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When Having the US Debt Paid Off Was a Problem 633

Posted by timothy
from the problem-I'd-take dept.
Hugh Pickens writes "NPR reports that not so long ago, the prospect of a debt-free U.S. was seen as a real possibility with the potential to upset the global financial system. As recently as 2000, the U.S. was running a budget surplus, taking in more than it was spending every year — and economists were projecting that the entire national debt could be paid off by 2012. So the government commissioned a secret report outlining the possible harmful consequences of retiring the debt completely. For one thing, paying off the national debt would mean the end of Treasury bonds, a pillar of the global economy. Treasury securities are crucially important to the world financial system in a number of ways: banks buy them as low-risk assets, the Fed uses them for executing monetary policy, and mortgage interest rates vary based on Treasury rates. 'It was a huge issue ... for not just the U.S. economy, but the global economy,' says Diane Lim Rogers, an economist in the Clinton administration. In the end, Jason Seligman, the economist who wrote most of the report titled 'Life After Debt (PDF),' concluded it was a good idea to pay down the debt — but not to pay it off entirely. 'There's such a thing as too much debt,' says Seligman. 'But also such a thing, perhaps, as too little.'"
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When Having the US Debt Paid Off Was a Problem

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  • by justforgetme (1814588) on Saturday October 29, 2011 @08:15AM (#37877776) Homepage

    Dear /.

    debt is a good thing, you can't have enough of it.

    Yours sincerely
    the IMF

    • by Chapter80 (926879) on Saturday October 29, 2011 @09:10AM (#37878072)

      Huge debt was not the problem.

      If I run a company, and I perceive money to be cheap right now (i.e. low interest rates for me), the logical thing for me to do might be to borrow lots of money and invest it into projects that will have a long term payoff, and allow me to grow or solidify my company. Same thing for individuals: If you can get a cheap interest rate, borrow and invest in something (perhaps a cost-effective education) that will have a good payoff.

      The factors that create "cheap money" are having a great credit rating and the market interest rates being low.

      The US had a great credit rating during 2000-2010. And interest rates could be considered low. So a logical decision would be to borrow lots of money at cheap rates, and invest in projects with good payoffs. I don't believe that the historic debt was necessarily a bad decision.

      The bad decision was to borrow a shitload of money and have a huge party of wasteful spending.

      • by Dragon Bait (997809) on Saturday October 29, 2011 @09:26AM (#37878164)

        ... logical thing for me to do might be to borrow lots of money and invest it into projects ... The bad decision was to borrow a shitload of money and have a huge party of wasteful spending

        Absolutely correct.

        Businesses have the concept of capital expenditures (generally plant, property, and equipment) and operational expenditures (labor, utilities, rent). For a family, capital expenditures are buying a house; operational expenditures are going out to dinner. Borrowing for capital expenditures when interest rates are low is an intelligent maneuver. Borrowing to cover operational costs is unsustainable.

        (Yes, I know, you can use your credit card to buy dinner [operational cost] and pay it off at the end of the month ... you're not incurring long term debt. However, using the credit card for dinning out all the time and then only paying the monthly minimum, you're heading for trouble.)

      • by erroneus (253617) on Saturday October 29, 2011 @09:32AM (#37878204) Homepage

        This is called "a bubble." It's a situation of unsustainable growth and prosperity. It's like buying lots of things on credit and thinking you're well off. In reality, someone will come along to collect and then you will realize you were never well off.

      • by Rob Y. (110975)

        the logical thing for me to do might be to borrow lots of money and invest it into projects that will have a long term payoff

        ...as long as you can identify projects that really will have a long term payoff. Housing fit the bill, until it didn't. But the snake oil salesmen (aided by the ratings agency) never noticed the shift. Without decent information, borrowing and investing can easily be traps. CEO's are expected to know how to get that info, but even they botch it more often than not (because 'long term' now means quarter to quarter to them, and because they are often rewarded whether they succeed or fail). Regular folks

        • by Rob Y. (110975)

          and by the way, by 'never noticed the shift', I mean 'pretended not to notice the shift'. These folks aren't morons - once a bubble forms, as long as they can get away with it, they're paid not to 'notice' bubbles. That's why we need regulators that are independent of the systems they regulate.

