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Macroeconomics for Dummies

Thermal

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I've never gotten real clarity on this, and would welcome input from those familiar with the subject.

I've heard the argument that deficit spending is not detrimental to a wealthy nation, because trading off debt is so lucrative that the country nets out on balance. Basically (AIUI), we can print money with abandon because our GDP is so staggering that we influence the rest of the planet and consequently it's global economy to the point that we steamroll the problem of playing with monopoly currency. Yes, we theoretically pay interest against the debt, but (again, AIUI)
the USD and what it bargains with is effectively erasing it's own debt. It's still there, but "means nothing". It is said that it is in a kind of bankruptcy-proof self-sustaining loop. So when the Ron Pauls of the world moan about returning to a gold standard, the fiat crew points out that we keep going up.

To a laypersons analogy, this sounds like living high on the hog on credit cards. But cards eventually have to be paid. The argument about trading debt is that it is paying its own interest and then some by just rolling the presses.

So of the many things I likely have wrong here, how does fiat currency pay for itself, if at all? Why are we not flat broke and hyperinflated to the point of economic collapse? Is it because we keep finding cheaper ways to buy stuff, like Chinese sweatshop labor, that temporarily infuses value to our economy? That eventually reaches critical mass though, doesn't it?
 
First, deficit spending doesn't necessarily have anything to do with printing money. Leaving that aside, so long as government debt doesn't grow faster than the economy, you don't have a problem. (Of course, in recent years the debt has grown faster than the economy.)
 
I'm not sure where I found it, but I read an interesting article that pointed out that whether a deficit is "good" or "bad" depends on what the money is used for. If the borrowed funds are used constructively and generates return at a higher rate than the interest rate, then by taking out the loan there's a net gain. It is interesting to ask what counts as "return". We can be strictly financial and ask if it causes an increase in government revenue in the balance. We can then also consider opportunity costs... if it's spent to address an emergency that will be more costly to the government later, for example. Or one could be more nebulous and ask if the population as a whole benefits more than the cost of the interest, even if it's not easily expressed in dollars.

The details could be talked about all day, but the core bit of wisdom "It depends what you're spending the money on" seems solid. Ultimately it could be no different than borrowing at 5% for an investment that gives you 10%.
 
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Two main things:
a government going into debt is how money is created. As the economy increases, so must the money supply. Avoiding government debt can be detrimental to economic growth.

Just like with any debt, the question of what is too much depends on what the money is used for: any bank will happily let you borrow at 3% if you can safely invest at 5%.
Governments can borrow at lower rates and invest in truly important, long-term projects like infrastructure, education, healthcare, which are know to pay for themselves many times over in economic growth and subsequent taxes.

What doesn't work as investment is giving away taxpayer money to rich companies and billionaires.
 
I'm not sure where I found it, but I read an interesting article that pointed out that whether a deficit is "good" or "bad" depends on what the money is used for. If the borrowed funds are used constructively and generates return at a higher rate than the interest rate, then by taking out the loan there's a net gain. It is interesting to ask what counts as "return". We can be strictly financial and ask if it causes an increase in government revenue in the balance. We can then also consider opportunity costs... if it's spent to address an emergency that will be more costly to the government later, for example. Or one could be more nebulous and ask if the population as a whole benefits more than the cost of the interest, even if it's not easily expressed in dollars.

The details could be talked about all day, but the core bit of wisdom "It depends what you're spending the money on" seems solid. Ultimately it could be no different than borrowing at 5% for an investment that gives you 10%.

Right, but the sticking point would seem to be that if we are getting a return at (say) 10% against borrowing at 5%, we would be paying down the original debt. But we are not. It continues to grow, so that surplus 5% and the original 5% is going 'elsewhere', and the original borrowed principal and interest continues to compound radically.
 
I've never gotten real clarity on this, and would welcome input from those familiar with the subject.

