Public debt - Politics Forum.org | PoFo

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Everything from personal credit card debt to government borrowing debt.

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By Kman
#13474865
Because debt is a politically expedient way of getting votes, cutting spending in order to balance a budget will upset voters alot more than simply taking out a loan in order to paste over the structural problems.
By Average Voter
#13475166
The interest rates in more trusted countries are below inflation, so they actually pay back less money in terms of real value.
By eugenekop
#13475229
The interest rates in more trusted countries are below inflation, so they actually pay back less money in terms of real value.


But they still pay a lot of money. Third of Israel's budget goes to paying debt. Isn't that ridiculously stupid?

Because debt is a politically expedient way of getting votes, cutting spending in order to balance a budget will upset voters alot more than simply taking out a loan in order to paste over the structural problems.


Yeah that's what I thought, but can really people be that stupid? Come on, what a stupid way to organize your livelihood??
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By Fasces
#13475242
If you can promise tax cuts and increase in welfare spending, you get votes. Long-term thinking is actually actively discouraged by the structure of the system, and those who look at the future often pay the price in the short-term, before they can even realize their vision. This is the single best argument against democratic government in the world today. Congratulations.
By wat0n
#13475253
Part of the valid reasons deal with operational issues. For example up here the gov't is having problems to spend in CLP (Chilean Pesos, our currency) so they had to issue debt (in CLP) to get some... Yes, it's sort of a weird situation :P

Other valid reasons are wars (if it's a defensive one), counter-cyclical policies in recessions and financing public investment for achieving economic development (maybe some South East Asian countries fall under the last category).
By eugenekop
#13477540
So it looks like I should always vote for the right-wing parties because they cut government spending, right? It just doesn't make sense otherwise, at least not until the deficit will disappear.
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By Nets
#13477546
If you look at the following list (http://en.wikipedia.org/wiki/List_of_co ... ublic_debt), you will see that ALL countries in the world have public debt.....So why is it a norm for having a debt among countries?


That is because public borrowing can be very useful when used prudently. Especially for developing countries who can borrow against an expected brighter future. In a sense, for these countries, it is a way of transferring wealth across time, bringing it from the future to the present.

For the most developed countries, this makes less sense, they should be creditors.

However reasonable individuals like myself do not usually live in constant debt. Why should we? You pay interest for your debt, so you end up losing even more money.


Yes, prima facie, you are losing money in absolute terms. But you have to remember that their is a convenience cost for access to credit. Lenders will only lend if it is profitable relative to other places they can park their money. Ignoring inflation for a moment, creditors must be compensated for passing up other investment opportunities by funding you.

Which brings me to your point of "losing even more money". The ability to bring money from the future to the present (by borrowing against your future earnings/whatever) is worth quite a bit. You aren't really losing anything, in present value terms. It is like saying you are losing money whenever you pay rent.

Consumer debt isn't necessarily a bad thing to have, Eugenekop. Access to credit for consumer durables like houses, cars, washing machines, etc is important and if managed responsibly is a huge economic boon.

I agree though, credit card debt to fund overspending is ridiculous.
By eugenekop
#13477558
Access to credit for consumer durables like houses, cars, washing machines, etc is important and if managed responsibly is a huge economic boon.


1. Is that the your main argument? Your post was a bit too professional, I didn't understand everything.
2. That is only true when the "consumer durables" will make you a more money than the money you lost on paying the interest. For example a company might loan money to buy equipment in order to produce a product that will make it a big profit and return the loaded money. But as far I know this is not the case with governments. They never return the load, so they continue to lose money on interest. Is that right?
By lucky
#13477559
Nets wrote:Consumer debt isn't necessarily a bad thing to have, Eugenekop. Access to credit for consumer durables like houses, cars, washing machines, etc is important and if managed responsibly is a huge economic boon.

Generally, debt is good if it is used to fund investments rather than consumption, and the investments give better returns than the interest rate on debt. Those three examples (house, car, washing machine) are investments, and they generate returns (not necessarily directly monetary) - a place to live (you save rent), a means to move (no need to rent a car or use other transport), a way to wash clothes. You have a productive asset in exchange for debt.