          Back around the peak of the housing bubble, I heard Alan Greenspan interviewed about his then new autobiography. The interviewer asked him whether a house was always a good investment, and he answered "In a capital

  • Say what? (Score:5, Insightful)

    by msobkow (48369) on Saturday October 29, 2011 @08:19AM (#37877792) Homepage Journal

    If there is no US debt, implying no need for Treasury bonds, that means there's nothing for people to invest in?

    Man, I've heard some absurd statements before, but this one takes the cake!

    • Re:Say what? (Score:5, Insightful)

      by JoeMerchant (803320) on Saturday October 29, 2011 @08:29AM (#37877840)

      If there is no US debt, implying no need for Treasury bonds, that means there's nothing for people to invest in?

      Man, I've heard some absurd statements before, but this one takes the cake!

      Nothing as "safe" as securities backed by the U.S. government. There may come a day when the U.S. government cannot pay its debts, but likely long before that day comes, the dollars they would be paid off in would be worthless too...

      Personally, I have more faith in the U.S. government than, say, Apple, or WalMart.

      • Re:Say what? (Score:5, Insightful)

        by SuricouRaven (1897204) on Saturday October 29, 2011 @08:39AM (#37877894)
        There can never come a day when the US government cannot pay it's debts, because no matter how bad things get they always have the Option of Last Resort: Print as much money as they need. The resulting inflation would be so severe it'd erode trust in the currency and initiate the hyperinflation death spiral and lead to the most serious global economic crisis of all time... which is why it hasn't even been considered as a serious option. But it's there. Should the situation ever become so desperate that economic suicide is the only way out.
        • by Morth (322218)

          Well, it might work, if they're fast. But you're assuming the debt is in US dollars, which it probably isn't (at least not all of it).

        • by khallow (566160)
          That's called default through hyperinflation. The end result would be that the US still defaulted on its debt (and will be treated as such!), plus it just destroyed any dollar-based asset out there including hundreds of millions of peoples' dollar-based debts and savings. You really should think about the consequences of hitting the hyperinflation "reset button" before you post such things. As I see it, there is no "last resort" in that strategy. It's just self-destructive wriggling on the hook.
    • Re:Say what? (Score:5, Insightful)

      by rtfa-troll (1340807) on Saturday October 29, 2011 @08:36AM (#37877874)

      If there is no US debt, implying no need for Treasury bonds, that means there's nothing as clearly stable as Treasury bonds for people to invest in?

      There FTFY. Suddenly if you actually read it the article doesn't seem as stupid as if you completely misrepresent it.

      We are clearly going to get a big bunch of amateur economists commenting on this one. Lots of people who understand nothing of economics (and thus would be perfectly qualified to teach economics in most universities, it often seems). Given that this is a tech site and not an economics maybe let's at least try to read the article and then the Wikipedia article about whatever we are posting about and at least attempt to flame those that don't. Nobody up for that?

      If we look at this a bit further, the obvious alternative to US treasuries would have been AAA rated securities, such as the collateralized debt obligations [wikipedia.org] which more or less caused the current economic crisis. That makes this paper pretty foresighted.

      • by Hatta (162192)

        If you've determined to never pay back all your treasury bonds, how can treasury bonds be a stable investment?

      • by digsbo (1292334)

        You're missing something critical. If there's less debt, there's less credit created by the Federal Reserve, because the Fed buys bonds in the repo market by writing checks on itself, monies from which go to the US treasury and into the economy. That's how the money supply expansion begins (it's multiplied by the fractional reserve banking system). The Fed has the asset of the bond on its books, and the equity of the newly created cash. Only the Fed can do this, since it has a legal right to counterfeit

  • by Pharmboy (216950) on Saturday October 29, 2011 @08:19AM (#37877794) Journal

    This makes a lot of assumptions. First, if we really had paid off all the debt and had a surplus, Congress would have found plenty of ways to spend the excess cash, in particular, infrastructure. Or they could have rebated back the difference to tax payers. More importantly, once the debt level got low, Congress has shown repeatedly that they are willing to increase spending on everything under the sun, good and stupid alike, so the actual chance of paying off the debt completely and running into problems with no treasury bonds being issued, is highly unlikely.

