Debt-o-phobia[W:594]

After one two many debates on the debt and deficit spending. I've come to a conclusion - the fear of debt is a phobia and I thought it was time to label it as such.

From Wikipedia:

In clinical psychology, a phobia is a type of anxiety disorder, usually defined as a persistent fear of an object or situation in which the sufferer commits to great lengths in avoiding, typically disproportional to the actual danger posed, often being recognized as irrational.[SUP][/SUP]

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Let me be clear: I genuinely want to understand the conservative view of debt and deficit. But the instant I ask WHY the debt and deficit spending is bad I get one of the following:

* It hurts confidence in the U.S. dollar! - but why?

* You're just a MMT nut or a Keynesian! - ok, so?

* Keyensianism isn't working in Japan! - Japan has vast structural differences from our own economy. But I didn't ask about why my ideas don't work, I asked how less spending would stimulate our economy

* Government is crowding out the private sector! - How? Can you demonstrate how the private sector is capital constrained?

* Public sector can't do things as well as the private sector! - It seems to me that they work well TOGETHER. Or do you not like computers, satellites, highways, bridges, clean water... But again, even if this were true, can you show how the private sector is constrained today?

Re: Debt-o-phobia

LOL, best sheet I have read all day.

Re: Debt-o-phobia

pdog said:

After one two many debates on the debt and deficit spending. I've come to a conclusion - the fear of debt is a phobia and I thought it was time to label it as such.

From Wikipedia:



Let me be clear: I genuinely want to understand the conservative view of debt and deficit. But the instant I ask WHY the debt and deficit spending is bad I get one of the following:

* It hurts confidence in the U.S. dollar! - but why?

* You're just a MMT nut or a Keynesian! - ok, so?

* Keyensianism isn't working in Japan! - Japan has vast structural differences from our own economy. But I didn't ask about why my ideas don't work, I asked how less spending would stimulate our economy

* Government is crowding out the private sector! - How? Can you demonstrate how the private sector is capital constrained?

* Public sector can't do things as well as the private sector! - It seems to me that they work well TOGETHER. Or do you not like computers, satellites, highways, bridges, clean water... But again, even if this were true, can you show how the private sector is constrained today?

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The value of debt is best demonstrated by how most businesses and families have debt.

Re: Debt-o-phobia

pdog said:

After one two many debates on the debt and deficit spending. I've come to a conclusion - the fear of debt is a phobia and I thought it was time to label it as such.

Let me be clear: I genuinely want to understand the conservative view of debt and deficit. But the instant I ask WHY the debt and deficit spending is bad I get one of the following:

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It is going to be very difficult to take your efforts as being serious in wanting to understand conservative economics when you open by trying to demean the very people you suggest you want to understand.

pdog said:

* It hurts confidence in the U.S. dollar! - but why?

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Confidence in any currency is extremely speculative, usually based on several factors. Primarily, their valuation relation to one another. Secondary, their economic model in relation to one another. Perhaps next, the relationship of nation Total Debt to annual GDP.

Over the long term when you run up Total Debt above 100% of GDP then you have a confidence headwind in terms of being able to sustain servicing that debt. Pressure on reasoning for budget deficits means a smaller basket of plausible decision to handle amplitude of the economic cycle. Equally, you pressure GDP growth year on year to sustain that debt regardless of the economic cycle. So high debt *can* harm confidence, but that does not mean it always *has* to harm confidence.

pdog said:

* You're just a MMT nut or a Keynesian! - ok, so?

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I would argue that presently there is no Keynesian economics in our economic model. At no time did Keynes suggest running deficits regardless of the status of the economy. At no time did Keynes suggest we run up Total Debt year on year regardless of the status of the economy. At no time did Keynes suggest the best economic model was one that is micro-managed like our own economic model is. At no time did Keynes suggest massive taxation as a means to grow government. At no time did Keynes suggest economic and monetary policy that would amplify the economic cycle (in other words, his theories were about methods to reduce the amplitude of the economic cycle... where as we have nothing but a bubble and then pop economic model.)