It's worse when you borrow to consume - for example for a vacation - and then you're left with debt and no productive asset. That's often stupid. The only exception I would make is if you're fairly certain of a large increase in your future income, but that's rare.
By eugenekop
#13477807
Generally, debt is good if it is used to fund investments rather than consumption, and the investments give better returns than the interest rate on debt.


Yeah that's what I thought. But then all government debts are bad because most of them pay for social security which is consumption.
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By LehmanB
#13477899
You have to remember almost a third of Israel's income is comming from taking new debts! So Israel did decide to enter a process of lowering the debt- but you do it with games- you take new debt to reduce the old debt since the new loan has lower credit payment. Eventually, a small slice of the debt is being cut within each year. Israel today don't take further debts for the regular usage.
By eugenekop
#13478222
You have to remember almost a third of Israel's income is comming from taking new debts! So Israel did decide to enter a process of lowering the debt- but you do it with games- you take new debt to reduce the old debt since the new loan has lower credit payment


So you actually think public debt is a good thing, or at least not as bad as I think it is? To me at first it seemed as living in constant debt and paying a lot of interest rates. Is that not the case? How much money a government can save each year if there was no debt?
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By Dave
#13478228
A significant reason for the universal existence of public debt is not just state behavior, but the hegemony of the debt-based money system. Prior to the financial crisis, for instance, Australia maintained public debt in circulation for the explicit reason to maintain a "risk-free" market in securities. The financial community makes money underwriting public debt issues and then collects interest on them, thus they have a powerful vested interest in maintaining the existence of public debt.
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By Rei Murasame
#13478271
Fasces wrote:If you can promise tax cuts and increase in welfare spending, you get votes. Long-term thinking is actually actively discouraged by the structure of the system, and those who look at the future often pay the price in the short-term, before they can even realize their vision. This is the single best argument against democratic government in the world today. Congratulations.

You've taken the words right out of my mouth, Fasces.

But I would add as well that at present, liberal-democracies are more responsive to the business-class lobbying than they are to the regular voters, and so the worst case scenario manifests: where the society at large gets very little welfare spending even after trying quite hard to get it, and the business-class gets tax cuts and exemptions that cause tax revenue to be so low that the State still ends up borrowing to maintain itself.
By eugenekop
#13478292
But I would add as well that at present, liberal-democracies are more responsive to the business-class lobbying than they are to the regular voters, and so the worst case scenario manifests: where the society at large gets very little welfare spending even after trying quite hard to get it, and the business-class gets tax cuts and exemptions that cause tax revenue to be so low that the State still ends up borrowing to maintain itself.


What about what Lehman said? It makes sense.
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By LehmanB
#13478336
So you actually think public debt is a good thing, or at least not as bad as I think it is? To me at first it seemed as living in constant debt and paying a lot of interest rates. Is that not the case? How much money a government can save each year if there was no debt?

A debt is a bad thing, even if has positive aspects.

The system of returning loans is initialy based on taking new debts to fund the returnings. Absurd as it sounds. If it has to return 100 billion Nis a year; and pay a credit of 5 Billion Nis, it will pay it by taking a new debt of 90 billion Nis, and the rest from its tax income. On the new debt, it will pay a lower interest since its position in the credit list is higher today. So the debt will be shrinked abit, so do the yearly payment on credits. Its a long process.

Despite being in a debt is initialy bad, immagine instead of shrinking the public debt, it would build a new rail system, that do coasts. Or will build a subway to Gush Dan. What is needed for that are 10-20 billion Nis per year to rebuild the entire railways. And this is about the investments of Israel in shrinking the public debt.

Now, calculate, what is more urgant? What will return itself more? What gives other parameters such as national stability and social benefits such as strengthning the periphery?

