[backwardsname]

I know there's another debt thread, but this one is somewhat more narrow (or I'd like for it to be, ideally).

Basically, I have a question for those of you who are concerned about government debt and deficits: Why?

I'd also like to restrict this question to sovereign nations with fiat currency, floating exchange rates, and monopoly issuance of currency (i.e., not the Eurozone). What exactly are your concerns with deficit and debt in the context of government (i.e. this isn't about private debt either, which can certainly be very problematic)? What are you worried will happen if we keep running huge deficits (I say we because almost all countries run deficits in the modern world, and have for decades, though I am American specifically)?

Now, as a disclosure, I am asking a leading question: I am a progressive and subscribe to Modern Monetary Theory (which really is no different from saying you subscribe to a thorough logical examination of very basic macroeconomics -- Econ 101 stuff, truly), so I am very pro-deficit. It's just that I very rarely hear any concerns about deficits that aren't based on serious misconceptions of our monetary system, but I am open and eager to hear new arguments!

So, again, to summarize: for all you deficit hawks out there, why do you not like the deficit? What do you fear will happen as a result of it? Why do you think a surplus (or a flat budget) is desirable?

[Zerogouki]

Debts mean paying interest. Interest means a flow of capital out of one's own country and into another. This is simply not sustainable, and will eventually cause a country's economy to implode.

[TropicalK]

A heavy debt-load gives the government an incentive to inflate the currency in order to decrease the real value of the debt. Inflation has many side effects, including high real tax rates on capital gains ,hurting savers, and promoting short-term spending.

There is also increasing risk of currency collapse and war.

[backwardsname]

Debts mean paying interest. Interest means a flow of capital out of one's own country and into another. This is simply not sustainable, and will eventually cause a country's economy to implode.

Well technically debt does not have to be financed by another country's central bank or private sector -- debt can (and is) purchased by private citizens in America as well.

Also, interest payments do not represent a flow of capital to other countries, even in the instance where debt is owed to other nations' central banks and/or private sectors. You simply mean that money is flowing out of the country; money is not the same thing as capital, either macroeconomically or financially speaking. But, really, money is also not flowing out of the country.

Realistically, though, most governments pay their debts by simply creating more money -- either by issuing new debt (and, realistically, creating a never-ending merry-go-round of debt paying off previous debt is completely equivalent, both philosophically and operationally, to creating money at will), or by literally printing new money (this is less common). Occasionally it is paid through tax revenue, but only if the govt is running a surplus (otherwise tax revenue cannot alone cover govt expenses, including interest).

So, what this means is that when govts pay debts, really they are adding to the money supply (in their currency). So, what happens if we pay a lot of interest to China (central bank and private sector)?

Well, China's money supply grows, as some of this new money is spent into the domestic economy there. This correlates to an increase in aggregate demand in the Chinese domestic market, meaning an increase in Chinese consumption, which in turn results in either increased imports from America, or decreased exports to America (as they consume more of their own goods domestically). This in turn changes the overall money flow to China.

Also, realistically, interest payments do not restrict govt spending within the American economy, as we can simply issue more debt for domestic spending, meaning that we can keep the money supply in America steady. You are right in understanding that, essentially, a trade deficit, while desirable for many reasons, does represent a flow of aggregate demand and money supply out of the domestic economy, but what this means in reality is that the government must run a higher deficit and spend more domestically in order to compensate for this. If we had extremely high exports, we could conceivably run a surplus without reducing the money supply domestically because so much net income would be flowing into the domestic economy from other nations. This is how China is able to sustain growth and improve employment while often running a surplus.

A heavy debt-load gives the government an incentive to inflate the currency in order to decrease the real value of the debt. Inflation has many side effects, including high real tax rates on capital gains ,hurting savers, and promoting short-term spending.

Why? Why would government need to devalue their debt? Governments have no risk of default, nor is their spending limited by the revenue they actually take in, as they can simply issue new money/debt (which are often essentially equivalent -- the process of issuing new debt adds to the money supply, so operationally it's the same as creating new money). So, why exactly would a government care about reducing their real debt obligation?

Also, one can deficit spend without issuing debt, simply by creating money. I.e., finance a road building project simply by changing up numbers on the accounts of the construction company. This is deficit spending, but it does not incur debt (though, again, there's really no difference either way).

