Another 1.1T Spending - National Debt - No worries or what point consequences?

[ForrestNinja]

First of all, I'd like to clarify I'm just curious what opinions you all have concerning the national debt:  at what point does the country have too much debt before it can inflict considerable damage with inflation, stock market, health of the country, etc.; or, do you think we can just write it off and no amount of debt can produce any consequences?

I've read MMM posts a while back and heard over time opinions of others about how the national debt is not really a concern because the stock market always rebounds and over time and it will keep going up, etc.  IMO there is still a possibility that we could see something that has never happened before.  Just because in the short life of the market (compared to human history) it has gone up with booms and busts, it doesn't mean it can't or won't experience an event that wipes everything out and puts us in a ditch we can't get out of. 

I'm not too worried because if something like this were to occur in my lifetime we'll all be in the same boat and money doesn't define everything in life, we all die the same way we came into the world, but a significantly decreased quality of life is undesirable for most people. 

[StashDaddy]

Good question!  I'm sure any Conservatives on here will tell you the deficit/debt is way too high, and any Liberals will tell you that the spending is not enough (when will it ever be enough?)  =)

Thinking economically, debt comes at a price.  Just like a family having a high credit card debt.  If the interest rate on the debt is low, then the income that must be diverted to pay interest on the debt is no problem.  But as the debt grows, or if the interest rate rises, the income that must be diverted to paying off the interest also rises.  At some point, you will reach a point where you will have to:

a) default on the debt (seems unlikely)
b) curtail government spending on military/healthcare etc to divert more spending towards the debt
c) increase taxes to cover the interest on the debt.

Looking at other developed countries compared to the US, unfortunately I think the most likely outcome will be Option C. 

Well, at least that $1.1T goes to a good cause, right?  (see attached)

[Jags4186]

I hate when the talking heads come on the television and say "XYZ President has reduced the deficit".  Which is a kind way of saying "XYZ President is still increasing the debt".  I don't pretend to be an economist or pretend I understand global macroeconomics, but it seems to me if the debt keeps going up (I.E. there IS a deficit in the first place) that cannot be good for the long haul.  It just means there needs to be ever increasing taxes on the people to service the debt.  And since wages are stagnant or decreasing for the middle class (where most of the tax dollars come from) it means more of the revenue is going towards debt service vs growing the economy.

[golden1]

The way I see it, a country's debt curtails it's freedom to act completely independently, just like personal debt curtails a person's freedom to do do whatever they want to do.   As long as we have debts to other countries, we have to consider their interests when making decisions about our country's future.  Now one could conceivably argue that is sort of a good thing for international diplomacy in the sense that it helps keep the peace.  As long as we owe debt to ourselves, our hands are tied in what we can actually build internally as a country to move us forward in the future. 

Because we have by far the strongest military in the world, that mutes many negative consequences that our national debt has.  No one is going to invade us to get their money back.  That will probably allow us to push off the piper for a little while longer than otherwise.  However, eventually we will have to drastically reduce spending, raise taxes or probably both.   There will be a generation or two that is going to have to take the hit for the over-spending of previous generations, and no one is stepping up to the plate for some strange reason.  :P 

There is also the complication that the US is still the center of the world economy.  If we go down, the rest of the world goes down with us.  We aren't talking a US depression, we are talking a world depression of a magnitude of suffering that is difficult to contemplate.  I think all of these factors will most likely work to keep us afloat for awhile, but I still see a gradual unwinding of the debt that will result in the US becoming less of a world influence and a general lowering of our standard of living. 

[Future Lazy]

I was reading some articles on it a couple of days ago, and recall reading something to the effect of "The US earned X dollars but spend Y dollars in 2013, meaning that for every dollar spent, Z cents of it was borrowed."

I think it was 14 cents on the dollar?
http://www.heritage.org/research/reports/2014/12/federal-spending-by-the-numbers-2014

But I don't really think that's accurate. If someone was in debt to the ratio the USA is, I think people around here would say ALL the money is borrowed, until the net worth becomes positive. That's certainly how I think of it. I think it's disgusting that we would continue to overspend and build more debt, and only call it a crisis during budget time.

And it's not like the USA can sell it's house to avoid bankruptcy or something like that. I, for one, would love to step up to the plate and pay more taxes in exchange for better management. As long as the management is stagnant and stubborn - no matter what side of the party lines the majority falls on - we'll continue to be in freefall.

[Pooplips]

The debt we have will never be repaid based simply on the way our monetary system is set up. We current pay debt with debt so the debt is never extinguished. It's a simple problem with all fiat currency.

Principle < Principle + Interest. Therefore, in the end someone must always default. All debts cannot be paid back.

All money is created through the creation of more debt since money is backed my nothing and is itself debt.

To make it more confusing; money must constantly be created to flow through the economy to service the interest payments on the older debt. It's a never ending cycle. Until it ends.

Read about France in the late 1700's for more information.

[MrFancypants]

No worries.

We individuals strive to be debt free because some day we have to retire.  In order to maximize our resources, it makes sense.

