# Is US Federal debt sustainable? **URL:** \ **Category:** Great Debates\ **Created:** [January 27, 2015, 2:44pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001 "2015-01-27T14:44:54Z")\ **Posts on this page:** 20\ **Page:** 10
**Author:** ![Deeg](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/deeg/32/2955_2.png) [@Deeg](https://boards.straightdope.com/u/Deeg)\ **Post date:** [February 28, 2015, 5:18am UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/181 "2015-02-28T05:18:17Z")
> [@JoeTheBartender](#): > > How come you guys don’t listen to your Fed chairmans? > > [Remarks by Governor Ben S. Bernanke > At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois > November 8, 2002](http://www.federalreserve.gov/boarddocs/Speeches/2002/20021108/default.htm) > So the ex-chairman of the Federal Reserve contradicts your assertion that the gold standard caused the Great Depression and instead that the Federal Reserve caused it. > Got any other brilliant assertions? Dude, did you read your cite other than the quote? Friedman’s position (and Bernanke concurs) is that the Fed made the GD worse. But Friedman also notes that countries that got off the Gold Standard recovered sooner; read the section labeled “The Gold Standard and the International Depression”. Friedman himself noted multiple times that he was not in favor of returning to a gold standard. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [February 28, 2015, 11:40am UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/182 "2015-02-28T11:40:27Z")
So Joe has disclaimed influence from Ron Paul. How does he feel about Milton Friedman? > [@Deeg](#): > > Dude, did you read your cite other than the quote? Friedman’s position (and Bernanke concurs) is that the Fed made the GD worse. But Friedman also notes that countries that got off the Gold Standard recovered sooner; read the section labeled “The Gold Standard and the International Depression”. Friedman himself noted multiple times that he was not in favor of returning to a gold standard. Friedman may have won a Nobel Prize, but he wasn’t stupid: [QUOTE=Noah Smith (Econ. Prof.)] … almost all of our macro policy discussions these days center around Quantitative Easing, a tool popularized, and arguably invented, by Friedman… Friedman’s ideas are pretty close to the mainstream New Keynesian idea of the macroeconomy … the policy of Quantitative Easing - which takes us beyond the New Keynesian framework - was what Friedman explicitly suggested for Japan. Now notice that Quantitative Easing, and the Fed in general, are reviled by the American right. Rick Perry famously threatened to do physical harm to Ben Bernanke for “printing more money”. Ron and Rand Paul are famous for decrying QE and Bernanke, as are right-wing darlings like Peter Schiff. Bernanke is as devoted a Friedman disciple as exists… So the American right, whether of the populist fire-breathing type or the staid, WSJ type, despises the ideas of Milton Friedman. What they support looks a lot closer to “Austrian” economics, which Friedman explicitly denigrated. [/QUOTE] Who ya going to believe? The Nobel Prize winning libertarian, or the post-rational hyperlibertarian on YouTube? The latter, I guess, since YouTube view counts are how we measure credibility here in post-rational America. ---
**Author:** ![JoeTheBartender](https://avatars.discourse-cdn.com/v4/letter/j/b5a626/32.png) [@JoeTheBartender](https://boards.straightdope.com/u/JoeTheBartender)\ **Post date:** [March 2, 2015, 7:33pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/183 "2015-03-02T19:33:02Z")
> [@septimus](#): > > Hi again, **JoeTheBartender**. Like you, I feel that there is a government-financial complex which doesn’t serve the American people well. I was hopeful that the OWS would lead to public awareness and political reforms. _However, to succeed we must understand what the real problems are and, just as important, what they are NOT._ Okay I’m listening, but somehow I feel like I’m going get a snow job. > [@](#): > > I’m glad to hear that Ron Paul is not one of your mentors. He’s not an economist. However, we’re still waiting to hear what expert economists you are in tune with, as your ideas do not match my readings. (I trust you don’t assume that hundreds of economic scholars are in cahoots with a conspiracy and truth is now only to be found on Youtube! 