Also, inflation is FAR less harmful than unemployment, in economic and human terms. Each day of an able-bodied and work-seeking person being unemployed is lost aggregate demand, which means lost growth and productivity (which compounds upon itself, of course).

Even standard neo-liberal economic textbooks, such as Mankiw's Principles of Economics admit that inflation does not reduce purchasing power (as wages also rise). Inflation costs are relatively minor -- menu costs, shoe-leather costs, some mild confusion in the price system. Really, inflation mostly hurts the very very rich, and lenders (assuming their loans do not have a floating rate, although many do). This is a relatively small component of the population, but a very influential one, so perhaps it is no surprise that inflation has become the great demon of the post-war era, while unemployment has risen steadily ever since the 1950s! Seems like backwards priorities to me!

There is also increasing risk of currency collapse and war.

Well this is a grand statement! What is the risk of currency collapse? After all, government cannot default on its debt obligations, as it can always print more money. Even if the US government were required to liquidate all of its debt obligations simultaneously (an impossibility in the real world, of course, but for sake of argument...), and did so by simply printing more money (without issuing new debt), what would happen? Well, at that point perhaps you would have some hefty inflation -- but that is not the risk of default! So remember to be specific with what you mean!

Also, realistically, this has never happened. Weimar Germany and modern-day Zimbabwe are the two favorite examples of those who fear hyperinflation. However, in both cases, what really happened? Their real productive potential was destroyed by horrific warfare that decimated the population, capital resources, and productive potential of the economy as a whole.

Demand-pull hyperinflation occurs when aggregate demand outstrips productive potential. Printing more money adds to inflation not because more money simply devalues the currency -- this is a horribly simplistic understanding of monetary systems. It causes inflation because adding to the money supply causes higher aggregate demand. However, as long as we have huge unemployment rates -- 10% nearly, and closer to 18% if you include hidden unemployment and underemployment -- it would be truly insane to suggest that we are utilizing all of our productive potential here in America. Perhaps in other nations, but certainly not here (you'd have to be somewhere around 2% unemployment to reasonably make that claim, which was how we were in the 1950s).

So, again, what are you afraid of, really?

[TropicalK]

backwardsname, you seem to be operating under the assumption that the government can just print any amount of money with no consequences. If that was the case, shouldn't the government just give everyone in America a million dollars?

Well, China's money supply grows, as some of this new money is spent into the domestic economy there. This correlates to an increase in aggregate demand in the Chinese domestic market, meaning an increase in Chinese consumption, which in turn results in either increased imports from America, or decreased exports to America (as they consume more of their own goods domestically). This in turn changes the overall money flow to China.

There is nothing economically guaranteeing the proportionality of these feedbacks. And real world measures would suggest that the proportion is less than 1/5.

In that long rant, you never mentioned interest payments once, you merely mentioned the trade deficit with China. Zerogouki made one sentence and you managed to not address it.

Why would government need to devalue their debt? Governments have no risk of default, nor is their spending limited by the revenue they actually take in, as they can simply issue new money/debt

Printing money IS devaluing debt.

Well this is a grand statement! What is the risk of currency collapse? After all, government cannot default on its debt obligations, as it can always print more money. Even if the US government were required to liquidate all of its debt obligations simultaneously (an impossibility in the real world, of course, but for sake of argument...), and did so by simply printing more money (without issuing new debt), what would happen? Well, at that point perhaps you would have some hefty inflation -- but that is not the risk of default! So remember to be specific with what you mean!

Again, you are imagining my argument. I said currency collapse not default. Massive inflation is currency collapse. Whether the government technically defaulted is irrelevant.

Also, realistically, this has never happened. Weimar Germany and modern-day Zimbabwe are the two favorite examples of those who fear hyperinflation.

Hyperinflation is the result historically of practically every fiat money system ever tried, because of people like you. I am actually more concerned about an Argentinian style inflation situation.

it would be truly insane to suggest that we are utilizing all of our productive potential here in America.

Good thing nobody has suggested that in this thread. I believe that you are making a reference to the Phillips curve and the trade off between inflation and unemployment. As you should know, there is some level where trading unemployment for inflation makes sense. As someone supposedly knowledgeable in Economics, you should know that making an absolute statement like "unemployment is more important than inflation" is not standalone true. Also, the Phillips curve does not hold up to empirical testing.

