A Question About Public Debt in Western Nations - Page 3 - Politics Forum.org | PoFo

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Everything from personal credit card debt to government borrowing debt.

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#13989497
just a quick question as their appear to be some knowledgable people regarding economics posting on this thread.

what would happen if the US passed a bill tomorrow paying off the entire national debt? if the government printed 15 trillion in one sitting, how bad would inflation rise? we talking mugabe/zimbabwae status?
#13989692
Eran wrote:This is not true. Most banks collateralize and/or hedge their mutual exposures. The net damage to a major bank due to bankruptcy of another shouldn't be major. There would be no domino effect, as Lehman's collapse demonstrated. In fact, surviving banks are likely to flourish in the short-term due to reduced competition.


Lehman's collapse put strain on the system. A system under strain is more vulnerable to new stresses, not least is the subsequent lack of trust between financial institutions, which in this case saw inter-bank lending rates shoot up. Within weeks of Lehman's collapse, both AIG and Washington Mutual also failed.

What more proof do you need? Is your argument really "we didn't suffer complete financial meltdown so there was no effect"?

Eran wrote:
If a major bank shut it's doors for a week, riots on the streets would be almost guaranteed.
There are simple measures that can be taken. Most major countries currently insure retail depositors. Honouring those insurance commitments would have mitigated any street riots.

Don't full yourselves. It wasn't the common man in the street that was bailed out. It was equity holders and executives in the banks themselves. This was pure crony capitalism, disguised through fear-mongering as a necessary system rescue.

Not to mention the degree to which banks' recklessness was cause and promoted by past rescues and guarantees.


I'm aware of the deposit guarantee schemes. My father had an investment in an Icelandic bank and out of stupidity my government decided to refund his cash (even though the bank wasn't even based in the EU!). However the refund took some time to arrive - I don't recall the exact delay, but it was certainly weeks, if not months. Governments are bureaucratic and act slowly. They wouldn't be capable of reacting fast enough to stop serious social unrest if a major retail bank failed.

oppose_obama wrote:just a quick question as their appear to be some knowledgable people regarding economics posting on this thread.

what would happen if the US passed a bill tomorrow paying off the entire national debt? if the government printed 15 trillion in one sitting, how bad would inflation rise? we talking mugabe/zimbabwae status?


I wouldn't consider myself knowledgeable enough to fully answer that question, but I very much doubt that it would be as bad as Zimbabwe.

What would be likely to happen is a serious lack of trust in the US on the part of any future bond holders or investors. This would likely result in serious inflation (south american style, not Zimbabwe style), and the US would have difficulty both exporting and importing goods. It would be forced to become far more self sufficient, and could expect to regress economically by several decades. The government would be given a choice between it's military and the welfare of it's people. It couldn't afford to maintain both, so would have to either abandon it's military to cutbacks and decay, or maintain the military and use it to suppress rising civil unrest.
#13990123
A couple of additional points -

Firstly, bailing out each individual saver in a retail bank is likely to be considerably more expensive than a bank bailout. This is because you would effectively be de-leveraging the banks assets. Banks only typically keep a small amount of deposits in reserve - for example, if $100 is invested in a bank, it may keep $5 on hand and lend out the other $95. If a government bails out the bank, then it will simply need to top up it's reserves, so in the example, it may have to replace the $5. However if the bank fails completely, and the government needs to refund lenders, then it will need to refund the entire $100. That's why it's often better to act pre-emptively and bail out banks rather than rescue depositers. Not to mention that for a government to individually bail out each customer doesn't sit squarely with the libertarian doctrine of some posters on this thread. I presume libertarians would rather see starving children and riots.

Secondly, I'd suggest a good model for what may happen if the US tried to immediately print it's way out of it's debts would be what happened to Russia after the collapse of the soviet union. Things got nasty for a while, but eventually they settled down. Perhaps you guys would get your very own Putin :lol:
#13990135
Lehman's collapse put strain on the system. A system under strain is more vulnerable to new stresses, not least is the subsequent lack of trust between financial institutions, which in this case saw inter-bank lending rates shoot up. Within weeks of Lehman's collapse, both AIG and Washington Mutual also failed

AIG and WaMu were both on the verge of bankruptcy independent of Lehman. I don't think there is any causal relation between Lehman's collapse and theirs.

