US National Debt / Deficit - How does it end?

[Cortex7]

The gov't can't issue 'too much' debt, unless it just burns the money it raises. Because it usually issues just enough to satisfy the domestic private sector's and foreign sector's propensity to net save.

When economy deteriorates, the private sector's propensity to save increases, as does the budget deficit. Budget deficit actually adds to private sector's net financial assets.

War is an example of destruction of wealth. They are literally burning those dollars. Now don't get me wrong here, of course those dollars are soldiers wages etc., but most of those thousands of soldiers could be doing something of actual VALUE, like running a business that produces more wealth. Nevermind the bombs, tanks, ships, etc. that are depleting the worlds net wealth by destroying and polluting.

How does budget deficit add to private net financial assets? Are you just talking strictly on paper or what? They're borrowing money from the FED who just creates it from nothing. That's currency debasement, that's inflation, which is just another tax on private sectors savings! They're stealing purchasing power from anyone who saves, which is definitely not adding to net financial assets!

War is something that actually generally will actually stimulate the economy which will generally increase wealth. The businesses that build bullets, and bombs and other "tools" of war will need to hire more workers, as will their suppliers. 

And on top of that... when the cities need rebuilding it's the "boom years".

[maurya78]

It ends in tears of course
Eventually the $ will have to go back to being backed by a scarce and valuable commodity, the value of which cannot be affected by policy

[twiifm]

The gov't can't issue 'too much' debt, unless it just burns the money it raises. Because it usually issues just enough to satisfy the domestic private sector's and foreign sector's propensity to net save.

When economy deteriorates, the private sector's propensity to save increases, as does the budget deficit. Budget deficit actually adds to private sector's net financial assets.

War is an example of destruction of wealth. They are literally burning those dollars. Now don't get me wrong here, of course those dollars are soldiers wages etc., but most of those thousands of soldiers could be doing something of actual VALUE, like running a business that produces more wealth. Nevermind the bombs, tanks, ships, etc. that are depleting the worlds net wealth by destroying and polluting.

How does budget deficit add to private net financial assets? Are you just talking strictly on paper or what? They're borrowing money from the FED who just creates it from nothing. That's currency debasement, that's inflation, which is just another tax on private sectors savings! They're stealing purchasing power from anyone who saves, which is definitely not adding to net financial assets!

War is something that actually generally will actually stimulate the economy which will generally increase wealth. The businesses that build bullets, and bombs and other "tools" of war will need to hire more workers, as will their suppliers. 

No it doesnt.  Its just after wars there needs rebuilding and reconstruction

[btcbug]

War is something that actually generally will actually stimulate the economy which will generally increase wealth. The businesses that build bullets, and bombs and other "tools" of war will need to hire more workers, as will their suppliers. 

Nope, war is similar to the broken window fallacy. Destruction does not cause a net increase in wealth. There is a huge difference in productive work and unproductive work. Simply creating work for the sake of "more jobs" to make numbers look good is useless.

http://economics.about.com/od/warandtheeconomy/a/warsandeconomy_2.htm

[RoadTrain]

I'm not actually sure what your main point is anymore, other than trying to point out accounting details. Are you asserting that fiat currency and unlimited growth in money supply is a sustainable system? Please clarify your position.

My point is that government deficits are generally ok.

I get what you're saying on double-entry and I agree that technically speaking that is correct. What I think you're saying is that no money is ever destroyed, it only changes hands and therefore it's all accounting games. I agree to a point, but what I tried to point out was that War is destruction of REAL wealth. Have you read about the broken window fallacy? What if the government paid people to dig ditches all day and then fill them back in every night? You're missing the point that some work is productive (produces net savings) and some work is of little to no value.

I didn't speak of real wealth, I spoke about financial wealth. These are quite different things.

If people were getting paid for digging ditches, it would still be work. These people can then go to shop and buy some hi-tech shit, stimulating REAL production and investment. Yes, resource allocation is ineffective, but money is still added to the economy.

It's my understanding that the FED buys treasury bonds, effectively lending the gov. money. Let me add that it wouldn't matter even if the gov. issued it's own interest free currency and spent it, it would still be inflation. Where does the FED get money? Answer: it creates new currency. Inflation = counterfeiting = taking peoples purchasing power.

