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It's interesting that many people seem to have accepted that endlessly taking on more debt is a good idea. Debt has to paid off and you can't just take it on en

It's interesting that many people seem to have accepted that endlessly taking on more debt is a good idea. Debt has to paid off and you can't just take it on endlessly. I wonder what the future looks like if the United States continues to take on more and more debt. Right now we can't really pay it off ever so we're stuck servicing it forever. Seems like we're giving our children a much worse world than the one we were born in. When I was born the debt was pretty manageable and over the course of my lifetime it exploded to something that's basically never going to be paid off.

jameskilton 16y ago
Our future will pretty closely mirror what's going on in Europe right now. Greece's debt is some 115% of it's GDP and Italy has around 110%. What happens to Europe, and particularly the PIIGS nations in the next few months will be very important to pretty much the rest of the developed world. And besides that, we can look to history to show us that most major empires (e.g. Roman, Ottoman, British) that ended up collapsing did so partly because of rampant over-spending and a very broken debt-to-gdp ratio.
- jswinghammer 16y ago
  On the plus side at least we won't have an empire anymore. That's about the only good thing I see coming from all this.
  - abalashov 16y ago
    Perhaps, but in all likelihood it just means someone else will have an empire.
- Perceval 16y ago
  Not entirely. Greece and Italy cannot issue the currency in which their debt is denominated. The Germans (and French to a lesser extent) control the ECB. The U.S. can issue the currency its debt is denominated in. That puts us in a different situation than Greece. Not necessarily better, but not as imminently bad either.
  - techiferous 16y ago
    Would this mean that the U.S. dollar, being fiat currency, would not be a good place to keep your wealth?
    - bd_at_rivenhill 16y ago
      There are other fiat currencies issued by governments that are managing their finances better, but if you decide to purchase debt issued by those governments, be sure to understand the fact that you are making a bet on the relative value of currencies and that factors other debt load and fiscal policy will affect these values, especially in the short run.
    - mechanical_fish 16y ago
      Let's let James Galbraith answer that: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis. If there's a better place to keep wealth than US Treasury securities, nobody seems to know what it is.
      - anamax 16y ago
        > If there's a better place to keep wealth than US Treasury securities, nobody seems to know what it is. "Better" does not imply good.
        bryanh 16y ago
        In the relative world of finance, I doubt you could argue anything is definitively "good".
    - Perceval 16y ago
      The traditional safe havens for people worried about fiat currency have been gold and silver. This sets them apart from other commodities. All commodities, including gold and silver, are used to hedge against inflation. But gold and silver have a traditional or historical role as an alternative to paper money. http://www.minyanville.com/businessmarkets/articles/gold-crude-oil-spreads-west-texas/5/24/2010/id/28418 http://www.minyanville.com/businessmarkets/articles/gold-cru... Treasuries, denominated in U.S. dollars, are held as liquid assets. People usually hold these when they expect markets to decline. They are perceived as very low risk, safe investments. They don't carry a lot of return, but they are seen as reliable. If you think that the U.S. is going to issue a huge amount of dollars in order to pay off its debts ('monetizing the debt'), that would ordinarily lead to a great deal of inflation. The situation we are currently facing may prevent inflation from occurring. Because we are entering a credit crunch, the overall money supply has actually started to contract (using the broadest measure of money, 'M3'). A contraction in the money supply would lead to deflation. Thus a massive printing of U.S. dollars (at least in the short term) may serve to counteract deflation rather than causing inflation. http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html http://www.telegraph.co.uk/finance/economics/7769126/US-mone... Because of the turmoil in Europe, odd things have been happening. Usually the dollar and gold move in opposite directions (strong dollar weak gold, weak dollar strong gold). But people have been fleeing the Euro, causing both the dollar and gold to strengthen at the same time. http://seekingalpha.com/article/204718-reading-into-the-simultaneous-rise-in-gold-and-the-u-s-dollar?source=feed http://seekingalpha.com/article/204718-reading-into-the-simu... The euro is facing a crisis, Japan's banks are also quietly scrambling for funds to prop up their banks, and there's a great deal of debt in the Chinese system that hasn't really been put to the test yet (but may be soon). There isn't really any currency that is unencumbered by large amounts of debt, including the dollar. Nevertheless, of the major world currencies (dollar, euro, pound, yen, yuan), the dollar probably still enjoys the greatest confidence. If you are going to invest in anything denominated in a major currency, the dollar is still probably the best at the moment. If you have no medium- to long-term faith in fiat currencies, then buying gold and silver are the traditional alternatives.
bradgessler 16y ago
How will the average Joe be affected by all this?
- Judson 16y ago
  In all seriousness, when the average Joe has to take wheelbarrows of cash into a store to buy groceries. (Granted, its unlikely our inflation will rival that of Zimbabwe) http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
- fghjkoi8uygt 16y ago
  When the value of the dollar drops the cost of anything foreign you have to buy goes up. Like that black oily stuff you are so fond of?
mechanical_fish 16y ago
Debt has to paid off and you can't just take it on endlessly. That is simply not true. Governments are different than you and me. James Galbraith: http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html http://voices.washingtonpost.com/ezra-klein/2010/05/galbrait... "Government does not need money to spend just as a bowling alley does not run out of points." "Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets." "The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes." "On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience."
- mechanical_fish 16y ago
  I'll reply to myself because I've just explained this sentence to myself: Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. The central fact of economics is: The economy grows. The number of people on earth is still growing. The productivity of individual workers is still growing. We are capable of making more stuff in every year than we did in the previous year. Now, suppose the supply of money were finite. But the amount of stuff being made keeps getting larger. So, every year, the price of everything goes down, because there's an ever-larger supply of pizza and beer but a constant amount of money. But this creates a serious problem for the economy. Because now we've got deflation. And that produces a really big incentive to save. Too big an incentive. Everything will be cheaper tomorrow, so every individual benefits by burying money in the backyard and spending as little as possible. But as people bury more and more money, the economy shrinks, because there is less and less money to spend, and everyone is trying to hang on as long as possible without spending anything. You end up with lots of people sitting, unemployed, with tools idle, and resources idle, and money buried in the backyard, staring at each other and waiting for someone to make the first move. Because, thanks to deflation, the first person who spends anything is a relative loser. And now your economy has deadlocked. And that's why the government always runs a deficit, and why the inflation target is always higher than zero. The government prints money to make sure that the supply of money stays good. This produces some amount of inflation, of course, but the growth benefits of liquidity outweigh the inconvenience of having to do something more interesting with your money than bury it. (Why don't more people understand this? Partly it's because the growth of the economy is a historically new phenomenon, dating back only about 150 years. Before that, as far as we can tell, human economic production per capita barely grew throughout millennia of history: http://www.amazon.com/Farewell-Alms-Economic-History-Princeton/dp/0691121354 http://www.amazon.com/Farewell-Alms-Economic-History-Princet... The other cause for misunderstanding is that if you, say, define "gold" or "silver" as equivalent to money, and your society's economic productivity grows, but society's ability to dig up gold or silver grows exactly as fast as overall productivity at all times, the currency magically manages itself. Because of this, for a hundred years and more of the Industrial Revolution the world managed to struggle along with a gold-based money system. But, of course, the gold standard was abandoned when people finally figured out that this process is very haphazard -- indeed, it cannot be controlled. You can't discover gold overnight, but sometimes you need more money in the economy overnight. Like now, for example.)
Encosia 16y ago
As long as the debt is payable only in dollars and dollars are available only through fractional reserve banking, it's impossible to ever truly reduce the debt owed to the Fed through any means other than default. We can shift it around (and have been for some time now), but it still exists. The real kicker is that our economy is dependent on the nonstop creation of new debt. Without it, the money supply dries up and we enter a deflationary recession.

