4 ms·

The US debt is a problem in the same way that the earth constantly falling into the sun is a problem. You've missed a velocity vector in your analysis. Ask yo

The US debt is a problem in the same way that the earth constantly falling into the sun is a problem. You've missed a velocity vector in your analysis. Ask yourself this: if you get dollars for your maturing Treasury, where do those dollars end up in aggregate? They are either taxed away due to them circulating past tax points as they are spent and respent, which eliminates the need for a bond, or they are saved which increases the demand for a new bond from the individual, the deposit holding bank and the central bank (on the same dollar due to the hierarchy of money). Where's the problem?

Apes 7y ago
Your analogs are poor fits: The solar system is an extremely stable system, while our economic system is not at all stable. Your proposed money cycle is based on the concept of a closed system, which the US economy is definitely not. If the US government starts having to pay an unbearable amount of debt, money is going to outflow to other countries and make it harder for the US to issue new debt. If the US just issues enough money to pay the debt off, then interest rates are going to go through the roof and overcompensate for what just happened, making the situation even worse. The US economy would probably collapse.
- neilwilson 7y ago
  The dollar economy is a closed system. Dollars cannot be converted. They are always exchanged. So where do they go and what do people do with them? A paper dollar is just a receipt for a liability entry in the US treasury - wherever you are in the world. For interest rates to go up, bond prices have to go down. If the Fed just buys up bonds that drop below par with new dollars, how can interest rates go up?
AnimalMuppet 7y ago
If your velocity enables you to stay in orbit, there's no problem. If not, then you're just falling, which is also fine... until you hit the ground. As for your analysis of what happens when you receive payment for a bond, you seem to be saying that the government gets the money back, either by taxing spending or by you buying a new bond. I don't buy that analysis, for two reasons. First, I could receive payment for a Treasury, and buy some other investment with it. And second, your analysis would remain unchanged even if the result was hyperinflation (that's "hitting the ground" in my first paragraph).
- neilwilson 7y ago
  "First, I could receive payment for a Treasury, and buy some other investment with it." You could. But that is just an asset swap. The person who gets your cash is then faced with the same choice you were - spend it (which will result in taxation) or save the money (which ends up with a bond purchase). Always remember that money doesn't stop at the first use.
  - AnimalMuppet 7y ago
    No, they are faced with the same choice I was - spend it, or invest the money in a bond, or invest it somewhere else. In particular, people in aggregate can decide to invest less money in Treasury bonds. This has in fact been happening - there have been Treasury auctions that have "failed", which in practice means that dealers buy the remaining bonds. But they can't do that forever, because the dealers don't have infinite money. And even the static picture that you present isn't enough, because the government is running a deficit, and therefore needs more money to come into Treasury bonds. The same amount isn't enough. Even the same amount plus the interest earned isn't enough.

Apes 7y ago

Your analogs are poor fits: The solar system is an extremely stable system, while our economic system is not at all stable. Your proposed money cycle is based on the concept of a closed system, which the US economy is definitely not. If the US government starts having to pay an unbearable amount of debt, money is going to outflow to other countries and make it harder for the US to issue new debt. If the US just issues enough money to pay the debt off, then interest rates are going to go through the roof and overcompensate for what just happened, making the situation even worse. The US economy would probably collapse.

neilwilson 7y ago
The dollar economy is a closed system. Dollars cannot be converted. They are always exchanged. So where do they go and what do people do with them? A paper dollar is just a receipt for a liability entry in the US treasury - wherever you are in the world. For interest rates to go up, bond prices have to go down. If the Fed just buys up bonds that drop below par with new dollars, how can interest rates go up?

AnimalMuppet 7y ago

If your velocity enables you to stay in orbit, there's no problem. If not, then you're just falling, which is also fine... until you hit the ground. As for your analysis of what happens when you receive payment for a bond, you seem to be saying that the government gets the money back, either by taxing spending or by you buying a new bond. I don't buy that analysis, for two reasons. First, I could receive payment for a Treasury, and buy some other investment with it. And second, your analysis would remain unchanged even if the result was hyperinflation (that's "hitting the ground" in my first paragraph).

neilwilson 7y ago
"First, I could receive payment for a Treasury, and buy some other investment with it." You could. But that is just an asset swap. The person who gets your cash is then faced with the same choice you were - spend it (which will result in taxation) or save the money (which ends up with a bond purchase). Always remember that money doesn't stop at the first use.
- AnimalMuppet 7y ago
  No, they are faced with the same choice I was - spend it, or invest the money in a bond, or invest it somewhere else. In particular, people in aggregate can decide to invest less money in Treasury bonds. This has in fact been happening - there have been Treasury auctions that have "failed", which in practice means that dealers buy the remaining bonds. But they can't do that forever, because the dealers don't have infinite money. And even the static picture that you present isn't enough, because the government is running a deficit, and therefore needs more money to come into Treasury bonds. The same amount isn't enough. Even the same amount plus the interest earned isn't enough.