# 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:** 15\ **Page:** 3
**Author:** ![Mosier](https://avatars.discourse-cdn.com/v4/letter/m/7ea924/32.png) [@Mosier](https://boards.straightdope.com/u/Mosier)\ **Post date:** [August 17, 2012, 2:28am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/41 "2012-08-17T02:28:47Z")
> [@smiling\_bandit](#): > > 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. You can’t possibly be saying that the government has never made a good investment, can you? ---
**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, 3:47am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/42 "2012-08-17T03:47:36Z")
Even the worst investors get it right by accident sometimes. The difference is that bad investors are actually trying to find good investments, whereas governments are trying to steer money to favored interest groups. If Warren Buffett was investing based on which companies were run by his friends, how successful would he be? ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [August 17, 2012, 4:48am UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/43 "2012-08-17T04:48:17Z")
[TVTropes](http://tvtropes.org/pmwiki/pmwiki.php/UsefulNotes/Economics) is a surprisingly useful source sometimes – see its list of Economic Fallacies: > [@](#): > > 1. America the bankrupt: National debts don’t work like your personal debt. For example, people don’t buy your debt to prop up your currency. Yet for some reason a lot of writers tend to think of the national debt in the same terms as a bank loan, with angry creditors and everything. When this trope is invoked expect to see a consortium of angry foreign dignitaries banging on a conference table that they want their money back. In reality, if countries actually acted like this, the global financial system would probably collapse pretty spectacularly and everyone would be screwed. This trope is not specific to America, but for some reason Americans are exceptionally paranoid about the National Debt, particularly when the Chinese are buying it up, and now not buying it anymore. Oddly enough, America’s National Debt isn’t even that bad by international standards. Also, the US national debt is in terms of dollars, and the government can create as many dollars as they need to pay off the debt. Everyone would be paid the amount owed, but the new dollars would lead to inflation. The key here is that governments usually owe substantial portions of their debt to ‘themselves,’ i.e. either the government owes money to different branches, or those branches hold their assets as bonds and treasury bills instead of money; by owing money to yourself, you usually don’t charge yourself interest (beyond inflation) and you theoretically can’t default on money you owe yourself. This is how Japan can have gross debt worth over 100% of their yearly economic output and have little economic effects: 70-80% of its debt is owned by the Japanese Central Bank. In the United States, around 35-40% of the government debt is owed to itself, mainly to the Social Security Administration. Also, debt owned to foreign entities makes up MUCH less of the debt than people seem to think: as an example, China owns only 6% of the total US debt. ---
**Author:** ![Mosier](https://avatars.discourse-cdn.com/v4/letter/m/7ea924/32.png) [@Mosier](https://boards.straightdope.com/u/Mosier)\ **Post date:** [August 17, 2012, 1:09pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/44 "2012-08-17T13:09:22Z")
> [@adaher](#): > > Even the worst investors get it right by accident sometimes. The difference is that bad investors are actually trying to find good investments, whereas governments are trying to steer money to favored interest groups. If Warren Buffett was investing based on which companies were run by his friends, how successful would he be? Is it your argument that government spends money less wisely than private industry does? That government only makes good investments on accident? ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 17, 2012, 2:26pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/45 "2012-08-17T14:26:58Z")
> [@John\_Mace](#): > > Yes, it was. > Depends on a lot of other factors. A monetary crisis is not necessarily analogous to the aftermath of a war. And yes, that was another analogy. If the theory is that debt hurts the economy, you’d expect to see the economy hurt after large increases in debt. I understand there are always factors and exceptions, but if the economy never behaves the way the theory says it should, of what use is the theory? ---
**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, 2:40pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/46 "2012-08-17T14:40:09Z")
> [@Mosier](#): > > Is it your argument that government spends money less wisely than private industry does? That government only makes good investments on accident? If we’re talking about pure investment attempts, yes. Spending that is not really investment, as in, not expected to make a return of any sort, is different. ---
