US National Debt / Deficit - How does it end?

[jjacob]

The common misconception is to think that credit is somehow limited to certain amounts.
The reality is that it's only constrained by the borrower's creditworthiness. So if there's a creditworthy company willing to borrow $1 dollar, it will be able to do it, no matter how large is the government debt.

While credit might not be limited to certain amounts, the price of credit is impacted.
So large government debt results in the price of debt to the private sector increasing.
This is called 'crowding-out' effect in economics.

[RoadTrain]

The common misconception is to think that credit is somehow limited to certain amounts.
The reality is that it's only constrained by the borrower's creditworthiness. So if there's a creditworthy company willing to borrow $1 dollar, it will be able to do it, no matter how large is the government debt.

While credit might not be limited to certain amounts, the price of credit is impacted.
So large government debt results in the price of debt to the private sector increasing.
This is called 'crowding-out' effect in economics.

Like we don't have Fed out there but only free market.
The price of bank credit, apart from risk perceptions, only depends on 'funding' costs, which are guided by Fed, which sets interest rate targets.
It doesn't matter how large government debt is when federal funds rate hovers near zero.

However I should note that government deficits can influence the economy in the bad way, like this:

The government must not "over-fund" the desire to net save, i.e deficit spend so that effective demand exceeds the potential for the economy to expand to meet it. This happens at some point when the economy approaches full capacity utilization and full employment, if the government continues deficit spending. Should that happen, demand side inflationary pressure will arise – a general continuous economy wide price level increase.

[MightyStorm]

I have a lot of my own thoughts and fears about where the US national debt is leading our nation and the world. I feel like I’ve done enough of my own studying to have a good understanding of what the likely outcome(s) are but want to get some perspective from other well informed individuals here on bitcointalk.

My conclusion is that the US debt is already so out of control that it will just keep rising until we either default on our loans or we enter a period of rapid inflation as we try to pull a Weimar Republic and print our way out of debt. Maybe someone will contradict this conclusion but I think that the majority will agree that the US financial collapse is beyond preventing at this point even if it is for different reasons than my own.

The real area of interest to me is how does this end? I’ve been reading the book “Patriots” which I believe is the darkest possible scenario for a post economic collapse US. The collapse I am more inclined to believe in is that we’ll face hyperinflation for a short period until the deficit is effectively paid off and during this time our economy will become a basket case. Critical services (electricity, police, firemen, most businesses), communication (Internet, TV, newspapers), and our government will continue to function throughout. The chaos will be at its worst for a matter of months. The worst hit will be the poor who depend on services that may fail such as welfare, food stamps, and other entitlements. There will be regional violence but nothing large scale or long lasting. The loss of life due to things relating to the collapse will number in the thousands or maybe tens of thousands but certainly not millions.

What is everyone else’s view on just how this could play out? Or perhaps are there any who believe this sort of collapse will just never happen?

Situation with US national debt is very strange. It's difficult to understand for me how it's possible.

[itsAj]

A government debt is different than a personal debt.  Government spending doesnt just burn away, even if its spent on what somebody may "waste" its spent on jobs and contracts and pushes money into the economy.  Look at the postal service, a collosal waste and cannot keep up with UPS or FedEx, but where does all that money go?

Additionally debt should be in relationship to the GDP output of the country.  If both are increasing at the same rate, then we remain the same.  The actual dollar value increases, along with inflation, so sticker shock always seem high.

Its an interesting subject with much to learn about and of course opinions

The most important thing that "u.s. in debt, omg we gonna default" folks don't understand is accounting.
Debt issued by someone is an asset to someone else. When debt is issued, say, by a private sector corporation, it becomes an asset to someone in the private sector, but a liability to the corporation. Net assets of private sector don't change.
But when debt is issued by US Treasury it becomes asset to the private sector (both domestic and foreign) but a liability to the public sector. So issuing debt is actually adding net financial assets to the private sector, creating financial wealth.

This way budget deficits tend to improve private sector's financial health. Of course it's not a magic bullet, but people should really stop being scared of public debt.
There's no anything special, it's just an instrument to manage the economy.

One thing that you are missing is the fact that in order to buy this asset, someone in the private sector must exchange cash (also an asset) for the treasury bond. There would be no change in the total amount of assets in the private sector. Also the private sector owning a lot of government bonds means they are not able to invest as much money in their own business that will likely be more productive.

