When Having the US Debt Paid Off Was a Problem 633
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.'"
Re:Yes, because debt IS money (Score:4, Informative)
Fractional reserve banking brings additional money in circulation by borrowing. https://secure.wikimedia.org/wikipedia/en/wiki/Fractional_reserve_banking [wikimedia.org]
Paying off the debt takes that money out of circulation again. As a consequence the money that's left over will become more valuable, and prices will drop. This could result in a deflationary spiral according to many economists.
Re:Say what? (Score:4, Informative)
Re:Yes, because debt IS money (Score:4, Informative)
Fractional Reserve banking is a sword that cuts both ways.
Watch this movie [moneyasdebt.net] for a clear explanation.
Re:The Myth of the Clinton Surplus (Score:5, Informative)
The claims that we had erased the federal debt and had gone on to a surplus were based on long-range projections that were totally inaccurate, and had never been realized.
Possibly because the long-range projections didn't include 2+ unbudgeted wars, a near doubling of the regular defense budget, a huge expansion of medicare without any new revenues specified to fund it, big "temporary" tax cuts for billionaires, a huge loss of tax revenues due to the economic meltdown, etc.
It doesn't take a genius economist to figure out why the US debt is going up-up-up. You've just got to learn to ignore what politicians say and watch what they do.
Re:The Myth of the Clinton Surplus (Score:4, Informative)
It was the Omnibus Budget Reconciliation Act of 1993 Clinton and the Democratic
Nonsense.
From http://rpc.senate.gov/releases/1997/BUDDEAL2.JT.htm [senate.gov]:
Prior to Republicans assuming control of Congress in 1995, President Clinton refused to embrace the idea of a balanced budget. Clinton's first budget called for an astronomical tax hike of $220 billion that Democrats in Congress increased to $240 billion. Clinton's first three budgets -- released in 1993, 1994, and 1995 (for FYs 1994, 1995, and 1996 respectively), left deficits of $241.4 billion, $201.2 billion, and $194 billion by his own estimation (which CBO scored at $228.5 billion, $206.2 billion, and $276 billion respectively). In the meantime he vetoed the Republicans' budget in 1995 -- a budget that would have cut taxes and been the first to have balanced since 1969. Not until election year 1996 did he even aspire to balance, producing a budget that left an $81 billion deficit in its final year.
From No, Bill Clinton Didn't Balance the Budget [cato.org]:
And 1993 -- the year of the giant Clinton tax hike -- was not the turning point in the deficit wars, either. In fact, in 1995, two years after that tax hike, the budget baseline submitted by the president's own Office of Management and Budget and the nonpartisan Congressional Budget Office predicted $200 billion deficits for as far as the eye could see. The figure shows the Clinton deficit baseline. What changed this bleak outlook?
Newt Gingrich and company -- for all their faults -- have received virtually no credit for balancing the budget. Yet today's surplus is, in part, a byproduct of the GOP's single-minded crusade to end 30 years of red ink. Arguably, Gingrich's finest hour as Speaker came in March 1995 when he rallied the entire Republican House caucus behind the idea of eliminating the deficit within seven years.
Re:Yes, because debt IS money (Score:4, Informative)
Read the wiki page on fractional reserve banking, and how it increases money in circulation. Paying off debt is the same process in reverse.
A simple example: when I loan you $1000, and you give me an IOU in return, that IOU can be traded around, so it counts as money. In the mean time, that $1000 can also be traded. So, in effect there's a total of $2000 around from a single $1000 loan.
Re:Yes, because debt IS money (Score:2, Informative)
No they don't. Banks create the money for the loan out of the loan. The requirements for deposits stem merely from laws based on fractional reserve banking, i.e., a bank can create money based on some multiple of the amount of its deposits.
Watch the video I linked to. It explains it very clearly, including a section explaining how your belief that banks lend out deposits is a myth. As another example, banks can create about $100,000 in loans from a deposit of $1111.12 in high powered money(*) in a 9:1 fractional reserve regulatory scheme.
Essentially, your mind is rebelling against the disgusting notion that banks create money out of nothing making you a slave to debt.
(*) http://en.wikipedia.org/wiki/Monetary_base [wikipedia.org]
Re:Yes, because debt IS money (Score:4, Informative)
Instead of watching the video, look at the wiki page, and its references. https://secure.wikimedia.org/wikipedia/en/wiki/Fractional_reserve_banking#Money_creation [wikimedia.org]
I've watched the video before, and it doesn't get the details right. Besides, it doesn't give you any references, so it's worthless as an argument.
