Posted: 2/22/2013 6:18:23 AM EDT
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In discussion with liberal brother about the national debt, he stated that part of that debt can just be "written off" since we just owe it to ourselves. Sounds nice and simple in his eyes.
If that were done for a portion of the debt, what effect would that have on the economy? Hyper-inflation? Seems to me we would knock a portion of the domestic product (?) off the ledger but still have the money printed and circulated for it out there. As you can tell, I did not grasp much of the one Econ class I took thirty years ago. I just likened it to running my unpaid for truck off into oblivion but still owing the bill for it to the dealer. I stil have to pay for it but have no asset to show so my actual outgoing expense compared to my pile of assets just went way up. Anyone care to explain any of this and educate me? |
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He doesn't know and obviously I don't either. I believe he thinks that the Gov't can pass a law that is basically a debt forgiveness between the feds and states or between agencies.
Debt forgiveness sounds more like default to me unless you have two agreeing parties and some other country forgiving our debt would mean our credit rating is shot. Same between states and the fed as well. Correct? |
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Well outside of our credit rating taking a HUGE nose dive because we just showed we aren't willing to follow through with our committments even on debt owed to ourselves, the amount of debt we owe to ourselves is dwarfed in comparision to the overall debt. Just 'canceling' our debt owed to ourselves in an attempt to reduce the deficit would be like pulling a couple sticks off a tree and declaring the tree cut down.
A bad credit rating also means nobody will want to buy our bonds and continue funding this mess. No more 'loan' money from bonds coming in the less the government can do and the more things get cut. The more cuts on vital functions and jobs lost the worst the economy because lots of people are out of work. The ones still working are getting taxed out the ass becuase the government cannot and will not be willing to run on a skeleton crew, so the money to keep everything the way it is has to come from somewhere. People love to talk about a 'simple' government, but we're never going to get that. Even a government collapse won't get us there, it would only get worse than what we have now and much faster than the current rate. Most of our actual debt is from treasury bonds that have been issued. China owns a lot of those bonds and I'm pretty sure they'd be a little more than pissed off if we just said we were going to stop paying them. |
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I think he is ignorant of the overall issues - what Rush is calling a low information voter. I don't understand the whole picture and don't know what this country can do at this point. I don't think we can ever pay off the trillions of dollars of debt we owe. And we will never start to slow and reverse the downward trend because we can't break our addiction to spending on entitlements.
After all, Americans are "entitled", right? He's like a lot of folks who can't think outside the box. They are inside the walls, never been up to look out over them and see whats going on and can't imagine anything other than what they've known inside the walls. |
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Quoted: I think he is ignorant of the overall issues - what Rush is calling a low information voter. I don't understand the whole picture and don't know what this country can do at this point. I don't think we can ever pay off the trillions of dollars of debt we owe. And we will never start to slow and reverse the downward trend because we can't break our addiction to spending on entitlements. After all, Americans are "entitled", right? He's like a lot of folks who can't think outside the box. They are inside the walls, never been up to look out over them and see whats going on and can't imagine anything other than what they've known inside the walls. It's very simple if you understand how the system works. The government takes out loans just like people take out loans at a bank. The government has to pay this debt back. However it gets do to something that most people can't or shouldn't do... it gets to pay off its current debt by borrowing "new money." This is called revolving debt, and the debt is called treasury bills. The government sells these "blls" to thousands, tens of thousands, hundreds of thousands, or millions of different "investors" -- people who lend the money to the government. These people also include governments... like China for example. So, the government has all of this debt. It must pay it back. The only way to pay it bank is to have money left over at the end of the year, or the quarter, to make payments on the debt. That is called a balanced budget. We don't currently have a balanced budget, and we haven't had one in over a decade. So, the question is... how does the government make more money to pay off this debt? There are 2 ways: increase taxes and reduce spending. The republicans want the government to make more money by getting rid of or reducing "entitlements" (social security, medicare, welfare, etc.) and the democrats instead want to make more money by increasing taxes on the rich and reducing spending to military. In the end... SOMEONE is going to have to pay down the debt. We all know the poor can't do it. So who is left? The rich and the middle class. This means taxes are going to go up. When taxes go up, prices go up, because companies just pass along the cost of increased taxes to consumers. Then the poor complain because prices went up (because taxes went up), so they want higher minimum wage, which cause corporations to increase prices again. it's a cycle. Yes this is extremely simplified, but it still stands as the basic truth. The government of Greece used to be in the same position we are currently in... except they had about 30% of all employees as government workers... all getting federal benefits with 80-90% pensions upon retirement. The Greek government chose to ignore its spending for 3 decades. Now they are bankrupt. So what does that foretell about this country if we don't get the budget balance and spending under control? |
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I'll take a stab at this.
When the government doesn't have enough money to pay its bills, it must borrow. It usually borrows by issuing Treasury Bills. A T-Bill is a special type of bond. Many folks issue bonds, which are simply promises to repay a loan (usually with interest). The amount of interest depends on how risky the bond seems to be: If Fly-By-Night Auto Mechanics Corp wants to raise money, they'll probably pay a high interest rate. The US government is considered to have an exceptional credit rating and thus it generally has to pay a low interest rate. Treasury Bills are sold by the US government to a few types of investors:
People buy T-Bills because they are considered a very safe investment. In fact they are so safe that some investors are willing to accept interest rates less than the rate of inflation. This is good because it allows the US government to pay the interest on all these T-Bills pretty cheaply. A ten-year T-Bill (you get paid back in full with interest in ten years) is only paying 2% interest right now. Your brother is describing a "default," where the US government refuses to honor the bonds it has issued. This works great for the borrower -- once. It is the national equivalent of refusing to pay your mortgage and walking away. You walk away from a mountain of debt, but nobody will ever loan you money ever again, except perhaps at absurd interest rates. For example, people are afraid that Greece will default and screw bondholders, so their interest rate spiked to around 48% in March 2012. This is obviously bad just like an ARM mortgage: we can't cover our budget right now, so imagine if the interest we're paying quadrupled overnight? It would be like if you had a tight household budget and your mortgage went from 2% to 50% overnight. You'd be hosed. Of course, Uncle Sam has a special option: if nobody will offer us the interest rate we want (perhaps because they're afraid we won't pay them back), the Federal Reserve can buy as much debt as needed at whatever interest rate desired. The problem is that the Fed is loaning us money which it prints up out of thin air, which causes inflation as more dollars enter circulation. In addition to the issue of interest rates skyrocketing upwards, whoever holds the bonds gets screwed ("takes a haircut"). The problem is that the #1 holders of T-Bills are... Us. The Social Security Trust Fund and private investors hold more than a third of all the T-Bills. Your 401K would take a big hit if Uncle Sam said that domestic bondholders are not getting paid. Social Security would be even more insolvent than it already is. Defaulting on the national debt is not a good option. |