You just proved his point that you don't understand accounting or financial markets

Who do you think are buying these Treasuries?  Some corporation trying to decide on opening a new factory or putting the money into bonds instead?  LOL

If a private citizen buys $1 in government treasuries then they will have $1 less they can invest in a loan to a company that would potentially be borrowing money to build a new factory. This would make the cost of credit more expensive, and when the $1 is a trillion dollars the cost of credit goes up a lot more, potentially making an investment not possible for the factory.

The common misconception is to think that credit is somehow limited to certain amounts.
The reality is that it's only constrained by the borrower's creditworthiness. So if there's a creditworthy company willing to borrow $1 dollar, it will be able to do it, no matter how large is the government debt.

Another misconception is to think that government debt is somehow removes money from the financial system. First of all, what do you think happens to money raised by debt issuance? It goes back to the economy by government spending. The second point is that government debt is quasi-money (an almost perfect collateral) by being an integral part of Fed's payment system.

If the private sector holds a lot of government bonds, it's for a reason. And the reason is that the private sector is willing to save. And you can't just go and stop issuing debt hoping it will help restart the investment cycle. The economic policy must be a lot smarter than that.

Only a percentage of the money that the government spends goes back into the economy (less then 100%), so the net effect of government borrowing is that money is taken from the economy.

The price of credit is affected as well as the availability of credit (lenders needing borrowers to be more creditworthy). If the government is issuing more debt (increasing supply) while the demand is staying the same, then the interest rates will rise, which means the interest rates (costs) for other borrowers will rise as well, essentially making it more difficult to borrow money (it may be profitable to borrow @ 4% but not at 5%, plus 5% costs more money then 4%).

[snappa4ever]

The common misconception is to think that credit is somehow limited to certain amounts.
The reality is that it's only constrained by the borrower's creditworthiness. So if there's a creditworthy company willing to borrow $1 dollar, it will be able to do it, no matter how large is the government debt.

While credit might not be limited to certain amounts, the price of credit is impacted.
So large government debt results in the price of debt to the private sector increasing.
This is called 'crowding-out' effect in economics.

Exactly. As the government issues ever increasing amounts of debt the cost of issuing debt in the private sector will get prohibitively expensive that most of the private sector is essentially priced out of the debt markets making it difficult to expand and grow, which leads to lower profits, which leads to lower tax revenues which leads to higher government borrowings.

[Slingshot]

 
RE: The real area of interest to me is how does this end?
----------------------------------------------------------------

 Considering the present situations, all combined, and what we have learned these last several years,
plus the revolution that is Bitcoin and the Decentralized Cryptocurrencies:

 here goes my own thoughts!


 Depending on a very long list of factors here we come, rushing into this Digital Information Age.

 It's really tough to say with any certainty how things finally FULLY unwind.


1. Inflate their way out, faster and faster as time marches on, as conditions demand.

2.  War our way out, through WW3. Don't dismiss this possibility, if only by way of accident, or through
    sheer stupidity, rather than on purpose.

3.  If things monetarily speaking fly apart suddenly, and things become so untenable in widespread
    fashion, then a "new deal", a new Bretton Woods, type of deal, may be negotiated, among the major
    powers. Of course natural and man made calamities could cause something no one is now expecting.

4.  Wild card #1: International REVOLT of the Fed's dollar. It's looking mighty bleak suddenly for the fed
    and it's debt-based dollar, the worlds sole reserve currency, since early 2014. see the link for that:
    https://bitcointalk.org/index.php?topic=743858.0;all

     Don't dare think that simply because the dollar has been dominate for many decades that it will
    continue to always be so. In fact no matter what it would appear it's not possible for the dollar alone to
   last much longer at all as the worlds sole reserve currency.
    
     In fact it may not last another year before the world fully revolts against the dollar by avoiding it for
    most international settlements, except that is for what is traded to and from the USA itself. And yet
    even that may not last given how the "Pigs" nations don't hold anything over on the USA when it comes
    to fiscal mismanagement, gross negligence, systemic frauds, and their own monetary insanity. If things
    quickly spiral completely out of control in the USA then it's all bet's off for how long the present dollar
    remains fully convertible, much less a major currency of trading in the global marketplace. The USA is
    now quite dependent on many nations for most goods. Things are not as they once were not so long ago.

