What If We Paid Off The Debt? The Secret Government Report

http://www.npr.org/blogs/money/2011/10/20/141510617/what-if-we-paid-off-the-debt-the-secret-government-report?ft=1&f=93559255

by joelhaus • 15 years ago

237 220 15 years ago

npr.org

drallison3• 15 years ago

An interesting read, but disquieting since it's mostly speculation and opinion without any real data or any models of debt and the dependencies of the economy on debt. And white papers of this sort appear to be the basis of policy decisions with far-reaching consequences.

commieneko3• 15 years ago

Welcome to economics. Trying to model real, functioning economies is a lot like trying to model natural language. We think we understand a lot about it, but there is a level at which we really don't know what's going on. And it doesn't help there _everyone_ involved in an economy is not only willing, but eager to game it.

drallison3• 15 years ago

Economics could (and should) be much more of an engineering science than it is. The math and theories are rather beautiful, but do not have much to do with the real non-linear chaotic world in which we live. For some reason, no one expects that economic theory be predictive in the same sense that we expect of theories in the physical sciences.

It seems to me that a bit of data and a little bit of modeling would have greatly improved the opinion piece this document describes.

As for Economics, it is really time to rethink the field. I rather liked Eric D. Beinhocker's book, The Origin of Wealth (http://www.amazon.com/Origin-Wealth-Evolution-Complexity-Eco...). See also his Wikipedia bio: http://en.wikipedia.org/wiki/Eric_Beinhocker.

sudonim• 15 years ago

As a private citizen, it's my goal to have no debt, and savings in excess of my future debts.

Can someone explain why it's good to have a global economic system that is at great risk if the United States gets rid of it's debt?

rdtsc3• 15 years ago

I think that should make you think about how there is a systemic failure in the global monetary system.

Many crazies advocate abolishing the Fed as they see it enslaving and controlling the entire economy without much supervision and control by the citizens of this country. Not saying they are completely right or anything, but it this is basically a warning or a symptom that something is perhaps fundamentally wrong (I sure don't know well enough how it works, it is just a feeling).

Think of it as what would the drug companies do if all of the sudden there were cheap easy un-patent-able cures for all the chronic diseases. Would they start selling herbal supplements? Go into homeopathy business? Would they invent more 'restless leg syndromes' type diseases. I think it is a bit like that. It shows perhaps there is something wrong with the system & the constraints and incentive are not working they way we'd expect.

hvs• 15 years ago

Many non-crazies also advocate abolishing the Fed. One of them is running for President.

skylan_q4• 15 years ago

I'm not a crazy and I advocate the abolishment of the fed. People claim we need them as "a lender of last resort" and then they rally against bailouts. People don't realize that practicing the "last resort" lending is a bailout!

Also, Cantillon effects messing up the economy, putting more wealth in the hands of banking elite, growing the size of government, etc... are other problems made possible by central banking.

vacri4• 15 years ago

I used to work as a technologist in a sleep lab. 'restless leg syndrome' is not some disease to shill drugs. It fucks people up quite badly by preventing them from sleeping properly.

Whether it was either just enough to stop them from getting to the deeper, restorative levels of sleep, or bad enough that they had to get out of bed and walk around for a couple of hours, restless leg syndrome is a clear blight on quality of life. Sure, it may not be fatal (except where increased tiredness is generally), but it's still a significant health issue to be afflicted by.

nobody314159• 15 years ago

But if nobody had debt you couldn't have savings - well you could but the bank would charge you for storing them rather than paying you interest.

uvTwitch• 15 years ago

God forbid nobody could get rich simply by having a lot of money. If that were the case, people might have to actually provide society with a valuable product or service to earn a living!

borism7• 15 years ago

guess what, country is no private citizen. it isn't even a family or a company, so pictures like this are deeply flawed:

https://fbcdn-sphotos-a.akamaihd.net/hphotos-ak-ash4/318450_...

pessimizer9• 15 years ago

Exactly. There's no global police force that comes to foreclose on your country when your debt hits a certain level. What happens is that when people have doubts about your ability to pay your debts on time (relative to other investment options,) you have to pay a higher interest rate.

