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Reblogged: To Whom Are "Third Rails" Really Dangerous?

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Writing at RealClear Politics, James Harrigan and Antony Davies observe that, as of October 26, the federal government has already exhausted this year's revenues towards this year's expenses. They call it "Deficit Day", and elaborate further:

When politicians talk about the debt, they invariably refer to the debt-to-GDP ratio, which is presently around 106%. That measure is fine for comparing debt levels across countries (it is noteworthy that the Greek and Cypriot economies imploded when their ratios reached 120%), but it doesn't tell us much about a government's ability to make good on what it owes. To measure the government's ability to repay its debt, we need to look at the debt-to-income ratio. That is 600%.

The last ratio, they note, is approaching the point at which it would become mathematically impossible, all things remaining the same, for the government to repay its debt. And then the authors drop the real hammer: They hadn't even included so-called "unfunded liabilities", such as Social Security, in that calculation. When those are included, the ratio becomes 3,000 per cent -- already well past that point. I guess they had to leave out the "unfunded liabilities" to even be able to have a "deficit day".

I agree with the authors that this is cause for alarm, but disagree with their contention that "our financial problems begin with deficits". No: Those deficits had to come from somewhere, and that "somewhere" is spending on programs which enjoy significant political support. We aren't going to even start solving these problems until the sense in which these programs are known as "third rails" changes from "dangerous to attack" to "dangerous to continue", and that's going to take cultural change on a historic scale.

-- CAV

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When I read "mathematically impossible" I stopped reading. This is just moronic.

 

Morons will not carry us forward to a glorious future of a "cultural change on a historical scale", smart people will.

 

National debt, just to remind people who are ignorant of economics (like this blogger no doubt), is mostly money we loan to ourselves. We aren't borrowing the money from Mars or Jupiter--and no, on a net basis, we're not borrowing a significant part of it from China. The analogy of an individual running up their credit card too high (which Obama recently used) is both false and misleading.

 

We certainly do have a problem of demographics which at this rate will cause a global Armageddon dip the active workforce leading to marginally higher taxes for the working part of the population insofar as we don't raise the retirement age. Japan has gone / is going through this. They are still there, last I checked.

 

Imagine scare-mongers like this writing about your drive home from work: "CAR HEADING DIRECTLY INTO WALL, SURE TO KILL ALL OCCUPANTS". They leave out the fact that when you pull into your garage, you typically apply the brakes before you run down the house. There's no cause for alarm and there never was.

 

Scaring people into a cultural revolution won't work in any case, but scaring them with things that aren't true is even more pointless..

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National debt, just to remind people who are ignorant of economics (like this blogger no doubt), is mostly money we loan to ourselves. We aren't borrowing the money from Mars or Jupiter--and no, on a net basis, we're not borrowing a significant part of it from China. The analogy of an individual running up their credit card too high (which Obama recently used) is both false and misleading.

 

What exactly does 'we loan to ourselves' mean?

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What exactly does 'we loan to ourselves' mean?

Yeah, that's about the point where I stopped reading. I suppose the "mathematically impossible" phrasing in the OP is slightly silly, but "we loan to ourselves" beats it by several orders of magnitude.

 

It's a case of the pot calling the kettle black, and then some.

Edited by Nicky
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[Folks, I've read every word Ayn Rand has ever written and I am a former Objectivist campus activist. I've argued for the Objectivist cause longer than some of you have probably been alive. You can try all you want to paint me in some corner of communist if it makes you feel better but its not actually "true"--if you still care about such things.

 

For the smarter among you, I'm your future...]

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What exactly does 'we loan to ourselves' mean?

 

Most of the debt carried by the US government is held by US citizens. If we default on it, "they" don't come and repossess our country, etc.

 

***

Also, it's important to  make a distinction between public and private debt (see SN's link). Private debt has a completely different dynamic than sovereign debt. Myself and the OP were talking about sovereign debt...

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Most of the debt carried by the US government is held by US citizens. If we default on it, "they" don't come and repossess our country, etc.

