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When Having the US Debt Paid Off Was a Problem
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.'"
Dear /.
debt is a good thing, you can't have enough of it.
Yours sincerely
the IMF
-- no sig today
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!
I do not fail; I succeed at finding out what does not work.
Public debt ensures that all tax paying citizens are on the hook. Even someone who is responsible and is able to manage their personal money suddenly become beholden to whoever holds the debt. What better way to hijack an entire country?
Palm trees and 8
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.
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/
It is fascinating and scary.... and real. Our whole economy is now built on debt, and it really is not a good thing.
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's so-called "risk free asset". 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) 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, 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.
Seastead this.
It also did not include actualizing the social security debt or some of the other debts / trickery that was used to create the supposed surplus. It's explained here:
http://www.craigsteiner.us/articles/16
You can verify it here (U.S. Treasury site):
http://www.treasurydirect.gov/NP/NPGateway
Enter 09/30/1997 through 10/01/2001 for range and look at 9/30 for each year.
Fractional reserve banking brings additional money in circulation by borrowing. https://secure.wikimedia.org/wikipedia/en/wiki/Fractional_reserve_banking
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.
In the 1950's each $1 borrowed produced approx 95 cents of GDP. By 2008 that had dropped to 12 cents. At the moment it's -45 cents. For every $1 borrowed the USA errodes 45 cents of it's wealth. If USA fed spending continues at it's current pace? It will take 20% of the rest of the worlds GDP to fund that spending by 2020. Europe is toast. They're about to go to the Chinese for funding. That will come will strings I'm not sure the West is ready for. There will be no money left for the USA to use by 2020. The rest of the west will have used it. 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. HHHmmm, I wonder what sort of reaction an economic dictator will get when they tell the USA how to run their country in return for continued support? I, for one, am not looking forward to all this unravelling.
That's what happens when you hit Reply All.
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
Yes, that is the Federal Reserve's notion of money and the one they prefer because they control that money. That's why keeping the US Dollar as the unit of international exchange is so important. Prior to this, the notion of wealth was collecting and maintaining what ultimately traces back to physical resources.
So now, "money" is generated by having someone "owe" you something. This is in a very literal sense a means by which the entire world is enslaved.... to the 0.0001%. I know it sounds all conspiracy theorist-like, but think on it.
The stuff you earn and save is actually a form of debt and its ultimate value is determined by the central party who owns the debt. If the Federal Reserve were to blink out of existence, ALL of my money becomes worthless and my savings becomes zero.
Those economists are idiots. The only reason that's at all a risk is because the Federal Reserve has allowed the wealth to accumulate in the hands of a small group of people. Basically, robbing the poor to pay the rich by keeping treasury yields low. And they keep the yields low by issuing additional bonds.
The problem is that it has the effect of discouraging the poor from saving any money and gaining the advantage of savings while artificially increasing the numbers in the bank accounts of the rich.
So, in a sense it could cause a deflationary spiral, but only if there's criminal negligence on the part of the Fed as it would require a prolonged period of significant debt retirement rather than a smoother more predictable payment plan.
Fractional Reserve banking is a sword that cuts both ways.
Watch this movie for a clear explanation.
Learning HOW to think is more important than learning WHAT to think.
http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms
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.
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.
Why is Snark Required?
In the 1950's money was borrowed to fund research and development. This resulted in putting men on the moon and spurred the computer age and caused 20 years of growth. That is called an investment. Investment debt is a good thing. Consumer debt is a bad thing. Buying TVs on credit cards is a bad thing. That is the equivalent of what they politicians are doing with our money right now. They are wasting over $2 trillion dollars on the equivalent of paying people to stay home and watch TV and have kids that will grow up to stay home and watch TV and have kids. As much as people complain about the military budget it pales in comparison to the amount that is spent on social programs. What the politicians are doing now is the equivalent of borrowing money from one credit card to pay off another.
If you are not allowed to question your government then the government has answered your question.
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.
Sheesh, evil *and* a jerk. -- Jade
That analogy itself is messed up. You made an assumption that money was based purely on work. But if you want to follow the history of money that way, you have to realize that at one point money was traded for commodity.
Let's imagine that money is a measurement of favor. I lug you some rocks, then I will be entitled to some kind of favor from you tomorrow. Maybe you'd give me a feast with a whole chicken. But I wasn't in the mood for a chicken that time, so I decided to put off receiving favor from you. After two years, I expect to still be entitled to that feast of whole chicken. But with inflation, for some reason you'd only give me half of the chicken, because you claim that my favor has devalued over time. What gives?