Inter-bank lending rates did go up. This is precisely the kind of price signal that markets generate and which in turn modify the behaviour of their participants. Higher rates cause banks to reduce lending to each other, which in turn reduces the kind of inter-dependencies that worry you.

What more proof do you need? Is your argument really "we didn't suffer complete financial meltdown so there was no effect"?

Any kind of proof would be nice. We have none - only hysterical pronouncements by power-hungry politicians and whining of their banker cronies. I didn't claim Lehman's collapse had no effect - allowing more banks to fail would certainly have had some effect, but we have no good reason to suggest it would have let to the kind of melt-down that governments used to justify immensely costly (in the short term) and distortive (in the long term) rescues.

Governments are bureaucratic and act slowly. They wouldn't be capable of reacting fast enough to stop serious social unrest if a major retail bank failed.

Yet you trust them to know when and how to rescue banks? You trust them with hundreds of billions of dollars?

In the slightly longer term, some losses by individuals wouldn't be catastrophic to society or the economy, but would help sensitise people to look into the credit quality of the institutions in which they invest their money. Nothing would work to make bankers cautious and responsible more than market discipline.

Firstly, bailing out each individual saver in a retail bank is likely to be considerably more expensive than a bank bailout.

I understand your point. You are assuming that a bank failure in the presence of credible deposit insurance would still lead to a run.

A run, however, is not an unmitigated disaster. If people know that their checking account is safe, the need to withdraw will be greatly mitigated. In the past we had lines in the streets, but not riots or breakdown of society.

If the experience of a bank in which you trusted your money failing is a bad one, that will cause people going forward to give some attention to which banks (or which types of accounts) they trust. Nothing will cause bankers to behave prudently more than knowing that the alternative is to lose business.

From a libertarian principled perspective, I expect several consequences to withdrawal of government intervention in retail banking:
1. Banks will both become, and advertise the way they are safe. Large equity (i.e. shareholder capital) component in the balance sheet will help, as will rating reports and cross-guarantees from other financial institutions.

2. Banks will start offering 100% reserve deposits. Whether the underlying money is gold or fiat, there is no reason why a bank shouldn't be able to offer a perfectly safe account (albeit not an interest-paying one). Most people would split their financial assets amongst several banks, and keep some of those assets in such perfectly safe deposits. For a reason I still don't fully understand, there is no current mechanism for a commercial bank to segregate cash holdings from the assets of the bank itself. Banks can do that for securities (such as government bonds) but not for cash.
#13990293
cathartic moment wrote:
Firstly, bailing out each individual saver in a retail bank is likely to be considerably more expensive than a bank bailout. This is because you would effectively be de-leveraging the banks assets. Banks only typically keep a small amount of deposits in reserve - for example, if $100 is invested in a bank, it may keep $5 on hand and lend out the other $95. If a government bails out the bank, then it will simply need to top up it's reserves, so in the example, it may have to replace the $5. However if the bank fails completely, and the government needs to refund lenders, then it will need to refund the entire $100. That's why it's often better to act pre-emptively and bail out banks rather than rescue depositers.



This is spot on in my opinion.
A very powerful insight.
#13990753
^^

This conclusion is incorrect and all you have to do is look at your numbers to see why.

Even at the height of the crisis less than 5% of banks assets were considered 'toxic'.
#13991290
5% of all banks in totality or 5% for each bank?

There is a massive difference.

If one bank has 80% toxic assets and another bank 12 % toxic assets, that explains why one collapses and the other survives.

So the banks that folded in the crash were those banks that had traded and insured all the toxic assets. Who had specialised in them.
Northen Rock and RBS for example.


5% of the total banking assets is a massive amount of money. Vast.
That might be the monetary equivalent of 1 in every 20 banks going bust.


However I am not confident of your 5% figure.
The write downs for toxic assets of two of the banks I am invested with during the crash were around 60% and 40%.
With the 40% at the time being considered to be an abnormaly low exposure. A cautious bank.

