Everyone says US can't raise debt ceiling forever. Why?

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Even if it can always be repaid, it is still risky because what it is repaid with may be worthless.

But that's the beauty of it -- the debt is denominated in the same stuff [$], no matter how much that stuff's worth

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[CIYAM]

It seems people have forgotten what ended the cold war (Russia going broke).

Strangely enough although Russia could print as many ruples as they wanted it didn't help them (as no-one ended up wanting them).

Although the US dollar is far more important it can (and likely will) suffer the same problem. China has already started talking about a "post-US" future (and they own most of the US debt).

The US shouldn't forget how it defeated Russia.

[Hawker]

It seems people have forgotten what ended the cold war (Russia going broke).

Strangely enough although Russia could print as many ruples as they wanted it didn't help them (as no-one ended up wanting them).

Although the US dollar is far more important it can (and likely will) suffer the same problem. China has already started talking about a "post-US" future (and they own most of the US debt).

The US shouldn't forget how it defeated Russia.

Interesting point.  And a lot of people agree with you: http://marginalrevolution.com/marginalrevolution/2007/06/why_did_the_sov.html

Good points all except a small correction.  Most US debt is owned by US citizens.  China has some but its not the big player.  If you want to see who loses should US default, look at pensioners.

[CIYAM]

Good points all except a small correction.  Most US debt is owned by US citizens.  China has some but its not the big player.  If you want to see who loses should US default, look at pensioners.

Interesting - do you have a link to the figures?

I guess also that pensioners are not the most feared people by any government (including their own).

[notme]

Good points all except a small correction.  Most US debt is owned by US citizens.  China has some but its not the big player.  If you want to see who loses should US default, look at pensioners.

Interesting - do you have a link to the figures?

I guess also that pensioners are not the most feared people by any government (including their own).

Pensioners make up probably 70% of the voting population in the US.  Democratically elected politicians fear nothing more than losing the support of their voters.

[mootinator]

Bitcoin co-exists with dollars the way sterling does.  Bitcoin is great for international transfers and for things you want kept private.  I don't accept its a wealth storage vehicle - I wouldn't expect someone saving for a pension to invest in bitcoin as the fluctuations would kill them. 

Then they're doing it wrong. A reasonable pension strategy is toss differnt percentages of your money at various things and forget about them for 40 years. Why on earth would anyone doing that care about fluctuations?

[notme]

they are going to be screwed no matter what system we have.

And if irresponsibility crashes the current system, they will be the ones who die.

The current system cannot crash.  Worst case, you might have a political madness that causes lenders to charge your government more.  And really, I don't think the system is doing much to keep the poor alive.  

On that, I tend to agree.  I don't see hyperinflation of the USD as a real possibility in the next decade in the absence of some sort of institutionalized debt forgiveness (yeah right).  I was objecting to your statement that if such a crash did occur,

life would go on just fine

If you said, "Life would go on just fine for me", I could agree.

[CIYAM]

Pensioners make up probably 70% of the voting population in the US.  Democratically elected politicians fear nothing more than losing the support of their voters.

True - but when party A and party B offer the exact same thing (debasement of the currency) what choice do they have?

(am pretty sure that the pensioners are not the type to vote for party C)

[Rival]

If printing money does not cause inflation, then why does the government bother with budgets at all? They could just print up money and spend it on whatever they like. They could simply print up 10 million dollars for every citizen, hand it out, and then we could all retire and live in luxury. The truth is, printing money is a balancing act between goods and services produced and the amount of currency available for circulation. Go to little or too much and things get jacked up really fast.

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Q. If printing money does not cause inflation, then why does the government bother with budgets at all?
A. printing money is a balancing act between goods and services produced and the amount of currency available for circulation.

