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Why America's gigantic national debt is a good thing

David_N

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This is in response to a recent time magazine piece about the national debt which attempts to scare readers.
Why America's gigantic national debt is a good thing
Let's start where Grant does, with the idea that the federal budget is like a family's budget. As Grant awkwardly half admits later, this is totally wrong. Individuals, families, and businesses are all cash-constrained. To get money, they have to go out and do something: get a job, sell goods and services, or borrow. That's not true of the federal government, since the Constitution invests it with the unique power to create money. We've divided that power up between the Federal Reserve and the Treasury Department, and we usually speak of the former as "controlling the money supply." But as Grant says, the Fed is ultimately a creation of Congress.

So any government with a fiat currency system, which is what America and most advanced Western nations have now, can always just create money to pay off creditors in a pinch. That's why interest rates on U.S. debt are so low — a sign of investors' trust. It's why we've happily run a debt for almost two centuries, and why Japan's interest rates remain quite low despite a debt load far larger than ours.

It's true, as Grant says, that printing money is not wealth creation. But it can enable wealth creation. The government can hire people to build roads and bridges, to clean up public spaces and parks; to provide education and health care. All that is real economic production made possible by the government's power to borrow and create money. Similarly, while simply giving money to the poor doesn't create wealth, it does give them the initial resources they may need to re-enter the economy — and thus begin creating wealth again.

Grant mocks the idea of stimulus, saying we doubled the size of the federal debt after the Great Recession and got only a sluggish recovery for our efforts. But plenty of economists looked at the economic hole left by the 2008 financial crisis, and concluded the stimulus policies on the table weren't nearly big enough to fill it. The size of the hole is all that matters. Whatever level of deficit spending is required to fill it is the right level of deficit spending. In fact, as the government has moved away from the things Grant pines for — like balanced budgets and "sound money" — the economy has become less volatile, and periods of mass unemployment far more rare.

Historically, though, hyperinflations have been really hard to pull off, precisely because the government has to go to such an extreme. Most have been associated with war or some other similar calamity. Even our massive debt and deficit buildups in WWII only briefly rocketed inflation to 10 percent before quickly falling back to earth.

Moreover, inflation is not a universal evil. Moderate inflation, in the range of 3 to 4 percent, is one sign of a healthy economy. It means employment is plentiful, labor markets are tight, and wages are increasing — which is what puts upward pressure on prices. What's remarkable is not that the Fed is trying to increase inflation, as Grant complains. It's that inflation is rock bottom and the Fed can't seem to make it go higher.

Thoughts?
 

Visbek

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Yep, Spross is pretty much spot on.

The only thing I think he omitted is that at a certain point, debts still can become unsustainable, and economic conditions may not be favorable to inflating the currency to fix that issue. But, as he points out, it all depends on how willing people are to buy government debt.

And people are definitely willing to buy it. Consider Argentina, which has had major debt issues in the past ~20 years. They defaulted on their debts, tried to pay off a fraction of it, but a bunch of hedge funders bought a bunch of that debt and are fighting tooth and nail to be paid in full. Despite all sorts of shenanigans over those issues, and years of bad reputation and legal barriers to issuing new debt, Argentina roared back into the bond market a few days ago by selling $16.5 billion in debt, a record for emerging markets.

It seems to me that a lot of people just don't understand government debt, and how substantially different it is from personal debts.
 

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David_N

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Yep, Spross is pretty much spot on.

The only thing I think he omitted is that at a certain point, debts still can become unsustainable, and economic conditions may not be favorable to inflating the currency to fix that issue. But, as he points out, it all depends on how willing people are to buy government debt.

And people are definitely willing to buy it. Consider Argentina, which has had major debt issues in the past ~20 years. They defaulted on their debts, tried to pay off a fraction of it, but a bunch of hedge funders bought a bunch of that debt and are fighting tooth and nail to be paid in full. Despite all sorts of shenanigans over those issues, and years of bad reputation and legal barriers to issuing new debt, Argentina roared back into the bond market a few days ago by selling $16.5 billion in debt, a record for emerging markets.

It seems to me that a lot of people just don't understand government debt, and how substantially different it is from personal debts.
Well, for a currency issuer that doesn't peg its currency, with no debts in another currency, and no gold standard with plenty of available resources/potential output, government bonds will never become a real issue. In my opinion.. Just ask Japan. Their problem doesn't come from their bonds, hell, they're desperate for inflation, which helps counter the idea that government debt increases inflation.
People don't understand government debt, and in turn, people decide to harm themselves.
(Unless we get into a massive war..)
 
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Neomalthusian

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Well, for a currency issuer that doesn't peg its currency, with no debts in another currency, and no gold standard with plenty of available resources/potential output, government bonds will never become a real issue. In my opinion.. Just ask Japan. Their problem doesn't come from their bonds, hell, they're desperate for inflation, which helps counter the idea that government debt increases inflation.

If they get desperate enough for inflation, will they deploy 'helicopter money?' Why not?
 

Fenton

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This is in response to a recent time magazine piece about the national debt which attempts to scare readers.
Why America's gigantic national debt is a good thing


Thoughts?

