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Umm, I don't think scenario two is how government debt works... No one will actually spend more than $1000, you could only actually withdraw $800. You can't withdraw the extra $200 if the government is using that $200. A problem only appears when you want more than $800 right now. In practice, you have all 1000 and the government 200, but it's still only really 1000. In a way, it's a means for unused money to be used by other entities. Things get a lot more complex if we talk about long-term payments like mortgages.

I'm not saying there is no issue. I think the point is that the problem is totally misidentified and blown out of proportion by the OP. I'm not super informed on all this, so I may be missing important points.

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Umm, I don't think scenario two is how government debt works... No one will actually spend more than $1000, you could only actually withdraw $800. You can't withdraw the extra $200 if the government is using that $200. A problem only appears when you want more than $800 right now. In practice, you have all 1000 and the government 200, but it's still only really 1000. In a way, it's a means for unused money to be used by other entities. Things get a lot more complex if we talk about long-term payments like mortgages.

I'm not saying there is no issue. I think the point is that the problem is totally misidentified and blown out of proportion by the OP. I'm not super informed on all this, so I may be missing important points.

It's a short OP, with three claims in total, really. You don't need to be super informed to confirm or deny them, they're some very basic claims.

 

So which do you disagree with? Is the federal debt-to-GDP ratio not 106%? Is the debt-to-income ration not 600%? Is the unfunded liabilities to income ratio not 3000%? 

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It's a short OP, with three claims in total, really. 

The larger, implicit, claim is that this is a problem. For instance, people like Krugman pooh-pooh Detroit's bankruptcy by saying even a trillion dollar shortfall can be covered without the U.S. feeling too much pain, and they aren't too far wrong if one looks across the whole system and averages everything out: which is what their altruistic ethical system and mis-aggregating epistemology lure them to do.

 

Similarly, with the the question of gross debt, it is pretty easy to argue that the current levels of debt are manageable and "we" can even go higher without the system being  unstable. The idea is that if Japan can run at 250%, mostly "owed to itself", the U.S. has huge buffers. 

Edited by softwareNerd
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Umm, I don't think scenario two is how government debt works... No one will actually spend more than $1000, you could only actually withdraw $800. You can't withdraw the extra $200 if the government is using that $200. A problem only appears when you want more than $800 right now. In practice, you have all 1000 and the government 200, but it's still only really 1000. In a way, it's a means for unused money to be used by other entities. Things get a lot more complex if we talk about long-term payments like mortgages.

I'm not saying there is no issue. I think the point is that the problem is totally misidentified and blown out of proportion by the OP. I'm not super informed on all this, so I may be missing important points.

 

Crow claimed the Government borrows the money from my savings.  That is why I am asking him to develop the answer since it doesn't make sense to me.

 

You pointed out the issue - "A Problem only appears if you want more than $800 right now." and "In practice, you have all 1000 and the Government 200, but it's only really 1000."

 

That is a contradiction that doesn't make sense so I'm giving him a chance to explain it in better detail. 

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The larger, implicit, claim is that this is a problem. For instance, people like Krugman pooh-pooh Detroit's bankruptcy by saying even a trillion dollar shortfall can be covered without the U.S. feeling too much pain, and they aren't too far wrong if one looks across the whole system and averages everything out: which is what their altruistic ethical system and mis-aggregating epistemology lure them to do.

 

Similarly, with the the question of gross debt, it is pretty easy to argue that the current levels of debt are manageable and "we" can even go higher without the system being  unstable. The idea is that if Japan can run at 250%, mostly "owed to itself", the U.S. has huge buffers. 

 

That was my issue on the Krugman thread.  He is obviously using collectivist con game to shift numbers around since the debt is not America's problem, it is Detroit's problem. 

 

Everything is no problem to the collectivists since they claim a "national pool of income" that can be used to "pay for everyone's debt".  They don't spell it out (outside of a few hacks like Robert Reich) but it is there in statements like this. 

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... collectivists ... claim a "national pool of income" ...

Yup. It goes way beyond Dem/GOP. It is an inherent flaw in the epistemological approach of most of macroeconomics: the idea that higher aggregates (e.g. higher GDP) and more equality are the two noble goals of economic policy. Milton Friedman falls for this abstract idea just as John Kenneth Galbraith does.
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Wow, this really isn't that hard. The US government issues debt that people buy in the same way a corporation or an individual does. In either case you give them funds and in exchange you get a piece of paper saying you get your funds back whenever you present it.

 

Your bank, with your savings, buys government debt. Thus some or all of your savings may be part of the national debt.

 

Now, as for the implications, there are many, and they are complicated.

