

Debt ceiling: Why the Great American Ponzi scheme might just keep running - brkumar
http://www.firstpost.com/economy/debt-ceiling-why-the-great-american-ponzi-scheme-might-just-keep-running-1179989.html

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rayiner
Sigh. So much writing and yet his logic train goes off the rails right out of
the station.

The crucial difference between what the U.S. is doing and a Ponzi scheme is
that the U.S. is actually generating income, to the tune of 1/4 of the world's
economy. That income stream is missing in a Ponzi scheme. Paying off maturing
debt by refinancing it with new debt is nothing unusual--corporations do it
all the time. It's fine because there is the underlying income stream.

Now, the fact that it's not running a Ponzi scheme doesn't mean the U.S. can
continue borrowing forever. Creditors might get nervous if the debt levels get
too big relative to the income stream. What the U.S. has to worry about is not
how much debt it's taking out now. What the U.S. has to worry about is some
other country becoming a more attractive place for the world to stash its
cash.

~~~
notahacker
The US doesn't really even have to worry about another country becoming more
attractive to park its cash; its financial obligations are still all
denominated in dollars and the Federal Reserve can still continue to print
them. The only real concern is that if there are deep structural problems the
economy it might have to raise taxes to combat inflation (simultaneously
cutting the deficit) even in an environment where there's no economic growth.
As you point out, the US economy is plenty big enough to pay down debts with
tax takings instead, but the government might have to hurt the economy to do
so.

~~~
rayiner
Right, but my point was that we get to consume more than our GDP because we're
an an attractive place to park cash. When that ends, we can pay off our
dollar-denominated debts but we won't be able to keep spending more than we
generate.

~~~
waps
That's in theory. In practice the shock that ending that will cause will end
any hope the US has of paying back it's debt, or even the interest on it,
immediately. So it will cause an immediate default and destroy the economy
that promised to pay it back in one fell swoop. There's no way out of that
situation that doesn't involve reneging on repayment. Either directly (any
sovereign nation, like the US, can simply legislate it's debt away like Greece
-partially- did, and counterintuitively investors have no choice and will
immediately reinvest, again, like Greece demonstrated)

So the US, like every other nation on this planet (barring a few, but only a
few exceptions), has zero hope of ever paying back it's debt. So it won't.

That doesn't mean the illusion can't last a few more decades or even a century
or two (though only a few states managed to make it last even a single
century, the most famous being the Roman republic).

The reason that everybody's happy with this state of affairs is that it
allows, at this moment, an economy that's factors larger than it would
otherwise be.

This situation came to be as an "accident" (that has happened hundreds of
times before in history), and there simply is no conceivable way out. Anybody
who can rattle the boat risks losing big, even if it's monetary interests are
protected, so the situation keeps existing until someone really, really goes
too far.

Apres nous, le deluge. (google this sentence)

------
Spooky23
The good times will keep rolling for quite some time. 12% of the debt is held
by the Fed (aka. they printed money), and inflation is still 1.5%.

The solution to our fiscal woes is simple: we keep printing money. Eventually
the markets will tire of this, and interest rates will go up. When that
happens, companies and rich individuals will have a disincentive to hoard
money and will begin to do something with it, which may increase inflation and
interest rates more. The risk is that countries, companies and wealthy
individuals will stop hoarding funds and start spending money, further
increasing the money in circulation.

The gamble is whether this happens before or after the demographic bubble that
is weakening the ability of schemes like Social Security to fund their
benefits. Once the boomers go away, the entitlement programs will be more
self-sufficient.

~~~
atlanticus
That's not cool. People here want to hear about how the US is doomed. They are
absolutely crazy for it, regardless of reality.

Edit: This post is an interesting case where people upvote it because of the
title and then flag it after they read the comments.

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betterunix
_Governments typically spend more than they earn_

Funny how at the end of the 90s, we had set things up to pay down the national
debt, and how one of the issues in the 2000 election was what to do with the
projected surplus. I believe it was Gore Vidal who referred to the "United
States of Amnesia."

~~~
Zimahl
Well, one would assume that had the US not stumbled into 2 expensive foreign
wars we probably wouldn't be in the situation we are in now. We went into
massive debt during WWII as well we just weren't able to borrow the money from
foreign markets, we had to settle for US war bonds.

