Given a Shovel, Americans Dig Deeper Into Debt

oneplain1 · Tar Sands Joined: Nov 18, 2007 Posts: 54

This post has basically opened the can of worms called:
one hundred and one things wrong with America and what the hell can we do to undo the colossal clusterf__k that we have created?

Apparently the person in today's world who gives a rat's ass about what is going on and what would be the "right" thing to do to fix it, is the one with the problem.

Makes my head hurt! Wallet too!

TheDude

BlueGhostNo2 · Tar Sands Joined: Jun 24, 2008 Posts: 50

Na na boom in worm based human composting tech startups! :D

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

cube · Fusion Joined: Mar 12, 2005 Posts: 3796

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

dorlomin · Light Sweet Crude Joined: Aug 05, 2007 Posts: 1124

$490 billion deficit projected for 2009.

Byron100

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

Byron, I will tackle that one tomorrow. Usually debt is repaid through a combination of inflation, currency devaluation, debt repayment including interest (future wealth), slower growth and reduced (future) consumption. We can argue tomorrow whether inflation, currency devaluation and debt default is 'free money'? Usually countries that go down that route are much poorer for it in the end.

Argentina is a serial defaulter. I think that kept them poorer than they would have been had they just spent within their means and developed normally. At least at the turn of 19th century the GDP of France, Canada and Argentina were very similar. Now Argentina is a minnow in comparison and there has been a real human cost to their five debt defaults in the intervening decades. I really do not think they got away with anything. But we can talk about the USA tomorrow. Cheers.
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The organized state is a wonderful invention whereby everyone can live at someone else's expense.

Byron100

Rather than start a new thread, I''ll just use this one to propose one of my "alternate history" fantasies...if some of you folks could be so kind to comment on this, it'd be much appreciated. Smile

Alternate history of the United States: The Founding Fathers, looking ahead into the future, they see the value of saving money for the future, as well as the poisonous nature of debt. So, they include in the new Constitution that the Federal Government must run a surplus of at LEAST 10% a year, for the next 200 years. This money would go into US Treasury Bonds, the interest paid on it would just be reinvested into the pile. Also, they include in the Constitution that loaning money for interest is strictly prohibited by law, both on the federal and state level. If someone wants to buy something, they gotta save for it in advance. So, America is founded on the principle of "anti debt"...saving is the path to wealth.

Fast forward to the year 2000. America gets together on a national discussion on what to do with the huge pile of money sitting in the so-called National Fund, which if released, would yield annual interest payments of approx $50,000 for *every man, woman and child* (and no, illegal immigrants can't have any, not a dime, you gotta be a US citizen, bro...LOL). So, they amend the Constitution to award interest from the National Fund so everyone gets that $50,000 a year, for each and every year from here on forward.

So, does that mean America would be wealthy beyond imagining? Wouldn't there be enough national wealth so we could all live in mile-tall glass towers, powered by gargantuan fusion plants, while vast spaceships go around harvesting the riches of the Solar System? Would we be well on our way to a Utopian Star Trek-like future, in which no one wants for anything, as there is pretty much unlimited money to pay for all the technological wonders our minds could possibly conceive?

Or would all this lead to a total economic clusterf*ck even worse than the one we're in now, with Armageddon about to arrive any day now?

Comments, anyone?
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cube · Fusion Joined: Mar 12, 2005 Posts: 3796

Byron100

3aidlillahi

If you go back 200 years and cut Jefferson's hair, we lose WWII to an Asian monk. That's how f*'ed up you can make the world with a time machine. There's so many factors that you'd have to realize if you went back in time and changed things.

1) Slavery. Would that still be able to exist in such an environment? If not, then no Civil War (or at least much much less likely).

2) We could not have moved West as quickly. Hey, we may not have even been able to purchase the West. Anybody typing West of the Mississippi may have been speaking Spanish or French at the time.

3) Wars. Could we have survived WWI and especially WWII as a creditor nation? We had a debt 120% the size of our GDP at the end of WWII! Not too possible to increase the war machine without debt.

It goes on and on. Pretty fun stuff to think about though.

