

U.S.'s $13 Trillion Debt Poised to Overtake GDP - startuprules
http://preview.bloomberg.com/news/2010-06-04/u-s-s-13-trillion-debt-poised-to-overtake-weigh-down-gdp-chart-of-day.html

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jswinghammer
It's interesting that many people seem to have accepted that endlessly taking
on more debt is a good idea. Debt has to paid off and you can't just take it
on endlessly. I wonder what the future looks like if the United States
continues to take on more and more debt. Right now we can't really pay it off
ever so we're stuck servicing it forever. Seems like we're giving our children
a much worse world than the one we were born in. When I was born the debt was
pretty manageable and over the course of my lifetime it exploded to something
that's basically never going to be paid off.

~~~
mechanical_fish
_Debt has to paid off and you can't just take it on endlessly._

That is simply not true. Governments are different than you and me. James
Galbraith:

[http://voices.washingtonpost.com/ezra-
klein/2010/05/galbrait...](http://voices.washingtonpost.com/ezra-
klein/2010/05/galbraith_the_danger_posed_by.html)

"Government does not need money to spend just as a bowling alley does not run
out of points."

"Since the 1790s, how often has the federal government not run a deficit? Six
short periods, all leading to recession. Why? Because the government needs to
run a deficit, it's the only way to inject financial resources into the
economy. If you're not running a deficit, it's draining the pockets of the
private sector. I was at a meeting in Cambridge last month where the managing
director of the IMF said he was against deficits but in favor of saving, but
they're exactly the same thing! A government deficit means more money in
private pockets."

"The way people suggest they can cut spending without cutting activity is
completely fallacious. This is appalling in Europe right now. The Greeks are
being asked to cut 10 percent from spending in a few years. And the assumption
is that this won't affect GDP. But of course it will! It will cut at least 10
percent! And so they won't have the tax collections to fund the new lower
level of spending. Spain was forced to make the same announcement yesterday.
So the Eurozone is going down the tubes."

"On the other hand, look at Japan. They've had enormous deficits ever since
the crash in 1988. What's been the interest rate on government bonds ever
since? It's zero! They've had no problem funding themselves. The best asset to
own in Japan is cash, because the price level is falling. It gets you 4
percent return. The idea that funding difficulties are driven by deficits is
an argument backed by a very powerful metaphor, but not much in the way of
fact, theory or current experience."

~~~
mechanical_fish
I'll reply to myself because I've just explained this sentence to myself:

 _Because the government needs to run a deficit, it's the only way to inject
financial resources into the economy._

The central fact of economics is: The economy grows. The number of people on
earth is still growing. The productivity of individual workers is still
growing. We are capable of making more stuff in every year than we did in the
previous year.

Now, suppose the supply of money were finite. But the amount of stuff being
made keeps getting larger. So, every year, the price of everything goes down,
because there's an ever-larger supply of pizza and beer but a constant amount
of money.

But this creates a serious problem for the economy. Because now we've got
deflation. And that produces a really big incentive to save. Too big an
incentive. Everything will be cheaper tomorrow, so every individual benefits
by burying money in the backyard and spending as little as possible.

But as people bury more and more money, the economy shrinks, because there is
less and less money to spend, and everyone is trying to hang on as long as
possible without spending anything. You end up with lots of people sitting,
unemployed, with tools idle, and resources idle, and money buried in the
backyard, staring at each other and waiting for someone to make the first
move. Because, thanks to deflation, the first person who spends anything is a
relative loser. And now your economy has deadlocked.

And that's why the government always runs a deficit, and why the inflation
target is always higher than zero. The government prints money to make sure
that the supply of money stays good. This produces some amount of inflation,
of course, but the growth benefits of liquidity outweigh the inconvenience of
having to do something more interesting with your money than bury it.

(Why don't more people understand this? Partly it's because the growth of the
economy is a historically new phenomenon, dating back only about 150 years.
Before that, as far as we can tell, human economic production per capita
barely grew throughout millennia of history:

[http://www.amazon.com/Farewell-Alms-Economic-History-
Princet...](http://www.amazon.com/Farewell-Alms-Economic-History-
Princeton/dp/0691121354)