Self-contained

[Peter Lambert]

Ignore the debt ceiling which is just a charade the government puts up and focus instead on the debt. All the debt is earning interest. As the total amount of debt rises, eventually the interest on the debt will cost more than the country takes in in revenues from taxes. At that point the only way for the government to pay that interest is by borrowing more money (also known as running a ponzi scheme) or by printing more dollars. Printing more dollars results in inflation. As the rate of inflation goes up, people demand higher interest rates to offer more debt, and so a vicious cycle begins where you need to print even more money and you enter hyperinflation. One thing that could shake up this fiasco is if people start to demand debt denominated in something other than USD. Then the government would not have the option of just printing more money to pay back the debt.

The debt ceiling is like a guy with a credit card saying "I am not going to go more than $1000 dollars in debt", then when he hits that and still wants to buy stuff he says "I am not going to go more than $2000 in debt", he can keep going on up as long as he wants until he gets to his credit card limit set by the card issuer. Then it doesn't matter where he puts his own limit, he could say "I am not going to be more than $8000 in debt", but if his limit is at $2500, he will never be able to get to his debt ceiling, he will have to stop at $2500.

Same fallacy again in the same thread  

Its nothing like a credit card limit.  Owners of credit cards don't own money printing presses.  The government does.  If it all goes wrong, they can print more money.  That's why its a safe investment - it can never fail to be repaid.

Did you even read what I said? The credit card limit is not the debt ceiling, it is what lenders are willing to lend to the country. As the debt goes up it will be harder and harder to find people willing to lend money, just like as you max out your credit card it becomes harder and harder to find somebody to give you another credit card. What happens when people are no longer willing to buy US debt denominated in USD since it is inflating, and they will only buy US debt denominated in other currencies (whether it be gold, euro, bitcoin, whatever)? When people stop buying USD denominated US debt, then the US will no longer have a printing press with which to pay back the debts, and they will have to operate in the same world as the guy with the credit card. Would you give a guy a loan if his income is less than the minimum payments on his current loans?

[Rival]

Ignore the debt ceiling which is just a charade the government puts up and focus instead on the debt. All the debt is earning interest. As the total amount of debt rises, eventually the interest on the debt will cost more than the country takes in in revenues from taxes. At that point the only way for the government to pay that interest is by borrowing more money (also known as running a ponzi scheme) or by printing more dollars. Printing more dollars results in inflation. As the rate of inflation goes up, people demand higher interest rates to offer more debt, and so a vicious cycle begins where you need to print even more money and you enter hyperinflation. One thing that could shake up this fiasco is if people start to demand debt denominated in something other than USD. Then the government would not have the option of just printing more money to pay back the debt.

The debt ceiling is like a guy with a credit card saying "I am not going to go more than $1000 dollars in debt", then when he hits that and still wants to buy stuff he says "I am not going to go more than $2000 in debt", he can keep going on up as long as he wants until he gets to his credit card limit set by the card issuer. Then it doesn't matter where he puts his own limit, he could say "I am not going to be more than $8000 in debt", but if his limit is at $2500, he will never be able to get to his debt ceiling, he will have to stop at $2500.

Same fallacy again in the same thread  

Its nothing like a credit card limit.  Owners of credit cards don't own money printing presses.  The government does.  If it all goes wrong, they can print more money.  That's why its a safe investment - it can never fail to be repaid.

Did you even read what I said? The credit card limit is not the debt ceiling, it is what lenders are willing to lend to the country. As the debt goes up it will be harder and harder to find people willing to lend money, just like as you max out your credit card it becomes harder and harder to find somebody to give you another credit card. What happens when people are no longer willing to buy US debt denominated in USD since it is inflating, and they will only buy US debt denominated in other currencies (whether it be gold, euro, bitcoin, whatever)? When people stop buying USD denominated US debt, then the US will no longer have a printing press with which to pay back the debts, and they will have to operate in the same world as the guy with the credit card. Would you give a guy a loan if his income is less than the minimum payments on his current loans?

What happens is, the Fed just buys all of the debt. There is no practical reason they cannot just buy it all if no one else will take it. Although, what that does to the exchange rate and the balance of trade is anyone's guess.

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... What happens when people are no longer willing to buy US debt denominated in USD since it is inflating, and they will only buy US debt denominated in other currencies (whether it be gold, euro, bitcoin, whatever)?...

