was mentioning.
Note that IMF-type policies of austerity can theoretically "work", if there are sufficient net exports. Even when domestic demand is savaged by austerity measures, the economy can grow by producing goods for the US and the EU at cheap prices. But net exports-led recoveries are a typical case of fallacy of composition: if there is a world-wide recession, then going for net exports will fail (unless we somehow manage to export to Mars...).
The problem facing the US and EU these days is that people seem to have forgotten that austerity was only ever a policy meant for the others.
This is how we got here in the first place.
When excessive debt is the problem, no amount of spending can cure it. The debt must be paid down or written off, most likely a combination of both.
Sadly your type of thinking is pervasive because it sounds so compelling. But while nobody in their right mind runs up a credit card thinking that this will somehow make them richer, there persists a widespread belief that borrowing and spending somehow makes a country better off. It doesn't, and it won't.
If anything positive is to come out of all of this, it might be the final discrediting of borrow and spend programs created in the name of Keynes. It will hopefully be the death of the widespread belief that you can borrow or tax your way to prosperity. Perhaps someone will come up with a kindergarten rhyme to teach children not to believe in free lunches.
The growth happened after the government spending (ie, military) was wound down. It was the retiring servicemen and women wanting to get on with the rest of their lives that caused the productivity boom.
After the war, the U.S. was in a great position to supply the world, having an economy running at full steam and no war damage to repair. But the Great Depression ended as war began, due to demand for military equipment.
You can pretend that our economy revolves around who's president and what political party system they belong to but no matter how hard you pretend it still isn't true.
Those are real policies, and they have real impact. You can pretend that they don't and that politics is all a "game", but no matter how hard you pretend it isn't true. (Sure, it's mostly a game, but at the margins it's important stuff, and not well served by bland internet cynicism).
Suggesting that Clinton was responsible for the takeoff of internet companies in 2000 and the housing boom is silly. He was a major beneficiary of a great economic time.
The crash of 2008? Many economists wisely point to Republican-led market deregulation, notably the repeal of Glass-Steagal in 1999, as the causes.
Considering that Democrats fight for stronger regulation and pass them (Dodd-Frank... even if that one is DOA), while Republicans fight for deregulation, it's a bit off to imply that the party has no effect on the economy.
That's a huge ideological difference and one that has significant effects on the economy, even in the short-mid term.
Um, Gramm-Leach was supported by a majority of both Dems and Reps. Clinton signed it.
The only major dispute between the parties was over whether to make CRA compliance a precursor for banking mergers. (I.e., banks can't merge or acquire if they don't lend to enough minorities.)
As far as I know, Bush's main forays into finance were Sarbox (increasing regulation), his ill-fated attempts to more strictly regulate Fannie and Freddie, and various laws pushing more people into homeownership (again, increasing regulation). Could you point out any acts of Republican-led market deregulation, ideally from the past 10 or so years?
While this is true, of those who opposed it, the vast majority were Democrats. 58 Democrats opposed it, only 6 Republicans did. The Republicans also controlled both houses and wrote the legislation so they certainly deserve more blame.
Repealing Glass-Stegal set the fuse by allowing banks to flip loans into the market offloading their risk, but it was the change in the net capital rule (http://en.wikipedia.org/wiki/Net_capital_rule#The_net_capita...) in 2004 under the Bush administration that lit the match and kicked off the crisis by creating a massive amount of potential credit that led to the banks handing out loans like candy to anyone who'd take em knowing they could immediately flip the loan and pocket the profit with little risk.
Glass-Steagall has nothing to do with the secondary market for mortgages. Banks were flipping loans in the early 80's. This is how Salomon Brothers became famous.
...the change in the net capital rule (http://en.wikipedia.org/wiki/Net_capital_rule#The_net_capita...) in 2004 under the Bush administration that lit the match and kicked off the crisis by creating a massive amount of potential credit that led to the banks handing out loans like candy to anyone who'd take em knowing they could immediately flip the loan and pocket the profit with little risk.
