The problem isn’t our ability to pay our debt: That’s just fine. The only reason people might want to stop loaning to us is that some high government officials think we have a God-given duty to refuse to pay our debts.
We are growing but very slowly. At this point in the last comparable recession, 1981, the US was growing at 7%. We are at less than half that now, and there is still the threat of a Eurozone collapse which would hurt growth, and now China’s growth is slowing down which may affect our growth rate too. It is a definite possibility that slow rates of growth are the new normal. If growth returns then austerity is temporary unnecessary pain, but if it does not more deficits and debt means calamity.
Before I go any further, I’d like to make a point that to me this isn’t a political finger pointing exercise. What Obama has done is just awful. But Bush/Cheney are not removed from blame, nor did the policies of any number of administrations which spent money that was set aside for long term entitlements like SS and medicare.
I think this is a fair comment and I appreciate you pointing it out. But I don’t believe I did that. I do know the difference. Perhaps I simplified it to the point that it appeared that I don’t, but I do. Governments do have the ability to 1) print money, 2) raise taxes, 3) sell assets, 4) invade countries with strategic economic materials (say, Iran and take its oil - just for the sake of argument). Before the US Govt would go belly up, I believe it would do any and all things within its power to keep it afloat. However, one day, someone may notice that the emperor has no clothes.
Thank you. (for the record, I cherry picked this one quote because it seemed that most of the replies were of the “it’s not as bad as you think” variety.
We have them right where we want them? An interesting long term strategic approach to controlling the other country considered a “super power” by some.
OK, let me see if I understand some of the posts in here. Deficit spending is ok and is in fact preferable right now since interest rates are so low. Borrowing from other countries is much better than bringing down our countries debt. Right?
The US is not in danger of defaulting on their debt for any number of reasons, some of which I listed above. So no matter what the present looks like, the world looks at the US as a viable investment, able to pay debt off when it comes due.
But when does it end? If the US is borrowing money to pay off the interest on the debt and doesn’t even touch the principle, is that a trigger?
If Unemployment continues to climb (just supposin’), and tax revenues from the people are reduced so drastically that they have to borrow more than they planned. No matter what the interest rates are… how can that be good for our country, economy, or whatever?
I am someone who is not buying that the economy is slowly turning around. I believe this is BS, designed to help us all feel better and make Obama look good before the election. The stats are all massaged. As pointed out by someone above, saying the country is doing better and the economy is growing at any significant and sustainable level is hard to swallow.
As** Saint Cad **pointed out,
I don’t envy the next administration any more than I envied Obama. But if those of you that are convinced that things aren’t as bad as they seem, then the continued borrowing and deficit spending can and will continue and we should never feel the effects of it.
Who do state and local govts look to if they can’t pay their bills? Do they have the ability to ask the federal government for funds (borrowed of course), or are they forced to balance their budget by any means necessary?
If/when gas prices climb above the 5/gallon threshold this summer (can someone tell me exactly why gas prices are so damn high? There is no shortage. There is no run on stations like in the 70’s. As far as I know OPEC isn’t squeezing us with outrageous cuts…), things will begin to trend down again… lower travel overall means lower tourism dollars… which hits all areas of our economy.
I guess I don’t see an end. The great depression was ended in large part by WWII and the post WWII housing boom. What gets us out of this one?
What if the emperor is dressed in Armani suits but naysayers keep trying to claim they’re actually Wal-Mart knock-offs?
The US continuously “pays the principle”. But the concept of “principle” in the first place shows a remarkable lack of understanding of where the debt comes from. Those Treasuries have a fixed term. They are continually being paid off while new Treasuries are issued.
Basically, you keep insisting on treating US debt like credit card debt when it’s nothing of the sort.
Most state governments are forced to balance their budgets.
This is not necessarily a good thing (i.e. another example of why government spending is NOT like corporate or household spending).
