6 ms·

Who defaults first: Greece or the US?

23 points by andrewaylett 15y ago

andrewaylett 15y ago
I find it hard to believe that some kind of agreement won't be reached, whether it'll be a sensible one or not, but it's certainly fair to say that there's a chance of disaster, and that a US default would be an awful lot worse than a Greek one.
- thaumaturgy 15y ago
  An agreement absolutely will be reached, but that doesn't make the situation much better. It's quite likely that Congress will have to accept yet another increase of the debt ceiling, while we'll see even more cuts from social services at home.
nhaehnle 15y ago
This whole discussion is very depressing, because it highlights how uninformed the people are about what government debt represents. At least that is what a poll with 70% against raising the debt ceiling tells me. Government debt equals private assets, and so being against government debt is being against (at least one form of) private assets. If you are against the accumulation of private assets for whatever reason (for example, because you're a communist - see what I did there?), there are still better ways of preventing that than making the government commit economic suicide. Honestly, the US should just get rid of the debt ceiling altogether, and recognize that the size of the budget deficit needs to be benchmarked not against pseudo-religious standards, but against how much productive capacity is available in the real economy - because that is what you need to look at to prevent inflation (which is the only possible negative economic outcome from a budget deficit that is too large). Edit: I would appreciate some feedback on why people vote me down. I try to reply to questions and criticism as to the contents of what I write in a calm and clear fashion. I hope people don't just vote me down because they disagree with something that I write, or find it politically uncomfortable.
- nodata 15y ago
  Why does government debt equal private assets? and another question: why does a huge thing like a country need debt at all, shouldn't it (on average) be debt free?
  - dexen 15y ago
    > Why does government debt equal private assets? Not that I fully agree with his assertion, but: Gov't debt usually takes form of `bonds'. Such bonds are issued for fixed terms and traded on free market. Both private and institutional investors (including other countries) invest in bonds, thus some of gov't debt will normally be in hands of private investors. Government bonds are considered highly secure and reliable means of investment, if somewhat low-yield. That allows the issuing country to rely on bonds for matching income to expenditures any time it needs to, at rather low cost. Should a country declare bankruptcy, or just near it, this instrument is much harder to use for the govt. Consider having a look at http://en.wikipedia.org/wiki/The_ascent_of_money http://en.wikipedia.org/wiki/The_ascent_of_money which covers the topic pretty well.
  - tobylane 15y ago
    Government debt is apparently a good thing, it encourages internal private (businesses of that country) growth. I can't find more about it, it is something worth understanding properly.
  - nhaehnle 15y ago
    > why does a huge thing like a country need debt at all, shouldn't it (on average) be debt free? Axiomatically, if you sum up over all worldwide assets and liabilities, they sum to zero. That is a fact that simply follows from accounting. So the world as a whole is (net) debt free (until we start trading with extraterrestrials, then things might change). The US probably is roughly net debt free on average, summing over all domestic private and government assets and liabilities. I don't have time to run the numbers right now. Certainly, even if the US is not debt free on average, its net debt towards foreigners is much less than the government debt, and also less than the sum of government debt held by foreigners. If people just stopped looking only on one side of the coin, they would realize that and chill out over the government debt.
bad_user 15y ago
So, this may be a stupid question but - What happens when a country defaults? What are the consequences of that?
- tobylane 15y ago
  Their loans get more expensive, and everyone who loaned to them has to write off the loans, or extend them a lot. Greece's loans are currently 1 year, if I understood correctly the plan for their default is to turn them into 30 year loans, like South America did ~25 years ago. Also, like Greece is now, the country has to have massive public service cuts, and tax hikes. Have the republicans been asked about the possibility of this?
  - StavrosK 15y ago
    I read an article the other day about how about 54% of an average salary goes to the government in one form or another. Unfortunately, it's in Greek, but, from what I saw, it was very accurate.
    - tobylane 15y ago
      That's true of most countries, and it's much lower than it used to be, mid Cold War UK and US top tax rates were 85 and 90 just for income tax. Now top tax rate is 50, but then you have National Insurance (NHS) and so on. If you buy something pre-tax you can save over 60%.
      - StavrosK 15y ago
        That's for top tax rate, though (over 100k, in Greece). I'm talking about the more average salaries, about 45k gross, which comes out to about 1700 EUR/mo net (after just income tax and insurance payments). Taxes on cigarettes, gas, etc are still absurdly high (something like 80% of the price of cigarettes is tax, if I remember correctly).
- jvdh 15y ago
  Basically, it renogatiates the terms of outstanding debts to a new interest rate, and longer terms. See also: http://en.wikipedia.org/wiki/Sovereign_default http://en.wikipedia.org/wiki/Sovereign_default
blumentopf 15y ago
Hilarious typo in a headline in the middle of that article: "Pubic opinion"
stayjin 15y ago
An honest, yet a little bit provocative, question: The "mainstream" explanation regarding Greek dept is because Greeks are bon viveurs who spent all the money they could put their hands on on drinking and gambling without financial control. Does anybody know any explanation regarding the US debt?

