Really, how much money can a government spend before someone says “stop”?
What would have to happen for the American economy to collapse?
Is there massive spending a tactic to reduce the value of the dollar so that imports become more expensive? Is the hope to revitalize the manufacturing base of the US?
There must be some wildly divergent ideas on this because I certainly can’t run my personal life this way, yet hundreds of Congresspeople and Senators vote regularly to allow gigantic budget deficits. What is their economic philosophy?
The someone who will say “stop” is lenders. People stop lending money to a government when they believe it will either (a) default; or (b) repay the debt only by debasing its currency. Lenders do not yet fear either from the United States.
Any number of things, many of them (for example, Avian flu wiping out half our population) having nothing to do with debt.
No, it’s a tactic to get politicians reelected. The spending makes the beneficiaries happy, and the pain of an increasing debt is too diffuse and indeterminate to make people unhappy.
No, see above.
Sure you can; you can go into debt. The limiting factor will be the willingness of creditors to lend to you, just like it is for the government.
Re-elect me.
Who are these lenders? How are they making money on this? Wouldn’t it take one big lender to say, “This is BS, I want my money back!” for this to collapse?
You seem to be suggesting that this could go on forever.
It can go on forever, until China and India and Japan and other countries decide they no longer want to invest in US Government obligations. Then they’d still be sold to someone, but with higher and higher interest rates, and at some point, well, I guess the US will be owned by them (moreso than now) and/or we’ll all be selling apples and pencils on street corners.
(How long before this ends up in Great Debates or The Pit? :))
The simple answer is “as much as it wants.”
Some background:
Governments work these days on paper money or its equivalent. Basically, it’s a game in which everyone agrees that a dollar of that country’s currency is worth a certain amount of something-or-other. As long as the country limits how much paper money is available, the value of each piece of paper remains relatively stable.
A government can screw this up by printing many more pieces of money, even though everyone in the world agrees that the “backing” (something-or-other) isn’t there. The Confederate States of America tried this, and so did Weimar Germany. The result is that each piece of paper becomes worth less.
Think about it: you have 100 simoleons (pieces of paper), whose value is backed up by 100 kilograms of unobtainium. You decide that you want something that costs 200 simoleons, so like Stimpy you decide to print another 100. Wrong-o! Everyone sees that you still have only 100 kg of Ub, so each piece of paper is now worth 50. 200 simoleons, each worth 50kg of Ub.
OK, so instead, you decide to incur debt. Instead of printing the 100 extra simoleons, you sell another piece of paper that says the bearer can have 100 simoleons when you get around to paying him off. You now have 200 simoleons, but you’re theoretically on the hook for 100, eventually.
You can keep doing this by paying off the debts with new borrowing. You can go as long as you want! But suppose, just for the sake of argument, that somebody shows up and demands money.
You could borrow more, but suppose again that everyone wants their money at once!
You, as the sole issuer of simoleons, have an ace in the hole: print more simoleons. You never promised your creditors that the 100 simoleons you owe them would be worth anything; you only promised them 100 simoleons. So off to the printing press…
Naturally, if you have to pay off 1 million simoleons and you still only have 100 kg of Ub lying around, printing more paper is going to drop the paper’s value substantially. But legally, you’re in the clear.
And that, my friend, is what some macro-economists would argue about deficit spending. The US government can borrow as much as it wants. It can always legally pay off the debt by printing more money. If it does, though, it ends up devaluing the money. Some economists would say, therefore, that deficit spending is equivalent to devaluing the currency.
I should note that the Federal Reserve Board may come into this. That part always confuses me, so some other poster can help out.
But in essence, a government can pay off any debt it has by printing money. At some point, though, the money becomes worthless. The creditors may be legally forced to accept it, but they’ll be angry. Countries have been invaded for less…
Peope who buy United States Treasury bills, notes and bonds. This is a diverse group including American investors (I own a few myself), foreign investors, and foreign central banks.
By charging interest. Like any borrower, the government pays interest on its bonds.
No, no one individual lender is big enough to have that kind of pull. If a single investor decided to sell his/her/its bonds and not buy any more, someone else would pick up the slack.
However, if a consortium of the largest foreign companies and central banks got together and decided to bail out at the same time . . . It could get ugly. You’d really have to go into Great Debates to get into the likelihood and consequences of that happening.
The United States has been in debt since 1837, so it has been going on for 169 years. And at times–for example, just after World War II–the debt was even larger relative to our gross national product than it is today.
Ok, this might be a dumb question, but what happens if the U.S. government pays off all the debt in simoleons, then turns around and says that the simoleon is no longer an honored currency?
“As of now, the legal tender for the United States is officially clams, worth 1 k of unobtainium, and available for trade in on a 1-to-1 basis for all U.S. citizens and domestic corporations. If you’re neither, bad day for you.”
Other than sending the whole global economy into a tailspin, is there a reason why just taking your currency out and shooting it and replacing it with a new currency doesn’t work?