😃 ) I just have to tell you that I don’t think economists know what they’re doing. I mean just recently there was proof positive that austerity leads to growth, but then that got shot down. And economists are always surprised by how high or low a certain metric is… the discipline has very little predictive power. I use things called common sense and logic, and economists don’t use either. Just their attempt at promoting constant growth in a finite environment is proof positive they don’t live in the real world. > [@](#): > > I’d ask you to separate your complaints about leaving the gold standard from “fractional reserve” banking. They’re different issues. Privately-created paper money (a more straightforward term than the bugaboo “fractional reserve”) co-existed with a gold standard for centuries. (And by the way, gold has intrinsic value in a way that paper does not. I don’t blame you for tuning out Dopers who don’t even seem to understand this much.) Of course bankers are always trying to palm off their bankrupt IOUs as money. Scoundrels do such things. I object to making their IOUs government fiat money, as we have today. Fractional reserve banking, privately created paper money, bank notes, or whatever you want to call it is basically fraud. Here’s a good question, if we are all supposedly equal under the law, how come I can’t write someone an IOU for hundred dollars when I only have 10 like the banks can? > [@](#): > > I’d also ask you to clarify your understanding of inflation. You cite that money has lost 85% of its value since 1970. What does this mean to you? Do you think 85% of Americans’ wealth has somehow been misappropriated? Of course it is. If I had a 10 bill in 1970 and today that piece of paper can only get .16 worth of goods, I’d say you got robbed. The fact of the matter is that when the money supply increases against the same total value of goods and services that money supply increase comes at the expense of the existing money. > [@](#): > > The thrill of compounding leads to scary-sounding numbers. The loss of value you speak of averaged 4.2% per year. Moreover, inflation averaged 7.9% annually from 1970 to 1982 and only 2.8% from 1982 to 2014. The higher inflation was associated with particular conditions. > More importantly, you should understand that _predictable_ inflation is relatively harmless, indeed even beneficial. If everyone expects 2% inflation this year, and 2% the next year, this can be factored into interest rates, cost-of-living adjustments, etc. Predictable inflation is fine if we understand the dollar as an arbitrary measuring rod. High or unpredictable inflation is a problem and, though 7.9% isn’t particularly high as inflation rates go, lessons were learned from the 1970-82 period. > > IMO, considering stable inflation of 2.8% to be a serious problem displays poor understanding of economics. Would you like cites from economists of various schools who think 2.8% inflation is preferable to 0% inflation? I told you economists don’t impress me. Most of them have apparently bought in to the banks creating money out of thin air but I still consider that fraud. ---
**Author:** ![JoeTheBartender](https://avatars.discourse-cdn.com/v4/letter/j/b5a626/32.png) [@JoeTheBartender](https://boards.straightdope.com/u/JoeTheBartender)\ **Post date:** [March 2, 2015, 7:34pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/184 "2015-03-02T19:34:37Z")
> [@John\_Stamos\_Left\_Ear](#): > > Other people are making the case. When I see his posts, I see someone who won’t listen (notice how he doesn’t reply to those who do take him to task less brusquely than I did, and with citations), and I see someone who is evading answering questions about where he gets his ideas. His posting shows me he’s not worth the effort that other posters are already doing a nice job of providing, so I have zero problem not wasting my time. Sorry I put some thought behind my posts so it might look like I’m not answering questions but I actually am. ---
**Author:** ![Saint\_Cad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/saint_cad/32/18907_2.png) [@Saint\_Cad](https://boards.straightdope.com/u/Saint_Cad)\ **Post date:** [March 3, 2015, 3:26pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/185 "2015-03-03T15:26:57Z")
Honest question re: fractional reserve. I have $100,000 in deposits sitting in my bank in real banknotes. I lend out $90,000 in cash. I know have $190,000 sitting on my books consisting of $10,000 in my vault and $90,000 in cash out in the public. Have I created $90,000? If so where is it? It’s not in cash obviously so does it only exist as pencil marks in a ledger or bits in a computer? Does it cancel out? $190,000 on the bank’s books minus $90,000 in borrower’s liabilities? If so, then that means that once everything cancels out that the total money in the system equals the total amount of cash in existence. Is that true of our system? ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [March 3, 2015, 3:33pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/186 "2015-03-03T15:33:03Z")
You’ve created $90,000 as far as _the economy_ is concerned, assuming all your borrowers do something with the money. You haven’t created any money from your own perspective, though, since your liabilities cancel out your assets. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [March 3, 2015, 3:41pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/187 "2015-03-03T15:41:01Z")