 

Saying that our national debt can go to 100% or 200% or 300% and we won't all die is not the same thing as justifying the forced taxation of citizens to pay for stuff deadbeats don't want to pay for themselves. If you use this (ridiculous) argument against forced taxation, you will end up proven wrong by the facts, and you will reinforce your opponent's position.

 

Sorta like those nutjobs that tell everybody that the Apocalypse is absolutely going to be in exactly 4 1/2 weeks from now, and that we should all prepare, and this will once and for all prove the existence of God. Then it doesn't happen and the Atheists of have their day and people (correctly) dismiss these nutjobs as nutjobs.

 

The OP is positioning himself as one of those nutjobs. This isn't good news if you are an advocate of Liberty...

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Your bank, with your savings, buys government debt. Thus some or all of your savings may be part of the national debt.

...

Saying that our national debt can go to 100% or 200% or 300% and we won't all die

We will all die. But I am hoping to use my savings to postpone the inevitable for a while.

 

That's why my savings will be invested in something tangible like gold, or at least loaned to someone moderately responsible with their financial balance, not in a national debt headed towards 300% of GDP.

 

Because, no matter how much you assure me that I'm not gonna die, I'm quite confident that if I loan my money to a government that's about to default, I'm not gonna be able to pay for medical treatment when I need it, and I'm gonna die.

Edited by Nicky
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Crow claimed the Government borrows the money from my savings.  That is why I am asking him to develop the answer since it doesn't make sense to me.

 

You pointed out the issue - "A Problem only appears if you want more than $800 right now." and "In practice, you have all 1000 and the Government 200, but it's only really 1000."

 

That is a contradiction that doesn't make sense so I'm giving him a chance to explain it in better detail.

Looks like you're not going to get that explanation from Crow, so allow me:

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator.

.

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Wow, this really isn't that hard. The US government issues debt that people buy in the same way a corporation or an individual does. In either case you give them funds and in exchange you get a piece of paper saying you get your funds back whenever you present it.

 

Your bank, with your savings, buys government debt. Thus some or all of your savings may be part of the national debt.

 

Now, as for the implications, there are many, and they are complicated.

 

Saying that our national debt can go to 100% or 200% or 300% and we won't all die is not the same thing as justifying the forced taxation of citizens to pay for stuff deadbeats don't want to pay for themselves. If you use this (ridiculous) argument against forced taxation, you will end up proven wrong by the facts, and you will reinforce your opponent's position.

 

Sorta like those nutjobs that tell everybody that the Apocalypse is absolutely going to be in exactly 4 1/2 weeks from now, and that we should all prepare, and this will once and for all prove the existence of God. Then it doesn't happen and the Atheists of have their day and people (correctly) dismiss these nutjobs as nutjobs.

 

The OP is positioning himself as one of those nutjobs. This isn't good news if you are an advocate of Liberty...

 

OK – So what your saying is the government does not borrow the money directly from me, but from the bank.  The bank can still give me all my money since they have plenty of cash on hand and I can reasonably expect that everyone will not make a withdraw at once.  This makes sense as I remember one of the reasons the Reserve System was created was to facilitate trade between banks in case one did have a “run” on it by its clients. 

 

But this leads be to another question.

 

The money is provided by people like me but the IOU come from...?  At some point the bank is going to want to (or have to) redeem the IOU.  If it is a bond or Note it will mature, or at minimum the bank will need to reinvest and turn an IOU from a line asset into actual cash.  When I repay an IOU I earned the money.  The government has two issues: 1) It doesn’t earn money, and 2) By definition of this conversation, it doesn’t have any money since it is borrowing it every year to pay its obligations (let alone the interest it is giving for the original loan).

 

How is the IOU repaid? 

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Looks like you're not going to get that explanation from Crow, so allow me:

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator.

.

That's the conclusion of people who consider fractional reserve banking to be immoral. Basically, I described sharing.

 

Like in math, show your work! Don't just show your conclusion.

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OK – So what your saying is the government does not borrow the money directly from me, but from the bank.  The bank can still give me all my money since they have plenty of cash on hand and I can reasonably expect that everyone will not make a withdraw at once.  This makes sense as I remember one of the reasons the Reserve System was created was to facilitate trade between banks in case one did have a “run” on it by its clients. 

 

But this leads be to another question.

 

The money is provided by people like me but the IOU come from...?  At some point the bank is going to want to (or have to) redeem the IOU.  If it is a bond or Note it will mature, or at minimum the bank will need to reinvest and turn an IOU from a line asset into actual cash.  When I repay an IOU I earned the money.  The government has two issues: 1) It doesn’t earn money, and 2) By definition of this conversation, it doesn’t have any money since it is borrowing it every year to pay its obligations (let alone the interest it is giving for the original loan).