When the Fed buys treasuries, it effectively replaces one financial asset (bond) with another (currency). Considering that bonds are interest-bearing quasi-money, it doesn't change much.
All these actions unnecessarily cause price inflation, which is a complex phenomenon.

Yes you can compare the two, but Keynesians and quacks would rather have us believe otherwise! Don't try and say that we're living in a magical world where phony fiat money can substitute for real world production.

Ok, then translate your analogue into fiat money reality. I'll tell you if it's correct.

[odolvlobo]

War is something that actually generally will actually stimulate the economy which will generally increase wealth. The businesses that build bullets, and bombs and other "tools" of war will need to hire more workers, as will their suppliers. 

It is incredible that people actually believe that. Effectively, you are saying that wealth is increased by doing nothing (and getting paid for it). Where does the wealth needed to pay the bomb builders come from? It doesn't come as a result of making bombs.

[spazzdla]

War is something that actually generally will actually stimulate the economy which will generally increase wealth. The businesses that build bullets, and bombs and other "tools" of war will need to hire more workers, as will their suppliers. 

It is incredible that people actually believe that. Effectively, you are saying that wealth is increased by doing nothing (and getting paid for it). Where does the wealth needed to pay the bomb builders come from? It doesn't come as a result of making bombs.

Debt from the rothschilds on our childerns dime.

So debt slavery.

[btcbug]

I'm not actually sure what your main point is anymore, other than trying to point out accounting details. Are you asserting that fiat currency and unlimited growth in money supply is a sustainable system? Please clarify your position.

My point is that government deficits are generally ok.

Alright, sure it's not going to bring down the economy until it gets extreme so in that sense it's " generally ok".

I get what you're saying on double-entry and I agree that technically speaking that is correct. What I think you're saying is that no money is ever destroyed, it only changes hands and therefore it's all accounting games. I agree to a point, but what I tried to point out was that War is destruction of REAL wealth. Have you read about the broken window fallacy? What if the government paid people to dig ditches all day and then fill them back in every night? You're missing the point that some work is productive (produces net savings) and some work is of little to no value.

I didn't speak of real wealth, I spoke about financial wealth. These are quite different things.

If people were getting paid for digging ditches, it would still be work.

I agree, real wealth IS different than financial wealth. Financial wealth is meaningless without real world productivity. You can't magically divorce the two and have a sustainable economy long term.

These people can then go to shop and buy some hi-tech shit, stimulating REAL production and investment. Yes, resource allocation is ineffective, but money is still added to the economy.

Where would the money be coming from to pay these unproductive people? Nobody trades value for nothing. In a free market those who are unproductive really only hurt themselves. When the government forces the productive members to pay the unproductive it's a drain on their savings, as well as a disincentive to bother saving in the first place. The more unproductive members there are, the greater the burden on everyone else. This a huge reason the gov. is in debt, it's because of the expanding welfare state and bureaucracy that goes with it. All of this results in a system with increasing numbers of people living off the backs of the productive. The load will simply become to heavy.

Printing new currency and giving it to unproductive people does nothing to help this. It doesn't matter if they spend it on "hi-tech shit" and real investment. That currency is simply counterfeit bills that causes price inflation and hurts savers. Printing currency is great a great tool for expanding government power (welfare, warfare, bureaucracy) i.e. wastefulness and making the politicians look like heroes who can promise people everything.

[/quote]

[zorke]

War is something that actually generally will actually stimulate the economy which will generally increase wealth. The businesses that build bullets, and bombs and other "tools" of war will need to hire more workers, as will their suppliers. 

Nope, war is similar to the broken window fallacy. Destruction does not cause a net increase in wealth. There is a huge difference in productive work and unproductive work. Simply creating work for the sake of "more jobs" to make numbers look good is useless.

http://economics.about.com/od/warandtheeconomy/a/warsandeconomy_2.htm

When something is destroyed, it will need to be rebuilt after the war is over. If the winning country uses their own "industry" to rebuild the country then that country's economy will benefit. This is one reason why the US economy did so well after WW2

[teukon]

When something is destroyed, it will need to be rebuilt after the war is over. If the winning country uses their own "industry" to rebuild the country then that country's economy will benefit. This is one reason why the US economy did so well after WW2

Building useful infrastructure can have economic merit.
Destroying and rebuilding such infrastructure cannot.