     The world has simply grown tired of giving the USA and and it's parent corporation the Fed a free
    lunch, and suffering from the massive inflation that both force upon the world, thus giving the fed and
    the USA a monetary free lunch every single day.

     Almost the entire population of the USA doesn't understand what they have long since always
    enjoyed by way of merely having to conjure up ever more counterfeited export dollars for goods and
    services along with forcing other nations to suffer from extreme inflationary pressures by having the
    dollar remain the worlds sole reserve currency of this world. Other nations have long since been
    required to store huge volumes of dollars for their own bi-lateral trading amongst themselves, as well as
    with the USA. Most physical dollars that exist are stored overseas, in overseas banks, for international
    settlement. But maybe not for much longer, oops...

     Lastly, as those dollar flow back onshore to the USA it is thought that they will swiftly create massive
    inflation in the USA, at least in many asset prices, since no one anymore is so foolish to save mainly in
    dollars (bonds, banks) besides grandma and grandpa, whom have merely modest savings and knowledge
    to begin with. Yes, it's true that many corporations are still incompetent enough to store many billions of
    dollars worth of wealth in US government bonds and bills. But they too are not all their cracked up to be,
    nor anywhere near as prudently managed as they like to think they are. In fact...it's only commercial
    bankers that are even worse at investing their own money, and other peoples money, than the typical
    major corporation. Today the entire banking system is capitalized chiefly on you guessed it...Govt Bonds.

     In other words, if the dollar should be forced back into the mode of what all other currencies are then
    most of the brunt will be suffered by the USA. This is exactly why the grand chessboard is in overdrive
    Geo-politically speaking. And why the USA and it's parent the Fed are desperately trying to find a way
    to avoid what looms large (PetroDollar Revolt).

     If the world was truly smart they would try to negotiate with the USA a mutually beneficial way out of
    this mess. But don't dare hold your breath trying to get even two major powers to negotiate, let alone
    the top 8 or 20 powers, to everyone's mutual satisfaction and AGREEMENT, signed, sealed, and done.
    Then again, nothing is more dangerous that the most powerful nation in the history of the world fully
    spiraling completely out of control. So like I just said, if the world was truly smart...

     It's just not known how we will all find our way out of this mess that I term debt-based fiat currency.
    And make no mistake about it, it's the DEBT BASED Currencies that are THE PROBLEM.

      DEBT BASED Currencies are the biggest weapons of mass destruction should calm heads and cool
    minds not prevail, or compromise not be found, and widespread panic or revolts occur, and not swiftly
    be tempered. Of course debt-FREE currencies are The Solution, but that's all too obvious for anyone
    but a fools fool, and the tyrant's (owners) of the central banks.

     Why has the USA quickly evolved into what it has become. Re-read the prior paragraph.

    The ruling wealthy elite had best enjoy their high times while they can, for it's obvious that the vast
    majority of them wont be so wealthy, nor so elite for much longer, before at least many of them are
    shall we say fully compromised one way, or another. And after all, they really did do it to themselves.
    But as always they will blame others, and insist on bailouts for themselves, and austerity for the masses
    of 'little people'. Their complete failures, but they will continue to insist on bailouts for their own failures.

     No matter what it wont be so pleasant as it was for a length of time. How much longer is anyone's
    guess?

     But later on the sun will shine brightly again, and hopefully we again will make real progress as humans
    keep right on evolving socially, politically, and monetarily, every century, with many a setback in
    between. In the long term I am extremely bullish for the human race, but in the near term not so much.


      Enter Wild Card #BTC:
     ==============

  
      The new safest of all safe havens is bitcoins. Yet it would appear hardly anyone has gotten  that memo just
     yet with merely 1.5% or so of the total population in the USA already owning at least some bitcoins so far.
      
      Soon the rest will, or at least many more will, and later others will follow. In fact the way this current monetary
     system ends might be with Bitcoin, and maybe even relatively soon, by swallowing up and consuming the
     existing monetary system, leaving the late comers into bitcoins holding whats termed worthless scraps of paper
     (failed fiat currencies and bonds) as a surprising and sudden mass panic flight out of dollars may or may not
     ever occur. As one central bank and government after another is forced to rapidly inflate away their own captive
     government's debts it would appear that nothing is completely out of the realm of possibilities. Yes this might at
     first seem extremely unlikely, but maybe not. The same thing was almost surely said for gold & silver coins, and
     their gold backed notes decades ago.

