That’s not the only consideration. As you can see from this Fed chart, for most of 2012 the interest rate on the 10 year treasury bond was negative.
This is mistaken.
We can look at the TIPS spread (inflation-protected bounds versus conventional bonds) to get a rough inflation estimate, then compare that estimate against conventional Treasury yields. Treasuries were clearly yielding less than inflation for a brief time recently. We can see that same result directly from TIPS yields, too, which went negative. People were deliberately buying bonds that they knew would have a negative real yield when accounting for inflation.
Edit: Well, I was scooped on that one.
what don’t you understand about the problem paying down 17 trillion dollars of debt? Do you think we can continue to raise that level indefinitely?
As I tried to point out earlier with this chart, it’s meaningless to look at any of this is unadjusted dollars. A 1940 dollar is not a 1970 dollar is not a 2000 dollar. So if the fed policy is to target 2% inflation (which it is) the the dollar will always be worth less in the future and in absolute, unadjusted terms the answer to your question is ‘yes’ - we can and certainly WILL raise that level indefinitely.
When it comes to government debt, many people have a household analogy in mind, and imagine that the government should always try to balance the books, and any deficit at all is a bad thing.
A better analogy is to a business. As long as the expectation is that GDP will be higher in the future, it makes sense to run perpetual deficits. Help the economy to grow more quickly now, and pay it back later (when you’ll be in a better position to pay it back). And, if you look at a long-term graph of the US economy, that’s a pretty safe bet even including downturns like the current one.
That’s not to defend the current $17 trillion total however. I’d put that down to:
- US tax law, that has too many loopholes at the top end
- The USD being the world reserve currency
- The politics of promising the world and cutting taxes
- Stimulus, due to the recession
And since #2 is beginning to change, things could get ugly pretty soon.
Mijin: Thanks. I did go a little over board in the sense that there were certain assumptions built in to what I meant - like the assumption of long term growth as you’ve pointed out. Also the assumption that the deficit necessarily has to continue to grow (in unadjusted dollars), etc.
edit: nix the second one - I don’t know what I meant. I think I need to reboot. 
Actually, I wasn’t responding to you, deltasigma: I think you posted while I was writing my post. But we’re broadly saying the same thing anyway.
Yes. I did understand that (‘sure you did’ :rolleyes: ;)) . I’m not sure why I phrased it like that. 
That you don’t understand what “paying down” means. “Paying down” your mortgage means making scheduled payments. We already do that with our debt. “Paying down” credit card debt typically would mean making payments in excess of minimum to pay off the outstanding balance quicker, we don’t do that. But we don’t really need to, if your concern is our nominal debt level mind that if we just stopped issuing debt, it would collapse to $0 in 30 years. Really in 10 years it would be substantially lower and by 20 it would be very, very low indeed.
But we’ve basically always had debt, only Andrew Jackson ever paid it off to the point that we basically had none, and only for two fiscal years. Debt for government is more like a rolling credit line, as long as it does not grow faster than GDP and is at levels where it can be reasonably financed it isn’t intrinsically a problem. The problem in recent years has been debt growing faster than GDP and debt starting to approach levels at which servicing it might become a problem in terms of being painful because it will require us to either raise revenue or cut services. There is some debate about at what point your debt relative to GDP can be before it is a problem, but everyone agrees ours is moving in the wrong direction in that regard.
taking a loan out to pay debt is something a tax payer should be concerned about as well as anyone dealing with US currency.
The US dollar was once considered to be very stable and now countries are abandoning it as a common currency.of exchange. 17 trillion is a lot of money to owe if there is no indication it’s gong to do anything but go up.
The USD isn’t currently being abandoned if for no other reason than the fact that there simply isn’t anything else that can be used in it’s place right now. For a while everyone was certain the Euro would be the next reserve currency and if the system had been designed with at least some degree of central oversight, that may well have happened. But we all know how things really ended up playing out.
The Yuan/Renminbi can’t replace the dollar since the Chinese govt doesn’t even let the value float on the Forex markets, so that one’s not even getting out of the gate. And even if they changed that policy tomorrow, there’s the whole int’l banking infrastructure issue - which I won’t even pretend to understand. The best I can make out is that everyone on the planet is geared up to settle transactions in dollars - and probably Euros, Pounds, maybe Swiss Francs and a few others. So you have to have the infrastructure support plus you have to have the economic power to do things like the fed did during the financial crisis. Again, no clear idea here except that one part involved lending multiple trillions to foreign sovereign banks so as to avert a liquidity crunch (shortage of dollars). I don’t think anyone sees China in that role very soon.
But this isn’t to say that concerns over devaluing or debasing the currency aren’t valid. What Bernanke has done over the past 5-6 years simply dwarfs anything the fed did previously in terms of increasing the money supply. He got the nickname helicopter Ben for a reason after all (dropping cash from helicopters was seen to be a fair description of his monetary policy). The problem was that the people criticizing him only thought they understood what was going on.
Many still believe they were right and Uncle Ben is yet to be vindicated. There’s even some truth in that. If the economy heats up suddenly, keeping a reign on it without stifling it is going be tricky to say the least.
