Wealth has gone up, because even though there’s the same amount of acres and pigs, those acres and pigs are worth different amounts to different people. Maybe that piece of land is more easily accessed by A’s tractor than by B’s, and so now it can be plowed and used to grow things where it couldn’t before. Maybe B already has a sow, and so now with the addition of A’s pig he has a breeding pair. Maybe A just plain likes the land and B just plain likes the pig for no particular reason. The point is, the land is worth more in A’s hands than it is in B’s, and the pig is worth more in B’s hands than it is in A’s, and so the net value of both increased with the trade.
I’ve read of the economy under a gold standard as analogous to a car without a steering wheel. In the hands of someone who is liable to aim for the first cliff he sees and drive off it, having no steering wheel is safer, because he can’t do that. But in general, having a steering wheel is safer because normal people don’t want to drive off cliffs and will benefit from the ability to steer away from any that they are pointed towards.
There are a lot of maybe’s in that paragraph. I don’t believe the nation’s wealth has increased at all in this situation. Both the pig and the land were already there. You are assuming that the other party will do something with their new possession to increase wealth but the trade itself doesn’t produce a penny of new wealth. Maybe the guy with the pig will keep it as a pet and the new landowner wants a place to put a bench to read a book. Just because one idiot thought a pig was worth a billion dollars does not make it so. Just wait until the new landowner tries to resell that parcel.
Wealth going up by billions of dollars from that transaction is obviously absurd, and I said as much. But even short of that, what I said is true. If the buyer of the pig places greater value on having a pet than the seller did, then the pig’s value has increased. If the buyer of the land values a place to put a reading bench more than the seller does, then the land’s value has increased.
That does nothing to increase the wealth of the nation. Both of those items are still worth the same on the open market.
Look, if you want to start talking about the difference between book value and fair value…
We need to make the pie higher. 
Setting aside discussion of pigs and land, I’ll note that statistics on national wealth are somewhat obscure. What is reported is GDP, which is something else. That’s the value of output of goods and services, typically measured over a single year (or measured quarterly and multiplied by ~4 to get the annual total. Then add seasonal adjustments.)
Measuring wealth is trickier because transactions are rarer. Barter transactions are subject to special IRS rules, unsurprisingly as they raise tax evasion issues.
See WWII Germany or late 2000s Zimbabwe for examples.
$130 000 000 in Ontario. 
…or do they? What value was added, precisely?
(bolding by CP for emphasis)
Alas; they are bad for exactly the same fundamental reason: the borrower did not return the obligation in the form equivalent to the value the lender expected when they lent the money.
It makes no difference that a government can print money and return a worthless face value payment, or that a homeowner can default and return a dilapidated house worth less than the lender thought.
No difference whatsoever, and more than a few nations have found this out the hard way. As with any other lending transaction, some due to incompetence and some due to external circumstance. Unfortunately, there is no magic “get out of debt free” card that governments can play. In some ways they are even more limited than an individual for external recourse, and in many ways more likely to make the error of living beyond their means to repay in the first place.
But the canard that borrowing at a government level somehow does not parallel what happens at a personal or business level is the exact reason we can have this chat again in twenty years or so, when you are in a better position to have learned the hard way.
Well, that’s the “promise”–the expectation on the part of a lender, really–that sets the interest rate for sovereign debt.
If the expectation is that you will remain stable as a government and you won’t cheat me by repaying me with inflated currency (never an actual promise, but you get the idea) then I will lend you money without trying to get much interest back.
If I don’t trust you–I don’t think your “promise” to remain stable or be able to pay me back is very good–then I want a high interest rate so I can get all my money back before you run out of good money with which to pay your other creditors, and have to start printing money willy nilly.
At one point a couple summers ago (as I recall) mistrust that nations would default got so high that lenders paid ( ! )–yes, PAID–Germany to lend money to Germany.
Apparently, Germany’s “promise” to pay lenders back something close to what they were hoping to get in present value made its sovereign debt a sounder investment than finding someone who would pay interest on it, but probably not keep their “promise” to repay a present-value expectation.
Njtt is right and you are wrong. Governmental debt is fundamentally different from personal debt. Being in control of your currency is critical. The countries that have seen the worst effects of debt, say Argentina a while back or Greece more recently, could not devalue their currency and paid the price. The U.S. is not in that position.
The proof can be found in the behavior of reality. From 2008 on, the debt grew hugely because of the recession. Something like 50% of all the debt in the country’s history was accrued in five years. How did the world financial community react? By making the cost of future debt so cheap that at times you actually lost money by investing in it (i.e. interest was effectively negative for short periods). Either all the best investors in the world community are wrong about the heinousness of the debt or the deficit hawks are. I know which way I’d bet.
I suppose that you are assuming that all parties are rational and correct in judging there self interest.
Suppose you and I enter into this deal because you (ignorantly) suppose that you can successfully drill for oil on my parcel and I (just as ignorantly) think I can make silk purses from the sow’s ears.
I don’t know that you can estimate the wealth gained from a single transaction, without letting it play out (which is the equivalent of letting the market measure it, as other posters suggested). Who knows, maybe you will strike oil, or something else of value.
I’m not arguing whether or not the US will collapse economically–although it’s my personal opinion that it will, and within two or three decades.