I don't think you understand what you are talking about. Flipping is always low risk, regardless of whether you mark to market or mark to model.
All the modified NCR rule would have done is allowed banks to hand out loans like candy and not flip them.
The repeal of Glass-Stegall let them flip loans to the market while their funding was FDIC insured since they were gambling with depositors money, something they didn't have access to before that. That makes flipping more attractive because you're insured by the FEDS.
The net capital rule change amplified this ability making handing them out like candy attractive; what good is a ton of credit if you don't leverage the shit out of for all you can.
> All the modified NCR rule would have done is allowed banks to hand out loans like candy and not flip them.
Which is what I said; I wasn't implying that the flipping was related to the net capital rule.
Whoa... tell that to the folks who worked at Bear Sterns and Lehman during 2007/2008. This is precisely why all of the major banks needed a bail-out. The risk models all automatically assumed that these instruments would maintain their liquidity, but when that capital dries up, it turns into a game of musical chairs.
When your business model fundamentally relies upon a liquid market for short-term credit[1], you typically end up in bankruptcy court when/if the music stops (unless of course you threaten the entire financial system and get a government bail-out).
When the institutions you rely upon for credit lose faith that you can repay your debts, you're sunk. Mark to whatever, that only matters with long-term debt.
[1] http://en.wikipedia.org/wiki/2007_subprime_mortgage_financia...
Bear collapsed because they held huge long bets on housing with high duration. In contrast, companies like Goldman (mostly short term strategies) survived just fine.
My top comment comes off like I'm a big time republican and that couldn't be further from the truth. I just want to point out that the great economy that Clinton benefited from was not his creation.
I tend to agree that some of the deregulation did contribute to the crash in 2008. Some of that same deregulation also, very likely, contributed to the boom in the early 2000's.
The big housing boom started post-Clinton. It was intentional, to get us out of the 1999 tech crash.
Clinton benefited from the tech boom and the end of the cold war. (Bush I got hammered by the post-war transition recession, which ended before the election.)
Depends on what you mean by paying off the debt. If you pay off the debt by just issuing a sufficiently large amount of reserves at the Fed to do so, then yes, I would agree. Then you just transform one form of government liability (treasury bonds) into another form of government liability (reserves). No problem there.
But if you're actually talking about eliminating net government liabilities, you're missing the point. Here's why:
Individuals in the private sector want to accumulate net financial assets, if only to save for retirement. Every financial asset is somebody else's corresponding financial liability.
But retirement funds & co. are huge. Who is going to incur the necessary net financial liabilities to correspond to them? Private entities? Why would we allow private entities to run up that much debt? Also, with private entities you always have the problem that people might change their mind about their credit-worthiness.
The federal government, on the other hand, is at the top of the pyramid of liabilities (see e.g. here: http://neweconomicperspectives.blogspot.com/2011/09/mmp-blog...), and they can easily incur and sustain the required net financial liabilities to allow the private sector to save in net financial assets.
So government liabilities play an important role in the stability of the financial system.
If you run down the federal debt, you end up in a situation like the Eurozone, where the entity at the top of the pyramid of liability (i.e. the ECB) does not incur sufficient liabilities (and in fact, does not have the mandate to do so, for good reason) to support a stable financial system. The debt crisis is a direct result of this flawed setup, and you would be wise to avoid copying it in the US.
Other countries deal with surpluses with sovereign wealth or rainy day funds, but you could just as easily envision rebating a surplus as fully-refundable tax credit "dividends".
Then again, they don't actually have an official inflation target, so...
I see no reason the Fed wouldn't go for outright deflation if they thought they could get away with it. They seem to be really happy with their current tight money policy. :(
Think about it, how could it be that it is only 1.5% inflation when the size of the money supply is doubled or tripled?