(This is obviously not a strong area for me.)
That description would be great if we hadn’t floated our currency back in 1971. The value of our currency is now determined by market exchange rates, not gold backing. This answer really isn’t very relevant to the OPs question.
The stop can be instituted in two ways: 1, Congress fails to increase the statutory debt ceiling (aka ‘the total amount of bonds the US can have in circulation’). To fail to do this would be simply irresponsible, because it would likely have cataclysmic (did I spell that right?) consequences. Continuing to increase the debt has some possible long-term negative outcomes, but can’t be considered reckless in the same way that NOT increasing it can be.
2, the market for bonds just dries up. It is pretty hard to see this happening, either. Should the market for government bonds shrink, the interest on the bonds is adjusted upward. Just like any other supply-and-demand transaction, the seller can make bonds more attractive to find enough buyers. Drawn out to some extreme, this can have consequences on our economy, too, but there is substantial disagreement about how high interest rates must grow before these effects start harming the economy.
There is also 1a, in which spending and revenues become balanced. This would substantially slow down the rate of debt growth, but it would not end it for the foreseeable future. The excess receipts of the Social Security Trust Fund are used to buy government debt, so even if the rest of our budget is balanced, the amount of debt sold each year will still be a good bit of money for years to come.
The question that was not asked bears some investigation, too: is our debt out of control? Our national debt is very large, no doubt. It is also growing quite fast. But our economy is growing, too, and so far, the ratio of our debt to wealth hasn’t gotten really out of hand. Our accumulated national debt amounts to roughly 70% of our annual economic output. Belgium has a debt of about 95% of its annual economic output. Japan is at 170 percent. Hong Kong is at 1 percent.
Ever notice how people fall all overthemselves to help out rich people, while average and poor folks just have to make due? Like how Tom Cruise can always get reservations at any fancy restaurant and the chef might treat him to dinner just to be a nice guy, but most of us just have to enjoy the Big Mac that we bought ourselves?
Well, the US is the greatest celebrity ever known, and we’re average people. Yes, different rules apply. I could provide a more technical answer, but really, this probably sums it up quite nicely.
(But there is one point at which I cannot help but comment: the comparison of national economic policies with personal budgets are simply facile. Not only do people also go very deeply into debt – what, did you pay cash for your house? – but governments don’t have to do things like save for retirement, while they are expected to increase spending during tight economic times to do things like fight wars or help the poor, while people have to reduce spending, which is the essential nature of an economic downturn.)
How is not increasing debt reckless? Does this apply to other countries? Canada has had a balanced budget and even a surplus for about 10 years. Would we be better off having defecits each year?
Isn’t there a 2b, where the market for bonds tanks, the value of the dollar goes through the floor, the dollar price of all imported items such as oil, DVD players, Xboxes and whatever goes through the roof, and much grousing occurs?
Governments have something going for them individuals dont: the sovereign power to levy taxes. So bonds are a good deal as long as the government that issued them is expected to continue existing in something like it’s present form.
But granted there has to be some finite limit. We’re now something like 7 trillion dollars in debt, and piling up more every year. Can the national debt go to 20 trillion? 50? 100?
Debt and deficits are not the same thing. Under the US system, Congress establishes a limit on how much debt the government can carry. Again, debt is the accumulated value of outstanding instruments like bonds, which have been issued over the years, and deficits are the shortfalls between revenue and spending each year.
As deficits continue, and for various other reasons like the existence of trust funds, the US has been racking up more and more debt. The sale of bonds brings money into the treasury that is then used for various purposes. Simply put, if we reach the debt ceiling, have no cash in the treasury (due to budget deficits) and cannot sell instruments to finance spending, then spending has to an immediate stop.
That means that pretty much everything the government does would come to a crashing halt. The military wouldn’t get paid. States wouldn’t get money for various health care programs, like Medicaid. Air traffic controllers couldn’t show up to work. Banking regulators would be furloughed. The FBI couldn’t be out there catching criminals. It would be a big, big, BIG deal.
If we continue with deficits and increasing debt, at some point it will become an excessive burden. Interest rates, over time, will grow. Inflation will increase. Investment will decline, unemployment may go up, and standards of living will probably go down.
But dealing with that type of economic crisis is much different than putting an end to debt issuance; like the difference between failing to change the oil in your car and shifting your car into Park when it is going 60 mph down the freeway.
By the way, Canada’s debt is about 37% of your annual gross domestic product, or $600 billion dollars. Much less than the US, yes, and a preferable situation, and Canada is a very fiscally responsible nation, no doubt. However, the implication that deficits are always bad, and that any sufficiently large value of national debt constitutes a crisis, really isn’t the case.
It would indeed be very much preferable for the US to run a balanced budget and have a smaller debt, but the US is experiencing good economic growth overall, inflation is under control, and interest rates are reasonable, indicating that the large amount of debt in the US has not yet seriously impacted our economy.
