Because without government stimulus (and bailouts) unemployment would have been greater than it was and the credit system could have frozen up even worse than it did. If the government chose to do nothing, the markets would have tanked still further. Since your preferred policy seems to be no debt, I can only conclude that you prefer a depression to the evils of debt.
Not that we wouldn’t have run a deficit anyway since revenues would have tanked worse than they did, and we’d still have an army to pay.
It depends. If you have an investment that pays more than your mortgage, taking the tax benefits into account, the mortgage pays. You get to keep appreciation on your house, not the bank, so you need only consider the reward you get from investing the money. And I see septimus brings up the excellent point of the net present value of the money. Inflation is good for mortgagees. Cash has benefit if you expect deflation, and cash is sometimes an excellent bargaining tool when negotiating for a house in a hot market.
I could pay off the rest of my mortgage today, but it would be a dumb move.
Even as a liberal I have to admit that raising taxes has some drawbacks. especially of you raise them for the middle class and below. Government really can’t just raise taxes as much as they want to erase deficits.
A bridge is an investment, many government expenditures aren’t. You should read up on the difference. I await the input from an expert to enlighten us.
Oh but a business can set its income also - just raise prices. Oh that doesn’t work? Neither does it work for government. And income in both cases is an estimate. If employment (sales) goes down tax revenue (product revenue) goes down also. And businesses usually don’t have board members who think getting revenue from customers is a bad thing.
Today government borrowing costs are very low, and since we have so much low hanging fruit return from investment should be relatively high. We should be spending more in infrastructure investments. The anti-deficit mania is hurting us.
Excellent point. Unfortunately a lot of politicians can’t seem to tell the difference.
You’re neglecting risk. As happened in the recession, if government bonds are the only safe haven, investors will flock to them even if they pay basically nothing in interest. I think in Europe some government bonds (used by big banks) are paying negative interest.
You should expand your reading beyond deficit hawks.
Government deficits means surplus in non-government sectors. If the deficit is wiped out then private and foreign accounts will have to shift to match. I’m guessing the large corporate savings would be history. Amusingly, if you go back to the late 90s and early 00s you can find some economists fretting about what years of surpluses would do to the bond market.
There are different ways of getting to zero deficits. If the economy booms and wipes out the deficit then that’s probably a good thing. If there’s no deficit because spending was slashed and taxes were hiked that’s probably a bad thing. Especially if you cut things like education and infrastructure.
It’s more helpful to look at the deficit as the result of other factors, not by itself as some terrible monster that must be slain no matter what. Worry more about asset bubbles or spiraling health care costs. Also keep in mind there are a lot of people who want to use deficits as an excuse to cut social spending or “drown the beast.” Oh no, we cut taxes and now the deficit exploded. Guess we have to privatize Social Security.
Because of the gold standard there was no easy way to inject liquidity into the system and prevent deflation. Now that we are on a fiat money system the government can inject liquidity and prevent deflation whenever it wants to. Thus even in a downturn there is no reason to use deficit spending to increase aggregate demand since it can be done much better with monetary policy without increasing the deficit.
Even Krugman agrees that monetary policy should be tried first, but sometimes it is not adequate. Also, the deficit will increase automatically as the result of greater payments for things like unemployment and decreased revenue due to a slowing economy. But that’s a feature.
I don’t recall saying that my preferred policy is no debt. I don’t recall, in this thread, support or opposing any policy of any sort.
You imagined it in what I took as the John Lennon sense. You also did not mention the obvious disaster that would be the consequence. Are you now saying that debt is not a problem? And that debt is a good way of reacting to a downturn? If you do, I will happily take it all back.
if you take a Econ course, they will tell you that a deficit that is nor more than the increase in GDP is a good thing. You need* some* debt to stimulate the economy and keep deflation away.
The issue is with GWB size debt- huge and unsustainable.
Yup.
I’m not really sure why this whole bonds/govt. debt thing is so confusing to so many people.
At its core, it’s not a lot different than a person having a credit card with an unlimited credit limit. It’s all well and good when you’re using it to do things like putting a new roof on your house after a hailstorm, buying a security system or getting a new computer so you can work from home more efficiently, and you don’t have the cash on hand to pay for them outright. You know you’ll pay more overall for buying them with the card, but when your roof is leaking, it’s still a better tradeoff to pay a bit more down the road than to endure a leaking roof until you can save up to pay for it outright, or until you get a raise that allows you to pay outright.
All that’s fine and good- where it gets sticky is when the combination of your mortgage, utilities, internet service, cable TV, child support payments, children’s allowances, security system subscription, food bills, etc… either exceed the cash you’re making from your job, or you break even, so you have to use the unlimited credit card to either pay for regular mundane monthly expenses, or you have to do something screwy like using the card to pay its own minimum monthly fees.
