Too Little Debt? Is that possible?

[the_recruit]

All debt is bad.

Utter nonsense. Taking on debt that allows you to earn more wealth over the long term than you could have without taking on the debt isn't bad. How is it bad?

 

[vasuderatorrent]

All debt is bad.

:shock: You just ended the discussion. Wow! :surrender

 

[fmw]

Utter nonsense. Taking on debt that allows you to earn more wealth over the long term than you could have without taking on the debt isn't bad. How is it bad?

C'mon now. What you say is true of business. government doesn't create wealth. It is a net spender of wealth.

 

[JohnfrmClevelan]

C'mon now. What you say is true of business. government doesn't create wealth. It is a net spender of wealth.

No - the government creates dollars, and it is a net spender of dollars. There is a big difference. When the government creates and spends dollars by deficit spending, they aren't taking wealth away from anybody, they are just making and spending new dollars. But people still vie to earn those new dollars, and this increases production. Wealth is created when the government spends money, because people and businesses have to earn it by producing.

 

[vasuderatorrent]

When the government creates and spends dollars by deficit spending, they aren't taking wealth away from anybody,

Do you disagree with the supply and demand school of thought that claims more dollars in circulation reduces the dollar's value? Throughout history nations have printed excessive paper money which shortly led to hyperinflation. If that is true, then savers would lose a significant amount of wealth during this process. I'm not saying it is wrong for the government to discourage idle money. (After all, it is called currency for a reason.) Your implication that nobody's wealth is reduced by the government's creation of new dollars isn't entirely true. It's true to the extent that inflation is kept at a minimum. Our government has done a great job at maintaining this balance but it doesn't mean that they always will.

 

[Ganesh]

We had some of the highest levels of government debt ever just after WW2. However, not only were the costs of the war paid off, but that period- the '50s and '60s, were some of the most prosperous ever.

During that time there was not only strong growth, but also social and tax policies that favored the maintenance of a middle class. This was key to keeping money in circulation, and supporting employment.

Today we have a relatively low tax regime, and policies that allow for large amounts of private capital to shift about the world very easily. We have (an unarticulated) policy of private opportunity, and public responsibility. The private sphere speculates (often recklessly, as we have seen) and the public picks up the pieces. This is why, IMO, we see the issues with high levels of government debt today.

Debt really has little meaning in itself at the government level, but is dependent on economic and social conditions. It has a lot of meaning for an individual, which is a whole other question.

 

[JohnfrmClevelan]

Do you disagree with the supply and demand school of thought that claims more dollars in circulation reduces the dollar's value?

YES! I absolutely disagree with that. John Harvey explains it better than I could:

Money Growth Does Not Cause Inflation! - Forbes

Throughout history nations have printed excessive paper money which shortly led to hyperinflation.

Excessive money printing is usually a response to inflationary events, not the cause. Check out examples of hyperinflation, and you will find other, more reasonable reasons for inflation - most often, it's large drops in production, caused by war, drought, political upheaval, etc. Sometimes, it's debt owed in foreign currencies. I don't know of any examples of hyperinflation that have come about simply because the government decided to print up tons of currency in response to nothing.

If that is true, then savers would lose a significant amount of wealth during this process. I'm not saying it is wrong for the government to discourage idle money. (After all, it is called currency for a reason.) Your implication that nobody's wealth is reduced by the government's creation of new dollars isn't entirely true. It's true to the extent that inflation is kept at a minimum. Our government has done a great job at maintaining this balance but it doesn't mean that they always will.

There is little or no benefit to society in general when people save. Savings is not the source of capital.

Government spending is a benefit for those who earn that money, at the very least. They in turn spend those dollars, etc., etc... You are correct that the potential drawback is inflation, but first, you have to demonstrate that it does, indeed, lead to inflation; and second, if there is inflation, you then have to do the cost/benefit analysis, and decide whether you would rather have a bit of inflation or a shortage of demand and unemployment.

In the end, the quantity theory of money and inflation eventually leads you to the conclusion that, if it is correct, it means that economic activity in general leads to inflation. That is, the more economic activity you have, the more inflation you are going to have. If that is true, I'll take the increased economic activity and the accompanying inflation over the alternative. But since I don't think that it's true that economic activity leads to inflation, the choice is even easier.

 

[vasuderatorrent]

YES! I absolutely disagree with that. John Harvey explains it better than I could:

Money Growth Does Not Cause Inflation! - Forbes



Excessive money printing is usually a response to inflationary events, not the cause. Check out examples of hyperinflation, and you will find other, more reasonable reasons for inflation - most often, it's large drops in production, caused by war, drought, political upheaval, etc. Sometimes, it's debt owed in foreign currencies. I don't know of any examples of hyperinflation that have come about simply because the government decided to print up tons of currency in response to nothing.



