Basic Economics Question

[Mutt]

When a country never runs at a surplus, never taking in more than it spends, how can it ever pay back the enormous debt principal it owes to those it's borrowed from? Without just printing money out of thin air.

[PornDiscounts-V]

By tying the worth of the printed money to the actual work behind the set price of the money instead of a hard currency backed by gold.

[Jeremy_Totem]

by getting a loan from somebody else? YOU for exemple when you buy some bonds...

[kane]

The short answer is that it can't. It borrows money from one person to pay another. That is why our national debt continues to rise.

[Adraco]

Basic economics class:
By inflation.

If a country borrows $1000
and then run an inflation of 10% for one year
they can then repay the loan at 90% of the value.

There are a lot more to it, of course, but that's a basic theory.

Another is by investing.
Investing a loan of $1000 today
into something which grows faster than the interest rate, say healthcare savings, you can then repay the loan in a few years time with the difference between the interest rate paid and the growth/savings of the investment.

[freecartoonporn]

they sell what they have, bonds/lands to other countries.

[ilnjscb]

It can't. It takes a long time, but in the end default is inevitable.

[woj]

they doesn't necessarily need to pay it back...

everyone thinks that "debt" is bad, but imagine you are a real estate investor... each year you borrow 100k to buy a piece of real estate, rent it out, and after all expenses including interest payments, you come out ahead by $10k/year...

in that scenario you could continue borrowing 100k each year forever, letting your debt grow to ridiculous levels, but as long as your income grows 10k/year each time you do it, where is the problem?

of course this assumes that the borrowed funds are actually invested wisely, not pissed away on useless stuff...

[Mutt]

they doesn't necessarily need to pay it back...

everyone thinks that "debt" is bad, but imagine you are a real estate investor... each year you borrow 100k to buy a piece of real estate, rent it out, and after all expenses including interest payments, you come out ahead by $10k/year...

in that scenario you could continue borrowing 100k each year forever, letting your debt grow to ridiculous levels, but as long as your income grows 10k/year each time you do it, where is the problem?

of course this assumes that the borrowed funds are actually invested wisely, not pissed away on useless stuff...

you're talking from the borrower's point of view, what about the lender? with real estate the lender's loan is secured by the land property. if the borrower can't make its payments the lender forecloses. what's China got as security?

Bonds are just more debt and it just keeps adding to the national debt. The answer is that the United States can't pay back the principal if it had to, but due to its place in the world 'it's too big to fail'. for now. While the US does have its special place in the world it should just print the hundreds of billions and pay down the debt to China and other major creditors - let them take that money and invest it elsewhere or buy up more US resources.

[lezinterracial]

The biggest buyer of US debt now is the Federal Reserve. Will be interesting to see how that turns out over the years.

[Paul_Matthews]

The money will only be lent if there are sufficient securities tied in with that debt, which in the case of sovereign debt will be gold or possibly state infrastructure.
In many cases, the money is also lent to said country purely in order to get regular payments with interest, rather than having the intent of getting the loan paid off per se. The debt (and corresponding bonds) are a form of asset, and are then sold and bought as any asset would.

Unfortunately one then gets systemically important financial institutions (sifi's), that then buy this debt, and modern economics would just not allow major defaults of this debt in large amounts and the debt then eventually just gets written off in certain circumstances. (such as a lot of African debt which just gets written off on a seemingly regular basis - but in these cases certain rights then get privileged to the bond owners, such as mining rights)

Oh, and I just have to add - that's not really a basic economics question, but rather a really, really complicated one which has many more factors that what I have briefly mentioned :-0

[PR_Phil]

you're talking from the borrower's point of view, what about the lender? with real estate the lender's loan is secured by the land property. if the borrower can't make its payments the lender forecloses. what's China got as security?