I've heard the argument that deficit spending is not detrimental to a wealthy nation, because trading off debt is so lucrative that the country nets out on balance. Basically (AIUI), we can print money with abandon because our GDP is so staggering that we influence the rest of the planet and consequently it's global economy to the point that we steamroll the problem of playing with monopoly currency. Yes, we theoretically pay interest against the debt, but (again, AIUI)
the USD and what it bargains with is effectively erasing it's own debt. It's still there, but "means nothing". It is said that it is in a kind of bankruptcy-proof self-sustaining loop. So when the Ron Pauls of the world moan about returning to a gold standard, the fiat crew points out that we keep going up.

To a laypersons analogy, this sounds like living high on the hog on credit cards. But cards eventually have to be paid. The argument about trading debt is that it is paying its own interest and then some by just rolling the presses.

So of the many things I likely have wrong here, how does fiat currency pay for itself, if at all? Why are we not flat broke and hyperinflated to the point of economic collapse? Is it because we keep finding cheaper ways to buy stuff, like Chinese sweatshop labor, that temporarily infuses value to our economy? That eventually reaches critical mass though, doesn't it?

First, deficit spending doesn't necessarily have anything to do with printing money. Leaving that aside, so long as government debt doesn't grow faster than the economy, you don't have a problem. (Of course, in recent years the debt has grown faster than the economy.)

I'm not sure where I found it, but I read an interesting article that pointed out that whether a deficit is "good" or "bad" depends on what the money is used for. If the borrowed funds are used constructively and generates return at a higher rate than the interest rate, then by taking out the loan there's a net gain. It is interesting to ask what counts as "return". We can be strictly financial and ask if it causes an increase in government revenue in the balance. We can then also consider opportunity costs... if it's spent to address an emergency that will be more costly to the government later, for example. Or one could be more nebulous and ask if the population as a whole benefits more than the cost of the interest, even if it's not easily expressed in dollars.

The details could be talked about all day, but the core bit of wisdom "It depends what you're spending the money on" seems solid. Ultimately it could be no different than borrowing at 5% for an investment that gives you 10%.

First, a country's debt might be more akin to a mortgage than credit card dept. Keep that in mind when you hear that dishonest narrative like the one McCarthy has been spewing lately claiming one's budget should balance. I'm waiting for a news interview where an anchor asks him, "what about that homeowner's mortgage debt?" You may not want your mortgage payment to increase your debt, but that mortgage debt is still part of the equation.

And even if none of that was relevant, for all the years there was a GOP POTUS, deficit spending didn't matter one bit when it came to tax cuts.

Reagan increased deficit spending then acted like a magical trickle down would take care of it. No, it didn't. It was a facade. The deficit increased and it looked like he was magically growing the economy.

Then you have GW Bush. He took office on the heels of Clinton's balanced budget spending. So what did Bush do? He claimed all that extra money belonged to the taxpayers and he would give it back. More tax cuts for the better off.

Along came the very expensive Iraq war. What did GW do to pay for it? Surely not increase taxes accordingly. Of course not. He was still operating on Daddy's failure: "Read my lips, no new taxes." GW had a lot of Daddy issues but that is water under the bridge.

Second, while you might want your monthly payments to match monthly bills (microeconomics) that's still quite different from macroeconomics like a country's deficit spending. When you hear people like McCarthy pretending it's as simple as wanting your expenses to match your income, he's gaslighting people. And he knows quite well he's spouting a lie.

Yeah, well **** you McCarthy. If you were the least bit honest you'd agree to rescind the Trump tax cuts for the rich. As long as McCarthy can fool most of the people some of the time his lies will continue to work for him.

Except I hope at some point people will wake up and vote these ******** out of office. If deficit spending is an issue, fine, rescind those tax cuts for the rich. Otherwise shut the **** up about it.

I know that doesn't answer the questions asked, but others are doing fine with that.
 
Right, but the sticking point would seem to be that if we are getting a return at (say) 10% against borrowing at 5%, we would be paying down the original debt. But we are not. It continues to grow, so that surplus 5% and the original 5% is going 'elsewhere', and the original borrowed principal and interest continues to compound radically.

yeah, but the person (more likely Institutional Investor) is very happy to be able to park their money securely at 5%, and would have to find much riskier investment if they got their money back.
 
