It's interesting that many people seem to have accepted that endlessly taking on more debt is a good idea. Debt has to paid off and you can't just take it on endlessly. I wonder what the future looks like if the United States continues to take on more and more debt. Right now we can't really pay it off ever so we're stuck servicing it forever. Seems like we're giving our children a much worse world than the one we were born in. When I was born the debt was pretty manageable and over the course of my lifetime it exploded to something that's basically never going to be paid off.
"Government does not need money to spend just as a bowling alley does not run out of points."
"Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets."
"The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes."
"On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience."
I'll reply to myself because I've just explained this sentence to myself:
Because the government needs to run a deficit, it's the only way to inject financial resources into the economy.
The central fact of economics is: The economy grows. The number of people on earth is still growing. The productivity of individual workers is still growing. We are capable of making more stuff in every year than we did in the previous year.
Now, suppose the supply of money were finite. But the amount of stuff being made keeps getting larger. So, every year, the price of everything goes down, because there's an ever-larger supply of pizza and beer but a constant amount of money.
But this creates a serious problem for the economy. Because now we've got deflation. And that produces a really big incentive to save. Too big an incentive. Everything will be cheaper tomorrow, so every individual benefits by burying money in the backyard and spending as little as possible.
But as people bury more and more money, the economy shrinks, because there is less and less money to spend, and everyone is trying to hang on as long as possible without spending anything. You end up with lots of people sitting, unemployed, with tools idle, and resources idle, and money buried in the backyard, staring at each other and waiting for someone to make the first move. Because, thanks to deflation, the first person who spends anything is a relative loser. And now your economy has deadlocked.
And that's why the government always runs a deficit, and why the inflation target is always higher than zero. The government prints money to make sure that the supply of money stays good. This produces some amount of inflation, of course, but the growth benefits of liquidity outweigh the inconvenience of having to do something more interesting with your money than bury it.
(Why don't more people understand this? Partly it's because the growth of the economy is a historically new phenomenon, dating back only about 150 years. Before that, as far as we can tell, human economic production per capita barely grew throughout millennia of history:
The other cause for misunderstanding is that if you, say, define "gold" or "silver" as equivalent to money, and your society's economic productivity grows, but society's ability to dig up gold or silver grows exactly as fast as overall productivity at all times, the currency magically manages itself. Because of this, for a hundred years and more of the Industrial Revolution the world managed to struggle along with a gold-based money system. But, of course, the gold standard was abandoned when people finally figured out that this process is very haphazard -- indeed, it cannot be controlled. You can't discover gold overnight, but sometimes you need more money in the economy overnight. Like now, for example.)
These are great points you're making. And I think the way you are making them is very intuitive. It is impossible to default on a currency you control. You just print some more space-credits. I think you sum up why you should always be printing space-credits nicely.
> Why don't more people understand this? Partly it's because the growth of the economy is a historically new phenomenon, dating back only about 150 years.
I personally think the reason people don't understand this is because they think that a government should be run the way a family should: save and don't live off credit.
If a country prints more money, then it makes the money it has worth less. So those with large foreign currency reserves in say, US dollars, will be worth less.
Of course, when the US dollar is worth less compared to other currencies, then there is more of an incentive to export and produce locally, rather than import.
I am not convinced of your idea. The economy doesn't always need to grow, and can not always grow. This is how we get bubbles, when things start growing too fast, and it all collapses on itself.
Dude, m_f, you're normally one of my favorite posters on here and you say stuff that makes a lot of sense, but you've got some errors going on on this one:
> But this creates a serious problem for the economy. Because now we've got deflation. And that produces a really big incentive to save. Too big an incentive. Everything will be cheaper tomorrow, so every individual benefits by burying money in the backyard and spending as little as possible.
That's basically just summed up modern macroeconomic thought right there. The problem is, it's wrong for a lot of reasons.
First off, deflation is a good thing - deflation means tomorrow you can get more for the same price. The industry in the most rapid deflation over the last 10 years has been the computer industry - you can much, much more computer for the same money now than you could at any point in the past. This is, by itself, a good thing.
Now, not everything is prone to deflation anyways, and you've got to realize that deflation lowers costs on both the producing and consuming side. So farmers are getting lower prices for their food gradually, but their tools and tractors are getting cheaper too.
But will the economy grind to a halt without new money coming into it? Well, the historical pre-central-banking answer is no of course, but why is that?
