The worst that can happen is the US defaults. Now how likely is that no matter what some crazy politician does?
There are ways to default without defaulting. Set up an inflation rate of say two percent a year and growth of three percent and deficits disappear in less than no time. The states needs to liberalize immigration to get the rich smart people instead of the dumb way they do it now and change the tax laws to encourage investment and economic growth, but of course the politicians pandering to “the poor” who want the government to take care of them will prevent this.
This subthread started (I think) with my contention that the notion that national debt is somehow exempt from the same principles of personal/corporate debt is incorrect.
You’ve shifted the bar a bit to asking me to defend why I think the US is doomed.
I’d like to get back to that first point first.
Countries can overspend and they can get into trouble doing it. This is the whole reason they get tempted to “print trillions of dollars,” and why printing trillions of dollars gets them into trouble. It’s essentially pushing the concept of fiat money past “good faith and credit” and into “idiots printing paper money.”
Countries are not exempt from the principles of lending and borrowing. Their sovereign debt is secured by their ability to repay according to the value expected when the money was lent. When they exceed that, there isn’t a magic “we are a country so we are exempt from debt principles” card.
Wrt the US, what I see is an increasingly insatiable appetite to expand spending beyond our willingness to pay. We’ve shifted that burden downstream, and given the trajectory I linked to above occurs in a time of peace, it’s quite sobering. We aren’t facing a single real external crisis except for some hobby wars. Our future demographics are frightening.
Let me suggest that if we are as exempt from the way debt works as you and njtt suggest, why wouldn’t we borrow an unlimited amount? If there is any amount that is unreasonable, I suggest it is unreasonable precisely because countries are not somehow different from individuals and corporations when it comes to the general principles and consequences of over-borrowing.
And you’re missing the point Exapno is making. Those ten countries that went bankrupt? They’re all still there.
Bankruptcy doesn’t mean the same thing for a country that it does for a business. Countries really are too big to fail. And nobody can foreclose on them and repossess California because they’re late on their payments. The worst case scenario for a country is it can’t borrow money for a few years and pays higher interest rates later on.
Ah…yes.
The people did not die and the political boundary did not necessarily change.
But I’m not sure that happens with personal and corporate bankruptcy either.
What happens is that the things the (old, pre-bankrupt) currency used to buy are no longer purchasable. The holder of the debt, and often the borrower, suffer signficant, measurable, real-life hardships. Real loss of purchasing power. Real loss of stuff. Real diminution in the quality of their life.
Again, the idea that countries are somehow exempt from the principles that underlie responsible borrowing, and that their debt is “different,” is badly mistaken. When they screw up, they may not necessarily cease to exist as a nation, but the consequence of their overborrowing directly accrues to their populace in exactly the same sorts of ways that consequences of over-borrowing accrue to individuals and corporate entities.
Countries are not too big to fail financially. Many do. When they do, real consequences result. Your worst case scenario is nowhere near the worst case. The worst case is that no one will lend you any money and you don’t have any of your own left. A national park is not going to be able to provide a Social Security pension, pay a medical bill, provide a library or fix a pothole even if a borrower was unable to foreclose on it.
Perhaps visiting a few really crappy countries might convince you that having no money is a pain in the ass even if the general public still owns some nice vistas.
This does define the difference in our arguments. You think that the two points are separable, while I insist that they must be considered together in context to be meaningful.
We both say that debt can be a bad thing if overdone. The consequences differ greatly. For me, large debt means that servicing the debt takes up too much of the annual budget, denying money to needed programs. It can also impact capital lending by sucking in that money for higher returns. Stagflation and higher unemployment and a whole of other ills can result. Your consequences are higher debt, something, something, doom. Well, maybe. We have been through high debt to GDP levels (WWII) and stagflation (Vietnam) and high unemployment (Great Recession). In each case, the underlying health of the economy ensured that these were temporary unpleasantnesses.
Is the underlying U.S. economy significantly worse than during these earlier crises? That’s a terrifically hard question. I’d say it’s worse than after WWII - that was a high point, after all - but certainly equal to or better than the 70s or 00s.
Say it’s not. Assume we are really getting weaker as structural technological unemployment worsens. We are the world’s default currency. Every nation has huge interests in seeing that the world’s default currency is stable until a replacement currency is available. So, again, what are the alternatives that could take the place of the U.S. dollar?
The pound? Unlikely. Britain is way too small these days. The yen? Japan might have been looked to 30 years ago, but its decades of stagnation have taken it out of the game. The euro? I’m sure that was their intent at the beginning, but the EU looks to be entering a period of low growth and high instability, exactly what you don’t want to see. The yuan? China’s GDP is expected to pass ours sooner rather than later. Let’s say 20 years, to use your time frame. Instability is again the key. The U.S. is the home for parking money - buying our debt - because it is considered so incredibly stable. China is not. It might be in another 20 years - who the heck knows - but that’s incredibly optimistic.
In the meantime, not only does the Fed, the government, the internal banking community, and the corporate community have incentive to keep the dollar strong and the economy stable, but so does the rest of the world. Anything that hurts us hurts them, and probably to a greater extent.