Creating productive jobs can be economically valid.
Creating unproductive, or worse, destructive jobs cannot.

Bombing one's own country to destroy infrastructure and create jobs will not improve the average quality of life.
Employing millions of people to dig holes and millions more to fill those holes in again will not make us wealthier.

[teukon]

It is incredible that people actually believe that.

Indeed.  I wonder why this is such a common error though.  Do you suppose that the "war stimulates the economy" crowd are typically assuming that "all work is equally productive"?

Might it be that this axiom also leads to puzzlement when a person creates a great deal of wealth with relatively little work?  If I subconsciously held that "all work is equally productive" then, when presented with the seeming paradox of the very rich, I'd deduce that there must be some unfairness/theft/exploitation occuring at some level.

[btcbug]

It is incredible that people actually believe that.

Indeed.  I wonder why this is such a common error though.  Do you suppose that the "war stimulates the economy" crowd are typically assuming that "all work is equally productive"?

Might it be that this axiom also leads to puzzlement when a person creates a great deal of wealth with relatively little work?  If I subconsciously held that "all work is equally productive" then, when presented with the seeming paradox of the very rich, I'd deduce that there must be some unfairness/theft/exploitation occuring at some level.

I'd guess it's a common error because that's the type of economic thought taught in schools, no? It's conveniently in line with the state expansion of welfare and warfare. It's over complicated and made to appear as legitimate, sound economic reasoning because underneath it's a massive fraud!

[RoadTrain]

Where would the money be coming from to pay these unproductive people? Nobody trades value for nothing. In a free market those who are unproductive really only hurt themselves. When the government forces the productive members to pay the unproductive it's a drain on their savings, as well as a disincentive to bother saving in the first place. The more unproductive members there are, the greater the burden on everyone else. This a huge reason the gov. is in debt, it's because of the expanding welfare state and bureaucracy that goes with it. All of this results in a system with increasing numbers of people living off the backs of the productive. The load will simply become to heavy.

Printing new currency and giving it to unproductive people does nothing to help this. It doesn't matter if they spend it on "hi-tech shit" and real investment. That currency is simply counterfeit bills that causes price inflation and hurts savers. Printing currency is great a great tool for expanding government power (welfare, warfare, bureaucracy) i.e. wastefulness and making the politicians look like heroes who can promise people everything.

Ok. Let's imagine a situation when U.S. budget is in balance. There are several million unemployed. The economy operates at below full capacity. The the gov't decides to implement a program called "Ditches for cash". It spends about 100 billion dollars a year to employ somewhere between 3 and 4 million unemployed people.

What do we have then? Disposable incomes in the economy increase by $100 billion, translating into increased spending, which increases capacity utilization and employment.
Because of increased taxes collection, the actual deficit is below $100 billion, let's say $70 billion. (Actually, if no money of these $100 billion is saved by the private sector, deficit will be zero) These $70 bln will be added to the private sector's net savings.

What's wrong here, besides the fact that this kind of work is unproductive? Anyways it not necessarily needs to be digging ditches, it might be some kind of infrastructural projects. Losing human capital is no better than doing unproductive work.

[odolvlobo]

Where would the money be coming from to pay these unproductive people? Nobody trades value for nothing. In a free market those who are unproductive really only hurt themselves. When the government forces the productive members to pay the unproductive it's a drain on their savings, as well as a disincentive to bother saving in the first place. The more unproductive members there are, the greater the burden on everyone else. This a huge reason the gov. is in debt, it's because of the expanding welfare state and bureaucracy that goes with it. All of this results in a system with increasing numbers of people living off the backs of the productive. The load will simply become to heavy.

Printing new currency and giving it to unproductive people does nothing to help this. It doesn't matter if they spend it on "hi-tech shit" and real investment. That currency is simply counterfeit bills that causes price inflation and hurts savers. Printing currency is great a great tool for expanding government power (welfare, warfare, bureaucracy) i.e. wastefulness and making the politicians look like heroes who can promise people everything.

Ok. Let's imagine a situation when U.S. budget is in balance. There are several million unemployed. The economy operates at below full capacity. The the gov't decides to implement a program called "Ditches for cash". It spends about 100 billion dollars a year to employ somewhere between 3 and 4 million unemployed people.