There is little or no benefit to society in general when people save. Savings is not the source of capital.

Government spending is a benefit for those who earn that money, at the very least. They in turn spend those dollars, etc., etc... You are correct that the potential drawback is inflation, but first, you have to demonstrate that it does, indeed, lead to inflation; and second, if there is inflation, you then have to do the cost/benefit analysis, and decide whether you would rather have a bit of inflation or a shortage of demand and unemployment.

In the end, the quantity theory of money and inflation eventually leads you to the conclusion that, if it is correct, it means that economic activity in general leads to inflation. That is, the more economic activity you have, the more inflation you are going to have. If that is true, I'll take the increased economic activity and the accompanying inflation over the alternative. But since I don't think that it's true that economic activity leads to inflation, the choice is even easier.

You are my favorite person to disagree with. You are a great teacher. I love your input. Very informative.

 

[vasuderatorrent]

In the end, the quantity theory of money and inflation eventually leads you to the conclusion that, if it is correct, it means that economic activity in general leads to inflation. That is, the more economic activity you have, the more inflation you are going to have.

Yes. These are compatible predictions. The government does discourage economic activity at times in order to maintain the balancing act of maintaining a strong dollar/a strong economy. I believe a strong dollar and a strong economy are competing forces. They never work hand in hand. There has to be a referee to keep one from become too much stronger than the other. A strong dollar encourages savings which creates a strong dollar which encourages further savings which creates an even stronger dollar which encourages more savings on and on infinitely. The save thing, more purchasing creates a weaker dollar which encourages faster spending to protect you from a weakening dollar which causes faster spending which leads to a weakening dollar which leaders to faster spending on and on infinitely. I'm sure that you are familiar with the theory. It sounds like you disagree with this prediction. Yes?

 

[fmw]

No - the government creates dollars, and it is a net spender of dollars. There is a big difference. When the government creates and spends dollars by deficit spending, they aren't taking wealth away from anybody, they are just making and spending new dollars. But people still vie to earn those new dollars, and this increases production. Wealth is created when the government spends money, because people and businesses have to earn it by producing.

No, it takes wealth from the private sector in the form of taxes. When the government creates and spends dollars not representing real earned wealth it simply dilutes the value of the other dollars. Wealth is not created when the government spends money. Wealth is created from business profits. All wealth is so created. Every nickel. You can't justify government debt and overspending to me using this kind of nonsensical economic theory.

 

[Ganesh]

No, it takes wealth from the private sector in the form of taxes. When the government creates and spends dollars not representing real earned wealth it simply dilutes the value of the other dollars. Wealth is not created when the government spends money. Wealth is created from business profits. All wealth is so created. Every nickel. You can't justify government debt and overspending to me using this kind of nonsensical economic theory.

When used for domestic purpose, government does not expend money, but merely transfers it. Now one could argue about the wisdom of particular transfers, but the same applies to the private sector. We are talking about management in this case, not mathematics.

And the term wealth is subjective. Is your community "wealthier" with a hospital with modern equipment in it, or "wealthier" with a full compliment of Starbucks and McDonalds? We usually consider the former to be funded by government, or at least charity. But ultimately, this is irrelevant. If society wants these particular things, then resources must be used to create them, whether we call it the Federal Dept of Health, or Acme Hospital Construction and Pizza Delivery Co Ltd. There are of course differences in how we perceive is the best method of management of delivery of these services, but these are secondary to the essential economic argument here.

The private sector also takes "wealth" from government (ie: you and me) in the form of myriad services and subsidies. The dividing line between private and public is really quite subjective, and does indeed vary quite a bit from country to country.

The government can indeed create wealth, just about any time it wants to. It can start up industries, invest in projects that will enhance the quality of life in the future, hire employees, and probably numerous other things that an economist could better explain. What it does or doesn't do is ultimately a political question, not an economic one.

 

[JohnfrmClevelan]

Yes. These are compatible predictions. The government does discourage economic activity at times in order to maintain the balancing act of maintaining a strong dollar/a strong economy. I believe a strong dollar and a strong economy are competing forces. They never work hand in hand. There has to be a referee to keep one from become too much stronger than the other. A strong dollar encourages savings which creates a strong dollar which encourages further savings which creates an even stronger dollar which encourages more savings on and on infinitely. The save thing, more purchasing creates a weaker dollar which encourages faster spending to protect you from a weakening dollar which causes faster spending which leads to a weakening dollar which leaders to faster spending on and on infinitely. I'm sure that you are familiar with the theory. It sounds like you disagree with this prediction. Yes?

