This is an argument that has always puzzled me. Admittedly I’m fairly uneducated in the realm of economics, but it seems to me that money is basically a surrogate for goods, labor and services. All that money, debt and the economy does is determine how those goods and services are being distributed and whether it is done efficiently.
In our grand kids generation there will or will not be enough goods labor and services to go around regardless of what the debt is. The question is how the growing debt will affect the distribution of their wealth.
Currently our fiscal methodology is to spend money on things the government deems as worthy much of it going to the poor (food stamps well fare etc) some of it going to the rich (government contractors) etc. It is doing this by taking money from the rich in the form of having them buy T-bills, and in return giving them IOUs. We could just as easily do this in the form of taxes, without giving out the IOUs but Republicans prefer the giving out IOUs method.
So the concern for our Grandchildren basically boils down to a concern that all those the IOUs that the government is writing will mean that the government has to pay so much to the wealthy that it will have problems managing to fund its other obligations. So again it appears that the negative consequences of the debt is really just a matter of solving the growing wealth inequality problem.
This might seem valid, but with two big caveats:
(1) Mounting debt might lead to financial instability which reduces employment and thus reduces goods and services.
(2) You assume the debt is owed to fellow Americans. Since instead trillions are owed to Japan, China, etc., eventual repayment (at least in non-inflated dollars) will require that goods be exported instead of consumed by Americans or that American assets be transferred to foreign ownership. The value of foreign-owned Treasury debt is already about one-third the total market value of corporations traded on the NYSE.
Let’s face it: no country with our natural resources and military power is going to just go bankrupt and give away the farm to foreign debtors. We would sooner just default and piss everybody off, while taking care of our own, than do that.
I’ve argued for many years now we need to swallow a bitter pill of both taxation and service cutting. We need probably several dollars of revenue for every dollar of services cut, basically we need revenue to go up to around 22% of GDP and outlays to go down to 19-20%. Ideally revenue could be a little lower while services stay the same, but the reality is unless we have serious economic growth like we did in boom periods of the past we have to actually pay more taxes than is otherwise good, to get ourselves out of the hole we’ve dug.
I don’t see any great realization of these facts on the national stage, and our debt problem will continue to get worse. The only two outcomes I see is an unforeseen economic boom “grows us out” of the problem, or some grim future awaits.
According to the Tax Policy Center, in 2013 we’re estimated to be at 15.8% of GDP as revenue, projected to rise to 18.9% in 2018–essentially nowhere near where it needs to be.
Outlays are not in as bad a shape but are still too high–22.8% now and not projected to get all that much lower. Most of the best boom years of the 50s and 60s outlays were just under 20%, same for the best of the Clinton years at the end when the economy was really booming.
If we accept that foreign-owned debt is more likely to lead to problems than domestic-owned debt (and default or devaluation would certainly qualify as a problem), we should note that government deficit spending is only part of the problem.
Not only do Americans refuse to increase taxes, they borrow or use their surplus savings to buy Chinese-made goods rather than investing that money directly or indirectly into Treasury debt. Thus paper dollars (or eventually Treasury paper, or corporate stock-certificate paper(*)) leaves the U.S. for China as Chinese goods come in. Doom is still quite evitable, but wake-up calls don’t seem to be working.
(* - Before a kind Doper asks if I’m aware that many “paper” assets are actually paperless electronics these days, let me say that the image of U.S. paper exchanged for Chinese goods was deliberate, to exploit a metaphor. The U.S.-China trade is so lop-sided that container ships returning to China are often empty, or packed with very low-value cargo. One of the commonest low-value cargoes for these return trips is literally … U.S. waste paper!)
I’m not following you. When does the government ever pay to the wealthy? The wealthy pay far more to the government than they receive from the government.
But none of that matters in my argument. In 50 years, let’s say, a person not yet born is using x% of his tax dollars to pay interest on the debt that WE have incurred. That X% isn’t going to whatever. Whether you believe in social programs or bigger bombs or whatever, that X% isn’t going to what you think government should do. It is going down the sewer simply to service debt that was incurred years prior.
If we keep running deficits, then more of our money will go to debt service. We can couch it as a percentage of GDP being lower, etc. but that number X above will keep increasing. That’s bad.
To make it even more bitter, we’re also going to see some inflation, which will rob us all of value-for-money, but will help make the debt seem smaller. It’s a “strategic triad,” not one single leg of which is admirable.
I realize that conservatives like to use “colorful language” but this phrasing tends to confirm what I see upthread: you let your idealogy blind you to facts.
General Electric has debt of $400 billion or so, depending on how you account. Are the billions it pays in interest money “down the sewer”? (I thought not; your contempt is focused on government.)
The U.S. owes trillions to agencies like the Social Security Trust Fund. Is the interest received by SSTF money “down the sewer”?
Big banks and rich families own U.S. debt. (This is what Buck Godot was referring to.) Are the interest payments they receive money “down the sewer”?
When the U.S. pays interest it doesn’t make a bonfire of banknotes and burn them, nor does it flush them down the toilet. It mails checks to the bond-owners, be they big banks, the Rockefellers or whoever. I don’t need to provide a cite for this, do I?
There’s no need to rephrase your previous post: its point was trivial. I’m just offering help for your future posts. Gibberish like “money down the sewer” will make your ideological blind spots overly obvious.
Of course. And I will bet that each of them pay more in federal taxes per year than either of us make in a lifetime. Where is the free ride and not paying a fair share?
Well please humor me and my ignorance a little longer and explain why our grandchildren paying interest to big banks is better than paying for substantive government.