> [@Saint\_Cad](#): > > Honest question re: fractional reserve. I have $100,000 in deposits sitting in my bank in real banknotes. I lend out $90,000 in cash. I know have $190,000 sitting on my books consisting of $10,000 in my vault and $90,000 in cash out in the public. You can’t have “deposits” sitting on your books in “real banknotes”. Deposits are liabilities for a private bank. Banknotes are assets for a private bank. Two completely different things. Banking works by double-entry accounting. If a new customer comes in to deposit 100k in cash, then to record that transaction, there must be two entries. DEBIT 100k cash (asset) CREDIT 100K deposit (liability)The first entry records the fact that there is now more cash in the vault. This is an asset. The corresponding entry is to record the fact that the bank now has more liabilities. The deposit is the amount the bank owes to the customer who deposited the money: a liability. That liability is a legal responsibility. If the customer wants cash back, then the bank has the obligation to give them cash, but it won’t be the “same” cash that they deposited. Double-entry: the new asset matches the new liability. Supposing that the reserve requirement is 10%, then the bank must keep 10% of those deposit liabilities as cash. They may lend the other 90% out. (This is a large oversimplification of the way the regulation actually works, but it’s good enough for our purposes here.) What will happen is that the bank will give up the cash in exchange for a new loan. If they make a loan of 90k, then that cash leaves the vault and a new 90k loan is created. DEBIT 90k loan (new asset) CREDIT 90K cash (decrease of previous asset)Presumably, that 90k of cash will be deposited at another bank, which might start the process over again. But that is, again, a simplification of the real money creation process. The final point is that the total amount of assets for this particular bank stays square at 100k if the check for the loan is deposited at another bank. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [March 3, 2015, 3:54pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/188 "2015-03-03T15:54:15Z")
> [@Saint\_Cad](#): > > Honest question re: fractional reserve. I have $100,000 in deposits sitting in my bank in real banknotes. I lend out $90,000 in cash. I know have $190,000 sitting on my books consisting of $10,000 in my vault and $90,000 in cash out in the public. > > Have I created $90,000? If so where is it? It’s not in cash obviously so does it only exist as pencil marks in a ledger or bits in a computer? > > Does it cancel out? $190,000 on the bank’s books minus $90,000 in borrower’s liabilities? If so, then that means that once everything cancels out that the total money in the system equals the total amount of cash in existence. Is that true of our system? The bank has $100,000 in assets and $100,000 in liabilities. How did you get $190,000 without adding the two sides of the ledger together? Money (M1) has jumped from $100,000 to $190,000 (your customers’ demand deposits plus the $90,000 cash you loaned out. Not $200,000: cash in bank vaults is not included in the FRB measures M0, M1, M2). Yes, you’ve “created” $90,000; it comprises(_), in effect, the paper checks or plastic debit cards you’ve given your depositors, or rather the computer bits watching that money. (_ - although it was created with the loan.) I’m not sure “total amount of cash in existence” is a meaningful concept. The FRB defines Monetary Base (MB) as the total of banknotes in circulation or in private bank vaults (but not FRB vaults!) _plus_ reserves deposited in FRB. I’m not sure MB is a useful statistic either; in recent years MB has skyrocketed (to little effect). ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [March 3, 2015, 5:57pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/189 "2015-03-03T17:57:32Z")
> [@JoeTheBartender](#): > > I use things called common sense and logic, and economists don’t use either. Just their attempt at promoting constant growth in a finite environment is proof positive they don’t live in the real world. We’ve always lived in a constant environment. Don’t you believe the growth we’ve seen so far? Where does it come from? Added population. New ideas and new technologies. For instance, we turn sand with a few impurities into computer chips, and turn blank computers into software. > [@](#): > > Of course it is. If I had a 10 bill in 1970 and today that piece of paper can only get .16 worth of goods, I’d say you got robbed. Anyone who had that $10 bill for 45 years and expected to keep its value is an idiot. But you are only talking spending. In 1973 right out of college I got offered a job for $12K a year. Today those would be poverty wages. (And I was a computer science major, not English major.) The absolute dollar amount means nothing - how long it takes to earn enough to buy something means a lot more. > [@](#): > > The fact of the matter is that when the money supply increases against the same total value of goods and services that money supply increase comes at the expense of the existing money. Inflation without wage increases is bad. Inflation with equivalent wage increases is not bad. In fact it may be good - if you know that prices will go up, you buy now which improves the economy. OTOH in a deflationary environment prices will go down so you put off purchases, and the economy may crater. > [@](#): > > I told you economists don’t impress me. Most of them have apparently bought in to the banks creating money out of thin air but I still consider that fraud. Fraud involves the withholding of information. What information about the basics of our economic system is being hidden? That you don’t like it doesn’t make it fraud. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [March 3, 2015, 6:24pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/190 "2015-03-03T18:24:22Z")
