Deficit Concerns

[imported_Kranar]

<< We have one of the highest deficits ever. The deficit doesn't affect the value of the dollar, it only affects the value of a US sold bond (if even, heh). >>

I wouldn't be so quick to downplay the deficit, and yes it does directly affect the value of the dollar in the long run.

If the debt is too high, then interest rates increase. Not just for the federal government, but also for you, and for corporations.

If the Federal Reserve adopts the stance that the debt the government owes is irrelevent and just hands out as much money as the government asks for, well then you end up with MASSIVE inflation because money is simply being created essentially with the foreknowledge that it will never be compensated for or repaid, thus making it virtually worthless.

Trillions of dollars get funnelled through the government to the public, trillions of dollars that will never be accounted for thus decreasing the purchasing power of the dollar.

[Nakiro]

1) When the government runs a deficit it does increase the interest rates temporarily, until companies that want to invest money that they get by selling private bonds leave the private bond market. Then the interest rate becomes lower again. The long run effect is zero, or very little in most cases.

2) If the government never paid back its debts, or never planned on doing it, bonds would never sell. This obviously isn't the case.

3) The government doesn't just "make money" when they run a defcit, they sell government bonds which do get paid back, or more often never get paid back, but are given a small monthly interest rate on the princple. This interest is financed through one of two things, more bonds, or taxes.

Ultimately the sale of bonds is nothing more than an implicit promise by the government to raise taxes in the future.

Those who buy bonds are essentially protecting themselves against higher taxes in the future, as the interst they gain from the bond will be what they use to cover the higher taxes.

4) The government doesn't just take money that is never accounted for. The deficit is paid typically a year after it is incurred, so all the services of the defecit have already occured.

Money doesn't just dissappear, it goes back into the hands of where ever the government spent it, which is typically in private industries for goods and services rendered (ie the construction of air craft, ammunition, structural concerete for government buildings), or the people who work government jobs (people in the IRS, etc).

The money that company and those people recieve then gets put back into the rest of the economy the same way your paycheck does.

So no, a deficit doesn't devalue the dollar in the least.

Uh, the debt from the dollar is but a miniscule portion of the deficit we have. Which is mainly from trade and the issuance of bonds.

[Nakiro]

OH yes, and I wanted to add, the only cause for inflation is an increase in the money supply (which has nothing to do with interest or the interest rate), which typically happens when the federal reserve decides to release more money into the economy.

This is pretty simple, it buys back government bonds, and in doing so has to pay an amount higher than the principal.

And what he said.

[imported_Kranar]

But the notion that the government can just keep on taking money, even if the interest rate on the loan is say... 2 percent a year, eventually means that the government will be paying back more in interest than it initially took out to begin with.

With that said, I don't think it's a safe assumption to simply say "Bah... big deal, we'll just raise taxes sometime down the road to pay off a debt which is increasing exponentially."

If the Federal Reserve does not take the government's debt seriously and continues to hand out money to it, then inflation increases because of exactly what you just said, the money that the Reserve gives to the government goes into the hands of the public, which means that the overall buying power decreases. The government doesn't just borrow money to sit on or swim in, they spend it and release it into the economy.

<< 2) If the government never paid back its debts, or never planned on doing it, bonds would never sell. This obviously isn't the case. >>

No, it isn't the case... yet.

But to say that the government can just continue borrowing and that somehow people will still continue buying bonds is absurd. You even state that one of the only ways that government can pay back old bonds is through new bonds! That means that bonds have been exhausted as a source of income for the government since any money generated by a new bond would have to go into paying an old bond. The only other source of income would then be taxes, but this too risks getting exhausted.

But the notion that the government can just keep on taking money, even if the interest rate on the loan is say... 2 percent a year, eventually means that the government will be paying back more in interest than it initially took out to begin with.

