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.'"
1% (Score:1, Insightful)
because debt is yet another way to subsidize big money?
a quick note from our sponsors: (Score:4, Insightful)
Dear /.
debt is a good thing, you can't have enough of it.
Yours sincerely
the IMF
Say what? (Score:5, Insightful)
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:1% (Score:5, Insightful)
Re:Say what? (Score:5, Insightful)
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)
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.
Re:The Myth of the Clinton Surplus (Score:5, Insightful)
I never liked Clinton either but I'm starting to revise my opinion based on the last two clowns that replaced him. He looks better everyday.
Re:Say what? (Score:5, Insightful)
Rentiers (Score:5, Insightful)
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.
Re:a quick note from our sponsors: (Score:4, Insightful)
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.
Re:a quick note from our sponsors: (Score:5, Insightful)
... 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.)
Re:a quick note from our sponsors: (Score:4, Insightful)
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.
Re:1% (Score:2, Insightful)
Well, the problems we currently face are mostly caused by US policies of the last 10 years which are better described by "organize nothing, remove any regulations, cut taxes, finance wars we can not afford ourselves". So look who were the decision makers in the US during this times.
Re:Yes, because debt IS money (Score:5, Insightful)
It's so odd that the banks can make a profit on something they don't even have -- the money they loan is loaned into existence and then they get real money back as profit.
"Money as Debt" is a little hokey, but still interesting: http://video.google.com/videoplay?docid=-2550156453790090544 [google.com]
Re:1% (Score:5, Insightful)
This resulted in putting men on the moon and spurred the computer age and caused 20 years of growth.
Give credit where it is due, and don't forget the spoils of war -- the German rocket technology and science, which propelled the US space science into the late 70s. The rest of the world was paying their war time debts up until the 80s.
Re:Republicans always lie about Clinton. (Score:1, Insightful)
This is a silly post. Remember spending bills originate in the House. Here is your list with Congressional Control
Regan +9.3%
House Democrats
Senate Democrats until 1981
Senate Republican 1981-1987
George H. W. Bush +13.0%
House Democrats
Senate Democrats
Clinton -0.07%
House Democrats 1993-1994
House Republicans 1995-1997
Senate Democrats 1993-1994
Senate Republicans 1995-1997
Clinton -9.0%
House Republicans 1997-2000
Senate Republicans 1997-2000
George H. Bush +7.1%
House Republicans 2001-2004
Senate Democrats 2001-2002
Senate Republicans 2003-2004
George H. Bush +20.7%
House Republican 2005-2006
House Democrat 2007-2008
Senate Republican 2005-2006
Senate Democrat 2007-2008
So it seems that the only time there was a real decrease was the Republican Revolution of 1994 when they were fighting Clinton. Once Bush was elected and they had full majorities they started spending again. More complicated and interesting than you claim.
Re:There is nothing intrinsically wrong with debt (Score:4, Insightful)
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.
Re:Yes, because debt IS money (Score:2, Insightful)
Your thinking is completely backwards.
The purpose of money is to facilitate transactions.
That's it. Nothing more. Nothing less. You can barter instead, if you prefer. But the purpose of currency is to facilitate transactions. It is not there to "save your wealth". It is only there as a universal, interchangeable IOU note. This is why gold, oil, and the rest are NOT money - these are assets.
Money are just IOU notes. Money (in the abstract!) is debt of someone else that you are holding - that's the definition of money. There is a very good reason to have inflation. The reason is so someone that is descendant from Ancient Rome doesn't swing by and buy stuff based on how much their ancestors in Rome managed to collect. Deflation or non-devaluating currency creates the ultimate trust funders. This scenario is the ultimate economy killer.
On the other hand, high inflation is bad too. You want to allow people sufficient time for them to decide what they want to buy. You can't have 50+% inflation per year - that creates problems with debt. Actually, if you have lots of fixed debt and there is lots of inflation, your debt melts away rather quickly.
Ideal scenario is low, positive inflation. So $100 today will only buy $95 worth next year and $89.50 year after that, etc.. This scenario facilitates the real use of the money. Use it or lose it.
So how can you use your money? You can buy assets (house, land, companies) or you can lend it to others that need cash (bonds)..
So why do we have money that devalues? So people keep working. So our society doesn't disintegrate.
This is massive price deflation and it benefits the consumer.
You are missing the point completely. Reduction in computer prices has been brought by increased efficiencies in production of this technology, *and* due to actual sales. If no one bought anything for $1500 earlier, well, you can rest assure that the $20 option today would not be available.
Your cheaper prices in very few sectors are brought to you by miniaturization and automation - by reduced input costs. This is fine in specific areas, as long as overall, you have inflationary monetary policy.
This keeps going until there is $10,000. So the banks create $9,000 of money from that first $1000.
This depends on the requirements for your reserves. Your scenario works only if the reserves are 10%. This varies. Chinese have reserves of about 40% (less leverage). A bank must ALWAYS stay above reserve requirements. So 10% min reserves means they would generally have double or even triple the minimum, depending on the size of the bank.
Anyway, the purpose of fractional reserve banking is to facilitate liquidity. The purpose of interest is not to make money, it is to prevent loss. If you pay 7% floating interest and the bank can sell that debt as 3% interest, then they are not making 4% profit off of it. 4% assumes only that less than 1/25th of their loans are going to default. If more default, the bank is screwed and loses lots of money.