The other cause for misunderstanding is that if you, say, define "gold" or
"silver" as equivalent to money, and your society's economic productivity
grows, but society's ability to dig up gold or silver grows _exactly as fast_
as overall productivity at all times, the currency magically manages itself.
Because of this, for a hundred years and more of the Industrial Revolution the
world managed to struggle along with a gold-based money system. But, of
course, the gold standard was abandoned when people finally figured out that
this process is very haphazard -- indeed, it cannot be controlled. You can't
discover gold overnight, but sometimes you need more money in the economy
overnight. Like now, for example.)

~~~
po
These are great points you're making. And I think the way you are making them
is very intuitive. It is impossible to default on a currency you control. You
just print some more space-credits. I think you sum up why you _should always
be_ printing space-credits nicely.

Reminds me a bit of what Paul Krugman has been saying over on his NYTimes
blog: <http://krugman.blogs.nytimes.com/>

> Why don't more people understand this? Partly it's because the growth of the
> economy is a historically new phenomenon, dating back only about 150 years.

I personally think the reason people don't understand this is because they
think that a government should be run the way a family should: save and don't
live off credit.

------
nikete
It is worth to point out that one is a stock (debt) and one is a flow (GDP),
and the right way of comparing them would be by taking the net present value
of the flow, or comparing the cost of servicing the debt per year to GDP (so
debt servicing cost climb to x percent of gdp).

~~~
emrosenf
According to this NYT article
(<http://www.nytimes.com/2009/11/23/business/23rates.html>), debt service was
$202B in 2009. It is projected to go to $700B in 2019.

To put that in perspective, $500B more than covers what we spend on education,
energy, homeland security and the wars in Iraq and Afghanistan.

Of course, this assumes that our interest rates stay the same. I don't see how
this is possible as our debt/GDP rises. I fear we are seriously choking
ourselves.

~~~
jrockway
I don't think we are choking ourselves. Loaning money to the US government
means the government can use all its resources to pay you back. We have not
tapped any of those resources yet; taxes in the US are pretty low compared to
the rest of the developed world.

Also keep in mind that the government can loan money at a higher interest rate
than it can borrow it at. (I am not sure how much income this generates,
though.)

~~~
kiba
Higher taxes might actually lead to lower tax revenues or a tax revolt.
There's no such thing as a free lunch.

~~~
philwelch
We're not so far down the Laffer curve that raising taxes would lower
revenues, and it's unlikely we will be anytime soon.

~~~
jacobolus
Moreover, the Laffer curve is mostly an absurdity.

Martin Gardner’s improved depiction:
[http://books.google.com/books?id=oXEaTdstD7gC&pg=PA133&#...</a>

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aufreak3
A dumb question - isn't the GDP a per-year figure whereas the debt a total
figure? ... so doesn't it simply mean that if all GDP goes to paying off the
debt, it will necessarily take more than 1 year. That pay off period is
increasing and about to cross the 1 year threshold, but I'm not getting the
"debt cycle" concept .. in other words what is the difference between 1year-
delta and 1year+delta?

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jsz0
Like anything else in America we're going to need a crisis for anyone to even
consider doing something to resolve the problem. It seems to me that a drastic
cut in military spending, raising the retirement age to 70, raising taxes on
_everyone_ , closing tax loopholes, and an across the board cut of 5%-10%
should be a good start to get this resolved in the next 20 years.

~~~
mechanical_fish
_raising the retirement age to 70_

That's idiotic. The official US unemployment rate is nearly 10%. The U6
unemployment rate, which is probably closer to what one actually means when
one asks "how many people are looking for work" is twice that high. One in
every four Americans who wants a job does not have one and we're going to
raise the retirement age? What earthly good will that do?

~~~
slackerIII
I'm guessing he means "raise the age when folks begin collecting social
security benefits"

~~~
mechanical_fish
Same difference. When you take away money that older people are living on, you
force them to look for work. Which, in this economy, will tend to make them
unemployed.

I suppose great-grandma can always move in with her grandkids. Of course, the
grandkids are also 25% likely to be unemployed.

Naturally, there is a subset of people for whom Social Security is a needless
luxury because they are living off of private investments. The proper way to
target these people for additional funds is to nudge up the marginal tax rate
on those private investments. This is difficult to accomplish, of course,
because people with lots of money can afford to buy votes.

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duffbeer703
I think the difference today is that everyone is using fiat currency, and the
markets for commodities potentially useful as a medium of exchange (gold, oil,
etc) are too volatile.

We've already been living with slow inflationary growth, despite the nonsense
spewed by the government. In 1985, a single wage-earner could support a
middle-class family. In 2005, two parents need to work, mostly to pay a
mortgage and pay a few minimum wage earning daycare workers.

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dnsworks
Drill baby drill!!!!!!