If the people's faith in USD is so low that they will buy US debt denominated in foreign currencies but wouldn't buy same debt denominated in dollars, two things become apparent:

1.  The people are confused & shouldn't be buying US debt period, no matter what it happens to be denominated in, since U.S. dollars are backed by the full faith and credit of the U.S. Government.  Don't throw your money away, no matter how the deadbeat promises to repay you.

2.  If "full faith and credit of the U.S. Government" is worthless, debt ceiling is the last thing we should worry about

[Carlton Banks]

Ok, quit the arguing. It's a complex picture, all you guys are proving is that for every single issue counter-point, there's a corresponding single issue counter-point.

You can't explain the effects of the USD on the world economy in such tiny bites of argument, you all end up trolling each other and yourselves simultaneously. The dollar has the biggest and most multi faceted effect on the world economy of all the currencies out there, and that's the heart of the matter really, as the nature of this relationship that all other currencies and economies and commodity prices and numerous forms of worldwide debt vehicles have with this uber-currency is now beginning slowly to change, Bitcoin being a highly potent but as yet not at all fulfilled alternative to the present situation. You're all trying to argue about a compex relationship that's in a state of flux, or about points of principle in isolation of the whole picture. Get a grip.

[johnyj]

To give you an illustration, imagine there's only one dollar and only one kitteh to spend that dollar on.  The kitteh is worth a dollar.  If another kitteh appears (our kitteh was preggers), each kitteh is now only worth *half* a dollar.  Deflation.  Print another dollar?  Each kitteh is now worth a dollar again.

This is a difficult-to-discover cheat. The price has "stickiness". If it used to be one dollar per cat, then if there are two cats now and still one dollar, each cat still worth one dollar, and it is possible that they are not for sell so there is no need for extra dollars. Printing one dollar at mean time equal to stealing from the added production

The real question is: Are people really so stupid that without enough dollar they can't do the trade? It seems the major economy books think so   (I'm printing dollar to buy your goods because without my printed dollar you can't trade!!!)

[johnyj]

Back to this picture, notice that 30.4% of the government debt belong to US individuals and institutions, but since majority of the wealth belong to 1% of the people in US, you can guess who owns all those debts



Anyway, if FED can do debt forgiven for the bonds they bought with printed money, I don't see there is any problem. But, if FED indeed like many conspiracy said is a private organization, then things will be complicated

[lightfoot]

Classic fallacy comparing a person with a credit card to a government.  Of course you could live on a credit card forever if you owned a money printing press.  The best thing is that once you are really seriously in debt, the lenders are screwed.  They are more scared of you defaulting that you are of borrowing.  So they reduce your interest rate.

Bernanke says "appearantly, there is no inflation". He appearantly knows that more money leads to inflation, can't see it, and then shrugs and takes advantage of the situation.

The government is really like a person with a credit card, but with these differences: The governement lives forever, so the lenders don't  worry about that. Second, like a bully, it can just take whatever it wants from the constituents in taxes. Third, it can print new money and lend out non-existing money, which is analog to a bar owner diluting the whisky.

The reason there is "no inflation" is because an exceptional amount of virtual/fake/real/whatever you call it *money* was destroyed in the last downturn. Especially in house values, the money that people were borrowing against simply ceased to exist.

If it had been paper money that was burned, there would at least have been value created in the form of BTUs of heat, but there wasn't even that.

Thus printing a "trillion" dollars or so simply replaced the M3 type "money" that "vanished".

Kind of weird, but it is what it is, and it is why gold is where it is and inflation is where it is.

C

[sidhujag]

Ok, quit the arguing. It's a complex picture, all you guys are proving is that for every single issue counter-point, there's a corresponding single issue counter-point.

You can't explain the effects of the USD on the world economy in such tiny bites of argument, you all end up trolling each other and yourselves simultaneously. The dollar has the biggest and most multi faceted effect on the world economy of all the currencies out there, and that's the heart of the matter really, as the nature of this relationship that all other currencies and economies and commodity prices and numerous forms of worldwide debt vehicles have with this uber-currency is now beginning slowly to change, Bitcoin being a highly potent but as yet not at all fulfilled alternative to the present situation. You're all trying to argue about a compex relationship that's in a state of flux, or about points of principle in isolation of the whole picture. Get a grip.

