Author Topic: United States National Debt concern  (Read 57208 times)

schimt

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United States National Debt concern
« on: June 18, 2014, 10:22:00 AM »
I have recently become relatively well versed in personal finance, but most of my goals rely on the strength of the US dollar, which is outside my control. I was wondering what everyone's thoughts and concerns are on the future strength of the US dollar in relation to the size of our governments national debt situation.

This came up in a conversation I was having, and really didn't know how to respond. I understand that a certain amount of debt and inflation is required for a healthy economy, but when you look at a list of all the countries and their national deficit, we are right on the top of that list which is concerning.

Do any of you increase your international holdings to hedge against these concerns?

I searched real quick and didn't find a specific topic on this, so please direct me there if this thread already exists.
« Last Edit: June 18, 2014, 10:47:52 AM by schimt »

brewer12345

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Re: United States National Debt concern
« Reply #1 on: June 18, 2014, 10:39:55 AM »
A brief search of the web will find you a lot of tinfoil hattery which I think you can safely ignore.  Basically, the US has had debt: GDP at these levels in the past and has managed to bring down debt levels and muddle through.  If the USD does implode, it would almost certainly take the global economy with it, so international diversification probably would not be of much help.  So unless you are ready to stockpile gold, MREs and shotshells I would just get on with life.  I will note that a big part of how the US got out of its debt: GDP pickle last time was in part by "experiencing" an elevated level of inflation for a number of years.  I am not entirely convinced that this will be the way out this time around, but just in case I have emphasized a certain amount of inflation-proofing in my financial profile: 30 year fixed rate mortgage I will not prepay, heavy dollop of energy producer equities, very limited exposure to bonds especially longer maturities.

arebelspy

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Re: United States National Debt concern
« Reply #2 on: June 18, 2014, 10:42:10 AM »
The national debt is in US dollars.  We literally cannot default, as we can print more.  (Imagine if I owed you $100 "arebelspy bucks" that I print from my printer.  Do you think there's any way I couldn't pay that?)

The consequences of that could be .. not good, yes (hurting our ability to borrow more), with the clearest immediate one being rampant inflation.

Hedge against that scenario, and don't worry about our national debt too much.
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waltworks

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Re: United States National Debt concern
« Reply #3 on: June 18, 2014, 10:50:44 AM »
Ignore the paranoid wackos and zerohedge nutters. Debt/gdp has been higher than this before and unless you really think the US (and by extension/contagion, global) economy is ripe for total collapse, just keep investing as you always have.

If you want to worry about something worry about climate change or meteor impact or super-volcanos. Humanity has managed far worse than a little debt many times and millions/billions of amazing, smart people are making the world better every day.

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Re: United States National Debt concern
« Reply #4 on: June 18, 2014, 10:55:33 AM »
I've been concerned about this issue for awhile and the shit will eventually hit the fan. People are currently cleaning up their balance sheets with low interest money. As long as people currently buy our paper (debt) then all is well. But if there is a perceived credit risk than the buyers of our iou's will demand more money for the risk. So our soldiers (paper dollars) will start compounding and costing us more and add to the national debt. How would the USA devalue the debt to make it more manageable when the interest rates start ticking up? What should be done and what will be done may not be in sync when the time comes. Congress is in denial of this massive problem. Below is a classic exchange between the Fed Chairman and Senator Schumer:

http://www.businessinsider.com/schumer-tells-bernanke-get-to-work-2012-7

Eric

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Re: United States National Debt concern
« Reply #5 on: June 18, 2014, 11:52:46 AM »
but when you look at a list of all the countries and their national deficit, we are right on the top of that list which is concerning.

Are you talking about the National Deficit, or the National Debt?  They're two different things.  The Deficit is the amount of shortfall between the expenditures and receipts on a yearly basis.  The Debt is a cumulative total for all of the shortfalls plus interested owed.  You know, that big multi-trillion dollar number.  I'm assuming that you mean National Debt above when you say we're at the top of the list.

Now I'm not dismissing our debt as a non-problem, but it needs to be put in context.  Looking at raw numbers, of course we're at the top, but we also have the largest economy in the world.  If you look at our Debt to GDP ratio, it's not exactly pretty, but we're not at the top of the list.  We're behind Japan, Italy, UK, & France, among others.

And as mentioned above, we have the ability to print our own currency, which gives us much more flexibility than those countries that don't. 

Brian Fellows

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Re: United States National Debt concern
« Reply #6 on: June 18, 2014, 11:55:58 AM »
You have to keep in mind that the debt is not really "oh shit, we need someone to bail us out!" money.