For example, in Texas, budget cuts resulted in hundreds of thousands of teachers being laid off. That means more people needing to take advantage of government aid. There’s no state income tax, but in other states where budget cuts have meant thousands of lost government jobs, it means reduced income tax revenue, which means even more austerity. Even in Texas, reduced incomes means a hit in sales tax revenue.
Actually…
Supply/demand. While supply is higher than ever before, demand is even bigger. China is coming on strong, which means they’re using more hydrocarbons than ever before. They’re set to double their demand for oil pretty quickly, and the US also uses more than ever before, though the rate of growth is low. When supply can’t keep up, prices rise.
In fact, the US is producing more oil now than ever before. But demand has risen faster than supply has.
It’s surprising that people still don’t get this. Prices, adjusted for inflation, haven’t yet reached the peak price of gas. We’re seeing a pretty cut and dried case of supply and demand.
I was reading an article recently about the unrest in Syria. It mentioned that the locals are scrambling to get their hands on dollars. Dollars. Not euros. Not rubles. Not yen. Not yuan. Not even gold or silver.
The reason state governments are forced to balance their budgets are because about 120 years ago a bunch of them were forced into default. Now they have to lay off workers which is bad but there is no chance of default which is good. The trade off is possibly unecessary short term pain versus the possibility of collapse. The politician’s incentives are aligned to always avoid the short term pain if possible. This makes the collapse scenario more and more likely.
We saw this play out in the financial collapse. The collapse of the housing market was very unlikely to happen. So many firms bet alot of their clients money that it would not happen. They made a huge amount of money for many years with this strategy, and then went out of business when they were wrong.
The degree to which the failed economic beliefs of the freshwater and austerian camps continue to exert influence is quite fruatrating and sad.
I’m sure we would be well further into recovery if we could have passed the tax increases that Reagan did.
Are you kidding me? The collapse of the housing BUBBLE was inevitable. I saw it coming about 5 years before it happened. It was utterly unsustainable and in my part of the country, the increase in “value” was bizarrely extreme. And what was unbelievable was how many people thought it was unlikely to collapse.
What are you doing with the millions you made putting your money where your mouth is and cashing out on your economic foresight?
Or is this just another “I knew it all along” kind of silly retrospective thing?
120 years ago? Try 170 years ago. Link. Unless you have some other examples which didn’t show up in my search. I really think we don’t need to set policy based on the experience of the 1840s. However, since state governments can’t print money, I agree it is better if the federal government would have protected more state jobs like the stimulus package did. However this does not mean cutting taxes on businesses and cutting middle class state jobs.
I’m not exactly sure why you blame the collapse of the housing market on government’s short term view. The root cause was the short term view of business, since stopping the risky loans would have hurt the quarter results and thus cut stock prices relative to others. If we didn’t have right wingers in control, maybe we would have seen a softer landing, but prices were going to deflate. Krugman was talking about this for years before it happened, though I’m not sure even he got how bad it was. It is true that there is government and there is government. The right shouldn’t be running the finances of a lemonade stand given their record.
I did say “about”.
If they hadn’t passed those laws maybe it would have happened every twenty years. We don’t know, all we do know is that default has never happened again.
The printing money thing is overrated because you can only inflate your way out of debt for one auction and then it gets priced into the next auctions.
I don’t blame the housing collapse on only the government’s short term view. I was saying that the politicians incentives were the same as the CEO’s of the financial firms. Maximize short term gains because the odds are small that something bad happens and if it does it will probably be to someone else. This worked great until it catastrophically failed. Lots of people were saying that we were in a housing bubble, but the people in charge were saying housing prices had always gone up and would continue to do so. Now they are saying that people have always bought our government’s debt and will always continue to do so. I hope they are right this time.
We built our house from savings, and put what would have been our mortgage money in the bank, while we watched in wonder other people doing very risky things with their money and their mortgages. That’s what we always do. Our philosophy is simple: be very frugal, incur no debt, take no risks.