      Indeed  that seems to be what the real 'best and brightest' have already devised and implemented, and much
     to the dismay and chagrin of the present rulers of this world termed the owners of the central banking systems.
     Some of the real and true best and brightest came up with Bitcoin.

      They can't stop Bitcoin. They can try as they certainly will try, but they cannot stop it. It's an unstoppable force.
     Not even the most powerful governments and corporations combined anywhere can stop Bitcoin. Not even global
     banning it will ever stop Bitcoin. The Bitcoin genie is out of the bottle, and she isn't ever going to be able to be
     stopped with existing technology and techniques. That much is perfectly crystal clear to some of us that have
     painstakingly critically analysed all that it offers the complete spectrum. Some will simply insist on only bitcoins
     from here on, until finally something out distances even Bitcoin technologies. I don't expect that to happen any
     time in the near or even medium term. Decades from now yes, but almost certainly not in the next 20+ years.
     And even if something does catch up and surpass Bitcoin it's apt to be ever so slowly, and methodically, giving
     anyone plenty of time to read the tea leaves and ever so methodically slowly shift away.

      But still, governments themselves wont simply roll over and fully concede to this decentralized monetary
     revolution. So expect new debt-FREE currencies of some type to also exist along side decentralized
     cryptocurrencies that will be the new "checks' in the checks and balances, that hopefully keeps governments
     from becoming fiscally and monetarily as incompetent and corrupt as the existing failed system certainly is today.

      Today it's merely a thin veneer of confidence and lack of any viable alternatives (until now) still propping up the
     crooked set of monetary and fiscal failed policies. Nothing lasts forever. Not even the fed and debt based fiat ponzi
     schemes known as debt-based dollars and other fiat currencies.


     In conclusion:
    =========

     G.W. Bush Jr. in September 2008 certainly got one thing correct: "This sucker is going down".


      Odds are, the bankers keep QE going at an ever increasing long term rate, until suddenly one emergency after
     another forces ever more QE 'papering over' (legalized counterfeiting) the vast majority of the world government's
     debts, and not merely just a few of them.  As that occurs at least some of those currencies will become smaller
     international financial players, and their subjected populations very much held hostage until things finally unwind,
     fully.

      I strongly suspect that Bitcoin will be come to be seen as the new Safe Haven relatively soon, and every gold bug
     and consumer, and banker, and corporation alike had best get that straight, or be left as the fiat bag holders.
    
      And unlike past gold and silver coinage there wont be any value left in any fiat notes, bills, and bonds once the
     monetary dust settles as the scrape paper dealers load up the paper notes, bills and bonds in their trucks for
     recycling at the paper recycling centers.
  
      Best hedge your wagers ladies & gentlemen. But hedging with almost any fiat currency today is an act of pure
     futility, as well as an act of complete insanity, what with counterfeiting long since shifted to maximum overdrive.
     As for wising up dumb money? Well, someone has to slap them back to sanity sooner or later!

     Bitcoin is Freedom.

[steelhouse]

http://useconomy.about.com/od/usdebtanddeficit/a/National-Debt-by-Year.htm
National Debt 1971 $398
National Debt 2013 $16738
National Debt (present 2014 FY ends 9-30-2014) $17754
===============
Come out to be 9.2%

Aug 2014 - The deficit this year will be $506 billion, CBO estimates, about $170 billion lower than the deficit in 2013.
https://cbo.gov/topics/budget/budget-projections .  According to CBO we were suppose to be running massive surpluses in 2008, 2009.

This has got to be one of the biggest poor estimates in the history of government central planning.  It is already $1 trillion only, 1 month after the prediction.

But despite that, $1 trillion is still below historic norms with 20 days left in the fiscal year.

It is going to end badly because congress and 3 of the last 4 presidents have been clueless.

Inflation is just another tax.

The big question will be to see if the fed will correctly end quantitative easing then raise rates, then gdp should catch up.

