# The Case For Debt **URL:** \ **Category:** Great Debates\ **Created:** [August 16, 2012, 1:10am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634 "2012-08-16T01:10:04Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 16, 2012, 7:29am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/21 "2012-08-16T07:29:01Z")
The OP misses the best example of countries being able to hold large debts for long periods and still do well. [British debt](http://boffyblog.blogspot.com/2010/10/uk-debt-facts.html) (the forth graph on that page, I just grabbed the first google hit for the famous graph, I didn’t actually read the blog its on) for the last several hundred years was a huge proportion of GDP. They were well over 100% GDP (as high as 250% GDP) every year 1710-1870 and then again from 1914-1970 or so. And yet for most of that period they were dominant economically. I don’t think I’d go as far to say debt is an (intrinsically) good thing (at least, it depends on what its being spent on), but its pretty easy for a large, wealthy country to sustain large amounts of debt for arbitrary amounts of time. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 16, 2012, 7:32am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/22 "2012-08-16T07:32:52Z")
> [@Rune](#): > > Also an additional key difference between 1945/1980 and 2012 is that in 2012 much of the debt is held by non-American citizens. So the debt and interest servicing is going to stimulate economies outside the USA. They’re sending us cash and in return we’re sending them a very small portion of that cash back in the form of interest payments. The net result is a net flow of capital into the US, not out of it. ---
**Author:** ![Rune](https://avatars.discourse-cdn.com/v4/letter/r/e68b1a/32.png) [@Rune](https://boards.straightdope.com/u/Rune)\ **Post date:** [August 16, 2012, 7:43am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/23 "2012-08-16T07:43:57Z")
> [@Simplicio](#): > > They’re sending us cash and in return we’re sending them a very small portion of that cash back in the form of interest payments. The net result is a net flow of capital into the US, not out of it. In the short term. Obviously over the total debt history the net flow will be the other way. As long as the interest is greater than zero – or larger than the inflation rate. How big a percentage of the budget are you ready to set aside for debt interest payments? ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 16, 2012, 8:05am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/24 "2012-08-16T08:05:37Z")
> [@Rune](#): > > In the short term. You specified 2012, which is the short term. We’re currently having our economy stimulated by foreign money in the form of selling debt, not the other way around. > [@](#): > > Obviously over the total debt history the net flow will be the other way. As long as the interest is greater than zero – or larger than the inflation rate. Which it isn’t. Real interest rates are currently negative. Foreign investors are essentially paying us to use their money to stimulate our economy at the expense of their own. Obviously that won’t be the case forever, but it will be until the global economy improves, at which point the deficit will shrink due to improving economic conditions. ---
**Author:** ![ralph124c](https://avatars.discourse-cdn.com/v4/letter/r/8797f3/32.png) [@ralph124c](https://boards.straightdope.com/u/ralph124c)\ **Post date:** [August 16, 2012, 12:08pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/25 "2012-08-16T12:08:17Z")
What about huge trade imbalances? (Such as the USA and China). For decades, the USA has watched as industrial jobs disappear-while Chinese manufacturers captured US markets. This has lead to enormous trad surpluses for China-since the Chinese buy little, and sell a lot, they have a lot of dollars. Taken to its logical conclusion, China must recycle these dollars to the USA-otherwise they face losing their best customer. Yet, what happens when the dollar gets depreciated? Do the Chinese stop selling? Or maybe they will just buy up America? ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 16, 2012, 3:53pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/26 "2012-08-16T15:53:21Z")
> [@Simplicio](#): > > The US won’t default on its debts, so that debt is indeed an asset to people holding it. Given that people are basically paying the gov’t to get Treasury bills at this point, its pretty clear the markets agree. > > Meh, its not that hard to grow out of debt. Plenty of other countries have grown out of debts without having a WWII destroy their competitors. > > Consider, nominal growth 2004-2009 was 4%. If you held the deficit to 1% GDP with the same level of growth you could cut the deficit in half in 20 years. Burning Europe to the ground isn’t necessary. The idea that the destruction of Europe helped us economically is ridiculous. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 16, 2012, 4:10pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/27 "2012-08-16T16:10:32Z")
> [@Try2B\_Comprehensive](#): > > I dunno. This suggest debt has no consequences. Creditors could change their behavior, no? Debt does have consequences, it’s just that (involuntary) default cant be one of them. US debt is safe in a way that Greek debt is not, because we don’t need creditors. The US government can, and does, finance its debt itself. It happens whenever the Fed buys Treasuries. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [August 16, 2012, 4:49pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/28 "2012-08-16T16:49:06Z")