What do we have then? Disposable incomes in the economy increase by $100 billion, translating into increased spending, which increases capacity utilization and employment.
Because of increased taxes collection, the actual deficit is below $100 billion, let's say $70 billion. (Actually, if no money of these $100 billion is saved by the private sector, deficit will be zero) These $70 bln will be added to the private sector's net savings.

What's wrong here, besides the fact that this kind of work is unproductive? Anyways it not necessarily needs to be digging ditches, it might be some kind of infrastructural projects. Losing human capital is no better than doing unproductive work.

First, let's skip the economy-is-operating-below-capacity scenario because if you put people to work doing nothing, then the economy is still operating below capacity even though everyone is "working".

The root of what you are suggesting is that the Fed prints $100 billion and just gives it to everyone.

Ok, why only $100 billion? Wouldn't $300 trillion be better? What would happen if the Fed gave every person in the U.S. $1 million? According to your logic, it would mean the end of poverty because everyone would be a millionaire.

Let's make it simpler. Instead of giving away money, let's suppose that the U.S. simply declared that $1 is now $1000. The economy would explode and everyone would have enough money to buy whatever they want, right?

Ok, I have indulged in your fantasy, now for the realism. The result would not be prosperity, the result would be inflation. Things would look great for a short period time, but then increased demand will causes prices to increase. Spending would increase, but so would prices. In the end all you will have done is devalue the currency.

If the U.S. borrows the money instead of printing it, then what you are doing is taking wealth from your children. Who is going to pay back the debt? Certainly not the ditch diggers! They aren't doing anything productive so they will always require your subsidies.

[btcbug]

Where would the money be coming from to pay these unproductive people? Nobody trades value for nothing. In a free market those who are unproductive really only hurt themselves. When the government forces the productive members to pay the unproductive it's a drain on their savings, as well as a disincentive to bother saving in the first place. The more unproductive members there are, the greater the burden on everyone else. This a huge reason the gov. is in debt, it's because of the expanding welfare state and bureaucracy that goes with it. All of this results in a system with increasing numbers of people living off the backs of the productive. The load will simply become to heavy.

Printing new currency and giving it to unproductive people does nothing to help this. It doesn't matter if they spend it on "hi-tech shit" and real investment. That currency is simply counterfeit bills that causes price inflation and hurts savers. Printing currency is great a great tool for expanding government power (welfare, warfare, bureaucracy) i.e. wastefulness and making the politicians look like heroes who can promise people everything.

Ok. Let's imagine a situation when U.S. budget is in balance. There are several million unemployed. The economy operates at below full capacity. The the gov't decides to implement a program called "Ditches for cash". It spends about 100 billion dollars a year to employ somewhere between 3 and 4 million unemployed people.

What do we have then? Disposable incomes in the economy increase by $100 billion, translating into increased spending, which increases capacity utilization and employment.
Because of increased taxes collection, the actual deficit is below $100 billion, let's say $70 billion. (Actually, if no money of these $100 billion is saved by the private sector, deficit will be zero) These $70 bln will be added to the private sector's net savings.

What's wrong here, besides the fact that this kind of work is unproductive? Anyways it not necessarily needs to be digging ditches, it might be some kind of infrastructural projects. Losing human capital is no better than doing unproductive work.

Where did the $100 Billion come from?

1)If it was taken from tax revenue then all they've done is taken $100B from some people and given it to others. Why does it matter which group spends? Why couldn't the original holders of the $100B spent it into the economy themselves? To put it another way, you've take away $100B from the first group who now has that much less to spend. Essentially it's a wash, but you've also manage to incentivize inefficiency as well.

Also, if the government took the $100B and paid it as wages to the ditch diggers, then those people would also be taxed on the money again. I think the argument could also be made that the more times the money is redistributed and re-taxed it probably results in wasteful overhead, but I don't know, and it's practically irrelevant to my main point.

2)If they created new currency and spent it into the economy, then all they did was dilute everyone else's dollar holdings. Again, it wouldn't matter if it was spent by the unproductive ditch diggers on real goods, because the effect would be the same. As new money circulates through the economy the falsely perceived increase in wealth causes prices to be bid up. This is why the term inflation traditionally referred to an expansion of the money supply and price inflation is an effect of it. If wages keep up with inflation it might not be as bad, but typically they don't. People on fixed incomes and savers are also punished. Ask yourself why it's illegal for the average Joe to counterfeit money? So, why is ok for the gov?

