Forum Post: Two reasons to stop worry about the Budget Deficit.
Posted 12 years ago on Sept. 30, 2012, 10:24 a.m. EST by hazencage
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1.Japan and Britain have had higher GDP/debt ratios then ours for years. In fact Japan's GDP debt ratio has been in the 200% for a long time now and continues to grow, but they still have not defaulted. On the other hand the united states is likely to reach a GDP/debt ratio of 102% by 2016, and therefore our sovereign debt will still remain in good shape comparable to countries that also have a AAA bond rating score, and a similar economy.
In 2001 Japan had their debt downgraded by S&P, but despite this downgrade the Japanese ten year bond is still one percent in present times. Therefore Japan, which has a higher GDP-to-Debt ratio when compared to us, is still able to run a deficit. Thus as long as the interest rates on our bonds remain low, the United States can continue to run a deficit, but most importantly the simple lesson is this. As long as our bonds continue to posses a low interest rate, then it is most likely that investors will continue to help fund our debt. Furthermore even if an independent credit rating downgrades us it doesn’t mean the United States runs the risk of a sovereign debt crisis. Instead it simply implies that the final arbiter in regards to our deficit is the interest rate on our bonds.
CIA world fact book and a internet article commenting on "This Time Is Different: Eight Centuries of Financial Folly".
“credibility, Chutzpah and Debt” nytimes.com. Paul Krugman Web. 7 Aug. 2011.
Finally if individuals want to learn more about how the deficit is paid off and recreated at a constant rate they should learn about the process involved.
Do you have any links that describe how US deficits are paid off?
no just books and basic macroeconomic stuff.
Well, there are some here who believe that basic macroeconomic textbooks are "partisan" and "propaganda for the elites". It makes it tough to have any normal discourse at all.
I disagree with conservatives, but if they do the research I have to respect their claims until I can find evidence to challenge them. A lot of the Phony Liberals on this forum have made me sick at times though.
One of the claims the libertarians make here is that "deficit spending is payed for by the govt printing money, which enriches bankers." I know that this is not exactly how it works, but I have been to lazy to look it up because the monetary system bores me lol. Thats why I was hoping you knew of some basic textbook explanations of the process, so that I don't have to sort through the millions of google hits.
Basically governments, the public, and other entities can buy Tressury Bills and when this happens the deficit is payed down, but at the same time a new debt is created.
And this is how the deficit becomes national debt basically, right?
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that varies from text to text. but in this context i think he's right. there is nothing biased about explaining how deficits are paid off and how the monetary system works, if its a decent textbook.
http://en.wikipedia.org/wiki/Deficit_spending
Right. My take on Friedman was that he was basically an evil genius. He figured out some tricks to stem off stagflation, but then used his own success to push his conservative ideology. Since economics is a principle course in business schools etc, it makes sense that they would push theories that enrich their bottom line.
Yes. It is possible to create a temporary false economy that looks good on paper. When everyone thought their $200,000 home was worth $500,000, they felt wealthy. When people bought bundled mortgages that were supposed to pay off, they thought they had wealth. It was an illusion. Real wealth cannot be created from banking schemes or by creating bubbles.
Right. So, the real problem isn't with the existence of the Fed, the FDIC, fiat currency, steady inflation, fractional reserve lending, interest lending, or any of these fundamental and uncontroversial building blocks of how we handle money in the modern day.
Yes, they aren't controversial to me. but they are to the uninformed imo. One thing to note. The most prosperous period within a society in history in terms of widely distributed wealth and general prosperity (1950-1970) occurred under these structures
To my knowledge the Federal Reserve, going off the gold standard, controlled inflation, and the FDIC were all created at least in part to protect the interests of the working class, in the same spirit as trust-busting, etc. Their are those going around railing against these advancements claiming that there were actually some kind of ulterior motives going on. I can't imagine what alternatives they support, if any.
It seems there will always be those that see conspiracies every turn.
The unholy marriage of shitty public schools, adolescent male angst and strong marijuana?
Quite possibly.
OK, going from the wikipedia, I need this excerpt explained in slightly more detail:
"Governments usually issue Government bonds to match their deficits. They can be bought by its Central Bank through Quantitative easing. Otherwise the debt issuance can increase the level of (i) public debt, (ii) private sector net worth, (iii) debt service (interest payments) and (iv) interest rates (See: "crowding out" below). Deficit spending may, however, be consistent with public debt remaining stable as a proportion of GDP, depending on the level of GDP growth."
Here are some definitions of a couple of those terms. If you still have questions, I try to answer them if I can. http://en.wikipedia.org/wiki/United_States_public_deb http://en.wikipedia.org/wiki/Crowding_out_(economics)
OK. When their is a deficit, the Gov can issue bonds, which are essentially interest bearing debt that needs to be paid back. Correct?
Besides the exception of QE, this debt adds to the total public debt. Right?
(ii) because of the interest accrued on the debt, private sector net worth is increased. Right?
(iv) because we are in a liquidity trap, expansionary fiscal policy doesn't really reduce investment spending (that is, if you believe in liquidity traps). Correct?