[RoadTrain]

The common misconception is to think that credit is somehow limited to certain amounts.
The reality is that it's only constrained by the borrower's creditworthiness. So if there's a creditworthy company willing to borrow $1 dollar, it will be able to do it, no matter how large is the government debt.

Another misconception is to think that government debt is somehow removes money from the financial system. First of all, what do you think happens to money raised by debt issuance? It goes back to the economy by government spending. The second point is that government debt is quasi-money (an almost perfect collateral) by being an integral part of Fed's payment system.

If the private sector holds a lot of government bonds, it's for a reason. And the reason is that the private sector is willing to save. And you can't just go and stop issuing debt hoping it will help restart the investment cycle. The economic policy must be a lot smarter than that.

Only a percentage of the money that the government spends goes back into the economy (less then 100%), so the net effect of government borrowing is that money is taken from the economy.

The price of credit is affected as well as the availability of credit (lenders needing borrowers to be more creditworthy). If the government is issuing more debt (increasing supply) while the demand is staying the same, then the interest rates will rise, which means the interest rates (costs) for other borrowers will rise as well, essentially making it more difficult to borrow money (it may be profitable to borrow @ 4% but not at 5%, plus 5% costs more money then 4%).

Do you know anything about accounting?
Where on Earth the 'remaining' money goes?
This might be interesting to you: https://en.wikipedia.org/wiki/Sectoral_balances

Do you see any correlation between budget and treasury yields here:


or here:

?

In fact, when budget deficit naturally increases it's because of economic slump. And rates fall as a result of the slump, not rise.

Exactly. As the government issues ever increasing amounts of debt the cost of issuing debt in the private sector will get prohibitively expensive that most of the private sector is essentially priced out of the debt markets making it difficult to expand and grow, which leads to lower profits, which leads to lower tax revenues which leads to higher government borrowings.

^ Look above, what do you think?

[btcbug]

No one is saying it is impossible to balance the budget; we are saying it is impossible congress will actually act before it gets so bad that we implode.

That is exactly it!


The political system is simply a popularity contest. No politician, and I mean NO politician, is going to commit career suicide and make the necessary cuts. Their choices are limited. Cut spending, raise taxes, inflate. There is zero chance of cutting spending and the other two result in catastrophe.

[RoadTrain]

No one is saying it is impossible to balance the budget; we are saying it is impossible congress will actually act before it gets so bad that we implode.

That is exactly it!


The political system is simply a popularity contest. No politician, and I mean NO politician, is going to commit career suicide and make the necessary cuts. Their choices are limited. Cut spending, raise taxes, inflate. There is zero chance of cutting spending and the other two result in catastrophe.

Who said cuts are necessary?

Cutting is not gonna help the economy, but budget tweaking might be.

[btcbug]

No one is saying it is impossible to balance the budget; we are saying it is impossible congress will actually act before it gets so bad that we implode.

That is exactly it!


The political system is simply a popularity contest. No politician, and I mean NO politician, is going to commit career suicide and make the necessary cuts. Their choices are limited. Cut spending, raise taxes, inflate. There is zero chance of cutting spending and the other two result in catastrophe.

Who said cuts are necessary?

Cutting is not gonna help the economy, but budget tweaking might be.

Cutting out wastefulness is what I meant. By "tweaking" you make it sound like shuffling things around is the solution. I would make the distinction though that you can't cut things immediately, but most certainly things need to be scaled back as far as government spending goes. The market will reclaim what is given up (and actually necessary) by government and mange it more effectively, but it will take time no doubt.

[twiifm]

No one is saying it is impossible to balance the budget; we are saying it is impossible congress will actually act before it gets so bad that we implode.

That is exactly it!


The political system is simply a popularity contest. No politician, and I mean NO politician, is going to commit career suicide and make the necessary cuts. Their choices are limited. Cut spending, raise taxes, inflate. There is zero chance of cutting spending and the other two result in catastrophe.

Who said cuts are necessary?

Cutting is not gonna help the economy, but budget tweaking might be.

Cutting out wastefulness is what I meant. By "tweaking" you make it sound like shuffling things around is the solution. I would make the distinction though that you can't cut things immediately, but most certainly things need to be scaled back as far as government spending goes. The market will reclaim what is given up (and actually necessary) by government and mange it more effectively, but it will take time no doubt.

