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The US federal debt was even higher in the wake of World War II. The US government did not run surpluses and deleverage in the following decades. The economy g

The US federal debt was even higher in the wake of World War II. The US government did not run surpluses and deleverage in the following decades. The economy grew, without hyperinflation, and the debt became irrelevant. The solution to high levels of debt is sustainable economic growth, not deleveraging. Mass deleveraging would be an economic catastrophe.

Retric 11y ago
US still has a significant chunk of WWII debt after one of the greatest sustained economic booms of all time. Growth really is not the answer. Inflation sounds great, just default without technically defaulting, until you actually see what it does to the economy. The real solution is to simply spend vastly less money accepting that pain now is better than letting the US become a failed state.
- chadzawistowski 11y ago
  It sounds like you're suggesting austerity, which comes with its own set of problems. Between inflation and austerity, I don't think there's a clear absolute choice.
- jqm 11y ago
  If you could really direct things on a massive scale that could work. But I fear each little piece will scream bloody murder if it's cheese gets cut off and it becomes feasibly impossible to do what needs to be done.
- Amezarak 11y ago
  > US still has a significant chunk of WWII debt after one of the greatest sustained economic booms of all time. Let's pretend this is true. (I doubt it.) Let's keep in mind that US debt is owed in bonds, redeemable in US dollars. If I get a 30 year mortgage in 1945 and simply rollover the debt whenever it comes due, but my wealth has increased dramatically, my mortgage does not matter. If I take out a 100k mortgage and then go on to found Apple and become a multibillionaire, then yes, growth was the answer. My debt may not have changed, but it is completely and utterly irrelevant when considering my financial situation. > Inflation sounds great, just default without technically defaulting, until you actually see what it does to the economy. Which is why the 50s and 60s were known as horrific economic times, right? Assuming by "inflation" you just mean an increase in the money supply - quintupling the money supply since 2009 doesn't seem to have led to the sky falling. > The real solution is to simply spend vastly less money accepting that pain now is better than letting the US become a failed state. No, the real solution is to spend more money now, taking advantage of historically low interest rates that at times have been negative in real terms, to do whatever you can to kickstart economic growth, and let the debt inflate away 'naturally'. Preferably you do this by investing in infrastructure projects, education, and science, and other things that produce real benefit, but if you want to fill mines with hundred dollar bills and fill them in so others can mine them out, that's fine too. In this case there is no pain. Spending less money now isn't accepting necessary pain, it's causing unnecessary pain. The US will not become a failed state because of mild inflation. Hyperinflation will never be a problem in the US barring a world war or huge resource or natural catastrophe. People have been preaching the doom-and-gloom inflation story for probably a century now. Every year, it's just around the corner. Well, it isn't. I can only speculate why the story is so popular. I can only assume that people have been taught to internalize all debt as a moral issue: less debt is Good, more debt is Bad, and there must therefore be dire consequences visited upon the guilty nations that don't treat debt as it must be treated. But the debt of sovereign, money-printing governments bears no resemblance to the debt of individuals, and there really are no consequences to a government being in debt forever. (Actually there's no consequences to individuals being in debt forever either - I am in perpetual debt to my credit card company, and spend the majority of my paycheck on it...but I pay it off every month.) It would in fact be a bad thing if there were no US bonds to purchase; you've suddenly eliminated a huge source of safe investment from the market.
  - mooreds 11y ago
    I think the story is popular because it resonates with how we need to manage our personal finances. See http://mobile.nytimes.com/blogs/krugman/2014/04/21/the-economy-is-not-like-a-household/ http://mobile.nytimes.com/blogs/krugman/2014/04/21/the-econo... I don't agree with everything Krugman writes, but it's pretty clear to me that treating an economy like a household is short sighted.
  - Retric 11y ago
    Your assuming US was paying all of the interest on debt. They where rolling over principle and interest which causes things to spiral. Also, US had negative inflation in 1955 and overall low rates from 1950-1969. It only spiked after that. 1974 to 1982 where generally bad. http://www.usinflationcalculator.com/inflation/historical-inflation-rates/ http://www.usinflationcalculator.com/inflation/historical-in...
    - RobertoG 11y ago
      You can get inflation in two ways. One way: people and firms are expending more money that the economy can digest. If a government wanted to compensate this, could raise taxes or, ironically, retiring money from the system emitting debt. The other way: the money that people is expending is the same but the economy, for some reason, shrink. That would be a supply shock. That is what happened in the 70's with the oil cartel.
      - Retric 11y ago
        That's not really true. At its core Money has value as a means to pay Taxes and Debt. If the economy shrinks people need to pay less in Taxes which lowers the demand for dollars. At the same time it's harder to pay debt which generally causes deflation not inflation. Similarly, if the Government spends more than it takes in by "Printing Money" that also devalues its currency. For really high rates of inflation the only viable option is for the government to print money. EX: If your inflation rate is 18% the economy would have to be 1/5th the size in 10 years and 2.5% in 20 years which just flat does not happen.