So, again, what are you afraid of, really?

both unemployment and inflation.

[hannigaholic]

The problem with debt is that its burden ultimately falls on taxpayers. Whether it's through inflation (which incurs numerous costs to the economy), or directly through taxation. In principle I don't care about whether we owe foreign citizens money, or whether interest payments have to be financed through taxation; I care about whether the tax burden that eventually falls on me is being made needlessly higher in the long run by taking on debt instead of raising taxes.

As such, I mostly only support debt financing when it works out cheaper than simply taxing people there and then. Debt is not bad in and of itself, but the problem is that it's used so that governments can say 'look, we're not taxing you' when the reality is that they will be taxing you, for even more, in the long run. In fact, sometimes I think governments are inept and genuinely believe that simply by financing spending through debt they are automatically saving taxpayers money.

The alternative situation when I support debt financing is when that first condition is not met but the population are already struggling financially such that even though it would work out cheaper in the long run to simply tax them now, the pain they would have to endure now would not be worth it, similar to how sometimes you peel a plaster off slowly, even though you know the total value of pain will be higher, because the short burst of pain will be too much.

[Zerogouki]

I'm glad that TropicalK is around to sort through backwardsname's nonsense so I don't have to.

"He can compress the most words into the smallest ideas of any man I ever met." - Abraham Lincoln

[Bramlow]

I'm glad that TropicalK is around to sort through backwardsname's nonsense so I don't have to.

Indeed.

There's nothing wrong with government debt per se. Apart from Tropical's point about inflation and printing money, however, extremely large government debt leads to spiralling interest expenses simply because of the compound growth. You end up diverting enormous tax revenues not to pay off the debt, but just to keep it stable. This is money out of your national budget where it could actually do some good (in infrastructure, education, healthcare, and so on), and ends up hampering your future growth prospects and your actual ability to pay that debt off. Not a good situation to be in.

[backwardsname]

I'm glad that TropicalK is around to sort through backwardsname's nonsense so I don't have to.

"He can compress the most words into the smallest ideas of any man I ever met." - Abraham Lincoln

Yes, always a good policy not to do your own thinking.

Wait, that doesn't sound right...

backwardsname, you seem to be operating under the assumption that the government can just print any amount of money with no consequences. If that was the case, shouldn't the government just give everyone in America a million dollars?

Not at all! I've never suggested any such thing -- what I have said is that there is an irrational fear of government creating money at will. Yes, in excess, it can produce hyperinflation, but the amount that qualifies as "excess" is not some mystery number. Everyone seems to get caught up in some very abstract (and, in my opinion, highly moralized and emotional) concepts of what causes inflation without sitting down and looking at the real world and real operations in the monetary system. Inflation happens for knowable reasons -- the govt can spend money out of thin air without creating huge inflation. Indeed, it should be possible to run a massive (but stable -- i.e., non-accelerating) deficit, completely unfinanced by bonds, which would result in 0 inflation, or indeed, would be insufficient to prevent deflation (if the country were running a huge trade deficit, say).

Should the government give everyone in America a million dollars? Of course not! That would be disastrous. However, it would probably be a pretty solid idea to give everyone in America somewhere around $5,000 to $10,000. Temporary FICA holiday would be a good idea, or maybe some kind of job guarantee, where anyone able-bodied and seeking work could get a guaranteed government job for somewhere around $9/hour (maybe adjusted for COL by region).

There is nothing economically guaranteeing the proportionality of these feedbacks. And real world measures would suggest that the proportion is less than 1/5.

I didn't suggest they would be equal! I merely suggested that some effect would indeed take place. Which is true. China is rapidly becoming more expensive for companies looking to outsource as they are utilizing more and more of their productive capacity and prices (especially wage-rates) are rising.

In that long rant, you never mentioned interest payments once, you merely mentioned the trade deficit with China. Zerogouki made one sentence and you managed to not address it.

