3 ms·

> At nation scale, lending money does not work like buying coffee. This seems to be the econ 101 answer all modern day Chicago - school influenced economists g

> At nation scale, lending money does not work like buying coffee. This seems to be the econ 101 answer all modern day Chicago - school influenced economists give out. Student: if the US has a debt that's more than their current GDP, isn't that bad? If a family had a credit card debt higher than their current salary, we'd say that they were in bad financial shape. Economist: The macroeconomics of a nation work much differently than a single family's budget. Student: Well, when the family has no plans to cut expenses, continues to charge more and more each year on the credit card, and their solution involves some vague plan of getting a huge raise sometime in the future, how does this not end in disaster for the family, but turn out fine for a government doing the same thing. Economist: Running deficits and borrowing money in perpetuity is good for a large country to do, just not for an individual. It is known. Student: well eventually the family's interest payments will be more than they actually make, leaving nothing left for actual expenses. At that point, their card is canceled and they have to sell all their stuff, move out of their home, and crash with the parents. And nobody lends to them again for a long time, and only at high rates. How does a nation avoid this outcome when the math is the same? Economist: Trust us <waves Jedi hand>. I get the feeling we're going to someday look at today's accepted macroeconomic theories, and wonder just WTF we we're thinking.

diffeomorphism 8y ago
> Student: How does a nation avoid this outcome when the math is the same? Economist: As I have told you multiple times by now, it isn't. That is what we taught you in first year. You can't simply arbitrarily scale up models from lemonade stand to international trade. Things are not all linear, simplifications in one model are simply not valid in another model. Arguments like these always strike me as similar to "if evolution, then why are there still monkeys". Maybe you are right, everything is really simple and everybody else has been too stupid to see it. Or maybe people are right when they tell you that you don't quite understand what you are talking about.
- leetcrew 8y ago
  there are many facts about computers that seem trivial to me, but would take weeks of background to even begin to explain to my intelligent friends in other fields, so i can accept that there might be some complex topics in other disciplines where you just have to take the experts at their word. that being said, are there any economists here who can ELI5 the actual difference between private and public debt?
  - roenxi 8y ago
    I've been experimenting with explaining this - here is the current draft. An ordinary borrower has a number of ways they can get in to trouble - like losing their job and so being unable to repay a loan. The government avoids all that because government writes the law and it controls the creation of currency so it can always choose to technically not have a problem. These changes make it almost meaningless to assess a government's debt in norminal terms (eg, 'the debt is $x trillion!' isn't actually a concern, because the government as a body can simply create $x trillion if it wants. Wish I could do that :P). So we have to look at the governments debt in real terms, at which point we need a completely different model than a small time player, who is mostly concerned with by nominal issues. Then you run in to the issue that in real terms, nobody agrees on anything - which is why the economy is run with a nominal currency system. But there are people, like me, who think in real terms the US of today is a completely different beast from the US of the 1970s. There are massive demographic and political differences.
    - leetcrew 8y ago
      thanks for the stab at an explanation. it sounds like you're saying that the debt load vs GDP is important, but the relationship in nominal terms doesn't say much. is that an accurate reading?
      - roenxi 8y ago
        Yes. But even then it is a bit difficult to speak with certainty because governments choose the tax rate and as long as the army stays intact can recover from nearly anything. In this context, I believe debt load to GDP for the US after WWII, and that didn't cause a problem. The concern is that the US has a debt load consistent with a world war and conditions that are really quite favorable. So the obvious questions are "at what point does this get paid back?" and "in like-for-like real terms, assuming politicians are cynical and greedy, is there any reason to believe this debt will be honored?".
- deleted 8y ago
  [deleted]

diffeomorphism 8y ago

> Student: How does a nation avoid this outcome when the math is the same? Economist: As I have told you multiple times by now, it isn't. That is what we taught you in first year. You can't simply arbitrarily scale up models from lemonade stand to international trade. Things are not all linear, simplifications in one model are simply not valid in another model. Arguments like these always strike me as similar to "if evolution, then why are there still monkeys". Maybe you are right, everything is really simple and everybody else has been too stupid to see it. Or maybe people are right when they tell you that you don't quite understand what you are talking about.

leetcrew 8y ago
there are many facts about computers that seem trivial to me, but would take weeks of background to even begin to explain to my intelligent friends in other fields, so i can accept that there might be some complex topics in other disciplines where you just have to take the experts at their word. that being said, are there any economists here who can ELI5 the actual difference between private and public debt?
- roenxi 8y ago
  I've been experimenting with explaining this - here is the current draft. An ordinary borrower has a number of ways they can get in to trouble - like losing their job and so being unable to repay a loan. The government avoids all that because government writes the law and it controls the creation of currency so it can always choose to technically not have a problem. These changes make it almost meaningless to assess a government's debt in norminal terms (eg, 'the debt is $x trillion!' isn't actually a concern, because the government as a body can simply create $x trillion if it wants. Wish I could do that :P). So we have to look at the governments debt in real terms, at which point we need a completely different model than a small time player, who is mostly concerned with by nominal issues. Then you run in to the issue that in real terms, nobody agrees on anything - which is why the economy is run with a nominal currency system. But there are people, like me, who think in real terms the US of today is a completely different beast from the US of the 1970s. There are massive demographic and political differences.
  - leetcrew 8y ago
    thanks for the stab at an explanation. it sounds like you're saying that the debt load vs GDP is important, but the relationship in nominal terms doesn't say much. is that an accurate reading?
    - roenxi 8y ago
      Yes. But even then it is a bit difficult to speak with certainty because governments choose the tax rate and as long as the army stays intact can recover from nearly anything. In this context, I believe debt load to GDP for the US after WWII, and that didn't cause a problem. The concern is that the US has a debt load consistent with a world war and conditions that are really quite favorable. So the obvious questions are "at what point does this get paid back?" and "in like-for-like real terms, assuming politicians are cynical and greedy, is there any reason to believe this debt will be honored?".
deleted 8y ago
[deleted]