The ticking time bomb of debt... Still ticking 80 years later - Politics Forum.org | PoFo

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Everything from personal credit card debt to government borrowing debt.

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#15117996
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Rodger Malcolm Mitchell points us to nearly a century of breathless warnings about the imminent explosion of the debt time bomb. He links to a couple of dozen, but you could probably find a hundred more, liberally scattered with phrases like ticking time bomb, fiscal cliff, national bankruptcy, ad infinitum.

It's all fantasy folks. We have problems up the wazoo, and we may end up getting sunk by any number of them. But I guarantee you one thing: the national debt will never be one of those things.
#15118001
quetzalcoatl wrote: the national debt will never be one of those things.


That's a bit of a strong statement.

I think eventually they will be right and the debt will be a massive problem. However, that is contingent on America fucking up in a multitude of other areas first, so arguably, we should be focused on other things like growing the economy more and solving inequiality, etc. If you get those things right, then I agree that the national debt all by itself wouldn't be a big problem. Though, I'm sure that statement is debatable too.
#15118010
Never say never, I guess. However, here's a good alternative way of looking at the US national debt:

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To break this down a little, the federal debt has an inverse relation to private debt in our monetary system. This is expressed by basic accounting identities. You can't reduce public debt without either increasing private debt or reducing private savings.

The only time debt is a problem is when there is excessive private debt in the system. Private debt is anything like mortgages, car loans, consumer credit, municipal bonds, corporate bonds, etc. Ironically, it is usually attempts to reduce public debt that result in higher private debt, which triggers economic contraction.

Taxes and private debt remove dollars from the economy. Government spending and public debt add dollars to the economy.
#15118017
quetzalcoatl wrote:To break this down a little, the federal debt has an inverse relation to private debt in our monetary system. This is expressed by basic accounting identities. You can't reduce public debt without either increasing private debt or reducing private savings.


The reduction of public debt will be a lot larger than the reduction of private savings, for realistic numbers. Apart from the direct effect of taxation it also depends on the effect on output, given the current state of the economy. In general the government can increase the total savings of the economy by being frugal, in particular if the savings can be easily exported.
#15118092
Rancid wrote:I'd have to think about this some more. That relationship could just be a historical correlation, and not some sort of hard truth.


A little macro food for thought:

National Accounting relationship between aggregate spending and income:

Y = C + I + G + (X – M), where Y is GDP (income), C is consumption spending, I is investment spending, G is government spending, X is exports and M is imports (so X – M = net exports).

GDP (Y) is also subject to another set of identities, as follows:
Y = C + S + T, where S is total saving and T is total taxation (other variables as previously defined).

If you rearrange the factors, you can separate out these accounting identities into a sectoral balances relationship between these three sectors: private sector (S – I), government budget sector (G – T), and external sector AKA net exports (X – M):

(S – I) = (G – T) + (X – M), or alternately:
Net Private Spending = Net Govt Spending + Net Exports

If you examine this sectoral relationship in detail, you can see a few interesting tidbits:

* If you increase net exports, you can increase net private spending without changing net govt spending (this is the post war Asian miracle, in macro terms).
* If net imports remain steady and net government spending remains constant, then net private spending will remain constant. That sounds okay at first glance, but it has a big problem: it doesn't allow for family income to remain constant as population grows. Net private spending must increase in proportion to population growth, or else families will suffer reduced incomes.
* Either net govt spending or exports must increase as population increases, or else per capita incomes will fall.
* If net exports are steady, net government spending must increase over time to match population growth. Notice that net government spending is defined as G - T (gross govt spending minus taxes).
* Net government spending can only grow if the deficit grows. That is to say government spending must exceed taxes on a consistent basis, which is exactly the same as saying there must be a deficit.
* This is reflected in the historical record, where the relatively small number of budget surpluses are followed by sharp recessions as private net income falls.

