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"To the argument that just as average families have to pay off their mortgages, so too must the government someday pay off its debt, the Optimist says families actually do not pay off their mortgages. Yes, our grandparents eventually paid off their mortgage, but by the time they did, our parents had a mortgage of their own - and it was even bigger! And by the time they paid off their mortgage, guess what? Their kids, namely us, had acquired mortgages that were bigger still. So the family's mortgage debt actually persists and even grows, just as the government's does."

This looks like a fallacy of equivocation to me where he is shifting between two different definitions of "family."

When your grandparents have a mortgage, their grandchildren are not responsible for it if the grandparents do not pay it off. The same is true of the parents and the grandchildren when each of them gets their own mortgages.

So one mortgage isn't rolled over and made the responsibility of the descendants the way national debt is.

When you have a collection of individual mortgages, those mortgages are the responsibility of the individuals who took them out. Our national debt, on the other hand, is like one huge individual mortgage that keeps getting larger and larger, and which we are all responsible for to pay off.

Seems to me he's mixing up two uses of the word "family" to mean individual generations with individual responsibilities, and multiple generations with collective responsibilities that they don't really have.

Michael, please do not base your future economic planning on this insanity. It ignores the law of supply and demand and equates money (pieces of paper and electronic credits) with production (actual goods and services). See http://mises.org/resources/4016 for an example of a government that believed they could increase debt forever.

This idea seems to ignore the possible evils of inflation. OK, so the US is never going to be like Zimbabwe, but if the economy suffers unduly and Chinese currency becomes numero uno, the American standard of living will probably suffer.

"Our national debt, on the other hand, is like one huge individual mortgage that keeps getting larger and larger, and which we are all responsible for to pay off."

Are we? The Skeptical Optimist would argue that the debt never has to be paid off, only rolled over in perpetuity. Look at the massive debt we incurred when fighting WWII. Was it ever paid off?

What actually happens with government debt is that the economy expands enough to shrink the debt as a percentage of GDP. The debt is never paid off; it just becomes smaller and smaller relative to the economy as a whole.

"an example of a government that believed they could increase debt forever"

I don't think Weimar Germany offers a good parallel to our present situation. Germany, devastated by war, had a very limited number of goods available, so even a small increase in the amount of money in circulation would drive up prices quickly. In an environment where there are many more goods available, there is much more leeway for increasing the money supply without ill effects. That's not to say there won't be an uptick in inflation, but hyperinflation seems like a highly unrealistic scenario to me.

There's also a difference between expanding the amount of money in circulation and expanding the amount of money that sits in reserves.

Here's the Skeptical Optimist on the subject of money in motion vs. money at rest:

http://snipurl.com/jn247

It's worth reposting a link that Jim Baird provided:

http://snipurl.com/jnaob

This is a brief but highly interesting discussion of federal debt, inflation, interest rates, etc.

A few excerpts:

"When we adopted a monetary base of intrinsically worthless paper money in the mid-20th century, we created a new paradigm that is still widely misunderstood. The imperatives are quite different from those of the earlier gold-based system ...

"Nothing about government debt requires that it be paid off. Of course individual securities must be redeemed as they mature, but the Treasury can roll over its maturing debt indefinitely. Rolling over means selling new securities to pay for the redemption of maturing securities ...

"Some fear that as the national debt grows it will create an ever increasing inflation rate. That fear is not supported by the historical record. The debt/GDP ratio reached an all-time high at the end of World War II, yet the inflation rate during the next two decades averaged only 2%. In the following decade the debt/GDP ratio fell to a long-term low, while the inflation rate averaged about 8%. If there is an upper limit to the debt in terms of its effect on the inflation rate, it has yet to be experienced."

"What actually happens with government debt is that the economy expands enough to shrink the debt as a percentage of GDP."

But you run into a problem: Big as it is, the planet is a limited resource, and it seems to me that the economy cannot expand forever on a planet that is a limited resource. So at some point the debt becomes too big for the economy to expand enough to shrink the debt.

Ironically, the problems our children will face would be much less severe if we were more conservative and less liberal with spending money and energy, which money really does represent too.

And all the indications are that we ARE running out of oil and without any workable alternative technology (including solar and wind power) to fuel growth or even maintain the size of the economy as it is.

Fossil fuel has provided an extremely cheap source of fuel to drive our economy. And it seems we are already passed peak production and are on the downslope.

Fusion power could save our asses, but unless we have a miraculous breakthrough in the field very soon, it seems unlikely that it's going to save the day. I hope it does. But I would feel more comfortable if the evidence that it would was more solid than faith based.

I was going to write a long post on production, supply and demand, inflation... but I'll simplify it.

The government spends whatever and borrows it instead of taxing. They buy stuff. They never have to pay it back.

They're lying. Somebody is going to pay for it. Somebody is not going to have that "stuff" they bought. Maybe the Chinese and Saudis, more likely us, later on.

Basic law of economics: there's no such thing as something for nothing.

The economist that I talked to that taught at a major university claimed that as long as the dollar is the world currency we might not suffer too much with our debt. But if the dollar is no longer accepted as the world currency we will find very high inflation rates much like other countries that have borrowed and printed money and ran up a massive debt.