**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, 2:41pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/47 "2012-08-17T14:41:36Z")
> [@LinusK](#): > > If the theory is that debt hurts the economy, you’d expect to see the economy hurt after large increases in debt. I understand there are always factors and exceptions, but if the economy never behaves the way the theory says it should, of what use is the theory? Actually, Rogoff/Reinhart found that empirically, countries start to struggle economically with 90% or higher debt. [http://articles.businessinsider.com/2010-08-11/markets/30064363\_1\_ratios-fiscal-consolidation-deficit-hawk](http://articles.businessinsider.com/2010-08-11/markets/30064363_1_ratios-fiscal-consolidation-deficit-hawk) Less than 90% debt-to-GDP ratios have no significant impact on growth Above 90% ratios have a significant impact to growth – with these countries averaging negative growth ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 17, 2012, 3:04pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/48 "2012-08-17T15:04:07Z")
> [@Rune](#): > > It still has to be serviced. With interests. In 2011 the interests on the US debt was nearly half a billion dollars. You could probably have used those money some place else. And currently the interest is very low. In ten or twenty years it most likely will not be, and when you roll over the debt you’ll have to take accept higher interests. How big a percentage of the budget are you ready to set aside for debt interest payments? > > 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. Suppose the US printed up a trillion dollars in currency, and sent it to China, as a gift. Now suppose the Chinese people hoarded all that money and hid it in mattresses and sock drawers. Other than the cost of paper and ink, would we be poorer than we were before? But they won’t just save it, right? They’ll want to use it for something. Suppose they use it to buy stuff from each other, does that hurt us? What if they use it to buy stuff from us? But we don’t just print up money and send it to them, right? The money comes out of our economy, and we have less money as a result. When we have less money people spend less, causing economic contraction and unemployment. Fortunately there’s a solution. When China, or any country, takes our money and fails to send it back, the money needs to be replaced. The way to replace it is for the government to spend more into the economy than it takes back in taxes. When money goes to China, we need to make up for what is lost. As far as escalating interest payments are concerned, I’d argue that the Fed should purchase bonds to prevent it. Then there are no interest payments to worry about. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 17, 2012, 3:35pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/49 "2012-08-17T15:35:28Z")
> [@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. As I understand it China uses yuan to purchase Treasuries. In order to do that they have to trade yuan for dollars on the international market. (Treasuries are mainly sold for dollars, not yuan.) Buying dollars and selling yuan pushes the yuan down and the dollar up, making Chinese products cheaper. The yuan ultimately comes from the Chinese central bank, which can create yuan for free, in any amount. (At the cost of cheapening the currency.) The net result is China has more US debt, and the rest of the world has more yuan. That yuan tends to get spent on Chinese goods and services, creating jobs in China, and a trade imbalance. The trade imbalance is equal to the flow of Treasuries, and other dollar denominated financial assets, to China. In other words, to simplify all that, I’d argue that China is getting dollars and bonds from us, and we’re getting goods and services from them. Since the dollars are dollars they got from us in the first place, there’s no net flow of dollars into the US. On net, they’re getting bonds, and we’re getting goods and services. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 17, 2012, 4:31pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/50 "2012-08-17T16:31:28Z")
> [@puddleglum](#): > > 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. They have done it, and it didn’t lead to inflation or higher interest rates. The Fed bought a couple trillion of US debt in the last few years - tripling its holdings. Inflation has remained low, and interest rates are even lower. They don’t have to keep doing it forever. But they \*should \* keep doing it until unemployment falls, or there’s some sign of inflation. ---
**Author:** ![ralph124c](https://avatars.discourse-cdn.com/v4/letter/r/8797f3/32.png) [@ralph124c](https://boards.straightdope.com/u/ralph124c)\ **Post date:** [August 17, 2012, 4:54pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/51 "2012-08-17T16:54:28Z")
Perhaps a naive question: but why do the US taxpayers have to pay interest on the US National Debt? The Fed now lends to banks at 0%-why not roll the debt over to bonds paying 1% or less? That accounting trick wold save some money! ---
**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 17, 2012, 6:31pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/52 "2012-08-17T18:31:14Z")
> [@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. I think you are confusing consumption and waste. Welfare are a form of transfer payment and frankly a really tiny part of our budget (unless you consider social security and medicare/medicaid). > [@ralph124c](#): > > Perhaps a naive question: but why do the US taxpayers have to pay interest on the US National Debt? The Fed now lends to banks at 0%-why not roll the debt over to bonds paying 1% or less? > That accounting trick wold save some money! Umm how much do you think US treasuries pay? That is the large concern. Right now we pay a very low interest rate and it is still a large part of our budget. If we ever hit higher interest rates, we would need very robust revenues to cover the interest. ---