For the most part both left and right ignored what Keynes really was trying to tell us.

pdog said:

* Keyensianism isn't working in Japan! - Japan has vast structural differences from our own economy. But I didn't ask about why my ideas don't work, I asked how less spending would stimulate our economy

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Japan's economic model is not a good example of Keynesian economics either.

pdog said:

* Government is crowding out the private sector! - How? Can you demonstrate how the private sector is capital constrained?

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When government over-regulates, it tends to impact business models that favor larger organizations which in turn drown out entrepreneurship and advancement. Not always the case, but happens to be something we see enough. Not so much with Technology and Consumer Staples sectors, but definitely with sectors like Transportation, Energy, Financials, Utilities, and Healthcare.

pdog said:

* Public sector can't do things as well as the private sector! - It seems to me that they work well TOGETHER. Or do you not like computers, satellites, highways, bridges, clean water... But again, even if this were true, can you show how the private sector is constrained today?

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That is always what you see with the all or nothing arguments from left and right. The truth is we have never had a pure market economic model (capitalism,) and we have never had a pure planned economic model (socialism.) It has always been a mixed model of some degree where the bar on lean one way or the other is moved all over the place as we go. Usually by political whim over economic reality. Something else Keynes suggested was a bad idea, constant shifts in influences with no real way to see what single decision empirically impacted results.

Re: Debt-o-phobia

debt....used wisely, can be a great tool

debt, used unwisely, can be a killer

ask any of the number of americans who file for bankruptcy each year

what that does to their lives.....

how hard it is to reestablish credit, and the exorbitant rates they have to pay

from what it does to finding a place to live, to buying a car, to getting a bank to open a checking account

everything is harder after a bankruptcy

at some point....i dont know when....and neither does anyone else....we will have trouble selling our debt

when that happens.....hope that you have a cash hoard laying about somewhere.....

you will need it.....

Re: Debt-o-phobia

sangha said:

The value of debt is best demonstrated by how most businesses and families have debt.

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This is a little ambiguous reading it on the screen in those words ....

Do you mean that the impact of debt is best demonstrated by observing that most businesses and families have debt, and seeing that most of them work through that debt just fine? (i.e. buying a house and/or a car(s) on credit doesn't cause most people to go bankrupt).

Re: Debt-o-phobia

OrphanSlug said:

Over the long term when you run up Total Debt above 100% of GDP then you have a confidence headwind in terms of being able to sustain servicing that debt.

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Why couldn't the government service the debt? What would cause the government to not be able to do this?

Equally, you pressure GDP growth year on year to sustain that debt regardless of the economic cycle.

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How is GDP growth related to debt service, in your view?

Re: Debt-o-phobia

Lets start from the most obvious examples of the problem with debt. The first being the interest that must be paid on debts. In 2014 the interest on the government debt was 430 billion dollars. The larger the debt becomes the higher the interest paid on it will become as well. This means that approximately 3% of the GDP is going into paying interest on the debt. The larger the federal debt becomes the more of the GDP will be devoted to simply paying interest.

The second problem with the national debt is that the federal government, and even state and local governments do not see any issue with deficit spending. Anyone who has known a teenager with their first credit card knows what happens when the average person thinks that debt doesnt matter. Right now the US is living beyond its means. While it is possible to sustain such a lifestyle for a limited time period it always comes back to haunt the person or entity involved. When there is a "surplus" the first thing the government does with it is spend it on new programs. They do not pay down the debt so the debt continues to climb. Just as with any individual or business one can live with debt for only so long. Even assuming that the US never defaults on its debts eventually one of two things will happen. The first will be that people will stop loaning the US money. If your debt gets high enough people do not see the risk of lending you money being worth the chances of you not paying it back. The second is a rise in the interest rate on the money that is loaned to the government. If the US can no longer secure more loans it will be faced with a need for massive cutbacks in a very short timer period. This as has been seen previously in our history does not go over well. If on the other hand it continues to get loans but at higher interest rates, more and more off the GDP will go to paying interest on the loans.

