When we talk about national debt

[ultimablah]

Who, exactly, does this country owe the $10 trillion or so to? Other countries, and if so, why? If not, then who?

I've never really thought about it, but I realized "national debt" doesn't actually mean anything to me.

 

[Jimmy Snyder]

Me.

Extra text added to satisfy a curious criterion.

 

[Office_Shredder]

Wikipedia is your friend
http://en.wikipedia.org/wiki/United_States_public_debt

jimmy, that criterion is probably there to keep people from posting things like 'Me.'

 

[Jimmy Snyder]

jimmy, that criterion is probably there to keep people from posting things like 'Me.'

I. Extra text added to satisfy a curious criterion.[/color]

 

[Office_Shredder]

Ironically, your attempt to circumvent the filter and create content-less posts has nearly sparked a content-full conversation

 

[ultimablah]

I read the Wiki article, but it still makes little sense to me. Why does the government owe $10 trillion to debt instruments? Why would they borrow that much from a private organization, when they print their own?

More importantly, where does all of our currency come from, and how does that relate to national debt? I'm told the federal reserve produces money, but I'm not sure how that all works.

 

[Office_Shredder]

It used to be that all currency was backed by gold. So the government would say $1 is worth 1 ounce of gold, and at any time you could trade in your dollar bill for that ounce of gold. It meant that the government couldn't just print more money, because it would need more gold to back the value of that new money. This kept the value of the dollar relatively stable. Then we went off the gold standard, and have what's called 'fiat' currency. So nothing actually makes the money worth anything, other than the fact that other people are willing to trade for it (this isn't entirely true, as the government requires you to pay taxes in dollars, so there is inherent value in dollars over, say, trading in clam shells).

This has upsides and downsides. The major upside is the government no longer has to keep massive gold supplies to back the currency, and is able to print money to pay for everything. The downside is that the money isn't inherently worth anything, which means it can drop. So if the government just reels off trillions of dollars, the value of the dollar will drop dramatically because the supply has increased so suddenly, so having one dollar isn't worth as much anymore. This limits the government from printing off all the money it wants... in fact, Zimbabwe is an example of this occurring right now. It's estimated over half the government income is from printing money, and what do you know? The inflation is in the billions of percent per year (prices double every week or something).

So if the government needs money, instead of printing all of it it takes out loans. It requests money from the public (which includes foreign governments, corporations etc.) and in return promises to pay back more money later. This happens quite regularly nowadays, which has caused the national debt to balloon.

As an aside, the government does print off money each year, but the Federal Reserve (I think) is tasked with controlling monetary policy to ensure a stable currency

 

[CaptainQuasar]

I read the Wiki article, but it still makes little sense to me. Why does the government owe $10 trillion to debt instruments? Why would they borrow that much from a private organization, when they print their own?

More importantly, where does all of our currency come from, and how does that relate to national debt? I'm told the federal reserve produces money, but I'm not sure how that all works.

Here's another question to ask yourself: if the government prints its own money why does it ever need to collect taxes?

I'm not an economist or anything but my amateur attempt at understanding fiat currency (paper money that isn't backed by gold or silver, what we've had for the last several decades) is this:

In a dollar-based economy, there ought to be a dollar somewhere for each thing of value, right? But if dollars have to be backed by something like gold, there can only be as many dollars as there is gold, which is going to be a fairly fixed amount.

But new economic value gets created all over the place all the time - companies manufacture new goods from raw materials, technology advancements increase the value of things (just to make an example up - a Ford Model T might have cost the same as a horse to own but in many respects it has more value; goes further, faster, etc.), the value of real estate increases due to population pressures, everyone personally does work / provides services to their employer every week and gets a paycheck for it, teenagers come of age and enter the work force, and so on.

So with a gold standard, unless a country has a really productive source of gold (like Spain had during the Spanish Empire) the economy expands much faster than the supply of gold does. So the supply of gold can sort of put some artificial brakes on the expansion of the overall economy. (Plus you get funny effects where each country wants to get gold away from the other countries and hoard it.)

In a country where a central bank like the U.S. Federal Reserve or the Bank of England prints the money as a fiat currency they're able to create new dollars to match the expansion of the economy. I believe that the primary method of doing this is that the central bank loans money to other banks in the nation's financial sector.