The one with the 60% write down got nationalised. The one with the 40% did not. Other banks in between managed to get private bailouts.
#13997276
Well unlike private companies, government's usually aren't obliged to repay debt by any deadline, etc.

So the Right are always lying when they moan about government debt. It's really pathetic
#13997334
redcarpet wrote:Well unlike private companies, government's usually aren't obliged to repay debt by any deadline, etc.

So the Right are always lying when they moan about government debt. It's really pathetic


Factually incorrect. Government debts are normally for a fixed term. Often, when the term expires, government will simply borrow more money at the end of the term, but in order to do so, they need to have a reasonable credit rating (which is exactly the problem that Spain and Italy have been experiencing recently).
Last edited by cathartic moment on 02 Jul 2012 09:48, edited 2 times in total.
#14338969
I Had a S & L go broke and the monthly interest along with the principal exceeded the amount protected by FDIC.

Over time I got some of the "attached" back but never the total amount confiscated. It was paying 14% :-)

Never bought another Jumbo where that could happen.


Little chance :-( !
#14353125
"Baff"]Defaulting on debt is an issue if you wish to engage in international trade.
So it's importance is of differing levels depending on each specific country.
Global trade is facilitated through the exchange of money, rather than a direct exchange of goods. Promissary notes. If your promise is worthless, trade with you as we know it ends.

Austerity is just an execise in common sense.
If you spend more than you produce, eventually your economy will fail. The big question to my mind is "when?", rather than if.
There is an argument to be made that I might borrow money in order to start a successful business. That the act of borrwing will make me richer in the long term.
The problem here is the track record of those people in our governments who have been using this argument. Have they done so successfully, are they doing so for the greater good of the whole or just their own political clientele?
An easy way to judge this would be to check and see that those debts have been repaid, or whether, the debt is still rising. If it is continually rising, instead of just having risen for a short period and then got repaid, it is clear that profits are not being made.
Further to this, the profits that are made must outweigh any intrest payments on the money to be worthwhile. So once the cost of borrowing reaches a certain scale it is no longer a solution anyway.

The cost of borrowing is going to go up if you show no sign of repaying, if your economy is in defecit, or if you start sounding like you are willing to default.
So you can't just run endless social programs, the option is not available. You have to balance the amount of programs you wish to have with the amount of resources you have available to maintain them.


It is my opinion that political power > economic power.
So as hard as I may work to achieve my goals, a group of people can always take it off of me by warrant of their group power. It is after all easier to gang up and take someones factory than it will ever be to gang up and build one for yourself.
It is for this reason that I expect my economy to collapse sooner or later.

Once this conclusion has been reached any sensible person must endeavour to place his savings and securities elsewhere. Beyond the political ability of others to take from them.
So if your solution is to tax the most productive members of any society more, the resultant behaviour we can reasonably expect from them is to move beyond your ability to exercise control over them. To go somewhere where they will not be discriminated against.


Skeptic-1

It seems when one does not have the capital to start a business the place to go has for years been the stock market "not the bank"

With the right promotion you can pedal anything there. Banks don't want any part of you until you are a going profitable entity.

Maybe buy your receivables .....

IMO if you can't raise the capital why would one think you can run a profitable venture ? I wouldn't lend mine ! We went through that when we started to blow the bubble. It was a disaster ! It used to be one felt the banks knew business ( and they did) until they were let loose to operate in areas they were neophytes.

Why would banks lend money to a small operator to buy an others mortgage ? Can you explain that ? Thats their business !!

Are there people classified as "workers" or does everyone in the UK just shuffle paper ? Often As partners in crime of one type or another I would feel more comfortable if I understood what makes you guys keep ticking :-)
#14417473
It's not serious in Australia.

It's only a serious problem for countries with a high national debt, because, or I presume, the service cost each year is higher. The devil is in the detail, always.

Plus the Right have a tendency to rail against any debt. As well as borrowing to finance a deficit budget as a Keynesian strategy to end a recession. That's a political choice, to rail against it and portray it as simply spending money in a 'splurge' and so on is misleading.
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