The OP misses the best example of countries being able to hold large debts for long periods and still do well. British debt (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.
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?
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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.