**Author:** ![ITR\_champion](https://avatars.discourse-cdn.com/v4/letter/i/c67d28/32.png) [@ITR\_champion](https://boards.straightdope.com/u/ITR_champion)\ **Post date:** [August 17, 2012, 6:54pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/53 "2012-08-17T18:54:34Z")
> [@LinusK](#): > > They have done it, and it didn’t lead to inflation or higher interest rates. The Fed bought a couple trillion of US debt in the last few years - tripling its holdings. Inflation has remained low, and interest rates are even lower. > > They don’t have to keep doing it forever. But they \*should \* keep doing it until unemployment falls, or there’s some sign of inflation. Okay, so we all acknowledge that it’s _possible_ for government debt to lead to soaring inflation and interest rates. It’s happened in countless cases ranging from Argentina ot Germany to Russia. But the argument is that it’s not happening in the USA right now, so therefore we might just as well spend with wild abandon at the moment, run up a huge deficit, use the Federal Reserve to keep interest rates low, and everything will be fine. Then, the argument goes, if there’s some sign of inflation, we should stop doing that. But the problem is that once inflation gets started, stopping it is very difficult. Right now inflation is low, but suppose that by this time next year, it’s risen by a couple percentage points. Is the United States simply going to stop deficit spending? Hardly. That’s not an option, given the size of the deficit we have. Even if we could somehow magically produce a balanced budget, we would still have the mountain of debt and someone would need to hold that debt. If investors weren’t willing to hold the debt, we’d need to raise interest rates. If we called on the Federal Reserve to buy all the debt, inflation would go even higher. We’re heading for a future of rising inflation and no way to stop it. ---
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [August 21, 2012, 5:26pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/54 "2012-08-21T17:26:26Z")
> [@LinusK](#): > > The US cannot default on the debt. (Putting aside Congressional theatrics, for the moment). The Fed has purchased around $2 trillion in debt in the last few years. It could purchase far more than that - in fact, it could purchase all of it, if it wanted. This is sort of true, but only vacuously so. In real terms, the US _absolutely can_ default on its debt, the same way any country defaults on debts denominated in its own currency: it can inflate the currency to worthlessness. Yes, by US law, that bond will pay you the $X it states on it. The question is whether the dollar will be worth anything. If the Fed did in fact buy all the debt, it would do so by issuing way more dollars, making all existing dollars worth less. Do this big or often enough, and pretty quickly people stop lending you money in a currency that you have the power to manipulate. Pointing to the law and saying “Don’t worry, it’s impossible for us to default” won’t really get you anywhere once that happens. I’d argue that the analogy to WWII isn’t an apt one. We were in debt there because we’d been spending a bunch of resources on the war, and the economy expanded because we had all sorts of expanded manufacturing capabilities at the same time as most of the rest of the production centers of the world were reduced in whole or part to smoking piles of rubble. I’m not familiar enough with the post-Reagan economy to offer an opinion there, but I think you should look for something other than the debt level to explain things. > [@ralph124c](#): > > The Fed now lends to banks at 0%-why not roll the debt over to bonds paying 1% or less? Because the bondholders wouldn’t agree to it. You can’t necessarily pay back a loan whenever you want to; it depends on the terms you set when the loan was made. Do you own any Treasury bonds? I’ve got some in my safe deposit box. They say that they pay a certain (fluctuating) rate for 30 years or until _I_ choose to cash them in. They can’t just say “Oh, we decided we didn’t want to pay you that much. Here’s a bond that pays less.” ---
**Author:** ![just\_some\_guy5](https://avatars.discourse-cdn.com/v4/letter/j/5daacb/32.png) [@just\_some\_guy5](https://boards.straightdope.com/u/just_some_guy5)\ **Post date:** [August 22, 2012, 11:51pm UTC](https://boards.straightdope.com/t/the-case-for-debt/631634/55 "2012-08-22T23:51:19Z")
> [@LinusK](#): > > The debt is never paid off. It’s rolled over from one year to the next. Just to be clear - the debt doesn’t simply “roll” over. Specific maturities come due that must be paid down (e.g., 10 and 30-year bonds). The reason a country’s net debt holds stable (or increases) from year-to-year is because investors are willing to purchase new bonds. [Previous page](https://boards.straightdope.com/t/the-case-for-debt/631634.md?page=2)