Those 4 million unproductive people in your example would be much better employed, but not at the expense of everyone else. They need to find productive jobs by creating value as entrepreneurs or being hired by a existing productive company.

[btcbug]

Where would the money be coming from to pay these unproductive people? Nobody trades value for nothing. In a free market those who are unproductive really only hurt themselves. When the government forces the productive members to pay the unproductive it's a drain on their savings, as well as a disincentive to bother saving in the first place. The more unproductive members there are, the greater the burden on everyone else. This a huge reason the gov. is in debt, it's because of the expanding welfare state and bureaucracy that goes with it. All of this results in a system with increasing numbers of people living off the backs of the productive. The load will simply become to heavy.

Printing new currency and giving it to unproductive people does nothing to help this. It doesn't matter if they spend it on "hi-tech shit" and real investment. That currency is simply counterfeit bills that causes price inflation and hurts savers. Printing currency is great a great tool for expanding government power (welfare, warfare, bureaucracy) i.e. wastefulness and making the politicians look like heroes who can promise people everything.

Ok. Let's imagine a situation when U.S. budget is in balance. There are several million unemployed. The economy operates at below full capacity. The the gov't decides to implement a program called "Ditches for cash". It spends about 100 billion dollars a year to employ somewhere between 3 and 4 million unemployed people.

What do we have then? Disposable incomes in the economy increase by $100 billion, translating into increased spending, which increases capacity utilization and employment.
Because of increased taxes collection, the actual deficit is below $100 billion, let's say $70 billion. (Actually, if no money of these $100 billion is saved by the private sector, deficit will be zero) These $70 bln will be added to the private sector's net savings.

What's wrong here, besides the fact that this kind of work is unproductive? Anyways it not necessarily needs to be digging ditches, it might be some kind of infrastructural projects. Losing human capital is no better than doing unproductive work.

First, let's skip the economy-is-operating-below-capacity scenario because if you put people to work doing nothing, then the economy is still operating below capacity even though everyone is "working".

The root of what you are suggesting is that the Fed prints $100 billion and just gives it to everyone.

Ok, why only $100 billion? Wouldn't $300 trillion be better? What would happen if the Fed gave every person in the U.S. $1 million? According to your logic, it would mean the end of poverty because everyone would be a millionaire.

Let's make it simpler. Instead of giving away money, let's suppose that the U.S. simply declared that $1 is now $1000. The economy would explode and everyone would have enough money to buy whatever they want, right?

Ok, I have indulged in your fantasy, now for the realism. The result would not be prosperity, the result would be inflation. Things would look great for a short period time, but then increased demand will causes prices to increase. Spending would increase, but so would prices. In the end all you will have done is devalue the currency.

If the U.S. borrows the money instead of printing it, then what you are doing is taking wealth from your children. Who is going to pay back the debt? Certainly not the ditch diggers! They aren't doing anything productive so they will always require your subsidies.

Another excellent way to put it!

[RoadTrain]

First, let's skip the economy-is-operating-below-capacity scenario because if you put people to work doing nothing, then the economy is still operating below capacity even though everyone is "working".

No. Capacity underutilization means that there's an excess installed productive capacity. It means that production can be increased without inducing significant inflation pressures.

The root of what you are suggesting is that the Fed prints $100 billion and just gives it to everyone.

No, that's not what I suggested. That's kind of a Helicopter Ben thing.

Ok, I have indulged in your fantasy, now for the realism. The result would not be prosperity, the result would be inflation. Things would look great for a short period time, but then increased demand will causes prices to increase. Spending would increase, but so would prices. In the end all you will have done is devalue the currency.

Yeah, of course if you run to extremes there will be inflation. That's a task of the government to spend wisely to avoid inflationary and deflationary pressures.

If the U.S. borrows the money instead of printing it, then what you are doing is taking wealth from your children. Who is going to pay back the debt? Certainly not the ditch diggers! They aren't doing anything productive so they will always require your subsidies.

Explain the bold part.

Government debt is not needed to be paid back to zero, it's a monetary instrument, it can be issued, can be repaid, if monetary conditions warrant. It's not a burden for the generations, it's an asset.