But in the case of US debt, the opposite seems to be true: http://4.bp.blogspot.com/-iFxt2vNk2y0/TZNxgTINNEI/AAAAAAAAAW...

When Moody's downgraded the US credit rating, the response was a rush to, not a flight from government bonds.

munin• 15 years ago

you die.

the government lives forever.

jfruh2• 15 years ago

Well, this is yet more evidence, as if anyone needed it, that budgeting for a sovereign nation -- particularly one whose economy the world revolves around -- is qualitatively different from budgeting for a household.

skylan_q4• 15 years ago

I don't find the assertion that "this would be bad" to be evidence that it would be bad.

Some questions: Would it be bad for a person to be debt free? A household? A neighborhood? A small company? A large company? A city? A state? A small country? A large country?

Why is it good for companies and people to be debt-free, but bad for countries?

sliverstorm3• 15 years ago

Have you ever heard the theory that a little debt is a good thing?

With businesses, investing borrowed money can help the company grow, and give returns greater than the interest on the debt.

With countries, the theory goes, a little debt means other countries have a vested interest in your success or failure. For example, why hasn't China invaded the USA yet? Perhaps they are waiting until they get their ~$4T back! :)

borism7• 15 years ago

For example, why hasn't China invaded the USA yet? Perhaps they are waiting until they get their ~$4T back! :)

theoretically it is fairly easy to repay those $4T. you would need some large container ship to transport all of them back to China, but a lot of those go back over Pacific fairly empty anyway.

burgerbrain2• 15 years ago

"why hasn't China invaded the USA yet?"

Well for starters, the Chinese don't seem to really be in the business of invading countries on the opposite side of the world, do they? Unlike another little country I can think of...

matwood• 15 years ago

As a private citizen no debt is generally the right way to go, but not always. It really depends on each situation.

A great example is buying a house. If you have the cash for the house that's great, but do you want want to tie up that much money into a single asset especially when the cost of money is so low right now? Other investments might not be that great today, but over the next 15 or 30 years you can probably find an investment that beats the current low rates of 3.75% or below.

dpatru2• 15 years ago

The reason why buying a house is considered a good "investement" is because the government/federal reserve keeps creating more money and devaluing the dollar. Under such conditions, the person who borrows a lot of money now will do well. Homes are convenient for this because there is a lot of infrastructure/expertise in place to make this happen (mortgage industry), but the purchase of any large, permanent asset will work.

When you buy a house on credit now, you're spending newly created money. You're purchasing a large asset at current prices (which are set by the current money supply.) As the new money you've injected into the economy circulates, prices rise. But you had the advantage of buying before you injected the new money.

If money were not continually being created, eg if it were backed by gold, then prices would drop over time, because the rate of innovation and productivity gains is greater than the rate of new production of gold. In this scenario, houses should depreciate over time.

nknight• 15 years ago

Who said it was good? An honest examination of the current state of reality is not a value judgement.

dpatru2• 15 years ago

> why it's good to have a global economic system that is at great risk if the United States gets rid of it's debt

The banking industry makes money when it issues loans. So it's very important that people keep borrowing. To keep people borrowing from the banks and not from each other or private savings, the banks are allowed to create money and lend it at below-market rates. So in general, it's always a better deal for a borrower to borrow from a bank than from private savings.

The current system is great for bankers, great for government (who can essentially get all the money it wants from the bankers), and great for borrowers. It's bad for people who don't borrow, especially savers.

hugh3• 15 years ago

Linkbait title from NPR. It's clearly not a secret government report, since if it was then it couldn't have been obtained via a FOI request.

It is a genuine concern, though, what would happen if US Treasury Bonds ceased to exist. There's a good argument to be made for the US not completely paying off its debts.

morsch3• 15 years ago

Well, the word secret has multiple meanings. I think it's fair to call this a secret memo, in a fairly broad sense of secret. But I agree that it's misleading, since secret has an additional sense specific to government documents.

darrennix• 15 years ago

The basic premise of this article is suspect. The US would still issue enough T-Bills to provide stability even in a zero-debt scenario... it would simply buy other safe, long-term assets to hold.