To use another analogy, you might compare us to a frat boy who drinks a lot of beer while in college. Some people will condemn him for having a terrible, filthy habit regardless of his actual state of health just because some folks don’t care for alcohol. We know that if he continues to drink a lot, he will almost certainly run into very substantial health problems, but that doesn’t mean that he ought to be committed to the very expensive Betty Ford Clinic right at this minute.
It is a possibility, but the idea that this is just going to happen one day is pretty remote. Nobody who is a player in the international finance system has a good stake in having the US economy tank.
Take China, for example. They hold large amounts of US debt and US cash. If the bond market tanks and our currency crashes, they are left holding the bag with enormous amounts of worthless paper. The simplification that the Chinese (or another country) has got us by the cajones isn’t terribly accurate. It’s more like our financial fates are chained together.
General Questions is better suited to simple questions with factual answers.
The OP is more of a Great Debate, so that’s where we’re going.
samclem GQ moderator
There’s the old saying. If you owe the bank $10,000 and can’t pay it back, you’ve got a big problem. If you owe the bank $10,000,000 and can’t pay it back, the BANK has a big problem.
Thing is, sovreign countries can pull stunts that would land ordinary citizens in jail for fraud. Like, defaulting on debts. Just up and declare, “You know all that money we borrowed a couple of years ago? Yeah, we’re not paying. Screw you guys, I’m going home.” What happens to the defaulting country? Well, people tend not to loan them money any more. Their economy takes a hit. But short of war, what can the lenders do about it? So if we buy 100,000,000 widgets from China and send them a note saying, “We owe you 100,000,000 simoleons”, what can China do if we rip up the note and tell them we’re not gonna pay? We’ve already got their widgets! Hahahaha, suckers! Note: this would actually be a very bad idea. Better to tax the hell out of ourselves and pay off the loan. Nobody likes a cheater.
I was aware that we had floated our currency. In fact, the analogy wasn’t exact even before we did that. I was trying (in simple terms) to explain my opinion that deficit spending is like building up debt, which is roughly the same as printing more paper, which is roughly the same as deflating the value of the currency.
Thus proving, BTW, that at least I am not capable of teaching most of macroeconomics in a single reply! :smack:
Hear hear!
In a previous post, somebody noted that the US has been in debt throughout its history.
Alexander Hamilton, the first Secretary of the Treasury, pushed hard for a permanent floating debt. His reasoning was multi-fold, but part of it was an attempt to tie Europe into the fate of the US. He suggested that if we paid off our debts to European creditors (particularly the Dutch), the Europeans would have little interest in our affairs. If, however, we kept up a debt with them, the financiers would be tremendously interested in seeing that the US succeeded. They, in turn, would influence their governments.
It was not a popular stance, but then many of Hamilton’s ideas were way ahead of his time.
Some may argue that debts and deficits are dangerous. Others may say that they are neutral. Many may tell us not to care. All politicians seem to criticize the deficit when it seems to be money the other party spent. I merely observe that for years the Republicans criticized the Democrats for huge deficits. Then in Clinton’s era we paid off the deficit, and in "W"s era we’ve run it up again. The Republicans seem to be less vociferous about it.
Some observations:
- Some of the debt would be in domestic hands. Those people get a wash.
Yesterday they had 1 million simoleons, today they have 1 million clams. - The foreigners would be extremely angry. Governments themselves would
take action, and private foreign financiers would push their governments to
so. - The action would probably be to stop trading with the US until we paid up, if
not worse. - And, every other country wouldn’t be able to buy from us anyway. Sooner or
later, someone would have to trade clams for foreign currency so that the
foreigners could pay us in clams. My guess is that all foreign countries would
prohibit this. We’d be unable to sell our stuff except within the US. :eek: We
have nowhere near the demand to support that. - Conversely, we’d have to have foreign currency to buy outside stuff, like say
oil? Where do we get foreign currency? Well, we trade simoleons for it! Others
want simoleons so they can buy our stuff, we want quatloos so we can buy
theirs. If the market for simoleons disappears, we have no way to buy
foreign currency (again, read “oil”).
The end result may be worse than we’d like to imagine. Now follow with me:
Last Friday was Cinco de Mayo. It celebrates the victory of the Mexicans over the French. Now why the heck were the Frecnc in Mexico? Answer: they, the British, and the Spaniards were there to collect on debts that Mexico owed and had defaulted on. When the Mexicans promised to repay the debts, the British and Spanish left. The French stayed until the Mexicans finally kicked them out (with American financial assistance) in 1867. 
I learned a ton from this and I wouldn’t have learned anything if this had been in GD. I don’t see how this question is different than any others. I thought I was getting factual answers.
Some amount of debt is not always bad, for corporations or individuals. If I can borrow $1000 at 5% interest and I believe that I can make a 6% return on that money, then I should borrow it. It’s only debts that perform below the level of interest that should generally be avoided.