Q 1;correct ,2 the interest is on top of already existing debt, 3 correct, the interest goes to private entities.4 what we are talking about here is monetary policy rather than fiscal. Fiscal would be about how the congress decides to spend money. I don't think we are in a liquidity trap at present. As Bernanke said himself, we have "structural " issues. The thing is, monetary policy can only go so far. http://ftalphaville.ft.com/blog/2012/08/31/1141371/bernanke-the-speech/
Yeah I know the difference between fiscal and monetary.
Can you explain how the govt running a deficit affects interest rates (without going into crowding out or QE)?
It's questionable that they do. It's a controversial subject. I don't believe they do. http://www.international-economy.com/TIE_SU03_Defic.pdf
Well then I guess wikipedia fail for not pointing out the controversy. So much for the "liberal bias".
Thanks for the link.
So then what about all the trolls here talking about "go ahead, spend more and then just print your way out of it!" or whatever. Are they referring to QE? In what way, if any, are deficit spending and monetary policy interrelated?
The trolls don't bother to find out what they are talking about. Usually they are repeating talking points. Well, in general terms, in what I'll call normal times, for lack of a better term, monetary easing (low central bank interest} tends to stimulate investment. The post Depression era would be an example of "normal" in that at that point, the only real ingredient that was missing was adequate liquidity (money in circulation) . We still had factories. We still had potential customers, but the economy froze up. Now, there actually is a lot of money floating around. What is lacking is a customer/ consumer base. This brings us back to the jobs issue. The traditional big world customers have been the US and Europe. Both {that is the working classes} are now relatively short on expendable income. European nations have , to a large extent, also traded good paying manufacturing jobs for lower paying service industries, {or no job at all} and outsourced manufacturing to Asia, and other low wage countries. An exception is Germany. Germany has protected its economy and has a trade surplus.
So you are referring to the various recessions that followed WWII? So what you are saying is that expanding the money supply won't help us because our problem isn't based on interest rates being too high. Instead, it is inherent in the current structure of our economy which is a result of globalization, etc.
I can see that. I guess I'm just trying to counter the claims that our problems are based in our monetary system itself. Maybe it's a lost cause trying to argue with someone who believes that "our money is printed out of thin air" or "inflation is a form of debt slavery".
You are correct. The "money out of thin air - the sky is falling" meme is a red herring." Inflation is a form of debt slavery" is just plain backward. Inflation (moderate} tends to be an advantage to the working class and a disadvantage to the wealthy, investor class..
Thanks for the review, I have been going on things just "being true" for a while since I took macro years ago now. It's a sad state we're in when so many young minds will look to Ron Paul, the Zeitgeist movie and the like over actually taking an econ class.
It is sad, but there is also a lot of bad economics being taught in major universities. I think I sent you this link before on neoliberalism, but economics, is subject to politics and the free market ideology of Milton Friedman began to gain acceptance in the Reagan era even though it was just really a resurection of the old classical, liberal economics that had been discredited by Keynes. http://www.corpwatch.org/article.php?id=376 http://www.thecrimson.harvard.edu/article/2011/11/2/mankiw-walkout-economics-10/
As long as we continue the present path of print, spend, and tax, cities like NY will do well; which props up the surrounding rural urban, but move outside these areas and we see something radically different - people are hurting. Your arguments in light of the current stresses on regional economy are counter intuitive, anti-American, and entirely partisan.
It seems to me that you are spreading common misconceptions about the financial system, and raising a red herring argument which verges on conspiracy theory.
On the contrary to your accusation, all of the fear mongering about the national debt has been highly partisan, with the aim of supporting austerity measures. Obstructionism is literally anti-American.
It's not obstructionist unless I obstruct and what I am actually trying to do is remove the obstruction of my liberty from government debt. All of this spending is fine as long legislators assume responsibility for it, but they don't - they charge to the people.
I was more referring to the (R) congress, in that they had an explicit strategy of blocking Obama's budget by spreading hysteria about the national debt. This was an entirely partisan act.
What does your "liberty" have to do with the government debt? That's just a nonsense Tea Party talking-point.
If government stays its present course, it will eventually be very less costly to the American people, to remove all Federal government than it is to keep it. And those people you are now begging money of to finance our debt, are going to support us - they're going to provide the power to do it.
the fact that you used the word "print" in order to describe the process of moneterizing debt shows that you have no understanding of how the system actually works. Furthermore when you make a claim such as "which props up the surrounding rural urban, but move outside these areas and we see something radically different - people are hurting." you will need to provide proof. Finally why are you talking about inflation when the topic is about the deficit?
I think we all have a reasonable understanding of how the government monetizes to rake tax payers over the coals. And we've been well aware of it for many years.
The money that comes out of NY helps prop the entire regional economy whether it is in the form of commuter employment, housing, service related industry, etc. It's not something that requires proof; everybody in the entire world knows it.
And I don't recall ever mentioning inflation.
So spend spend spend!!
In general spending will have a positive effect on the economy if inflation is moving at a predictable rate, but somethings have less of multiplyer effect.