If, for example, the US were borrowing money at 3% by issuing T-Bills, it would just buy a basket of high-grade foreign and corporate debt at 3.5% and earn a spread of 0.5% while continuing to provide adequate liquidity of T-Bills.

jimmyhwang• 15 years ago

But by doing that, you have an inherit risk of potentially getting a worse return than the bonds you issued. The government shouldn't be in the investment management industry. They already have enough issues trying to manage the country.

raheemm• 15 years ago

In spite of the recession, US debt is still considered the safest asset in the world.

That's the challenge. How would you replace such a secure asset? After the US, Japan and EU used to be pretty solid economies, but not anymore.

joshuacc2• 15 years ago

I may be missing something, but why couldn't the US dollar function as a replacement?

jwallaceparker4• 15 years ago

> In spite of the recession, US debt is still considered the safest asset in the world.

Precious metals are much safer than US debt.

Most tangible things (metals, real estate, income producing businesses) are safer than currencies that can be created out of thin air.

cube132• 15 years ago

>The basic premise of this article is suspect. The US would still issue enough T-Bills to provide stability even in a zero-debt scenario... it would simply buy other safe, long-term assets to hold.

The US has no reason to issue T-Bills in a zero-debt scenario, through. The only reason that the US government has to sell bonds like T-Bills is to make up for the difference between income(taxes and fees) and costs. If the budget is completely balanced, there is no reason for the government to sell off bonds of any form, since they would need to pay them off with interest at a later date.

anigbrowl• 15 years ago

True, but if you had zero debt it might well be appropriate to issue some. for example, suppose you want to build a vast new infrastructure project; it may make more sense to borrow to do so if the cost of capital is lower than the opportunity cost of waiting for the money to accumulate.

davekinkead• 15 years ago

Australia faced the same issue over the period 2006-2009 when the national debt became a surplus. The bond market didn't implode as this article would predict. Rather the govt simply continued to issued bonds and bought other assets to keep the market alive.

The bond market actually did very well - in 1998 there was approx $167BB of govt debt issued while in 2008 there was $480BB.

http://www.brr.com.au/event/43083/recent-developments-in-the... for a boring speech about it by the RBA governor

mc32• 15 years ago

"What do you do with the money that comes out of people's paychecks for Social Security? Now, a lot of that money gets invested in –- you guessed it — Treasury bonds. If there are no Treasury bonds, what do you invest it in? Stocks?"

So why couldn't we buy other sovereign debt --obviously stable/safe. It's not as though we're the only ones with debt or safe debt. I don't imagine Germany or Japan or France defaulting.

Newgy3• 15 years ago

This part of the article got it wrong. SS money is spent, it is not invested. The SS Trust Fund gets an IOU but there's no asset backing it. That's different from a Treasury bond, which is a real financial asset that is tradeable and marketable.

Also, the US wasn't really running a true surplus, it was still borrowing from SS during this period. The feds use SS to mask the true size of the deficit, and it was only by this phony accounting that the budget was "balanced".

brc6• 15 years ago

Didn't I read recently that treasury or someone similar basically admitted that Social Security isn't asset backed? That it's a case of funds-in, funds-out?

I know the republican guy got hounded for his 'ponzi scheme' comment but there is an element of truth in that hyperbole. Without new workers contributing SS payments, the recipients wouldn't have anything coming in. So it's not a ponzi scheme as such, but it's certainly not an investment fund either.

afdssfda• 15 years ago

And if all of us stopped using credit cards, the credit industry would fail to catastrophic effect. Support your credit card company by going into massive debt. It's for the economy.

refurb2• 15 years ago

This sort of makes no sense. The Province of Alberta (in Canada) balanced their budget, then paid off all debt in the early 2000s.

They still had the ability to issue debt (and did) because it was the belief that they were a good credit risk that was the reason behind the AAA rating.

borism7• 15 years ago

Province is not a country - they don't issue their own currency. Comparing Alberta's AAA to US or whatever sovereign AAA is nonsense.

skylan_q4• 15 years ago

Ok, but what difference does this make?

hristov6• 15 years ago

Ahh, remember the good old times under Clinton when we were actually paying off the debt. What happened then? They mocked Al Gore for his plans to pay off the debt (remember all the "lockbox" stuff) and then we got a president that promised tax cuts and drastically increased federal spending, and added a couple of wars just for fun. Now there is absolutely no danger of paying off the debt.