The government is never going to retire.  Being debt free wouldn't magically make everything better.  If anything, the pain we'd have to go through to get there would make things drastically worse.

Check out the information on this page, and sort by "per capita."

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Many of those countries are double, triple, and beyond the debt we're carrying and they're doing fine.  You can say that Iceland had some issues recently, which would be fair, but their society hasn't crumbled.

Then sort it by "% of GDP" and we're so far down on the list that it's comical.  Yes, we have the biggest number, but the US is so stinking rich it's not really a problem.

[projekt]

Here are several disjoint thoughts in support of running deficits and not worrying too much about the public debt.

The cost of the public debt has to be considered with respect to the cost of servicing (paying interest on) the debt, as well as the cost of retiring debt. Long term treasury rates are near historical lows. Short term rates are nearly zero.

On the other hand, the cost of retiring debt at this time would be an increase in taxes, which is a policy that may put the economy at serious risk. The economy has been slowly growing. Even slight contractionary pressure on the economy could precipitate another recession, with more debt coming from automatic stabilizers.

In fact, at this time, probably the best thing we could do is make long-term investments in infrastructure. This is the time to do the blue-sky projects like high-speed inter-city rail, building 4th-generation nuclear plants, outfitting cities with gigabit fiber, etc. The cost of capital is extremely low and the payoffs could be huge. It is also a great time to put money into scientific research.

Ideally, we would retire the debt during economic booms, but the last time we had that opportunity, the politicians chose tax cuts instead. There is no politician who is willing to give up their spending items in the name of retiring debt. And, there are a ton of politicians who have pledged to never raise taxes, even when it makes economic sense.

Many economists (Dean Baker, for example) think that the size of the public debt and deficits only have meaning with respect to the size of the economy. If the economy grows, it's fine for the public debt to grow with it. If the economy contracts, you have bigger problems and deficit spending will probably be needed to restore the economy to growth.

Devices like the "debt clock" deliberately take the number out of context to promote fear. That's not cool.

It's amazing to me how there is always plenty of deficit money for war, never any left over for construction.

[StashDaddy]

On the other hand, the cost of retiring debt at this time would be an increase in taxes, which is a policy that may put the economy at serious risk.

Couldn't you also cut spending?  Granted, it will also hurt the economy.  But some would argue that it would be better for the country in the long term.  Force people to be more self-reliant, and government to become less wasteful and more efficient.  Silly stuff like that.

No, I don't want to ADD to the spending problem by spending more on mass transit.  Let the individual cities buy their own mass transit, if they can afford it and want to pay for it through local taxes.  We don't need to build new nuke plants now b/c they would probably not be profitable.  The excess of natural gas in America has done wonders for the price of electricity.  And no, I don't want the government getting involved with installing fiber so people can spend more time streaming media.

[xocotl]

The debt we have will never be repaid based simply on the way our monetary system is set up. We current pay debt with debt so the debt is never extinguished. It's a simple problem with all fiat currency.

Principle < Principle + Interest. Therefore, in the end someone must always default. All debts cannot be paid back.

All money is created through the creation of more debt since money is backed my nothing and is itself debt.

This is not at all true. Fiat currency can be issued without being debt when the issuer spends money. The only case where fiat currency loaned at interest cannot all be paid back is when the issuer never spends money. USD are issued by the federal reserve, which in addition to spending some money itself for staff gives all of its profits to the US government, which most certainly spends money.

[sabertooth3]

I'm not at all worried about the national debt. The last time the US had zero debt was during the presidency of Andrew Jackson, so people saying that the national debt is going to crush us or cause our downfall are, I think, a bit hypersensitive.

Like some have said above- the ideal situation is one where government pays down debt during boom times, and deficit spends in bad times. We're really good at the latter and really bad at the former.

[Tetsuya Hondo]

Given that the Federal Government can borrow money for around 0%, this is the best time in it's history to take on debt. And I would have no problem with it... if it was used towards infrastructure and investing in our future prosperity.

But, we'll piss it away on intell black budgets (aka the fear industry) and defense systems that the Pentagon doesn't want and insuring million dollar beachfront homes in hurricane zones and subsidies to pet industries, etc.

[gillstone]

On the other hand, the cost of retiring debt at this time would be an increase in taxes, which is a policy that may put the economy at serious risk.

Couldn't you also cut spending?  Granted, it will also hurt the economy.  But some would argue that it would be better for the country in the long term.  Force people to be more self-reliant, and government to become less wasteful and more efficient.  Silly stuff like that.

No, I don't want to ADD to the spending problem by spending more on mass transit.  Let the individual cities buy their own mass transit, if they can afford it and want to pay for it through local taxes.  We don't need to build new nuke plants now b/c they would probably not be profitable.  The excess of natural gas in America has done wonders for the price of electricity.  And no, I don't want the government getting involved with installing fiber so people can spend more time streaming media.