My point was that interest payments to other countries do not drain the debtor nation of currency unless the government chooses to let it. One can simply compensate for this outflow by, uh, printing more money (which I have been saying again and again). And in fact this is what we do in practice by creating a revolving door of debt. Also, I would advocate for not issuing bonds/debt to "finance" government deficit spending in the future anyway, as this is unnecessary, so that solves the interest payment problem right there.

Printing money IS devaluing debt.

That may be the consequence, yes, but the causality as put to me was backwards. Governments have no need to devalue their debt, because they are incapable of default. I've gone over this, right? Why would an individual want to devalue their debt -- to reduce their real burden and lower their risk of default. But again, you cannot equate government to currency-restricted institutions/households/individuals. They are fundamentally not comparable. This is something so many people fail to understand. Comparisons between government and businesses or households are fundamentally fraudulent because government is the monopoly issuer of currency! It is nothing short of ludicrous to compare a household to a government with a monopoly on currency, taxation, and force.

Again, you are imagining my argument. I said currency collapse not default. Massive inflation is currency collapse. Whether the government technically defaulted is irrelevant.

Fair enough, but can you provide me with an example of hyperinflation that wasn't preceded by some massive loss in productivity? I.e., don't give me the same tired Zimbabwe or Wiemar Germany examples -- in both cases, their real output was crushed by warfare, so the same amount of money chasing a tiny fraction of their previous output resulted in hyperinflation. I don't know of any examples of hyperinflation induced by deficit spending alone. Venezuela might be heading down the road of accelerating inflation but this is also arguably due to Chavez' economic policies, which gladly sacrifice output for the sake of making a moral point (same thing that happened in Zimbabwe), so it's still an issue of declining output.

Hyperinflation is the result historically of practically every fiat money system ever tried, because of people like you. I am actually more concerned about an Argentinian style inflation situation.

Every fiat money system? Well, clearly, your definition of hyperinflation is rather loose, considering that most industrialized nations have never experienced it in the fiat era. The inflation that we know in America, or the UK, or what-have-you, is really fairly mild, and has little cost to the economy. Compared to the steadily rising unemployment since the 50s, the cost to the economy is in fact completely negligible.

Good thing nobody has suggested that in this thread. I believe that you are making a reference to the Phillips curve and the trade off between inflation and unemployment.

No. I am making a Modern Monetarist operational argument about how adding to the money supply increases aggregate demand. I am making allusions to AD/employment curves. But, also, I should mention that the Philips curve does work quite well outside of cost-push inflation, so it's really extremely silly how much it's been decried as useless, when really it should have just been narrowed in application to demand-pull inflation. Seems to me that that was always more politically motivated than scientifically.

As you should know, there is some level where trading unemployment for inflation makes sense. As someone supposedly knowledgeable in Economics, you should know that making an absolute statement like "unemployment is more important than inflation" is not standalone true. Also, the Phillips curve does not hold up to empirical testing.

It is not standalone true, but it is true in 99% of real-world affairs. With the rare exception of Zimbabwe-level hyperinflation (again, which we've only ever seen be caused by declining productivity, not merely monetary expansion alone), unemployment has substantially more massive costs to output, purchasing power, and nearly all other meaningful metrics of economic well being.

both unemployment and inflation.

I suggest you seriously reconsider anything more than a token fear of the latter.

[TropicalK]

Indeed, it should be possible to run a massive (but stable -- i.e., non-accelerating) deficit, completely unfinanced by bonds, which would result in 0 inflation, or indeed, would be insufficient to prevent deflation (if the country were running a huge trade deficit, say).

I don't see how this is possible without an extreme police state and crushing price controls. Maybe you could provide an argument instead of a statement.

I didn't suggest they would be equal! I merely suggested that some effect would indeed take place. Which is true.

If the effect is small enough, it will not outweigh its costs. Magnitude is important.

Governments have no need to devalue their debt, because they are incapable of default.

You are misunderstanding me. Governments wish to devalue their debt regardless of whether they can default. Nobody is talking about default because it is irrelevant. They devalue their debt for a simple reason: to make it less economically burdensome. If your argument is that debt is not burdensome because money can simply be printed, than each dollar printed has a marginal effect of inflation. A simple substitution shows that a marginal printed dollar could either go to welfare of citizens or paying off debt. For a given amount of inflation (whatever that amount may be) a choice must be made to either enrich citizens or enrich debt-holders. Given these parameters it is even more obvious that debt is harmful.