Third money is a limited resource. There is not an infinite amount of money in the world because the currency we use has no intrinsic value anymore. The value of the currency comes from the strength of the economy of the issuing government. Money is a kind of IOU from the government. The less trust a person has in the government the currency comes from the less value that currency has. This is why people say a high debt is bad for the dollar. The higher the US debt the less likely people feel that the government can cover the IOU of its currency. The fact that there is a limited amount of money in the world appears to be one of the most often overlooked concepts in economics. The concept of currency is a stand in for the barter system. It allows for easier trading between different individuals as it does not require each trader to have something specific the other person wants. When a company makes a product they sell it to a distributor, that distributor then sells it to the customer. Each time currency is utilized as a form of universal barter. This is why there is a limit to the amount of money in the world. As it is simply a stand in for barter, the fact that there is a limited amount of "stuff" in the world means there is a limited amount of money.

What this all means is that borrowing money is always a limited process. Just as fossil fuels will eventually run out so to will the ability of the US to borrow more money for its programs. As a final example imagine these two people. One person has a clear credit card because he pays the balance every month and the other person has a few more things and a full credit card. Both people make the same amount of money. If they both encounter a sudden expense who is more likely to be able to deal with this new expense without a negative chain of effects. Debt is bad, the more you have the worse your situation becomes.

Re: Debt-o-phobia

Tetron said:

Lets start from the most obvious examples of the problem with debt. The first being the interest that must be paid on debts. In 2014 the interest on the government debt was 430 billion dollars. The larger the debt becomes the higher the interest paid on it will become as well. This means that approximately 3% of the GDP is going into paying interest on the debt. The larger the federal debt becomes the more of the GDP will be devoted to simply paying interest.

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GDP doesn't pay debt, money does. Money is created by the government.

The second problem with the national debt is that the federal government, and even state and local governments do not see any issue with deficit spending. Anyone who has known a teenager with their first credit card knows what happens when the average person thinks that debt doesnt matter.

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The federal government is different than state and local governments. The former creates money, so it's basically like comparing it to a teenager with their first credit card doesn't make sense. The teenager can't create money, s/he can just earn and spend it.

When there is a "surplus" the first thing the government does with it is spend it on new programs. They do not pay down the debt so the debt continues to climb.

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The debt is paid every day.

Just as with any individual or business one can live with debt for only so long.

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Individuals and businesses can't create money, they can only earn or spend it, so this isn't a valid comparison.

Even assuming that the US never defaults on its debts eventually one of two things will happen.

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Can you please explain how the US could involuntarily default on its debt?

The first will be that people will stop loaning the US money. If your debt gets high enough people do not see the risk of lending you money being worth the chances of you not paying it back.

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How is there involuntary default risk?

The second is a rise in the interest rate on the money that is loaned to the government.

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But interest rates are controlled by monetary policy.

If on the other hand it continues to get loans but at higher interest rates, more and more off the GDP will go to paying interest on the loans.

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Again, what is the problem with paying higher interest rates, even if this were the case?

Re: Debt-o-phobia

sangha said:

The value of debt is best demonstrated by how most businesses and families have debt.

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And the corresponding bankruptcies that go along with carrying unsustainable debt?

Re: Debt-o-phobia

Lutherf said:

And the corresponding bankruptcies that go along with carrying unsustainable debt?

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If you create money you can't go bankrupt because you just create money to pay for it.

Re: Debt-o-phobia

Khayembii Communique said:

GDP doesn't pay debt, money does. Money is created by the government.

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I'm going to stop you right there because everything else you said seems to be based on that concept. Perhaps you could be so kind as to elaborate on that point so we can all better understand your perspective.

Re: Debt-o-phobia

pdog said:

After one two many debates on the debt and deficit spending. I've come to a conclusion - the fear of debt is a phobia and I thought it was time to label it as such.

From Wikipedia:



Let me be clear: I genuinely want to understand the conservative view of debt and deficit. But the instant I ask WHY the debt and deficit spending is bad I get one of the following:

* It hurts confidence in the U.S. dollar! - but why?

* You're just a MMT nut or a Keynesian! - ok, so?

* Keyensianism isn't working in Japan! - Japan has vast structural differences from our own economy. But I didn't ask about why my ideas don't work, I asked how less spending would stimulate our economy

* Government is crowding out the private sector! - How? Can you demonstrate how the private sector is capital constrained?

