You can’t possibly be saying that the government has never made a good investment, can you?
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?
TVTropes is a surprisingly useful source sometimes – see its list of Economic Fallacies:
Is it your argument that government spends money less wisely than private industry does? That government only makes good investments on accident?
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?
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.
Actually, Rogoff/Reinhart found that empirically, countries start to struggle economically with 90% or higher debt.
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
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.
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.
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.
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!
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).
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.
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.
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.
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.”
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.