Debt ceiling

[Felix]

@Felix--I agree with your description of how it works, but do you feel that unlimited (maybe unchecked is a better word?) printing now only to be offset by tightening later to reign in inflation seems like a good plan? Would a more moderate spending plan that necessitated less money printing be better in the long term because the subsequent inflation issues would be less severe? Would the government and markets be less beholden to the Fed if there was more moderate deficit spending?

Well, my counterquestion would be this:

Is a deliberate and economically unneccessary default now not worse than a potential inflation risk at some undefined point in the future which can be prevented and reigned in by policy action?

And don't you have more important things to worry about than the small probability of eventual inflation? Don't you have infrastructure to improve, education to provide, unemployment to deal with, an aging population, climate change, etc.

The problem is not money. Not when you can print it into and tax it out of existence. It is in real resources and the real economy where you get wealth and prosperity. Why throw a virtual monkey-wrench into the machine which prevents dealing with the real issues?

[slimicy]

Is a deliberate and economically unneccessary default now not worse than a potential inflation risk at some undefined point in the future which can be prevented and reigned in by policy action?

It is if you have no faith in the capability of future policy action. I'm fairly moderate myself, but probably identify closest with the libertarians and this is mostly where they're coming from. They feel like the country is mortgaging itself with the assumption that it can be fixed in the future, but they (the libertarians) have absolutely zero faith in the future of our political machine. I do think default is excessive, but I can see where they're coming from; faith is not in high supply at the moment.

[Felix]

But that whole "mortgaging itself" idea stems from a false identification of the dollar as a gold-standard currency. What exactly is it that needs to be fixed? The deficit? That is not an issue. Not in a fiat money system.

In a gold standard system I'd worry along with the libertarians and Austrians (I used to do this myself), but this is no longer the case.

[workathome]

@Felix - So do you think there should be no limit to debt? Just let it go on infinitely (or until the bartender cuts us off)?

[Felix]

Yes. There is no need for an artificial debt limit. That's the point. There is no bartender to cut you off. You are the bartender.

The only real constraint is in the real resources you have available in your economy, the education of your population, the minerals in your soil, the soil itself, the machines and tools, etc.

The only worry you have moneywise is that you might overdo it with spending in an already well-running economy. THEN you should tax more and spend less to bring down inflation and do all the things people want to do preemptively now. This would bring down the deficit as a side-effect. But the point is having the economy run at a maximum, not fixing a number in a Fed account, which is all the deficit is. It is merely the difference between what the government has spent and what it has collected in taxes. This difference exists as savings on private bank accounts.

The US still holds the deficit it had from WW II, when it had a way higher debt to GDP ratio.
http://static.seekingalpha.com/uploads/ ... vs_gdp.jpg

It still increased the nominal debt.

It grew out of it by providing the real world environment conducive to economic growth.

What is the horrible doomsday scenario that has all you guys so scared? Can someone explain this to me in some detail?

Let's say the debt rises to 100 Trillion. What will happen?

[Dragline]

To play devil's advocate, here's a contrary view: http://market-ticker.org/post=224642

As I always say about these things, the proof will be in the pudding in the future.

[Felix]

I would agree with Denninger that the accumulated debt in the private sector is indeed a problem. It is mostly government debt that I do not worry about.

It makes much more sense to say that we have been living beyond our means when thinking about the private sector, not the government.

When the private sector melts again (and it will for all the Austrian reasons - private debt is still pretty high), there better be a government willing and able to jump in.

Having no limits on government debt would be helpful if Denninger is right. Maybe this time one could let the banks fail and bailout the general population instead for a change.

I still see the problem as one of policy choice, not economic fundamentals.

Maybe we'll see an experiment on October 17th.

[slimicy]

What is the horrible doomsday scenario that has all you guys so scared? Can someone explain this to me in some detail?

Let's say the debt rises to 100 Trillion. What will happen?

I'm no expert on monetary policy, but from what I understand we still have to service our debt (pay out our bond holders). The higher the debt rises, the higher these interest payments get, and the more taxes the government has to collect just to service the debt before it even gets a penny to spend itself. It seems to me like we're headed on the path towards a vicious cycle, and while I agree that we're not on the gold standard anymore, so the debt isn't quite as bad as people are making it out to be, there's still a limit to how much we should incur. You seem to be implying with your last questions there that there's no disadvantage to debt, and I don't believe that's true.

http://www.cnbc.com/id/101062461

[jennypenny]

(I've written a response three times but I can't quite get it to say what I mean, so I'm giving up. )

@Felix--I agree with your description of how it works, but do you feel that unlimited (maybe unchecked is a better word?) printing now only to be offset by tightening later to reign in inflation seems like a good plan? Would a more moderate spending plan that necessitated less money printing be better in the long term because the subsequent inflation issues would be less severe? Would the government and markets be less beholden to the Fed if there was more moderate deficit spending?

