# Ballooning U.S. debt levels

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Staff Emeritus
Gold Member
The US keeps printing extra dollars, but what are the actions being taken to reduce the nation's debts? Alan Greenspan warns that the ballooning debt levels could lead to another crisis at the bond market. Together with the simmering race to weaken national currencies makes me very worried about the future economic situation.
He said the deficit, which hit $1.3 trillion this year, may begin to frighten the bond market, which could undermine the recovery and push the economy back into recession. "The big, serious problem is whether or not the outlook for the longer-term deficit spooks the bond market to a point where long-term interest and mortgage rates move up very sharply," said Greenspan. "If that happens, that will cause the double dip." http://abcnews.go.com/Business/wireStory?id=12144826 ## Answers and Replies Astronuc Staff Emeritus Science Advisor I think the financial markets are already skittish based on what I've read recently, and a recent phone call I received. mheslep Gold Member The US keeps printing extra dollars, but what are the actions being taken to reduce the nation's debts? Alan Greenspan warns that the ballooning debt levels could lead to another crisis at the bond market. Together with the simmering race to weaken national currencies makes me very worried about the future economic situation. http://abcnews.go.com/Business/wireStory?id=12144826 Noting that you led with the US printing money angle on the debt which will hurt European exports to the US, versus excessive US government spending which won't (not directly anyway), I'm curious if you, as a European (?), feel you have a particularly European concern about this issue? Last edited: The US keeps printing extra dollars, but what are the actions being taken to reduce the nation's debts? Alan Greenspan warns that the ballooning debt levels could lead to another crisis at the bond market. Together with the simmering race to weaken national currencies makes me very worried about the future economic situation. Apparently, many sentient beings on our planet realize that excessive debt is growing anchor which, when it grows large enough, will pull the entire ship to her watery grave. Unfortunately, those who were elected continue to believe that spending more and printing more is healthy for the economy, long-term. Economic Grade: F- Either that or they know it won't work, but are simply doing it to garner the votes of those who errantly believe it'll work but don't know better. Either way, if it's not only stopped, but reversed, and I mean like right now, we're economically doomed. Vanadium 50 Staff Emeritus Science Advisor Education Advisor Printing money will have the following consequences: 1. It's inflationary. Inflation transfers wealth from creditors to debtors, and as the US government is in debt, one can see the appeal. 2. Inflation provides additional tax income (in units of constant value). Because the US tax code is progressive, if the dollar is devalued and if people's income remains constant in buying power, the number of dollars goes up, and the marginal tax rate goes up. 3. A devalued dollar provides an advantage to the US in foreign trade, as exports become cheaper and imports more expensive. This, of course, assumes other currencies remain constant in value. Today this is not a very good assumption. Some numbers (in billions): US net worth:$60,000
US GDP: $14,600 US public debt:$13,700
US budget deficit for 2010: $1,171 Size of "Quantitative Easing 2":$600

CRGreathouse
Homework Helper
2. Inflation provides additional tax income (in units of constant value). Because the US tax code is progressive, if the dollar is devalued and if people's income remains constant in buying power, the number of dollars goes up, and the marginal tax rate goes up.

Not usually, since brackets are inflation-adjusted each year.

Staff Emeritus
Gold Member
Noting that you led with the US printing money angle on the debt which will hurt European exports to the US, versus excessive US government spending which won't (not directly anyway), I'm curious if you, as a European (?), feel you have a particularly European concern about this issue?
Well this is not about Europe, but about the scenario that Alan Greenspan sketches: that this is a big and serious problem and the effect that the deficit is going to have on the bond market. Mugaliens appears to agree, is this a large cloud hanging overhead that could bring some really bad weather?

Since you ask, I think many people frown over the fact that the money seems to be printed so easily. This is however not the main issue at hand, the problem is: how much extra money can you print and for how long can you sustain an economy on that before it backfires?

It is clear that in Europe the governments (are trying to) work hard to limit the deficits. Much to the dismay of many people, I'm sure you are aware of the many strikes and up-rises of people who disagree with the proposed budget cuts. It is not clear to me how the US government is planning to overcome the economic crisis and deficits, besides pouring more money into the system, hence the question.

