The traditional way a state defaults is when their debts are in a currency they have to exchange with their own currency on the open market. Vs their own which they can create via central bank actions. In the former a self-sustaining collapse in exchange rates makes it impossible for the state to buy enough foreign currency to make their debt payments. In the former case, default happens, see Argentina in 2001 or so. In the latter this doesn't happen, see Japan 1989-present.
In the US, all of Federal and state governments debt is denominated in dollars. Varying exchange rates don't effect the ability of the government to pay debt. And the government can borrow money from the Fed, because it can.
Why? As we produce more stuff, we also need to spend more to keep prices stable. Printing money and throwing it at the economy is one way to make that happen. As long as our rate of spending remains in line with our level of production, we shouldn't see inflation or deflation.
Why do we need a balanced budget?
If you're Greece and you can't issue your own currency, your national debt matters. But the U.S. can always issue new currency to cover its liabilities.
I guess I have a hard time understanding why we should care about the amount of the U.S. national debt.
Because the rate of production never stays in line with the rate of spending; you can't force it to stay inline. If you debase a currency, consumers will typically seek to spend it before it loses more purchasing power, which automatically unbalances your economy because you can't control exports or production in a way that you can match the consumption. We saw this disastrous effect during the 2000s, when the dollar lost a large amount of value due to budget deficits, and the middle class lost a lot of ground as wages failed to outpace the currency devaluation.
Why should you care about the US national debt? Because at just ~3.5% interest on that debt, it'll eat up a share of the Federal budget larger than either Social Security or Medicare/Medicaid, at a time in which the US already can't afford its entitlements. Each year that goes by, the US can only afford to pay a lower and lower interest rate on its national debt, and it has to 'print' to cover the deficits today - tomorrow when the red ink on entitlements is greater and the interest costs are greater, the deficit will be greater (projected to explode higher in the near future). That will lead to further devaluation of the dollar, which will further wreck the middle class as it did last decade with the weakened dollar. Exports didn't come even remotely close to making up for the weaker dollar hit last decade, and they won't next time either. The US runs a massive trade deficits, it takes a far worse hit on a weaker currency than it benefits from such.
The only large buyer left for US debt, is the Federal Reserve. The US Government is insolvent without monetizing its own debt via the central bank. Once a nation hits that point, it never recovers.
Hmm. I wouldn't characterize what happened in the 2000s as a debasement of the dollar. Real wages have decreased, but shouldn't we want to spend less money on labor as we develop labor-saving technologies and take advantage of cheap foreign labor that substitutes for domestic labor?
Why is a trade deficit a bad thing? It means we're sending dollars overseas and other countries are sending us real stuff in return. Sounds like a pretty good deal to me.
What's wrong with the fed being the only large buyer for U.S. debt? If the fed holds all our treasury securities, then the interest payments don't really matter, right?
Is there any reason why it's bad for this to be a permanent arrangement?
I still don't see why an ever-growing deficit is a problem. Do you think it will necessarily lead to inflation? If so, why?
When you say that the U.S. can't afford its entitlements, what do you mean by that?
Because if you spend more than you make, you are essentially borrowing from the future (with compound interest). Eventually the quickly-compounding interest and principal overwhelm you and you have to spend most of what you produced to service/repay the debt for many years (exactly the situation Greece is in).
Printing money without the accompanying increase in goods/services produced is _stealing_ from everyone who has savings using the currency. The unit of currency loses its value, impoverishing the saver.
The only sustainable way to prosperity/affluence is through increased productivity, not financial shenanigans.
> Because if you spend more than you make, you are essentially borrowing from the future (with compound interest).
Not if you never pay it back.
> Eventually the quickly-compounding interest and principal overwhelm you and you have to spend most of what you produced to service/repay the debt for many years
If the fed holds the treasury securities, the treasury just pays the interest to the fed. By law, any profits the fed makes go right back to the treasury again. Why would the interest payments be a problem?
> (exactly the situation Greece is in)
Greece can't issue their own currency.
> Printing money without the accompanying increase in goods/services produced is _stealing_ from everyone who has savings using the currency.
Right. But I was asking about a scenario in which there would be an accompanying increase in production.
> The only sustainable way to prosperity/affluence is through increased productivity, not financial shenanigans.
Agreed. But financial shenanigans do have the potential to hurt our prosperity/affluence. Wouldn't preventing the supply of money from growing in line with our productive capacity count as such a shenanigan?
We tend to expand credit/debt to keep the economy running and then it all comes crashing down when we start calling our debts back in. THAT is not sustainable.
Instead of expanding the amount of credit, why shouldn't we just expand the amount of actual money?
>Instead of expanding the amount of credit, why shouldn't we just expand the amount of actual money?
So just print more money? I just tried to explain to you that printing money without producing more goods/services just dilutes your purchasing power. The pain caused by _moderate_ inflation is easier to hoist on unsuspecting public, so inflation is typically chosen over bankruptcy (if you control the money printer - Greece is out of luck).
>there would be an accompanying increase in production.