Why do you continue to post such DISHONEST drivel ? Such blatant propaganda ??? Who do you think youre fooling ?

Does integrity and honor and character mean anything to you ??

Because I know YOU KNOW this crap is a blatant misrepresentation of reality so why do you keep posting it ?

To just ONE of the bolded paragraphs stating that the reason why interest rates are so low is because of " investor trust" in the US dollar.

There's not ONE mention in that ridiculous article of the FEDs or the Bank of Japans UNPRECEDENTED Monetary actions that have by design suprpressed yields down to nothing for the last EIGHT YEARS

There's NO MENTION of the fact that the FED now owns more US debt ( 66% more ) than China or any mention of China's unloading of US Treasuries.

As China Dumps Treasuries, World Sees No Better Place for Refuge - Bloomberg

There's also nothing " remarkable " about the lack of inflation after QE increased the money supply. Grant may think its " remarkable " but he also thinks our interest rate is a function of " investor trust "

Grants a raging moron.

Monetary stimulus doesn't create demand for consumer credit. It doesn't incentivize new private sector growth and it doesn't instill " trust " in the American dollar.

A lack of inflation after QE isn't remarkable, its expectected.

Its pretty damn clear why there are massive piles of wealth that belong to Corporations, Banks and investors that have been sitting stagnant for the last 8 years.
 

Captain Adverse

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Why do you continue to post such DISHONEST drivel ? Such blatant propaganda ??? Who do you think youre fooling ?


Don't forget that crap about the Fed being a creation of Congress. That's utter B/S! It's a creation of the major banking interests who control it. Congress merely put it into law, at the instruction of the people they really worked for.

Also, these "theories" intentionally ignore how the average citizen is affected by inflation. So the banks, big business, and our government are going to be okay? It's just John Q. Citizen who can't save or have any financial stability, who ends up in debt because we have to spend our money fast before it loses value.
 

David_N

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Why do you continue to post such DISHONEST drivel ? Such blatant propaganda ??? Who do you think youre fooling ?
/snip
Where?
Does integrity and honor and character mean anything to you ??
Huh?
Because I know YOU KNOW this crap is a blatant misrepresentation of reality so why do you keep posting it ?
Huh?
There's not ONE mention in that ridiculous article of the FEDs or the Bank of Japans UNPRECEDENTED Monetary actions that have by design suprpressed yields down to nothing for the last EIGHT YEARS
You mean returns on bonds? Bonds aren't meant to be profitable, investors don't care.
There's NO MENTION of the fact that the FED now owns more US debt ( 66% more ) than China or any mention of China's unloading of US Treasuries.
And?
http://ticdata.treasury.gov/Publish/mfh.txt
Russia also dumped treasuries at some point if I recall, we felt no effects. Boo-hoo.
There's also nothing " remarkable " about the lack of inflation after QE increased the money supply. Grant may think its " remarkable " but he also thinks our interest rate is a function of " investor trust "
Grant may be a moron, I never said I agreed with everything in his piece.
Monetary stimulus doesn't create demand for consumer credit. It doesn't incentivize new private sector growth and it doesn't instill " trust " in the American dollar.
Yes, we need fiscal stimulus.
 

Fenton

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Where?

Huh?

Huh?

You mean returns on bonds? Bonds aren't meant to be profitable, investors don't care.

And?
http://ticdata.treasury.gov/Publish/mfh.txt
Russia also dumped treasuries at some point if I recall, we felt no effects. Boo-hoo.

Grant may be a moron, I never said I agreed with everything in his piece.

Yes, we need fiscal stimulus.


So you were totally unaware of the last 8 years of unprecednented FED monetary stimulus before posting that article ?

Because if you had no idea that the FED and the BoJ for that matter had a zero interest rate policy in effect and thats why you posted a article saying low interest rates were a function of " investor trust " then I owe you a apology

And I dont think Grants really a moron, I think he's a liar.
 

Visbek

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Don't forget that crap about the Fed being a creation of Congress. That's utter B/S! It's a creation of the major banking interests who control it.
While the Fed is not going to ignore the banks, they don't take their marching orders from the banks, either.

In fact, in the wake of Lehman's collapse, it was the Fed and Treasury that were calling the shots, e.g. strong-arming the banks into taking emergency loans (so the weak banks wouldn't be singled out) and subjecting them to stress tests.

But hey, don't let a few facts get in the way of a good anti-government rant :roll: Do go on....


Also, these "theories" intentionally ignore how the average citizen is affected by inflation. So the banks, big business, and our government are going to be okay? It's just John Q. Citizen who can't save or have any financial stability....
1) Low rates of inflation (2-5%) are beneficial for everyone, including John Q Citizen.

2) Deflation is just as big an issue for John Q as is high rates of inflation.

3) The article DOES talk about the dangers of hyperinflation... and points out that it's somewhat difficult to cause one, at least for the American economy.

4) If things ever really get bad enough that the government has to pump out hyperinflation-causing amounts of cash to meet is obligations, everyone is equally screwed, including the banks and the wealthy. The super-rich will be a little more insulated, but not much, as the value of their holdings would be seriously damaged before they could move it to a safer location.
 
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