For the Fed, "inflation" means an increase in the overall money supply. You get an increase in the money supply when people borrow money, and you get a decrease in the money supply when people pay off (or default) on loans. In a macro-economic sense we've been going through a period of pretty severe deflation since the housing market crashed, which is why the Fed is desperately pumping money into circulation. For all the gory details see here:
http://globaleconomicanalysis.blogspot.com/2008/12/humpty-du...
tl;dr: You can have a rise in the cost of living and deflation at the same time, just like you can have stable prices during inflation.
p.s. If you don't understand why the money supply increases when people borrow, this is a good (though a bit dramatic) primer:
http://video.google.com/videoplay?docid=-2550156453790090544
Aslo, the Fed is not desperately pumping money into circulation. For example, they're paying interest on reserves (that is, paying banks to park money in accounts at the Fed). If they were trying to get money into circulation, the wouldn't be doing that, or would even be charging interest on excess reserves. Both policies have been used by central banks in the past; in fact the Fed didn't use to pay interest on reserves until the recent bank crisis started.
For inflation expectations? TIPS spreads.
The actual inflation rate is determined based on a basket of goods, which may or may not match your consumption patterns. Of course things get complicated by substitution effects, hedonic adjustments, etc. I don't know that I believe the official number any more than you do. But the fact is that the official number is what the Fed is supposed to target.
Note that groceries are explicitly excluded from "core" inflation calculations in the US because they're subject to severe supply shocks which have nothing to do with the value of money or inflation, by the way.
> how could it be that it is only 1.5% inflation when the > size of the money supply is doubled or tripled?
Trivially, if everyone keeps their money under a mattress. We're not quite that bad, but not much better off right now, either.
Second, I think the fact that the market crashed in 2000 might have a little something to do with gov't deficits as well.
I think the estimates were made for the plans Clinton put. He didn't plan to go on war with Afghanistan or Irak or make huge spending.
To a lay reader like myself, it would easily lead to confusion if people talk about different numbers without making the distinction clear. Is there a well known relationship between government debt and private debt? Or is talking up Total US Debt just a distraction from the article, which talks about Government Debt?
Yes.
"[...T]he difference between the government budget deficit and the trade deficit must equal the difference between private saving and investment[...]"
http://internationalecon.com/Finance/Fch5/F5-9.php
Holding the trade deficit constant and lowering government debt implies a rise in private debt.
It's also a bit of apples-and-oranges when you compare the nominal debt of one country with another without looking at the differences in GDP between the countries, i.e. the size of each country's economy.
The debt dollar is a horrible instrument that will not end well. We may be decades off, but it's gonna be ugly.
Spending increased more slowly from 92-94 before the Gingrich congress came to power, than it ever did afterwards. And Clinton didn't have to shut down the government to do it.
http://en.wikipedia.org/wiki/United_States_federal_governmen...
If, for example, the US were borrowing money at 3% by issuing T-Bills, it would just buy a basket of high-grade foreign and corporate debt at 3.5% and earn a spread of 0.5% while continuing to provide adequate liquidity of T-Bills.
The bond market actually did very well - in 1998 there was approx $167BB of govt debt issued while in 2008 there was $480BB.
http://www.brr.com.au/event/43083/recent-developments-in-the... for a boring speech about it by the RBA governor
The US has no reason to issue T-Bills in a zero-debt scenario, through. The only reason that the US government has to sell bonds like T-Bills is to make up for the difference between income(taxes and fees) and costs. If the budget is completely balanced, there is no reason for the government to sell off bonds of any form, since they would need to pay them off with interest at a later date.
However, I was assuming that the size(and budget) of the federal government is large enough that if it were completely balanced, and all debt was paid off, they would have enough surplus cash(or the ability to redirect funds) to invest in a large-scale project like that. Short of another world war, I don't think that there are really any projects that would absolutely require this kind of immediate investment by the public.
You can always go bigger, and in such an incredibly desirable position as you describe, the potential economic feedback loop from going even further with investment in infrastructure and public services is too big to ignore.