    The govt. can still issue bonds even if they have no debt, to assist the global market, the question being what they do with the cash that is raised.

    • During the boom time for real-estate values in Florida, the local counties were awash in money... they had plenty of things to spend it on. There are no more county maintained unpaved roads in most central Florida counties now, lots of new administration buildings, and now that the tax money is on the decline, they're all crying about programs they are having to cut.

      I thought the promise of Republican politics was smaller government and less taxes, but when they got handed the Presidency and later control

      • I thought the promise of Republican politics was smaller government and less taxes

        You need to learn to distinguish between politicians' advertisements and what they're actually selling.

    • The govt. can still issue bonds even if they have no debt, to assist the global market, the question being what they do with the cash that is raised.

      Well, obviously the answer is to invest in U.S. Treasury Bonds ... oh, wait.

    • by chill (34294)

      Bonds are debt. They are where you loan the government your money and they promise to pay you back at a later date, plus interest. Debt.

      Saying you can pay off all the debt and still issue bonds indicates a fundamental misunderstanding of finance.

      You don't think all those millionaires and billionaires pay cash for everything, do you?

      They, too, have debt. However, their debt-to-income ratio [wikipedia.org] is much smaller. That is, they take in more than they loan out. The U.S. government doesn't. They take in roughly $2T an

  • I mean even if you don't currently don't have any debt you may want to have some for a couple of years because you want to make a big purchase like a house or a car. Actually on top of that even if you're in the black temporary credit is still useful and even I have that right now, it's called a credit card.(IE even if your finances are in the black loads of people still use credit cards since it helps with transactions.)
  • You can just take the money and buy bonds of another country for it, thus having a surplus and still using bonds.

  • by prefec2 (875483) on Saturday October 29, 2011 @08:38AM (#37877886)

    They made a study. And they looked at their glass sphere and the remains in their coffee mug and came up that maybe, no debt is a problem. The result is _perhaps_ there is something like too little debt. But they do not need to worry. The surplus during the early 2000 was due to the New Economy bubble. Every one made some extra money by lending and borrowing until the whole mess blow up, the fed reduced the interest rates and the financial companies worked on the housing crisis, which triggered financial crisis of today, which triggered the state finance crisis. And all debt of all countries increased from the last dip after New Economy and the present crisis. And the same applies to crises from the past.

    The Jews had a ruling once (if I remember correctly) after 49 years they divided all livestock among all families equally. As that was the representation of wealth, they collected all the money of the world and divided it equally among the people. Maybe we should do that. Or at least take all state debt of all countries and declare it gone. Ok the banks would most likely end to exist. But hey we could build new ones.

  • by markdavis (642305) on Saturday October 29, 2011 @08:39AM (#37877892)

    Unfortunately, debt *is* money. If you have never seen the video, do yourself a favor and watch it:. Trust me, it is worth your time:

    http://www.moneyasdebt.net/ [moneyasdebt.net]

    It is fascinating and scary.... and real. Our whole economy is now built on debt, and it really is not a good thing.

  • Rentiers (Score:5, Insightful)

    by Baldrson (78598) * on Saturday October 29, 2011 @08:49AM (#37877930) Homepage Journal
    This kind of "economics" is the sort of epic stupidity that is bringing down the US economy.

    Using the US government as your debt-collection agency so you can park your capital somewhere while you golf with Obama or whatever it is you do, is EXACTLY the kind of thing that results in the deindustrialization of the economy.

    When TFA says: "banks buy them as low-risk assets" it is betraying the truth of the "economics" profession reflected in Modern Portfolio Theory [wikipedia.org]'s so-called "risk free asset [wikipedia.org]". The reality is that this "risk free asset" is the foundation of the centralization of wealth via what classical economists referred to as "economic rent": The portion of return on the economy which is, for all practical purposes, simply the result of there being an economy.

