This is my least favorite part of the doomsday scenarios.
Let’s say my bank fails. The money I have on deposit is insured by the FDIC, so it’s safer there than under my mattress, right?
But let’s say that the FDIC itself fails. Pretty much the only way that will happen is as part of an overall collapse of the financial system, in which case money won’t be worth anything, anyway.
Okay, so I’ll buy genuine gold and silver and platinum and use that as my medium of exchange. Great, until I go to get fuel for my generator (because I’m betting that the electrical grid won’t survive, either.) The person with the fuel doesn’t want my Krugerrands because a hunk of metal has far less practical value to him than the gallon of diesel he already has.
If you want to take a practical, proactive step to be ready for doomsday, buy canned food. At least it will also be there for you in the far more likely event of a tornado, earthquake, hurricane, flood, etc.
I don’t think it’s as easy to dismiss the OP as people are doing.
Deficit spending is unsustainable over the long term. Unlike individuals, for a country the long-term may be measured in decades/centuries instead of months/years but eventually a country will reach a point when no more debt can be/should be created.
The housing bubble collapse devistated this country economically and some can argue that some areas of our economy havn’t started to recover. Many of the “recovery” numbers I hear are second derivatives. For example, you hear on the news that the number of new unemployment claims fell last month. Hmmmmm . . . so more people lost their job, just at a lower rate than the previous month? That means the economy is still going downhill just not as fast.
The government has no backup plan. If you read my posts, you know I’m more Austrian than Keynesian. I also blame Ronald Reagan for a lot of the bloat we see in our budgeting. The fact is that the government is so engrained in the economy already (which J. M. Keynes never advocated) that it cannot pump more into the economy during bad times and get a decent return. From 2008 to 2011 (and yes it is BOTH Bush and Obama) the deficit (amount added to the debt) has totaled $4.25 trillion, ($9 trillion to $13.25 trillion) or an increase to the debt of almost 50%* and for all of that extra debt, some Keynesians say the economy has not recovered because the stimulus needed to be more.
*Not adjusted for inflation
So now let’s throw a major disaster (like the eruption of the supervolcano in Yellowstone) or the collapse of another sector of our economy into the mix. Are you convinced that everything will be ok because the US has a AA+ rating from the geniuses at Moody’s?
Let’s get back to the OP and assume that based on SCOTUS’s decision on Obamacare causes the health-care/insurance bubble to collapse.** Unemployment skyrockets as insurance companies close. Doctors/hospitals go out of business as no one can afford to see them. Ditto for pharmasutical companies including those that are “too big to fail”. What happens then?
**That is not unrealistic. When Colorado passed a law saying that child-only insurance was “zero-reject”, all of the insurance companies except Kaiser and Rocky Mountain said fuck you, we won’t offer that policy at all. problem solved. Oh and you can only apply two months out of the year to Kaiser and RMHP. It’s not inconceivable that insurance companies will drastically change their business model or just get out of the game if they feel the restrictions are too onerous.
The currencies are connected with a sort of soft peg, sure, but Measure for Measure was talking about the very forces that China uses to connect them. A falling dollar will only lower the value of the yuan if the connection between the two is continually maintained.
Their extensive dollar holdings, including US debt holdings, are the very mechanism by which they influence their exchange rate. In order to keep the whole process going, China needs to sock away its extra dollars in some manner. If they were to decide to dump their Treasuries – or even in the milder case: if they chose to stop increasing their dollar savings – then they would immediately lose all control of the exchange rate. The RMB would come unmoored from the dollar, and not be so relatively stable and fixed as it is at present. In that case, the dollar would indeed quickly fall relative to the yuan. That’s the underlying point Measure for Measure was talking about.
Pretty much what Marley said. I think a lot of the confusion on this stuff is trying to relate a large government entity such as the US to a person with personal income and debt. It just doesn’t work that way.
The thing is, we aren’t near even minor financial collapse, let alone epic collapse. Certainly, some day, the US will cease to exist as an economic superpower…and as a country for that matter. But, to paraphrase from Gladiator, not yet…not yet.
As others have noted, this is simply wrong. You are trying to think in terms of the US being an individual borrowing from a bank. It doesn’t work that way. China and Russia (and everyone else) buys treasury instruments that are little money making machines for them. They do this because the US is still a good and stable investment. Recently (in the last few years IIRC) China has begun divesting itself of some of this…which basically means they aren’t buying as many new treasury instruments (this might have changed recently btw, with the Euro having such issues). But there hasn’t been a flood of other countries doing this, in fact quite the opposite, as the US is still seen as a good place to stash your eggs in a volatile world.