Imagine an alternate universe in which there is still a Glass-Steagall act, the Bush tax cuts were never passed, the Afghanistan and Iraq wars were never started, the financial crisis was limited to a few isolated dominoes, and the US is on track to pay off its sovereign debt completely by 2016. We could build a competent, national network of high speed rail without borrowing anything. Or, we could borrow again and build a world-class rail network, invest heavily in education, transform the nation's healthcare system, revitalize NASA... There is always room for more investment.
Also, this is a really depressing fantasy to return from.
We would have ended up in the hole anyway, since the revenue burst was bubble induced and destined to go down. But even if that wasn't true they would never have allowed the surplus to continue.
Even then it was imaginary, because the growth in Social Security and Medicare spending was always going to outstrip revenue under the rosiest of scenarios.
That's the challenge. How would you replace such a secure asset? After the US, Japan and EU used to be pretty solid economies, but not anymore.
Precious metals are much safer than US debt.
Most tangible things (metals, real estate, income producing businesses) are safer than currencies that can be created out of thin air.
Here is a historical chart of the price of gold (in dollars) since 1833.
http://www.nma.org/pdf/gold/his_gold_prices.pdf
Dollars originally were redeemable in gold. But because of inflation of the money supply (i.e. creating more dollars) the US didn't have enough gold to pay their outstanding debt (i.e. the dollars out there being held by other countries).
So Nixon was forced to sever the dollar's tie with gold in 1971. At that point the dollar is a fully flexible (or fiat) currency.
Look at the price of gold in that chart since 1971.
That's not the value of gold going up. It's the value of the dollar going down.
Gold supply is relatively stable. It takes investment and time to mine new gold, so only a small amount is introduced into the economy each year.
New dollars are added to the economy at a terrifying rate. Every fiat currency in the history of mankind has always gone to zero.
So you would be exchanging one liability of the government for another one. If you are so blasé about high levels of outstanding government liabilities in the form of cash (imagine the amount of physical bills that would have to be printed! ;-) ), then why not just stick with what works today, namely high levels of outstanding government liabilities in the form of debt?
I don't want to pick on you specifically, but man would those discussions on HN be more fruitful if people were aware of basic facts in macro-economic accounting.
This didn't mean that there were no securities on issue - the need for an active market in government debt meant that there were still securities outstanding, but these were offset by liquid assets that could be sold to buy back the debt if necessary. I don't know what the surplus money was invested in, but one of the leftovers from that period is a 'Future Fund' which is a very large pool of investment funds held in trust for the future pension needs of the public service. That is - the money was separated out from the general revenue pit and put aside to pay out the retirement benefits of the people employed by the government itself. I do know that this fund is a diversified fund like any other, and invests in different styles and classes of securities.
Of course, a change in government since that period and a drop in revenues from the financial crisis means this is no longer the case. But for that brief period it was a very good place to be - income tax rates were going down every single year and the economy had an unbroken 13 year period of real growth in wages and productivity.
You don't need public debt to function properly. Australia is a perfect example of this. In fact, a lack of public debt is a good thing as it allows a government to either return taxes via lowering tax rates, or invest the surplus for the inevitable rainy day, or, to build productive infrastructure if that is what they choose to do.
The US could have done the same and I understand that is what this "secret report" recommended.
Does anyone know how much of the money supply is government debt?
I always get dizzy when I try to understand the monetary system. It seems insane. It really shouldn't work at all.
If you want to get a headache, too, try reading http://en.wikipedia.org/wiki/Money_supply, http://en.wikipedia.org/wiki/Fractional_reserve_banking or watching Money as Debt.
China, however, has a currency which is pegged to the dollar and backed by the US treasury. As a result, our government debt increases their money supply.
you use wrong/incomplete models to describe it (incidentally so do policymakers).
try http://en.wikipedia.org/wiki/Modern_Monetary_Theory for starters.
