Good News Most People Don’t Believe

Zeitgeist 1 Minute
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21 thoughts on “Good News Most People Don’t Believe”

        1. Debt is just a means of financing. It’s constantly being repaid, but new government bonds are always being issued. If by repaid you mean brought down to zero, that’s extremely rare in developed economies because doing so involves a lot of austerity and suffering among the population. (It happened once in the US under Andrew Jackson and it preceded one of the worst economic depressions in 19th century America.)

          Personally, I’d prefer that our governments aimed for more or less balanced budgets and saved deficit spending for recessions, but rising debt isn’t a problem if it isn’t increasing as a percentage of the total economy. Debt / GDP ratios did increase during the recession, but that was part of what was necessary to keep our economies from freezing up. They’ve leveled off now and we’ll likely see a gradual long term decrease in the ratios, at least until the next economic crisis, war, etc. Of course, the debt in raw currency will continue to increase, and politicians will continue to scare people about it.

          Hope that makes sense. It’s difficult to explain briefly.

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          1. And of course, debt is a means of financing. But financing what? Social programs will perhaps always require borrowing, but should the Renminbi stop there? Is borrowing from foreign investors to bailout privately owned financial institutions, and then further lending on to those same institutions at virtually zero cost yet more money that’s been borrowed, really a prudent policy given the taxpayer has to pay the interest on the debt? 💡 Should not the lesson now be learned that to have a reliance upon a privatised and hence profit-seeking financial system dangerous? Money is a public good! As you may recall, I do not advocate the collapse of that same system and we went over that here: https://selfawarepatterns.com/2014/09/21/the-great-recession-was-less-severe-than-the-great-depression-because-we-do-learn-from-history/

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          2. Financing what is the key question. In the US federal government, treasury bond proceeds along with various tax revenue, all get lumped into general government funds, which are then budgeted out for various purposes. Tracing actual debt to specific spending isn’t really possible. (In US states, it often is possible because most states can only borrow for specific capital expenditures such as road building.)

            I don’t think anyone ever agrees with everything their government spends money on. (US conservatives often resent paying taxes because they perceive that money goes to things they disagree with such as social welfare.) But they’re still stuck paying taxes, or investing portions of their retirement in government bonds. It’s part of the social contract we all live under.

            I think private versus public ownership is always a tension between the innovation of the markets versus the danger of market failures. Right now, my feeling is that regulated private ownership is the right compromise for the financial sector. Public ownership might eliminate the dangers of a market failure, but it also could lead to a financial system that doesn’t evolve well with the changing economy.

            BTW, while typing this comment, I watched an interview of Paul Krugman doing a full force defense of Obama’s overall policy decisions. An interesting coincidence.

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          3. That’s a lot of talk about reducing the annual deficit, but none about the accumulated debt.

            This is not OK in our personal lives; why is it good for the government to operate this way?

            Not that there should never be any debt. But with no plan or goal to ever eliminate it… Why do others keep lending to us? Eventually won’t the creditors come calling?

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          4. As I noted above, governments are constantly rolling over their debt, paying off current creditors while borrowing from new ones (or borrowing from the same creditors with new bonds, bills, etc.) So creditors are constantly getting paid.

            Comparing this situation to personal finances can be problematic, but consider that when you go to the bank for a loan, they look at your financial numbers, most notably how much income you’re taking in, your assets, and your existing debt. What is important to them is not your raw numbers, but your ratios, such as debt to income. Someone who makes $20,000 a year is going to have a harder time borrowing $100,000 than someone who makes $200,000 / year. They also look at your credit history.

            Creditors to the government do a very similar calculation. The debt to GDP ratio, the ratio of public debt to the total income of the economy, is the number they look at. If that ratio is low, the government is a good risk and pays a low interest rate. If the ratio is high, then they often have to pay a higher interest rate, but an individual government’s history of reliable debt payments (essentially their credit history) comes into to it too. A reliable government can get away with a higher ratio than an unreliable government that has a history of defaults.

            So, the important things are the debt / GDP ratio and debt payment history. Because of this, debt is only a problem if a country’s debt is growing faster than its total economic income. That’s why the total public debt can stay the same, or even increase at a moderate rate, and not lead to national bankruptcy.

            It’s normal for both governments and corporations to carry ongoing debt. Carrying no debt usually means that they’re forgoing opportunities.

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        1. Not sure on the rollover question. My understanding is that Japan is one of the countries (like the US and UK) that have never defaulted, which gives them a lot more flexibility on the ratios. (Once a country has defaulted even once, financial markets never give them the same leeway again.) Having most of their debt held by their own population also helps, particularly since the interest payments are going back into their own economy.

          But my understanding is that their debt ratio is so high because their economy has struggled for the last couple of decades, and that it’s not clear that they’re out of it yet.

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    1. Hmmn, just tried it on Chrome on iOS and the link and commenting worked for me. Note that Larry turned off commenting on his post, so if you were on the original that might have been an issue.

      I’m grateful for you making me look at the site via mobile however, since I’m appalled by how the comment indenting looks. I’m about to lower the indent limit back down to compensate.

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    1. I’m afraid I fall into the “some people” category, at least some of the time. Whether or not lowering the deficit is a good idea depends on the state of the economy. Lowering the deficit in a recession is generally a bad idea since it puts contractionary pressures on a down economy. And I do think both of our governments lowered their deficits too fast, causing pointless suffering for millions. (Although I’ll admit to being less familiar with the UK situation.)

      On the other hand, when the economy is doing well, I do see deficit reduction as a good thing. Although I think worrying too much about deficits that are less than the growth in economic income is misguided.

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  4. For some reason I can’t reply directly to any of the comments in one of the threads above. I’m replying to this comment of yours.