I think he says tweaking to mean different economic ailments require different medicine.  Austerity doesnt work in recession.  We've already seen that in the eurozone

[leannemckim46]

No one is saying it is impossible to balance the budget; we are saying it is impossible congress will actually act before it gets so bad that we implode.

That is exactly it!


The political system is simply a popularity contest. No politician, and I mean NO politician, is going to commit career suicide and make the necessary cuts. Their choices are limited. Cut spending, raise taxes, inflate. There is zero chance of cutting spending and the other two result in catastrophe.

Who said cuts are necessary?

Cutting is not gonna help the economy, but budget tweaking might be.

Budget cuts are necessary. Our spending levels are well above the 40 year average as a percentage of the GDP. Entitlement growth is projected to grow at rates well above even the best case GDP growth scenarios. The only way to prevent the US from spiraling into too much debt we need to make cuts.

[RoadTrain]

No one is saying it is impossible to balance the budget; we are saying it is impossible congress will actually act before it gets so bad that we implode.

That is exactly it!


The political system is simply a popularity contest. No politician, and I mean NO politician, is going to commit career suicide and make the necessary cuts. Their choices are limited. Cut spending, raise taxes, inflate. There is zero chance of cutting spending and the other two result in catastrophe.

Who said cuts are necessary?

Cutting is not gonna help the economy, but budget tweaking might be.

Budget cuts are necessary. Our spending levels are well above the 40 year average as a percentage of the GDP. Entitlement growth is projected to grow at rates well above even the best case GDP growth scenarios. The only way to prevent the US from spiraling into too much debt we need to make cuts.

You're wrong if you think government spending and debt are somehow "yours".
In fact, you both are in much different positions, you are financially constrained in your spending and debt. Government is not. That's because government issues dollars, and you don't.

[superresistant]

 
It is amazing how some people still believe the fall of the USA is not going to happen.
As if an Empire can last forever.
As if you can "fix things" politically.

As if it didn't happened already.

[RoadTrain]

It is amazing how some people still believe the fall of the USA is not going to happen.
As if an Empire can last forever.
As if you can "fix things" politically.

As if it didn't happened already.

How does it relate to the topic we discuss here?

[superresistant]

It is amazing how some people still believe the fall of the USA is not going to happen.
As if an Empire can last forever.
As if you can "fix things" politically.
As if it didn't happened already.

How does it relate to the topic we discuss here?

I answered the topic :

How does it end ?
It does not end.

There are things that are ineluctable. All previous empires/kingdoms had the same money/inflation problem. No of them ever solved it.

Watch the fall and enjoy.

[RoadTrain]

It is amazing how some people still believe the fall of the USA is not going to happen.
As if an Empire can last forever.
As if you can "fix things" politically.
As if it didn't happened already.

How does it relate to the topic we discuss here?

I answered the topic :

How does it end ?
It does not end.

There are things that are ineluctable. All previous empires/kingdoms had the same money/inflation problem. No of them ever solved it.

Watch the fall and enjoy.

Things change, and now they are changing faster than ever. Modern monetary system is almost completely different than that of previous empires. And I'm watching.

[superresistant]

Things change, and now they are changing faster than ever. Modern monetary system is almost completely different than that of previous empires. And I'm watching.

Yes, the monetary system is different but the goal is the same : create infinite amount of money to ensure endless prosperity.
When a goal is impossible, it doesn't really matter what solutions you come with.

Prosperity can only be temporal and given to some people (as opposed to everyone).
Nothing last forever, especially as you say, when things change faster than ever.

The faster the change, the more unstable is the world and the more short sighted are people.

[RoadTrain]

Things change, and now they are changing faster than ever. Modern monetary system is almost completely different than that of previous empires. And I'm watching.

Yes, the monetary system is different but the goal is the same : create infinite amount of money to ensure endless prosperity.
When a goal is impossible, it doesn't really matter what solutions you come with.

Prosperity can only be temporal and given to some people (as opposed to everyone).
Nothing last forever, especially as you say, when things change faster than ever.

The faster the change, the more unstable is the world and the more short sighted are people.

My vision is that we have no idea of what's gonna happen and it's really hard to predict because of ever increasing technological progress.
So I'm very cautious when using historic examples as a foundation for predictions.