NOTE: accounting identities are not causal factors, they simply reflect the underlying structural relationships in monetary economies.
#15118097
quetzalcoatl wrote:
A little macro food for thought:

National Accounting relationship between aggregate spending and income:

Y = C + I + G + (X – M), where Y is GDP (income), C is consumption spending, I is investment spending, G is government spending, X is exports and M is imports (so X – M = net exports).

GDP (Y) is also subject to another set of identities, as follows:
Y = C + S + T, where S is total saving and T is total taxation (other variables as previously defined).

If you rearrange the factors, you can separate out these accounting identities into a sectoral balances relationship between these three sectors: private sector (S – I), government budget sector (G – T), and external sector AKA net exports (X – M):

(S – I) = (G – T) + (X – M), or alternately:
Net Private Spending = Net Govt Spending + Net Exports

If you examine this sectoral relationship in detail, you can see a few interesting tidbits:

* If you increase net exports, you can increase net private spending without changing net govt spending (this is the post war Asian miracle, in macro terms).
* If net imports remain steady and net government spending remains constant, then net private spending will remain constant. That sounds okay at first glance, but it has a big problem: it doesn't allow for family income to remain constant as population grows. Net private spending must increase in proportion to population growth, or else families will suffer reduced incomes.
* Either net govt spending or exports must increase as population increases, or else per capita incomes will fall.
* If net exports are steady, net government spending must increase over time to match population growth. Notice that net government spending is defined as G - T (gross govt spending minus taxes).
* Net government spending can only grow if the deficit grows. That is to say government spending must exceed taxes on a consistent basis, which is exactly the same as saying there must be a deficit.
* This is reflected in the historical record, where the relatively small number of budget surpluses are followed by sharp recessions as private net income falls.

NOTE: accounting identities are not causal factors, they simply reflect the underlying structural relationships in monetary economies.


Got it. Thanks
#15118121
quetzalcoatl wrote:A little macro food for thought:

National Accounting relationship between aggregate spending and income:

Y = C + I + G + (X – M), where Y is GDP (income), C is consumption spending, I is investment spending, G is government spending, X is exports and M is imports (so X – M = net exports).

GDP (Y) is also subject to another set of identities, as follows:
Y = C + S + T, where S is total saving and T is total taxation (other variables as previously defined).

If you rearrange the factors, you can separate out these accounting identities into a sectoral balances relationship between these three sectors: private sector (S – I), government budget sector (G – T), and external sector AKA net exports (X – M):

(S – I) = (G – T) + (X – M), or alternately:
Net Private Spending = Net Govt Spending + Net Exports

If you examine this sectoral relationship in detail, you can see a few interesting tidbits:

* If you increase net exports, you can increase net private spending without changing net govt spending (this is the post war Asian miracle, in macro terms).
* If net imports remain steady and net government spending remains constant, then net private spending will remain constant. That sounds okay at first glance, but it has a big problem: it doesn't allow for family income to remain constant as population grows. Net private spending must increase in proportion to population growth, or else families will suffer reduced incomes.
* Either net govt spending or exports must increase as population increases, or else per capita incomes will fall.
* If net exports are steady, net government spending must increase over time to match population growth. Notice that net government spending is defined as G - T (gross govt spending minus taxes).
* Net government spending can only grow if the deficit grows. That is to say government spending must exceed taxes on a consistent basis, which is exactly the same as saying there must be a deficit.
* This is reflected in the historical record, where the relatively small number of budget surpluses are followed by sharp recessions as private net income falls.

NOTE: accounting identities are not causal factors, they simply reflect the underlying structural relationships in monetary economies.


S is not total savings in your equations, it's private savings. With total savings it would simply be S=I+X-M.