Fair enough, but can you provide me with an example of hyperinflation that wasn't preceded by some massive loss in productivity?

Argentina, Russia

[backwardsname]

I don't see how this is possible without an extreme police state and crushing price controls. Maybe you could provide an argument instead of a statement.

Well I think the logic has been laid out quite a bit in my previous posts (and thus didn't intend to make what would be taken as a baseless statement) but I'm happy to illustrate!

First, we have to talk about how inflation works, I think. I don't think I'm making any grand or controversial statements when I say that inflation is caused by, essentially, more dollars chasing the same amount of goods. Right? This is macro 101 material -- again, I don't think this is particularly controversial. The government prints more money, this means there is more money in the private sector that can be used to purchase the same amount of goods. Therefore, as that money gets split up among all the available output, that output is priced higher. Makes sense, easy stuff.

Now, what happens if you keep the money supply stable, but productivity goes up? Then you have, essentially, the same amount of dollars chasing more real output. This means that there's not enough money to keep prices stable among real output, and you get deflation. Now, this was what happened very regularly (as we all know) in the era of the metallic standard. Bank panics and financial collapses were regular, and lost output was often extremely devastating; our current recession pales in comparison to the 6 depressions we had in the pre-fiat era (including the Great Depression), and many of the recessions and credit bubble collapses.

Why do credit bubbles pop up when money supply is too small? Well, again, to just go through some very well-accepted, non-controversial, 101 material -- when banks lend, they create money, functionally speaking. Repayment destroys this money, but if the private sector -- as a whole -- continues to leverage itself ever higher, the money supply is effectively increased. Now, unfortunately, private households and businesses (and banks) have a default risk, since they are leveraged against real assets (and when those assets become devalued, such as in the housing crisis...well, look out!), so eventually there is a crisis of confidence resulting in huge defaults, and massive destruction of the money supply, which then results in deflation (and as we know, deflation is absolutely brutal -- it leads to huge unemployment, massive losses in output and growth, etc. Inflation is, in real terms, absolutely nothing compared to deflation). Theoretically, if there could exist a financial regime in which private banks simply decided to lend to each other indefinitely, they could effectively create money indefinitely by loaning each other money to pay off previous loans to each other. It's just that it's very hard to get human beings to trust each other enough for this to ever happen.

OK, so we've gone over inflation and deflation a bit (and discussed how deflation is much much worse than inflation). The key point being that much of the price level revolves around how much money is available to purchase all of the real output of an economy.

Now, insert my previous arguments about how government deficit spending (whether financed by debt such as bonds or not -- it doesn't make much difference) increases the money supply, and how government surpluses decrease the money supply. If a government tuned its spending based on market factors such as AD and real output, theoretically the government could tune the money supply to be, as closely as is reasonably possible, tuned to the size of real output. After all, real output does generally increase. So, if the money supply stays constant (government runs budget-neutral), then this will actually be deflationary because we will have the same number of dollars chasing ever more goods and services. In order for 0 inflation and deflation, you actually need to have the money supply steadily increase to keep pace with increases in output. Otherwise you produce credit bubbles -- because if productivity increases and there are available goods, but people don't have enough money to purchase them, they will borrow. This is why government surpluses always mirror increases in private sector leveraging/decreases in the private savings rate. And if this continues for too long, the bubble pops and you have deflation and unemployment (as now).

In fact, this recession right now is a great illustration! We have expanded the non-private-credit money supply dramatically since 2008, and yet many economists argue that we may actually be experiencing real deflation, as many indexes of deflation do not factor in house prices. A simply model of "MORE MONEY = INFLATION" fails to explain this, but it makes perfect sense if you realize that after so much money was destroyed in the recent credit collapse, even huge public spending will barely manage to replace that lost money, and additionally we have huge untapped productive potential. We would have to put far more people back to work before we could start seriously worrying about substantial demand-pull inflation. Realistically, Modern Monetary Theory is the best explanation for our current crisis that other schools (be they Keynesian, Monetarist, Austrian, or whatever) are struggling to explain. MMT would anticipate both a private credit bubble resulting from the Clinton surplus that ultimately led to the 2001 recession, which we then "solved" by inducing the private market to hugely overleverage itself on the housing market (to replace overleveraging on tech stocks/startups).