It's because people won't put their money under the mattress - they'll try to get their money (and thus, resources) producing more wealth for them.
Under a normal, sane, classical banking system, this is by giving it to a loan banker. What's a loan banker? He's someone you give your money to, who lends it out, but you can only get your money at certain times, not whenever you want. So you give him your $10,000, he says he'll give you back $10,000 + X in one year.
X is the interest you get paid. The loan banker charges the borrower interest for the money. Say, 10%. The borrower has to pay back $11,000 after a year. Then the banker gives, for easy math, let's say 5% to you. So you get back $10,500.
But wait - why doesn't the economy grind to a halt? Because the borrower spends the money, and increases productivity with it, thus paying back the loan. If he fails to, the banker collects the collateral and sells it to recover as much as he can. You risk your money by giving it to the banker, but if his operation is sound, it's not that much of a risk.
Anyway, loan bankers are extinct in the USA, we only have savings-and-loan banks, where you can get your money at any time. A bank where you could get your money at any time used to be called a deposit bank, but they didn't loan your money out for you, they kept it and transferred it to other people for you when you wrote a check. You actually paid to keep your money safe in a deposit bank, whereas loan banks paid you.
Mixing the two - your money is gone and loaned out, but you can collect it any time regardless - this is where the need for central banks originated. There was a landmark legal case in England about whether this mixed form of banking was fraud or not in the late 1600's, and the judge said it wasn't, and that's where today's banking system came from, but I think the judge made a mistake.
Long story really really short, you don't need to inject new money, people will loan it out very carefully into productive endeavors, and that's why all the non-central-banking economies throughout history didn't grind to a halt. True, they get slower growth in most years, but you also don't get the crippling nasty bank crashes that central banking creates.
There's no reason to assume that the random guy you quoted is right or even knows what he's talking about.
Likewise, there's no reason to assume you know what you're talking about, this time, so why did you quote that post as if it's the ultimate truth on deficits, and why are you speaking as if with a voice of authority on the matter?
A lot of the people talking about the economy in the media say things that are aligned with their personal interests, and there's an endless supply of commentary that sounds plausible when you don't understand/know enough yourself, happens to be something you want to believe in, and is still nonsense, bullshit/lies, or just detached from reality.
Galbraith was arguing that the current level of government debt is managable, not that any level of government debt is managable. If your interpretation were true, the government could spend limitless amounts with no tax. Do you think that is a viable scenario?
Our future will pretty closely mirror what's going on in Europe right now. Greece's debt is some 115% of it's GDP and Italy has around 110%. What happens to Europe, and particularly the PIIGS nations in the next few months will be very important to pretty much the rest of the developed world.
And besides that, we can look to history to show us that most major empires (e.g. Roman, Ottoman, British) that ended up collapsing did so partly because of rampant over-spending and a very broken debt-to-gdp ratio.
Not entirely. Greece and Italy cannot issue the currency in which their debt is denominated. The Germans (and French to a lesser extent) control the ECB. The U.S. can issue the currency its debt is denominated in. That puts us in a different situation than Greece. Not necessarily better, but not as imminently bad either.
What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.
If there's a better place to keep wealth than US Treasury securities, nobody seems to know what it is.
There are other fiat currencies issued by governments that are managing their finances better, but if you decide to purchase debt issued by those governments, be sure to understand the fact that you are making a bet on the relative value of currencies and that factors other debt load and fiscal policy will affect these values, especially in the short run.
The traditional safe havens for people worried about fiat currency have been gold and silver. This sets them apart from other commodities. All commodities, including gold and silver, are used to hedge against inflation. But gold and silver have a traditional or historical role as an alternative to paper money.
Treasuries, denominated in U.S. dollars, are held as liquid assets. People usually hold these when they expect markets to decline. They are perceived as very low risk, safe investments. They don't carry a lot of return, but they are seen as reliable.
If you think that the U.S. is going to issue a huge amount of dollars in order to pay off its debts ('monetizing the debt'), that would ordinarily lead to a great deal of inflation. The situation we are currently facing may prevent inflation from occurring. Because we are entering a credit crunch, the overall money supply has actually started to contract (using the broadest measure of money, 'M3'). A contraction in the money supply would lead to deflation. Thus a massive printing of U.S. dollars (at least in the short term) may serve to counteract deflation rather than causing inflation.
Because of the turmoil in Europe, odd things have been happening. Usually the dollar and gold move in opposite directions (strong dollar weak gold, weak dollar strong gold). But people have been fleeing the Euro, causing both the dollar and gold to strengthen at the same time.