I believe someone else noted it above, but the largest holder of US ‘debt’ is actually the American people.
Again, the flaw here is that they will somehow ‘call due’ the ‘loans’. That isn’t going to happen and it’s not how it works. At worst, what would happen is they won’t buy any new treasury instruments in the future, which would certainly be bad, but it’s not like they can repossess the country or something.
It’s mostly just unjustified fear. Sadly, this stuff isn’t all that intuitively obvious, and it doesn’t translate in a one for one way with how individuals live or are effected. Countries really do operate by different rules (even leaving aside the fact that countries control their own military, police and judicial systems), and it’s difficult for lay persons to really grasp that. I know I have only a tenuous grasp of this stuff…just enough to know that there are huge differences, and that you can’t try and make analogies between an individual, a corporation and a country. They all operate under different rules and constraints.
While all of this is true, it really doesn’t address the point that many of us are trying to make. At the moment, investors do think that US Treasury Securities are “a good place to stash your eggs”, even though interest rates are quite low. They think this because they are certain that the US will make good on its debt, while there are few other secure options available. But there’s no guarantee that ths will always be true. Cases such as Greece, Italy, and Argentine show that when the global community of investors gets skittish about a certain government, the collapse comes suddenly and unexpectedly. It doesn’t matter whether those holding the debt are Americans, Chinese, or some combination of those and other international investors.
I agree that there is nothing to say that the way things are right now is the way they will always be. I doubt there will be a sudden and radical shift away from other countries or individuals/corporations or other entities buying US treasury instruments, but it could certainly erode over time. And certainly it won’t matter who holds the ‘debt’ at that time, since presumably fewer and fewer people or countries would be buying our securities in that environment…which would mean a huge shift away from the US.
Right now, however, I’m not seeing any signs of imminent ‘epic financial collapse’ of the US, which was mainly what I was getting at there.
Current deficit spending is due to the weak economy. Given our relatively strong position relative to those in Europe who have been using an austerity approach, it appears to be working, and it would have worked even better if the states hadn’t cut back so much. Keynes did not advocated deficits all the time, only when the economy is weak. If we could break out of this no tax increase ever nonsense and cut or eliminate the deficit when times get better (through increased taxes and reduced expenditures that come naturally when the need for welfare is decreased) we will be in a far better position. The Bush deficit increases in prosperity though war spending and the tax cuts were stupid indeed.
Because we have a dynamic economy, new unemployment claims will never go to 0, nor should they. Concentrate instead on real job growth. If that is greater than the extra people coming onto the job market by hitting 18 or whatever - those retiring, we’re golden. A few months ago there was criticism that the decrease in unemployment was from people still not going onto the market - last month unemployment stayed steady because people are looking. Housing prices have stabilized, perhaps going down a bit, but sales are up. Around the Bay Area we are back to multiple offers on houses. But the improvement isn’t for everyone, I fear those out of work for years are still having it tough.
Given the loss of wealth due to the collapse of the housing bubble, this is a reasonable position.
WW II was a super disaster - and it did wonders for the economy. Putting people to work fixing windows broken due to a volcano would be good.
Businesses go under due to lack of demand. There can be no lack of demand for health care. Even if this scenario happened (wildly unlikely) you think we’d just sit there? We’d have government paid insurance in a shot. Any Republicans who preferred to see people die rather than “socialist medicine” would get lynched. So your scenario would have a good ending.
China doesn’t have any choice. They have huge amounts of cash that they have to put somewhere. There simply are no other countries with a safer economy in which to invest the amounts China has. Is our economy as strong as ever? No, but neither is the rest of the world. And the few countries with stronger economies are not taking on new debt. China’a alternative is to stuff it in a mattress, which is not safe either, and pays no interest. We have them right where we want them.
It’s not bad at all. That ~$15 trillion debt figure can be broken down a number of ways, but roughly 1/3 of that debt is intra-government–stuff like the Social Security Trust Fund, FHA, etc. The remaining 2/3 is public debt is “public” in the sense that it is owned in publically-tradeable treasury instruments (bonds, notes, etc.), but a large portion of this is held by the Fed as part of their monetary policy. That leaves about half the debt in the hands of what I would call “disinterested creditors”, i.e. people/institutions who expect to be paid off in the same way your bank expects you to pay the mortgage, no matter what hard-luck story you tell.