In the long run we’re all dead. I’m not going to make predictions about the world more than 20 years out. The problem I see is that you aren’t willing to make predictions about even the next 20 years, to give us some reason other than “bad things can happen” to move to your side. Bad things not only can happen, but do, regularly. We’ve survived all of them for reasons which were well understood at the time, not just in hindsight. And one of those reasons is that the U.S. is indeed too big to fail - because nobody will let it.
You need to give us some believable* scenario in which the rest of the world decides to do a Lehman on us to have any case at all. That’s what I keep asking for. I don’t think you have one.
*I can do six **unbelievable **scenarios before breakfast.
What would prompt you to think that the debt is like an underwater mortgage we can’t pay, what are you basing the idea that the US is over-borrowing on, in other words? If you want to extend the question to a simple normal household example, there are those who would say our debt is like a mortgage that we can not pay. I often see people throw out big numbers with lots of zeros; but the debt is only part of the equation, the debt to GDP ratio is important; if I make 100,000 a year and borrow 10,000 its not the same as making 5,000 a year and borrowing 10,000. I can’t say I know the answer one way or another myself; but I have yet to hear anyone make a coherent case for the situation in the US being significantly more like the former rather than the latter case.
Please don’t be offended if I drop a few truth bombs on your field of ignorance; but I wouldn’t want poor Jiggerj to go out into the cold without a sound understanding of basic macroeconomic principles, he(or she) could catch the sniffles.
Wealth is not money in terms of economic analysis. Wealth is resources; money is just a representation of wealth. In your example, the wealth would increase is if something like dude A grew a bunch of tomatoes, then the wealth of the community would go up by the amount of tomatoes. In your example there is no gain in wealth just the possibility of a future gain in wealth. I know I know I know, money is always going around all scantily clad and saying, “look at me, look at me I’m so sexy you know you want me baby but everyone wants me so you can’t have me - I’m goin with that rich guy over there he’ll let me stay in a nice air conditioned bank in switzerland, You’ll probably just give me to your greasy slumlord who’ll trade me for some juju beans, what kind lady do you think I am? I have class, get lost”.
But say you were stranded on an island in the middle of nowhere and you had a suitcase filled with a billion dollars; now money’s not lookin so sexy, more like a toothless old hag (no offense to any toothless old hags out there), then you want the equivalent of what money can buy - but without any way to trade your cash for resources, you would trade that billion for a lifetime supply of delmonte steaks if the opportunity came along; heck you’d trade it for a bag of cheetos cause its not doin ya any good on this island.
The world, so to speak, has little to gain if we go bust. They are certainly hoping we are too big to fail, as the international consequences would be shaky if not disastrous.
That doesn’t mean we get to borrow unlimitedly. Since we both agree on that, you must have some sort of negative consequence that accrues. What is it for you, and does not the fact that we can’t borrow unlimitedly mean that national debt is subject to the same fundamentals as personal debt: You cannot borrow (print money) with no limits just because you are a country.
Anyway, the doom I predict is simply a relatively peaceful breakup of the US, much the same way the USSR fell apart.
The US scenario I predict:
We’ll figure out that we are spending X percent of taxes on interest, with minimal left over for services. Rumblings will increase. Worldwide anxiety will rise. Interest rates will rise. Cost to service the debt (currently about 2.5% interest, or 6% of Federal spending, which is itself up 40% over the last ten years) will rise. Spiral time.
Somewhere around the time a dollar sent to Washington does nothing but pay the interest on a national debt, the most credit-worthy states will chat up seceding. They’ll issue demands for fiscal Federal restraint, which will not be forthcoming. Anxiety increases, pushing up interest rates. Inflation spirals.
etc etc and down she goes
Nothing at all to do with whether or not external owners of our debt think/hope we are too big to fail. We’ll voluntarily walk away from our union because it makes no sense to belong to it. In the 1860’s, that was worth a war. Given the mobility of today’s society, that ain’t gonna happen.
We’ll see.
In that case, I can make no rational sense of what you are talking about- mind you this does not rule out that it is completely over my head. A couple of farmers with a pig and a field; sounds like the start of one of those jokes my uncle would tell me when I was a kid my parents weren’t listening or paying attention.:eek:
When a person or a corporation goes bankrupt the law comes along and takes their assets. Nobody is going to take the assets from a country that goes bankrupt. And when a corporation goes bankrupt, it can be disbanded and cease to exist. Despite your nightmare scenario, this isn’t going to happen to the United States. None of the countries you listed dissolved into nothingness.
There are consequences but they’re not as apocalyptical as you’re claiming. If the United States flat out defaulted on its debt, a lot of people would lose money. And nobody would want to buy American bonds for quite a while. But the United States would still exist and the American government would still exist. There would still be a national economy and a tax base. We’d have higher taxes, more unemployment, more poor people, and less government services. But the country wouldn’t cease to exist.
You’re also making an apples and oranges comparison by putting the national debt alongside the GDP. The debt is an ongoing item that has accumulated for decades. GDP is an annual statistic. Obviously if we tried to pay off the entire debt in a single year it would be an economic tsunami. It would be like somebody trying to pay off their entire mortgage in a single year.