Hi, jtgain ! My responses to you may have been overly snarky, but you’re just flailing at random now. What do either of these two non-sequitur paragraphs have to do with anything that’s been posted in this thread?
The first is in a dialog that began with Buck Godot’s #101. Did he say anything at all about “free ride … fair share”?
The second is in a sub-dialog initiated by my suggestion that infested gibberish like “down the sewer” does not contribute to intelligent debate. In fact, I’d make a specific suggestion to you: Try to make your diction more objective. Your thinking might then become more objective as well.
Case in point: No matter how much they may detest Reagan, rational observers admit that his policies reversed economic stagflation and contributed to the downfall of communism. Yet fringish observers like you find it impossible to concede that Clinton and the Democrats succeeded at massive deficit reduction. (Flail further if you wish – it will inform me further about you, not about economics or politics.)
Certainly not an economic wizard but I am curious about a couple things and hopefully those well studied will offer an opinion.
The U.S. most often carries a debt. That said, does it make a difference in the long who owns the majority of that debt,? IE, China, Japan and so on? what are the ramifications for the U.S. if the lion’s share of the debt is foreign owned.? and
Is there a relationship between the Fed continuing to print money, low interest rates, the amount of debt the U.S. has and who owns that debt. And if there is a relationship and should it unfavorably unfold what is the worst case scenario for the U.S.?
I can answer some questions related to interest rates. The fed’s power over rates is limited but not as limited as people had previously imagined.
People used to believe its control was limited to the short end of the curve or IOW, short maturities via setting the fed funds rate. However it has shown that buy selectively buying certain securities with long maturities in the open market, it can effectively influence the long end of the curve as well.
However it was only able to do that because of the fact that further increases in the money supply had no effect on inflation. Normally that would not be the case.
As a practical matter, it is the market that sets interest rates via supply and demand and a host of other factors such as inflation expectations and economic outlook. The fed can influence those factors but it takes a great deal of insight into how the financial markets work in order to manipulate them successfully as Bernanke has done and get the results you want without causing utter chaos in the process.
And even he was stymied early on trying to use monetary policy to stimulate the economy. Similarly, there will always be situations where the market will move more quickly than the fed can and respond more appropriately to the relevant factors.
As for foreign ownership, I think the tacit fear is that one day the Chinese may decide to just dump our debt on the open market in which case the value would plummet and the rate would rise. I don’t think that is a realistic scenario though not least of all since it would mean a huge loss for them. But beyond that, the market for US debt has always been stronger and more resilient than people have expected.
I’m still unsure why this debate has turned personal. The point I made is that debt service is a drain on future generations. I’m not blaming Reagan, Clinton, Obama, John D. Rockefeller or anyone else. I was just responding to the suggestion that carrying a massive debt is no problem at all so long as the GDP continues to grow.
I pointed out that this debt service only goes to pay bond holders (and I dropped the “down the sewer” remark). It doesn’t go to roads or bridges or Medicare or tanks or anything of substance. Would you like to refute that or continue with the snark?
It would be fine to “hijack” the thread briefly and write, for example, “BTW, debt servicing is a drain on future generations.” But instead you quoted and responded to other Dopers’ posts as though you were carrying on a specific dialog. Ignore, temporarily, whether your opinions are correct or not and review the dialogs to see if you can understand what I mean by calling your posts non sequiturs. I find such confusion frustrating, and got snarky.
I do agree that in times of prosperity an effort should be made to reduce debt, but I suggest you may overestimate the badness of non-growing debt. Yes, it will mean future generations need to continue paying “rent” to, e.g. the Rockefellers, on the money borrowed, but similar payments would be made if, instead of buying the bonds, the Rockefellers had bought land and leased it to the government. This is, indirectly, related to the point Mr. Godot made to which you responded first that the Rockefellers do not receive such payments, then that they do. Such self-contradictions detract from the debate.
Again, please review the dialog and test, not whether your views on the debt are fundamentally correct or not, but whether they contributed to logical dialog, i.e. to the answering of the questions that were asked.
So you’re saying China and Japan will eventually have to buy more stuff from America. Isn’t that what we’re trying to get them to do anyway?
And isn’t American assets will be transferred to foreigners exactly the same as foreigners will invest in America? Again, isn’t that supposed to be a good thing?
The beauty of the forex markets is that they are self-balancing - as long as currencies are allowed to float. Except that China doesn’t allow that with regard to their currency which why you periodically hear talk of China being labeled a currency manipulator.
But generally speaking, what happens is that a country that imports more than it exports will have its currency devalued on global markets. As that happens, goods it produces will appear to be relatively cheaper on the global market and goods it wants to import will appear (domestically) relatively more expensive. Therefore it will gradually import less and export more.
Alternatively, when its currency is relatively cheap, it means foreign investors will be able to buy domestic assets cheaply in their (i.e., the foreign) currency. But as things shift, those assets will become relatively more expensive.
Suppose Americans invest in Treasuries. Any money we invest in Treasuries immediately comes right back to us, doesn’t it? No amount of Treasury buying reduces the amount of money we have by even $1, right? Even if we bought all of the Treasuries, we’d still have exactly the same amount of money as we did before. In other words, the amount of stuff we buy from China really has nothing to do with how much Americans invest in Treasuries.
And: what’s wrong with US dollars going to China? Suppose they use them to buy stuff from us? What’s so horrible about that? Isn’t that exactly what we want?
Or, suppose they don’t send them back. They just keep them, forever. How does that hurt us?