Well, my counterquestion would be this:

Is a deliberate and economically unneccessary default now not worse than a potential inflation risk at some undefined point in the future which can be prevented and reigned in by policy action?

I don't think a deliberate default is the goal, and I'm not saying the debt ceiling can't ultimately be raised. I do think reaching the debt ceiling is an appropriate time for an assessment of current spending. Was the ceiling reached faster than projected? Why? Was all of the new spending necessary? Is it bearing fruit? Spending should still be productive even in an unlimited spending situation.

I also think an argument can be made against the idea that government debt is good just because it's really private sector savings. I would agree with you if that money benefitted everyone equally, but I don't think it does.

[Felix]

@slimicy:

I think this would answer your question:
http://moslereconomics.com/wp-content/g ... s-zero.PDF

@jenny:
I agree that spending should still be productive even in an unlimited spending situation. I also agree that the uneven private sector savings are an issue (inequality). That's in part personal responsibility and in part public policy. I believe that public policy does play a major role here in general.

I guess my main point is that the government needs to make sure the numbers add up so that its actions don't mess up the economy artificially. It needs to spend enough to allow for taxes and savings desires. If you have a high savings environment where credit is going down, you would need less taxes and more spending to not make the situation worse. If you have a credit boom and high inflation, you need more taxes and less spending. Maybe during the pre-recession boom some of that would have been helpful.

High spending and low taxes effectively result in the same thing: more money in people's pockets and a higher deficit. And low spending and high taxes result in less money in people's pockets and a lower deficit. Which dial you turn is a political decision.

How you do this is important in terms of reaching social goals. You can make the numbers work but still have a bad outcome in that area. The thing is that if you do not make the numbers work you will harm the economy either way.

I hope I understood you correctly.

[slimicy]

@slimicy:
I think this would answer your question:
http://moslereconomics.com/wp-content/g ... s-zero.PDF

Ok, lets say I agree with his hypothesis 100%. That still doesn't answer how we get out of the spiral of growing debt. There has to be a ceiling, it can't possibly go on forever. At some point, even if we're borrowing at 0%, there will reach a time when our bond payments will be larger than the value of economic growth that government spending is providing, thus rendering it net negative on the economy. Once that point is reached how do you recover from that? Tax more? At that point wouldn't the amount needed to be taxed be so large that it would grind the economy to a halt?

Again, I'm no expert here, and I'm not trying to pick a fight. I'm legitimately curious

[Felix]

Well, if you spend lots of money into the economy that produces little to no additional economic growth, you would cause inflation probably and then you would need to steer back and increase taxes and decrease spending, thereby lowering the deficit. It's not that tons of government spending is always great. There is a risk of inflation with too much government spending when you have reached the productive capacity of the economy. When that's the case you need to step on the brakes.

If the government spending is beneficial or not is largely dependent on the economic climate. In an economic downturn, when yet another private credit bubble has popped, the government can jump in and provide liquidity and employment to soften the blow. When inflation starts, taxes need to be increased and spending lowered. It's a matter of timing.

The focus is on what the action does to the real economy, not to a number in a Fed account.

Some of the spending programs are actually economy-dependent and act as stabilizers of the system. Take unemployment. The payments for that rise in a recession when lots of people are fired and companies stop hiring because there is not enough demand for their products. Then the government starts spending more money on welfare programs, which counteract the low-demand environment by providing additional income to the economy. As the economy picks back up, people get hired again and don't need to be on the dole anymore and the government automatically spends less.

[vivacious]

Trolling? I don't know. She pops in with assertions, and is unfazed by facts, seems to miss the point of any refutation. This implies trolling, but then in nonpolitical threads, there are other strange patterns that don't align with prog-trolls.

Honestly, I think she's 13. So I cut her some slack. At 13, assertion is all it takes to make a point, as your peers don't know anything either. There isn't a ERE for kids forum, so I say let her play.

Are you referring to me or JohnnyH or what?

I'm male and honestly it's not worth talking to a lot of people here about economics. Macroeconomics on the scale of billions and trillions are nothing like your $250,000 mortgage and credit cards and whatnot. It sounds kind of pathetic when people compare their personal finances to the government.

Ya. He also doesn't seem to know that Bush signed the 2009 budget though--not Obama.

I said that nowhere, I used 2009 to attempt to add strength to your "much, much lower" deficit. Excluding the 2009 budget your argument is even weaker.

You can't blame the recession, deficit, Katrina, etc on Obama.

I think I understand you... Everything Obama does is great and works, if it doesn't it was Bush's fault/mess... I imagine your gut reaction to that statement is to label me a Bush supporter.

And like it or not (I have mixed feelings about it because I would have done it a little differently) the stimulus worked.

Still waiting for any evidence you might have to support this claim... Worked for the financial sector, perhaps, but most Americans are certainly still worse off.