But people pay off their mortgages by paying off a piece of it each year from their annual income over the course of several years. And the United States could do the same with the national debt if we chose to do so. The national debt is about $17,500,000,000,000. The federal revenue is about $3,000,000,000,000 a year. So if we increased federal revenue by 60% (let’s raise those taxes!) we’d pay off the national debt in ten years with no change in national spending. That’s a radical plan but it shows that the problem is solvable.
The debt is a serious problem but it’s not a disaster.
The point is “configuration of assets matters”. A society of a million people where each person owns a pig but most don’t know what to do with a pig is not as wealthy as a society where one skilled pig farmer owns a million pigs and the rest have none. Even though the number of pigs is the same, in the hands of a pig farmer they are productive capital, whereas apportioned among the populace they are mostly a nuisance.
This is why people (voluntarily) trade in the first place. Person A possesses asset X, while person B possesses asset Y, and both A and B think “I would be enriched by possessing the other person’s asset more than I would be impoverished by the loss of my own” and so, they decide to trade and are both better off. If they weren’t both better off, they wouldn’t trade.
We’ll have to agree to disagree on that partner. I’m using very very basic economic terminology that is universally accepted by economists to explain how economics works. If you’d like to make up your own definitions about what defines the wealth of society and confuse that with wealth distribution within a society, that’s cool. As long as no animals or children were hurt during the construction of this obscurification, I won’t call the authorities. I’m just tryin to help little jigger out in regards to answering the OP, in sensible terms.
I don’t get the apples and oranges analogy. I think you make a coherent point in regards to paying down the house all at once; but just because GDP is measured yearly and and the debt accumulates over time does not mean that they are not interrelated or that one should not be weighed against the other along with many many other things when assessing the health of the economy. Servicing the debt is a part of the equation, among other things, but I don’t really want to go into it, we could start walking down a long boring path about the economy; I’m worried jiggerj will get so bored he(or she) will go to some other message board, or (gag me) yahoo answers.
I know any number of political sources of power on the left, all the way to communism, in the obvious extreme, that would, and do, take issue with that, and act or would act, effectively, against this type of rationality.
I submit this because of your opening assumption of “a society” does not include other political considerations.
The thing is, the US government can just print up 20 trillion dollars and hand them out to creditors like candy. And that national debt that was such an albatross evaporates as we pay it back with nominal dollars that are now worth a fraction of their previous value.
Yes, this is bad. It means everyone who lent money to Uncle Sugar gets kicked in the nuts. It means interest rates and inflation go fucking crazy, you think the 70s were bad, well, welcome to crazytown now. It means we can’t fund shit through borrowing anymore because nobody with any sense buys US debt no matter what crazy interest rates we offer, because everyone knows that we’ll just devalue to dollar to rip off our lenders.
Huge financial mess, stockbrokers jumping out of skyscrapers, stagflation, mass hysteria, great depression, mass immigration of unemployed financial system workers out to Californee hoping for migrant farm work, and on and on.
In none of these cases is an individual state seceding from the goddam union. And if they try, soldiers will drag the governor out of his mansion and shoot him in the head. Because in your scenario the whole reason we disband the United States is because we can’t pay back out ridiculous debts, so we close up shop instead. But that means the debt holders are screwed, yes? They get nothing, yes? They lose, yes? So why can’t we just pass a law screwing over our creditors without disbanding the United States? If we owe a quadrillion dollars to China we just tell them to fuck off, we’re not paying, we’re defaulting. What is China gonna do? Invade us? Sanction us? Refuse to lend us more money? At this point China’s economy is just as fucked as ours, how do they keep the factories running with no one buying their exports? Oh, they’ve got trillions of dollars that we owe them, that means they take over? No, those trillions of dollars are now worthless scrap paper.
Republics and kingdoms from time immemorial have done similar things–get into debt, trump up some charges against the debt holders, execute them and confiscate their estates and sell the women and children into slavery. This happened all the time in Rome. Jewish moneylenders used to end up dead after wars when a kingdom was bankrupt. But the country doesn’t dissolve over something as silly as a financial crisis.
Seriously, name one country in the modern era that dissolved just because their currency lost it’s value. The thing is, modern countries have debts that are very large relative to their annual GDP, true. But these debts are small compared to the total assets of the country. The United States has vast fields of grain, factories, educated citizens, mines, roads, bridges, and on and on. These are productive assets that generate economic value that whoever is in control of the United States government can tax and exploit.
Countries fall apart when shit starts going down, and the authorities call the cops and soldiers and order them to handle the situation, and the cops and the soldiers don’t follow orders. If the dollar collapses we deal with the dollar collapsing, and get back on our feet either with new money, or we get used to lots of zeros at the supermarket, like the Italians used to have. Bread is $2000 a loaf, apples are $3000 a kilo, we get used to it.
Of course this is Not Good. But it ain’t Mad Max where everyone is now roaming the wastelands looking for gas and canned goods.
Mr. Nylock, is this really the first time you’ve encountered the concept that trade increases wealth? I would have thought that was pretty basic economics. Heck, I have no formal education in economics whatsoever, and I know about it.