    A rational political economy would distribute all economic rent evenly in a citizen's dividend thereby replacing all government transfer programs (with their attendant public sector rent seeking [wikipedia.org]) with market demand for what the people (as opposed to the wealthy or the politically influential with their lobbyists) need..

    Since it is clear that the US Federal government is now captured by the rentiers (rent seekers) of both the private and public sectors, it cannot admit rational political economic thought. So the responsibility devolves to the States. There is a proposal for State legislation to remediate some of the pathology created by a positive feedback loop of centralized power [dailypaul.com], but realistically, even the State governments are so depleted of resources by this vicious cycle that there is little hope for them to salvage the Republic.

    • What would saving the Republic do exactly? The US has never embraced Georgism and it's descendants, whether it had a strong republic or a weak one ... two forces have opposed wealth accumulation in the US as far as I can see, the growth made possible by the massive availability of natural resources outpacing wealth accumulation (unfortunately that stopped working in the 70s) and strong central government stepping in (Sherman, FDR, etc).

      The states have always been locked in by the race to the bottom enforced

      • The over-interpretation of the Constitution's Interstate Commerce Clause (violating the 10th Amendment) might be thought of as an inevitable result of the reaction to Shay's Rebellion that was, itself, the impetus for creating a stronger central government than that provided by the Articles of Confederation. If so, it was clearly not a uniformly held opinion of the Founders that the States should be so limited in their powers.

        So practically speaking, it is true that even if the States were able to salvag

  • If I were to print money in my basement, I would go to jail. Why then are banks allowed to do it? Banks get to create money out of thin air every time they get people to sign a loan. This is because they are allowed to loan out 9x more money than they take in from people making deposits. That is why banks LOVE it when you deposit money in your savings account because it gives them permission to loan out 9x more money. Not only can they collect interest on that money that they create out of thin air, but if you can't pay them back, they get to seize your assets!

    The hand that giveth is above the hand that receiveth. Private banks are above the governments who borrow money from them. Bankers are the masters of deception and fraud. The only things they create are debt and inflation through fractional reserve lending (fraud). Both of those are bad. They create all kinds of problems (such as the "business cycle"), and force people to participate in speculative investing or else watch their savings get inflated away.

    Fractional reserve lending was pioneered by Nathan Rothschild and stemmed from greed -- he wanted to lend out more gold than he actually had! Anytime a bank expands the money supply by loaning out more money than they actually have, they are stealing from you who have saved. I understand the need to expand the money supply in order to prevent deflation. However, the government, not a private central bank, should be the one to do that. If the government created money, then they could spend that money rather than having to tax it away from the citizens.

    It is no coincidence that the IRS was created shortly after the Federal Reserve Bank was created. How else would the government get money to pay interest on the money it borrowed? If you are in debt, you are a slave to your creditors. In 1913, "our" government allowed itself to become enslaved by the private Fed. The power to issue currency should reside with a government who is accountable to the public. The government exists to serve We The People. We The People should never allow ourselves to becomes slaves to our government (via entitlements, welfare, government healthcare, etc) who is a slave to the central bankers. Woodrow Wilson, and the few members of Congress who were actually present in the capital building 2 days before Christmas in 1913, made the terrible decision to give the power to issue currency to a privately held central bank (that doesn't even need to pay taxes!). The Fed is not really accountable to the public. Yes, the Fed board members are appointed by the President, but that very important decision should not be left up to a single man who may be too easily corrupted.

    Governments do not need to borrow money from a bank. They can create money debt free! They are supposed to be doing that according to the US constitution:

    "Congress shall have the power to coin money and regulate the value thereof." Since the value of money is determined by the quantity, Congress should be controlling the quantity of money, not banks!

    Read up on Bill Still's ideas for monetary reform in his book "No More National Debt". If you don't want to read, then watch these films:
    The American Dream
    Money as Debt
    The Money Masters
    The Secret of Oz
    Inside Job
    • If I were to print money in my basement, I would go to jail. Why then are banks allowed to do it? Banks get to create money out of thin air every time they get people to sign a loan. This is because they are allowed to loan out 9x more money than they take in from people making deposits.