Eh. Billions of dollars in loans are unpaid everyyear. The US excuses more loans than any other country. We could theoretically tell everyone to go fuck themselves, and it wouldn't do a whole lot because fact remains, we are the biggest fish in the sea. (Not that I'm advocating such an action mind you)

There are some economists who would argue that if you *aren't* running a debt than you are not doing enough. Some of them in power economical positions right now. I think you put too much emphasis on what we as consumers have as debt and the way things work on a geo-political scale.

[imported_Kranar]

RangerD1, you and I are talking about two different things.

I'm not talking about the trade deficit, I'm talking about budget deficit which are independent of one another to a certain degree.

The budget deficit that the government owes to the Federal Reserve effects the U.S. directly, it's economy, and the value of its dollar regardless of other nations.

[imported_Kranar]

In other words RangerD1, this is the debt that the government owes to its own country, its economy, its own people.

If that debt isn't paid, then there exists money with nothing productive to back it up, and that is precisely what causes inflation.

You're right. We are talking about different things, but what you are talking about is a very miniscule part of the budget. I don't think anyone has claimed that we are about to default on our bond payments.


If you are referring to the assets that back our green backs, then that is something entirely different.

[Chadj]

DUMBNESS ALERT:

Deficit doesn't affect dollar = Stupid remark.

After WWI, when Germany was in debt millions (billions) in reparations, their dollar decreased due to their debt. Example, a jar of pickels went from 8 marx (sp), to 20,000 marx.

Straight from a text book. Enjoy.

Originally posted by Chadj
DUMBNESS ALERT:

Deficit doesn't affect dollar = Stupid remark.

After WWI, when Germany was in debt millions (billions) in reparations, their dollar decreased due to their debt. Example, a jar of pickels went from 8 marx (sp), to 20,000 marx.

Straight from a text book. Enjoy.

Is that in a section about monetary policy? If so, what did they use to pay the debt?

[Nakiro]

Originally posted by Chadj
DUMBNESS ALERT:

Deficit doesn't affect dollar = Stupid remark.

After WWI, when Germany was in debt millions (billions) in reparations, their dollar decreased due to their debt. Example, a jar of pickels went from 8 marx (sp), to 20,000 marx.

Straight from a text book. Enjoy.

That is because they paid off the debt by printing money.

We do not now and never have done that here.

[Nakiro]

Originally posted by Kranar
But the notion that the government can just keep on taking money, even if the interest rate on the loan is say... 2 percent a year, eventually means that the government will be paying back more in interest than it initially took out to begin with.

With that said, I don't think it's a safe assumption to simply say "Bah... big deal, we'll just raise taxes sometime down the road to pay off a debt which is increasing exponentially."

If the Federal Reserve does not take the government's debt seriously and continues to hand out money to it, then inflation increases because of exactly what you just said, the money that the Reserve gives to the government goes into the hands of the public, which means that the overall buying power decreases. The government doesn't just borrow money to sit on or swim in, they spend it and release it into the economy.

<< 2) If the government never paid back its debts, or never planned on doing it, bonds would never sell. This obviously isn't the case. >>

No, it isn't the case... yet.

But to say that the government can just continue borrowing and that somehow people will still continue buying bonds is absurd. You even state that one of the only ways that government can pay back old bonds is through new bonds! That means that bonds have been exhausted as a source of income for the government since any money generated by a new bond would have to go into paying an old bond. The only other source of income would then be taxes, but this too risks getting exhausted.

First off, anyone taking 2% interest is on the losing end of that bargin. Inflation historically is around 3% a year.

I'll borrow as much money as you let me for 2% a year.

Second, the government does and continues to finance bonds through the sale of other bonds. This does not add to the money supply in any way, and in a lot of instances offers stability to instable markets by providing a form of currency that does not depreciate.

[Nakiro]

Originally posted by Kranar

If the Federal Reserve does not take the government's debt seriously and continues to hand out money to it, then inflation increases because of exactly what you just said, the money that the Reserve gives to the government goes into the hands of the public, which means that the overall buying power decreases. The government doesn't just borrow money to sit on or swim in, they spend it and release it into the economy.