I’m just saying that debt is debt and sovereign debt is not somehow fundamentally exempt from the same principles that govern borrowing and lending at a level of personal finance. You have confused the short term horizon of investors with the general topic of whether or not national debt is somehow fundamentally different from personal debt.
It’s not, and the canard that it is different is what I claim will eventually catch up with us.
During the recent financial crisis, I was nearly 100% in Treasuries (plus some gold). There is no chance the US will default short term. Within reason, none at all. I now own neither, although Treasuries are still absolutely sound in my opinion, for the short term. Those are just investment decisions based on my particular horizon.
Previous to the same crisis, many investors with short term horizons made a fortune borrowing to buy houses and flipping them in a rising market. Whether they were all correct or not within that horizon is irrelevant to the fundamental point that the type of debt being taken on was unsustainable in the long run.
Every borrowing transaction–sovereign or personal–has a lender on one side hoping to make a good return, and a borrower on the other side hoping a good faith promise and (typically) some sort of security will induce the lender to lend. For the same fundamental principles that this relationship turns sour at the personal or corporate level, it can turn sour at the national level.
History is full of nations where this has happened, for reasons of internal incompetence and reasons of external circumstance.
I’m really kind of mystified by this idea that nations are somehow exempt from the ordinary “laws” of borrowing to excess gone bad. But join njtt in 20 years telling me you told me so, at least with respect to the US.
History is also full of nations not going bust.
I’m not understanding what you think you are extrapolating from. Obviously the picture in 2008 was very bad. That’s why the government has worked to lessen the possible damage. The deficit has been sliced by a full trillion dollars since then. The absolute numbers of the debt are not nearly as important as the relative size of the debt. The economy is recovering and that’s critical: the surpluses of the 90s were made possible by the economic boom. Relative to other countries, the U.S. has recovered from its lows better than most western countries. The developing countries’ incredible growth rates are slowing exactly as expected as well. Unless the entire world economy collapses the extrapolation I see is for continual progress, the usual highs and lows notwithstanding. Where else are investors of that magnitude going to go?
The absolute difference between national debt and personal debt you ignore is that the U.S. cannot go bankrupt and cannot be foreclosed upon. I’m not trying to claim that debt can’t be bad or that unlimited debt wouldn’t be disastrous. However, the proper forces appear to understand that and work continually to mitigate the extremes. Your argument is reminiscent of those who talk about the minimum wage. On the one side are people saying that it should track inflation and on the other people who shriek, “Well if it’s so good why don’t you make it $100,000 an hour?” Yes, extremes are idiotic. But they also don’t occur in reality.
Ahhh got it.
But it’s not a question of “bankruptcy” or “foreclosure,” which are legal definitions and concepts.
And I am confused why you think the US cannot go bankrupt…of course we can.
What the US can do–just as with personal or corporate debt–is default on its loans or fail to pay them on time or dissolve as a Union (because all incoming tax money is servicing the debt without providing a return to taxpayers) or print so much money no one cares to own the currency.
Call the result what you like…what has happened is that the same principle applies: Borrowing beyond your means caused you to crap out.
Happens all the time, even with countries. Call it what you like.
No one–not even countries–are exempted from the consequences of debt or the principles that underlie responsible borrowing.
Does this help?
And should interest rates rise…ouch.
I’m going to stick with the question I already asked, “Where else are investors of that magnitude going to go?”
Look around the world and point me to a major financial power that does not have debt. China certainly has a lower ratio of debt to GDP than does the U.S. but I will bet you big money right now that China is more likely to have a major financial crisis in the next 20 years than the U.S.
It’s the same question that some people asked about the stock market at the beginning of 2009. Where will the money go if not stocks? The answer was: nowhere. It went right back into stocks. You have to provide a working alternative before anyone will accept your prophecies.
As for that fairly silly list of bankrupt countries, let’s concentrate on the one real parallel: Great Britain. The pound used the be the world’s default category before the dollar. Over the course of two wars and their aftermath, the U.K. lost its empire, drew back from the colonies that it drew raw materials from, had its oil fields nationalized by Middle Eastern potentates, saw two generations decimated by war damage, and endured a giant debt spike in the 1940s. That’s far beyond the foreseeable worst case scenario of the U.S. And what was the horrible fate that befell it? Its world ranking in GDP went from 2nd to 6th.
Can that happen to the U.S. in the future? Certainly. Heck, even Argentina, which actually defaulted, is no worse than 26. But neither the U.K. nor Argentina is a devastated hellhole. They’re actually both doing fairly nicely by any other standard than being the world’s sole superpower. I remain unable to see your apocalyptic future and I wish you would say something more substantial than “doom is coming!”
All of those modern examples involve debt owed in a foreign currency AFAIK. Except Russia, which suffered from a collapse of its currency which is something different. They didn’t have a debt problem AFAIK. The older examples occurred before central banking was invented.
That said, countries can default on their debt. Here’s a serious treatment of the subject. This Time Is Different: Eight Centuries of Financial Folly: Reinhart, Carmen M., Rogoff, Kenneth S.: 8601404555053: Amazon.com: Books While the US does not have to do so due to the fact that it runs the world’s main reserve currency, I can’t rule out a debt crisis inflicted by Tea Party sympathizers. That’s not a political broadside: the Republicans have threatened to default on the nation’s debt more than once after all and they haven’t refuted that practice as a matter of principle.