Bonds are just more debt and it just keeps adding to the national debt. The answer is that the United States can't pay back the principal if it had to, but due to its place in the world 'it's too big to fail'. for now. While the US does have its special place in the world it should just print the hundreds of billions and pay down the debt to China and other major creditors - let them take that money and invest it elsewhere or buy up more US resources.

They can't just print the money.

In the past few years they have printed too much money, as much as they could, for bailouts and military spending. While they didn't actually "print" cash, they sold securities worth trillions of dollars which has a similar effect as printing money because it adds to the available funds in the pool without having increased the actual worth of the nation. When you add to the pool without increasing actual worth, you devalue your currency as it is a product of your worth.

so, if the federal reserve / mint decides to just print a trillion dollars, they devalue each and every dollar in existence and while they can immediately use the money they printed, they have not increased the overall worth of all the money there is.

in this scenario the gov can use that trillion dollars to retire some outstanding debt, but the US runs at a perpetual deficit and will simply need to issue new debt in the near future, the problem is that when they do go do issue new debt, they have devalued their currency due to the printing of excess money, thus the value of the new debt will be lower, this means in the end, they will have to issue more debt to accomplish the same things than they would have had they not printed more money.

the issue compounds because the value of the securities is a product of a required return that factors in not only real interest rates on risk free debt, but accounts for several risk issues including inflation risk, default risk, currency exchange risk, etc.

US treasury Bonds used to be the definition of a risk free investment, they no longer are, virtually the entire world has moved to using the LIBOR rate because of the new risk that is now associated with the US economy. Thus it already costs the US slightly more to issue new debt than it used to. If the US prints more money than the economy can sustain, they increase currency exchange risk and inflation risk due to the devaluation of the dollar and they increase default risk as other countries will understand that printing more money is no longer a viable option. Then new US Government debt issues will be worth even less than they were before because lenders are requiring a greater rate of return. Either the Gov would have to offer a higher coupon rate on their debt, or their issues would sell at a discount.

it's a vicious cycle.

[sperbonzo]

It can't. It takes a long time, but in the end default is inevitable.

Bingo!


You can use all of the tricks of fiat currency.... e.g. Borrowing from others in the form of bonds, Centralized banking that buys back their own government bonds, (i.e. loaning itself the money), increasing taxes, (including those designed as regulatory fees which are actually taxes), printing more money, (i.e. artificial inflation, which is, in the end, just another form of taxation), confiscation of retirement funds and savings, currency controls to keep revenues from leaving the country, price and wage controls, etc, etc, etc.... But history shows us that, in the end, default and reset will eventually be reached.

Typically in those situations, the vast majority of all of the pundits, officials, experts and spokespeople of their day refuse to believe that this will happen until it does.




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[thumbuilderic]

Bingo!


You can use all of the tricks of fiat currency.... e.g. Borrowing from others in the form of bonds, Centralized banking that buys back their own government bonds, (i.e. loaning itself the money), increasing taxes, (including those designed as regulatory fees which are actually taxes), printing more money, (i.e. artificial inflation, which is, in the end, just another form of taxation), confiscation of retirement funds and savings, currency controls to keep revenues from leaving the country, price and wage controls, etc, etc, etc.... But history shows us that, in the end, default and reset will eventually be reached.

Typically in those situations, the vast majority of all of the pundits, officials, experts and spokespeople of their day refuse to believe that this will happen until it does.




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Yeah, that's about it. It'll eventually catch up with us. Maybe not us, but our kids. Not my kids. Someone else's kids. I don't like kids.

[slapass]

When a country never runs at a surplus, never taking in more than it spends, how can it ever pay back the enormous debt principal it owes to those it's borrowed from? Without just printing money out of thin air.

If you are talking about the US, we did have a surplus under Clinton.

But the real answer is growth. As the economy grows the debt is a smaller percentage of the whole so becomes less important. Your house mortgage seems huge when you take it out but as your income grows it becomes easier to manage.