 

How is the IOU repaid? 

 

The government surely earns (gets) money. They make money the old-fashioned way, they take it by force. :-)

 

Also, the government has money. Lots of it. They pay back their bonds on a regular basis. A government that doesn't do this is called insolvent and nobody buys their bonds anymore.

 

As for the other details, there's a difference between the Federal Reserve and the Treasury. It's a long story. Google it...

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We will all die. But I am hoping to use my savings to postpone the inevitable for a while.

 

That's why my savings will be invested in something tangible like gold, or at least loaned to someone moderately responsible with their financial balance, not in a national debt headed towards 300% of GDP.

 

Because, no matter how much you assure me that I'm not gonna die, I'm quite confident that if I loan my money to a government that's about to default, I'm not gonna be able to pay for medical treatment when I need it, and I'm gonna die.

 

Excellent. When you start having savings, post some pictures.

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The government surely earns (gets) money. They make money the old-fashioned way, they take it by force. :-)

 

Also, the government has money. Lots of it. They pay back their bonds on a regular basis. A government that doesn't do this is called insolvent and nobody buys their bonds anymore.

 

As for the other details, there's a difference between the Federal Reserve and the Treasury. It's a long story. Google it...

 

If they have lots of money then why are they borrowing it?  They may start with a lot of money but it runs out or by definition they would not need to borrow more.  Unless you are saying the pay the IOU first then spend the rest on current expenses before they run out and borrow more.  

 

And to your other point what your telling me is that basically future tax revenue is their guarantee to pay the IOU they borrow today? 

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If they have lots of money then why are they borrowing it?  They may start with a lot of money but it runs out or by definition they would not need to borrow more.  Unless you are saying the pay the IOU first then spend the rest on current expenses before they run out and borrow more.  

 

And to your other point what your telling me is that basically future tax revenue is their guarantee to pay the IOU they borrow today? 

 

Yes, that's the way it... works... How did you think it worked? The US government currently runs a deficit as it has from time to time since its inception.

 

And yes, when you borrow money, you are counting on future revenue.

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But the revenue later is already earmarked for existing expenses, so it cannot pay for the debt. The Government either needs more revenue or borrow more to pay for it. 

 

OK, so here is what we have:

 

If the Government runs a debt, it will either need to take more money from me today, or borrow it from banks knowing it will take more later from me to pay the debt so the bank can stay solvent.  

 

But they don't take more now and worse they keep borrowing more each year so the process repeats and the reckoning of having to pay for the debt cycle off is continually punted forward in larger quantities each time.  

 

What is  the end game for such a system?  Further, how does that not sound like a Ponzi Scheme?  I know you did not mean that so please clarify.  

Edited by Spiral Architect
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But the revenue later is already earmarked for existing expenses, so it cannot pay for the debt.

 

No, some of the revenue is earmarked for debt service, and it thus far has always paid its debt service, shows no sign of failing to do so.

 

 

 OK, so here is what we have:

 

If the Government runs a debt, it will either need to take more money from me today, or borrow it from banks knowing it will take more later from me to pay the debt so the bank can stay solvent.  

 

But they don't take more now and worse they keep borrowing more each year so the process repeats and the reckoning of having to pay for the debt cycle off is continually punted forward in larger quantities each time.  

 

What is  the end game for such a system?  Further, how does that not sound like a Ponzi Scheme?  I know you did not mean that so please clarify.  

 

Certainly the US government cannot continue to run up its debt (and/or deficits) to "infinity". Nobody--including boogieman Paul Krugman or any of the Keynesians--would tell you otherwise. Companies often borrow to stay in business in lean times and pay back debt--or at least stop going into further debt--and then pay it back during better years. The US ran surpluses, for instance, from 1998-2001.

 

It's worth noting at this time that the US government borrows money at near zero interest rates, so service on our debt is actually quite small compared to the principle. While "infinity" is not an option, we can actually run our debt up quite a bit before its a serious problem.

 

Paying down our debt would be a matter of raising taxes and/or cutting social security and/or the economy growing and revenues naturally rising. On that last note, you will pay more taxes if you start making more money, so the government will take in more revenues because of that.

 

The end game? The short answer to (the first part of) your question is: who knows. Based on past experience, it's likely we're going to close the deficit fairly soon (sooner than expected based on today's numbers).