* Public sector can't do things as well as the private sector! - It seems to me that they work well TOGETHER. Or do you not like computers, satellites, highways, bridges, clean water... But again, even if this were true, can you show how the private sector is constrained today?

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I seriously doubt you want to understand anything other than your own conclusions.

Since you admit you've had one two (sic) many debates on the subject, why beg for more?

Re: Debt-o-phobia

Khayembii Communique said:

If you create money you can't go bankrupt because you just create money to pay for it.

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So, for example, if I had a printing press and just cranked out $100 bills I could never go broke? Is that what you're trying to say?

Re: Debt-o-phobia

Lutherf said:

I'm going to stop you right there because everything else you said seems to be based on that concept. Perhaps you could be so kind as to elaborate on that point so we can all better understand your perspective.

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Lutherf said:

So, for example, if I had a printing press and just cranked out $100 bills I could never go broke? Is that what you're trying to say?

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If you had the ability to create money you would never be insolvent or be able to involuntarily default.

Re: Debt-o-phobia

Khayembii Communique said:

If you had the ability to create money you would never be insolvent or be able to involuntarily default.

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That's true but it's an incomplete assessment of the situation. You have to also consider the method you use for creating money and how your currency is valued as compared to competing currencies.

Re: Debt-o-phobia

Lutherf said:

That's true but it's an incomplete assessment of the situation. You have to also consider the method you use for creating money and how your currency is valued as compared to competing currencies.

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You were the one that brought up bankruptcy. I was stating a truism that shows the government can't go bankrupt.

Re: Debt-o-phobia

Khayembii Communique said:

Why couldn't the government service the debt? What would cause the government to not be able to do this?

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It boils down to limitations of Fiat Money systems and the economic feasibility to extract taxation out of the economy to cover the debt. Either way you still have a budgetary constraint year on year, which tends to compound when you effectively add to Total Debt every year. For the US, our Total Debt as a percentage of GDP is roughly 102.4 (or, it was at the end of 2014 Q4.) As of the 2014 budget, roughly 7% of our budget is allocated to servicing debt. Which is not horrible, but imagine if our fiscal position allowed for that 7% (or even half of that) to all end up in infrastructure and technology spending as an economic boost to aggregate demand.

To answer your questions, it then boils down to expectation of GDP growth balanced with taxation needs to cover fiscal demands (both politically made, and prior economic decision made.)

It would be unlikely for the US to not be able to service our debt, but we cause our own limitations based on prior unsound fiscal decision making. Which in turn puts pressure on our Fiat Money system to expand at rates some may suggest are unsound.

Khayembii Communique said:

How is GDP growth related to debt service, in your view?

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Similar answer. In budgetary terms the outlook expects GDP growth to handle the relationship of taxation to spending as a percentage of GDP. If you run deficits just about all the time (which we do,) and GDP goes flat or even negative (which can happen in an economic cycle,) but spending does not go down (in our case it rarely if ever does) then the net effect is accelerated Debt addition and budget constraint on servicing debt.

The more debt becomes a budget concern, the less room for economic policy to address whatever made GDP go flat (or down) in the first place.

Think the 2008 mess. We ran deficits and upped Total Debt all the way up to the point of our economic collapse, because of we budget fought on what to do about it and ended up accelerating our additions to Total Debt. If we were really Keynesian we would not be running deficits so often, usually for political reasoning over economic impact reasoning.

The bottom line is simply having a Fiat Money system does not negate how debt is valued against a nation's currency and/or economic potential. And even if you find an economist that suggests debt never matters, that does not mean investment in a nation's currency (which we rely on greatly) agrees with the theory.

Re: Debt-o-phobia

Khayembii Communique said:

You were the one that brought up bankruptcy. I was stating a truism that shows the government can't go bankrupt.

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Really? What do you call it then when you have several hundred trillion units of your currency that nobody except your citizens will accept for goods or services?

Re: Debt-o-phobia

Khayembii Communique said:

GDP doesn't pay debt, money does. Money is created by the government.