Easier said than done. The US GDP has been bumping barely above 0 over the past several years, which means we are not producing more. A lot of reasons for it, but one of them is lack of consumption caused by excessive debt of consumers, who are flat out broke (and heavily in debt).
> I just tried to explain to you that printing money without producing more goods/services just dilutes your purchasing power.
Yes. But then you went on to say:
> The US GDP has been bumping barely above 0 over the past several years, which means we are not producing more. A lot of reasons for it, but one of them is lack of consumption caused by excessive debt of consumers, who are flat out broke (and heavily in debt).
If we hand real money to consumers instead of handing them credit and plunging them into debt, why wouldn't that address the lack of consumption problem?
> The pain caused by _moderate_ inflation is easier to hoist on unsuspecting public, so inflation is typically chosen over bankruptcy
I'm skeptical that printing money and handing it to consumers would cause any amount of inflation. If we assume a downward-sloping long-term aggregate supply curve -- and the long term gets shorter the more scalable our businesses are -- then the more stuff we produce, the cheaper that stuff gets. Right?
Besides, if we do see inflation rates that are higher than what we want, the government has other levers it can use to address that.
1. Open market operations. The fed sells treasury securities back to the open market thereby removing dollars from the supply.
2. Increase bank reserve requirements to discourage bank lending. This reduces the amount of credit (and therefore debt) and can help reduce future credit crises.
3. Tax consumption/spending. Taxation is fine as a means to reduce the money supply and influence consumer behavior. But I'm not sure how useful it is to view taxation as a way to fund the government. Why not spend as needed and tax as needed without worrying about balancing the two?
>I'm skeptical that printing money and handing it to >consumers would cause any amount of inflation.
Printing money and giving it to consumers IS inflation (it is the very definition of inflation).
Example: if you have two oranges and $10 in money supply, they will each cost $5. If you print additional $10, you will have $20 sloshing around and the price of an orange will automatically jump to $10 each. The consumer will still be able to only buy the same amount of oranges as before.
Okay. Let's say we have two oranges and $10 in the money supply. Let's also say that one guy has all of the $10 and he's only ever going to want one orange. What's the price of an orange? $10. One orange gets sold and the other gets wasted.
If you print an additional $10 and hand it to a different guy, what's the price of oranges? Still $10, but both oranges get bought.
Your scenario is too simplistic to use. The premise that "if you print additional $10 and hand it to a different guy, the price is still $10" is false.
A better example of your idea is - college education. By giving out free money to people, the government increases supply of buyers (students) - and the sellers (colleges) keep rising prices (cost of college is through the roof - quadrupled/quintupled over 20 years). Because they have a stream of buyers they otherwise would not have.
Yes, I said "giving free money to people", because even though they are formally student loans, many of them will never be repaid. It is really a transfer of wealth from US taxpayers to the higher education complex, who can charge tuition multiple times what it was years ago (accounting for inflation included).
Yes. Both of our scenarios were simplistic. You came up with a simplistic scenario in which adding money to the supply did cause price inflation and I came up with a simplistic scenario in which adding money to the supply did not cause price inflation.
Printing money and handing it to consumers is not "the very definition of inflation." There's more to it than that. Price inflation happens when the rate of spending outstrips the rate at which real value is being traded. Money supply is a factor, to be sure, but so is monetary velocity, and productive capacity.
> A better example of your idea is - college education. By giving out free money to people, the government increases supply of buyers (students) - and the sellers (colleges) keep rising prices (cost of college is through the roof - quadrupled/quintupled over 20 years). Because they have a stream of buyers they otherwise would not have.
Agreed. It's free money in the sense that much of it won't be paid back. But it's not free in the sense that those students have to spend it on college, which leads to market distortions. People will pay whatever it takes to get the best college education possible even if they have to spend money they don't have, especially if the only way to access that money is to spend it on college.
> Yes, I said "giving free money to people", because even though they are formally student loans, many of them will never be repaid.
Yes.
> It is really a transfer of wealth from US taxpayers to the higher education complex, who can charge tuition multiple times what it was years ago (accounting for inflation included).
Yes.
Traditional college doesn't scale well. The market is saturated and we're flooding it with consumers who have access to more and more money.
But education can scale. MOOCs scale. You can get a really good education without paying very much. Such an education might not lead to a job, but is that necessarily a problem?
In my mind, it's a waste of money for the government to pay for students to go to school (either through loans or grants).
"If you're Greece and you can't issue your own currency, your national debt matters. But the U.S. can always issue new currency to cover its liabilities."
Hence the antipathy to joining Euro in UK. See the European Exchange Rate Mechanism and Black Wednesday.
Interesting. I like what he says about debt-to-GDP, but I'm not sure I understand his leap to the conclusion that we should be striving for full employment.
I understand why we'd want to scale production to meet the increased demand induced by consumers having more money. But if it would be efficient for us to scale up production without creating jobs, why should we create jobs?
Technically, printing your way out of a debt crisis is still considered a partial default. From the investor's standpoint it's no different than an official markdown.