First, last I remember hearing, something like 17% of the debt was owed to social security.  So, money that's literally owed to pay to other US citizens. 

Second, the reason that the US offers bonds is because the math says it's a good deal for them to borrow money at that rate, and the people buying bonds have decided it's good for them to LEND money at that rate.  It's mutually beneficial.

Third, as others above me have said, the US' gigantic GDP means the situation's not as dire as others would have you believe.  GDP/Total Debt is the important ratio.  If the whole rest of the world called in all of their debts at once, you know who the US would be better off than, given their large GDP/debt number?  Germany and Canada.  You don't hear Germans and Canadians worrying about their national debt all the time, do you?

At the end of the day, the reason the rest of the world invests in the USD like you're describing is because it's one of the most stable currencies in the world, because it's controlled and backed by one of the most stable economies. 

schimt

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Re: United States National Debt concern
« Reply #7 on: June 18, 2014, 01:19:46 PM »
Are you talking about the National Deficit, or the National Debt?   
Meant debt which is increased by the deficit year after year.
And as mentioned above, we have the ability to print our own currency, which gives us much more flexibility than those countries that don't.
Yes we can print money, as long as it is responsible and does not cause excessive inflation. Which again makes me think, why do we stay credible to others.

I was not thinking about it in terms of GPD to debt ratio, makes a fair more sence when thinking about it this way.

Ignore the paranoid wackos and zerohedge nutters. Debt/gdp has been higher than this before and unless you really think the US (and by extension/contagion, global) economy is ripe for total collapse, just keep investing as you always have.

I was not planning to change my investing plans, other then possibly adjusting asset allocation, but it helps to be armed with some reasoning not to be so concerned and to explain when questioned.

Thank you for the replies and feedback!

johnhenry

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Re: United States National Debt concern
« Reply #8 on: June 18, 2014, 01:59:49 PM »
Read what MMT has to say about what money is and how it works.  I agree with over 95% of what MMT has to say about what money is (in our post gold-standard world).  Here's a really good working paper on the subject: http://www.levyinstitute.org/pubs/wp_658.pdf  The best place to start in my opinion.

One of these days.... 100 years.... 500 years.... when fiat money has been the norm long enough, citizens and governments will understand it well enough to ditch the broken thinking that comes from forcing our fiscal and monetary policies to conform to the rules when hard-money was in effect.

In short, sovereign governments that issue their own currency are not bound by the same fiscal restraints as individuals, households, or even state governments. Sovereign (currency-issuing) governments don't borrow money, they create money.  The "national debt" is a misnomer.  It is not a really a debt at all.  It is just a number representing the total financial assets created by the government to serve the public's need for currency.  Note: While it is true that interest is paid by the government on treasuries, that is NOT a requirement.  This is a way for the government to encourage saving/investing by determining the rate it pays on savings, not a method for borrowing money.

If you believe that the US or any other government (that issues currency) should a) balance it's budget and/or b) pay down it's "national debt" you should ask yourself why.

If you believe the government really "borrows" money instead of creating it, ask yourself.... from whom does it borrow the money?  After all, who else can make US dollars for the government to "borrow" in the first place.

There are still some hard-money advocates out there, who believe that we should return to the days of hard-money where sovereign governments should "borrow" money from those who already have it instead of creating it.  Those folks propose pegging the value of money to gold or some other physical substance, as it was before 1971ish.  Whether you believe that or not, MMT does a great job of explaining how money really works since governments around the world did abandon the gold standard.

as arebelspy correctly points out: The potential threat in a fiat money system is inflation.  But for a serious student of the alternative (and I know of no other besides some hard-money standard like gold), that risk is not so scary when the inadequacies of that system are understood.  Inherent unfairness, and the very real risk of deflation being the two most common.

Where real-world planning is concerned.  Owning marketable skills and hard assets like real estate are the best hedge against inflation.

Happy reading!  It's exciting stuff!

« Last Edit: June 18, 2014, 02:01:48 PM by johnhenry »

johnhenry

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Re: United States National Debt concern
« Reply #9 on: June 18, 2014, 02:04:30 PM »
The "debt" of the US nor any other sovereign government cannot be "called" at any time.  Whether it is a billion dollars held by a Chinese company or a single dollar in the wallet of a US citizen.  The holder of that US dollar is not able to demand anything in return for it except another dollar!

milesdividendmd

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Re: United States National Debt concern
« Reply #10 on: June 18, 2014, 03:26:28 PM »
John Henry, great stuff. Great article.