In the other hand, i'm worried the Knesset will invest it mainly on welfare so perhaps it is better atleast to return loans and not to release it to the government. :lol:
By eugenekop
#13478480
So Lehman, you disagree with Fasces? He said:

If you can promise tax cuts and increase in welfare spending, you get votes. Long-term thinking is actually actively discouraged by the structure of the system, and those who look at the future often pay the price in the short-term, before they can even realize their vision. This is the single best argument against democratic government in the world today. Congratulations.


In your opinion, public debt can be very useful for example to improve infrastructure (that will get more revenues in the future) and to pay for previous debt?
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By hannigaholic
#13480301
But they still pay a lot of money. Third of Israel's budget goes to paying debt. Isn't that ridiculously stupid?


No, it's sensible. When interest rates are lower than inflation, the present value of the debt is actually lower than the present value of just raising the money through taxes. You're only looking at the nominal values.

Say inflation is running at 10% and interest rates are 8% (for ease of calculation).
In year 0 you either have the option of taxing people to raise $100 million, or borrowing $100 million at 8% interest and paying it back 1 year later.
$108 million in one year is worth $98.2 million now, so the sensible thing to do is to borrow the money and make a saving to the taxpayer, in real terms (IE inflation-adjusted), of $1.8 million.

By not taking on the debt you would have saved money nominally, but incurred a cost in real terms.

This is one of the reasons why deficit financing during the current recession would have been a better idea than wholesale cuts, because all the 'quantitative easing' pushed inflation above interest rates on government bonds, at least in the UK. The cuts are essentially the same as extra taxes in terms of a present value cost-benefit analysis.
By backwardsname
#13481502
there are some problematic assumptions in the OP and following discussion

one is that you don't seem to understand that governments with sovereign control of their own currency (and which are fiat floating exchange currencies) can simply pay their debts at will -- that is, they can simply create money (we often call this "printing money" although in reality it is more changing numbers on speadsheets at various banks than any physical process).

This is why governments (excepting those that cannot control their own currency, such as state govts in federal systems, or Greece in the Eurozone, as an example) can never default on their debt.

So, in a sense, paying interest does not take a chunk out of the govt's budget, because we can simply spend more money. The govt has no theoretical limit on its budget -- govt does not even need to borrow money in order to spend money. Govt requires no income in order to spend, because govt has a monopoly on the issuance of currency and a monopoly on force and taxation.

In fact, governments issuing debt is no different from simply "printing money" -- although few people grasp this.

Illustration:

Let's assume a net neutral amount of public and private assets for sake of simplicity, and then explore the operational reality (as in, what steps literally take place) of what happens when govts issue debt.

Govt A issues $100 in bonds. Private Citizen B buys the $100 bond (public "debt").

Public's net assets: Still 0. Private economy's net assets: still also 0.
Net balance sheet:
Govt:
0 cash
0 debt obligations or assets

Private:
0 cash
0 debt obligations or assets

Nothing has changed yet -- the citizen traded $100 in liquid assets for a financial asset that was valued at $100. In other words, the private sector just lost -$100 in cash but gained a promise cash that is worth +$100, which essentially functions as money. No net change.

Net balance sheet is as follows
Govt:
+$100 cash
-$100 debt
= 0

Private:
-$100 cash
+$100 asset
= 0

Govt traded a financial asset (which it created essentially out of thin air) worth $100 for $100 in liquid cash. In other words, it created a debt-obligation of -$100 in order to get +$100 in cash, or, a promise of -$100 for immediate +$100. No net change.

Govt A now spends that $100 it just got in cash on a bridge (a very small bridge, apparently). What has happened?

The govt net assets are now down $100 -- the liquid cash is gone, but it still has the debt obligation of -$100 out to the private sector. And what about the private sector? It is now +$100 because it has the debt asset (the bond) and also the $100 from the govt spending. Essentially, the private sector bought something, and then got refunded the money but kept what it bought!

Balance sheet is as follows:
Govt:
0 cash
-$100 debt
= -100

Private:
0 cash
+$100 asset
= +100

As you can see, the net private money supply is in fact exactly equal to the govt deficit. What the government has done by issuing debt is creating money. It is literally no different from simply printing money. Both contribute in the same way to aggregate demand by increasing the money supply.