 

***

Also, it's important to  make a distinction between public and private debt (see SN's link). Private debt has a completely different dynamic than sovereign debt. Myself and the OP were talking about sovereign debt...

 

So you're saying (and Krugman too) that if the US government defaults, whether through technical default or inflation, it's not so bad for American citizens because American citizens own the debt?

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So you're saying (and Krugman too) that if the US government defaults, whether through technical default or inflation, it's not so bad for American citizens because American citizens own the debt?

As opposed to Argentinians who were screwed because the American debtors went and repossessed their assets! ;)
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As opposed to Argentinians who were screwed because the American debtors went and repossessed their assets! ;)

 

Lol. But that does introduce a good point. Wouldn't it actually be better for American citizens if the US government debt were owned by foreigners? That way the American government can do what Argentina is doing and basically steal the money by not bothering to pay it back. In the other case, it's American citizens that will be screwed by their own government.

 

Either way I don't see how you can honestly believe that US government debt levels are OK because the money is "loaned to ourselves", if you think for a few minutes about what that phrase really means in practice.

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So you're saying (and Krugman too) that if the US government defaults, whether through technical default or inflation, it's not so bad for American citizens because American citizens own the debt?

 

No (and neither did PK).

 

I'm saying that our government's debt doesn't mean what many people think it means, and equating it to your personal credit card debt (again, like Obama did, and many others continue to do) is moronic and false.

 

When you understand that US government debt consists mostly of the savings accounts of US citizens, then the notion of, for instance, a threshold percentage of GDP of the debt being "unsustainable" is simply made up out of thin air. Yes, there are implications of government debt at various levels, but it's not like a giant game of SimCity, no.

 

Also, it's important to make a distinction between government debt levels and average household debt levels. These are two different things with two different sets of implications.

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No one coerces you into signing a mortgage. There is an essential distinction between voluntary obligations and involuntary obligations.

 

Yes, I agree. I meant the above in the sense that people often leave their unpaid mortgage to their children to pay. It's not a big deal in the wider sense, but that was the point.

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Yes, I agree. I meant the above in the sense that people often leave their unpaid mortgage to their children to pay. It's not a big deal in the wider sense, but that was the point.

 

My understanding is that you cannot leave debt in excess of the asset value of the estate for your children to pay. To the extent that you can force unchosen obligations on to your children, that debt belongs in the same moral category as government debt.

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Just like your mortgage (or any other loan)....

 

Dramatic though, I'll give you that...

 

Populism, anybody?

 

 

I'm still not clear on the example. 

 

I put my money in my savings account to pull it out later to buy something.  I get a mortgage to buy something now and replay on a schedule later. 

 

What happens if I go to my savings account to get the money I saved?  Do I get the IOU?  What then?

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I'm still not clear on the example. 

 

I put my money in my savings account to pull it out later to buy something.  I get a mortgage to buy something now and replay on a schedule later. 

 

What happens if I go to my savings account to get the money I saved?  Do I get the IOU?  What then?

 

No, you get your money. That's how savings accounts work. (???)

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Magic gnomes watch over it.

 

Come one now. 

 

You said the the Government borrows the money from people's savings, but if I can still withdraw the money then it did not come from there or something else is going on which is where your original point on this lies I would trust.  

 

You said this stuff was simple and waved your hand at the OP for not understanding this.  Help me understand why you say that.  If the Government borrows the money from me but I still have the same money from my savings account, then why?  There has to be a reason?  

 

Try it this way.  Scenario One

 

I save my pennies to buy some land up north and have $1000 in the bank.  I withdraw it and purchase the land.  

 

$1000 has been spent.

 

 

Scenario Two

 

I have the same $1000 in my savings account that I'm saving to buy some land up north.

 

The Government borrows $200 of this to deficit spend for this year (why is unimportant) - It spends $200 on something.  

 

If I purchase the land I make a withdraw.  I would think there is only $800 since $200 has been borrowed, but something else is going on.  I can withdraw the full $1000, the $800 plus the $200 that was borrowed.    

 

In total I spend $1000 and the Government spends the $200 it borrowed.

 

$1200 has been spent from an account that only had $1000.

 

Why? 

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