It seems that in macroeconomics our intuition is often wrong.

The fresh water guys or "orthodox school" have been wringing their hands about our loose monetary policy, and it's inevitability of leading to inflation for 5 years now.

This is intuitive. And it is also wrong. Where is the inevitable inflation?

The Keynesians on the other hand have been arguing that this intuitive relationship between money supply and inflation does not apply during a liquidity crisis.

It seems the Keynesian model is more predictive, despite being counterintuitive.



jesselivingston

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Re: United States National Debt concern
« Reply #11 on: June 18, 2014, 04:52:57 PM »
I hear often that if interest rates increased, it would crush the government because they could not afford to pay the increased rate on the $17+ trillion debt. But they are not refinancing the whole $17 trillion in one shot. They roll over debt and sell maybe a trillion dollars of treasuries each year. Totally in the dark on how this is a big worry. Seems more like a misconception has been propagated.

gimp

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Re: United States National Debt concern
« Reply #12 on: June 18, 2014, 05:37:27 PM »
People have no concept of money beyond "I get it form a guy I hate, and spend it on things and owe the bank too much" so of course there's a lot of bullshit about national debt. It doesn't help when senators play on the misunderstanding to push one agenda or another - increased spending, decreased spending, cuts, expansions, new programs, fewer programs... ain't nobody understand that shit, especially not secondary, tertiary effects.

Here's what I do know. Various elected and appointed leaders and officials have made a lot of changes, many of them undoing something their predecessors did, over the past many many years. A great many more didn't make changes. Regardless, with a few blips here and there, people did ok. Some people did better and some did worse but we didn't riot in the streets from hunger and topple the government, and we didn't become so entitled and lazy that nobody showed up to work. We did ok.

So, conjecture: We'll probably keep doing ok. I'd like to be one of the folks who does better. I'll do it by controlling what I can and relaxing about what I can't.

johnhenry

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Re: United States National Debt concern
« Reply #13 on: June 19, 2014, 07:20:15 AM »
Q: What is money?
A: Denominated law.

Q: What is tax?
A: Social liability measured in money.  The required contribution of an individual to the group, in accordance with law.

Q: How is money created?
A: It is spent into existence by the group or lent into existence by banks on behalf of the group, in accordance with law.

dragoncar

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Re: United States National Debt concern
« Reply #14 on: June 19, 2014, 10:07:34 AM »
I'm more worried we will elect some hardcore  "eliminate deficit, pay down debt" politicians, which would probably send us into a depression

hodedofome

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Re: United States National Debt concern
« Reply #15 on: June 19, 2014, 02:46:01 PM »
Folks have been worried about our debt for like 50 years. I'm sure it'll all matter one day but when? 20 years? 200 years? Nobody knows. Stay diversified and worry about the things you can control.

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Re: United States National Debt concern
« Reply #16 on: June 23, 2014, 05:27:30 PM »
An analogy I like to use is comparing the US to a household getting a mortgage to use for leveraging the buying of stocks.

The mortgage rate offered the family equivalent to  the going rate on Treasury Bonds. So effectively 0%. With a 0% mortgage on the table, the household should take on as much debt as the bank will allow because they can get a better rate on almost any other investment. Usually, that question of "how much will the bank allow" is based off of the income of the family. If you make more, the bank will loan you more. You could even make a ratio of

how much debt the bank will let you have / how much income you have

That ratio is the same thing as the National Debt / GDP ratio. GDP (actually taxes on GDP) is our nation's income. So back tot the family, generally the bank could also say "oh, if you want a 500k mortgage vs a 300k mortgage, I'll allow it, but that is riskier so I want a higher interest rate." Currently, no other lender is forcing the US in this way. Thus the US has a 0% interest rate it can borrow money at. A family with similar loan terms on the table should take out as much debt as possible and invest elsewhere. The government should do the same thing.

Worst case situation is we ask for more debt and the lenders say "sure but at a higher interest rate" at which point US inflation would likely go up "some." Until that point, the government is doing the right thing in my opinion.

Though I do have a mortgage in my AA to act as an inflation hedge :-)

lithy

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Re: United States National Debt concern
« Reply #17 on: June 23, 2014, 06:14:31 PM »
I'm more worried we will elect some hardcore  "eliminate deficit, pay down debt" politicians, which would probably send us into a depression

If we were to eliminate huge swaths of government functions immediately, maybe this could happen, but if it were measured and calculated we it could be weathered.  Do you think that eliminating or reducing the national debt is a reasonable goal?