They are not releases more money into the economy. They are taking money they removed from the economy (if you even want to say that), and putting it back in.

No new dollars are created in this process, thus there is no increase in the money supply, and ultimately no inflation.

[Nakiro]

Originally posted by Kranar
RangerD1, you and I are talking about two different things.

I'm not talking about the trade deficit, I'm talking about budget deficit which are independent of one another to a certain degree.

The budget deficit that the government owes to the Federal Reserve effects the U.S. directly, it's economy, and the value of its dollar regardless of other nations.

Inflation is economically defined as a constant and contionous rise in the price level.

The price level is determined by the money supply. Unless new money is entered into the economy, the price level does not change.

How exactly do you purpose this deficit leads to inflation?

[imported_Kranar]

<< First off, anyone taking 2% interest is on the losing end of that bargin. Inflation historically is around 3% a year.

I'll borrow as much money as you let me for 2% a year. >>

You're totally missing the point of my statement with that response.

<< Second, the government does and continues to finance bonds through the sale of other bonds. This does not add to the money supply in any way, and in a lot of instances offers stability to instable markets by providing a form of currency that does not depreciate. >>

And I never said that it does. Once again, totally missing the point.

<< No new dollars are created in this process, thus there is no increase in the money supply, and ultimately no inflation. >>

This is just false. Monetization occurs every year to pay back both the budget deficit and the trade deficit.

The Federal Reserve bought back 7 percent of the government's debt, meaning 490 billion dollars was created to pay back the debt.

Every single year this amount increases.

[Edited on 9-1-2004 by Kranar]

[imported_Kranar]

<< Is that in a section about monetary policy? If so, what did they use to pay the debt? >>

They used exactly what I'm talking about, the monetization of the debt.

If the government runs out of money, the Federal Reserve doesn't give them money simply from the economy as Nakiro suggests. To think that that 400-500 billion dollars comes out of the economy every year to loan to the government is quite frankly absurd. Some of it comes from what the Reserve has, but some of it is also created/printed, which is known as monetization of the debt.

In Germany's case, the economy was totally shattered so its entire debt had to be monetized. This paid back the debt but as Chadj point out, so much money was created in the process that it led to hyperinflation.

In the U.S. 7 percent of the debt has been monetized, and every year this amount increases. And soon enough, if the debt isn't dealt with, it will be so bad that the interest rate alone will be too much than what the U.S. can afford to pay which will result in a combination of having to monetize the debt as well as sell much of it to other nations.

[Latrinsorm]

Originally posted by Kranar
To think that that 400-500 billion dollars comes out of the economy every year to loan to the government is quite frankly absurd.Uh, why? 500 billion isn't that much out of 11 trillion.

[Nakiro]

The interest rate on the US debt isn't affected by temporary changes.

And the fact alone that we are printing 7% of the debt off but still only have an inflation of 3% is enough of an indication that inflation at this point is not a big concern.

Historically, we are right on average.

And all debt is just an implicte reminder to raise taxes in the future. What's the government going to do if it pays off its debt? Tax the hell out of the non-bond holding citizens.

Those that have government bonds are freed from the burden, as whatever tax they pay will be releaved either somewhat or entirely by the refunding of their bond by the government.

If you pay off the domestic debt, you're just taking money out of the hands of those who can not afford it (or if you're Democrat, you're taking the potential for a higher short-run production function in the future by depriving companies of invest capital), and giving it to those who in fact already have it.

[imported_Kranar]

<< Uh, why? 500 billion isn't that much out of 11 trillion. >>

500 billion dollars a year, not total.

The total debt the U.S. owes just from the budget deficit is not 500 billion dollars...

It's 7 trillion.

[imported_Kranar]

<< And all debt is just an implicte reminder to raise taxes in the future. What's the government going to do if it pays off its debt? Tax the hell out of the non-bond holding citizens. >>

This is false.