But this so called refutation seems to be totally missing the point. No wonder - it's coming from Austrian. This is like asking Aristotelian about General Relativity. They're Universe apart.
Can someone explain why it's good to have a global economic system that is at great risk if the United States gets rid of it's debt?
Some questions: Would it be bad for a person to be debt free? A household? A neighborhood? A small company? A large company? A city? A state? A small country? A large country?
Why is it good for companies and people to be debt-free, but bad for countries?
Another way to look at it is that it's not just government debt that's important; there have to be some people who owe other people money or the economy doesn't function. The normal process of business institution-building is founded on the idea of loaning money (again, we usually call this "investment," but it's debt at its base). A good way to think about it is that if you are debt free, that's good for you, but if everyone were debt free, we'd still be living in an incredibly primitive economy.
A great example is buying a house. If you have the cash for the house that's great, but do you want want to tie up that much money into a single asset especially when the cost of money is so low right now? Other investments might not be that great today, but over the next 15 or 30 years you can probably find an investment that beats the current low rates of 3.75% or below.
When you buy a house on credit now, you're spending newly created money. You're purchasing a large asset at current prices (which are set by the current money supply.) As the new money you've injected into the economy circulates, prices rise. But you had the advantage of buying before you injected the new money.
If money were not continually being created, eg if it were backed by gold, then prices would drop over time, because the rate of innovation and productivity gains is greater than the rate of new production of gold. In this scenario, houses should depreciate over time.
With businesses, investing borrowed money can help the company grow, and give returns greater than the interest on the debt.
With countries, the theory goes, a little debt means other countries have a vested interest in your success or failure. For example, why hasn't China invaded the USA yet? Perhaps they are waiting until they get their ~$4T back! :)
Well for starters, the Chinese don't seem to really be in the business of invading countries on the opposite side of the world, do they? Unlike another little country I can think of...
theoretically it is fairly easy to repay those $4T. you would need some large container ship to transport all of them back to China, but a lot of those go back over Pacific fairly empty anyway.
Many crazies advocate abolishing the Fed as they see it enslaving and controlling the entire economy without much supervision and control by the citizens of this country. Not saying they are completely right or anything, but it this is basically a warning or a symptom that something is perhaps fundamentally wrong (I sure don't know well enough how it works, it is just a feeling).
Think of it as what would the drug companies do if all of the sudden there were cheap easy un-patent-able cures for all the chronic diseases. Would they start selling herbal supplements? Go into homeopathy business? Would they invent more 'restless leg syndromes' type diseases. I think it is a bit like that. It shows perhaps there is something wrong with the system & the constraints and incentive are not working they way we'd expect.
Whether it was either just enough to stop them from getting to the deeper, restorative levels of sleep, or bad enough that they had to get out of bed and walk around for a couple of hours, restless leg syndrome is a clear blight on quality of life. Sure, it may not be fatal (except where increased tiredness is generally), but it's still a significant health issue to be afflicted by.
Also wouldn't you working in a sleep clinic skew your perspective on how widespread the thing is? In other words you would only see people who have problems sleeping.
Also, I didn't say anything about how widespread it was - I said it fucked people up and it's not a pseudodisease.
It's not to say that there aren't overprescription issues, just don't fall into the Prozac trap - just because something's overprescribed doesn't mean there isn't a real disease around.
It doesn't mean Merck doesn't have a drug that lowers the threshold, but it also doesn't mean that all cases are due to this Merck drug.
Anecdotally, RLS has been around for quite a long time, but again, I don't know the timeframe of the drug you refer to.
> Many non-crazies [...] One of them is running for
> President.
Also, Cantillon effects messing up the economy, putting more wealth in the hands of banking elite, growing the size of government, etc... are other problems made possible by central banking.
The banking industry makes money when it issues loans. So it's very important that people keep borrowing. To keep people borrowing from the banks and not from each other or private savings, the banks are allowed to create money and lend it at below-market rates. So in general, it's always a better deal for a borrower to borrow from a bank than from private savings.
