Comment by acabal | Hacker News Reader

Comment by acabal | Hacker News Reader

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I think part of the problem is the popular perception that a nation's economy is just like a household economy: i.e. in a household if credit card debt is high, you gotta pay that off before you can spend more; or if you're earning $1000 per month but spending $2000, you gotta cut down on your cable bill and nights out.

That's a tantalizingly simple and intuitive comparison that everyone can understand and relate to. Unfortunately a nation's economy is so utterly unlike a household economy that the comparison is downright dangerous, because it leads to harmful false assumptions like "national debt is always a bad thing", "a nation must always 'earn' more than it spends at all times", and "an economy can never grow in a nation with debt".

I'm no economic wizard but it really surprised me that how everyone in Europe and many in the States are prescribing austerity, when basic history from this very century frequently demonstrates that austerity can lead to economic damage. Yes you can always find programs that can and should be cut back in any developed society, but considering debt to be the central and only problem in a situation where the debtor defines the very money it "owes" seems a little shortsighted to me.

Austerity in europe is essentially the only politically viable option at the moment. On one side you have Germany and a bunch of nations who refuse point blank to essentially write a blank check for the nations who need it, on the other you've got public opinion which is in no way ready to take the quantum leap of political integration necessary to make fiscal transfers meaningfully possible within the eurozone.

So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe.

Politically viable, sure – but it’s also the wrong way to go. It’s not sustainable since it won’t lead to forward progress. It only delays the catastrophe, while at the same time options do exist (as outlined in your first paragraph) – but the European leadership cowardly refuses to fight for them.

Making something that is not politically viable is a politician’s job – and they refuse to do it.

>So the default action is austerity, the IMF signed off on it because they feared that the euro's breakup would be catastrophically worse than almost any amount of austerity in europe.

Additionally, a 3rd option worth consideration: letting individual countries default.

Does Greece really need anyone's permission to default? Iceland didn't. Defaulting on the national debt is almost an act of war, but there is historical precedent.

No, Greece could have defaulted completely on its bonds - which were held by the German banks.

Then Greece would be OK, and the German banks about to fall like dominoes. Then the Germans might have become more reasonable about a bailout.

After all, they would really be bailing out not the Greek people, but German banks that shouldn't have bought bonds from crooked Greek politicians and Goldman Sachs.

I don't see how any of that is the Greek people's fault, and in the mythical "free market" said German banks would have been allowed to go bust years ago.

I'm not sure where you're pulling those harmful false assumptions from, but surely a nation should at least occasionally earn more than it spends? Because the US has only managed that trick 8 times since 1931, of which only one time was since 1960.

http://whereistheoutrage.net/domestic-issues/budget/budget-d...

And sure, unlike households, nations have the option of printing more money to pay off their debts. Unfortunately that doesn't generally work too well (see also: Zimbabwe, Weimar Germany).

As a pure logical matter, just because hyper inflation is possible does not mean it's the inevitable result of an inflationary monetary policy. Zimbabwe and Wiemar Germany are extreme examples. Both had their infrastructure devastated by war, and Wiemar Germany was subject to crushing, externally-imposed war indemnities.

Zimbabwe's war ended in the 70's. Horrific mismanagement by Mugabe and his cronies is the biggest culprit of the hyper-inflation now affecting the country.

If you look, you'll notice that a recession followed nearly every reported government budget surplus.

This is not surprising: a surplus means that the government is removing more money from the economy than it's adding, something which is rarely warranted absent a large current account surplus and/or an economy operating at full capacity.

You need to understand the sector financial balances.

It sounds like you're suggesting that America should more often earn more than it spends. (Correct me if I'm wrong.) Again I'm not a student of economics, but the fact that America in the 80 years since has become the most powerful economy in the world's history, while only being in the black 8 times, suggests to me that earning more than you spend isn't really as important as many think. Rather, it's the flow of money in and out of the economy and other factors that really matter.

That's why my original comment is about: Assuming that a nation is like a household--i.e., that at some point it obviously should earn more than it spends, because that's how a household operates--leads to conclusions that aren't always supported by history.

Weimar Germany's situation partly mirrors the one today. To deal with hyperinflation and a collapsing economy, in '31 Chancellor Brüning cut spending by 30%. It eventually led to a budget surplus but at the cost of 30% unemployment. Those events helped set the stage for what followed in WW2. Obviously the comparison is tangential, but it's interesting to think about nonetheless.

See: http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-ger... http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Re...

I see you're point about America's economy being the most powerful, but isn't that perhaps a bit like a marathon runner who sprints full speed the first mile and says "Whoa! Look at how much I'm ahead of everyone else!".

You may be right, but it seems there is more than just our current situation to consider. There are long-term ramifications of that debt. At some point, we can't just keep borrowing. It might be working for us today, but like the sprinting marathon runner, eventually it will catch up to us.

No, I'm simply suggesting that once you're sufficiently indebted, there's a limit beyond which people stop lending to you. And if you're getting further and further into real debt (adjusted for inflation and growth), you'll hit that limit eventually.

And yes, America is currently the most powerful economy in the world's history, and that's why it has an AAA credit rating despite its fairly disastrous finances. But barring total implosion, China'll be the top dog within a decade or so, and what happens then?

The way I understand it, a nation's economic standing as a borrower is based basically on trust. A lender nation trusts that the borrower nation can eventually repay its debt. That trust isn't so much related to the raw number of the current debt, but rather how the lender believes the borrower will behave and evolve in the coming years. Today nobody has a reason to believe the US will do anything but continue to grow (in the long run).

If in a hypothetical alternate universe the US had a civil war tomorrow, it could have a massive budget surplus and yet it'd probably find that nobody would be willing to lend to it regardless, because the climate of repayment would be so uncertain.

In today's real world, the US has the power to print its own money. In very real terms it can define the very term "debt" as whatever it pleases. That, combined with its status as a massive buyer of foreign goods, history of entrepreneurship and growth, history of corrective action by the Fed, insanely powerful military, and so on, means that it could owe 100x times as much as it does today, and nations would probably still happily lend.

A nation is not a household. It doesn't reach some magic number "lending ceiling" where everyone else says, "you owe 100 trillion and 1 dollars, we're not gonna lend any more" like might happen to a regular person with a credit card. A "AAA" rating is just some label that some private company makes up.

So the issue isn't some dollar amount drawn out of an economist's hat, but rather the real trust inferred from a nation's geopolitical position.

Any real students of economics please do correct me, as I have no doubt my reasoning is flawed somewhere. But this is how I currently understand it.

It's important to note that many of the holders of US debt are US-based, i.e. it is not all external debt like it would be in a household.

Well the interesting measure is the dept to GDP ratio, and as long as this ratio stays constant, the government is not really getting into financial trouble. Running the numbers, I find that the ratio stays constant for D'=g*D, where D' is the new dept, g the GDP growth and D the total dept. Additionally this just need to hold on average, that is a government should bring down the dept/GDP ratio in the boom ( when multipliers are low anyhow) so that it can spend during the bust ( when the multipliers are higher). But note that the government can run deficits all the time.

About your examples, the first sentence of the Wikipedia article for Zimbabwe is: [1]

"Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in Zimbabwe's civil war and confiscation of private farms."

While in Weimar Germany the French occupation of the Ruhr valley, the at that time most important industrial region of Germany, directly preceded the hyperinflation. ( And arguably the Beer Hall Putsch [2], Hitlers first attempt to seize power, was the more important event in '23.)

[1]https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe

[2]https://en.wikipedia.org/wiki/Beer_Hall_Putsch

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