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First the government does not create money. The government creates currency which is a separate thing entirely. The money the government spends comes from the taxation of its citizens it does not have its own "income" like a person or a business does, it takes part of the income of its citizens and spends it on government projects and programs. When the government prints more currency the amount of "money" it has doesnt change, what changes is the percent of that wealth each dollar represents. When the government prints excessive currency inflation occurs. By decreasing the value of the individual dollar inflation makes investments less valuable and decreases the relative wealth represented by a debt. This tends to anger those who loaned the money in the first place as you are decreasing the value of their investment. The money that the government obtains by taxing its citizens is used to pay the interest on the outstanding debt of the united states. This means the 3% of the wealth of the country is going to those who hold the debt owed by the American government each year.

Khayembii Communique said:

The federal government is different than state and local governments. The former creates money, so it's basically like comparing it to a teenager with their first credit card doesn't make sense. The teenager can't create money, s/he can just earn and spend it.

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No part of the government of the United states can make money, the federal government can print currency, but as explained above it cannot make money. The government can only tax its citizens to acquire money and then spend that money on programs and services.

Khayembii Communique said:

The debt is paid every day.

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No the interest on the debt is paid regularly, the principle (the actual amount owed) is left intact. This means that each time a new expense is created by the government it increases the principle owed by the united states.

Khayembii Communique said:

Individuals and businesses can't create money, they can only earn or spend it, so this isn't a valid comparison.

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Individuals and businesses can create money, in fact they are the only ones that can. Money as you use the word is more properly described as wealth. Individuals and businesses provide products and create wealth the government does not. It is in fact prohibited from doing so. The way the US government is designed it should not be capable of making its own money as that would decrease the control its citizens had over it.

Khayembii Communique said:

Can you please explain how the US could involuntarily default on its debt?

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If the united states can no longer obtain loans then a time will come when it will not be capable of paying for the interest on its outstanding debt. At that point, or any earlier point if a loan is called in, the government would default on its loans as it would not be capable of paying its contractually obligated amount.

Khayembii Communique said:

How is there involuntary default risk?

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Please explain this question more as I do not see how it relates to involuntary default. This statement refers to the natural tendency of investors to become less interested in loaning money as the debt owed by the borrower increases.

Khayembii Communique said:

But interest rates are controlled by monetary policy.

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No the interest rates are controlled by supply and demand. When the federal government changes the "interest rate" that refers to the federal funds rate. This is the amount of interest a bank can charge another bank for overnight borrowing of funds. The lower this rate the more likely a bank is to give out loans as it has access to more cash at a lower percentage. This would also effect the interest rates on the loans the banks give out to customers. This interest rate influences the interest rate on loans but does not control it. More risky loans will still be given at higher percentages, and it has no ability to control the interest rates charged by foreign powers who loan money to America, for example china.

Khayembii Communique said:

Again, what is the problem with paying higher interest rates, even if this were the case?

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The problem with this is something anyone with a credit card has experienced. The higher your credit balance the more of your income goes to paying off the interest on that balance and the less you have to spend on actual purchases. Anyone who has missed a payment also knows what happens when their interest rates go up.

Re: Debt-o-phobia

OrphanSlug said:

It boils down to limitations of Fiat Money systems and the economic feasibility to extract taxation out of the economy to cover the debt. Either way you still have a budgetary constraint year on year, which tends to compound when you effectively add to Total Debt every year. For the US, our Total Debt as a percentage of GDP is roughly 102.4 (or, it was at the end of 2014 Q4.) As of the 2014 budget, roughly 7% of our budget is allocated to servicing debt. Which is not horrible, but imagine if our fiscal position allowed for that 7% (or even half of that) to all end up in infrastructure and technology spending as an economic boost to aggregate demand.

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But a budget constraint is self-imposed and has nothing to do with the ability of the government to still spend on infrastructure and technology regardless.

To answer your questions, it then boils down to expectation of GDP growth balanced with taxation needs to cover fiscal demands (both politically made, and prior economic decision made.)

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But taxation has nothing to do with fiscal demands. The government doesn't spend money it receives from taxes, it spends money that it creates out of nothing. Taxation is just a macroeconomic policy tool.