But they can't just print money willy-nilly; if they create more dollars than correspond to the total value of all the stuff in the economy the value of an individual dollar goes down. Whereas the cost of a gallon of milk was a single dollar at some point in the past, nowadays it's between three and four dollars (at least where I am it is.) If the government just prints as much money as it wants to you get runaway inflation as happened in Weimar Germany after WWI or during the last decade in Zimbabwe: a gallon of milk goes up to a thousand dollars, then ten thousand, then a million dollars... essentially, everyone collectively realizes at the same time that a dollar isn't worth anything.

That's why the U.S. government can't just print money to pay its employees and buy whatever it wants. The money it spends has to be represented by real economic value that gets transferred to government ownership somewhere along the line. Hence the government has to collect taxes or raise money in some other way, and when it doesn't raise enough it has to borrow money to buy what it wants. If we just printed money to pay government debt we would wreck our economy with runaway inflation.

As I understand it that's one concern about this recent government bail-out of banks - that there wasn't time or a practical way to raise "real" money to fund it, that the banks have essentially been bought out or shored up by the government simply printing money.

Another aspect of it to understand is that the U.S. government is in a very unusual position compared to other governments in the world: the U.S. national debt is denominated in U.S. dollars. We're able to get that arrangement because we're the most powerful economy in the world. So technically we could print money to pay off the debt and the money we payed out to our debtors would become worthless as inflation skyrocketed and we would laugh at them and thumb our noses. We could only ever do that once, really. But most countries don't have that luxury: they have their own local currency while their national debt is denominated in U.S. dollars or euros or something, so they have no way of printing money that would pay off their debt.

[edit]One more thing: so when you ask how a fiat currency dollar can have value when there's no asset which backs it they usually say something like "the value of a dollar derives from confidence in the U.S. government." I think what this specifically means is people have faith that 1) the U.S. government is going to make sure that all debts denominated in dollars are going to get paid (both its own debts and private debts by enforcing the laws) and 2) the U.S. government is going to ensure that a dollar represents real economic value by maintaining the economy (keeping interest rates under control, fixing things like the financial crisis) and by not doing things like creating runaway inflation.

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[quadraphonics]

Here's another question to ask yourself: if the government prints its own money why does it ever need to collect taxes?

Printing money boosts inflation, which erodes the value of the national savings. I.e., printing money is a tax on the wealthy and retired. It doesn't hurt the working population as hard because unemployment goes down and salaries tend to keep pace with the inflation.

More saliently, the Fed is constantly trying to balance the downside of printing too much money (inflation) against the downside of not printing enough (unemployment). Both downsides have dire political consequences for incumbents if they are not kept in check. Thus, the Fed is restrained from excessive printing or witholding of money.

 

[quadraphonics]

Also, the national debt counts all debt owed by public institutions in the US, whether it's debt to individuals or institutions or governments, foreign or domestic. Last I checked, the majority of it is still owed to domestic entities.

There's also the consumer debt, which is the debt owed by individuals in the US (not the government). This is basically the outstanding balance on the population's credit cards and other forms of financing. The last I heard, this was also some really big number, with a high percentage owned by foreigners, but I don't have a good source at the ready...

 

[ultimablah]

This seems to make sense... one question, though; how does a fixed value for currency raise unemployment?

 

[quadraphonics]

This seems to make sense... one question, though; how does a fixed value for currency raise unemployment?

It's not that a fixed value per se raises unemployment, but high interest rates that do it (high interest rates are the same thing as printing less money). As far as its macroeconomic effects go, you can consider a fixed currency (say, gold standard) to be equivalent to a fiat currency where the Fed is committed to ensuring 0% inflation. They would then do this by setting interest rates sufficiently high. There are a number of mechanisms that work together to translate high interest rates into reduced employment. One effect is that people save a higher percentage of their income, so there's that much less money showing up as demand for goods, which means that much less money for companies to make goods, meaning that many fewer people they can afford to pay to make said goods. The other big effect is that higher interest rates, by definition, raise the cost of borrowing money. This makes it that much more expensive for companies to finance new equipment and factories and so on, and so that much less jobs available. On the upside, inflation is kept very low.