The US is currently at 16T debt with a 15T economy so its already @ 108%.
Dont worry about a thing, everything is fine.
well if we cut spending and stop worrying about job creation I would expect your number to increase even further. Its simple economics.
This is why we need monetary reform and back our money on real wealth by building infrastructure throughout America, simultaneously creating million of jobs.
HR 2990 is an open bill to fund the improvement of our cities nationwide. The NEED Act would control inflation because it will enable the government to invest in America by creating infrastructure, which is real wealth. Inflation is caused when new money is created without the creation of new wealth.
Raising taxes on the rich isn't enough by itself. We need to do both.
inflation helps pay off debt. Inflation is primarly only a problem if its unstable.
Exactly. This is obviously true.
You run into many on these forums who see inflation, deficits and central banking as "a conspiracy to enrich the elites". Good luck reasoning with them.
Inflation is like an economic smoke screen. If the average person doesn't know if he's getting paid a fair wage or buying a product for a fair price, but the employer and the seller do, who has the clear advantage?
Looking at the distribution in income over the last 40 years, as inflation increased, so did the share of income increase for the top 10%, and even more so for the top 1%.
If a person has $10,000 in a savings account earning .1% interest and inflation is 3%, he is losing 2.9% on his money.
If he has received the same wage for 3 years, and inflation is 3%, by the third year, he is losing 9% on his money.
If he goes to the store and buys a box of cereal that contains 15 cents of grain, that should cost $1.50, but because of excessive price increases pays $3.00, he loses 50% on his money.
Every time this guy loses, someone else gains. Inflation is a great way to make more money if you know how to play it.
You think that a savings account is a good investment? I thought libertarians were supposed to be good with money.
The money in that bank account would be safer under the mattress. But the point is, the 1% use inflation as another lever to extract more wealth into their pockets. By both underpaying their workers and overpricing their products, tremendous profits are generated. Inflation is a fog that blurs the economic vision of the many to enrich the few.
Many say inflation is necessary for economic growth. What good is economic growth if you don't share in it?
Inflation seems bad on the most basic level because your savings decrease in value, and your dollar buys less and less. However, there are some very boring but uncontroversial reasons why we need inflation.
The things that you don't want are deflation or hyperinflation.
Nope, we don't want hyperinflation. And no one in power whether in Gov or Banking will ever step up to pulling the plug on their inflationary life support. Our prosperity depends on pulling the plug; theirs doesn't. As long as we bend over, they'll bang us. Whether with constant easing in their current system or the promise of their replacement system, we continue allow the grand screwing. Instead, debt forgiveness and voluntary monetary system will be the foundation for a just prosperity.
So we should just all live in communes and trade sea shells? Sorry, you're just not making sense.
How can you infer from my post that societies would have to live in huts near the sea? Do you believe that people are that stupid? The history of money is a grand illustration of how real money was debased and eventually forced out of people's hands. In its place is government mandated inflation with its main impact of redistributing resources. Do you believe that but for inflation, people wouldn't possibly know how to be productive and prosperous? No government required to meddle with it; government just has to protect it like any property.
Inflation benefit those who are in debt because the debt shrinks. Debtors are conversely affected.
Inflating away the debt instead of paying it down is strongly favored by the debtors. Among other dysfunctions (a euphemism for corruption) is that inflation disenfranchises the working class, engenders class warfare, emboldens big government to get bigger, funds incessant war, signals entrepreneurs to act when in fact the market gave no such signal, etc. The monetary system is immoral. But so what, right? At least the debtor is benefiting.
Does inflation really make sense to you?
Populist movements like the People's Party have been fighting for inflation since the Gilded Age. Respectfully, essentially everything thing you just said was incorrect.
Free-market think tanks, and other pro-elite groups have done a lot of work in the recent future to spread paranoid fairytales about our financial system. You are apparently doing their work for them.
Inflation is just another hidden tax that disproportionally hits the poor.
So what do you suppose we should do about inflation? Remember inflation isn't always bad and a moderate amount of it is necessary for the economy to grow.
What good is economic growth if you don't share in it? The bottom 90% shared in 3% of the economic growth over the last 40 years.
http://stateofworkingamerica.org/who-gains/#/?start=1968&end=2008
40 years ago the liberal legislative era was just starting to end.
Surprisingly, it is also the point at which the middle class began it's decline.
Nice of you to point that out once again, as we should never forget that notorious starting point.
Deficits normally arent a problem, but this is the first time with all the upcoming promises, an aging population, and a declining educational system.
Yes, the dynamics have changed, haven't they? We are now on the backside, the downside of the post-WWII prosperity and the age of the Boomers is coming to an end, a thud that will resonant to the younger.
Exactly. If we cut spending to pay down the debt, where will the money to pay it back come from? Growth will be stifled and unemployment will stay high.
I'm sorry I don't understand why anyone thinks you can spend more than you take in year after year and think it will all be ok forever.
do you you understand anything about how the proccess actually works?
No process is designed to spend more than you take in on a continuous basis. When you take in less you have to cut, that's not hard to figure out.
thats not how it works.....
look up the word "Treasury Auction".