Two main things:
a government going into debt is how money is created. As the economy increases, so must the money supply. Avoiding government debt can be detrimental to economic growth.

Just like with any debt, the question of what is too much depends on what the money is used for: any bank will happily let you borrow at 3% if you can safely invest at 5%.
Governments can borrow at lower rates and invest in truly important, long-term projects like infrastructure, education, healthcare, which are know to pay for themselves many times over in economic growth and subsequent taxes.

What doesn't work as investment is giving away taxpayer money to rich companies and billionaires.
Politicians don't run budget deficits so that they can get a good return on the money. They do so for pork barreling purposes.

They are so willing to mortgage out children's futures for short term political gain that I would make deficit budgets unconstitutional. Borrowing money should only be for infrastructure investments.
 
Politicians don't run budget deficits so that they can get a good return on the money. They do so for pork barreling purposes.

They are so willing to mortgage out children's futures for short term political gain that I would make deficit budgets unconstitutional. Borrowing money should only be for infrastructure investments.


That wasn't the question/point.

Also, plenty of countries do exactly that - just not Americans, especially not Republicans.
 
The US enjoys a special position as the controller of the US global reserve currency. I don't really understand such things fully, but writing on the topic claims that the special status of the US partially insulates the US economy from the pains of inflation at the expense of other currencies and economies.

The Dollar Is Strong. That Is Good for the U.S. but Bad for the World.
The Federal Reserve may have no choice but to wage a relentless inflation fight, but countries rich and poor are feeling the pain of plunging currencies.

https://www.nytimes.com/2022/09/26/business/economy/us-dollar-global-impact.html
 
That wasn't the question/point.
The point/question was how long we can run deficit budgets before the debt becomes unsustainable. Do you really want to find out?

Also, plenty of countries do exactly that - just not Americans, especially not Republicans.
Exactly! Democracy tends to favour short term solutions regardless of whether it creates longer term problems or not.

That is why we must not allow borrowing money to buy votes.
 
The point/question was how long we can run deficit budgets before the debt becomes unsustainable. Do you really want to find out?

yes, absolutely.

Exactly! Democracy tends to favour short term solutions regardless of whether it creates longer term problems or not.

That is why we must not allow borrowing money to buy votes.

so you don't want a Democracy - got it.
 
If "democracy" means giving politicians so much power that they bankrupt a country then I don't want it.

But I fail to see how making deficit budgets unconstitutional is equivalent to abolishing democracy.

You want to put decisions out of the hands of voters.

But all means, put in mandatory Checks& balances - but if a country wants to vote for bankruptcy, that's exactly what should happen.

It's the World Bank and IMF which destroyed many economies by denying governments the right to default.
Purely undemocraticly.
 
It's called limiting the powers of the government. Democracy doesn't mean voting on who will be the next dictator.

I'm pretty sure that you wouldn't want the government to be able to criminalize free speech, atheism, etc.


Who makes the decision of what is and isn't beyond the power of the government?

In the case of Debt (to stop your derail) , historically it has been other governments, not the voters or creators of their constitution.

Don't you think a government should have the right to declare bankruptcy?
 
Who makes the decision of what is and isn't beyond the power of the government?

In the case of Debt (to stop your derail) , historically it has been other governments, not the voters or creators of their constitution.

Don't you think a government should have the right to declare bankruptcy?
This doesn't make an iota of sense.

You know very well that the powers of the government are limited by the constitution as interpreted by the Supreme Court. Why you would act skeptical about limits on the powers of government is beyond me.

And blaming foreign governments for the profligacy of the politicians is just silly. They may do special (ie expensive) favours for their corporate sponsors but they wouldn't get away with handing brown paper bags to their foreign counterparts.

And governments wouldn't have to worry about declaring bankruptcy if they couldn't hock the country into oblivion in the first place.
 
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