On your point...the government never should have given away so much land allow the creation of railroads; stagecoaches eventually got you there just fine.  And what's with the allowance of right-of-way for telegraph and telephone lines? Just lets people write less letters.  And finally, what with our government wasting funds through ARPA since the 70's to fund some nonsense technology that lets computers connect with each other and transmit data?

Spending on infrastructure is good for businesses and good for the economy.  We can cut spending, but before we kill the ability to repair bridges and clean water systems, we need to look at more wasteful sources of pork.  We spend more on national defense than the next 7 nations combined.  The Defense Department has weapon systems that it doesn't want, but Congress is forcing it to fund.  It has two separate companies each building different engines for the F-22 Raptor because Congress is making it do so.  Sub-contracting our wars has resulted in whole new industries where private mercenaries, ostensibly paid by the government through a contract, are getting several times more pay than our soldiers. 

[StashDaddy]

Gillstone, the difference is that railroads, telephone lines, and the internet are nationwide systems.

Yes, I agree--the military has a hell of a lot of pork, too!

[r3dt4rget]

The US borrowing so much money is similar to holding a mortgage. The interest is so low sometimes that it makes more financial sense to borrow the money now than pay down the debt and lose more on inflation.





The US is only spending 6% of it's budget to pay for the interest on all the outstanding debt. That's pretty cheap considering all the debt pays for, and how much we rely on debt to pay the bills each year.

It's not like a family spending money on credit cards. It's more like a family keeping a 30 year mortgage. If the interest rates are low enough it's actually better to pay it off in 30 years rather than sooner because your extra cash flow can be used on investments that return more than the mortgage.

[r3dt4rget]

BTW it's nearly impossible to really make significant cuts in the budget. On both sides of the isle hell will be raised if there is even an attempt to stop inflation adjustments for a particular item. For example instead of a 3-5% increase in the budget for XYZ, the budget remains flat for the next 5 years. No actual cuts, but political parties and the media have a frenzy with it. The US pretty much counts on an expanding economy leading to more taxes and thus revenue.

[StashDaddy]

I'm confused about that 2nd graph...how can $222.8 billion be only 6% of a $1.1T spending bill?  Shouldn't that be 20%?

[mxt0133]

USD are issued by the federal reserve, which in addition to spending some money itself for staff gives all of its profits to the US government, which most certainly spends money.

Incorrect.  The there is nothing federal about the Federal Reserve it is owned by member banks which are private corporations.  They lend money to the US Government at interest and interest earnings are paid via dividends to it's member banks.  The Federal Reserve is a private institution that is chartered to handle monetary policy for the US Government that the Federal Reserve Board oversees, whose members are appointed by the President.* 

With regard to profits or surplus funds from interest payments that the US Government pays back on the interest it pays to borrow money from the Federal reserve.  Once all "necessary expense of the Federal Reserve has been paid for or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock."**  If any funds are left then the surplus funds are transferred to the US Treasury.

Another advantage that the private member banks enjoy on their dividend payments are:

"c) Exemption From Taxation. Federal reserve banks, including the capital stock and surplus therein, and the income derived therefrom shall be exempt from Federal, State, and local taxation, except taxes upon real estate."**

*http://en.wikipedia.org/wiki/Federal_Reserve_Board_of_Governors
**http://www.federalreserve.gov/aboutthefed/section7.htm

[gillstone]

Gillstone, the difference is that railroads, telephone lines, and the internet are nationwide systems.

Yes, I agree--the military has a hell of a lot of pork, too!

So are nuke plants.  The average nuke plant generates of a gigwatt of power that is transmitted across a broad region.  That requires large outlays partially by utilities, but largely by the government.  The reason we have federal investment in state infrastructure is that the cost of some forms of infrastructure can be overwhelming, even with taxes.  There are small towns in Montana who are using wood water pipes from the 1940's.  Heavy taxation in a small town is not an option but nor is cholera.  Replacing 2-inch water lines with 4-inch pipe costs hundreds of thousands, throw in a decent water treatment system and you get into the millions real quick. 

Sure we could just tell them to live with it or not live there, but since we can't grow grain on a skyscraper in Manhattan, we have to help make rural areas liveable enough that farmers and ranchers actually want to be there.

Additionally, federal funding comes with requirements for uniformity so a state highway in Idaho has the same load tolerance as a state highway in Vermont.  Consider the issue in rail transit in Europe where Spain's decision to use a wide-gauge rail in 1845 made rail transit to and from the Iberian Peninsula more difficult until they adopted the international gauge in the 90's.

Of course there are limits to this logic and great value in the experimentation that can happen in local areas; but large scale investment from a federal level, whether through direct funding or block grants through states and participating jurisdictions, does provide a great deal of the "national" infrastructure that makes this country work.

[r3dt4rget]

I'm confused about that 2nd graph...how can $222.8 billion be only 6% of a $1.1T spending bill?  Shouldn't that be 20%?

The last year of data on the graph is from 2013.

[DollarBill]

If the Government didn't have any debt then they wouldn't have any leverage to make the hard decisions. Like which program to cut or needing to raise taxes. They would just have to hand over more money because they could afford it then.