~~~
mr_luc
That's true -- although it highlights just how ridiculous the decision-making
around those wars was.

In World War 2 the United States was facing other world powers who were
capable of converting their entire economies to war purposes; in 2001, the
United States was facing a tiny pocket of wealthy and determined radicals who
would occasionally try very hard to blow something up.

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grej
Interesting article. Particularly this:

"The way this entire arrangement evolved had the structure of a Ponzi scheme.
China and other countries invested money in various kinds of American
financial securities including government bonds. This has helped keep interest
rates low in the US. This helped Americans consume more. The money found its
way back into China (like a return on a Ponzi scheme), and was invested again
in various kinds of American financial securities, helping keep interest rates
low and the consumption going.

Foreign countries have an incentive in keeping this Ponzi scheme going."

TLDR: When nearly all parties have a vested interest in continuing to kick the
can, the can will likely be kicked for a very long time.

~~~
anigbrowl
But it's wrong. It's a good description of a how a Ponzi scheme works, but in
a Ponzi scheme that's _all_ that happens - there's no actual economic activity
taking place. The US, by contrast, has a very large and productive economy.

Also, bear in mind that the treasury borrows at a fixed interest rate. When
you hear of rates going up, that's the rate that will have to be paid on
future bond issues. With inflation as low as it is right now, it makes good
sense to borrow. In fact, we should be borrowing more, probably much more, and
investing it in major infrastructure upgrades that would yield higher economic
gains over the lifetime of the bond than the puny rates of interest we pay on
current borrowings.

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aliston
"This money printing adds to the money supply. This excess money can
ultimately lead to high inflation with excess money chasing the same amount of
goods and services."

I'm in the process of writing a blog post on this. For now, the printing
hasn't led to an increase in the money supply. Banks are holding record
amounts in reserves and aren't lending the way that they were in 2008, so the
money supply hasn't increased.

~~~
jpmattia
> _so the money supply hasn 't increased._

The money supply has indeed increased:
[http://research.stlouisfed.org/fred2/series/M2/](http://research.stlouisfed.org/fred2/series/M2/)

Perhaps you are thinking about monetary velocity, which is decreasing:
[http://research.stlouisfed.org/fred2/series/M2V](http://research.stlouisfed.org/fred2/series/M2V)

~~~
aliston
Yes, I meant that it hasn't increased in the way that it "should" relative to
the monetary base.

------
ThomPete
interestingly of all developed countries only the US and Denmark of all places
have a debt ceiling.

~~~
Fuzzwah
Your comment prompted me to actually learn a little about the history of the
US debt ceiling and why it was implemented.

[http://en.wikipedia.org/wiki/History_of_United_States_debt_c...](http://en.wikipedia.org/wiki/History_of_United_States_debt_ceiling)

> In 1917 (and during World War I) the Debt Ceiling Law was passed, which
> allowed the executive branch to issue bonds and take on other debt without
> Congressional approval, as long as the total debt fell under the statutory
> debt ceiling.

I find it interesting that a law which was passed nearly 100 years ago to free
up the executive branch from being constrained by congress has now resulted in
the executive branch being bent over a barrel by congress.

~~~
Spooky23
Consider the alternative -- every bond issue would require congressional
approval.

Congress isn't going to cede it's power to control spending -- the debt
ceiling is a hack that gives the President the autonomy to operate while
continuing to give Congress the power of the purse.

~~~
Fuzzwah
True. But that is only one alternative, not "the" alternative.

Take Australia. The government proposes a budget and the senate reviews it and
after making any changes they decide are required and the government agrees,
it passes.

In the situation where a deal can't be made and the senate blocks supply of
money to the government the "politically neutral" governor general can dismiss
the government and force an election.

This has happened once:

[http://en.wikipedia.org/wiki/1975_Australian_constitutional_...](http://en.wikipedia.org/wiki/1975_Australian_constitutional_crisis)