Carrying some debt can be positive.  The government's house is no different than your own, except that they can print money to solve their problems.

Of course their printing of money is effectively stealing your money (via inflation) so that should maybe be considered a bad thing.  Or at least I think it should be.

For those who are totally unconcerned, read this as an extreme example of government manipulating currencies.

http://online.wsj.com/news/articles/SB125963843649570793
http://www.bbc.co.uk/news/business-21982652

Before I get jumped on, no I do not think the above are probable or even remotely possible in the United States, but smaller versions of it certainly are.  I think it is good to be wary, although I think there is little that can actually be done.  If there is a shit hit the fan moment, I think you will be unlikely to be completely ready for the specific scenario.  So best to not worry about that particular time, but do what you can as a citizen to help avoid it.

chasesfish

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Re: United States National Debt concern
« Reply #18 on: June 23, 2014, 06:48:00 PM »
Stock and income producing real estate are really the only two assets that will outpace inflation long term.  I'll always remember the  old country guy who told me early on in my career "I just figured ownin four rental houses meant I'd always have four times the cost of livin every month"


Deficit and debt to GDP are big issues that need to be addressed.  Unfortunately it's like cancer and our politicians are refusing to treat it because the chemo is painful.  Both sides lie, it can't be fixed by only cutting expenses or only raising taxes


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dragoncar

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Re: United States National Debt concern
« Reply #19 on: June 23, 2014, 06:48:39 PM »
I'm more worried we will elect some hardcore  "eliminate deficit, pay down debt" politicians, which would probably send us into a depression

If we were to eliminate huge swaths of government functions immediately, maybe this could happen, but if it were measured and calculated we it could be weathered.  Do you think that eliminating or reducing the national debt is a reasonable goal?

Carrying some debt can be positive.  The government's house is no different than your own, except that they can print money to solve their problems.

Of course their printing of money is effectively stealing your money (via inflation) so that should maybe be considered a bad thing.  Or at least I think it should be.

For those who are totally unconcerned, read this as an extreme example of government manipulating currencies.

http://online.wsj.com/news/articles/SB125963843649570793
http://www.bbc.co.uk/news/business-21982652

Before I get jumped on, no I do not think the above are probable or even remotely possible in the United States, but smaller versions of it certainly are.  I think it is good to be wary, although I think there is little that can actually be done.  If there is a shit hit the fan moment, I think you will be unlikely to be completely ready for the specific scenario.  So best to not worry about that particular time, but do what you can as a citizen to help avoid it.

Printing is just taxation of wealth.  I'm not sure if you are "one of those" who refers to all taxation as "stealing".  But no, I don't think eliminating the national debt is a goal that makes any sense at all.  National debt is basically citizens savings.  Who do you think owns all those treasuries?

milesdividendmd

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Re: United States National Debt concern
« Reply #20 on: June 23, 2014, 07:52:32 PM »

Stock and income producing real estate are really the only two assets that will outpace inflation long term.  I'll always remember the  old country guy who told me early on in my career "I just figured ownin four rental houses meant I'd always have four times the cost of livin every month"


Deficit and debt to GDP are big issues that need to be addressed.  Unfortunately it's like cancer and our politicians are refusing to treat it because the chemo is painful.  Both sides lie, it can't be fixed by only cutting expenses or only raising taxes


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This is a bit of a false equivalency isn't it?

One side says it can be fixed by cutting discretionary spending only.  (Republicans)

The other proposed to raise revenue and cut spending. (Democrats)

The biggest issue about the debt right now is that it distracts us from focusing on the real problem at hand: unemployment.





chasesfish

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Re: United States National Debt concern
« Reply #21 on: June 23, 2014, 07:57:24 PM »
Yes, unemployment and very low labor participation rate ads to the problem.  Only 2/3rds of the citizens s are working.

I won't respond to the rest of the post, I believe both sides really suck at addressing the problem and they've both had full control for periods over the last 14 years


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gimp

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Re: United States National Debt concern
« Reply #22 on: June 23, 2014, 08:08:20 PM »
They may be slimeballs, but they're not idiots. They haven't failed at fixing the problem, they've simply never bothered to make any changes past what's needed to get some votes. They figure that it's not really a huge issue, things more or less keep working, and if it starts to not work in several decades then the new folks will get it fixed. They're probably right.

warfreak2

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Re: United States National Debt concern
« Reply #23 on: June 24, 2014, 04:30:58 AM »
This graph should be obligatory in any discussion of US public debt:



Taking out debt is a transfer from a liability to an asset. It does not decrease your net worth. Debt is generally bad either because:
  • The interest rate is higher than the benefit you get from using the money (the US government borrows at extremely low interest rates)
  • You fritter it away on frivolous expenses, rather than investing it in assets (as shown on the graph, this simply isn't what the US government does, at all)

Man, I wish I could borrow as cheaply and invest as effectively as the US government.