Everyone has always told us it’s pathetically stupid of us to just put our savings into CDs etc. but it’s worked out fine for us so far. We have zero debt, money for retirement (not millions however) and a paid-for house after putting our child through private college on our savings. Few of our contemporaries can say the same, apparently.
But this is way off topic.
If China and Russia stop lending money to the US, this will have global economic consequences that would affect China and Russia, probably not for the better. The bankers and leaders in China and Russia presumably know this. Why would they want to cause a global economic crisis?
The scale is totally different from a bank deciding not to lend you more money. If you personally were to go bankrupt, it wouldn’t affect the global economy much at all. This is not true of the US.
In my case, I was too financially ignorant to even know how to take advantage of a bursting bubble. I’m a financial moron, but all my debts are paid at least. 
I figured it was a bubble about a year or so before it collapsed. Not because I’m prescient, or even smart, but because 1/2 of a duplex were selling for approx. $210,000 in my sketchy ass neighborhood. The prices kept shooting up monthly for no reason I could think of. I lost a few hundred when the internet stocks collapsed, and this felt like the same thing. I knew that you could invest against a bubble, but I figured that your timing had to be good, and mine certainly isn’t. And to be honest, I just didn’t think about it that much.
I know we’re getting a little OT, but how do you profit off a collapse like the housing bubble? I’ll probably torture myself with the answer, but I still want to know.
The way to profit off of the housing bubble was to sell a house at the top of the bubble, to short a stock of a company exposed to the bubble, or to invest in a hedge fund that was buying credit default swaps. The problem is you do not just have to know it is a bubble you have to know when it is going to pop. If you had tried to profit off of the bubble 2 years before it popped you would have lost your shirt.
What this fails to consider is opportunity cost. Given your tolerance for risks this was probably the exact right choice to have made but the opportunity costs likely have been large.
This is an area where people can differ about in regards to government spending as well. Because of public choice considerations I regard the opportunity costs of the foregone borrowing to be very low. Those who want us to borrow more because of the flight to safety capital has been experiencing think the opportunity costs may be high.
The Fed has been printing money like crazy - do you see any inflation? When things improve it needs to take the extra money back of course, but the great decrease in wealth from the collapse of the housing market, and the credit freeze, really required some money get pumped into the economy. Things would be a lot better if businesses had made more use of the money, but now that sales and consumer confidence are up again, perhaps they will stop sitting on it. So politicians don’t quite work in the short term model you described, but CEOs sure do. That is why the bank CEOs, at a high level, weren’t crooked, but forced to drive their banks to the brink by the lack of regulations and competitive pressures. The only way to keep banks from playing chicken with each over until they get run over is to build a regulatory fence. Yes, it does reduce profits in the short term. Tough, and it does it for everyone at once.
Businesses can’t be expected to give people money when there is no business reason to do so. Government is not like that. When there is a downturn there is more need for services as people lose their jobs - and sometimes their houses. If the response to this is to make things worse by cutting services and throwing more people on the unemployment lines you are going to see a delayed recovery. I know the theory is that this will make businesses more confident, but if they see even fewer customers than before I am at a loss to see why they’d expand. It certainly hasn’t worked very well in Europe.
As for the housing bubble, the Fed should have done something about that - an agency which should not have a short term view. Politicians have a short term view, sure, but not as short as the quarter to quarter view of a CEO, and they run on whole lots of issues. I fail to see why they couldn’t have put limits on mortgages - except because of the lobbyists, of course, like Newt. But that’s a different problem.
Meanwhile, back on the farm, cities like Detroit and LA are imploding under their own weight. Debt isn’t just a repayment problem. As more debt is incurred we have to spend more money to service it which means something has to be cut back. It’s a given that the age of retirement will be raised for social security. It means that bridge repairs are scheduled further into the future. It means cities will turn to other means of revenue streams such as speed cameras and billing for emergency services. In countries that have socialized medicine it means longer delays in diagnosis and treatment.
The signs of increased debt load are obvious.