You're doing exactly what you accuse me of. You also don't understand basic logic. No actually it makes my argument stronger, not weaker. And by you thinking the opposite it makes you look really foolish. You cited a 2007 number when the reality is that Bush left the deficit at a record level in 2009. Then Obama cut it significantly.

I'm not even a big Obama fan but you can't ascribe the economic downturn and other problems to him. This is like Fox News. It's like you don't even know that he came in on January 20, 2009.

The economy is without a doubt better than it was in 2007/2008. You can't contest that. Unemployment is down, the stock market is up, etc. I agree that we still have a ways to go though and for average Americans the situation could be better, yes.


It's times like this when I think about leaving the forum. Some people so desperately want to impose their mental ideas on reality even when it doesn't fit.

At least Felix seems to get it. It's a waste of energy when it feels like 10th grade economics in here.

[vivacious]

If you also simply look at other countries that opted to have austerity budgets most all of them didn't work out--they made the situation worse.

I am generally for balanced budgets. In the case of recessions though running deficit budgets can improve the situation if you do it right.

That is especially true for America. Felix I can prove that America is in a position to take on far more debt than the rest of the world.

I'm sorry but it's like talking to someone who got an F in high school economics when people don't understand some basic principles. Some of which are--gasp--maybe counterintuitive.

[Spartan_Warrior]

It's a waste of energy when it feels like 10th grade economics in here.

Ha! I was just thinking how little of any of this was actually taught in school, 10th grade or otherwise. To be fair, this kind of thing is not "common knowledge" in America and some might even argue that is deliberate (subject for another thread). I for one admit that 1) some of this stuff goes over my head... but I argue about/have opinions on it anyway, foolish manipulated voter that I am; and 2) a not-insubstantial portion of my own economic knowledge is from reading this very forum, so I wouldn't consider it a total waste of energy.

OTOH, name-calling is always a waste of energy. Unless you're a paid insult comic.

@Felix: Is the economic model you're describing what would be called "Keynesian economics"?

[jennypenny]

+1 to what spartan said.

I also think that economics is not math, and there is no one right answer.

[jacob]

This thread is getting dangerously close to getting locked.

Behave!

[44deagle]

Ok, lets say I agree with his hypothesis 100%. That still doesn't answer how we get out of the spiral of growing debt. There has to be a ceiling, it can't possibly go on forever. At some point, even if we're borrowing at 0%, there will reach a time when our bond payments will be larger than the value of economic growth that government spending is providing, thus rendering it net negative on the economy. Once that point is reached how do you recover from that? Tax more? At that point wouldn't the amount needed to be taxed be so large that it would grind the economy to a halt?

Again, I'm no expert here, and I'm not trying to pick a fight. I'm legitimately curious

The FED buys the bonds... then eventually returns the interest on bonds back to the treasury. Repeat as much as necessary. How could that possibly have a negative net economic impact?

[JohnnyH]

I'm male and honestly it's not worth talking to a lot of people here about economics. Macroeconomics on the scale of billions and trillions are nothing like your $250,000 mortgage and credit cards and whatnot. It sounds kind of pathetic when people compare their personal finances to the government.

Well, that's just like... your opinion, man... My opinion is that is blatantly delusional to think the US debt is irrelevant because its of reserve status.

You cited a 2007 number when the reality is that Bush left the deficit at a record level in 2009.

I cited 07 as a min, and 09 as a high... It's you who continues to draw erroneous partisan conclusions about my intent. I was simply quoting local max/min, never did I suggest 09 was an Obama budget (as you have accused me of twice now)... I wanted to talk about debt, not try to force every number into a partisan worldview.

The economy is without a doubt better than it was in 2007/2008. You can't contest that. Unemployment is down, the stock market is up, etc. ... Some people so desperately want to impose their mental ideas on reality even when it doesn't fit.

I agree it does seem better, there is certainly less fear. Questioning your ideas doesn't mean imposing my own... My view is pretty agnostic, it's complex, countless variables, n=1, probably too early to say. Govt numbers and news reports say great improvement, but I remain skeptical... It's you who made the bold claim that the stimulus worked.

It's a waste of energy when it feels like 10th grade economics in here.

Before we got to 10th grade anything we'd have to deal with prerequisite grade reading comprehension.

Look, no offense... When I think someone is putting on the partisan blinders, I tend to get mouthy and for that I apologize... Bygones be bygones.

[vivacious]

I wasn't trying to be partisan. I've said I don't even like Obama all that much. I'm mixed about him.

Simply look at all the countries that ran austerity budgets though. It made the situation worse and/or resulted in a double dip situation in almost all of them. That's not a coincidence.

You seemed to be implying certain things. In order to compare how far down the deficit is at you simply have to look at what Obama inherited. You can't just pretend the recession didn't happen. And it has in fact gone down dramatically.

Some things can be debated in economics but some things can't.

The budget is in fact starting to balance itself.

I also standby the assertion that the debt is nothing to worry about. Sure we should probably pay it off at some point.

And I feel that the budgets should generally be balanced during normal times.