- paavokoya 11y ago
  >accepting that pain now is better than letting the US become a failed state. If you look throughout history, there has never been any nation or empire that has ever done this. The US will fail just as Rome and others before it.
  - tribune 11y ago
    Doesn't mean we should embrace to keep the financial party going...
  - dragontamer 11y ago
    Last time I checked, if you're $1 million in debt... its your problem. If you're $18 Trillion in debt, its the bank's problem. Just saying. True, $5 Trillion of the debt is held by the US Government in some form (around $2 Trillion is held by the Fed, another $3 is held by Social Security). So it'd be bad for them if the US Government defaulted. And that's why we need to pay back the debt, so that Social Security and the Fed can continue to function. Social Security has lent trillions of dollars to the US Government. They deserve to get their money back.
    - maxerickson 11y ago
      The primary banker of the US government is the organized society living in North America.
      - dragontamer 11y ago
        I recognize that, and yes, this is a very important note to consider. The true reason we want to pay off our debt, is because we citizens of the US Government rely upon the debt to be repaid. (Pension funds, Social Security, Investors, and the Federal Reserve are the top lenders to the US Government. NOT China as some people have noted). Indeed, if China became the chief banker, we'd just default and stick our middle finger across the Pacific Ocean. Station a few Aircraft carriers in the Pacific and tell them "Come get your money back, if you dare". But since the debt plays a critical role in our economy (an investor wishes for 7% returns may yearn for 5%+ interest rates of the past), its important to consider the debt from both sides. Yes, the US Government arguably wishes to be debt free. But similarly, the US Public wishes for a safe location to store cash for years-and-years. Long story short: the debt is only a problem if we the public decides its a problem. If that happens, we'd expect interest rates to go up. However, interest rates have only dropped, so that suggests that the market wishes for more debt to be created.
- st3v3r 11y ago
  "The real solution is to simply spend vastly less money accepting that pain now is better" Said someone who's probably not going to feel much of that pain. The problem with a lot of these "cut spending" mantras is that they usually want to do it in a way that hurts those on the bottom of society most, which is extremely appalling. And many of those "cut spending" people actually want to increase military spending.
  - Retric 11y ago
    IMO, reducing military spending by 2% total GDP is the safest way to cut right now.
- nodamage 11y ago
  > The real solution is to simply spend vastly less money accepting that pain now is better than letting the US become a failed state. Are you familiar with the Reinhart-Rogoff controversy in economics from a few years ago?
awakeasleep 11y ago
Wasn't the US's situation post-ww2 sort of unique? This sort of sounds like "just win the lottery again" type advice.
- deleted 11y ago
  [deleted]
- Amezarak 11y ago
  > Wasn't the US's situation post-ww2 sort of unique? No, not really. The US was not blown to bits, requiring a massive rebuild, nor did it particularly benefit from the blown-to-bits status of Europe; exports and imports were a small part of the economy.
  - Retric 11y ago
    Post WWII US was ~50% of world manufacturing. That's a rather strong starting position.
    - Amezarak 11y ago
      Calling it "world manufacturing" is misleading when you look at exports and imports as a share of GDP. http://graphics8.nytimes.com/images/2012/11/19/opinion/111912krugman3/111912krugman3-blog480.jpg http://graphics8.nytimes.com/images/2012/11/19/opinion/11191... As you can see, other than a brief Marshall-plan spike in the 40s, exports and imports as a share of the US economy didn't return to pre-Depression levels until 1974. And right now, the US does a whole lot more trade than it did after World War II. It makes intuitive sense our "starting position" wasn't that great, because poor, blown-up countries don't make great customers. The US economic success after World War II was domestic, not trade-based.
      - Retric 11y ago
        Looking at the total quantity of trade misses how profitable that trade is. Saudi Arabia gained wealth by selling oil at massive margins not just massive amounts of oil.
dforrestwilson 11y ago
Isn't economic growth the same thing as mass deleveraging? You're generating more cash for the same amount of debt, reducing your leverage multiple or percentage. The question is how to get there when the global economy is not doing well and China debt/official numbers can't be trusted.
partiallypro 11y ago
Debt markets were a lot different in WWII, currently key rates are at 0%, most government debts are being taken on by central banks. Deleveraging isn't a good option, because it can cause deflation...however, if we look at markets like Japan, their increased debt burden and NIRP policy, is effecting currency markets heavily. There is no good solution. Taking on more debt can push the string, and we can pray for economic growth to cover it, we can deleverage and cause a depression, or we can try to keep at near current levels of GDP. There is no good solution. Given that there is no good solution, I feel policy makers are much more prone to making massive mistakes that cause asset misallocation which will force deleveraging in private markets when that pops.
tremon 11y ago
The reliance on economic growth as debt relieval is what brought us overexploitation of natural resources, and also serves as a major impediment in responding to the threats of climate change. I'm not sure the world can survive another 50 years of economic growth.