A strong dollar should encourage spending, because things are cheap to buy. That doesn't necessarily mean that your economy is good or bad, it's just a reflection of your currency's relative value against other currencies. If you had a totally domestic economy, walled off from the rest of the world, you wouldn't even know if your dollar was strong or not. Anyway, I can't think of a time when the government actually tried to discourage economic activity in practice, nor can I think of a time when conditions would warrant such action. The only time I would take that action is when there was significant demand-pull inflation, and I don't think we've ever been close to that point.

I also don't think that saving, as in putting your dollars in the bank, has much (if any) effect on the strength of the dollar, the cost of loans, or anything else, really. When you deposit dollars in your bank, they are added to the bank's reserves. Even if you deposit currency, that currency is added to the bank's vault cash, which counts as reserves, and is adjusted according to the demand for cash (ATMs, etc.). Loans are not made from reserves. Banks create their loans from thin air - they mark your account up, they add your loan obligation to their "assets" column, and they adjust their level of reserves after the fact.

This also means that there is not much of a "capital market," where some fixed amount of capital is looking for the best rates. The amount of capital that banks can supply, backed by the Fed supplying reserves, is limited only by their capital requirements. The "supply" of capital is virtually unlimited, so the "supply" has no effect on loan rates. Just an interest rate controlled by the Fed, a time component, and a risk component go into loan rates.

 

[JohnfrmClevelan]

You are my favorite person to disagree with. You are a great teacher. I love your input. Very informative.

Thanks! That is really nice to hear once in a while.

 

[JohnfrmClevelan]

No, it takes wealth from the private sector in the form of taxes. When the government creates and spends dollars not representing real earned wealth it simply dilutes the value of the other dollars. Wealth is not created when the government spends money. Wealth is created from business profits. All wealth is so created. Every nickel. You can't justify government debt and overspending to me using this kind of nonsensical economic theory.

Every net dollar in existence is the result of federal deficit spending. This is where dollars come from. If you have a dollar in your pocket right now that you didn't receive as part of a loan that needs to be paid back, you can thank the government, because they are the ones holding the liability (in name only) so you can hold the (very real) asset. => This is different than "wealth." But dollars are still important.<=

Wealth is created when people or businesses create something worthwhile. And why do you work to produce worthwhile stuff? If you are like me (and everybody else I know of), you do it to earn dollars. And when you create something, it is added to an ever-growing pile of production. If new money really "diluted" the value of all other dollars, that would mean the pile of production didn't get any bigger. But it did, because the government spending induced you to produce something in order to earn their dollars.

 

[fmw]

Every net dollar in existence is the result of federal deficit spending. This is where dollars come from. If you have a dollar in your pocket right now that you didn't receive as part of a loan that needs to be paid back, you can thank the government, because they are the ones holding the liability (in name only) so you can hold the (very real) asset. => This is different than "wealth." But dollars are still important.<=

Wealth is created when people or businesses create something worthwhile. And why do you work to produce worthwhile stuff? If you are like me (and everybody else I know of), you do it to earn dollars. And when you create something, it is added to an ever-growing pile of production. If new money really "diluted" the value of all other dollars, that would mean the pile of production didn't get any bigger. But it did, because the government spending induced you to produce something in order to earn their dollars.

I heard this nonsense before. No point in continuing.

 

[fmw]

The government can indeed create wealth, just about any time it wants to. It can start up industries, invest in projects that will enhance the quality of life in the future, hire employees, and probably numerous other things that an economist could better explain. What it does or doesn't do is ultimately a political question, not an economic one.

Good, now that it can create its own wealth, it can stop taxing us. We've replaced common sense with partisan economic theory.

 

[JohnfrmClevelan]

I heard this nonsense before. No point in continuing.

So unless you can elaborate on your "dilution" theory, I can claim victory. Thanks for debating.

 

[Ganesh]

Good, now that it can create its own wealth, it can stop taxing us. We've replaced common sense with partisan economic theory.

Well, you're partly right. It is economic theory. But it is not partisan.

You have a very nice national park system in the US. The planning has been far sighted, very desirable products have been created, and there are no end of customers willing to pay. Given the nature of the business, this situation will likely go on forever. Wealth creation? Yes. Private sector? No. The services provided come from government, creator of wealth and employment in this (and lot's of other) cases.