We not only have massive debt but a huge trade deficit. Taken together I would not fall too much in love with our debt. After World War II we were the only industrialized country not bombed out so we were much more able to grow the economy. It was like a free lunch. The free lunch is over.

What looks like a recession is a decline of wealth with massive borrowing and printing of money to try and maintain our standard of living? Stated another way we are in denial of our declining standard of living. Denial is a common human and even national phenomenon. As many masters state wealth can be as harsh a teacher as poverty. Or not.

It appears to me it is going to be an Asian century but predicting the future is not for the faint of heart.

"The government spends whatever and borrows it instead of taxing. They buy stuff. They never have to pay it back. They're lying. Somebody is going to pay for it."

Well, in a sense the government does pay it back whenever a bondholder redeems a Treasury bond. But then the government turns around and sells a new bond to someone else. Thus they are continually rolling over the debt. As long as the government can pay the interest on these loans, it will not default. So the real question is whether the government can continue to afford the interest payments. Since we were able to afford the interest payments when the debt was 120% of GDP (after WWII), it seems likely that we can afford them now, when the debt is a much lower percentage of GDP.

Of course, a week ago I would have taken your position, so I certainly understand it. But I'm starting to think things are not as dire as they appear.

If "all" we have to do is grow the GDP, why have other countries with runaway debts failed to do so? Argentina, for instance, and Russia.

I don't think technology will save us this time around. Science is making fewer big breakthroughs akin to those in the 20th century that kept the shell game going. Only a cold fusion or other "pseudoscience" free energy breakthrough would save the day.

Does anybody really believe the way to good economy is to flood the world with debt that we have no intention of paying back?

"If 'all' we have to do is grow the GDP, why have other countries with runaway debts failed to do so?"

One possible answer is that those countries increased their debt much faster than they increased their GDP (not just for a year or two, but over an extended period of time).

The key is maintaining a debt load that can be serviced. If the interest on the debt grows too high, relative to tax revenues, then there are serious problems. As long as the interest is manageable, a country will not have runaway debt, no matter how many zeros there are in the debt figure.

"to flood the world with debt that we have no intention of paying back"

Well, we do pay it back, in the sense that we pay off the bondholders when their bonds mature. If we didn't, nobody would buy the bonds in the first place. But we then issue new bonds, effectively rolling over the debt. When those bonds mature, we pay them off, and then issue new debt, and so on. Again, as long as the interest is manageable, there shouldn't be a problem.

"Again, as long as the interest is manageable, there shouldn't be a problem."

But the question is: IS it manageable? And is that a smart way to live depending on all those IFs?

Peak oil. There aren't many people other than Rush Limbaugh who think oil is a renewable resource, and our economy runs on it. It's more than a little reckless to live this way given the challenges our children are going to be facing.

A good documentary to watch is Crude Awakening, which you can instantly stream from Netflix.

Just thinking about our deficit as a narrow economic issue without considering the forces that drive the economy and how they will fair in the future and make all those IFs possible is the worst kind of optimism because then it sounds like everyone is cheerfully laying back and waiting for someone else to come up with a solution and fix the problems.

I'm all for optimism, but not the kind espoused by Rush Limbaugh, which would have everyone sitting on their asses comfortable that SOMEbody is going to fix everything SOMEhow, so WE don't have to change how we do things now one tiny bit even.

"But the question is: IS it manageable? And is that a smart way to live depending on all those IFs?"

Is it smart to take out a mortgage? Is it smart to obtain a loan to pay for a college education? As long as the interest payments are manageable and the item in question (a house, a diploma) is likely to raise your standard of living, then yes, it's smart.

I agree it's a bad idea to get so deeply into debt that the interest payments eat you alive. But we're not there yet.

“and the item in question (a house, a diploma) is likely to raise your standard of living, then yes, it's smart.”

Did we Americans get deeply in debt as an investment for future wealth or to maintain our existing standard of living? I maintain that as our wealth as a nation started to decline we refused to accept this condition so we borrowed to maintain our existing standard of living.

I also maintain that having decades of a huge trade deficit and huge amounts of borrowing will in the future have dire consequences.

"As long as the interest payments are manageable and the item in question (a house, a diploma) is likely to raise your standard of living, then yes, it's smart."

Yeah but I'm questioning whether it really IS manageable. When I talk about manageability I'm talking about while dealing with known dangers on the horizon. Lots of people took out mortgages while things were good and then things turned different and their ability to pay went south too. In some cases people probably had no idea that their lives would change for the worse, and in other cases people probably knew they were on thin ice but took out the mortgage anyway.

So is the ice under us thick or thin? I say its thin as an OPTIMIST, because optimists believe in solutions, but only if we face the problems that are coming. We overcome problems by facing them and working hard to create new solutions. We will screw ourselves if we think, like Rush Limbaugh, for instance, that oil is a renewable resource that will keep the party jumping forever.

The ability of nations and of people to pay doesn't occur in a vacuum. Our economy is driven by cheap energy, and ignoring the dwindling supply of it is like taking out a 30 year mortgage having two warnings on the job, being fire-able after the third, while working for a boss who hates your guts.