They may be slimeballs, but they're not idiots.

Never ascribe to stupidity that which is adequately explained by malice.

:>

Brian Fellows

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Re: United States National Debt concern
« Reply #24 on: June 24, 2014, 07:40:38 AM »
Didn't the US pay off debt completely in the mid-1800s?  Did it just last so little time that it didn't even make a blip on that graph?

dragoncar

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Re: United States National Debt concern
« Reply #25 on: June 24, 2014, 08:13:33 AM »
Didn't the US pay off debt completely in the mid-1800s?  Did it just last so little time that it didn't even make a blip on that graph?

Looks like it's on the graph to me

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Re: United States National Debt concern
« Reply #26 on: June 24, 2014, 09:17:10 AM »
Sorry, should have been more specific than "mid-1800s."  It was in 1835 I believe, and lasted for maybe a year.  I guess the graph is just offset a bit?  Because it was followed by some really bad years, despite 1850 saying it was near zeroed out.

matchewed

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Re: United States National Debt concern
« Reply #27 on: June 24, 2014, 09:22:44 AM »
Sorry, should have been more specific than "mid-1800s."  It was in 1835 I believe, and lasted for maybe a year.  I guess the graph is just offset a bit?  Because it was followed by some really bad years, despite 1850 saying it was near zeroed out.

I think it's the limitation of 40 year snapshots rather than a year to year analysis.

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Re: United States National Debt concern
« Reply #28 on: June 24, 2014, 01:06:28 PM »
  The national debt could prove to be a non event or a black swan event.  It is hard to say completely.  The world economy is entering waters new to the human experience.  Because the USA is the largest economy it reaps some benefits and handicaps. 
  Personally I expect to see a time like in the 70's and 80's with inflation and unemployment.  Neither party is willing to bite the bullet to prevent it.
  End of the day hedge some for inflation.  If the bottom is going to fall out you really cannot prepare for that, just be adaptable.  Either way humanity will survive.

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Re: United States National Debt concern
« Reply #29 on: June 24, 2014, 01:16:36 PM »
Thank you dragoncar and milesdividendmd for some common sense:
Quote
Printing is just taxation of wealth.  I'm not sure if you are "one of those" who refers to all taxation as "stealing".  But no, I don't think eliminating the national debt is a goal that makes any sense at all.  National debt is basically citizens savings.  Who do you think owns all those treasuries?

For those still comparing a sovereign government to a household in terms of financing its expenditures via borrowing.... get with the program :)

It's post-1971.  The gold standard is dead.  Our government CREATES money by spending it into existence and allows it to be LENT into existence by banks.  It does not borrow money!!

If that scares you (hint: it should not), read this thought experiment.  This is what your government/household analogy should really look like if you want it to reflect reality.... Once you've accepted that we create rather than borrow money.

http://bilbo.economicoutlook.net/blog/?p=1075

For those who recognize the reality that sovereign governments employ fiat money, but still propose a return to a hard-money standard:  Set aside your (justified) distrust of government and put on your problem-solving hat.  Put yourself in the shoes of the (government) parents in the analogy above.  How can the government effectively procure resources for the common good when it does not control the method of procurement?  If it is forced to "borrow" from the kids who already have the money rather than create enough for all the kids to spend and save, it is from the beginning beholden to those with money.




Luck better Skill

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Re: United States National Debt concern
« Reply #30 on: June 24, 2014, 01:49:33 PM »
Thank you dragoncar and milesdividendmd for some common sense:
Quote
Printing is just taxation of wealth.  I'm not sure if you are "one of those" who refers to all taxation as "stealing".  But no, I don't think eliminating the national debt is a goal that makes any sense at all.  National debt is basically citizens savings.  Who do you think owns all those treasuries?

For those still comparing a sovereign government to a household in terms of financing its expenditures via borrowing.... get with the program :)

It's post-1971.  The gold standard is dead.  Our government CREATES money by spending it into existence and allows it to be LENT into existence by banks.  It does not borrow money!!