> [@septimus](#): > > I’m not sure “total amount of cash in existence” is a meaningful concept. The FRB defines Monetary Base (MB) as the total of banknotes in circulation or in private bank vaults (but not FRB vaults!) _plus_ reserves deposited in FRB. I’m not sure MB is a useful statistic either; in recent years MB has skyrocketed (to little effect). Historically there’s a strong relationship – especially in high inflation countries – between the monetary base and the price level. More money =\> higher prices. This relationship can break down at zero-percent interest because the bank reserves held at the Fed become an extremely close substitute for the shortest-term Treasuries. New monetary base that is intended to be “temporary” – conditional on current conditions and which would be swiftly withdrawn given 4% inflation – won’t have much effect on the price level. The Fed is exchanging one asset for another asset that is, in current conditions, almost identical. If there’s no real change in the asset, there won’t be much real change in the behavior. (And really, given interest on excess reserves, holding the base right now would be preferable for banks to holding the shortest-term T-bills.) So increasing the base in that context doesn’t necessarily mean much by itself. It works more through “future guidance” of expected future policy. But the currency in circulation component of the monetary base (the stuff that is not on Fed computers) still generally has a positive relationship with the price level. We can call this an “endogenous” variable. It depends on the banks’ and public’s desire to hold physical cash. The central bank does not control this directly, although they can influence it. And really, currency in circulation has always been the most important part of the monetary base. Before we hit the crisis, [banks didn’t bother to keep any reserves](http://research.stlouisfed.org/fred2/series/EXCSRESNS) in excess of their requirement. All the variability came from how much cash the public wanted to hold. That fact is still basically true, it’s just a lot more visible today than it ever was before. > [@JoeTheBartender](#): > > Here’s a good question, if we are all supposedly equal under the law, how come I can’t write someone an IOU for hundred dollars when I only have 10 like the banks can? You can. You are free to write an IOU to any other party in exchange for tangible goods and services. The only trick is: you have to convince them to accept the IOU. This isn’t a unique requirement. It’s the same for any private bank. No company or person is forced to accept the IOU of any private bank, if they don’t wish to accept it. But it even goes beyond that. If from this day forth, you decide to accept only grams of silver paid up front for any new transaction, then you are allowed to do so. You don’t have to accept any IOUs if you wish to decline them up front. But good luck finding anyone willing to trade with you. ---
**Author:** ![JoeTheBartender](https://avatars.discourse-cdn.com/v4/letter/j/b5a626/32.png) [@JoeTheBartender](https://boards.straightdope.com/u/JoeTheBartender)\ **Post date:** [March 4, 2015, 1:03pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/191 "2015-03-04T13:03:55Z")
> [@septimus](#): > > (I’ve taken the liberty of adding point numbers 1-4 in the following quote.) > (1) You define fractional reserve banking to be fraudulent and conclude that the fractional reservers are fraudulent. I tried to show that the paper (or plastic) money created by private banks is conceptually the same as IOU’s with very high credit rating. We’re finished on this. You can try to learn or we can agree to disagree. Unfortunately, money created as debt by private banks today is considered the official currency of the United States. Why do you want me learn that debt is money? To me money should be something of real value, not a bankers IOU. > [@](#): > > (2) I’m confused by your response. Do you think FRB is corruptly seeking Wall Street profits? Its own profits? In any event, don’t conflate 2% inflation with Zimbabwe-style hyperinflation. I’m through with the question of whether a low inflation rate like 2% is good or bad. You can try to learn or we can agree to disagree. LOL, isn’t that the Fed’s purpose? They’re the lender of last resort are they not? And who is it they are lending to that need a last resort? The banks, and mostly the big New York banks. Those deemed “too big to fail”. Too big to fail because some really rich, politically connected people will lose a lot of money? I resent the fact that you seem to think that you have something