By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD. Just set the risk free return to zero and you can use all of your old formulas. Yes several bank departments would not be able to make money for absolutely zero risk as they do now. Oh well, I suppose the banks would have to do what they are supposed to do, i.e., calculate risk properly.

But of course it is all academic now. Because it is unlikely to ever happen. Paying off the debt means doing something to help the future generations of Americans and it is doubtful any president would do such a thing, and if he did he would probably have to face a lot of angry voters who do not give a shit about the future generations as happened with Al Gore.

refurb2• 15 years ago

Take a close look at the graph. The debt starts going down for 3 years (at the peak of the market) and they make the assumption that that's going to keep happening for the next 14 years? Yay for gov't estimates.

Second, I think the fact that the market crashed in 2000 might have a little something to do with gov't deficits as well.

csomar• 15 years ago

Yay for gov't estimates.

I think the estimates were made for the plans Clinton put. He didn't plan to go on war with Afghanistan or Irak or make huge spending.

swaits4• 15 years ago

Total US debt (in dollars, not as a fraction of GDP, which is a horrible measure) increased every year through Clinton (and basically everyone else in modern history).

eftpotrm• 15 years ago

By what logic is it horrible to measure debt based on ability to pay?

DougBTX• 15 years ago

Is it more useful to talk about "Total US debt" than "US government debt"? When I first read your comment, I thought you were making the point that the article was misleading because it was using a fraction of GDP as a measure, when it in fact the main feature graph is measured in trillions of dollars.

To a lay reader like myself, it would easily lead to confusion if people talk about different numbers without making the distinction clear. Is there a well known relationship between government debt and private debt? Or is talking up Total US Debt just a distraction from the article, which talks about Government Debt?

_delirium• 15 years ago

Nominal debt seems like a pretty horrible measure. By that measure, Greece is much better off than the U.S., because its debt is a fraction of the size. Of course, it also has a smaller population and a smaller GDP--- exactly why it makes sense to report debt at least normalized by population, and probably, better, by GDP.

sjh• 15 years ago

The nominal value of public debt is an unreliable measure. Ireland's national debt was €30bn in 1987 and €36bn in 2002. But in the same period it went from around 128% of GDP to 32% of GDP.

yummyfajitas6• 15 years ago

We were not paying off debt under Clinton.

http://research.stlouisfed.org/fred2/graph/?id=FYGFD

We were merely reducing one kind of debt, namely debt held by the public. Total debt continued to increase.

gbhn• 15 years ago

http://www.treasurydirect.gov/NP/BPDLogin?application=np This site records debt to the penny, daily. There's a fair amount of up and down in such a measure, as you might expect. There are certainly (long-ish) periods during Clinton's presidency where the total debt, as well as debt held by the public, decreased from the day at the start of the period to the day at the end.

yequalsx3• 15 years ago

Actually, we did start to pay off the debt but this was at the very end of the Clinton administration. If you'll look closely at the graph you supplied you'll see this. Note that the first Bush budget wouldn't be until 2001.

The debt wasn't being paid off at a great rate but it was being paid off and the person's main point that you responded to is correct. We were well off financially until some very irresponsible actions by the Bush administration.

I disagree with the point about us never being able to pay off the debt. It can be done and there are historical examples of countries with higher debt/GDP ratios that were paid off.

Note: When talking about debt of a country people generally mean the debt of the government. There was a budget surplus at the end of the Clinton presidency and this is what people usually mean when they claim a government was/is "paying off the debt".

pessimizer9• 15 years ago

I wish I could upvote this a hundred times. You cannot, by definition, simultaneously maintain a trade deficit and reduce the sum of public and private debt.