China’s 8% stake definitely falls in the latter category. But even if China decided to leverage this by, say, demanding higher interest rates to keep buying T-bills, note that US investors are also heavily invested in China, so two could play at that game.
Again, govenment debt is not at all like personal debt. China holding 8% of the national debt is not at all the same as, say, being in hock to some loan shark. Sure it’s a problem, and it’s something the US should deal with considering the future growth of Medicare and Medicade, but the hysterical doomsayers who point at the $15 trillion and shudder are misguided at best–and in fdar more cases using the debt as a cudgel to do other things with government.
The problem with this is that it assumes that growth will eventually return to trend. There is no guarantee that this will happen and if it does not we are just digging ourselves a hole we can not crawl out of. Japan had a recession about 20 years ago and decided to spend massively on infrastructure to get the economy moving again. Now they have paved most of their islands, ran up a huge debt, and have anemic economic growth. This is a plausible scenario for the US except that they finance deficits domestically through appeals to patriotism. The US does not have that option. In that scenario our options are Grecian, default or crushing austerity.
The Bush tax cuts are a good example, there was a recession in 2001, the government passed tax cuts to stimulate the economy and the deficit ballooned. Then they started to come down and were on track to be eliminated. It seemed like the plan was working. However, we had the housing bubble pop, the financial crisis hit, and deficits exploded again. If we had known the financial crisis was going to happen we would have gotten the deficits under control sooner, but we were too optimistic about future growth. It could be that we are making the same mistake again.
It’s easy to say we’re not in big trouble now but the reality of runaway debt is in the news on a regular basis. We have cities and states that are defaulting on their loans. It’s like a closet full of GM’s and large banks waiting for the bailout fairy step in. We’re also about to see baby boomers retire.
Except that none of those countries have anything like the state- and municipal- government levels of debt that we do. When you include those, as well as Medicare, Medicaid and Social security versus their counterparts in other countries, we’re right up there at the levels of Greece and Portugal.
Oh, no worries, then; we’ll just eliminate 2/3 of the federal budget over a two-year period like we did after WWII. I’m sure that’ll be easy.
I’m not sure where you are going with this. Japan’s GDP in the 80s was red hot (i.e. “above” trend). The recession kicked that down, but they are more or less back “on” trend now, despite the relatively weak growth.
That’s some massively revisionist history.
One of the original arguments for the Bush tax cuts were the surpluses we were running. The motivation was to “return” that money to taxpayers. In fact, Alan Greenspan tried to downplay the idea that the tax cut would provide a short term economic boost. If we were interested in cutting deficits at all, we wouldn’t have enacted the tax cuts at all.
Remember Dick Cheney and “Reagan proved deficits don’t matter”? The Bush administration, at best, paid lip service to the idea of cutting deficits and actually flouted the fact they didn’t.
Actually, forget massively revisionist history. It’s flat out at odds with historical fact.
It’s a bit more complex than “lending us money”. Most of the US debt owned by China is in United States Treasuries Bills. We can always “pay them back” by printing more money. Except the value of those T bills would drop dramatically. I don’t think anyone wants that.
Our economy is roughly the same size as all of the EU or 2.5 times that of China. If anyone is “too big to fail”, we are.
They purchase American debt because they make money off of it.
The issue isn’t we are going to default and the rest of the world will come after us like an angry bookie. The issue is that paying billions on interest on our debt to other countries is ultimately drain on our economy.
There is an argument for that. However, there is also a very real possibility that if enough banks become insolvent at the same time, lending dries up and the entire economy comes to a screetching halt. That means companies invest in growth, purchase inventory or in many cases even make payroll.
I’m a big believer in free markets, however, letting large corporations go out of business and leave tens of thousands of people unemployed doesn’t help the economy either.
Which indications? Most indicators seem to indicate the economy is slowly improving.
And that is the argument for not letting the banks just up and fail.
No, I have no desire to see my savings wither away due to inflation. Which is basically what happens when you hide your money under the mattrass.
We’re not Japan - our economy is growing already. If we were stagnating then I’d worry.
Tax cuts in 2001 definitely made sense. However the tax cuts were targeted to the wealthy, and thus were very inefficient, resulting in a slow recovery from a reasonably mild recession. But there was plenty of time between the end of the recession - and growth - and the collapse of the bubble to have raised taxes again and cut the deficit.
And Greenspan’s continued policy of low interest rates to keep the economy going contributed to the housing bubble. A more stimulative tax cut would have made this policy unnecessary - a really politically neutral Fed chair, not a Rand disciple, would have also.