      That would be a problem - if the money in question weren't a) backed by collateral, and b) replaced as the loan is paid off. The amount of money circulating is thus a constant. (Even though it doesn't seem so to people wh

      • by rcb1974 (654474)

        The amount of money circulating is thus a constant.

        False. Constants don't change -- that is why they are called constants. Bank A loans out 0.9*deposit_X, which then gets deposited into Bank B. Bank B then loans out 0.9*0.9*deposit_X. Rinse and repeat say 100 times. Money_created_from_thin_air = 0.9 + (0.9^2) + ... + (0.9^100) = 9*deposit_X.

        The ideal currency is one whose purchasing power remains constant over time. That could easily be done using a feedback control loop, such as a PID controller. Whenever there is inflation, the government could

        • by Pence128 (1389345)

          Bank A loans out 0.9*deposit_X, which then gets deposited into Bank B. Bank B then loans out 0.9*0.9*deposit_X. Rinse and repeat say 100 times.

          Ok. Bank A loans out 0.9*deposit_X, which then gets deposited into bank B. Bank A has 0.1*deposit_X. Bank B loans out 0.9^2*deposit, which then gets deposited into bank C. Bank B has 0.09*deposit_X. Bank C loans out 0.9^3*deposit...

          (1 - 0.9^1) + (0.9^1 - 0.9^2) + ... + (0.9^99 - 0.9^100) = 0.999973439

        • The amount of money circulating is thus a constant.

          False.

          True, because no money is created out of thing air - in the end, no more money exists than has been created by the Fed. Period.

          The ideal currency is one whose purchasing power remains constant over time.

          Well, since we live in a decidedly less than ideal world - your point is what?

          There is no need for a middle man (Federal Reserve Bank) to take its cut and give it to its private shareholders.

          In some universe where the Fed distributes m

    • by Prune (557140)
      Mod parent down for perpetuating the myth of the money multiplier. "When banks create money by extending credit (loans create deposits), this occurs completely within the banking system and results in a liability for the bank (the deposit) and a corresponding asset (the loan). The customer has an asset (the deposit) and a corresponding liability (the loan). This nets to zero." Get it? You completely forgot that any money banks loan out are deposited at other banks. Deposits are a liability for the bank,
  • by Required Snark (1702878) on Saturday October 29, 2011 @09:34AM (#37878218)
    Here are the quick and dirty numbers

    http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms [wikipedia.org]

    Let's look at one figure, the percentage change in the national debt. Take the two terms (Regan, Bush) before Clinton, and the two terms after him (Bush). Negative numbers are decreases, positive increases.

    • Regan +9.3%
    • George H. W. Bush +13.0%
    • Clinton -0.07%
    • Clinton -9.0%
    • George H. Bush +7.1%
    • George H. Bush +20.7%

    The last time a Republican president decreased the National debt was Richard Nixon in his first term in 1973, +3.0%. This was over 9 presidential terms ago, over 36 years.

    So when Republicans try and trash Clinton's economic record, they always quote misleading figures. Also known as lying.

  • by jimicus (737525) on Saturday October 29, 2011 @10:02AM (#37878376)

    Seriously, this idea that all debt is automatically evil is silly. There's absolutely nothing intrinsically wrong with it. It's a tool. We have tools like live CDs, antivirus, screwdrivers and such; the economy has tools like loans, bonds and such.

    Where you run into trouble is if you can't service the debt. So really you want to avoid getting into so much debt that this is likely to be a problem. How much is too much? Depends how much you can service.

    • by betterunixthanunix (980855) on Saturday October 29, 2011 @12:03PM (#37879384)
      There is a problem with using public debt as a way to provide wealthy investors with a safe place to put their money. Debt is an investment because it is repaid at interest; public debt is repaid using tax dollars. Using tax revenue as a way to create returns on investments for the wealthy amounts to the enslavement of the population.

      Public debt is a tool for weathering hard economic times and paying one-time costs. When it becomes a shelter for the world's richest investors, there is a problem.

Murphy's Law, that brash proletarian restatement of Godel's Theorem. -- Thomas Pynchon, "Gravity's Rainbow"

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