> [@LinusK](#): > > Debt does have consequences, it’s just that (involuntary) default cant be one of them. US debt is safe in a way that Greek debt is not, because we don’t need creditors. The US government can, and does, finance its debt itself. It happens whenever the Fed buys Treasuries. If they did this it would create inflation which would lead to higher interest rates. Higher interest rates would mean they would have to keep financing the debt or face ruinous payments. Once they did that it would mean they would keep having to do it forever, leading to ruinous inflation which would destroy the economy. Borrowing money is cheap right now, but cheap ain’t free. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 16, 2012, 4:57pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/29 "2012-08-16T16:57:34Z")
> [@puddleglum](#): > > Borrowing money is cheap right now, but cheap ain’t free. With negative real interest rates, its better then free. It costs us negative money. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [August 16, 2012, 5:59pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/30 "2012-08-16T17:59:57Z")
> [@Simplicio](#): > > With negative real interest rates, its better then free. It costs us negative money. This is only relevant if the government invests the money. If it is used for consumption then it has to be paid back. If someone wants to give me 10 grand on the condition I give them 9 grand next Tuesday, the smart thing to do is spend one thousand dollars and keep the rest to pay them back. However if I spend all 10 grand then when next Tuesday comes around I am going to be in serious trouble. My understanding of what the government is doing with the money is that it is spending it. If they are just spending the vigorish and saving the principle then debt would be a great idea. ---
**Author:** ![Mosier](https://avatars.discourse-cdn.com/v4/letter/m/7ea924/32.png) [@Mosier](https://boards.straightdope.com/u/Mosier)\ **Post date:** [August 16, 2012, 6:49pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/31 "2012-08-16T18:49:54Z")
> [@greenslime1951](#): > > Debt is desirable as long as the funds made available by that debt produce at least enough economic surplus to pay for it. In this regard, government debt is no different than private sector debt. > > This isn’t true indefinitely, though. The marginal cost of debt increases as more debt is acquired–on the scale that the US buys it, increased demand to borrow raises the cost of borrowing. At some point, it becomes cost-ineffective to borrow. > > Whether we’ve already reached that point is a subject for further debate. No it’s not. The cost for the government to borrow is negative up to about 5 years, and essentially zero up to 20 years. It has never in history been more cost-effective for the government to borrow than it is right now. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 16, 2012, 6:55pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/32 "2012-08-16T18:55:24Z")
> [@puddleglum](#): > > This is only relevant if the government invests the money… > My understanding of what the government is doing with the money is that it is spending it. Spending money is how gov’ts invest. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [August 16, 2012, 7:06pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/33 "2012-08-16T19:06:05Z")
> [@Simplicio](#): > > Spending money is how gov’ts invest. Only if they are spending money on things that are likely to increase future revenues. This is the same as any other entity, otherwise it is just consumption. ---
**Author:** ![greenslime1951](https://avatars.discourse-cdn.com/v4/letter/g/e9bcb4/32.png) [@greenslime1951](https://boards.straightdope.com/u/greenslime1951)\ **Post date:** [August 16, 2012, 7:12pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/34 "2012-08-16T19:12:08Z")
> [@LinusK](#): > > Your theory predicts that when the US borrows, interest rates go up. But the US has borrowed trillions, and interest rates have only gone down. What is the explanation for that? > > I’m not sure what you mean by economic surplus, but the US is not a private company, and it doesn’t work the same way. It’s not in business to make profits, and it can always pay its bills because it can’t run out of money. It’s not a “theory”–it’s simply the operations of supply and demand, the commodity in this case being money. There is a finite amount of funds to lend (to the public or the private sector). The US may have borrowed trillions of dollars, but its demand for borrowed funds hasn’t increased as quickly as the supply of funds–from newly prosperous and productive nations such as China. Economic surplus, in the classic sense, is the benefit that accrues to one or both parties to a transaction. If I buy a loaf of bread for $2.50, and I would have paid $3 for it if I had to, and you would have sold it to me for $2 if you had to, that’s 50 cents of economic surplus for both of us. In terms of borrowing, the economic surplus for the borrower occurs if the benefit from the use of the funds exceeds the cost of borrowing; the economic surplus for the lender occurs if the funds produce more income than they could if used elsewhere (interest earned\>opportunity cost). The US, like any other financial entity, can indeed run out of money. It’s a misconception that it “can always print more.” The distinction is that CURRENCY is not the same as money–if you print currency, it has to _represent_ something of actual value, or all you’ve done is reduce the value of all of your currency presently in circulation by a proportionate amount. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [August 16, 2012, 7:59pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/35 "2012-08-16T19:59:23Z")