 

As for the second part, I'm very sorry you were fooled by this moronic argument. You should have considered the source. :-) Charles Ponzi's scheme involved a scheme in which he lied about his assets. The US government is about as transparent as it gets about its assets and its ability to pay off its debts. It might be immoral in a number of ways, but it's not a Ponzi scheme (if you are in doubt, Google it...).

Edited by CrowEpistemologist
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Charles Ponzi's scheme involved a scheme in which he lied about his assets. The US government is about as transparent as it gets about its assets and its ability to pay off its debts. It might be immoral in a number of ways, but it's not a Ponzi scheme (if you are in doubt, Google it...).

 

Mr. Ponzi had to deceive his victims. The government engages in its scheme openly because its theft is not supported by fraud but by run of the mill physical force. I'd much rather be a victim of Charles Ponzi. At least I'd have the chance of getting out before it collapsed.

Edited by CriticalThinker2000
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Mr. Ponzi had to deceive his victims. The government engages in its scheme openly because its theft is not supported by fraud but by run of the mill physical force. I'd much rather be a victim of Charles Ponzi. At least I'd have the chance of getting out before it collapsed.

 

You can trade out of US dollars anytime you like. See Nicky's comment above: when he has savings someday, he's going to buy a gold coin. You can too.

 

Nevertheless, is doesn't pad one's credibility when you use terms you don't actually understand. Regardless of what one thinks of the national debt, it's no more a "Ponzi Scheme" than it is a pyramid scheme, embezzlement, or measles.

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It's more of a confidence game. The ultimate "too big to fail" story. In another Gus Van Horn blog, it is pointed out that: the bad news

 

. . . is that too many people see government as having an active role in bettering their lives, essentially by central planning.

The government is too big to fail (@ upholding individual rights as its sole charge?). The Federal Reserve is too big to fail (@ maintaining the confidence its customers have in its product?)

The agents of these agencies are implicitly (or explicitly) relying on continued increases of productivity (by the men of the mind), in spite of where such increases are not actively being subverted by regulations being imposed, such as the recent Tesla bill signed into law in Michigan.

 

And a solution offered: You can trade out of US dollars any time you like.

So the recognition that money, more importantly, is a tool of savings, has to be supplemented by the discovery that US dollars are not serving a de facto money, and the agency that granted them a monopoly actively seek to impose regulations (again, implicitly or explicitly) that deter those that might discover it.

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No, some of the revenue is earmarked for debt service, and it thus far has always paid its debt service, shows no sign of failing to do so.

 

Certainly the US government cannot continue to run up its debt (and/or deficits) to "infinity". Nobody--including boogieman Paul Krugman or any of the Keynesians--would tell you otherwise. Companies often borrow to stay in business in lean times and pay back debt--or at least stop going into further debt--and then pay it back during better years. The US ran surpluses, for instance, from 1998-2001.

 

It's worth noting at this time that the US government borrows money at near zero interest rates, so service on our debt is actually quite small compared to the principle. While "infinity" is not an option, we can actually run our debt up quite a bit before its a serious problem.

 

Paying down our debt would be a matter of raising taxes and/or cutting social security and/or the economy growing and revenues naturally rising. On that last note, you will pay more taxes if you start making more money, so the government will take in more revenues because of that.

 

The end game? The short answer to (the first part of) your question is: who knows. Based on past experience, it's likely we're going to close the deficit fairly soon (sooner than expected based on today's numbers).

 

As for the second part, I'm very sorry you were fooled by this moronic argument. You should have considered the source. :-) Charles Ponzi's scheme involved a scheme in which he lied about his assets. The US government is about as transparent as it gets about its assets and its ability to pay off its debts. It might be immoral in a number of ways, but it's not a Ponzi scheme (if you are in doubt, Google it...).

 

This has been very illuminating.  Basically you are saying you agree with every one else outside of the fact it's still manageable so no reason to raise the alarms yet.  I get having certain talking points aggravate you (I do that with property rights and environmentalism).    

 

Now for observations.  

 

Point 1: The money  to pay the debt is what should be paying for current expenditures, which it is not so that is contributing to more borrowing.  Borrowing would be lower without current revenue paying the debt, therefore we are borrowing more because of this. 

 

 

Point 2: Business borrow certainly but they do not continue to do it year after year as standard operating procedure.  It would be reasonable for the Government to do it for several years as part of a designed plan but what we have is debt as annual standard operating procedure.  3 years of surplus is a drop in the modern historical bucket and when combined with the hard fact that we have borrowed more since TARP than the entire history of the country combined this is no small thing.