The effect in the end is similar: money is created. The only difference is that the video makes you think the banks don't have any risk, and take all the profits, which simply isn't true. Banks suffer the consequences just as badly.
Re:1% (Score:5, Informative)
the military budget it pales in comparison to the amount that is spent on social programs
I'm assuming you're talking about welfare. If so, have you checked your facts recently? [googleapis.com]
Or are you trying to argue that anything that benefits people (social security, healthcare...) contributes to "paying people to stay home and watch TV"?
Source: http://www.usgovernmentspending.com/year_budget_2011USbf_13bs1n#usgs302 [usgovernmentspending.com]
Re:Yes, because debt IS money (Score:4, Informative)
> You don't have to put your money at risk because you can just save it in a vault and it won't lose value.
That's *precisely* why small amounts of inflation are a good thing -- it forces wealthy individuals to put their money to work and actively invest it in productive endeavors to avoid having it slowly lose value over time. As fashionable as it might be to cry over poor, frugal individuals whose meager thousand dollar savings are now worth $900, the truth is that 99.9% of Americans have no real savings to speak of. If you have $10,000 "saved" and owe $300,000 on your mortgage & student loans with 20-30+ year payback horizons, your $10,000 aren't "savings" -- they're "short-term cash flow insurance" to keep your credit rating from getting destroyed if you end up unemployed for 6 months.
The truth is, the middle 70% of Americans (those falling between the lowest ~29% and top 1%) would overwhelmingly benefit from inflation, because the majority of their "savings" are negative in the form of long-term debt with fixed interest rates. A few years of relatively HIGH inflation would have the net effect of washing away most of that long-term debt into irrelevance relative to their new, higher & inflated annual salaries. A thousand dollars per month in debt payments are painful when you make $50,000/year. The same thousand dollars in debt payments are almost a nuisance if your income increases to $250,000/year.
My parents aren't wealthy, but I saw the benefit of inflation first hand 10 years ago. They moved to Florida in the late 70s, and bought a house for around $80,000. Compared to the $40,000 their old house in Ohio was worth, the amount was absolutely staggering, and they felt like they could barely afford it since they were only making slightly more in Florida than they earned in Ohio. Fast forward 15 years, when they were making 4 times as much per year (of which maybe 20-30% of the increase was due to career progression, and 70-80% due to 1980s inflation). They ended up paying off the house 5 or 6 years early, because at that point the mortgage payments were less than the electric bill.
Now fast forward to 2011. Their neighbors have $480,000 mortgages on the same houses that sold for $80k circa 1978 and were approaching sales prices of almost a million dollars in 2006, and are now averaging $360,000 today. Even if they can afford the payments, they'll never be able to sell them in a normal real estate transaction for the rest of their working lives, because it'll be at least 15-20 years before they've paid off enough debt to not be underwater on the mortgage and able to sell them normally. Among other things, this means they're effectively chained to their current job market, because relocating would mean having to simultaneously rent in the new location AND try to be an absentee landlord (which, in the current market, is almost always a losing proposition). Their neighbors are hardly unique -- it's the same situation just about everywhere else in America. The fact is, at this point nothing short of 5-10 years of fairly HIGH inflation is going to restore the traditional mobility of America's job markets. When you own a house that you can basically afford, but can't sell, the economics of relocating for a better job get blown to hell unless that new job comes with guarantees that don't exist anymore (like a hiring bonus big enough to cover the losses of having to move back if the company eliminates your position within 5 years).
(In case anybody's wondering, I'm not analogizing myself... my own house is worth slightly more than I owe, though it's mostly due to the home improvements I've made whose costs aren't factored into the mortgage itself).
Deflation is particularly deadly for things where there's a long supply chain or delay between investment and sale of finished merchandise, like auto manufacturing (parts are ordered months, sometimes years, before production begins... GM doesn't just go to amazon.com and order ten million of some part specific to one of next yea
Re:Republicans always lie about Clinton. (Score:3, Informative)
Newt Gingrich was asked about this very thing. His response?
When he was asked once why he and his GOP comrades were chomping so much more federal pork than the Democrats ever did, he replied bluntly: "To the victors go the spoils." [realclearpolitics.com]