I hate to trot this link out again, but: http://internationalecon.com/Finance/Fch5/F5-9.php

klenwell• 15 years ago

How soon we forget. At the end of the Clinton years, government surpluses were treated as a frightening inevitability by Fed Chair, Alan Greenspan:

Mr. Greenspan said he was concerned that if the government did not begin to curtail its revenue, it would have more money than it needed when most of its debts were paid, leading to an accumulation of cash that he opposed. He said the government needed to start planning soon because there was $750 billion of debt that would not mature by 2011, so cash accumulation would begin by then, based on current projections, even though some of the debt would remain unpaid.

Source: http://www.nytimes.com/2001/01/26/news/26iht-fed.2.t_1.html

The Bush Administration figured out a couple different solutions to this problem.

ikirill• 15 years ago

That is not a good measure of debt. Government debt is only meaningful as a fraction of GDP (large countries have more debt than small ones, e.g.). So in this case you want this graph: http://research.stlouisfed.org/fred2/graph/?g=2TG which is (Gross Federal Debt)/(Gross GDP), and was clearly decreasing.

The distinction between gross and public-held debt is also not very useful. The difference between them is government debt held by parts of the government, which is money that the government owes to itself. Public-held debt was decreasing even more: http://research.stlouisfed.org/fred2/graph/?g=2TI

Newgy3• 15 years ago

The Gingrich Congress, not Clinton, controlled spending and gets most of the credit for the improved budget situation. That plus tax revenue from a massive tech bubble.

jbooth• 15 years ago

http://www.usgovernmentspending.com/spending_chart_1992_2011...

Spending increased more slowly from 92-94 before the Gingrich congress came to power, than it ever did afterwards. And Clinton didn't have to shut down the government to do it.

nextparadigms• 15 years ago

Ron Paul wants to cut $1 trillion in the first year, and end the wars. That would go a long way to paying off the debt. Plus he was against increasing the debt limit, so he's the only one who truly realizes the debt problem, and that the country might implode if they keep spending as they do, with no cuts whatsoever.

shareme• 15 years ago

Ron Paul is somewhat an illogical idiot.. ever hear of the 1920s crash? We got out of that situation by guess.wait for it.. debt spending in ramping up to fighting WWII..

ajross5• 15 years ago

Balanced budgets as a long term policy are a fine thing, and absolutely a good idea. Austerity in the face of recession is madness. This is the Greece/Portugal/Ireland solution, and it's a terrible one. Paul may be one of the few politicians to earnestly care about the first issue; but he's yet another tea party whackjob with his head in the sand about the second.

akmiller3• 15 years ago

Yes, the economy was soaring thanks to the technology and housing boom.

You can pretend that our economy revolves around who's president and what political party system they belong to but no matter how hard you pretend it still isn't true.

betterth• 15 years ago

Don't be dense, the parties have a lot of power in the economy.

The crash of 2008? Many economists wisely point to Republican-led market deregulation, notably the repeal of Glass-Steagal in 1999, as the causes.

Considering that Democrats fight for stronger regulation and pass them (Dodd-Frank... even if that one is DOA), while Republicans fight for deregulation, it's a bit off to imply that the party has no effect on the economy.

That's a huge ideological difference and one that has significant effects on the economy, even in the short-mid term.

ajross5• 15 years ago

Last I checked the "Bush tax cut" was a real bill, championed by one particular party, passed via a vote that went broadly along party lines, and signed by a president of that party whose administration worked hard to put his name on it. The guy in the other party, as I remember, wanted to do something like "save social security now".

Those are real policies, and they have real impact. You can pretend that they don't and that politics is all a "game", but no matter how hard you pretend it isn't true. (Sure, it's mostly a game, but at the margins it's important stuff, and not well served by bland internet cynicism).

anamax• 15 years ago

>Yes, the economy was soaring thanks to the technology and housing boom.

The big housing boom started post-Clinton. It was intentional, to get us out of the 1999 tech crash.

Clinton benefited from the tech boom and the end of the cold war. (Bush I got hammered by the post-war transition recession, which ended before the election.)

mmphosis• 15 years ago

Angry voters?

                George W. Bush  Al Gore
  Popular vote  50,456,002      50,999,897

sigzero• 15 years ago

As bad as Bush was...Gore would have been a disaster.

Lambent_Cactus• 15 years ago

You could still issue treasuries. As long as we're not experiencing deflation (the Fed is supposed to target 2% inflation), there's plenty of room for the government to borrow money at negative real interest rates, which it should be happy to do even if running surpluses.