 

End result: Record debt and more borrowing

 

 

Point 3: Running up the debt higher is still a problem even if at low interest.  It's a problem because that means we will have to borrow more to pay it later or tax more to pay it off.  This also does not take into account the distortions and miss investment caused by artificially reducing the interest rates to way below what the market would do.  Discussing the economic bubble from this however is beyond this discussion but should not be discounted as a consequence. 

 

 

Point 4: A growing economy an individual income is not a correct model of prediction here.  We can expect growth that will on average be represented by inflation but that simple evens out as Government expenditures also grow with inflation.

 

Speaking of inflation, we still haven't discussed the consequences of increasing the money supply.  The government is by definition of this conversation adding X amount of new dollars to the economy by issuing an IOU to banks.  There is no attempt to remove those dollars from the economy, and in fact being actively discouraged by those near zero interest rates.   This patter of adding more dollars to the economy causes inflation, which is now aggravated since we have established that the borrowing under current practice will result in more borrowing and increases in the money supply with no current plan to end it.  

 

Once inflation is added, we now see that inflation, in the long run, will result in less purchasing power, savings, and ultimately value for the Government to pay it's debt. 

 

 

Point 5:  By this conversation, we are borrowing money that will result in more borrowing, a sum total at record levels never seen in the history of the country, with no plan to either implement cost cutting to remove it or the huge confiscation of wealth to pay it off.  It will likely be the later which will increase proportionally to the size of the debt and burdened by the inflation caused by the decreasing value of the dollar.  

 

You've shown me that this will not be resolved soon, but in fact if we started to deal with it responsibly it would be a hole to dig out and a big one at that.  The fact we are projected to continue means that whole is getting bigger.  Add in another recession at some point caused by another bubble popping from the malinvestment of interest rates and Government spending and the prospect is even worse.  

 

 

Point 6: I agree on the Ponzi Scheme.  Social Security is a Ponzi Scheme.  This is more of a con game, like three card monte, except the con man only has a hand full of victims and calls his trade by what it does while the Government invests in convincing us it actually helps us while using the redirection of shuffling to conceal the fact they are taking more money from you later.  

 

Thank you - This has been very clarifying.  

Edited by Spiral Architect
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This has been very illuminating.  Basically you are saying you agree with every one else outside of the fact it's still manageable so no reason to raise the alarms yet.  I get having certain talking points aggravate you (I do that with property rights and environmentalism). 

 

I agree with.... whom?

 

Also, "raising alarms" is different than, "predicting doom". Certainly deficits and debt are not desirable, and can't go on to infinity, but imagining a) there's a threshold where we're all going to die; and B) that we cannot simply stop the process on a dime when/if it becomes a problem--is scare-mongering and not rooted in reality.

 

As for your points:

 

1. I don't understand that point.

 

2. Amazon has been running deficits since it was started. A business (or government) is either solvent or it isn't, and the determination is a complicated business decision based on the full context. Investors in both Amazon and the USA are not at all phased right now. Faith could be lost in either, but so far it hasn't.

 

3. Borrowing at low interest rates is cheaper than higher. As for interest rates being "artificially low" there's no evidence of that. Right now companies are stockpiling $trillions (literally) and the world is awash in cash with nowhere to go. There's nothing "artificial" about this.

 

4. I'm not in the business of predicting GDP growth, but I doubt you are either so your guess is as good as mine. We've discussed inflation at length in these forums, and suffice it to say that after 30 years of very low US inflation and a world-wide investment community who is convinced that there's no significant inflation on the horizon for the USA, there's no evidence of an "explosion" on the horizon. However, it is definitely the case that inflation we do have--1-2% per year?--absolutely does diminish your investment in T-bills. Investors know this yet they continue to invest as that is part of the investment equation.

 

5. Sorry, I still don't get how our current borrowing will necessarily lead to more borrowing. Our borrowing will lead to more debt, and marginally more debt service expenses. Yes, that might lead to more borrowing, but if the USA, for instance, runs a surplus, then there won't be any borrowing that year.

 

It might get better or it might get worse, depending on what the US does. Nobody expects Amazon or the USA to stay on the same road forever, and again, nobody believes it can go on for infinity, but the key here is to look at the situation rationally and make proper predictions, not scare-mongering.

 

6. Like I said, any major investor buying a T-bill knows exactly what they are doing. There's no fraud. Sure, with any investment there can be any number of interpretations of the facts, and different predictions of the future, but in this case there's no fraud to t-bill investors. Like it or not, US Treasury bills are extremely safe--arguably the safest investment on the planet. Sure, the premise of those investments might be wrong, and you can say that it's immoral that the US is putting its citizens in debt and so forth, but qua investment that's immaterial.

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