Retric 11y ago

US still has a significant chunk of WWII debt after one of the greatest sustained economic booms of all time. Growth really is not the answer. Inflation sounds great, just default without technically defaulting, until you actually see what it does to the economy. The real solution is to simply spend vastly less money accepting that pain now is better than letting the US become a failed state.

chadzawistowski 11y ago
It sounds like you're suggesting austerity, which comes with its own set of problems. Between inflation and austerity, I don't think there's a clear absolute choice.
jqm 11y ago
If you could really direct things on a massive scale that could work. But I fear each little piece will scream bloody murder if it's cheese gets cut off and it becomes feasibly impossible to do what needs to be done.
Amezarak 11y ago
> US still has a significant chunk of WWII debt after one of the greatest sustained economic booms of all time. Let's pretend this is true. (I doubt it.) Let's keep in mind that US debt is owed in bonds, redeemable in US dollars. If I get a 30 year mortgage in 1945 and simply rollover the debt whenever it comes due, but my wealth has increased dramatically, my mortgage does not matter. If I take out a 100k mortgage and then go on to found Apple and become a multibillionaire, then yes, growth was the answer. My debt may not have changed, but it is completely and utterly irrelevant when considering my financial situation. > Inflation sounds great, just default without technically defaulting, until you actually see what it does to the economy. Which is why the 50s and 60s were known as horrific economic times, right? Assuming by "inflation" you just mean an increase in the money supply - quintupling the money supply since 2009 doesn't seem to have led to the sky falling. > The real solution is to simply spend vastly less money accepting that pain now is better than letting the US become a failed state. No, the real solution is to spend more money now, taking advantage of historically low interest rates that at times have been negative in real terms, to do whatever you can to kickstart economic growth, and let the debt inflate away 'naturally'. Preferably you do this by investing in infrastructure projects, education, and science, and other things that produce real benefit, but if you want to fill mines with hundred dollar bills and fill them in so others can mine them out, that's fine too. In this case there is no pain. Spending less money now isn't accepting necessary pain, it's causing unnecessary pain. The US will not become a failed state because of mild inflation. Hyperinflation will never be a problem in the US barring a world war or huge resource or natural catastrophe. People have been preaching the doom-and-gloom inflation story for probably a century now. Every year, it's just around the corner. Well, it isn't. I can only speculate why the story is so popular. I can only assume that people have been taught to internalize all debt as a moral issue: less debt is Good, more debt is Bad, and there must therefore be dire consequences visited upon the guilty nations that don't treat debt as it must be treated. But the debt of sovereign, money-printing governments bears no resemblance to the debt of individuals, and there really are no consequences to a government being in debt forever. (Actually there's no consequences to individuals being in debt forever either - I am in perpetual debt to my credit card company, and spend the majority of my paycheck on it...but I pay it off every month.) It would in fact be a bad thing if there were no US bonds to purchase; you've suddenly eliminated a huge source of safe investment from the market.
- mooreds 11y ago
  I think the story is popular because it resonates with how we need to manage our personal finances. See http://mobile.nytimes.com/blogs/krugman/2014/04/21/the-economy-is-not-like-a-household/ http://mobile.nytimes.com/blogs/krugman/2014/04/21/the-econo... I don't agree with everything Krugman writes, but it's pretty clear to me that treating an economy like a household is short sighted.
- Retric 11y ago