As for your tidbits:
- Obviously, but that wasn't the Asian miracle. The Asian tigers had negative account balances, the didn't export savings, but imported them, while at the same time having trade surpluses. You have to include more variables for that, namely net income abroad and net current transfers.
- That makes no sense. Simple example, S=I, G=T, totally allows for all of them to grow together.
- Nope, see above.
- Nope, see above.
- Per definition.
- The identity holds at any time, nothing follows something else. It's not clear what you mean by "private net income".
#15118677
wat0n wrote:
Well, back in 1940 and until the '50s debt was indeed fairly high. The Federal Government went on to reduce it during the next decades.


It didn't. The debt to GDP ratio was reduced because GDP increased faster, but the stock of govt debt continued to increase.

Conversely, attempts to reduce govt debt by spending cuts and/or tax rises typically result in higher debt to GDP ratios through their negative impact on output.
#15118678
quetzalcoatl wrote:If net imports remain steady and net government spending remains constant, then net private spending will remain constant. That sounds okay at first glance, but it has a big problem: it doesn't allow for family income to remain constant as population grows. Net private spending must increase in proportion to population growth, or else families will suffer reduced incomes.
Either net govt spending or exports must increase as population increases, or else per capita incomes will fall.


Rugoz wrote: That makes no sense. Simple example, S=I, G=T, totally allows for all of them to grow together.


:?: Could you eloborate?
#15118735
SueDeNîmes wrote:It didn't. The debt to GDP ratio was reduced because GDP increased faster, but the stock of govt debt continued to increase.

Conversely, attempts to reduce govt debt by spending cuts and/or tax rises typically result in higher debt to GDP ratios through their negative impact on output.


Right but that's how we measure the stock of debt for the most part. I don't think anyone cares about the level itself.
#15118741
Rancid wrote:Indeed, however, couldn't one argue that chasing ever growing GDP growth in order to combat debt levels is unsustainable?


It depends. What does it depend on? At its most fundamental level, it depends on:

  • Interest payments as percent of GDP, which in turn depend on the interest rate of the stock of debt and the debt level as percent of GDP themselves
  • Primary surplus/deficit as percent of GDP
  • Trend GDP growth

https://www.imf.org/external/pubs/ft/tn ... nm1002.pdf
#15118749
SueDeNîmes wrote:The debt to GDP ratio was reduced because GDP increased faster, but the stock of govt debt continued to increase.

Conversely, attempts to reduce govt debt by spending cuts and/or tax rises typically result in higher debt to GDP ratios through their negative impact on output.
wat0n wrote:Right but that's how we measure the stock of debt for the most part. I don't think anyone cares about the level itself.


The stock of outstanding govt "debt" is precisely what the supposed "ticking time bomb" refers to. Some people care about it so much that they spend $billions trying to create panic about it, lobbying govt to keep it down, installing "debt clocks" in public places, funding thinktanks and university courses which oppose it.

Who are they and why do they do it? It's actually quite simple:

JK Galbraith wrote:
To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.


-JK Galbraith.
#15118766
SueDeNîmes wrote::?: Could you eloborate?


Not sure what to elaborate.

Investment (I) increases the capital stock, hereby increasing next period output (Y) and with it C,T,G,I,S. Part of G can also be seen as investment (e.g. infrastructure, education).

Galbraith wrote:And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.


Galbraith died in 2006, he's excused.
#15118801
Rugoz wrote:Not sure what to elaborate.

Investment (I) increases the capital stock, hereby increasing next period output (Y) and with it C,T,G,I,S.

What does "next period" mean and how does I increase without depleting S unless either G or (X-M) change positively?

Part of G can also be seen as investment (e.g. infrastructure, education).

Err yeah, but it can't increase the money supply without either net govt spending or a trade surplus. If the population increases and the money supply doesn't increase through either G or X-M, households and firms must either cut spending or dis-save, i.e. either spend savings or go into debt.
#15119009
..in fact, how does C increase without deflation? How does I increase under deflation? How does T, then, increase? The govt taxes in units of its own currency, not widgets.

If the population increases without increases in either G or (X-M), none of the other components can "totally grow together" without continuous orderly deflation. Where is the real world example of that?
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