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The US federal government budget is not like a household or the budget of a firm. Households and firms are USD users, which means that they can only make paymen

The US federal government budget is not like a household or the budget of a firm. Households and firms are USD users, which means that they can only make payments in USD if they first obtain those USD (whether as income or by loan). The US federal government, on the other hand, is the issuer of USD. If it wants to make a payment in USD, then nothing can stop it. This means that the debt-to-GDP ratio is an entirely meaningless measure as far as the government's ability to fight a recession is concerned. (It may have play a role in other consideration, such as questions about equity and distribution of wealth, but that's a digression.)

snowwrestler 12y ago
While you are correct economically, many of the U.S. government's decisions are made politically. And a high debt-to-GDP ratio definitely affects politics. I remember when TARP was up for debate. It was obviously needed, and it was the right idea (as proven out by its success). It still failed in the first vote in the House, because it was politically unpopular with enough people.
autokad 12y ago
i completely disagree. its not just politics as mentioned bellow, which is a very key point. The us government couldn't just keep printing money to pay for all of its deficit. the money would become worthless, and at a point it would be like breathing in a bag, but that doesn't matter as it would have collapsed before that ever happened. the dept to GDP ratio (as well as printing money) has a huge effect on a countries ability to issue bonds, just ask the PIIGS. interests rates on bonds would rise very quickly making the annual deficit larger and since all interest rates in the country are based off the US treasury interest rate (the risk free rate), they would rise too, even if the US' interest rate was at 0. that'd make any recession get out of control as credit froze up. it'd be the fed's worst nightmare. they would loose control of interest rates during a recession while the central government would loose its ability to borrow money.
- nhaehnle 12y ago
  I'm afraid that saying "just ask the PIIGS" is to miss the crucial point. Those countries are members of the Eurozone, and therefore their governments are currency users rather than issuers. Therefore, an analysis that draws upon your everyday household experience carries at least some water, even though it is entirely inapplicable to a monetarily sovereign government such as the US government. Other than that, I can only recommend that you try to consider all the relevant dynamic effects in the macroeconomy. For example, if money would indeed become worthless, this would not happen overnight due to the immense inertia of an economy as large as the US economy. It would be a drawn out process. Throughout that process, as a consequence of money losing value, the nominal GDP would increase, and therefore the debt-to-GDP ratio would decrease, which means that the system has a very strong self-stabilizing tendency.

snowwrestler 12y ago

While you are correct economically, many of the U.S. government's decisions are made politically. And a high debt-to-GDP ratio definitely affects politics. I remember when TARP was up for debate. It was obviously needed, and it was the right idea (as proven out by its success). It still failed in the first vote in the House, because it was politically unpopular with enough people.

autokad 12y ago

i completely disagree. its not just politics as mentioned bellow, which is a very key point. The us government couldn't just keep printing money to pay for all of its deficit. the money would become worthless, and at a point it would be like breathing in a bag, but that doesn't matter as it would have collapsed before that ever happened. the dept to GDP ratio (as well as printing money) has a huge effect on a countries ability to issue bonds, just ask the PIIGS. interests rates on bonds would rise very quickly making the annual deficit larger and since all interest rates in the country are based off the US treasury interest rate (the risk free rate), they would rise too, even if the US' interest rate was at 0. that'd make any recession get out of control as credit froze up. it'd be the fed's worst nightmare. they would loose control of interest rates during a recession while the central government would loose its ability to borrow money.

nhaehnle 12y ago
I'm afraid that saying "just ask the PIIGS" is to miss the crucial point. Those countries are members of the Eurozone, and therefore their governments are currency users rather than issuers. Therefore, an analysis that draws upon your everyday household experience carries at least some water, even though it is entirely inapplicable to a monetarily sovereign government such as the US government. Other than that, I can only recommend that you try to consider all the relevant dynamic effects in the macroeconomy. For example, if money would indeed become worthless, this would not happen overnight due to the immense inertia of an economy as large as the US economy. It would be a drawn out process. Throughout that process, as a consequence of money losing value, the nominal GDP would increase, and therefore the debt-to-GDP ratio would decrease, which means that the system has a very strong self-stabilizing tendency.