The current system is great for bankers, great for government (who can essentially get all the money it wants from the bankers), and great for borrowers. It's bad for people who don't borrow, especially savers.
the government lives forever.
https://fbcdn-sphotos-a.akamaihd.net/hphotos-ak-ash4/318450_...
But in the case of US debt, the opposite seems to be true: http://4.bp.blogspot.com/-iFxt2vNk2y0/TZNxgTINNEI/AAAAAAAAAW...
When Moody's downgraded the US credit rating, the response was a rush to, not a flight from government bonds.
It seems to me that a bit of data and a little bit of modeling would have greatly improved the opinion piece this document describes.
As for Economics, it is really time to rethink the field. I rather liked Eric D. Beinhocker's book, The Origin of Wealth (http://www.amazon.com/Origin-Wealth-Evolution-Complexity-Eco...). See also his Wikipedia bio: http://en.wikipedia.org/wiki/Eric_Beinhocker.
When Asimov posited his Pyschohistory in the Foundation books he indicated that it could only be statistically useful on populations measured in the _trillions_. And even then it could only work if the methodology were kept absolutely secret from everyone in the modeled society.
Asimov's Foundation Series books are enlightened works of science fiction, but they are fiction, not fact. I find is strange that you cite them as if they were seminal works in societal modeling.
When you are able to usefully, and predictively model "politics and power and sex and violence" then you will be doing extraordinary work and I'll look forward to you getting your well deserved Nobel Prize. :)
They still had the ability to issue debt (and did) because it was the belief that they were a good credit risk that was the reason behind the AAA rating.
Provinces and smaller countries can't do this. The value of their bonds will always be compared to the dollar (unless another currency becomes the standard).
It would of course be too outrageous for most polticians but here's a thing:
When the UK govt bailed out the banks they spent 500billion. The outstanding mortgage debt of everyone in the country at the time was 368billion.
Whilst I know there are many people without mortgages (because they rent) the knock on effect of paying off all the oustanding mortgages instead of recapitalising banks would have done some amazing things: it would have given the whole economy an enormous payrise which would have had an immediate positive effect on high-street retail.
Also because people would not immediately spend all of their new found money it would have gone into savings: recapitalised the banks indirectly. They were always using everyone's savings anyway.
It would have resolved the thing that caused the crisis: that being risky mortgage debt on the banks books. No more mortgage debt, no more unstable banks.
Lastly and probably most importantly, it would have allowed govts to raise taxes to refill their coffers because absolutely nobody would notice, and probably nobody would even care.
So why couldn't we buy other sovereign debt --obviously stable/safe. It's not as though we're the only ones with debt or safe debt. I don't imagine Germany or Japan or France defaulting.
Also, the US wasn't really running a true surplus, it was still borrowing from SS during this period. The feds use SS to mask the true size of the deficit, and it was only by this phony accounting that the budget was "balanced".
I know the republican guy got hounded for his 'ponzi scheme' comment but there is an element of truth in that hyperbole. Without new workers contributing SS payments, the recipients wouldn't have anything coming in. So it's not a ponzi scheme as such, but it's certainly not an investment fund either.
It's really a lot like your right pocket borrowing from your left pocket.
It is a genuine concern, though, what would happen if US Treasury Bonds ceased to exist. There's a good argument to be made for the US not completely paying off its debts.
Perhaps this is a ridiculous question, I admit I haven't taken a lot of econ. But couldn't they just take the money that comes out of people's paychecks and, you know, keep it? I know that treasury bonds have a very slight overall interest rate, but that interest is paid by tax payers anyway, so if I'm not mistaken it's a net gain of zero.
The government borrows SS taxes but spends the money, and provides a Treasury IOU to the Trust Fund. That IOU is not traded and is unrelated to the Treasury bond market in every way.