Other countries deal with surpluses with sovereign wealth or rainy day funds, but you could just as easily envision rebating a surplus as fully-refundable tax credit "dividends".

bzbarsky3• 15 years ago

The Fed is doing a miserable job of targeting 2% inflation if it's supposed to do that. Even in the face of a week economy and so forth, it's barely managing to hit 1.5% for inflation expectations.

Then again, they don't actually have an official inflation target, so...

I see no reason the Fed wouldn't go for outright deflation if they thought they could get away with it. They seem to be really happy with their current tight money policy. :(

ma2rten• 15 years ago

The banks could not only have done more risky investments. Americans seem to keep forgetting that they are not the only country in the world. American bank can still invest in foreign bonds. There are other countries which also happen to have a better security rating at the moment, you know?

nhaehnle6• 15 years ago

> By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD.

Depends on what you mean by paying off the debt. If you pay off the debt by just issuing a sufficiently large amount of reserves at the Fed to do so, then yes, I would agree. Then you just transform one form of government liability (treasury bonds) into another form of government liability (reserves). No problem there.

But if you're actually talking about eliminating net government liabilities, you're missing the point. Here's why:

Individuals in the private sector want to accumulate net financial assets, if only to save for retirement. Every financial asset is somebody else's corresponding financial liability.

But retirement funds & co. are huge. Who is going to incur the necessary net financial liabilities to correspond to them? Private entities? Why would we allow private entities to run up that much debt? Also, with private entities you always have the problem that people might change their mind about their credit-worthiness.

The federal government, on the other hand, is at the top of the pyramid of liabilities (see e.g. here: http://neweconomicperspectives.blogspot.com/2011/09/mmp-blog...), and they can easily incur and sustain the required net financial liabilities to allow the private sector to save in net financial assets.

So government liabilities play an important role in the stability of the financial system.

If you run down the federal debt, you end up in a situation like the Eurozone, where the entity at the top of the pyramid of liability (i.e. the ECB) does not incur sufficient liabilities (and in fact, does not have the mandate to do so, for good reason) to support a stable financial system. The debt crisis is a direct result of this flawed setup, and you would be wise to avoid copying it in the US.

jxcole• 15 years ago

Perhaps this is a ridiculous question, I admit I haven't taken a lot of econ. But couldn't they just take the money that comes out of people's paychecks and, you know, keep it? I know that treasury bonds have a very slight overall interest rate, but that interest is paid by tax payers anyway, so if I'm not mistaken it's a net gain of zero.

sliverstorm3• 15 years ago

The interest is more likely paid by new bonds, allowing inflation to help pay for interest.

Newgy3• 15 years ago

Former budget staffer here-- this part of the article is factually incorrect.

The government borrows SS taxes but spends the money, and provides a Treasury IOU to the Trust Fund. That IOU is not traded and is unrelated to the Treasury bond market in every way.

yequalsx3• 15 years ago

I don't know much about the bond market but is a Treasury IOU in the sense you mention really much different than a Treasury bond? I suppose the ability to reneg on the IOU without disrupting the bond market would be a difference. Provided this is true. That is, if the Treasury does not pay the IOU to the Social Security wouldn't there be a repercussion in the bond market? I don't see how a Treasury IOU would be different than a Treasury bond.

nostromo• 15 years ago

What's the difference between a "treasury IOU" and a treasury bond?

morsch3• 15 years ago

The money supply, ie. the amount of money in existence, fluctuates. Obviously, paper money is only a small fraction of the total amount of money "stored" in checking acccounts, etc. Money is created through debt. If nobody is in debt, the amount of money in circulation is much lower otherwise.

Does anyone know how much of the money supply is government debt?

I always get dizzy when I try to understand the monetary system. It seems insane. It really shouldn't work at all.

If you want to get a headache, too, try reading http://en.wikipedia.org/wiki/Money_supply, http://en.wikipedia.org/wiki/Fractional_reserve_banking or watching Money as Debt.

borism7• 15 years ago

I always get dizzy when I try to understand the monetary system. It seems insane. It really shouldn't work at all.

you use wrong/incomplete models to describe it (incidentally so do policymakers).

try http://en.wikipedia.org/wiki/Modern_Monetary_Theory for starters.