[rocketpj]

Basically issuing debt, especially on the scale that the US has been doing (and Canada to a significantly lesser extent), amounts to a 'short' on the value of your currency.  You are borrowing now on the assumption/hope that later the nominal value of your debt will be less.  Someone who gives you a loan in your currency (buys your bond) is doing the opposite - assuming the value of the loan will stay the same or go up.

The US is in a unique position as the 'reserve currency', meaning that people all over the world issue debt in dollars and complete transactions in dollars.  It also means that the whole planet buys US dollars just to carry on normally - which means a giant subsidy from the globe to the US, every year.  Basically the whole world is shorting the US dollar.

When everybody is on one side of a trade, the profitable place to be is on the other side.  Personally I think the US dollar will go up over the next couple of years (as it has been this year).  A free subsidy for all you Americans anyway.  That will be devastating for much of the world (all the countries who have issued debt in USD).  Which will make the dollar go up even more as global capital 'flees to quality'.  Which will further shatter the global bond market - outside the US.

TLDR - I think you guys will be fine.  You have been issuing bonds around the planet, basically getting free money, with no intention of ever paying it back.  If there is a global bond crisis, all the capital will rush to the US (see 1927-8, the last big sovereign debt crisis).  Equities will skyrocket, the USD will skyrocket.  At some point nobody will have any money to lend you, but by then your dollar will be so strong you won't need to borrow anything anyway.  Maybe retire a couple of aircraft carriers - perhaps it isn't really completely essential to your national interest to maintain dominance of the South Indian Ocean or something.

And then a crash, but I think even the most committed passive indexing mustachian will be able to see the writing on the wall when the stock market graph looks like a hockey stick.  Unfortunately, with that kind of activity you (we all) will end up with deflation - which has the potential to be much more devastating than inflation.

[PathtoFIRE]

Not worried.

Just skimmed the above comments, and wanted to add my own opinions. Simplistically, the US federal government is the sovereign issuer of dollars (and allows banks to also create dollars through loans). Now our system for historical and practical reasons is set up so that in most cases, the federal government issues bonds or other similar instruments to provide itself with some of the dollars that it uses to pay its employees, contractors, buy supplies, etc. But it doesn't NEED to do this, the federal government could (and sometimes does) create money and then spend (this doesn't apply to states or municipalities btw).

There are some benefits to the system as it exists now, in that you create a demand for dollars which helps the country out economically, and also I think of it as a way to recycle dollars, in other words to induce those with dollars to put them to use rather than hoard. But technically, the government could stop collecting any taxes, stop issuing any bonds, and could fund all operations through dollar creation. This MIGHT result in inflation if the influx of dollars ends up competing for otherwise constrained resources, so that there are more buyers (the government is a buyer here) than sellers, so prices increase. Alternatively, it might have NO EFFECT on inflation, such as after a recession when there are idle workers/factories/etc. and the newly created dollars are not necessarily competing with the private sector.

Basically, there is a totality of economic activity that we need and demand, and the government basically wedges itself into what is mostly a public buy non-government market and appropriates, on our behalf and at our direction hopefully, a portion of that economic totality in order to provide the services and products that either can't or shouldn't be provided on the open market. So to me, the real question is not what is the size of the government, or what is the deficit or "national debt" (which are merely accounting ledgers, and not real things in and of themselves). The real question is whether the results of government activity are 1) providing us with what we are demanding through our elective government, and 2) whether this government activity is also productive in laying the groundwork for future economic growth and prosperity. In other words, it's not how much the federal government spends, but what it uses that money for that is the real issue.

[Turkey Leg]

I'm not at all worried about the national debt. The last time the US had zero debt was during the presidency of Andrew Jackson, so people saying that the national debt is going to crush us or cause our downfall are, I think, a bit hypersensitive.

Like some have said above- the ideal situation is one where government pays down debt during boom times, and deficit spends in bad times. We're really good at the latter and really bad at the former.

Factcheck.org says we had a balanced budget and a zero deficit during the Clinton presidency.

[MrFancypants]

I'm not at all worried about the national debt. The last time the US had zero debt was during the presidency of Andrew Jackson, so people saying that the national debt is going to crush us or cause our downfall are, I think, a bit hypersensitive.

Like some have said above- the ideal situation is one where government pays down debt during boom times, and deficit spends in bad times. We're really good at the latter and really bad at the former.

Factcheck.org says we had a balanced budget and a zero deficit during the Clinton presidency.

zero deficit does not mean zero debt

[Turkey Leg]

I'm not at all worried about the national debt. The last time the US had zero debt was during the presidency of Andrew Jackson, so people saying that the national debt is going to crush us or cause our downfall are, I think, a bit hypersensitive.

Like some have said above- the ideal situation is one where government pays down debt during boom times, and deficit spends in bad times. We're really good at the latter and really bad at the former.