If the US government selectively defaulted on the Treasury bonds held by Social Security, would there be repercussions on the bond market? I don't know. It depends on whether you would continue to loan money to someone who was stealing from their children's piggy bank to pay off their bills. Maybe, if every other option for storing money was worse. What it would absolutely be was a theft of funds disproportionally levied from low income people to give as a gift to all other bondholders.
Whether something is marketable is meaningful. US bonds are traded on an open market. The securities issued to the SSA cannot be sold on this market or to anyone.
If APPL issued me a promised to pay me back for pizza last night I have... a promise. But if they issue me a bond I could turn around and sell it the next day, depending on whether I trusted APPL or had better uses for my money.
The securities issued to the SSA are functionally equivalent to "IOU"s.
> Is buying bonds a "plain ol' tax?"
The SSA has tons of assets, in non-marketable bonds. What's the point of an asset that can't be sold? It's just an accounting detail. If the bonds never existed the situation would not be functionally different.
edit: You know what functions of government don't hold any bonds? Almost all of them. Are the roads a pyramid scheme? Is all government a pyramid scheme? I still find it tough to believe that there's a group of people who say that:
1. Because the government can selectively default on the bonds held by Social Security if it votes to selectively default on the bonds held by Social Security.
2. Therefore, Social Security is an unsustainable pyramid scheme,
3. Therefore, the government should default on the bonds held by Social Security.
The government can also selectively default on the bonds held by me personally, or by China, or by anyone not named Todd. I can also collect their shares of the rent from all of my roommates, deposit it into my general fund at the bank, spend all the money on crack, then set the house on fire. The point of view of the "IOU" people is that my roommates should vote for me to do that, because once the money was in my bank account it transformed into whimsy and unicorns and at least the commitment to the crack binge and imminent homelessness gives them the certainty to plan for the future.
If the government is defaulting on any bonds, as an American, you have more to worry about than your retirement, namely roving bands of cannibals in the street and nuclear fallout, or that the Peter Peterson Foundation has finally taken back the White House.
I'm just a simple, evil republican bush-sucker. Does that help you categorize me and thereby ignore anything I'm saying?
Enjoy your Social Security!
None of what I said was intended to imply that Social Security will exist next year. There is a resurgent philosophical contagion that intends to whittle away all government functions until it is purely a police force to protect private property. They could easily succeed.
Over the long term people who pay off their credit cards every month are in a better cash flow position, which is why I laugh when people say they need cards to maintain their standard of living. Countries are no different.
Now, if you're making an investment sometimes it's worth borrowing money. Businesses do that all the time. Governments do it too, but only very rarely, and they usually end up spending far more past the point of diminishing returns.
they are freely interchangeable!
money IS debt!
Both US$ paper bills and US Treasury Bonds are liabilities of the government (where I consider the Fed as part of the government for obvious reasons). I use liabilities in an accounting sense, but you really need the basics of accounting down solidly to understand the monetary system.
Another term for liabilities is debt. So when you have a 1$ bill, the government "owes" you something. Here's where things get a bit confusing, because what exactly does it mean that the government "owes" you 1$?
Well, they have to extinguish the liability in the agreed-upon way. Usually, you extinguish a liability by moving a corresponding asset that is on the same level or higher up in the pyramid of liabilities (see here: http://neweconomicperspectives.blogspot.com/2011/09/mmp-blog...). When I owe you something, I extinguish my liability to you by giving you paper money.
But the government is at the top of the pyramid, so their liabilities can only ever be transformed into either another form (exchanging cash for bonds or reserves or vice versa) or they can be extinguished when you pay taxes.
That takes some getting used to, but nobody said economics was always intuitive.
Anyway money is just a tool to keep the populus occupied. And since without problems or debt there would be no need for governments and banksters, they shall exist to create problems(government) and debt(money) and therefore assure they survival.
And how's that working out? This is all FUD, FUD, FUD..
Yup, that little light still comes on. And yup, there's still food in there.
It might be a bullshit system, but it is functional.