If that scares you (hint: it should not), read this thought experiment.  This is what your government/household analogy should really look like if you want it to reflect reality.... Once you've accepted that we create rather than borrow money.

http://bilbo.economicoutlook.net/blog/?p=1075

For those who recognize the reality that sovereign governments employ fiat money, but still propose a return to a hard-money standard:  Set aside your (justified) distrust of government and put on your problem-solving hat.  Put yourself in the shoes of the (government) parents in the analogy above.  How can the government effectively procure resources for the common good when it does not control the method of procurement?  If it is forced to "borrow" from the kids who already have the money rather than create enough for all the kids to spend and save, it is from the beginning beholden to those with money.

  Money can be gold, business cards, or fiat.  What makes them all work as currency is that the government says it is the only currency it will accept for taxes.  Thus everyone will need some of that currency to pay taxes and will accept them in payment/barter.  That is true to the creation of money/currency.  That part of the analogy is true.
  By the same account we cannot go back to a gold standard cause there is not enough gold in the world to support the needed amount of currency.
  Inflation is created by an increase in currency without an increase in production of goods/services to exchange for.  I have read that when Spain was plundering the new world gold and silver it was suffering inflation at home.  The same is true in modern economies. 
  In the business card example by spending more cards the household creates wealth for the child.  Not true.  It creates barter for the child if they have something to barter for.  To use that example say I decide to pay 1200 cards to have the garden tended and 100 cards in taxes.  It would be possible for the child to work one month and take 11 months off leaving the garden (public sector) in disarray.
 

 

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Re: United States National Debt concern
« Reply #31 on: June 24, 2014, 02:29:58 PM »
Quote
In the business card example by spending more cards the household creates wealth for the child.  Not true.  It creates barter for the child if they have something to barter for.  To use that example say I decide to pay 1200 cards to have the garden tended and 100 cards in taxes.  It would be possible for the child to work one month and take 11 months off leaving the garden (public sector) in disarray.

  Can you explain/re-word this?  I'm not following.

  A government/household/money creating entity choosing to pay 1200 cards for a service to one individual and imposing a tax liability of 100 cards on that same individual would leave that individual with a financial net worth of 1100 cards until he/she spent some.  The decision by the government to pay 1200 cards upfront for a service to be rendered over the course of 12 months seems to be the issue here.  That's the way I see it.  Am I missing something?

Quote
Money can be gold, business cards, or fiat. What makes them all work as currency is that the government says it is the only currency it will accept for taxes.

  Correct.  I would adjust your statement to say that business cards would be a form of fiat currency, not an alternative.  And as you correctly point out, it makes no sense for a government to attempt to create a currency tied to a finite resource such as gold.  It does not take an extensive thought experiment to determine that inevitable fluctuations in the availability of that finite resource vs it's demand would be potentially as volatile as any over-printing or over-taxing done by government.  For example, what happens in the gold-standard world when Russia discovers easily mined gold deposits that represent 3/4 of the total worldwide gold reserves?  What happens when countries on the gold standard need to ship a large quantity of gold from one country to another to settle accounts... and that ship sinks to the darkest depth of the ocean?

  I think I'll stop the argument against hard-currency for now.  Surely there aren't many advocates on this forum that support it.


waltworks

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Re: United States National Debt concern
« Reply #32 on: June 24, 2014, 02:41:32 PM »
Inflation (within reason) is a feature, not a bug. Trust me, you don't want a world where your best financial move (and your neighbor's) is to just sit on hard cold cash waiting for it to gain value. We all starve, wealthy beyond our wildest dreams, in that world.

This is assuming we are talking pure economics and ignoring the problems growth-based consumption can cause for the environment.

-W

John74

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Re: United States National Debt concern
« Reply #33 on: June 24, 2014, 02:52:09 PM »
A brief search of the web will find you a lot of tinfoil hattery which I think you can safely ignore.  Basically, the US has had debt: GDP at these levels in the past and has managed to bring down debt levels and muddle through.  If the USD does implode, it would almost certainly take the global economy with it, so international diversification probably would not be of much help.  So unless you are ready to stockpile gold, MREs and shotshells I would just get on with life.  I will note that a big part of how the US got out of its debt: GDP pickle last time was in part by "experiencing" an elevated level of inflation for a number of years.  I am not entirely convinced that this will be the way out this time around, but just in case I have emphasized a certain amount of inflation-proofing in my financial profile: 30 year fixed rate mortgage I will not prepay, heavy dollop of energy producer equities, very limited exposure to bonds especially longer maturities.

That's how I see it as well.