[sperbonzo]

But the real answer is growth. As the economy grows the debt is a smaller percentage of the whole so becomes less important. Your house mortgage seems huge when you take it out but as your income grows it becomes easier to manage.

That's all fine except for the pesky fact that growth in the GDP is actually being out-paced by the growth of the government debt..... By 2038 the debt will actually become larger than the GDP itself.









p.s. Don't think that I'm advocating lower government spending.... because I know that this is a pipe dream. NO government willingly gives up ANY of it's power over people, money, etc.... They only grow and grow. Reduction in government only occurs when the whole ball of wax comes tumbling down, often in a very messy fashion.



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[slapass]

That's all fine except for the pesky fact that growth in the GDP is actually being out-paced by the growth of the government debt..... By 2038 the debt will actually become larger than the GDP itself.









p.s. Don't think that I'm advocating lower government spending.... because I know that this is a pipe dream. NO government willingly gives up ANY of it's power over people, money, etc.... They only grow and grow. Reduction in government only occurs when the whole ball of wax comes tumbling down, often in a very messy fashion.



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That is why the EU is all over the govts in trouble to reduce the speed at which their debt is growing. If the country grows at 3% and the debt grows at 3% and it is less then 100% of GDP, you will eventually grow your way out and no one generation has to take the hit. The US has done it before and so has most of Europe.

It is math and everyone who is paying attention knows this. That is why they are doing what they are doing. If they can reduce unemployment then the drag on economy goes away and growth picks up etc.

Did we go to far? Maybe but the solution is a known issue. So that begs the question as to why the Republican party who knows this keeps bringing the economy to a halt every 18 months. Hurts our growth. They want to keep blowing up third world countries but they want the Democrats to look bad for it.

[sperbonzo]

That is why the EU is all over the govts in trouble to reduce the speed at which their debt is growing. If the country grows at 3% and the debt grows at 3% and it is less then 100% of GDP, you will eventually grow your way out and no one generation has to take the hit. The US has done it before and so has most of Europe.

It is math and everyone who is paying attention knows this. That is why they are doing what they are doing. If they can reduce unemployment then the drag on economy goes away and growth picks up etc.

Did we go to far? Maybe but the solution is a known issue. So that begs the question as to why the Republican party who knows this keeps bringing the economy to a halt every 18 months. Hurts our growth. They want to keep blowing up third world countries but they want the Democrats to look bad for it.

Blah blah blah "the other party" blah blah blah.


They are BOTH growing the government in an out-of-control fashion and NEITHER is going to do anything to slow it down in any sense other than creative bookkeeping in order to make you think something is being done. Get off the "party" wagon and smell the truth. The Debt is already outpacing growth and it will not be slowed until it all falls apart. Government interference in order to "stimulate growth" in the private sector never works in the long run and always hurts growth in the short run through unseen consequences affecting the natural evolution of a free market.

The political class is too concerned with their own power and wealth to worry about what happens down the road to the rest of us... This is of course true about everyone, but in the case of the political class, they can actually use force to make you comply with their wishes. No company or individual can legally do that.





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[tony286]

Bingo!


You can use all of the tricks of fiat currency.... e.g. Borrowing from others in the form of bonds, Centralized banking that buys back their own government bonds, (i.e. loaning itself the money), increasing taxes, (including those designed as regulatory fees which are actually taxes), printing more money, (i.e. artificial inflation, which is, in the end, just another form of taxation), confiscation of retirement funds and savings, currency controls to keep revenues from leaving the country, price and wage controls, etc, etc, etc.... But history shows us that, in the end, default and reset will eventually be reached.

Typically in those situations, the vast majority of all of the pundits, officials, experts and spokespeople of their day refuse to believe that this will happen until it does.




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And you work in finance? Japans debt was 200% of gdp and they never defaulted.

[sperbonzo]

And you work in finance? Japans debt was 200% of gdp and they never defaulted.