The purpose of banks is to gauge RISK of the loans. Their money making is from arbitrage in rates and (mostly) from service fees (eg. brokerage fees, daily banking fees, lending fees, etc.). Fractional reserve banking simply allows them leverage. Without fractional reserve baking, a bank would not allow you to take out a loan unless they secured a bond offering for it first. Think of this as you can only get a mortgage 4x a year when bank issues more bonds. That would certainly screw up the economy.
Anyway, I could go on and on. But the bottom line is, money is debt and fractional reserve banking is simple leverage.
Re:Say what? (Score:3, Insightful)
I don't necessarily disagree with your predicted results but you're wrong about the lack of viable alternatives to oil. We could fairly easily sustain the world's energy requirements using Fission, Beamed Orbital Solar and a combination of the various traditional 'green' solutions out there. The problem is that the people with the power to make that happen are all short sighted fools who can't see/accept the basic facts of where we're heading (or just think that the problems will "sort themselves out" because of the "invisible hand of the free market") or greedy sociopaths who see where we're heading and don't give a shit because they're either old enough to be dead before the shit really hits the fan or think that they're rich enough to be able to ride out any problems in comfort.
You're right that switch probably won't be made within the required time-frame, but not from lack of ability so much as from a lack of willpower to do so from those who occupy the halls of power.
I'm not necessarily sure we're going to go into a complete collapse like you're suggesting but it's a near certainty that things will get a lot worse than most people expect...
Re:1% (Score:4, Insightful)
nickmh opined:
Meanwhile the USA's industrial productivity is dropping year by year. Those "organise anywhere" people are getting what they want. A dismantling of capitalism. I'm not sure they're gonna like like it.
Industrial productivity is the only way out. But that's not going to happen while you have the Fed funding and subsidising projects that will lift energy and industrial input costs.
Absolutely wrong.
Industrial productivity is not going to increase domestically as long as it is significantly cheaper to manufacture products overseas (i.e. - in China, India, Indonesia, etc.). Meanwhile, domestic income tax revenue will continue to decline as former line-level manufacturing employees permanently lose their middle-class incomes, while the self-styled "job creators" buy Congressional complicity in sheltering their own spiraling incomes from taxation (see: General Electric, etc.), and in generating 10-figure tax-funded handouts to themselves (see: the oil industry). Saying the problem is, "the Fed funding and subsidising projects that will lift energy and industrial input costs," is an attack on the flimsiest of straw men. The true problem is the combination of relentless globalization, predatory trade policy by the new industrial giants (China, again, and India, again), and MBA-dominated domestic corporate managment's obsessive focus on short-term profitability at the expense of the long-term viability of the companies whose interests they pretend to serve.
Welcome to the Roaring Twenties, redux.
Re:Republicans always lie about Clinton. (Score:4, Insightful)
It's not a libel. There is fundamentally no basis to believe that reducing tax rates when the marginal tax rate is below 50% will result in an increase in revenues. It's voodoo economics.
In addition there is no evidence that such tax reductions have in fact increased revenues. All revenue increases post such tax reductions are explainable by secular economic growth.
Re:Yes, because debt IS money (Score:4, Insightful)
You can stop reading, but it doesn't change the fact that we HAVE an economy because people are forced to invest instead of passively sit on money in a vault. Take away inflation, and you're left with de-facto feudalism where wealth is more or less eternal and static.
> If someone works hard and saves up to buy something large, like a house, your policy effectively steals a portion of that savings from them.
You'll have to pick a better example, at least with specific regard to "house you buy as your personal residence". Within comparable markets (obviously, someone selling a house in Detroit with the expectation of buying a comparable replacement in Los Angeles is in for a bit of a disappointment), you can sell your house and buy a comparable one with elsewhere. Now, you might not come out as well if you bought a house purely as investment property, but realistically, for about 98% of Americans (slightly distorted by flipping 5 years ago), "buying a house" is synonymous with "buying a house to live in as your one and only residence."
The fact is, if you're even remotely close to a typical middle-class American, your savings are a complete fiction anyway. They're a temporary insurance policy against a cash-flow disruption so you can keep making minimum payments and avoid losing *everything* in the meantime. Remember, in the context of inflation, 'savings' is almost entirely a synonym for "cash under the mattress", and NOT "investments", because investments (including invested retirement funds) generally inflate along with everything else.
So, if we're going to get personal, yes, fuck anybody who thinks it's worth destroying the economy so they can store cash in a mattress and expect it to magically retain (or gain) value. They're such a wacky, obscure, extremely rare edge case in the grand scheme of things, they aren't even a blip within the margin of error.
Re:1% (Score:5, Insightful)
Where do you think the government gets the money to repay its debts? There are two possibilities: tax revenue
The federal government never ever pay debts from tax revenue. Taxing is nothing more than a mechanism to reduce the aggregate money supply in the private sector. Once money has been taxed it is gone into the void. (for the federal government or any other currency owner that is)
The federal government doesn't own money. It doesn't make any sense, as it is the issuer and recaller.
As such, the only way for the federal government to repay debt is by creating new money. And with that realization, you quickly come to the understanding that the government doesn't have to borrow money if it doesn't want to. However, borrowing is a simple and easy way to manage interest rates and tie up private/foreign sector savings over a longer term so that it is impossible to flood the market with currency in a short interval. Hence, sovereign currency owners borrow to make the currency more stable.
As for Greece. They aren't a currency owner, so it sucks to be them.
Re:Republicans always lie about Clinton. (Score:3, Insightful)