jameskilton 16y ago

Our future will pretty closely mirror what's going on in Europe right now. Greece's debt is some 115% of it's GDP and Italy has around 110%. What happens to Europe, and particularly the PIIGS nations in the next few months will be very important to pretty much the rest of the developed world. And besides that, we can look to history to show us that most major empires (e.g. Roman, Ottoman, British) that ended up collapsing did so partly because of rampant over-spending and a very broken debt-to-gdp ratio.

jswinghammer 16y ago
On the plus side at least we won't have an empire anymore. That's about the only good thing I see coming from all this.
- abalashov 16y ago
  Perhaps, but in all likelihood it just means someone else will have an empire.
Perceval 16y ago
Not entirely. Greece and Italy cannot issue the currency in which their debt is denominated. The Germans (and French to a lesser extent) control the ECB. The U.S. can issue the currency its debt is denominated in. That puts us in a different situation than Greece. Not necessarily better, but not as imminently bad either.
- techiferous 16y ago
  Would this mean that the U.S. dollar, being fiat currency, would not be a good place to keep your wealth?
  - bd_at_rivenhill 16y ago
    There are other fiat currencies issued by governments that are managing their finances better, but if you decide to purchase debt issued by those governments, be sure to understand the fact that you are making a bet on the relative value of currencies and that factors other debt load and fiscal policy will affect these values, especially in the short run.
  - mechanical_fish 16y ago
    Let's let James Galbraith answer that: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis. If there's a better place to keep wealth than US Treasury securities, nobody seems to know what it is.
    - anamax 16y ago
      > If there's a better place to keep wealth than US Treasury securities, nobody seems to know what it is. "Better" does not imply good.
      - bryanh 16y ago
        In the relative world of finance, I doubt you could argue anything is definitively "good".
  - Perceval 16y ago
    The traditional safe havens for people worried about fiat currency have been gold and silver. This sets them apart from other commodities. All commodities, including gold and silver, are used to hedge against inflation. But gold and silver have a traditional or historical role as an alternative to paper money. http://www.minyanville.com/businessmarkets/articles/gold-crude-oil-spreads-west-texas/5/24/2010/id/28418 http://www.minyanville.com/businessmarkets/articles/gold-cru... Treasuries, denominated in U.S. dollars, are held as liquid assets. People usually hold these when they expect markets to decline. They are perceived as very low risk, safe investments. They don't carry a lot of return, but they are seen as reliable. If you think that the U.S. is going to issue a huge amount of dollars in order to pay off its debts ('monetizing the debt'), that would ordinarily lead to a great deal of inflation. The situation we are currently facing may prevent inflation from occurring. Because we are entering a credit crunch, the overall money supply has actually started to contract (using the broadest measure of money, 'M3'). A contraction in the money supply would lead to deflation. Thus a massive printing of U.S. dollars (at least in the short term) may serve to counteract deflation rather than causing inflation. http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html http://www.telegraph.co.uk/finance/economics/7769126/US-mone... Because of the turmoil in Europe, odd things have been happening. Usually the dollar and gold move in opposite directions (strong dollar weak gold, weak dollar strong gold). But people have been fleeing the Euro, causing both the dollar and gold to strengthen at the same time. http://seekingalpha.com/article/204718-reading-into-the-simultaneous-rise-in-gold-and-the-u-s-dollar?source=feed http://seekingalpha.com/article/204718-reading-into-the-simu... The euro is facing a crisis, Japan's banks are also quietly scrambling for funds to prop up their banks, and there's a great deal of debt in the Chinese system that hasn't really been put to the test yet (but may be soon). There isn't really any currency that is unencumbered by large amounts of debt, including the dollar. Nevertheless, of the major world currencies (dollar, euro, pound, yen, yuan), the dollar probably still enjoys the greatest confidence. If you are going to invest in anything denominated in a major currency, the dollar is still probably the best at the moment. If you have no medium- to long-term faith in fiat currencies, then buying gold and silver are the traditional alternatives.