Factcheck.org says we had a balanced budget and a zero deficit during the Clinton presidency.

zero deficit does not mean zero debt

I should read more closely! I wonder why they don't report debt in that article?

[xocotl]

USD are issued by the federal reserve, which in addition to spending some money itself for staff gives all of its profits to the US government, which most certainly spends money.

Incorrect.  The there is nothing federal about the Federal Reserve it is owned by member banks which are private corporations.  They lend money to the US Government at interest and interest earnings are paid via dividends to it's member banks.  The Federal Reserve is a private institution that is chartered to handle monetary policy for the US Government that the Federal Reserve Board oversees, whose members are appointed by the President.* 

With regard to profits or surplus funds from interest payments that the US Government pays back on the interest it pays to borrow money from the Federal reserve.  Once all "necessary expense of the Federal Reserve has been paid for or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock."**  If any funds are left then the surplus funds are transferred to the US Treasury.

First of all, I never said that the federal reserve was owned by the government, just that it issues USD and gives profits to the US government which spends money. And you're right, it does pay out dividends before giving the rest of it's profits to the US Treasury. In 2012 for example it paid out $1.6 billion of its profit in dividends to member banks before giving the remaining $88.9 billion to the US Treasury. So yes, it doesn't actually give all of its profits to the US government, only about 98% of its profits.

None of that changes the point I was trying to make though, which is that the claim that all fiat currency is created through debt which is then impossible to pay back is false.

[Pooplips]

USD are issued by the federal reserve, which in addition to spending some money itself for staff gives all of its profits to the US government, which most certainly spends money.

Incorrect.  The there is nothing federal about the Federal Reserve it is owned by member banks which are private corporations.  They lend money to the US Government at interest and interest earnings are paid via dividends to it's member banks.  The Federal Reserve is a private institution that is chartered to handle monetary policy for the US Government that the Federal Reserve Board oversees, whose members are appointed by the President.* 

With regard to profits or surplus funds from interest payments that the US Government pays back on the interest it pays to borrow money from the Federal reserve.  Once all "necessary expense of the Federal Reserve has been paid for or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock."**  If any funds are left then the surplus funds are transferred to the US Treasury.

First of all, I never said that the federal reserve was owned by the government, just that it issues USD and gives profits to the US government which spends money. And you're right, it does pay out dividends before giving the rest of it's profits to the US Treasury. In 2012 for example it paid out $1.6 billion of its profit in dividends to member banks before giving the remaining $88.9 billion to the US Treasury. So yes, it doesn't actually give all of its profits to the US government, only about 98% of its profits.

None of that changes the point I was trying to make though, which is that the claim that all fiat currency is created through debt which is then impossible to pay back is false.

The Fed creates USD and buys our debt, which we pay back plus interest. The Fed then returns to us 98% of our interest payment (profit). The money is still created through debt with the added benefit of devaluing the currency.

[gimp]

With due respect, US government financial systems are complicated enough that to discuss them and not look like a fucking moron, you need quite a lot of education. How many of y'all have it? You're better educated than most on the subject of money but I'm still embarrassed to read this thread. Stop bandying about your ignorance (all of you, on any side of the argument) and get that PhD in economics. (Not that that'll stop the arguments - nobel laureates in economics still disagree on key points, even if they agree on 99% of all other subjects.)

[Pooperman]

USD are issued by the federal reserve, which in addition to spending some money itself for staff gives all of its profits to the US government, which most certainly spends money.

Incorrect.  The there is nothing federal about the Federal Reserve it is owned by member banks which are private corporations.  They lend money to the US Government at interest and interest earnings are paid via dividends to it's member banks.  The Federal Reserve is a private institution that is chartered to handle monetary policy for the US Government that the Federal Reserve Board oversees, whose members are appointed by the President.* 

With regard to profits or surplus funds from interest payments that the US Government pays back on the interest it pays to borrow money from the Federal reserve.  Once all "necessary expense of the Federal Reserve has been paid for or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock."**  If any funds are left then the surplus funds are transferred to the US Treasury.

First of all, I never said that the federal reserve was owned by the government, just that it issues USD and gives profits to the US government which spends money. And you're right, it does pay out dividends before giving the rest of it's profits to the US Treasury. In 2012 for example it paid out $1.6 billion of its profit in dividends to member banks before giving the remaining $88.9 billion to the US Treasury. So yes, it doesn't actually give all of its profits to the US government, only about 98% of its profits.

None of that changes the point I was trying to make though, which is that the claim that all fiat currency is created through debt which is then impossible to pay back is false.

The Fed creates USD and buys our debt, which we pay back plus interest. The Fed then returns to us 98% of our interest payment (profit). The money is still created through debt with the added benefit of devaluing the currency.

To echo the above, it gives a slight bias towards inflation, which is better than deflation... but not as good as noflation as was typical of pre 1900 US currency over the long haul.