But if we just go with your basic hypothetical and assume that someone all of the political, military, technological, external forces are the same (we win WWI and II, have a slave trade and Civil War, etc.) then...

The government was absolutely miniscule back in the day. Even after the Revolutionary War, we only had a debt of 50 million USD (maximum 100 billion USD now, give or take). The role of the government originally was not to stimulate growth but to protect the people from the British, French, Canadians, pirates, etc. and ensure a common purpose.

Also, when you have a positive savings rate for the US government, that would mean a strong currency. D'oh! There was no federal currency back then. Only bank currencies, I think as well as gold/silver. But let's also say we create a federal currency (although it would have probably been seen as an act of tyranny by the government over private enterprise).

Because of the fiscal restraint of the government, this currency is very strong. That causes there to be great foreign investment in the US, which will supply jobs for the US which the government wouldn't be supplying through debt. That's one point I think that cube is missing.

Whether that is enough to counteract the lack of domestic investment is another issue, one which Mr. Bill might be able to answer.

I also would have loved to see how the US's anti-debt policy would work during droughts and crop failure. 300 million in the US? More like 3 million. Twisted Evil

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Riches are not from abundance of worldly goods, but from a contented mind.

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

The problem with running a permanent current account surplus as defined by:

Budget Surplus + Trade Surplus + Balance of Payment Surplus = Current Account Surplus

is that your surpluses by definition have to be someone else's deficits. The two must always balance.

So I would posit that if you're already running a Trade + Balance of Payment Surplus with the rest of the world you really do not need a Budget Surplus as well to have a strong and stable currency. A balanced budget would be just as effective.

The second problem is that any surplus has to be invested. Any investment carries a degree of risk. Counterpart risk. Interest rate risk. Currency risk. Market risk.

Therefore, you might not get your invested surplus back if you lent it to the developing world and they decide to default. They may see paying for basic infrastructure as more important than paying interest and principle back on your debt. Actually given the history of lending to emerging countries, debt default and debt forgiveness that is not an unrealistic assumption.

Thirdly, if you run a budget deficit you only stimulate above trend growth in the short-term. Whether the economy grows faster over time depends on the ROI of your deficit spending. If the nominal interest rate on your debt is say 5% p.a. then the economy will only grow faster than trend over time if the ROI is above 5% p.a.

If an enlightened government only invested in projects that improved its competitiveness then this might be possible up to a point. At some point you would have all the infrastructure you need to be the most competitive nation on earth and from that point on any further investments would tend to decrease in return.

However, any debt taken on to subsidize consumption, or in order to transfer wealth from productive activities to unproductive ones, would not reach the same ROI of at least 5% p.a., and then the economy has to grow below trend as that principle plus interest is paid out of future wealth.

Balancing budgets after running deficits means slower growth and job losses in the public sector for example. But if you never created the debt in the first place then the economy does not have to grow slower to repay that debt.

As the US economy is currently the largest in the world trying to make the US economy grow faster or become proportionately larger is kind of pointless. The vulnerability of the US economy is that a) it already owes more than $9 trilllion (federally) to the rest of the world, b) that it does not have that surplus or money to pay for existing infrastructure much less transition to a lower energy future, c) that it has huge unfunded future liabilities that they cannot pay for and if they cannot that causes other social, political and economic problems, and d) that the political will to run balanced budgets much less pay down existing debt seems to be politically unacceptable, so like any problem, if it is not addressed it tends to get worse becoming a bigger problem in the future.

If the USA would have passed laws to run balanced budgets at the federal, state and municiple level instead of deficit spending then the economy may be smaller in size, but it would be a lot stronger and less susceptible to external shocks whether they come from higher energy prices or shortages or of the financial kind. And of course inflation would have been a lot lower as well so saving would have been rewarded and those on fixed incomes would have fared better. I am not a Keynesian, but I have to feel bad the way his pseudo-followers have bastardized his ideas on supply side economics. And here we are - weak and vulnerable! ; - ))
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The organized state is a wonderful invention whereby everyone can live at someone else's expense.