But as to where we are today, I’ll just give you these 2 charts of the dollar compared to other currencies. One uses a broad basket of world currencies the other focuses mainly on major currencies. Both use 1973 as their base year. You can see that the dollar has held up pretty well.
One problem with these big debts is that we are in an era of low inflation. Inflation eats debt.
If you borrow to buy a house, and the repayments are $200 a month, that may be (say) 20% of your income. A few years of wage inflation later, it will be 15% of your income. The same applies to governments with their 30 year bonds. The cost may stay as the same number of dollars, but reduces as a percentage of [tax] income.
As a practical matter there is no chance of the US government ever literally defaulting on our debt. We borrowed 20 kajillion dollars and promised to pay back 20 kajillion dollars, plus interest. What happens if we don’t have the 20 kajillion? Oh my God, we’ll default!
Except, we can just reach into our back pockets, find some scrap paper and write “This piece of paper is worth 2 kajillion dollars” on it, and hand it to the people demanding payment.
The US government can create dollars out of thin air. The problem with this is that making new dollars doesn’t create any actual new wealth, and so if you double the amount of dollars by fiat each dollar can only buy half as much stuff. But hey, you promised them 20 kajillion dollars and 20 kajillion is what they’re going to get.
Low chance? I suppose. But sovereign default is too common to say there is no chance. Read this list:
The great example of a country that went from being one of the most prosperous in the world, to default, is Argentina, as explained here:
Opinions vary on the causes for Argentina’s economic tragedy, but poor governance due to major political parties with radically different positions is one candidate. Sound a little familiar?
Plus the believability of Chinese economic results as reported by the government seems to be iffy at best. I’d think a reserve currency would have to be backed by a transparent set of economic data.
It’s unfortunate that I have to spend time on this, when I’d rather talk about debt, but I think we need to go ahead and talk about Clinton. First of all, Clinton privatized the Internet and made significant reforms in the telecommunications sector in the mid 90’s. Second, the Clinton administration took antitrust action against Microsoft, allowing other competitors and new start-ups to get a piece of the market share. Finally, Clinton strengthened copyright laws, allowing for further privatization of the Internet. Anyone who thinks that Clinton didn’t actively provide an environment to Internet boom is just misguided. Sorry.
Though it may surprise you, I’m not a Clinton cheerleader, because I sincerely believe that it was his signature on the repeal of the Glass-Steagall Act is the reason why we’re in this mess in the first place. He allowed the financial industry to run wild inflating the already burgeoning Dot-Com bubble. Notwithstanding this fuck up (and it’s a big one), Clinton balanced the budget, created a surplus, paid down the debt % to GDP, and enacted pro-market reforms that augmented the Internet Revolution. Give him credit, where credit is due.
[QUOTE=Martin Hyde]
But it should be understood what that reduction actually entailed. It wasn’t so much “paying down” debt. If I have a $10,000 credit card balance it only goes down by paying it down. If I have 25% of my total assets worth of debt, and I double my assets, I’m not necessarily “paying down” anything. I’ve just become wealthier a lot faster than my debts have grown. That’s a good thing, but it’s not “paying down.” Specifically in the context of Clinton, since he was POTUS and not some omnipotent God, he deserves minimal credit for the GDP growth that reduced debt as a percentage of GDP and moderate to minor credit for balancing the budget.
[/QUOTE]
I don’t get what you’re saying, Martin Hyde. Why is there a reduction of debt as a % of GDP during the Truman administration, the Eisenhower administration, the Kennedy administration, the LBJ administration, the Nixon administration, the Ford administration, the Carter administration, and, finally, the Clinton administration? In fact, barring the Civil War, the War of 1812, and World War I & II, there’s a continual decline in debt as a % of GDP. If this is not “paying down” the debt, Martin Hyde, my god, can you explain the mechanism in which would the debt be paid down? If Clinton didn’t pay down the debt, did Carter? Did Nixon? Did Truman? Did Eisenhower? I’m not understanding the difference and hope you can enlighten me. Thanks.
- Honesty
Thank you. This is precisely what I wanted to talk about, although I (clearly) didn’t do a good job of highlighting it. Why is there such resistance to higher revenues? Eric Cantor has said he won’t enter discussion if revenue is on the table. Wouldn’t you agree this kind of behavior will make it impossible to create a surplus to pay the debt in the future? Finally, wouldn’t you agree this will make it more likelier that our debts will not be paid by our generation, but by subsequent generations, because the current generation is too selfish to pay the bills they’ve racked up?
- Honesty
uh huh. How’s that working for countries like Greece?
Paying down the debt means the total goes down, not up. That would be the meaning of the word “down”. It’s really quite simple. As debt increases more money is required to pay it off which means less money is available to cover the same services rendered by the government. At some point we either have to drastically raise taxes or drastically reduce services.
Greece has no sovereign currency, which means it can’t escape the usual way through internal devaluation and it lacks the full levers of monetary policy. It also has many other endogenous problems, such as corruption, tax compliance and labour market rigidities that also don’t apply to the US.
The US is in no imminent danger of default and will remain a reserve international currency for the foreseeable future. The example of Greece is irrelevant.