to teach me, especially after the following gem: > [@](#): > > (3) There’s no necessary connection between “money” and material wealth. No. Really now? That’s a new one on me! It’s almost funny that you believe something as outrageous as that. > [@](#): > > (4) Perhaps I phrased my claim poorly. Gold prices fluctuate, and obviously it would have been good to buy in 2004. I was thinking of the relationship between gold and T-bond values _over very long periods_, where fluctuating prices and rates get averaged out. > > No need. Debate should feature quality not quantity. Thank you for that last line. I couldn’t find a source for treasury rates in 1935, but somehow I think the $35 I got from my gold piece invested in T-bills for 80 years at 4 or 5% isn’t going to touch the $1200 that my goal piece will be worth today. ---
**Author:** ![JoeTheBartender](https://avatars.discourse-cdn.com/v4/letter/j/b5a626/32.png) [@JoeTheBartender](https://boards.straightdope.com/u/JoeTheBartender)\ **Post date:** [March 4, 2015, 1:06pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/192 "2015-03-04T13:06:56Z")
> [@septimus](#): > > Who ya going to believe? The Nobel Prize winning libertarian, or the post-rational hyperlibertarian on YouTube? The latter, I guess, since YouTube view counts are how we measure credibility here in post-rational America. Just because I used a quote regarding Friedman doesn’t mean that I follow all of his dictates. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [March 4, 2015, 1:07pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/193 "2015-03-04T13:07:29Z")
> [@Hellestal](#): > > (And really, given interest on excess reserves, holding the base right now would be preferable for banks to holding the shortest-term T-bills.) The FRB now pays 0.25% interest (instead of the usual zero) on excess reserves, ostensibly to keep interest rates from falling further toward zero. Meanwhile, the ECB “pays” NEGATIVE 0.10% on its deposits, to reduce the risk of deflation. Question: Does this seem odd? The difference in interest rates is only 0.35%, but the fact that the rates are _on opposite sides of zero_ makes it seem odd. Is it due to different conditions, or to different philosophies? ---
**Author:** ![JoeTheBartender](https://avatars.discourse-cdn.com/v4/letter/j/b5a626/32.png) [@JoeTheBartender](https://boards.straightdope.com/u/JoeTheBartender)\ **Post date:** [March 4, 2015, 1:09pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/194 "2015-03-04T13:09:18Z")
> [@Really\_Not\_All\_That\_Bright](#): > > You’ve created $90,000 as far as _the economy_ is concerned, assuming all your borrowers do something with the money. You haven’t created any money from your own perspective, though, since your liabilities cancel out your assets. I beg to differ. You purchased an asset (the loan documents, including the note) with money you didn’t have. That really sounds to me like you created money from your own perspective as a bank. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [March 4, 2015, 1:50pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/195 "2015-03-04T13:50:17Z")
> [@JoeTheBartender](#): > > I beg to differ. You purchased an asset (the loan documents, including the note) with money you didn’t have. That really sounds to me like you created money from your own perspective as a bank. 😕 In the specific scenario described, the bank purchases the loan by handing borrower $90,000 cash, i.e. 900 pieces of government-issued cotton-linen bearing a portrait of Benj. Franklin, and inscribed “Legal tender for all debts public and private.” In what sense were the Franklin portraits “money the bank didn’t have”? If you meant “money held in trust for a depositor” why didn’t you say so? Or is it, again, just your claim that all bank operations are “fraudulent”? (And please use a standard vocabulary. As **Voyager** pointed out, fraud implies deceit but the system is well-understood, and banks make no secret that you should call ahead for large cash withdrawals. Or do you think it is the others in the thread whose diction/vocabulary is deficient?) ---
**Author:** ![Trinopus](https://avatars.discourse-cdn.com/v4/letter/t/2bfe46/32.png) [@Trinopus](https://boards.straightdope.com/u/Trinopus)\ **Post date:** [March 4, 2015, 9:00pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/196 "2015-03-04T21:00:42Z")
> [@JoeTheBartender](#): > > I beg to differ. You purchased an asset (the loan documents, including the note) with money you didn’t have. That really sounds to me like you created money from your own perspective as a bank. Wasn’t that a standard 19th century banking practice? A bank might have $100,000 in gold-backed deposits, but would lend out (in letters of credit) a total of more than that to farmers and merchants in the town, stimulating the economy, and secured by the principle that “they won’t all want to withdraw it at once.” Even in the gold-standard days, banks did create money, and, if this was done wisely, it benefited everyone. (If it was done injudiciously, it led to panics and bank failures.) ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [March 4, 2015, 10:24pm UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/197 "2015-03-04T22:24:14Z")