3. A devalued dollar provides an advantage to the US in foreign trade, as exports become cheaper and imports more expensive. This, of course, assumes other currencies remain constant in value. Today this is not a very good assumption.
And a devalued dollar would make the debts smaller. Can you trust governments who say they'd never deliberately weaken its currency? I mean no one would admit to it, but apparently it's something that governments are now suspecting each other of.

lisab
Staff Emeritus
Gold Member
Well this is not about Europe, but about the scenario that Alan Greenspan sketches: that this is a big and serious problem and the effect that the deficit is going to have on the bond market. Mugaliens appears to agree, is this a large cloud hanging overhead that could bring some really bad weather?

Since you ask, I think many people frown over the fact that the money seems to be printed so easily. This is however not the main issue at hand, the problem is: how much extra money can you print and for how long can you sustain an economy on that before it backfires?

It is clear that in Europe the governments (are trying to) work hard to limit the deficits. Much to the dismay of many people, I'm sure you are aware of the many strikes and up-rises of people who disagree with the proposed budget cuts. It is not clear to me how the US government is planning to overcome the economic crisis and deficits, besides pouring more money into the system, hence the question.

And a devalued dollar would make the debts smaller. Can you trust governments who say they'd never deliberately weaken its currency? I mean no one would admit to it, but apparently it's something that governments are now suspecting each other of.

It wouldn't surprise me at all to learn that countries do some amount of currency manipulation to serve their own needs.

But with regard to your question, it's timely that you should ask now. Last week, a bi-partisan commission released a list of recommendations (well just a draft at this point) to reduce the deficit.

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf [Broken]

I know that's a long report but there are good ideas in there. Cutting spending a bit here and there, raising taxes a bit here and there. Pretty common sense stuff, really. It's not rocket science.

Both the left and the right reacted with heart-felt "Hell no!" So...here we are. Everyone knows we're heading off a cliff and our "leaders" are locked in a dog fight.

Someone get a hose.

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Gokul43201
Staff Emeritus
Gold Member
Well this is not about Europe, but about the scenario that Alan Greenspan sketches: that this is a big and serious problem and the effect that the deficit is going to have on the bond market. Mugaliens appears to agree, is this a large cloud hanging overhead that could bring some really bad weather?
We've had hundreds, maybe thousands, of posts here in the last few months, discussing the debt problem. Most of the discussion, however, has been purely from the American point of view, without very much discussion about more widespread effects. A new thread on this subject is therefore worthwhile, in that the wider global aspects may be debated.

Staff Emeritus
Gold Member
We've had hundreds, maybe thousands, of posts here in the last few months, discussing the debt problem. Most of the discussion, however, has been purely from the American point of view, without very much discussion about more widespread effects. A new thread on this subject is therefore worthwhile, in that the wider global aspects may be debated.
Yes, I noticed some of the discussion but didn't want to derail them. I think it would be interesting to go into the widespread effects, especially from a wide point of view.

mheslep
Gold Member
Printing money will have the following consequences:

1. It's inflationary. Inflation transfers wealth from creditors to debtors, and as the US government is in debt, one can see the appeal.

2. Inflation provides additional tax income (in units of constant value). Because the US tax code is progressive, if the dollar is devalued and if people's income remains constant in buying power, the number of dollars goes up, and the marginal tax rate goes up.

3. A devalued dollar provides an advantage to the US in foreign trade, as exports become cheaper and imports more expensive. This, of course, assumes other currencies remain constant in value. Today this is not a very good assumption.

Some numbers (in billions):