[Pooplips]

With due respect, US government financial systems are complicated enough that to discuss them and not look like a fucking moron, you need quite a lot of education. How many of y'all have it? You're better educated than most on the subject of money but I'm still embarrassed to read this thread. Stop bandying about your ignorance (all of you, on any side of the argument) and get that PhD in economics. (Not that that'll stop the arguments - nobel laureates in economics still disagree on key points, even if they agree on 99% of all other subjects.)

Given your excetional wisdom I'm surprised you took the time to post and criticize people try to gain a better understanding of such a complicated system.

[Pooplips]

]

To echo the above, it gives a slight bias towards inflation, which is better than deflation... but not as good as noflation as was typical of pre 1900 US currency over the long haul.

I have noticed a lot of talk about deflation being bad. If you have no debt and are retired why would deflation be bad? Your dollar would stretch farther.

Deflation is only bad if you are loaded with debt.

[xocotl]

USD are issued by the federal reserve, which in addition to spending some money itself for staff gives all of its profits to the US government, which most certainly spends money.

Incorrect.  The there is nothing federal about the Federal Reserve it is owned by member banks which are private corporations.  They lend money to the US Government at interest and interest earnings are paid via dividends to it's member banks.  The Federal Reserve is a private institution that is chartered to handle monetary policy for the US Government that the Federal Reserve Board oversees, whose members are appointed by the President.* 

With regard to profits or surplus funds from interest payments that the US Government pays back on the interest it pays to borrow money from the Federal reserve.  Once all "necessary expense of the Federal Reserve has been paid for or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock."**  If any funds are left then the surplus funds are transferred to the US Treasury.

First of all, I never said that the federal reserve was owned by the government, just that it issues USD and gives profits to the US government which spends money. And you're right, it does pay out dividends before giving the rest of it's profits to the US Treasury. In 2012 for example it paid out $1.6 billion of its profit in dividends to member banks before giving the remaining $88.9 billion to the US Treasury. So yes, it doesn't actually give all of its profits to the US government, only about 98% of its profits.

None of that changes the point I was trying to make though, which is that the claim that all fiat currency is created through debt which is then impossible to pay back is false.

The Fed creates USD and buys our debt, which we pay back plus interest. The Fed then returns to us 98% of our interest payment (profit). The money is still created through debt with the added benefit of devaluing the currency.

Yes, that is one way the Fed uses the USD it creates. That's not the only way though.

With due respect, US government financial systems are complicated enough that to discuss them and not look like a fucking moron, you need quite a lot of education. How many of y'all have it? You're better educated than most on the subject of money but I'm still embarrassed to read this thread. Stop bandying about your ignorance (all of you, on any side of the argument) and get that PhD in economics. (Not that that'll stop the arguments - nobel laureates in economics still disagree on key points, even if they agree on 99% of all other subjects.)

What better way to learn about it than by discussing though? :). It would be a rather boring world if only econ PhDs were allowed to talk about the federal reserve. It's not like anyone's going to be making policy decisions based on things said on this board, so the cost of someone saying something not quite right doesn't seem very high.

[Pooperman]

]

To echo the above, it gives a slight bias towards inflation, which is better than deflation... but not as good as noflation as was typical of pre 1900 US currency over the long haul.

I have noticed a lot of talk about deflation being bad. If you have no debt and are retired why would deflation be bad? Your dollar would stretch farther.

Deflation is only bad if you are loaded with debt.

Deflation is bad because it causes people to hold off on buying things because they will be cheaper later. This causes a drop in demand which leads to a loss of income/jobs and lower prices. It's known as a deflationary spiral. Look at gas. I'm holding off buying more because I know in a week, prices will drop $0.10 or so. I don't drive much, but I drive less to hold off while it drops more. I will resume normal driving once it bottoms out. See what I'm saying though? Slight inflation also provides some advantage to debt holders as in the future the loan will be worth less in terms of actual spending power value than it is today.

[mxt0133]

@xocolt - Thanks for the numbers I was trying to look up or derive that surplus amount. Where did you find it?

[Pooplips]

]

To echo the above, it gives a slight bias towards inflation, which is better than deflation... but not as good as noflation as was typical of pre 1900 US currency over the long haul.

I have noticed a lot of talk about deflation being bad. If you have no debt and are retired why would deflation be bad? Your dollar would stretch farther.

Deflation is only bad if you are loaded with debt.

Deflation is bad because it causes people to hold off on buying things because they will be cheaper later. This causes a drop in demand which leads to a loss of income/jobs and lower prices. It's known as a deflationary spiral. Look at gas. I'm holding off buying more because I know in a week, prices will drop $0.10 or so. I don't drive much, but I drive less to hold off while it drops more. I will resume normal driving once it bottoms out. See what I'm saying though? Slight inflation also provides some advantage to debt holders as in the future the loan will be worth less in terms of actual spending power value than it is today.

I understand your point but I would argue that holding off on purchases would only happen on more luxury items. I would still need to buy gas, tp, food, etc. Even luxury items would be bought because everyone would be trying to call the bottom in prices.

For every positive there is for inflation on debt there is a negative for inflation on savings. The only reason everyone is pro inflation is because so many more people are soaked with debt as opposed to living off savings.