The euro is facing a crisis, Japan's banks are also quietly scrambling for funds to prop up their banks, and there's a great deal of debt in the Chinese system that hasn't really been put to the test yet (but may be soon). There isn't really any currency that is unencumbered by large amounts of debt, including the dollar. Nevertheless, of the major world currencies (dollar, euro, pound, yen, yuan), the dollar probably still enjoys the greatest confidence.
If you are going to invest in anything denominated in a major currency, the dollar is still probably the best at the moment. If you have no medium- to long-term faith in fiat currencies, then buying gold and silver are the traditional alternatives.
As long as the debt is payable only in dollars and dollars are available only through fractional reserve banking, it's impossible to ever truly reduce the debt owed to the Fed through any means other than default. We can shift it around (and have been for some time now), but it still exists.
The real kicker is that our economy is dependent on the nonstop creation of new debt. Without it, the money supply dries up and we enter a deflationary recession.
It is worth to point out that one is a stock (debt) and one is a flow (GDP), and the right way of comparing them would be by taking the net present value of the flow, or comparing the cost of servicing the debt per year to GDP (so debt servicing cost climb to x percent of gdp).
To put that in perspective, $500B more than covers what we spend on education, energy, homeland security and the wars in Iraq and Afghanistan.
Of course, this assumes that our interest rates stay the same. I don't see how this is possible as our debt/GDP rises. I fear we are seriously choking ourselves.
I don't think we are choking ourselves. Loaning money to the US government means the government can use all its resources to pay you back. We have not tapped any of those resources yet; taxes in the US are pretty low compared to the rest of the developed world.
Also keep in mind that the government can loan money at a higher interest rate than it can borrow it at. (I am not sure how much income this generates, though.)
On the other hand, technology has significantly reduced the cost of tax avoidance for high net worth individuals compared to what it was during the Clinton era.
>or comparing the cost of servicing the debt per year to GDP (so debt servicing cost climb to x percent of gdp).
Yeah, or yearly debt servicing cost vs yearly tax revenue, or delta debt servicing cost vs delta tax revenue.
The GDP component only hints at the underlying issues - what it costs us to service the debt, and what it would cost us to stop adding to it, and what it would cost us to pay it down the hard way.
Right. I had the same question about directly comparing the GDP figure versus the debt figure. It'll certainly help if someone knowledgeable lays bare the important factors and how they bear on the "rising debt" issue.
A dumb question - isn't the GDP a per-year figure whereas the debt a total figure? ... so doesn't it simply mean that if all GDP goes to paying off the debt, it will necessarily take more than 1 year. That pay off period is increasing and about to cross the 1 year threshold, but I'm not getting the "debt cycle" concept .. in other words what is the difference between 1year-delta and 1year+delta?
Like anything else in America we're going to need a crisis for anyone to even consider doing something to resolve the problem. It seems to me that a drastic cut in military spending, raising the retirement age to 70, raising taxes on everyone, closing tax loopholes, and an across the board cut of 5%-10% should be a good start to get this resolved in the next 20 years.
That's idiotic. The official US unemployment rate is nearly 10%. The U6 unemployment rate, which is probably closer to what one actually means when one asks "how many people are looking for work" is twice that high. One in every four Americans who wants a job does not have one and we're going to raise the retirement age? What earthly good will that do?
Same difference. When you take away money that older people are living on, you force them to look for work. Which, in this economy, will tend to make them unemployed.
I suppose great-grandma can always move in with her grandkids. Of course, the grandkids are also 25% likely to be unemployed.
Naturally, there is a subset of people for whom Social Security is a needless luxury because they are living off of private investments. The proper way to target these people for additional funds is to nudge up the marginal tax rate on those private investments. This is difficult to accomplish, of course, because people with lots of money can afford to buy votes.
Also the age at which they might crash the market when they're all forced to begin dumping their 401(k) and IRA holdings. Kiyosaki called this "Rich Dad's Prophecy".
I think the difference today is that everyone is using fiat currency, and the markets for commodities potentially useful as a medium of exchange (gold, oil, etc) are too volatile.
We've already been living with slow inflationary growth, despite the nonsense spewed by the government. In 1985, a single wage-earner could support a middle-class family. In 2005, two parents need to work, mostly to pay a mortgage and pay a few minimum wage earning daycare workers.