I'm not talking about default. I"m talking about collapse. And that is a VERY long process.


Keep an eye on japan in the coming years. If they do not default, they will need to either go into VERY SEVERE "austerity" programs, or there will be hyperinflation of the yen (similar to the weimar republic).

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[slapass]

I'm not talking about default. I"m talking about collapse. And that is a VERY long process.



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Switzerland has been a round forever. A country does not have to collapse. If the fracking continues and we start exporting Natural Gas it could give us another 50 years of disfunction.

[Stephen]

A lot of folks miss the fact that US currency comes with a disclaimer: "In God We Trust"

If you trust the paper instead, and lose out, don't say we didn't warn you -- there's only one place to put your trust -- and it isn't a greenback. If the US defaults, it can simply say, "see, we told you..."

< don't trust the pennies, either

The only way to solve the problem is to go back to the gold standard and eliminate faith from the financial equation.

[tony286]

I'm not talking about default. I"m talking about collapse. And that is a VERY long process.


Keep an eye on japan in the coming years. If they do not default, they will need to either go into VERY SEVERE "austerity" programs, or there will be hyperinflation of the yen (similar to the weimar republic).

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I know that's the fantasy. And we have been waiting for this hyper inflation for quite some time now and nothing.

[sperbonzo]

I know that's the fantasy. And we have been waiting for this hyper inflation for quite some time now and nothing.

Of course. It's never happened before (except for Hungary in 1946, Germany in 1923, Greece in 1944, Zimbabwe in 2008, Roman empire at it's end, Chile in 1973, China in 1948, Argentina in 1989.... But everyone knows that everything turned out just FINE in the years following those situations in those countries!! )

(p.s. Imagine the consequences if that happens to one of the world economic giants in the modern system of interdependent economies...)

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[ilnjscb]

And you work in finance? Japans debt was 200% of gdp and they never defaulted.

Hmmmm.....

"With the population aging, domestic demand (which has been almost all of demand) for Japanese Government Bonds is likely to fall. A crisis could develop very quickly, in that even a small rise in interest rates could cause a large sell off in JGBs owned by banks and foreigners, and a disruptive rise in government interest costs."

Japan government debt

Risk of Bond Market Revolt in Japan: Expert

[slapass]

Hmmmm.....

"With the population aging, domestic demand (which has been almost all of demand) for Japanese Government Bonds is likely to fall. A crisis could develop very quickly, in that even a small rise in interest rates could cause a large sell off in JGBs owned by banks and foreigners, and a disruptive rise in government interest costs."

Japan government debt

Risk of Bond Market Revolt in Japan: Expert

Japan is done. The only saving grace is Japan owns their own debt. They have to borrow 50 cents of every dollar the govt spends. They are in lala land of every getting out of this and the rest of the world needs to pay attention.

[Buff]

Obviously there are only two ways to pay off a debt: run a surplus big enough to cover interest and principle payments; print money.

But there are many other options, too: default; debt forgiveness +default; debt forgiveness; debt renegotiation; etc.

But obviously, your point is that this isn't going to end well, and you're correct. Default or hyperinflation are the two most likely outcomes, although my guess is that the Federal Reserve banking cartel might try to implement a new currency tied to some commodity the US has an abundance of relative to everyone else and use some kind of scheme to de facto default but instead of the US feeling the pain, only the creditors would in the short run. I hope that wouldn't work though, because the US government needs to implode if for no other reason than justice.

[_Richard_]

I'm not talking about default. I"m talking about collapse. And that is a VERY long process.


Keep an eye on japan in the coming years. If they do not default, they will need to either go into VERY SEVERE "austerity" programs, or there will be hyperinflation of the yen (similar to the weimar republic).

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austerity is a discredited joke.

what is really happening; we're rolling the clocks back 200 years

no more entitlement. no more empowered rabble.

or do you think americans really care about the British royal wedding? you guys ran it more than we do.