Raising taxes does not guarantee a raise in the revenue for the government. Infact raising taxes can actually decrease the amount of revenue the government receives since it can lead to both a loss in productivity (companies and banks have less money to invest with), as well as tax resistance (companies off-shore or find other technicalities to avoid having to pay the increases tax).

Raising taxes is NOT the solution to pay off a 7 trillion dollar debt, which is why I don't in anyway criticize President Bush for reducing taxes.

[Nakiro]

The government can only raise money two ways:

G = T + B

Government spending is limited by the tax revenue it takes in and the sale of bonds. So yes, either the government will have to raise taxes, or it will have to cut spending.

While there is some theory that predicts raising taxes is not the right answer (which I happen to agree with, hence being Republican), because it does cause companies to spend more time dodging taxes and decresaes the incentive for individuals to work, this is only true for taxes that are based on percentages.

Taxes that are flat, or more often called lump sum taxes, do not create this type of affect. Because these taxes have to be paid regardless of whether you work or not, they have an absolute wealth affect. People have to work more to pay them, but the amount on the dollar they take home per hour isn't affected by them.

These are the type of taxes necessary to buy down the debt, if that's what you want to do. Most of these can come from removing government protected income, like the interest on a mortage payment is tax-free (which if you're earning enough to where you are taxed an amount greater than your mortage, the government lets you off on taxes for the amount of your mortage).

These tax cuts are basically the opposite of government lump sum taxes, and taking them away would be a decent source of revenue.

Whether or not its fair though, I'll leave that for others to debate.

Though I think we both agree on one thing, the government spends waaaaaaaaaay too much money.

[imported_Kranar]

<< Government spending is limited by the tax revenue it takes in and the sale of bonds. So yes, either the government will have to raise taxes, or it will have to cut spending. >>

The entire point I'm making is that government spending is not limited by anything whatsoever.

The budget deficit is one of the major election concerns with some in Congress even proposing a Constitutional Amendment so that government spending would be limited, legally.

So this is a current issue, and a growing issue as well. No inflation isn't rampant right now, but the point is that unless the deficit is dealt with, it will either lead to inflation or to a loss of sovereignty if the U.S. has to sell its debt to foreign nations.

<< While there is some theory that predicts raising taxes is not the right answer (which I happen to agree with, hence being Republican), because it does cause companies to spend more time dodging taxes and decresaes the incentive for individuals to work, this is only true for taxes that are based on percentages. >>

Canada managed to pay off its entire debt over the course of 11 years and now enjoys a surplus every single year.

The solution to paying off our debt was not through increasing taxes, which ironically is what the Conservative government here did. It was done entirely by cutting back on spending. And no, we do not have flat tax.

Taking a fiscally conservative approach to spending is the only way a government can guarantee putting its debt under control.

John Kerry seems to have the position you earlier posted, just raise taxes on the rich and then the deficit issue will be resolved. I think that such an approach is irresponsible and can have unpredictable results on the economy. It's like a company that's in financial trouble and decides to just raise the price on its products to compensate. That doesn't nessecarily work because you're not guaranteed that the people will buy your product at a higher price, infact quite the opposite usually occurs.

President Bush, however, wants to cut spending to pay back the debt which is not only responsible since it doesn't put the blame of the debt on the population and on the economy, but guarantees that the debt gets paid back in the long run.

[Nakiro]

I think you are reading into what I am saying.

Yes, you can raise taxes, or you can lower government spending. I prefer to do both myself.

But if you are going to hold government spending constant and eventually stop selling bonds, the result is going to have to be to increase taxes. That is all I was trying to say.

No, goverment spending is not limited, but it is accountable, and that is what I am trying to illustrate.

[imported_Kranar]

Fair enough.

Was a pretty interesting discussion for me anyways.

[Nakiro]

Yah I took a macro econ class over the summer. I found it fasinating.