John74

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Re: United States National Debt concern
« Reply #34 on: June 24, 2014, 02:56:37 PM »
For example, what happens in the gold-standard world when Russia discovers easily mined gold deposits that represent 3/4 of the total worldwide gold reserves? 


That is pretty well documented. When the Spanish found huge gold reserves in the new world, it created inflation back in Europe (as would be expected).

For me there is no going back to a gold standard. But gold remains a good hedge against certain currency disasters (see Argentina right now).
« Last Edit: June 24, 2014, 03:35:30 PM by John74 »

johnhenry

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Re: United States National Debt concern
« Reply #35 on: June 24, 2014, 03:22:13 PM »
Quote
Inflation (within reason) is a feature, not a bug. Trust me, you don't want a world where your best financial move (and your neighbor's) is to just sit on hard cold cash waiting for it to gain value. We all starve, wealthy beyond our wildest dreams, in that world.

Exactly!! And that's the very likely scenario in a hard-currency world where the population continues to increase, but gold (or any other finite resource) cannot be obtained from the earth at the same rate.  Any man with gold could indeed sit on it and watch it gain value.

I'll take my chances with a money supply that can be expanded (and contracted, if necessary) by a government of elected officials.

nawhite

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Re: United States National Debt concern
« Reply #36 on: June 24, 2014, 03:53:21 PM »
But gold remains a good hedge against certain currency disasters (see Argentina right now).

I have to say, a US fixed rate mortgage is a MUCH better hedge against runaway inflation. My house acts as my AA inflation hedge, gold is just a shiny metal that doesn't do anything.

John74

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Re: United States National Debt concern
« Reply #37 on: June 24, 2014, 04:30:33 PM »
Maybe. I think that a fixed rate mortgage is a good hedge against inflation. Against runaway inflation? not so much. Your upside is limited. Best case scenario, you get a house for next to nothing. And now you are stuck in a country with a runaway currency and probably a disastrous economy.

waltworks

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Re: United States National Debt concern
« Reply #38 on: June 24, 2014, 06:27:41 PM »
As others have pointed out, if that were to happen in the US, the world world would be pretty much F'd, so your only hedge is fertile women (or men, tastes vary) and penicillin and twinkies.

Investing based on that kind of worst-case scenario is pointless.

-W

Maybe. I think that a fixed rate mortgage is a good hedge against inflation. Against runaway inflation? not so much. Your upside is limited. Best case scenario, you get a house for next to nothing. And now you are stuck in a country with a runaway currency and probably a disastrous economy.

TomTX

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Re: United States National Debt concern
« Reply #39 on: June 24, 2014, 08:17:15 PM »
But gold remains a good hedge against certain currency disasters (see Argentina right now).

I have to say, a US fixed rate mortgage is a MUCH better hedge against runaway inflation. My house acts as my AA inflation hedge, gold is just a shiny metal that doesn't do anything.

I've started regretting not getting a larger mortgage when I refinanced.

Luck better Skill

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Re: United States National Debt concern
« Reply #40 on: June 24, 2014, 09:32:03 PM »
Quote
In the business card example by spending more cards the household creates wealth for the child.  Not true.  It creates barter for the child if they have something to barter for.  To use that example say I decide to pay 1200 cards to have the garden tended and 100 cards in taxes.  It would be possible for the child to work one month and take 11 months off leaving the garden (public sector) in disarray.

  Can you explain/re-word this?  I'm not following.

  A government/household/money creating entity choosing to pay 1200 cards for a service to one individual and imposing a tax liability of 100 cards on that same individual would leave that individual with a financial net worth of 1100 cards until he/she spent some.  The decision by the government to pay 1200 cards upfront for a service to be rendered over the course of 12 months seems to be the issue here.  That's the way I see it.  Am I missing something?
  I was saying pay 1200 a month to have the garden work done.
  Printing/spending money alone does not create wealth.  No sane economist believes a government can print/create an unlimited amount of money without destructive effects on the economy.
  To rephrase:  If the government printed 300 trillion dollars, or electronic zeros to make every household in the USA a millionaire it would not create wealth, but chaos.
  Some national debt is not a problem.  The debate is at what point, be that a $ amount or % of GDP does it become a problem.  When people believe the government is going to print money to a point of hyper-inflation it creates a run on the bank effect on the currency.
  Does that explain better?
 

Luck better Skill

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Re: United States National Debt concern
« Reply #41 on: June 24, 2014, 09:38:47 PM »
Quote
Money can be gold, business cards, or fiat. What makes them all work as currency is that the government says it is the only currency it will accept for taxes.