bradgessler 16y ago

How will the average Joe be affected by all this?

Judson 16y ago
In all seriousness, when the average Joe has to take wheelbarrows of cash into a store to buy groceries. (Granted, its unlikely our inflation will rival that of Zimbabwe) http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
fghjkoi8uygt 16y ago
When the value of the dollar drops the cost of anything foreign you have to buy goes up. Like that black oily stuff you are so fond of?

mechanical_fish 16y ago

Debt has to paid off and you can't just take it on endlessly. That is simply not true. Governments are different than you and me. James Galbraith: http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html http://voices.washingtonpost.com/ezra-klein/2010/05/galbrait... "Government does not need money to spend just as a bowling alley does not run out of points." "Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets." "The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes." "On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience."

mechanical_fish 16y ago
I'll reply to myself because I've just explained this sentence to myself: Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. The central fact of economics is: The economy grows. The number of people on earth is still growing. The productivity of individual workers is still growing. We are capable of making more stuff in every year than we did in the previous year. Now, suppose the supply of money were finite. But the amount of stuff being made keeps getting larger. So, every year, the price of everything goes down, because there's an ever-larger supply of pizza and beer but a constant amount of money. But this creates a serious problem for the economy. Because now we've got deflation. And that produces a really big incentive to save. Too big an incentive. Everything will be cheaper tomorrow, so every individual benefits by burying money in the backyard and spending as little as possible. But as people bury more and more money, the economy shrinks, because there is less and less money to spend, and everyone is trying to hang on as long as possible without spending anything. You end up with lots of people sitting, unemployed, with tools idle, and resources idle, and money buried in the backyard, staring at each other and waiting for someone to make the first move. Because, thanks to deflation, the first person who spends anything is a relative loser. And now your economy has deadlocked. And that's why the government always runs a deficit, and why the inflation target is always higher than zero. The government prints money to make sure that the supply of money stays good. This produces some amount of inflation, of course, but the growth benefits of liquidity outweigh the inconvenience of having to do something more interesting with your money than bury it. (Why don't more people understand this? Partly it's because the growth of the economy is a historically new phenomenon, dating back only about 150 years. Before that, as far as we can tell, human economic production per capita barely grew throughout millennia of history: http://www.amazon.com/Farewell-Alms-Economic-History-Princeton/dp/0691121354 http://www.amazon.com/Farewell-Alms-Economic-History-Princet... The other cause for misunderstanding is that if you, say, define "gold" or "silver" as equivalent to money, and your society's economic productivity grows, but society's ability to dig up gold or silver grows exactly as fast as overall productivity at all times, the currency magically manages itself. Because of this, for a hundred years and more of the Industrial Revolution the world managed to struggle along with a gold-based money system. But, of course, the gold standard was abandoned when people finally figured out that this process is very haphazard -- indeed, it cannot be controlled. You can't discover gold overnight, but sometimes you need more money in the economy overnight. Like now, for example.)

Encosia 16y ago

As long as the debt is payable only in dollars and dollars are available only through fractional reserve banking, it's impossible to ever truly reduce the debt owed to the Fed through any means other than default. We can shift it around (and have been for some time now), but it still exists. The real kicker is that our economy is dependent on the nonstop creation of new debt. Without it, the money supply dries up and we enter a deflationary recession.