[RoadTrain]

Where did the $100 Billion come from?

Just a random number.

1)If it was taken from tax revenue then all they've done is taken $100B from some people and given it to others. Why does it matter which group spends? Why couldn't the original holders of the $100B spent it into the economy themselves? To put it another way, you've take away $100B from the first group who now has that much less to spend. Essentially it's a wash, but you've also manage to incentivize inefficiency as well.

No, it's taken from deficit spending, i.e. debt issuance.

Also, if the government took the $100B and paid it as wages to the ditch diggers, then those people would also be taxed on the money again. I think the argument could also be made that the more times the money is redistributed and re-taxed it probably results in wasteful overhead, but I don't know, and it's practically irrelevant to my main point.

It's irrelevant, it could be tax-free money.

2)If they created new currency and spent it into the economy, then all they did was dilute everyone else's dollar holdings. Again, it wouldn't matter if it was spent by the unproductive ditch diggers on real goods, because the effect would be the same. As new money circulates through the economy the falsely perceived increase in wealth causes prices to be bid up. This is why the term inflation traditionally referred to an expansion of the money supply and price inflation is an effect of it. If wages keep up with inflation it might not be as bad, but typically they don't. People on fixed incomes and savers are also punished. Ask yourself why it's illegal for the average Joe to counterfeit money? So, why is ok for the gov?

Where the hell do you get this "create new currency" thing and constantly put these words in my mouth? I never said that in my post.
And inflation is much more complicated than "expansion of the money supply".

Those 4 million unproductive people in your example would be much better employed, but not at the expense of everyone else. They need to find productive jobs by creating value as entrepreneurs or being hired by a existing productive company.

It's a dilemma that socialists and capitalists can argue about forever. I won't.

[btcbug]

2)If they ISSUE DEBT and spent it into the economy, then all they did was dilute everyone else's dollar holdings. Again, it wouldn't matter if it was spent by the unproductive ditch diggers on real goods, because the effect would be the same. As new money circulates through the economy the falsely perceived increase in wealth causes prices to be bid up. This is why the term inflation traditionally referred to an expansion of the money supply and price inflation is an effect of it. If wages keep up with inflation it might not be as bad, but typically they don't. People on fixed incomes and savers are also punished. Ask yourself why it's illegal for the average Joe to counterfeit money? So, why is ok for the gov?

Where the hell do you get this "create new currency" thing and constantly put these words in my mouth? I never said that in my post.
And inflation is much more complicated than "expansion of the money supply".

See correction above in BOLD. I say, "create new currency" and you say, "debt issuance" or "deficit spending". They are the same, except the terms you use make it unnecessarily complex sounding.

Those 4 million unproductive people in your example would be much better employed, but not at the expense of everyone else. They need to find productive jobs by creating value as entrepreneurs or being hired by a existing productive company.

It's a dilemma that socialists and capitalists can argue about forever. I won't.

I will make my final attempt at explaining this:

Scenario #1:

You build a house. You burn it down. You build another house.
Q: How many houses do you have?
A: 1

Scenario #2:

You build a house. You don't burn it down. You build another house.
Q: How many houses do you have?
A: 2


A child can understand that the same effort went into both scenarios, but that scenario #2 resulted in additional net wealth. How can you not understand how unproductive this is?

You don't need to argue with me, the empirical evidence proves that Socialism is complete bullshit.

I'd recommend reading some Murray Rothbard, Mises, Schiff, etc.

[RoadTrain]

I say, "create new currency" and you say, "debt issuance" or "deficit spending". They are the same, except the terms you use make it unnecessarily complex sounding.

No, they aren't the same.

A child can understand that the same effort went into both scenarios, but that scenario #2 resulted in additional net wealth. You don't need to argue with me, the empirical evidence proves that Socialism is complete bullshit.

You missed my point.

Scenario #1: People are unemployed.
Net effect: poverty, human capital depreciation.

Scenario #2: People are digging ditches.
Net effect: we have ditches, poverty is reduced, still human capital depreciation.

Scenario #3: People are building infrastructure: roads, bridges, etc...
Net effect: we have improved infrastructure, human capital is preserved, poverty is reduced.

I prefer the third scenario, while you seem to prefer the first.