US net worth: $60,000 US GDP:$14,600
US public debt: $13,700 US budget deficit for 2010:$1,171
Size of "Quantitative Easing 2": $600 Nice post V. Also needed in Some numbers (millions): Unemployed 14.6 - the main reason, ostensibly, for the QE2. mheslep Gold Member Well this is not about Europe, I'd agree that Europe doesn't get a say in the matter, but of course it is in part about Europe because of Vanadiums aptly put https://www.physicsforums.com/showpost.php?p=2985537&postcount=5": "With all due respect, U.S. policy is clueless," [German Finance Minister Wolfgang] Schaeuble said [in response to QE2]. "(The problem) is not a shortage of liquidity. It's not that the Americans haven't pumped enough liquidity into the market." http://www.sodahead.com/united-states/china-russia-attack-fed-move-on-qe2-personally-i-think-they-are-right-and-the-fed-is-out-of-ide/question-1323087/" [Broken] "Russia's president will insist .... that such actions are taken with preliminary consultations with other members of the global economy," said Arkady Dvorkovich, a Russian official who is preparing the country's position in Seoul. The latter is a remarkable comment, given the US central bank doesn't consult with its own government, much less the Russians. Monique said: ... It is not clear to me how the US government is planning to overcome the economic crisis and deficits, besides pouring more money into the system, hence the question. The recent election indicates some hope for substantial cuts in spending. Last edited by a moderator: FlexGunship Gold Member Printing money will have the following consequences: 1. It's inflationary. Inflation transfers wealth from creditors to debtors, and as the US government is in debt, one can see the appeal. This is what leads, and has led, to hyperinflation. Where currency gets cyclicly devauled in each transaction and is usually only solved when a new currency is established. All currencies are ultimately on this road the moment they are decoupled from a standard. Maybe us Americans will get to use the Euro eventually. :( lisab Staff Emeritus Science Advisor Gold Member The latter is a remarkable comment, given the US central bank doesn't consult with its own government, much less the Russians. That gave me a chuckle...both what the Russians asked for, and your response. Staff Emeritus Science Advisor Gold Member This is what leads, and has led, to hyperinflation. Where currency gets cyclicly devauled in each transaction and is usually only solved when a new currency is established. I think Germany learned a strong lesson about hyperinflation during WOI, they are very strongly opposed to printing money. An interesting slideshow from TIME: http://www.time.com/time/photogallery/0,29307,1879735,00.html" [Broken] Last edited by a moderator: loseyourname Staff Emeritus Gold Member The bond markets are very far from driving US yields through the roof. The US Treasury just issued negative interest TIPS two weeks ago. Investors are literally paying the Treasury nominal dollars to store their money. Yields are at the lowest they've ever been. Our debt load has risen, but we're still at 94.3% external debt-to-GDP, compared to the average of the world's 70 largest economies of 90.8%. The UK is at 408%. Ireland is at 1,267%. With a GDP that is still close to three times larger than any other, and a tax burden as a percentage of GDP that is second-lowest among OECD nations, we're very, very far from reaching any kind of theoretical limit on borrowing capacity. We certainly need to solve the remaining structural deficit, but short of tripling our existing debt, we're not going to see a bond market crisis. What other country's securities are investors going to start flocking to? US Treasury debt is still far, far safer than anything else out there. This is what leads, and has led, to hyperinflation. Where currency gets cyclicly devauled in each transaction and is usually only solved when a new currency is established. This is always quoted as the reason any inflation is bad. The central banks (at least in europe) were prepared to do anything, any level of unemployment or any cut in spending was justified by a need to keep inflation below 2% or 2.5% or whatever the level of the day was. Why is moderate inflation, say 5% or 10% so bad? Even 10% means that prices double over a decade - do we need a new currency if a car costs twice as much as it did 10years ago? Saying it leads to Weimar levels of hyperinflation is as silly as claiming that violent computer games lead to genocide. Last edited: FlexGunship Gold Member Why is moderate inflation, say 5% or 10% so bad? Even 10% means that prices double over a decade - do we need a new currency if a car costs twice as much as it did 10years ago? Well, actually, 10% means that currency is devalued by a factor of 2.6 times (1.10^10) in a decade. The problem is with people who save money. Please don't take this as an insult, but judging by your inexperience with the issue, it seems that you've never lived through an highly inflationary period. 