Just a shame incomes aren't inflating at the same rate as prices

[StashDaddy]

Wait a minute.  For someone living off their investments, deflation wouldn't be great for the value of their stock portfolio!  Companies would take in less earnings, and stock values would decrease.

[xocotl]

@xocolt - Thanks for the numbers I was trying to look up or derive that surplus amount. Where did you find it?

The $1.6 billion figure for dividend payouts I found in the text here: http://www.federalreserve.gov/newsevents/press/other/20130110a.htm

I got my numbers for the profit payout to the treasury from the PDF graph linked to on that same page: http://www.federalreserve.gov/newsevents/press/other/other20130110a.pdf

[pzxc]

Deflation is bad because it causes people to hold off on buying things because they will be cheaper later.

Yeah, that's why nobody buys computers, TVs, smartphones, and other consumer electronics.  Because everybody knows they will just be cheaper in a month or six months.  So because of that NOBODY buys them....

[rocketpj]

Deflation is bad because it causes people to hold off on buying things because they will be cheaper later.

Yeah, that's why nobody buys computers, TVs, smartphones, and other consumer electronics.  Because everybody knows they will just be cheaper in a month or six months.  So because of that NOBODY buys them....

They will be cheaper but also BETTER in six months.  If you know that a car or (more importantly) a house will be 20% cheaper next year, will you wait to buy it?  Of course you will.  And if houses are getting cheaper every year, and interest is high (as is often the case in a deflationary environment) NOBODY will be interested in buying a home, and LOTS of us will be underwater on our mortgages and homes - even the mustachians.  And so the price will fall further, because nobody is buying and some people must sell or lose their homes.

Apply that to the whole economy and you have a massive disaster.  Of course we will all buy groceries and tomatoes or whatever, but major parts of our economies will grind to a halt - in a self feeding spiral.  If you think inflation is bad look out for deflation (last seen in 1930-33, not exactly a period of economic joy and cookies).

[StashDaddy]

pzxc, I agree!  Reminds me of a good blog post I read recently:  http://livingstingy.blogspot.com/2014/10/the-threat-of-deflation-youre-kidding.html

[StashDaddy]

$1.013 trillion for core agency budgets for day-to-day operations, with $521 billion for defense and $492 billion for non-defense. That represents about one-third of the federal budget and is essentially a freeze at current levels.

The federal budget was $3.8T in 2013 (http://en.wikipedia.org/wiki/United_States_federal_budget).

So if the real federal budget is close to $4T, why is the "spending" only reported as $1T??

[xocotl]

Deflation is bad because it causes people to hold off on buying things because they will be cheaper later.

Yeah, that's why nobody buys computers, TVs, smartphones, and other consumer electronics.  Because everybody knows they will just be cheaper in a month or six months.  So because of that NOBODY buys them....

... And if houses are getting cheaper every year, and interest is high (as is often the case in a deflationary environment) NOBODY will be interested in buying a home, and LOTS of us will be underwater on our mortgages and homes - even the mustachians. ...

The NOBODY here is a bit of an exaggeration, but I agree with the general sentiment. It definitely has an effect at the margin. I have delayed purchases of electronics because I knew that cheaper, better things would be available in the future (my last desktop purchase happened about a year later than it otherwise would have). Sure, I still buy electronics, but I would buy more of them more quickly if they were getting more expensive over time instead of the other way around. Obviously some people are going to buy houses even if prices in general are declining. The point is that not as many will.

pzxc, I agree!  Reminds me of a good blog post I read recently:  http://livingstingy.blogspot.com/2014/10/the-threat-of-deflation-youre-kidding.html

I totally agree with their claim that deflation isn't likely to happen, although not their reasoning behind it. Deflation isn't going to happen because the Fed is hell bent on it not happening, and they have the necessary tools at their disposal to keep it from happening.

[Pooperman]

Deflation is bad because it causes people to hold off on buying things because they will be cheaper later.

Yeah, that's why nobody buys computers, TVs, smartphones, and other consumer electronics.  Because everybody knows they will just be cheaper in a month or six months.  So because of that NOBODY buys them....

... And if houses are getting cheaper every year, and interest is high (as is often the case in a deflationary environment) NOBODY will be interested in buying a home, and LOTS of us will be underwater on our mortgages and homes - even the mustachians. ...

The NOBODY here is a bit of an exaggeration, but I agree with the general sentiment. It definitely has an effect at the margin. I have delayed purchases of electronics because I knew that cheaper, better things would be available in the future (my last desktop purchase happened about a year later than it otherwise would have). Sure, I still buy electronics, but I would buy more of them more quickly if they were getting more expensive over time instead of the other way around. Obviously some people are going to buy houses even if prices in general are declining. The point is that not as many will.

pzxc, I agree!  Reminds me of a good blog post I read recently:  http://livingstingy.blogspot.com/2014/10/the-threat-of-deflation-youre-kidding.html

I totally agree with their claim that deflation isn't likely to happen, although not their reasoning behind it. Deflation isn't going to happen because the Fed is hell bent on it not happening, and they have the necessary tools at their disposal to keep it from happening.