> [@JoeTheBartender](#): > > I couldn’t find a source for treasury rates in 1935, but somehow I think the $35 I got from my gold piece invested in T-bills for 80 years at 4 or 5% isn’t going to touch the $1200 that my goal piece will be worth today. _ **Welcome to the magic of compound interest.** _ $35 earning 5% over 80 years produces [35\*1.05^80](http://lmgtfy.com/?q=35*1.05%5E80) = $1734. That is more than $1200. That’s using your 5% figure. I lost my bookmark to Treasury rates since 1900 but here’s one for [Treasury 10-year rates since 1962](http://www.federalreserve.gov/releases/h15/data.htm). The geometric mean of the 10-year rates over these 53 years (1962 to present) is 6.45%, higher than your 5% estimate. Let’s assume you bought in 1932, when you could buy gold for only $21; suppose that the interest rate for the first 30 years is 3.3% (eyeball estimate on graph), and then 6.45% for the 53 years I was able to find. Over that 83-year period, your $21 gold purchase (ignoring any insurance or storage expense) has become $1200. The same $21 rolling over in 10-year treasuries would be [21_1.033^30_1.0646^53](http://lmgtfy.com/?q=21*1.033%5E30*1.0646%5E53) = $1535. _ **Welcome to the magic of compound interest.** _ ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [March 5, 2015, 12:57am UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/198 "2015-03-05T00:57:54Z")
> [@septimus](#): > > The FRB now pays 0.25% interest (instead of the usual zero) on excess reserves, ostensibly to keep interest rates from falling further toward zero. Meanwhile, the ECB “pays” NEGATIVE 0.10% on its deposits, to reduce the risk of deflation. Not just the ECB. The Swedish repo rate is now -0.1%, and deposits at the bank also carry negative interest. The Danish deposit rate is -0.75%, which is leading some private banks to charge negative interest of their own on customer deposits. The Swiss National Bank now has a negative target for its main instrument, the 3-month LIBOR, and the rate on its deposits are also negative. That’s four different central banks by my count that are using negative interest instruments. > [@septimus](#): > > Question: Does this seem odd? The difference in interest rates is only 0.35%, but the fact that the rates are _on opposite sides of zero_ makes it seem odd. Is it due to different conditions, or to different philosophies? Negative interest is pretty odd, but it’s not theoretically perplexing. The Fed tells us that they want an inflation rate of around 2% annually. Which means holding cash comes with a “real” interest rate of negative 2% annually. People accept cash knowing the fact of inflation, in the same way that we buy a cake knowing that we can’t stash the cake in the closet for two months and still expect it to be good. (Well, most of us aren’t that dumb. Given some of the silly comments I’ve seen from at least one poster, I can’t speak for literally everyone in the thread.) So a negative rate on deposits isn’t too conceptually unusual, even if it’s a new thing in the world. Banks could replace those deposits with cash. The cash would have a zero-percent nominal rate. But then… they’d have a helluva lot of paper cluttering up their vaults. That’s not actually cheap. That space has an opportunity cost. It’s an interesting question of how far negative rates on deposits can actually go: at a certain point, the deposit penalty on the computer cash would become so great that banks would exchange all of it for paper cash. Given a sufficiently negative rate, security costs for the extra cash would be less than the negative interest penalty. Given current technology, there is definitely a limit on how negative it can go. Rereading your question, I see this rambling doesn’t much touch on what you actually asked. Suffice it to say: it’s complicated. Different economies have different needs, and the deposit rate is not the only tool they have available. What we should care about is the aggregate effect of all their policies put together, given the highly disparate natures of their different economies. In these terms: the US Fed has been worlds better than the ECB. Rates are negative in Europe largely _because_ the European Central Bank has been so terrible. An extended period of low interest is a sign that monetary policy has been too tight. ---