  Your assuming US was paying all of the interest on debt. They where rolling over principle and interest which causes things to spiral. Also, US had negative inflation in 1955 and overall low rates from 1950-1969. It only spiked after that. 1974 to 1982 where generally bad. http://www.usinflationcalculator.com/inflation/historical-inflation-rates/ http://www.usinflationcalculator.com/inflation/historical-in...
  - RobertoG 11y ago
    You can get inflation in two ways. One way: people and firms are expending more money that the economy can digest. If a government wanted to compensate this, could raise taxes or, ironically, retiring money from the system emitting debt. The other way: the money that people is expending is the same but the economy, for some reason, shrink. That would be a supply shock. That is what happened in the 70's with the oil cartel.
    - Retric 11y ago
      That's not really true. At its core Money has value as a means to pay Taxes and Debt. If the economy shrinks people need to pay less in Taxes which lowers the demand for dollars. At the same time it's harder to pay debt which generally causes deflation not inflation. Similarly, if the Government spends more than it takes in by "Printing Money" that also devalues its currency. For really high rates of inflation the only viable option is for the government to print money. EX: If your inflation rate is 18% the economy would have to be 1/5th the size in 10 years and 2.5% in 20 years which just flat does not happen.
paavokoya 11y ago
>accepting that pain now is better than letting the US become a failed state. If you look throughout history, there has never been any nation or empire that has ever done this. The US will fail just as Rome and others before it.
- tribune 11y ago
  Doesn't mean we should embrace to keep the financial party going...
- dragontamer 11y ago
  Last time I checked, if you're $1 million in debt... its your problem. If you're $18 Trillion in debt, its the bank's problem. Just saying. True, $5 Trillion of the debt is held by the US Government in some form (around $2 Trillion is held by the Fed, another $3 is held by Social Security). So it'd be bad for them if the US Government defaulted. And that's why we need to pay back the debt, so that Social Security and the Fed can continue to function. Social Security has lent trillions of dollars to the US Government. They deserve to get their money back.
  - maxerickson 11y ago
    The primary banker of the US government is the organized society living in North America.
    - dragontamer 11y ago
      I recognize that, and yes, this is a very important note to consider. The true reason we want to pay off our debt, is because we citizens of the US Government rely upon the debt to be repaid. (Pension funds, Social Security, Investors, and the Federal Reserve are the top lenders to the US Government. NOT China as some people have noted). Indeed, if China became the chief banker, we'd just default and stick our middle finger across the Pacific Ocean. Station a few Aircraft carriers in the Pacific and tell them "Come get your money back, if you dare". But since the debt plays a critical role in our economy (an investor wishes for 7% returns may yearn for 5%+ interest rates of the past), its important to consider the debt from both sides. Yes, the US Government arguably wishes to be debt free. But similarly, the US Public wishes for a safe location to store cash for years-and-years. Long story short: the debt is only a problem if we the public decides its a problem. If that happens, we'd expect interest rates to go up. However, interest rates have only dropped, so that suggests that the market wishes for more debt to be created.
st3v3r 11y ago
"The real solution is to simply spend vastly less money accepting that pain now is better" Said someone who's probably not going to feel much of that pain. The problem with a lot of these "cut spending" mantras is that they usually want to do it in a way that hurts those on the bottom of society most, which is extremely appalling. And many of those "cut spending" people actually want to increase military spending.
- Retric 11y ago
  IMO, reducing military spending by 2% total GDP is the safest way to cut right now.
nodamage 11y ago
> The real solution is to simply spend vastly less money accepting that pain now is better than letting the US become a failed state. Are you familiar with the Reinhart-Rogoff controversy in economics from a few years ago?

