As others pointed out, Argentina and Greece are not comparable to the US. It’s not because of magic, it’s because they owed a lot money to foreigners, and foreigners didn’t owe nearly as much to Argentina and Greece.
It’s kind of like having a rainy day savings jar, that you put money into and occasionally “borrow” money from. That means you spend less on “rainy days” and more on other stuff. Otherwise, it doesn’t really make a difference how much money is in the jar vs your wallet, how much you “owe” the jar, or what the plan is to “pay the jar back” from your wallet. It’s your jar and your wallet, and ultimately you have full control over both. As long as you never use someone else’s money to buy stuff, your jar+wallet are immune from “bankruptcy”.
It’s actually slightly less than half, not most. If you also consider the debt the government “owes itself” (which maybe you shouldn’t, but is often included in the figures thrown around) then it’s only a third.
And yes, this is a potential problem. It’s worth keeping an eye on. But not such a serious practical problem right now, because for every dollar of American debt held by foreigners, there is about 90 cents of foreign debt held by Americans. If I owe you a dollar and you owe me 90 cents, then really I only owe you 10 cents.
I’m not arguing about whether it’s a problem. I’m just saying the tax-prepayment analogy doesn’t work as a result. Clearly foreign holders of debt are not prepaying their US taxes.
A rather big difference is that Greece can’t print its own money.
Government debt is also an asset - government spending doesn’t just vanish into the aether. It’s used to buy things - pension funds, or bridges, or guns, or an educated populace. Those things have a real value (you may disagree as to its number), and a real return - and it ‘makes sense’ to borrow whenever that return is higher than the interest rate.
But only up to a point - you still have to fund that debt with real money. The US can just print more money, which will generate inflation. Which is just another way of saying that the economy only has so much real output every year, and if the government directs half of it, there’s only half left for the private sector to direct.
Since the global financial crash, we went through a long period of low inflation - sometimes even deflation - where arguably government debt was pretty much irrelevant - the real economy had a capacity way below that which the private sector was directing. If interest rates pick themselves up off the floor, the government should start repaying its debts.
I quite like Simon Wren-Lewis’ commentary on these matters, though much of it is from a UK perspective.
I think @magnet’s explanation is correct, though it’s a bit obtuse. Maybe @Ginger_Yellow has a point about foreign owners of debt, though Wren-Lewis makes the point that this is probably more a distributional effect than anything else.
I generally disagree with SWL but his summary on debt is excellent.
The only point on which I disagree is the one he openly states is disputed - whether we are in “good times” - I think that one of the effects of globalisation has been to confuse a lot of monetary indicators through massive cross-border capital flows. With capital investment weighted towards the developing world but savings weighted towards the “first world” (due to better legal protections rather than market factors) interest rates in the “first world” will remain low even in the good times.
For the UK I would target the deficit at approximately the growth rate + inflation rate, leading to a very slow increase in the total debt load as a proportion of GDP. (Mainly to buffer the economy against Brexit risks). That means I want to run a higher deficit than the current government, but not by much.
EDIT: I think the thing about “pre-payment of taxes” is needlessly confusing. Yes, the ultimate guarantor of fiat currency is the fact you can use it to pay taxes. However that’s not really insightful when you consider the mechanisms surrounding government debt. I much prefer SWL’s way of looking at it.
I think it’s quite possible to disagree with a great deal of SWL stuff, but his explanations of economic basics - particularly debt - seems very solid.
You make a really good point about capital flows between first/third worlds and the effect on interest rates. I’ll need to think about that.
Edit: Isn’t the current government target to reduce the debt, as an absolute number? That’s quite a difference from the ~5% you’re advocating.
You are seriously just throwing out non-sequiturs at this point. What you are saying makes no logical sense.
This “borrowing money from the future” is a nonsense idea. The government is borrowing money just like you. The only difference is that they control the currency that debt is valued in, but as we already went over, there’s a limit to how much you can leverage that fact, because doing so impacts your ability to borrow.
This, right here:
What are you talking about here? Like, what are you talking about in terms of actual things? Are you talking about the government just increasing taxes to pay for interest on debt?
Seriously, you are saying stuff that is totally disconnected from reality.
This is absolutely true. It’s the “inertia” that I mentioned previously. The dominance that the US enjoys in the global economy gives us great benefits in terms of our ability to borrow money.
But this is absolutely not guaranteed to be the case forever. As once it is no longer the case, then things would turn south mighty fast.
I honestly don’t grasp what Magnet is even trying to say. His position is literally nonsensical to me.
This is nonsensical, because you are saying that the debtor and the lender are the same entity.
Sure dude, if you are only lending money to yourself in some meaningless act, then it doesn’t matter.
But that’s not how debt works in the real world, whether it be private or government debt. Government debt, just like private debt, comes from people paying money to the government with the requirement that they be paid back in the future. You can’t just expect that you’ll be able to always borrow more money in the future to pay it back, certainly not at the currently favorable rate.
Well, you said it was the only difference, but there are two important differences. Arguably, taxation is more important than control of the money supply when it comes to sovereign debt, but I’m not going to push that point.
Yes and no? My understanding was that as everything in the world gets measured in dollars, and the US has the sole right to print dollars, it basically sets the rules for the world.
Greece was kinda screwed because it needed other countries’ money to keep things going, and couldn’t print it’s currency.
The USA prints the worlds global currency, and doesn’t need other countries’ money, at least to the same extent.
I’m reminded of that old chestnut, that if you owe the bank $100 they can make things difficult for you.
If you owe the bank $1bn dollars, you own the bank.
Anyway, I’m not an economist, I’m just curious to see what effect this will actually have on the USA.
Well if the debt is so bad then this is the perfect thread, although we’re in 2018 now :).
Out of the many, many things that distress me in our current circumstance, the insistence of many in the media of treating trump as ‘normal’ probably ranks at the top. I think I’ve heard the phrase “the President’s agenda” more in the past year than during the entire Obama administration. Or after the latest chemical attack in Syria how [trump] was ‘moved’ by the images of dead children (hint: no, he’s not. ) It’s infuriating in ways I’ve never been able to express.
This blog post at LGM does a great job of articulating it. Worth the read.
NORMALIZING TRUMP
But I’ve lately become interested in another, albeit related, form of normalization. Let’s call this “analytical normalization”: the act of explaining and assessing Trump’s presidency as if we were dealing with a typical president and a typical administration.
If you want to understand not just what analytical normalization looks like, but the disruption that can follow when someone deviates from the standard mode of analyzing presidents and their policies, take a look at this video. It features a debate among Stephen Biegun, Peter Brookes, Sarah Kendzior, and James Kirchick in Estonia in 2017. There’s little remarkable about it until Kednzior starts speaking at around the 18 minute mark.
Kendzior describes Trump as, “at heart” a “kleptocrat,” who is out for his own fame and fortune, has no understanding of foreign affairs, and seeks to build a “dynastic kleptocracy.” At this point, the chair interrupts her and asks her to “stick to foreign policy.”
High school senior Noah Crowley, 18, sent out the “promposal” on Sunday over Snapchat. It shows a picture of himself holding a sign that states: “If I was black I’d be picking cotton, but I’m white so I’m picking U 4 prom.”
This is… such a totally weird thing to me.
Like, I guess the girl he’s asking is ALSO crazy racist? Because it seems like that’s a terrible pickup line? I dunno.