23 points by andrewaylett 15y ago

I find it hard to believe that some kind of agreement won't be reached, whether it'll be a sensible one or not, but it's certainly fair to say that there's a chance of disaster, and that a US default would be an awful lot worse than a Greek one.

thaumaturgy 15y ago
An agreement absolutely will be reached, but that doesn't make the situation much better. It's quite likely that Congress will have to accept yet another increase of the debt ceiling, while we'll see even more cuts from social services at home.

nhaehnle 15y ago

This whole discussion is very depressing, because it highlights how uninformed the people are about what government debt represents. At least that is what a poll with 70% against raising the debt ceiling tells me. Government debt equals private assets, and so being against government debt is being against (at least one form of) private assets. If you are against the accumulation of private assets for whatever reason (for example, because you're a communist - see what I did there?), there are still better ways of preventing that than making the government commit economic suicide. Honestly, the US should just get rid of the debt ceiling altogether, and recognize that the size of the budget deficit needs to be benchmarked not against pseudo-religious standards, but against how much productive capacity is available in the real economy - because that is what you need to look at to prevent inflation (which is the only possible negative economic outcome from a budget deficit that is too large). Edit: I would appreciate some feedback on why people vote me down. I try to reply to questions and criticism as to the contents of what I write in a calm and clear fashion. I hope people don't just vote me down because they disagree with something that I write, or find it politically uncomfortable.

nodata 15y ago
Why does government debt equal private assets? and another question: why does a huge thing like a country need debt at all, shouldn't it (on average) be debt free?
- dexen 15y ago
  > Why does government debt equal private assets? Not that I fully agree with his assertion, but: Gov't debt usually takes form of `bonds'. Such bonds are issued for fixed terms and traded on free market. Both private and institutional investors (including other countries) invest in bonds, thus some of gov't debt will normally be in hands of private investors. Government bonds are considered highly secure and reliable means of investment, if somewhat low-yield. That allows the issuing country to rely on bonds for matching income to expenditures any time it needs to, at rather low cost. Should a country declare bankruptcy, or just near it, this instrument is much harder to use for the govt. Consider having a look at http://en.wikipedia.org/wiki/The_ascent_of_money http://en.wikipedia.org/wiki/The_ascent_of_money which covers the topic pretty well.
- tobylane 15y ago
  Government debt is apparently a good thing, it encourages internal private (businesses of that country) growth. I can't find more about it, it is something worth understanding properly.
- nhaehnle 15y ago
  > why does a huge thing like a country need debt at all, shouldn't it (on average) be debt free? Axiomatically, if you sum up over all worldwide assets and liabilities, they sum to zero. That is a fact that simply follows from accounting. So the world as a whole is (net) debt free (until we start trading with extraterrestrials, then things might change). The US probably is roughly net debt free on average, summing over all domestic private and government assets and liabilities. I don't have time to run the numbers right now. Certainly, even if the US is not debt free on average, its net debt towards foreigners is much less than the government debt, and also less than the sum of government debt held by foreigners. If people just stopped looking only on one side of the coin, they would realize that and chill out over the government debt.

bad_user 15y ago

So, this may be a stupid question but - What happens when a country defaults? What are the consequences of that?

tobylane 15y ago
Their loans get more expensive, and everyone who loaned to them has to write off the loans, or extend them a lot. Greece's loans are currently 1 year, if I understood correctly the plan for their default is to turn them into 30 year loans, like South America did ~25 years ago. Also, like Greece is now, the country has to have massive public service cuts, and tax hikes. Have the republicans been asked about the possibility of this?
- StavrosK 15y ago
  I read an article the other day about how about 54% of an average salary goes to the government in one form or another. Unfortunately, it's in Greek, but, from what I saw, it was very accurate.
  - tobylane 15y ago
    That's true of most countries, and it's much lower than it used to be, mid Cold War UK and US top tax rates were 85 and 90 just for income tax. Now top tax rate is 50, but then you have National Insurance (NHS) and so on. If you buy something pre-tax you can save over 60%.
    - StavrosK 15y ago
      That's for top tax rate, though (over 100k, in Greece). I'm talking about the more average salaries, about 45k gross, which comes out to about 1700 EUR/mo net (after just income tax and insurance payments). Taxes on cigarettes, gas, etc are still absurdly high (something like 80% of the price of cigarettes is tax, if I remember correctly).
jvdh 15y ago
Basically, it renogatiates the terms of outstanding debts to a new interest rate, and longer terms. See also: http://en.wikipedia.org/wiki/Sovereign_default http://en.wikipedia.org/wiki/Sovereign_default

blumentopf 15y ago

Hilarious typo in a headline in the middle of that article: "Pubic opinion"

stayjin 15y ago

An honest, yet a little bit provocative, question: The "mainstream" explanation regarding Greek dept is because Greeks are bon viveurs who spent all the money they could put their hands on on drinking and gambling without financial control. Does anybody know any explanation regarding the US debt?