Functionally, then, there is no reason to issue debts when the govt wants to deficit spend -- it might as well just "print" money, since that is effectively what it is doing by selling debt that is not held against actual assets. That's the difference between govt debt and private debt -- private debt is held against actual assets of equal value, whereas govt debt is held against, essentially, the govt's ability to issue currency.

Now, you may be thinking, what happens though when the govt pays that bond out in five years (or whatever)?

OK, so govt is at -120, and public at +120 (because the value of the bond has increased by $20, and thus the govt now has a debt obligation of $20 that it didn't have five years ago before the bond matured, and the private sector has a debt asset of +$20 that it didn't have five years ago).

Govt:
0 cash
-120 debt

Private:
0 cash
+120 asset

So now the govt has to pay that $120 somehow -- i.e., convert that debt obligation that the private sector holds into cash. Essentially, we need to arrive at this balance sheet:

Govt:
-120 cash
0 debt
= -120

Private
120 cash
0 asset
= +120

Same as before, but the assets have just switched categories. So, govt needs to essentially replace the debt obligation it has with liquid cash (which is why the debt obligation can essentially function as money in the first place -- it's a promise of liquidity later on)

It can tax the private sector $120 (private -120, govt +120) but what would happen then?

Govt:
+120 cash
-120 debt
= 0

Private:
-120 cash
+120 cash
= 0

The private sector would give $120 in taxes to the govt, resulting in: 0 net assets for both. We're back to square one! This is very bad, because presumably in the last five years, real productive potential of the economy has gone up, but now we've erased $120 of the money supply in the private sector. Uh-oh -- now you've got deflation!

Luckily, taxes are politically unpopular, so the govt doesn't usually do this. It instead issues another $120 in bonds to the private sector.

What happens here? Well, same as last time. Govt creates a -$120 debt obligation, but gets +$120 cash in return. Private sector gets $120 in debt assets, but loses $120 in cash.

Let's look at the balance sheet:
Govt:
+120 cash
-120 debt (bond 1)
-120 debt (bond 2)
= -120

Private:
-120 cash
+120 asset (bond 1)
+120 asset (bond 2)
= +120

Govt then uses the cash from the new bond to pay back the old bond

Govt:
0 cash
-120 debt (bond 2)

Private:
0 cash
+120 asset (bond 2)

But of course now the government has 0 net cash, so if they need money for a new expenditure, we have to start the process anew, and by the time bond 2 matures, the govt will need to borrow $150 (or whatever the matured value is) to pay the old debt, resulting in a net money increase of $30 over the next five years.

So, from five years ago, essentially the private sector got another $20 out of the debt maturing -- in other words, by "borrowing" money to pay for expenditures, it's not any different than the government just printing $100 to pay for the bridge in the first place, except that borrowing actually results in more money supply creation in the long term due to interest (which is a good thing, but sort of a roundabout way of doing things).

So, essentially, if you recoil at the idea of the government just printing money outright -- well, we're already doing it! Government debt is therefore not like regular household or business debt, because we can pay it by creating new financial assets (new money) out of thin air, which businesses and households cannot, because their debt is loaned against real assets (there is a limit to their borrowing), so the net amount never actually goes up.

What this means for interest payments -- they don't actually limit the government's budget, because the government budget is not inherently limited. The concept of borrowing money to spend money, for the government, is entirely silly and misunderstanding of how a modern monetary system works that extends all the way up the chain to the central bank and the treasury (well, they get it, but the politicians who charge them with their duties do not!).

And remember, the net assets of the government = the net money supply of the private sector, so government surpluses are actually a way of saying that the government is destroying your money and net assets. This is why private savings rates are mirror images of deficits. This is why personal savings in the Clinton surplus era collapsed entirely, and why savings rates are going up right now in America -- because we're in a huge deficit, which allows for people to save in the private sector. Govt surpluses just mean the govt is destroying your money.

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