Anyway, the point being that a government could, theoretically, print money without ever financing it and run a deficit perpetually and still never produce more than trivial inflation.

Now, add in the complicating factor of trade deficits. Trade deficits represent real money supply leaving the economy. This is not necessarily bad -- getting useful goods that make people's lives better at low prices is a good deal, and represents efficient allocation of resources and labor. I would not advocate ever for tariffs or other restrictive trade practices. However, it does represent a decrease in domestic money supply, as money is leaving the country. So, essentially, that leaves the domestic market with less money chasing our real output -- and thus deflation and unemployment. So, even if real output were not increasing, the government could still need to run a big deficit to counter a large trade deficit.

Conversely, if you were in the position of running an economy with about 2% unemployment, and a trade surplus, you'd probably want to run a large government surplus because there are no reservoirs of untapped labor to rapidly increase output, and additionally tons of money coming in from other countries, so you would need to be constantly destroying domestic money supply in order to prevent high inflation.

If the effect is small enough, it will not outweigh its costs. Magnitude is important.

Fair enough. I think this is just a good argument for not issuing debt when printing money though.

You are misunderstanding me. Governments wish to devalue their debt regardless of whether they can default. Nobody is talking about default because it is irrelevant. They devalue their debt for a simple reason: to make it less economically burdensome. If your argument is that debt is not burdensome because money can simply be printed, than each dollar printed has a marginal effect of inflation. A simple substitution shows that a marginal printed dollar could either go to welfare of citizens or paying off debt. For a given amount of inflation (whatever that amount may be) a choice must be made to either enrich citizens or enrich debt-holders. Given these parameters it is even more obvious that debt is harmful.

Well if the debt is domestic, then paying it off still does add to the overall domestic money supply. If it's foreign, then it adds to their domestic money supply, so printing more money to spend domestically wouldn't "stack" with foreign interest payments. So, really, they're almost like separate accounts, if that's a metaphor that makes sense. One could have huge interest payments, but still spend as much, in real terms, as one wants to on domestic investment without driving up inflation domestically anymore than if one had no interest payments at all.

Argentina, Russia

Currently?

Argentina has about, what, 15% inflation? That's not hyper-inflation. Russia has about 8.8% currently. Also not hyper-inflation.

Neither of these are ideal, but they're not terrible either. Also, I haven't done much research into the root cause of either of these countries' inflation, but I wouldn't be surprised if it had to do with some condition that was causing declining real output. Or, they might be facing cost-push inflation -- I'm not an expert in either country's economic woes, so I'm not sure, but it should be noted that all this discussion thus far has dealt with demand-pull inflation (which is vastly more common).

But, again, even if it is demand-pull inflation -- be it related to falling output or too large of a money supply -- the theories I'm advocating have a very clear solution to inflation -- raise taxes/lower government spending. But that's not something you do until you're facing undesirable levels of inflation. If you practice austerity in a time of unemployment (lowered real output), or in a time of low inflation/some deflation, you're asking for disaster.

[Arie]

Theoretically, if there could exist a financial regime in which private banks simply decided to lend to each other indefinitely, they could effectively create money indefinitely by loaning each other money to pay off previous loans to each other. It's just that it's very hard to get human beings to trust each other enough for this to ever happen.

I lack the economic expertise to comment on the technical aspects in this discussion, but I do agree with this statement. Great civilizations have fallen or changed due to a crisis of faith, which is a crisis of belief in their gods, the divinity of their kings, sacredness of their ceremonies: These beliefs formed the foundation of those civilizations social, economic and political institutions. While some of us think we're beyond all that, we are just the same. our economy is based on faith: faith in the value of money, for example. The recent economic crisis is indeed such a crisis of faith. If we can maintain our belief system, however delusional, we can maintain a functional economy. The problem is that some of us cannot chose to believe just because its better to believe -- when the genie is out of the bottle, you can't put him back...

[christoph80]

If we can just run defecits galore, with absolutely no consequence, why does poverty even exist anywhere? You fucking keynesians need to figure it out. Keynesian economics works, but only to an extent. As your GDP and interest payments start to converge, you are in trouble. Thats it. Figure it out!