See the problem there? You’re not defaulting on your debt, but that’s only because you have an unlimited credit limit. If the bank was to impose one, you’d be in serious trouble, as you have no way to actually pay that credit card down with your current spending.
That’s basically what’s going on with government debt, albeit much simplified.
The problem is that deficit spending is stimulative and everyone wants to take credit for a boom economy so people don’t lay off the deficit spending just because the economy is healthy. Perhaps if we had a deficit spending trigger so that you could not engage in deficit spending if the real growth rate was more than 2 or 3%.
Deficit spending is NOT always stimulative. When the debt reaches a certain point, it begins to drag on the economy, and the market may well respond to additional borrowing by contracting, reducing private borrowing, etc. A ‘balance sheet’ recession can include government balance sheets, you know.
The other problem with infinite deficit spending is that eventually you have to pay the money back. it also hobbles monetary policy. Let’s say inflation starts up tomorrow, and the government would like to raise interest rates to control it. How does it do that when every point of interest adds $180 billion dollars in interest payments to the government’s budget? Paul Volcker had to raise interest rates over 10% to get inflation under control. That’s not even possible any more, as the government would go bankrupt if it was forced to pay its interest at anything near those rates.
It seems like the real question here is whether you believe that money is just a fiction, and governments can borrow and spend as much as they want with impugnity, or whether at some point there is a reality that will intrude and stop the party.
There’s always sticking your money under the mattress - essentially just holding on to your money and making no investment with it. But even sitting under the mattress, money will change in value as time passes.
An investment is when you do something with your money that hopefully will increase it above the mattress rate. But all investments have an element of risk. US Treasury bonds have always been considered one of the least risky investments in the world.
I know negative interest bonds exist but they’re so bizarre I don’t understand them. From what I can gather, their purpose is to push investors away from buying government bonds and towards other investments.
That’s because it can be difficult to tell the difference. One person’s infrastructure can be another person’s white elephant. I don’t know enough about the project, but im still unsure whether California’s proposed high speed rail system is prudent investment in infrastructure or an expensive waste.
Sorry if this has been posted already - I didnt’ see it.
Why debt, at least some debt, is healthy and useful:
Right. And there is the risk of getting robbed. Not to mention a bad night’s sleep from a bumpy mattress.
That’s why treasury bills were so popular. Clearly other investments weren’t paying enough interest to make their risk in uncertain economic times worth it. I’m just explaining the actions, not saying it was a good idea. I put my money into the market, and it turned out great.
It’s better to focus first on the real economy. The relationship between government spending and total spending is indirect. When, in future, the government is repaying its debt that just means that instead of spending by government there will be spending by whoever’s bonds were redeemed. (Yes, the bonds might be redeemed by Japan or China instead of U.S. interests, but trade imbalance is a separate issue from government deficits.)
I suppose your use of “infinite” was just intended as a colorful throwaway adjective, but it would mislead anyone who knows what “infinite” means! Infinite deficit spending is debt which is never paid back. 
And in 1980, when the inflation rate was 13.5% and the rate for U.S. 10-year bonds was less than 11%, the U.S. was showing a profit on those bonds! If you owe $1000, pay $110 interest and then owe only $880 in year-ago dollars you aren’t going “bankrupt” :eek: – you’ve shown a profit. Yes, there were high short-term real interest rates during some of the 1980’s, but these had the benefit of driving down long-term rates.
:eek: :smack: So that’s the “real question”, hunh? How about “How many strawmen can dance on the head of a pin?”
I am not sure what you mean.
The government borrows a million dollars, issues a debt instrument, and spends the milllion. Then the debt instrument comes due. The government collects a million dollars in taxes, plus more for interest, and repays the debt. The money didn’t come out of nowhere - it came out of the taxpayer’s pocket. The entity who held the debt certainly has his million dollars back, plus interest, but that is offset by the taxpayers who have a milion dollars + interest less to spend. That’s why deficit spending is borrowing from our children and grandchildren - they will have to pay the taxes to redeem the debt.
Is this like the idea that the Social Security Trust Fund can be paid for by some other source than the taxpayer?
Regards,
Shodan
:smack: Oh no. Not this ignorance again. :smack:
The following are facts:
(1) The USG, exclusive of SocSec Trust Fund, is running a deficit.
(2) The SocSec Trust Fund for many years has run a surplus. Due to baby boomer retirements it is about to start using up that surplus.
(3) The SocSec Trust Fund invests its surplus in USG bonds.
These three facts are unrelated to each other. Unrelated.
To help make this clear, imagine that SocSec invested its surplus in Japanese bonds instead of US bonds. Or just accumulated a large hoard of $100 banknotes. What effect would such a change have?
IIRC, you once suggested as “solution” to your “problem” that SocSec simply stop collecting taxes since it didn’t keep the money anyway. How well would that work? Discuss.