    As I noted above, governments are constantly rolling over their debt, paying off current creditors while borrowing from new ones (or borrowing from the same creditors with new bonds, bills, etc.) So creditors are constantly getting paid.

    With all due respect, this (and parts of what follows) read like doublespeak to me. So long as the debt keeps increasing (and so long as we have no reason to expect that it will ever do otherwise), I still don’t see how it’s not a big pyramid scheme.

    Comparing this situation to personal finances can be problematic

    Why?

    but consider that when you go to the bank for a loan, they look at your financial numbers, most notably how much income you’re taking in, your assets, and your existing debt. What is important to them is not your raw numbers, but your ratios, such as debt to income. Someone who makes $20,000 a year is going to have a harder time borrowing $100,000 than someone who makes $200,000 / year. They also look at your credit history.

    Creditors to the government do a very similar calculation. The debt to GDP ratio, the ratio of public debt to the total income of the economy, is the number they look at. If that ratio is low, the government is a good risk and pays a low interest rate. If the ratio is high, then they often have to pay a higher interest rate, but an individual government’s history of reliable debt payments (essentially their credit history) comes into to it too. A reliable government can get away with a higher ratio than an unreliable government that has a history of defaults.

    So, the important things are the debt / GDP ratio and debt payment history. Because of this, debt is only a problem if a country’s debt is growing faster than its total economic income. That’s why the total public debt can stay the same, or even increase at a moderate rate, and not lead to national bankruptcy.

    It’s normal for both governments and corporations to carry ongoing debt. Carrying no debt usually means that they’re forgoing opportunities.

    You make a good point about the ratio perspective.

    According to the US National Debt Clock, the US national debt is pushing $18 trillion, which is about $56k per citizen, or > $150k per taxpayer; and the US GDP is around $17 trillion. Over 100% debt to GDP ratio still seems like bad news to me.

    If the debt continues to increase indefinitely (which you seem to suggest would be acceptable), I can’t figure any way that that doesn’t lead to some creditor(s) eventually not being paid back.

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    1. On the replies, yeah sorry, I changed the maximum indents to fix the formatting issues you clued me into. For some reason, WordPress stops letting you reply at the maximum level of indentation, unless you click the reply link in the email notification or on the WordPress notification toolbar. (If you know of an option I’m missing to change that, please let me know, but I’ve observed the same limitations on other blogs.)

      On why you can’t compare personal finances to government finances: a government has two big advantages over an individual. The first is that they usually control their own currency, and second they can usually depend on their economy to grow every year.

      Ok, apologies but this is going to get wonky. Suppose your debt / GDP ratio is 100%, but you have 3% annual growth and 2% annual inflation. Your deficit can actually be around 5% of GDP (3% + 2%) and keep the same debt ratio. Any deficit below 5% of GDP will actually reduce the debt / GDP ratio. If the deficit is 1% of GDP, the debt / GDP ratio will go down around 4% every year, even though the total debt measure in currency is going up.

      Hopefully this table will format correctly. The numbers are in nominal currency for a hypothetical economy of $100 and annual deficits of $1.

      Year   GDP      Debt    Debt/GDP       Deficit
1      100      100     100%           1
2      105      101     96%            1
3      110      102     93%            1
4      115      103     90%            1
5      120      104     87%            1

      Note how the debt in currency continues to increase, but the ratio is going down.

      100% debt / GDP ratio is high, although that number includes a lot of inter-agency debt, and it was higher after WWII. Most of the developed economies are comparable right now due to the Great Recession. One thing the National Debt Clock isn’t telling you is that the national worth is about $124 trillion, or about $386k per citizen.
      http://en.wikipedia.org/wiki/Financial_position_of_the_United_States#Estimated_financial_position.2C_Q1_2014

      If all of the above is just too much in the weeds, consider that if debt is going up, but income is going up with it, we always have the means to pay the creditors. Indeed, the creditors are constantly being paid and they’re constantly buying new treasury bonds and notes in a continuous churn.

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      1. Here’s a problem for you – the US debt to GDP ratio is probably the highest it’s ever been in peacetime and is projected to grow to new record levels in the coming decades.
        http://en.wikipedia.org/wiki/History_of_the_United_States_public_debt
        Glad it’s not my taxes that are servicing that debt 🙂 In the UK, the present government’s austerity programme is stabilizing national debt as a percentage of GDP.
        http://www.ukpublicspending.co.uk/uk_national_debt
        And guess what – despite Keynesian economic theory, the UK economy is booming, and record numbers of private sector jobs are being created.

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  5. Remember that the economy of Greece collapsed when public debt reached 175% of GDP, and the economies of Spain and Italy have contracted substantially with public debts of around 100% of GDP. Similar levels of debt caused the Asian debt crisis of 1997.

    In general, a debt-to-GDP ratio of 100% seems to lead to economic collapse. What then, is the effect of the current public debt in the US? I suspect that it is having a strongly negative effect on growth.

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    1. Most of US projected debt issues are related to our health care system problems. The latest projections I’ve seen show improvements due to the ACA (Obamacare), but healthcare here still has a way to go. And yes, until we deal with it sufficiently, it will be an anchor for us.

      Greece had substantial structural problems, and my understanding is that Spain and Italy both have defaults in their history, which caused creditors to give them less leeway, and all of them lack control of their currency. Japan’s debt is at around 250% and they haven’t had a problem with creditors. Why? Because they’ve never ever defaulted. So picking a magic number that equals doomsday is really oversimplifying.

      On Keynsian economics, all I’ll say is let’s compare recoveries.

      Not that I think the US recovery is optimal by any stretch. We had way too much austerity ourselves although ours was unplanned for the most part. My understanding is that both of our counties benefited from our central banks keeping the money supply loose, a backdoor stimulus. But the austerity in both countries caused pointless suffering.

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