10% inflation means that 401Ks and other retirement plans have no value (or are at least much less secure). That there is no point in saving money since it is devalued so quickly (which creates a run on the banks so that people can spend the money on more stable investments like gold and old vinyl records). That no one will lend money (since inflation shifts debt back to the creditor as the value of the lent money goes down). You're absolutely correct that inflation on it's own doesn't create hyperinflation. But the public reaction to inflation DOES cause hyperinflation. Once the value of any fiat currency has been compromised, you cannot restore it. 10% inflation means that 401Ks and other retirement plans have no value (or are at least much less secure). That there is no point in saving money since it is devalued so quickly Assuming you keep the money under the mattress, stockmarkets and interest rates do tend to track inflation - at least they did in the 70s. Inflation also destroys debt - as the previous poster pointed out. Which means that things like your mortgage become negligble. A cynic would suggest that this is why the rich and powerful fight inflation at whatever the cost to the poor. Once the value of any fiat currency has been compromised, you cannot restore it. Do you need to? 100 years ago the weekly wage in the UK was less than 1pound, this meant there wasn't enough resolution in the currency to price things - every daily item cost 1 pence. You couldn't introduce a better loaf of bread or pint of beer because it doubled the cost. Shops, like the coop, had to introduce trading stamps and credit schemes just to give some flexibility. Is it really so bad to have a currency like the Yen where 1 Yen = smallest amount. I'm not worried that the inflation numbers are not adjusted for inflation. What worries me is the image of a ballooning level. FlexGunship Gold Member Assuming you keep the money under the mattress, stockmarkets and interest rates do tend to track inflation - at least they did in the 70s. Inflation also destroys debt - as the previous poster pointed out. Which means that things like your mortgage become negligble. A cynic would suggest that this is why the rich and powerful fight inflation at whatever the cost to the poor. I also mentioned that inflation destroys debt. Remember what happened last time someone destroyed debt? Credit markets froze and the Great Recession of 2008 started. Prior to 2008, you could've made an argument that removing debt from debtors was a good thing, and only punished wealthy creditors. Well, as it turns out, everyone in an economy relies on wealthy creditors because they're the only ones with enough money to to generate upward capital growth trends. Every time the "poor" try to overrun the "rich" a nation's economy falls apart. 100 years ago the weekly wage in the UK was less than 1pound, this meant there wasn't enough resolution in the currency to price things - every daily item cost 1 pence. You couldn't introduce a better loaf of bread or pint of beer because it doubled the cost. Shops, like the coop, had to introduce trading stamps and credit schemes just to give some flexibility. Is it really so bad to have a currency like the Yen where 1 Yen = smallest amount. Resolution in currency is a real problem; you're right. However, you're quoting a time when currency was only loosely established and was still on a gold standard (in fact that's where "pound" comes from). Actual exchanges rarely used currency like we think of it now; instead, most establishments would build tabs and send out monthly bills. Even then, it was common to cut up currency (pence) and pay in fractions. Furthermore, the effective inflation rate since 1900 in the UK is 9348% (http://www.thisismoney.co.uk/historic-inflation-calculator) which is a yearly average less than 5% which is a relatively normal rate. (x100 = 94.38, solve for x. x~1.0465) Obviously two world wars severely effected it for short amounts of time. Ignoring those, the average is about 2.4%. As John Maynard Keynes outlined in 1920, inflation is the best tool by which a government can recoup it's money from the governed. By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some" (http://en.wikipedia.org/wiki/Gold_standard#British_hesitate_to_return_to_gold_standard) Anyway, my point is that currency resolution is not a very good reason to devalue everyone's money. FlexGunship Gold Member I'm not worried that the inflation numbers are not adjusted for inflation. What worries me is the image of a ballooning level. Inflation, by it's nature, is exponential. Like compounding interest. I would say anything that exceeds x10=2 is probably far too high to be sustainable by a working population. mheslep Gold Member The bond markets are very far from driving US yields through the roof. The US Treasury just issued negative interest TIPS two weeks ago. Investors are literally paying the Treasury nominal dollars to store their money. Yields are at the lowest they've ever been. Our debt load has risen, but we're still at 94.3% external debt-to-GDP, compared to the average of the world's 70 largest economies of 90.8%. The UK is at 408%. Ireland is at 1,267%. Yes, true for external debt. Given the internal wealth of the US it is no surprise that the much of the debt is held internally as compared to other nations. I don't know that the internal/external distribution has much to do with the total risk of default of a government, the implied topic of this thread. For that risk, I look to the public debt of governments vs GDP. http://en.wikipedia.org/wiki/United_States_public_debt#Statistics_and_comparables" for 