It would be unlikely for the US to not be able to service our debt, but we cause our own limitations based on prior unsound fiscal decision making. Which in turn puts pressure on our Fiat Money system to expand at rates some may suggest are unsound.

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It's not unlikely, it's impossible.

Similar answer. In budgetary terms the outlook expects GDP growth to handle the relationship of taxation to spending as a percentage of GDP. If you run deficits just about all the time (which we do,) and GDP goes flat or even negative (which can happen in an economic cycle,) but spending does not go down (in our case it rarely if ever does) then the net effect is accelerated Debt addition and budget constraint on servicing debt.

The more debt becomes a budget concern, the less room for economic policy to address whatever made GDP go flat (or down) in the first place.

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Similar response. Any budgetary restraints are self-imposed and can be removed by congress without any issues. There's no reason for congress to throw up its hands if the debt service gets too large and go "welp, looks like we can't fund stuff anymore". They just choose what to fund and spend accordingly.

Re: Debt-o-phobia

Khayembii Communique said:

But taxation has nothing to do with fiscal demands. The government doesn't spend money it receives from taxes, it spends money that it creates out of nothing. Taxation is just a macroeconomic policy tool.

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Troll identified, this particular statement made me look at your other posts and I can see that you are trolling as I have trouble imagining any single person that has that poor an understanding of the economy. While the question you raise has merit you do not need to troll to get it attention, that just detracts from anything else that is discussed.

Re: Debt-o-phobia

Tetron said:

First the government does not create money.

Sure it does. Where do you think money comes from?

The money the government spends comes from the taxation of its citizens

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No it doesn't, taxation has nothing to do with government spending.

When the government prints more currency the amount of "money" it has doesnt change, what changes is the percent of that wealth each dollar represents. When the government prints excessive currency inflation occurs.

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This is only true if the economy is at full capacity.

This tends to anger those who loaned the money in the first place as you are decreasing the value of their investment. The money that the government obtains by taxing its citizens is used to pay the interest on the outstanding debt of the united states. This means the 3% of the wealth of the country is going to those who hold the debt owed by the American government each year.

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That's not true at all. If a bank buys a treasury security, all that happens is that the bank's reserve account is decreased by the cash value of its investment, and its treasury reserve account is increased by the cash value of its investment. Interest payments are made to the bank in its reserve account by increasing the value of the treasury reserve account accordingly. When the bond is paid off, the balance is decreased from the treasury reserve account and increased in the normal reserve account. The interest and principal came from nowhere. Thin air. Nothing. The number in the account just went up.

No the interest on the debt is paid regularly, the principle (the actual amount owed) is left intact. This means that each time a new expense is created by the government it increases the principle owed by the united states.

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This is just silly now. I can go buy a government bond, and I will get my principal back when the bond matures, just like it says on the bond. How do you not know this?

Individuals and businesses can create money, in fact they are the only ones that can. Money as you use the word is more properly described as wealth. Individuals and businesses provide products and create wealth the government does not.

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lol what? Wealth isn't the same thing as money. An expensive house isn't money. You can sell it for money, sure, but it's not actually money. Now you're just not making sense.

Please explain this question more as I do not see how it relates to involuntary default. This statement refers to the natural tendency of investors to become less interested in loaning money as the debt owed by the borrower increases.

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There is no point at which the government will not be able to find buyers for its treasury securities. Even if, as a thought experiment, we said, what if nobody buys bonds? Then the Fed will buy them.

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Re: Debt-o-phobia

Tetron said:

Troll identified, this particular statement made me look at your other posts and I can see that you are trolling as I have trouble imagining any single person that has that poor an understanding of the economy. While the question you raise has merit you do not need to troll to get it attention, that just detracts from anything else that is discussed.

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he's not trolling at all. His statement demonstrates the difference between legal constraints and economic constrains in a country with a fiat currency. Those constraints might be one in the same where a fiat currency does not exist, but that is clearly not the case here.

Re: Debt-o-phobia

Tetron said:

Troll identified, this particular statement made me look at your other posts and I can see that you are trolling as I have trouble imagining any single person that has that poor an understanding of the economy. While the question you raise has merit you do not need to troll to get it attention, that just detracts from anything else that is discussed.

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I'm not trolling at all.