Exactly and it evolved to what it is... and starting with Plaza Accord in 1985 this was really put in motion. Now that the cycle is over US will try to become an export driven country again driving confidence back into USD and thus creating more issues for everyone but itself.

In the end we dont know if this will work as China has caught on by now and is starting to forge ahead with skipping USD, which the US must have an issue with. Bitcoin is big in China nd the fact that the gov't couldn't get into the silk road wallet means its a very bullish story indeed for btc. I bet that SR was the ebst thing that ever hapend to BTC because it showed confidence in nations to see that the gov't with all its power can't break it. China's next move will be important.

[sidhujag]

Classic fallacy comparing a person with a credit card to a government.  Of course you could live on a credit card forever if you owned a money printing press.  The best thing is that once you are really seriously in debt, the lenders are screwed.  They are more scared of you defaulting that you are of borrowing.  So they reduce your interest rate.

Bernanke says "appearantly, there is no inflation". He appearantly knows that more money leads to inflation, can't see it, and then shrugs and takes advantage of the situation.

The government is really like a person with a credit card, but with these differences: The governement lives forever, so the lenders don't  worry about that. Second, like a bully, it can just take whatever it wants from the constituents in taxes. Third, it can print new money and lend out non-existing money, which is analog to a bar owner diluting the whisky.

The reason there is "no inflation" is because an exceptional amount of virtual/fake/real/whatever you call it *money* was destroyed in the last downturn. Especially in house values, the money that people were borrowing against simply ceased to exist.

If it had been paper money that was burned, there would at least have been value created in the form of BTUs of heat, but there wasn't even that.

Thus printing a "trillion" dollars or so simply replaced the M3 type "money" that "vanished".

Kind of weird, but it is what it is, and it is why gold is where it is and inflation is where it is.

C

Umm no inflation is where it is because of 2 things. THe model for calculating CPI is skewed to not show the real picture. The second and more important thing is that the USD is the base currency for trade around the world, and if you do a inflation index for the world from now and before you will see a different picture. Since it is being used everywhere the affects of inflation take alot longer to hit, but also take alot longer to unwind aswell if you were not to default. More and more likely the default scnario is playing out so play accordingly. Next few years we should start seeing bullish news for USD and it will rise, but after the cycle completes (3-5 years minimum) we should see a new downturn for USD and they probabyl will abolish it before taking a hit.

[crumbs]

To give you an illustration, imagine there's only one dollar and only one kitteh to spend that dollar on.  The kitteh is worth a dollar.  If another kitteh appears (our kitteh was preggers), each kitteh is now only worth *half* a dollar.  Deflation.  Print another dollar?  Each kitteh is now worth a dollar again.

This is a difficult-to-discover cheat. The price has "stickiness". If it used to be one dollar per cat, then if there are two cats now and still one dollar, each cat still worth one dollar, and it is possible that they are not for sell so there is no need for extra dollars. Printing one dollar at mean time equal to stealing from the added production

The real question is: Are people really so stupid that without enough dollar they can't do the trade? It seems the major economy books think so   (I'm printing dollar to buy your goods because without my printed dollar you can't trade!!!)

People's stupidity is absolutely irrelevant.  If a dollar which bought one kitteh yesterday is not enough to buy one today, that's price inflation.  If it can buy moar than one kitteh, that's price deflation.  Nothing tricky here.

You may be thinking about monetary inflation, which is defined as "We just printed moar money!"  In that case, printing more money does result in monetary inflation -- by definition.

Too many people use the word inflation without thinking about what, exactly, they're trying to say.  Monetary inflation may result in price inflation, but not always.  For instance, if our kitteh is slutting around, we can print money with impunity without causing inflation.  The nice people in charge of the money factories pay close attention to our kitteh, and know just what to expect when she's on the prowl