Democracy is for the people; you only vote once per season and we'll do the rest of the work for you don't have to.
It was the Omnibus Budget Reconciliation Act of 1993 Clinton and the Democratic
Nonsense.
From http://rpc.senate.gov/releases/1997/BUDDEAL2.JT.htm:
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:
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.
Very well written.
Most people think the way a bank works is they take money from depositors and lend it out and make money on the difference. Even if that were true it would be creating money because if the person saves money in a demand account (savings or checking) where they have access to it any time they want and the bank lends it out they have created money. Say I put $1000 in savings. My account shows I have $1000. Say the bank lends out $900 of it (Assuming there is a 10% reserve requirement which isn't even true anymore). There is now $1900 in the economy. It gets worse because when that person pays someone that $900 it goes into their bank and that bank can create $810. Now there is $2710 in the economy. This keeps going until there is $10,000. So the banks create $9,000 of money from that first $1000.
The key to this whole thing is letting banks lend out demand money. If we made this illegal the whole situation would change. Banks would only be allowed to lend out time deposits which are things like CD's where you give up access to the money for a certain time. This would prevent the bank from creating money because they could only lend out money that you don't have access to.
This could be accomplished without causing massive deflation by slowly raising reserve requirements.
The main reason deflation is bad is because today people have adjusted their lives based on debt and inflation. With deflation your wage goes down and you have problems paying off debts. But once transitioned to system where debt isn't money people do much better. 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. This I believe is why we have the current system. The powerful bankers and politicians like inflation because it allows them to spend money they don't have to tax to get. Also inflation forces you into the financial system so that your savings have a hope of maintaining purchasing power.
To think about deflation you have to look at the technology industry. This industry is growing so fast in productivity that it is still deflationary. Do people ever rush out to by a TV because they think it will be more expensive next year? Some people like the latest and greatest but most people wait for products to drop until they are in their price range. This is deflation. I bought an Apple II GS in 1998 with monitor and printer for somethings like $1500. This is like $3000 today. My kids have toys that are about $20 that are as powerful as it. I just bought a printer, copier, scanner, fax for $40. This is massive price deflation and it benefits the consumer.
I love Jesus, except for his foreign policy.
If you pay off debt the money is gone. Cash, paper foldable money, makes up about 5% of the money supply. The rest is just numbers in a balance sheet. Banks create new money when they create loans, but they don't create the paper -- just a ledger entry. The problem is, the money the banks create must be paid back at interest but they don't also create the interest. As a result, the amount of money owed is always greater than the amount of money in existence, thus ensuring that someone somewhere won't be able to find the money to pay off debts.
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
What changed under Obama? Nothing Good
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.
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.
Interesting term, "rent". Try seeing what happens when you don't pay rent on an apartment.
If the U.S. fails to make payments on its debt, then those debts will be in default. The value of treasury bond holdings would collapse in a mass selloff. This would affect every financial institution in the United States, including those fuzzy little Credit Unions. Many, many institutions would require FDIC/NCUA intervention, and the funds aren't really large enough to deal with a problem on that scale. The U.S. would have to either print money (thus devaluing the dollar on the world market, leading to shortages), or let the banks and credit unions fail, leading to many people losing their savings.
So, instead the government *must* make its debt payments. We've got long-term unemployment right now. That means there are a lot of people who aren't paying taxes, and probably won't be in the near future. In fact, even when they do find a job they're likely to be less productive than they were for many years. Unemployment and underemployment also strains the social safety net, the government must pay more to maintain a basic standard of living and keep crime in check. Taxes can't be raised quickly without impacting production, and in fact cutting taxes is basically the government's only tool to increase production. At the same time, if the government can't balance the budget interest rates on U.S. debt will slowly increase. We typically will borrow for 1-5 years, and when the bond comes due we'll pay some portion of the bond with cash and take out another bond on the rest, sort of like having multiple 5-year mortgages. This means that an increase in interest rates actually affects the existing debt, not just new debt, so interest payments would increase quickly. Eventually, we won't be able to afford market rates and we'll have to find a lender willing to let us borrow at a more reasonable rate. In exchange for the loan they'll demand we make certain changes (similar to a bankruptcy court ordering your possessions be sold). These changes will be painful, but not as painful as those required to immediately balance the budget and pay off bonds as they come due. That's what's happening in Greece right now.
TL;DR - Tell Greece that borrowing doesn't come with additional obligations.
The right to protest the State is more sacred than the State.
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
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.
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.
Palm trees and 8
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?
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
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.
Check out my novel.
> 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
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.
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.