> [@Ruminator](#): > > I don’t think the holders of King Louis XVI debts, or Russian debt (default 1998), or Argentina debt (default 2002), and countless others agree with you. > > You make it sound like debt is a magic elixir. US debt is a pretty important part of the global financial system. We set the benchmark for risk free interest rate. > [@Try2B\_Comprehensive](#): > > What do you mean, “The debt does not need to be paid back”? It keeps getting rolled over… for now > [@puddleglum](#): > > This is only relevant if the government invests the money. If it is used for consumption then it has to be paid back. If someone wants to give me 10 grand on the condition I give them 9 grand next Tuesday, the smart thing to do is spend one thousand dollars and keep the rest to pay them back. However if I spend all 10 grand then when next Tuesday comes around I am going to be in serious trouble. > My understanding of what the government is doing with the money is that it is spending it. If they are just spending the vigorish and saving the principle then debt would be a great idea. Is building a road, investment or consumption in your book? How about teaching our kids how to read and do math? ---
**Author:** ![Chessic\_Sense](https://avatars.discourse-cdn.com/v4/letter/c/7c8e57/32.png) [@Chessic\_Sense](https://boards.straightdope.com/u/Chessic_Sense)\ **Post date:** [August 16, 2012, 8:15pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/36 "2012-08-16T20:15:50Z")
> [@Simplicio](#): > > With negative real interest rates, its better then free. It costs us negative money. > [@Mosier](#): > > No it’s not. The cost for the government to borrow is negative up to about 5 years, and essentially zero up to 20 years. It has never in history been more cost-effective for the government to borrow than it is right now. What you two are forgetting is that the currency in your treasury is _also_ devalued by inflation. Let’s say I borrow 10,000 2012 dollars and promise to repay 11,000 2052 dollars. Now suppose that inflation over those 40 years outpaced the interest rate such that those 11,000 future dollars are worth only 9,000 now-dollars. It looks like you’re borrowing 10,000 now-dollars and promising to repay 9,000 now-dollars, so it looks like it’s automatically profitable, right? Well, the problem is, if you take your borrowed $1 now-dollar and stuff it into a mattress, you won’t pull out $1 now-dollar. In 40 years, you’ll pull out $1 future-dollar. So yeah, you’ll only have to pay back 9,000 now-dollars, but unless you’ve invested it, your 10,000 now-dollars became 8,180 now-dollars without you doing a thing. In other words, yes, we can borrow at negative real rates today, but you have to account for the fact that if left untouched, the money in your pocket automatically earns a negative real rate as well. So you can compare nominal to nominal or real to real, but the fact remains - you have to spend/invest the borrowed money in order for it to be a good deal for you. ---
**Author:** ![adaher](https://avatars.discourse-cdn.com/v4/letter/a/dec6dc/32.png) [@adaher](https://boards.straightdope.com/u/adaher)\ **Post date:** [August 16, 2012, 8:22pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/37 "2012-08-16T20:22:42Z")
A case can be made that the US government should borrow more right now, but that’s not a good general rule. In the 90s, it was beneficial for us to reduce our debt, and we did. But here’s the thing with borrowing now. It has to be borrowed long term, locking in really low interest rates, and it needs to be paid back before we have to roll over the debt into higher interest rates. Since we have no real plan to balance the budget ever, then the idea of borrowing more money than we are is insane. If we were only borrowing while the economy was weak, then it would make sense. Keynesian theory works when you run surpluses in good times and deficits in bad times. Running big deficits in good times and outrageous deficits in bad times just gets you where Greece is. It’s true the US can’t run out of money, but printing money has its own pitfalls as Weimar Germany found out. ---
**Author:** ![Rune](https://avatars.discourse-cdn.com/v4/letter/r/e68b1a/32.png) [@Rune](https://boards.straightdope.com/u/Rune)\ **Post date:** [August 16, 2012, 9:15pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/38 "2012-08-16T21:15:25Z")
> [@Damuri\_Ajashi](#): > > Is building a road, investment or consumption in your book? > How about teaching our kids how to read and do math? Those are both excellent investments. Provided the road leads anywhere useful of course, and not just to some senator’s private summer cottage. Consumption would be welfare checks. ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [August 16, 2012, 9:35pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/39 "2012-08-16T21:35:38Z")
And on that note, there’s some serious discussion of what the actual multiplier of governemnt spending is right now. There’s never going to be a really clear answer for this, but to be blunt, I haven’t seen any reliable study which indicating it’s much more than 1. Which is basically saying that we get jack squat in the long run for governemnt spending. Now maybe you could improve that by som really useful investment somehow. but it sure isn’t clear exactly what would be so profitable. ---
**Author:** ![adaher](https://avatars.discourse-cdn.com/v4/letter/a/dec6dc/32.png) [@adaher](https://boards.straightdope.com/u/adaher)\ **Post date:** [August 17, 2012, 12:52am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/40 "2012-08-17T00:52:02Z")
> [@Rune](#): > > Those are both excellent investments. Provided the road leads anywhere useful of course, and not just to some senator’s private summer cottage. Consumption would be welfare checks. Also, if additional funding on education isn’t actually improving education, that too is consumption. And describes most education spending increases over the last 30 years. [Previous page](https://boards.straightdope.com/t/the-case-for-debt/631634.md?page=1) [Next page](https://boards.straightdope.com/t/the-case-for-debt/631634.md?page=3)