RickHull• 15 years ago

MMT has resurged recently in large part due to the evangelizing efforts of Warren Mosler. One of his intros to MMT for the layperson is "7 Deadly Innocent Frauds". For a counterpoint, here is a comprehensive refutation of 7DIF: http://conant.economicpolicyjournal.com/2010/10/refutation-o...

jganetsk2• 15 years ago

Government debt and fractional reserve banking are two totally unrelated concepts. The latter is what increases money in circulation. Government debt only increases the debt instruments in circulation. Debt instruments, as far as I know, cannot be used to meet reserve requirements.

China, however, has a currency which is pegged to the dollar and backed by the US treasury. As a result, our government debt increases their money supply.

morsch3• 15 years ago

Well, obviously they're not totally unrelated, but I agree they are orthogonal. However, I was asking an honest question, how much of the money generated through fractional reserve banking is public debt? Ie. what's the ratio private/public debt?

sgoranson• 15 years ago

eih...isn't every dollar a Federal Reserve Note, i.e. the monetization of US debt? I'm pretty sure they're intimately related.

borism7• 15 years ago

US Dollars = US Treasury Bonds.

they are freely interchangeable!

money IS debt!

nhaehnle6• 15 years ago

I'm not sure why you got voted down for that - perhaps because you just wrote things as if they were stupid slogans. Since what you write is true (well, except you neglect to mention the difference in maturity and interest rate between US$ and Treasuries), let me elaborate.

Both US$ paper bills and US Treasury Bonds are liabilities of the government (where I consider the Fed as part of the government for obvious reasons). I use liabilities in an accounting sense, but you really need the basics of accounting down solidly to understand the monetary system.

Another term for liabilities is debt. So when you have a 1$ bill, the government "owes" you something. Here's where things get a bit confusing, because what exactly does it mean that the government "owes" you 1$?

Well, they have to extinguish the liability in the agreed-upon way. Usually, you extinguish a liability by moving a corresponding asset that is on the same level or higher up in the pyramid of liabilities (see here: http://neweconomicperspectives.blogspot.com/2011/09/mmp-blog...). When I owe you something, I extinguish my liability to you by giving you paper money.

But the government is at the top of the pyramid, so their liabilities can only ever be transformed into either another form (exchanging cash for bonds or reserves or vice versa) or they can be extinguished when you pay taxes.

That takes some getting used to, but nobody said economics was always intuitive.

borism7• 15 years ago

thank you!

swaits4• 15 years ago

> The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track.

And how's that working out? This is all FUD, FUD, FUD..

burgerbrain2• 15 years ago

opens up refridgerator

Yup, that little light still comes on. And yup, there's still food in there.

It might be a bullshit system, but it is functional.

tptacek• 15 years ago

This is such an interesting story, it's too bad politics are going to destroy our ability to talk about it on HN.

smogzer• 15 years ago

Report From Iron Mountain is similar: https://secure.wikimedia.org/wikipedia/en/wiki/The_Report_fr...

Anyway money is just a tool to keep the populus occupied. And since without problems or debt there would be no need for governments and banksters, they shall exist to create problems(government) and debt(money) and therefore assure they survival.

kingkawn2• 15 years ago

Why pay off all the debt? What are we saving our credit for? Of course the burden can rise so high that it is prohibitive to growth, but in general credit exists to be used.

tsotha5• 15 years ago

Well, for one thing you have to pay interest on the debt, so in theory you can afford more by not borrowing for it.

kingkawn2• 15 years ago

But for cashflow. There are investments that need to be made that are beyond the bounds of money on hand, not to mention that even if you can afford to pay up front you might deplete your ability to continue other programs services. This is why we have housing loans, credit cards, and car loans. This is commercial paper. this is national debt.

brc6• 15 years ago

Australia paid off all of it's federal public debt in the mid-2000's. By 2007 the Federal government had no net debt. That is - the net position of the governement (savings-debt) was zero.