And what is having a galaxy sized deficit going to do to our tax rates?

I mean I just can't make this seem like good news no matter how I turn it and look at it.

Read this one:

http://www.ft.com/cms/s/0/71520770-4a2c-11de-8e7e-00144feabdc0.html?nclick_check=1

The IFs involved in the optimism seem pretty iffy to me at this point. The more I look at the energy issues involved, the more the 1950's American dream of unlimited growth seems absurdly naive.

Look, long term, we'll be okay, but that doesn't mean the trip between here and there isn't going to be long, miserable, and littered with bones.

So the we in "we'll" doesn't mean us personally. It means human beings in general. I'm not making any personal predictions out of fear of jinxing my own existence.

Sorry, the link I posted went to a shortened version of the whole article I read. This one should get you to the whole thing:

http://www.ft.com/cms/s/0/71520770-4a2c-11de-8e7e-00144feabdc0.html


I wrote, "I don't think technology will save us this time around. Science is making fewer big breakthroughs akin to those in the 20th century that kept the shell game going." Here's support for that viewpoint from today's Business Week, Cover Story June 3, 2009, 5:00PM EST:

The Failed Promise of Innovation in the U.S.: During the past decade, innovation has stumbled. And that may help explain America's economic woes

By Michael Mandel

http://www.businessweek.com/magazine/content/09_24/b4135000953288.htm?chan=magazine+channel_top+stories

Let me inject something here.

Bonds are important for us to repay debt correct? The bond market is not in a pretty place right now. They do not look very appealing to foreign buyers. Normally that market has an inverse correlation with our equities markets. With the recent stock rally, we seem to be *&#&ing ourselves.

Commodities are important for our way of life right? To buy commodities we need money. The USD has decreased at a rate not seen in recent years, while the price of commodities grows.

The way our government is spending and printing, the USD will depreciate to the point that no one will be willing to buy our debt and we ourselves will be stuck with it. I believe that the last time the United States had to do this was during World War II.

Where are we headed? Well, I have my own speculations, but they are not pretty. I am of the opinion that something drastic has to change with the way the government has been handling the situation here. It's a fine line that separates debt that is manageable and debt that is not.

I don't think I can learn to love the deficit. I think the government hopes we learn to ignore it.

Since I'm mentioned in this blog, you might want to see a paper I presented on the subject at the U.S. Treasury a few years ago. Here's the link --

http://www.treas.gov/offices/economic-policy/round_table_documents/2004/reynolds.pdf

Budget deficits are no free lunch -- we have to use taxes to pay the interest. The current deficit is at least 4 or 5 times the size (relative to GDP) of deficits that used to provoke President Reagan's critics to make bad predictions of gloom and doom continuously from 1983 to 1989. What some call a stimulus plan I would describe as very large deferred tax bill.

Thanks, Alan Reynolds, for the comment and the link.

Well, well, well. I don't check this blog for awhile, and look what happens...

A lot of points, but many are still in a fixed-exchange, gold standard way of thinking. This gets everything extremely confused, as the imperatives are completely different for a user of a currency and its issuer (just as a subway token means something very different to the subway rider and the subway operator.)

Roger Knights:
If "all" we have to do is grow the GDP, why have other countries with runaway debts failed to do so? Argentina, for instance, and Russia.

Argentina owed debt denominated in other currencies, (mostly dollars), and it's export prices collapsed (reducing it's ability to acquire the currency to service them.) Once again, they were a currecny user that got in over their heads. Russia - well, they just decided not to pay their debt. A sovereign currency issuer always has the ability to pay it's debts (it's just crediting banks accounts, after all), but it can always refuse to do so. (Gingrich tried to get the government to default back in the 90s, for some childish reason, but Rubin was able to move money around enough to pay things until the rest of the Republicans wised up.) Russia remains Russia, whatever system they operate under.

I don't think technology will save us this time around. Science is making fewer big breakthroughs akin to those in the 20th century that kept the shell game going. Only a cold fusion or other "pseudoscience" free energy breakthrough would save the day.

That might be true, but if so it's a problem with the real economy, and no amount of financial manuvering will change it, for good or ill. Our grandchildren will consume what they produce, just as we do. Whatever they can produce at the time (whether limited by Peak Oil or expanded by Cold Fusion) will be what they can consume, but none of it will be put into a time machine and sent back to us.

Markl brings up the Weimar inflation. But hyperinflations like Weimar are caused by an inability or unwillingness to enforce taxation. (Taxes are what gives value to a currency). As long as there is a reasonably efficient tax system, there's not really a danger of hyperinflation because there will always be a demand for it. Especially in a progressive tax structure such as ours, an increase in economic activity will automatically lead to greater tax revenues which drain demand and and defuse inflation. And since the IRS is very effective at using random terror to keep most people on the straight and narrow, I don't think we're in any danger.

And as for Alan Reynolds and the Cato institute: the purpose of taxes is to reduce demand in the private economy in order to allow the government to spend without causing inflation. This has nothing to do with the level of debt outstanding. He needs to do some remedial work - most of that paper is pretty good, but he's still essentialy stuck in the gold standard paradigm.

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