  Correct.  I would adjust your statement to say that business cards would be a form of fiat currency, not an alternative.  And as you correctly point out, it makes no sense for a government to attempt to create a currency tied to a finite resource such as gold.  It does not take an extensive thought experiment to determine that inevitable fluctuations in the availability of that finite resource vs it's demand would be potentially as volatile as any over-printing or over-taxing done by government.  For example, what happens in the gold-standard world when Russia discovers easily mined gold deposits that represent 3/4 of the total worldwide gold reserves?  What happens when countries on the gold standard need to ship a large quantity of gold from one country to another to settle accounts... and that ship sinks to the darkest depth of the ocean?

  I think I'll stop the argument against hard-currency for now.  Surely there aren't many advocates on this forum that support it.

  I agree.  Hard currency sounds like a quaint solution but really creates scary problems. 
  However in black swan not so sane move I could see OPEC countries trying to create an oil backed currency.  It would create the illusion they have a very desirable currency cause everyone uses oil.  That would monkey wrench the world economy.

brewer12345

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Re: United States National Debt concern
« Reply #42 on: June 24, 2014, 10:08:19 PM »
Yeah, as soon as I read that post I was thinking you would be better off with a stockpile of shotshells, MREs and whiskey.

As others have pointed out, if that were to happen in the US, the world world would be pretty much F'd, so your only hedge is fertile women (or men, tastes vary) and penicillin and twinkies.

Investing based on that kind of worst-case scenario is pointless.

-W

Maybe. I think that a fixed rate mortgage is a good hedge against inflation. Against runaway inflation? not so much. Your upside is limited. Best case scenario, you get a house for next to nothing. And now you are stuck in a country with a runaway currency and probably a disastrous economy.

John74

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Re: United States National Debt concern
« Reply #43 on: June 25, 2014, 01:55:19 AM »
Yeah, as soon as I read that post I was thinking you would be better off with a stockpile of shotshells, MREs and whiskey.



Yeah, it did sound as if it came straight from a tin foil hattery. That was not my intention (and I was not the one who brought up the topic of runaway inflation). As I mentioned above, I agree with you, i.e. I think we will muddle through the national debt problem.
« Last Edit: June 25, 2014, 02:06:05 AM by John74 »

socraticmethod

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Re: United States National Debt concern
« Reply #44 on: June 28, 2014, 02:49:07 AM »
This thread is one to bookmark and revisit in 5 or 10 years. Some folks here are in for a rude awakening. In economics there is no free lunch, not even for governments.

Michael792

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Re: United States National Debt concern
« Reply #45 on: June 28, 2014, 03:10:33 AM »
Most of the debt is in forms that are owned by people within the US.

socraticmethod

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Re: United States National Debt concern
« Reply #46 on: June 28, 2014, 03:37:07 AM »
Most of the debt is in forms that are owned by people within the US.

Here you can see a pie chart showing the break down of ownership. Regardless of who is holding the bonds they are still a liability on the .gov balance sheet.

http://www.factcheck.org/2013/11/who-holds-our-debt/

waltworks

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Re: United States National Debt concern
« Reply #47 on: June 28, 2014, 08:06:36 AM »
Yes, we're all shaking in our boots. MREs on you in 10 years, or will we still be on the brink of disaster, just like 5 years ago?

-W

This thread is one to bookmark and revisit in 5 or 10 years. Some folks here are in for a rude awakening. In economics there is no free lunch, not even for governments.

brewer12345

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Re: United States National Debt concern
« Reply #48 on: June 28, 2014, 08:11:57 AM »
This thread is one to bookmark and revisit in 5 or 10 years. Some folks here are in for a rude awakening. In economics there is no free lunch, not even for governments.

Aside from stocking up on tinfoil and moving into a bunker, what exactly are you doing to prepare for your chosen doom scenario?

socraticmethod

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Re: United States National Debt concern
« Reply #49 on: June 28, 2014, 08:21:11 AM »
This thread is one to bookmark and revisit in 5 or 10 years. Some folks here are in for a rude awakening. In economics there is no free lunch, not even for governments.

Aside from stocking up on tinfoil and moving into a bunker, what exactly are you doing to prepare for your chosen doom scenario?

That isn't relevant to the topic of this thread. If some of the comments made here were correct then there would be no reason for government to tax or borrow at all. Just run the printing presses to fund their activities not to mention the trillions in unfunded liabilities. I guess Zimbabwe, Argentina, and the Weimar Republic just didn't know how to do it right.