**Author:** ![JoeTheBartender](https://avatars.discourse-cdn.com/v4/letter/j/b5a626/32.png) [@JoeTheBartender](https://boards.straightdope.com/u/JoeTheBartender)\ **Post date:** [March 5, 2015, 2:06am UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/199 "2015-03-05T02:06:49Z")
> [@Voyager](#): > > We’ve always lived in a constant environment. Don’t you believe the growth we’ve seen so far? Where does it come from? Added population. New ideas and new technologies. For instance, we turn sand with a few impurities into computer chips, and turn blank computers into software. It’s phantom growth. Most of it will disappear when we no longer have the energy bonanza that is fossil fuels. William Catton in his book “Overshoot”, calls it “phantom acreage”. The European culture first started using phantom acreage to support and grow their population in the colonial age. One of the first things they did after colonizing a new territory was set up plantations to grow food to be sent back home or to cut down trees support the construction and shipbuilding industries. That strategy has continued down to the 21st century, hence our involvement in the Middle East. Another form of phantom acreage is exploiting past sunlight for its energy. Of course you can see the limits to both of these strategies, can’t you? Really the biggest problem I have with banks creating money from debt is that is that it forces growth, it needs growth, it will die without growth. But the problem is “growth for the sake of growth is the ideology of the cancer cell”. > [@](#): > > Anyone who had that $10 bill for 45 years and expected to keep its value is an idiot. But you are only talking spending. In 1973 right out of college I got offered a job for $12K a year. Today those would be poverty wages. (And I was a computer science major, not English major.) The absolute dollar amount means nothing - how long it takes to earn enough to buy something means a lot more. Oh did I say $10 bill?!?!? I meant 10 silver dollars! But it kinda illustrates my point about fiat paper money inflation. It steals value from those pieces of paper. Those pieces of silver on the other hand, are now “worth” 160 of your precious Federal Reserve notes. Oh I agree with you, how long it takes to earn the money to buy the necessities is more important! Perhaps you could point me to a source that shows how well the middle class is doing with regard to inflation over the last 40 years? Never mind I know already, not very well. So $12K year, and just for arguments sake, let’s say you got paid in silver dollars. And every year there after you got paid in silver dollars. So let’s see how well you did. Do you make $192,000 a year (or hopefully more)? > [@](#): > > Inflation without wage increases is bad. Inflation with equivalent wage increases is not bad. In fact it may be good - if you know that prices will go up, you buy now which improves the economy. OTOH in a deflationary environment prices will go down so you put off purchases, and the economy may crater. Yes, and more spending means more manufacturing and more manufacturing means more extraction and more extraction means less and less and less remaining. I’ll bet you don’t know that when the first settlers went out West they actually found boulders of copper that were the size of Volkswagen Beetles? Today were lucky to get a few ounces out of a ton of ore. One of the other reasons I pay no attention to economists is that they pay no attention to the realities of life on this planet. To them if we run out of was something, we just substitute! For a discipline known as the “dismal science”, that’s a ridiculously optimistic outlook. > [@](#): > > Fraud involves the withholding of information. What information about the basics of our economic system is being hidden? That you don’t like it doesn’t make it fraud. For Exhibit 1 I hold that this very thread and the misunderstandings over money creation in this monetary system as evidence of the banks withholding information. ---
**Author:** ![JoeTheBartender](https://avatars.discourse-cdn.com/v4/letter/j/b5a626/32.png) [@JoeTheBartender](https://boards.straightdope.com/u/JoeTheBartender)\ **Post date:** [March 5, 2015, 2:21am UTC](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001/200 "2015-03-05T02:21:20Z")
> [@Hellestal](#): > > You can. > > You are free to write an IOU to any other party in exchange for tangible goods and services. The only trick is: you have to convince them to accept the IOU. > > This isn’t a unique requirement. It’s the same for any private bank. No company or person is forced to accept the IOU of any private bank, if they don’t wish to accept it. But it even goes beyond that. If from this day forth, you decide to accept only grams of silver paid up front for any new transaction, then you are allowed to do so. You don’t have to accept any IOUs if you wish to decline them up front. But good luck finding anyone willing to trade with you. What do you think Federal Reserve notes are? They’re just fancy IOUs. The only thing backing them as force of law. If you’re offered Federal Reserve notes in payment of a debt and you decline them the debt is vacated. Of course at one time, you could trade in paper money for real money and have something of value like a precious metal, but the Fed has engineered over the last century, to suspend payment in species. Again, what I object to is banks getting to call their IOUs United States currency. Do you understand the difference between your scenario and reality? [Previous page](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001.md?page=9) [Next page](https://boards.straightdope.com/t/is-us-federal-debt-sustainable/711001.md?page=11)