[Mutt]

They can't just print the money.

In the past few years they have printed too much money, as much as they could, for bailouts and military spending. While they didn't actually "print" cash, they sold securities worth trillions of dollars which has a similar effect as printing money because it adds to the available funds in the pool without having increased the actual worth of the nation. When you add to the pool without increasing actual worth, you devalue your currency as it is a product of your worth.

so, if the federal reserve / mint decides to just print a trillion dollars, they devalue each and every dollar in existence and while they can immediately use the money they printed, they have not increased the overall worth of all the money there is.

This is always what economists say about printing money, that it will devalue the dollar, hence inflation. BUT why would that have to be if the US printed 500 billion dollars to pay off China and China took the 500 billion and went on a worldwide shopping spree buying up resources, as they already do? What if for example China took that money and in just one transaction paid Canada for the rights to the Arctic?

[Paul]

This is always what economists say about printing money, that it will devalue the dollar, hence inflation. BUT why would that have to be if the US printed 500 billion dollars to pay off China and China took the 500 billion and went on a worldwide shopping spree buying up resources, as they already do? What if for example China took that money and in just one transaction paid Canada for the rights to the Arctic?

In that scenario the issue China would have, is finding a country gullible enough to accept that money for such a valuable resource.

Bingo!


You can use all of the tricks of fiat currency.... e.g. Borrowing from others in the form of bonds, Centralized banking that buys back their own government bonds, (i.e. loaning itself the money), increasing taxes, (including those designed as regulatory fees which are actually taxes), printing more money, (i.e. artificial inflation, which is, in the end, just another form of taxation), confiscation of retirement funds and savings, currency controls to keep revenues from leaving the country, price and wage controls, etc, etc, etc.... But history shows us that, in the end, default and reset will eventually be reached.

Typically in those situations, the vast majority of all of the pundits, officials, experts and spokespeople of their day refuse to believe that this will happen until it does.

I think this game will continue for quite some time to come, Either Congress lifts the debt ceiling or it doesn't and interest rates sore, the financial system melts down and the world is plunged into a great depression that'll make the 1930s one look like a walk in the park.

[slapass]

I think this game will continue for quite some time to come, Either Congress lifts the debt ceiling or it doesn't and interest rates sore, the financial system melts down and the world is plunged into a great depression that'll make the 1930s one look like a walk in the park.

This is why I tend to think this is all for TV as no one would be that stupid. Not even the Tea Party.

[crockett]

This is why I tend to think this is all for TV as no one would be that stupid. Not even the Tea Party.

We can all hope they aren't that stupid, but so far they haven't given anyone any reason to think they aren't. In fact some of them think it wouldn't be that big of a deal.. The tea party wasn't labeled "debt kamikaze" for no reason, the last time this played out.

[Barry-xlovecam]

All money, the Swiss franc being a small-time exception, is baseless now in terms of an absolute value like gold.

Thus all wealth and debt is relative to the nation's currency -- currency is not that much unlike a stock equity: Its value will float relevant to each country's balance sheet.

Debt/Wealth ratios are all relative -- so were would you rather live?

Where is there wealth to give value to currency.

Would you rather your government be indebted and yourself debt-free or with a manageable debt burden? Or, would you rather be saddled with a heavy personal debt burden and your country debt free? You can't have both it is an either/or proposition.

I love when people say they pay cash for everything -- 95% of them cannot get credit Same applies to countries ...

[GregE]

This is why I tend to think this is all for TV as no one would be that stupid. Not even the Tea Party.

I doesn't get any stupider than the tea party.



I hope you're right though.

[PornoMonster]

This explains it for you!


http://www.youtube.com/watch?v=Li0no7O9zmE

[Paul]

This is why I tend to think this is all for TV as no one would be that stupid. Not even the Tea Party.

It was the same with the bank bailouts in October 2008, they left it until the last minute but it was always going to happen because the alternative was a run on the banks.