2011 should be US: 100%, UK: 79%, Ireland: 93% (up from 28% in 3-4 yrs, the rate of increase is much of their problem). Moodies has suggested they'll downgrade US debt in the next decade should the trend continue. Last edited by a moderator: loseyourname Staff Emeritus Gold Member Yes, true for external debt. Given the internal wealth of the US it is no surprise that the much of the debt is held internally as compared to other nations. I don't know that the internal/external distribution has much to do with the total risk of default of a government, the implied topic of this thread. For that risk, I look to the public debt of governments vs GDP. http://en.wikipedia.org/wiki/United_States_public_debt#Statistics_and_comparables" for 2011 should be US: 100%, UK: 79%, Ireland: 93% (up from 28% in 3-4 yrs, the rate of increase is much of their problem). Moodies has suggested they'll downgrade US debt in the next decade should the trend continue. Interest charges right now are 7% of the federal budget and have actually declined since last year thanks to all of the low-rate refinancing since the Fed trashed interest rates. There is zero chance of a US default in the next 30 years (which covers the maturity of every T-bond in circulation). Bond agencies don't rate US debt. It's implied default-free. Ireland's interest rate is pushing toward 8% for the 10-year note right now. Ours is just above 1%. If we paid their rate, nearly 60% of our budget would be eaten up by interest charges. That's a huge and important difference. Their government is crippled by an inability to spend on anything else. There is, however, a good chance we'll need to raise taxes if we keep up all of the deficit spending. I'm not saying it's a good thing. But it's not armageddon. We're not going to default at a 17% of GDP tax burden and 0.5% of GDP interest charge. Not even close. And the reason the distinction between internal and external debt matters is that external debt is money leaking out of an economy. Internal debt is shifting income from taxpayers to bondholders, but they're all Americans in the same economy. Ireland is sending half of its taxes overseas. We're not. Last edited by a moderator: mheslep Gold Member Interest charges right now are 7% of the federal budget and have actually declined since last year thanks to all of the low-rate refinancing since the Fed trashed interest rates. There is zero chance of a US default in the next 30 years (which covers the maturity of every T-bond in circulation). Bond agencies don't rate US debt. It's implied default-free. <shrug> http://www.nytimes.com/2010/03/16/business/global/16rating.html?_r=1": NYT said: That sobering assessment, issued Monday by Moody’s Investors Service, provided a reminder that even Aaa-rated United States Treasury bonds, supposedly the safest of safe investments, could be downgraded one day if Washington failed to manage the federal debt. Moody’s said the United States and other major Western nations, particularly Britain, have moved “substantially” closer to losing their gilt-edged ratings. The ratings are “stable,” but “their ‘distance-to-downgrade’ has in all cases substantially diminished,” the credit ratings agency said http://www.businessinsider.com/us-debt-downgrade-moodys-2010-5" [Broken] For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, And BTW, the US is going to effectively default on the service it owes for Medicare. That's inevitable now. Ireland's interest rate is pushing toward 8% for the 10-year note right now. Ours is just above 1%. Well http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/" [Broken] but ok. If we paid their rate, nearly 60% of our budget would be eaten up by interest charges. That's a huge and important difference. Their government is crippled by an inability to spend on anything else. I agree the US is not Ireland. But the difference comes only from the confidence in the US ability pay off. There is, however, a good chance we'll need to raise taxes if we keep up all of the deficit spending. I'm not saying it's a good thing. But it's not armageddon. We're not going to default at a 17% of GDP tax burden and 0.5% of GDP interest charge. Not even close. That's the federal tax burden alone, the balance (state/local) also matters to the individual tax payer. It is not an absolute given that just raising taxes will decrease deficits. Nodody knows for sure where the http://upload.wikimedia.org/wikipedia/commons/thumb/3/36/Laffer-Curve.svg/250px-Laffer-Curve.svg.png" [Broken] lies, but I grant it is likely a bit farther up. And the reason the distinction between internal and external debt matters is that external debt is money leaking out of an economy. Internal debt is shifting income from taxpayers to bondholders, but they're all Americans in the same economy. Ireland is sending half of its taxes overseas. We're not. Agreed, but I suppose that goes to the overall economic health of the country, and not so much directly the tax revenue stream. After all, gov. bond income is tax deductible. There's another lesson here from Ireland. There's not unreasonable talk about the Ireland's and Greece's wrecking the EU as a whole. The US may suffer similarly from some of its more irresponsible states. Ireland's GDP is ~$285B. California's is \$1850B.

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