awakeasleep 11y ago

Wasn't the US's situation post-ww2 sort of unique? This sort of sounds like "just win the lottery again" type advice.

deleted 11y ago
[deleted]
Amezarak 11y ago
> Wasn't the US's situation post-ww2 sort of unique? No, not really. The US was not blown to bits, requiring a massive rebuild, nor did it particularly benefit from the blown-to-bits status of Europe; exports and imports were a small part of the economy.
- Retric 11y ago
  Post WWII US was ~50% of world manufacturing. That's a rather strong starting position.
  - Amezarak 11y ago
    Calling it "world manufacturing" is misleading when you look at exports and imports as a share of GDP. http://graphics8.nytimes.com/images/2012/11/19/opinion/111912krugman3/111912krugman3-blog480.jpg http://graphics8.nytimes.com/images/2012/11/19/opinion/11191... As you can see, other than a brief Marshall-plan spike in the 40s, exports and imports as a share of the US economy didn't return to pre-Depression levels until 1974. And right now, the US does a whole lot more trade than it did after World War II. It makes intuitive sense our "starting position" wasn't that great, because poor, blown-up countries don't make great customers. The US economic success after World War II was domestic, not trade-based.
    - Retric 11y ago
      Looking at the total quantity of trade misses how profitable that trade is. Saudi Arabia gained wealth by selling oil at massive margins not just massive amounts of oil.

dforrestwilson 11y ago

Isn't economic growth the same thing as mass deleveraging? You're generating more cash for the same amount of debt, reducing your leverage multiple or percentage. The question is how to get there when the global economy is not doing well and China debt/official numbers can't be trusted.

partiallypro 11y ago

Debt markets were a lot different in WWII, currently key rates are at 0%, most government debts are being taken on by central banks. Deleveraging isn't a good option, because it can cause deflation...however, if we look at markets like Japan, their increased debt burden and NIRP policy, is effecting currency markets heavily. There is no good solution. Taking on more debt can push the string, and we can pray for economic growth to cover it, we can deleverage and cause a depression, or we can try to keep at near current levels of GDP. There is no good solution. Given that there is no good solution, I feel policy makers are much more prone to making massive mistakes that cause asset misallocation which will force deleveraging in private markets when that pops.

tremon 11y ago

The reliance on economic growth as debt relieval is what brought us overexploitation of natural resources, and also serves as a major impediment in responding to the threats of climate change. I'm not sure the world can survive another 50 years of economic growth.