The converse of these effects explains why the Fed lowers rates when economic growth declines. When rates go down, the opposite happens: people spend more of their income, so there's more demand for goods and services, and it's cheap for businesses to finance expansions, so the economy grows more quickly. The downside to this, of course, is inflation.

So, what the Fed tries to do is walk a tightrope by keeping rates high enough that inflation doesn't get out of control, but low enough that unemployment stays low and growth stays up. In times of crisis, where growth has stopped or reversed, inflation is no longer a problem, and so rates will be cut dramatically. You can tell a crisis is over when inflation starts to pick up again (like it would have under low rates in normal times), at which point the Fed will take notice and bring rates back up.

The main difference between a currency with some fixed standard and a fiat currency is the ease with which you can make these adjustments. A fixed currency regime would require the accumulation or sale of large quantities of gold in order to make comparable adjustments, which is problematic for a number of reasons, and so such moves were not a significant feature of the gold-standard era. So, there's a steep price to a fixed currency, which is the inability to do much with monetary policy in order to react to a crisis. I have not seen any arguments in its favor that would overcome that downside.

 

[fourier jr]

Who, exactly, does this country owe the $10 trillion or so to?

hahaha I noticed that China owns the 2nd-biggest share of the US debt. & this is how China thinks the US should deal with it:


& don't forget the time bomb known as their $53 trillion in "unfunded obligations." check out these clips (of warren buffet, alan greenspan, etc) from IOUSA:
http://www.iousathemovie.com/clips/

 

[CaptainQuasar]

Printing money boosts inflation, which erodes the value of the national savings. I.e., printing money is a tax on the wealthy and retired. It doesn't hurt the working population as hard because unemployment goes down and salaries tend to keep pace with the inflation.

One thing about inflation in the special case of the U.S. is that, because the national debt is denominated in dollars, the real cost of repaying that debt is reduced. (Not that that makes rapid inflation desireable, but if we ever do trigger uncontrollable inflation by accident or (more) government incompetence at least there's one silver lining.)

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[quadraphonics]

One thing about inflation in the special case of the U.S. is that, because the national debt is denominated in dollars, the real cost of repaying that debt is reduced.

True, although that factor is known to everyone that borrows said debt and, if they are rational, they will not buy said debt unless the repayment rate exceeds their expectation for dollar inflation. An exception is when they have some other reason to buy the debt besides its prima facie value. For example, if a country was running a large trade surplus with the United States and wished to keep its currency from appreciating relative to the dollar (and so staunching the trade imbalance), they might well be happy to buy relatively short-term US debt at interest rates comparable, or even a bit below, inflation. In such a case, the country in question would basically be funding American consumption and government borrowing. I would suggest that unless you are an unskilled manufacturing worker, such an arrangement is not something you should oppose.

 

[CaptainQuasar]

hahaha I noticed that China owns the 2nd-biggest share of the US debt. & this is how China thinks the US should deal with it...

Then there was [thread=267007]this guy[/thread] who posted here at PF demanding that the U.S. give Alaska to Korea and Japan instead of the dollar sum owed. Heh heh, they wish. Well, we would never want to do Korea and Japan the disservice of rendering to them anything other than exactly what is promised on the Treasury Bills they bought, it would break our national honor doncha know.

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[CaptainQuasar]

True, although that factor is known to everyone that borrows said debt and, if they are rational, they will not buy said debt unless the repayment rate exceeds their expectation for dollar inflation. An exception is when they have some other reason to buy the debt besides its prima facie value. For example, if a country was running a large trade surplus with the United States and wished to keep its currency from appreciating relative to the dollar (and so staunching the trade imbalance), they might well be happy to buy relatively short-term US debt at interest rates comparable, or even a bit below, inflation. In such a case, the country in question would basically be funding American consumption and government borrowing. I would suggest that unless you are an unskilled manufacturing worker, such an arrangement is not something you should oppose.

Oh, yeah, I have no objection to China and Japan propping up the dollar. I just think it's cool we've got this "nuclear option" on the national debt. It's like, the nation that led the world in the trend of individuals racking up insane, hopelessly inescapable credit card debt and then defaulting and declaring personal bankruptcy has arranged things so that we've got the option of doing the same thing on a national scale. (Which would wreck everything economically, of course, just like declaring personal bankruptcy destroys your personal financial situation.)

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