It is subjective as to what goes into the private or public sector. We could have everything run by government, with your dreaded Democrats flipping your burgers and pouring your Starbucks; or, everything could be private, and you could have your Visa card ready if you had to call the police or fire departments. History has shown us that neither of these extremes work well, and so today the most successful economies are a mix of both.

Taxation is merely an agreed upon method of transferring money for pro-social reasons. If there were no taxes, there would have to be some other way to pay. That is of course unless you would like to live in some place like Somalia, where you could avoid tax, and rely exclusively on your AK-47 for your needs.

 

[imagep]

I'm not really talking about the fancy economics that we know of in academia. I am referring to the simple concept of quality of life. Personal economics is just a matter of how much stuff and how many services that you are able to enjoy. A good home economist is able to stretch a dollar not for the sake of having more money but for the sake of providing a better life for his/her family. Try not to be intimidated when I refer to economics.

This is kind of what I was trying to imply: If you temporarily make $20,000 per year, only have $20,000 of debt and an empty credit card with $10,000 available credit, would it be irresponsible to leave that credit card locked away? Would it be a good idea to tap into that $10,000 of available credit to get your family through the tough times? or would it be smarter to keep your debt level at $20,000 ?

I guess I made it more fancy than I really needed to.

I do that every year. My business is seasonal, so during the busy season, I pay down debt like crazy, and then live on debt during the off season.

I wish that I could make enough during the busy season to have some set aside, that's what my plan is every year, never seems to work out exactly like that. Regardless, if I didn't tap into my revolving credit, I wouldn't be able to keep the electricity on during our slow season, so credit is a very valuable tool to me.

I also have one credit card (Amex) that I charge a lot of stuff for business purposes on, and pay it off the next month, after my customers pay me. My balance will go over $10k in a single month, so it can be painful the next month when I have to pay it.

 

[imagep]

No need for one. All debt is bad. It may be necessary but it is always bad. There is no reason for the government to fall into debt. It results from a congress that acts like a kid in a candy store.

Our government can either borrow away money from people who chose to lend it to the government, or it can tax it away from people who don't particularly want their money taxed away. So which is worse, a voluntary system of funding our government, or a forced system?

 

[imagep]

I heard this nonsense before. No point in continuing.

Exactly which part of that is nonsense? Makes perfect sense to me.

 

[imagep]

Good, now that it can create its own wealth, it can stop taxing us. We've replaced common sense with partisan economic theory.

It doesn't create it's own wealth for income purposes, it creates wealth that everyone utilizes.

However it can create all the money that it needs, so yes, in theory, it is entirely possible that our government could exist without taxation as a source of revenue - assuming that government was so small that it could print an adequate amount of money to fund itself, without causing inflation.

There are though, reasons (other than for revenue) why taxation is necessary.

 

[vasuderatorrent]

Regardless, if I didn't tap into my revolving credit, I wouldn't be able to keep the electricity on during our slow season, so credit is a very valuable tool to me.

I think you understand what I'm getting at. Not many people have a situation like yours. Most people have a steady income that remains consistent with little to no fluctuation.

I just see that the government uses debt to function through the tough times. Businesses use debt to function through the tough times. It is however frowned upon for households to use the same strategy. Not many people are explaining to my why a household couldn't benefit in the same way. You seem to agree with me and understand what I am trying to say. I'm not sure too many people understand what I am trying to say. I guess a perfect income is too common for this concept to register.

 

[fmw]

It doesn't create it's own wealth for income purposes, it creates wealth that everyone utilizes.

Not on a net basis. On a net basis it spends wealth.

However it can create all the money that it needs, so yes, in theory, it is entirely possible that our government could exist without taxation as a source of revenue - assuming that government was so small that it could print an adequate amount of money to fund itself, without causing inflation.

Creating a single dollar out of thin air causes inflation - just not enough for people to notice. Prices have almost doubled over the past 10 years. That's due to inflation.

There are though, reasons (other than for revenue) why taxation is necessary.

Obviously no good ones.

 

[imagep]

Not on a net basis. On a net basis it spends wealth.

So we aren't a net richer country because we built the Hoover Damn or the Interstate Highway System or schools or won WW2?

Creating a single dollar out of thin air causes inflation - just not enough for people to notice. Prices have almost doubled over the past 10 years. That's due to inflation.

Nope. Inflation is caused by an inadequate quantity of goods and services to meet demand.

Obviously no good ones.

The reduction of pooled wealth, and the reduction of externalities are a couple to start out with.