The way the monetary system is set up favors inflation. As it stands, we're in a period of "deflation" in the sense that we've been far below historical inflation of 3ish percent since the recession.

[StashDaddy]

Interesting projection from CBO.

Publicly Held Debt Set to Skyrocket
Runaway spending on Medicare, Medicaid, and Social Security will drive federal debt to unsustainable levels over the next few decades. Total national debt comprises publicly held debt (the most relevant to credit markets) and debt that one part of the government owes to another, such as the Social Security Trust Fund.

PUBLIC DEBT AS A PERCENTAGE OF GDP

[StashDaddy]

I'm answering my own question here: 

$1.1 T in (discretionary?) "spending" but including MANDATORY federal spending, the ACTUAL gov't spending is close to $4 T.

Two-Thirds of All Federal Spending Was Mandatory in 2013
Social Security, Medicare, and Medicaid, along with other entitlement programs such as food stamps, unemployment, and housing assistance, make up 60 percent of all federal spending. Including interest on the debt, the share of the budget that is mandatory spending is two-thirds.

SHARE OF FEDERAL SPENDING IN 2013

[PathtoFIRE]

Another thought experiment:

So that "national debt" includes several items, including 1/3 that is intradepartmental debt (meaning one dept of the federal gov owes another), and 2/3 that represent outstanding bonds and such to individuals, countries, companies, etc.). Now all of these groups are holding Treasury securities of one type or another. The securities essentially promise a return of principal as well as agree to some amount of interest payment in the meantime. However, these are essentially all held in accounts with the federal government, i.e. accounts on government computers indicating what you've bought, and how much.

What happens when your Treasury security of choice matures? Practically nothing, your account changes from holding securities of a certain value paying interest to hold dollars of a certain value not paying interest. One of those things is considered "debt", and the other is just considered "money", but they are essentially one and the same. So if the federal government decided to stop offering anymore Treasury securities, slowly all of those accounts will convert from interest-paying securities to dollars. Nothing has changed, no money has been gained or lost. If everyone then withdrew their cash balances from the Treasury, all the Treasury would do is note the reduction of dollars in its accounts on its computers, and add those dollars to where ever everyone transferred, banks, credit unions, whatever.

Now I'm not saying there wouldn't be any consequence, as all of these people and entities that were relying on the steady and sure interest payments for their money would be hunting around to invest those dollars in something else, or maybe spending some on consumption. But notice that nowhere in this process does the federal government have to "pay" out, or take massive cuts, and raise massive taxes.

In other words, if we really wanted to retire the "national debt", it could be done in however long the most currently issued and longest Treasury term is. Easy as that.

[mcjuggerton21]

A couple good posts from Cullen Roche on the national debt from a macro economic perspective:

http://pragcap.com/answering-common-questions-i-e-rude-emails-about-the-national-debt


http://pragcap.com/the-us-government-is-not-bankrupt-like-detroit

Excerpt:

"How is the (national) debt going to ever be paid down?

Actually, the debt will NEVER get paid down. Saying that the govt has to “pay back its debt” is like saying that the private sector must pay back its debt.  This is true at the micro level, but false in the aggregate. Debt is someone else’s asset.  So, to “pay back” the national debt is to reduce non-government’s assets by that much. In a credit based monetary system there is no such thing as aggregate debt repayment. In the long-term, debt is pretty much always expanding.  And as our population grows we have, at least to some degree, growing needs for government (more policeman, firefighters, etc). So it’s not surprising that our debt has grown over long periods of time.

For some perspective on this consider the US government’s history with debt.  Since 1776 we have been in debt almost the entirety of our existence. There was a brief debt repayment in 1835, but the US economy slipped into a depression in 1837 and we quickly went back into debt as tax receipts collapsed. So, we have pretty much been in debt for 230+ years."

[projekt]

Interesting projection from CBO.

Publicly Held Debt Set to Skyrocket

You mean from the Heritage Foundation, a Republican think tank.

Here is a projection from the CBO itself (July 2014):

https://www.cbo.gov/publication/45471

[mak1277]

It just means there needs to be ever increasing taxes on the people to service the debt.  And since wages are stagnant or decreasing for the middle class (where most of the tax dollars come from) it means more of the revenue is going towards debt service vs growing the economy.

Bolded passage is a particularly fun bit of misinformation. 

In 2010, the top 1 percent of tax returns included 18.87 percent of all adjusted gross income and 37.38 percent of all federal individual income taxes paid. The top 5 percent earned 33.78 percent of income and paid 59.07 percent of taxes, and the top 10 percent earned 45.17 percent of income and paid 70.62 percent of taxes. (citation - taxfoundation.org)

In 2013, the CBO released information indicating that the top 40% of wage earners paid 106% of all taxes (!!!) (citation - http://www.cnbc.com/id/101264757#.)