This didn't mean that there were no securities on issue - the need for an active market in government debt meant that there were still securities outstanding, but these were offset by liquid assets that could be sold to buy back the debt if necessary. I don't know what the surplus money was invested in, but one of the leftovers from that period is a 'Future Fund' which is a very large pool of investment funds held in trust for the future pension needs of the public service. That is - the money was separated out from the general revenue pit and put aside to pay out the retirement benefits of the people employed by the government itself. I do know that this fund is a diversified fund like any other, and invests in different styles and classes of securities.

Of course, a change in government since that period and a drop in revenues from the financial crisis means this is no longer the case. But for that brief period it was a very good place to be - income tax rates were going down every single year and the economy had an unbroken 13 year period of real growth in wages and productivity.

You don't need public debt to function properly. Australia is a perfect example of this. In fact, a lack of public debt is a good thing as it allows a government to either return taxes via lowering tax rates, or invest the surplus for the inevitable rainy day, or, to build productive infrastructure if that is what they choose to do.

ohashi2• 15 years ago

I think that's great for Australia but isn't the central question what would happen without US public debt? Australian public debt isn't a pillar of the world economy.

vacri4• 15 years ago

Economies would adapt - they always have, they always will. Bubbles and tiger economies existed before the US was even a whiff of a dream. It's not like the US is $14T in debt in 2011 and in 2012 it'd be $0T in debt - repayment would take a long time, ample to examine effects and counter where needed.

jacques_chester• 15 years ago

If you'd read it properly, you'd notice that Australia kept a pool of debt-in-name-only turning over to serve local financial market needs. About 100 billion AUD IIRC, or ~10% of GDP at the time. The money raised through those particular bonds was never used. It just came in, sat around for a while, and went back out with a very small interest payment attached.

The US could have done the same and I understand that is what this "secret report" recommended.

handelaar2• 15 years ago

No, but Germany's is, and they've had extended periods of surplus.

shn2• 15 years ago

This is the most ridiculous idea I have ever heard of. It was probably a project for fun within some circles, that would be all. Here's the reason. US empire like many of her predecessors taxed her subjects. However unlike any other empire in history US has been able to tax her subjects indirectly. When I say subject I do not mean US citizens living within the borders in Northern America, but I mean anyone who carries US dollar bill in his pocket, does trade with US dollar terms and especially buy US treasury bills. These subjects literally subsidize US economy doing just that. Even if US could be able to pay off its debt they would not have stopped issuing loans, why would one want to stop influx of easy money. By creating inflation of money (a.k.a. printing money) US will always be able to pay her debt with lesser value. Same amount but less value.

shn2• 15 years ago

I wish those that down voted what I said could dispute and write something, and show some intellectual engagement. Pity.

darksaga• 15 years ago

The fallacy of the article is if we paid off the debt that we would never incur any debt in the future. Just not realistic to consider in any case.

Shivetya• 15 years ago

I think it is odd they would consider still selling bonds regardless of our debt load. Who never heard of a rainy day fund?

chris_dcosta• 15 years ago

I read the article thinking it was about the following idea, the principle is almost the same, just it's about govt debt not personal debt.

It would of course be too outrageous for most polticians but here's a thing:

When the UK govt bailed out the banks they spent 500billion. The outstanding mortgage debt of everyone in the country at the time was 368billion.

Whilst I know there are many people without mortgages (because they rent) the knock on effect of paying off all the oustanding mortgages instead of recapitalising banks would have done some amazing things: it would have given the whole economy an enormous payrise which would have had an immediate positive effect on high-street retail.

Also because people would not immediately spend all of their new found money it would have gone into savings: recapitalised the banks indirectly. They were always using everyone's savings anyway.

It would have resolved the thing that caused the crisis: that being risky mortgage debt on the banks books. No more mortgage debt, no more unstable banks.

Lastly and probably most importantly, it would have allowed govts to raise taxes to refill their coffers because absolutely nobody would notice, and probably nobody would even care.

maigret• 15 years ago

The report may have been secret, but the fact hasn't been anymore for quite a few years. Greenspan already mentioned it in his autobiography.

What If We Paid Off The Debt? The Secret Government Report

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