5 ms·

It sounds like you're suggesting that America should more often earn more than it spends. (Correct me if I'm wrong.) Again I'm not a student of economics, but

by acabal 14y ago

It sounds like you're suggesting that America should more often earn more than it spends. (Correct me if I'm wrong.) Again I'm not a student of economics, but the fact that America in the 80 years since has become the most powerful economy in the world's history, while only being in the black 8 times, suggests to me that earning more than you spend isn't really as important as many think. Rather, it's the flow of money in and out of the economy and other factors that really matter. That's why my original comment is about: Assuming that a nation is like a household--i.e., that at some point it obviously should earn more than it spends, because that's how a household operates--leads to conclusions that aren't always supported by history. Weimar Germany's situation partly mirrors the one today. To deal with hyperinflation and a collapsing economy, in '31 Chancellor Brüning cut spending by 30%. It eventually led to a budget surplus but at the cost of 30% unemployment. Those events helped set the stage for what followed in WW2. Obviously the comparison is tangential, but it's interesting to think about nonetheless. See: http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-germany-1931 http://www.guardian.co.uk/global/2011/nov/24/debt-crisis-ger... http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic#Outcome http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Re...

Kynlyn 14y ago
I see you're point about America's economy being the most powerful, but isn't that perhaps a bit like a marathon runner who sprints full speed the first mile and says "Whoa! Look at how much I'm ahead of everyone else!". You may be right, but it seems there is more than just our current situation to consider. There are long-term ramifications of that debt. At some point, we can't just keep borrowing. It might be working for us today, but like the sprinting marathon runner, eventually it will catch up to us.
jpatokal 14y ago
No, I'm simply suggesting that once you're sufficiently indebted, there's a limit beyond which people stop lending to you. And if you're getting further and further into real debt (adjusted for inflation and growth), you'll hit that limit eventually. And yes, America is currently the most powerful economy in the world's history, and that's why it has an AAA credit rating despite its fairly disastrous finances. But barring total implosion, China'll be the top dog within a decade or so, and what happens then?
- acabal 14y ago
  The way I understand it, a nation's economic standing as a borrower is based basically on trust. A lender nation trusts that the borrower nation can eventually repay its debt. That trust isn't so much related to the raw number of the current debt, but rather how the lender believes the borrower will behave and evolve in the coming years. Today nobody has a reason to believe the US will do anything but continue to grow (in the long run). If in a hypothetical alternate universe the US had a civil war tomorrow, it could have a massive budget surplus and yet it'd probably find that nobody would be willing to lend to it regardless, because the climate of repayment would be so uncertain. In today's real world, the US has the power to print its own money. In very real terms it can define the very term "debt" as whatever it pleases. That, combined with its status as a massive buyer of foreign goods, history of entrepreneurship and growth, history of corrective action by the Fed, insanely powerful military, and so on, means that it could owe 100x times as much as it does today, and nations would probably still happily lend. A nation is not a household. It doesn't reach some magic number "lending ceiling" where everyone else says, "you owe 100 trillion and 1 dollars, we're not gonna lend any more" like might happen to a regular person with a credit card. A "AAA" rating is just some label that some private company makes up. So the issue isn't some dollar amount drawn out of an economist's hat, but rather the real trust inferred from a nation's geopolitical position. Any real students of economics please do correct me, as I have no doubt my reasoning is flawed somewhere. But this is how I currently understand it.
  - bruceboughton 14y ago
    It's important to note that many of the holders of US debt are US-based, i.e. it is not all external debt like it would be in a household.

by acabal 14y ago

Kynlyn 14y ago

I see you're point about America's economy being the most powerful, but isn't that perhaps a bit like a marathon runner who sprints full speed the first mile and says "Whoa! Look at how much I'm ahead of everyone else!". You may be right, but it seems there is more than just our current situation to consider. There are long-term ramifications of that debt. At some point, we can't just keep borrowing. It might be working for us today, but like the sprinting marathon runner, eventually it will catch up to us.

jpatokal 14y ago

No, I'm simply suggesting that once you're sufficiently indebted, there's a limit beyond which people stop lending to you. And if you're getting further and further into real debt (adjusted for inflation and growth), you'll hit that limit eventually. And yes, America is currently the most powerful economy in the world's history, and that's why it has an AAA credit rating despite its fairly disastrous finances. But barring total implosion, China'll be the top dog within a decade or so, and what happens then?

acabal 14y ago
The way I understand it, a nation's economic standing as a borrower is based basically on trust. A lender nation trusts that the borrower nation can eventually repay its debt. That trust isn't so much related to the raw number of the current debt, but rather how the lender believes the borrower will behave and evolve in the coming years. Today nobody has a reason to believe the US will do anything but continue to grow (in the long run). If in a hypothetical alternate universe the US had a civil war tomorrow, it could have a massive budget surplus and yet it'd probably find that nobody would be willing to lend to it regardless, because the climate of repayment would be so uncertain. In today's real world, the US has the power to print its own money. In very real terms it can define the very term "debt" as whatever it pleases. That, combined with its status as a massive buyer of foreign goods, history of entrepreneurship and growth, history of corrective action by the Fed, insanely powerful military, and so on, means that it could owe 100x times as much as it does today, and nations would probably still happily lend. A nation is not a household. It doesn't reach some magic number "lending ceiling" where everyone else says, "you owe 100 trillion and 1 dollars, we're not gonna lend any more" like might happen to a regular person with a credit card. A "AAA" rating is just some label that some private company makes up. So the issue isn't some dollar amount drawn out of an economist's hat, but rather the real trust inferred from a nation's geopolitical position. Any real students of economics please do correct me, as I have no doubt my reasoning is flawed somewhere. But this is how I currently understand it.
- bruceboughton 14y ago
  It's important to note that many of the holders of US debt are US-based, i.e. it is not all external debt like it would be in a household.