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Old 08-23-2011, 09:55 AM  
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Government Spending

There could be justification for temporary government deficit spending if it truly grew the economy and increased GDP so the cumulative debt could be repaid. Public sector jobs as maintained by the stimulus have little or no positive impact on GDP as they produce no marketable goods. Likewise work on infrastructure may be needed but in reality should be paid for out of a thriving economy. If government spending were such that it stimulated GDP any results would lag the spending to the point that it would be hard to give it credit for the boost. As people go back to work in the private sector the GDP rises as more taxes are paid and government revenues increase. Government spending on unemployment comp, welfare, disability payments, Medicaid, etc drop as people go back to work so the deficit automatically shrinks relative to GDP however the debt remains unless paid down. Clinton produced a narrow (apparent) surplus at the end of this second term by eliminating the deficit but the debt remained (most fail to point that out). It wasn?t so much by cutting spending but because the economy grew enough to reach near full employment.

Our debt problem is not considered serious by many since our spending ability is not limited by the combination of our earning and borrowing ability as our government creates it?s own currency, borrows using bonds denominated in that currency, and doesn?t strap itself to some fixed exchange rate system (like gold standard), so there is no financial limit to the borrowing except for the dangers of super inflation down the line and a lack of confidence in the dollar. The Fed actually returns most of the interest received from the government (I haven?t been able to track where it goes) thus it feeds inflation in the long term.

Now with economics not being a pure science and academicians not being able to perform a laboratory experiment their predictions are merely their opinions. The charts from the past are not repeatable as the influencing factors differ, for example we have never had a government of this size before with the current and growing amount of regulation. The impact of over regulation is unpredictable, especially its impact on confidence and assuming risk. Also academicians have their views further shaded by their political loyalties much like Al Gore?s AGW IPCC cronies..
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Old 08-23-2011, 11:15 AM  
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Originally Posted by Eddie_T View Post
There could be justification for temporary government deficit spending if it truly grew the economy and increased GDP so the cumulative debt could be repaid. Public sector jobs as maintained by the stimulus have little or no positive impact on GDP as they produce no marketable goods. Likewise work on infrastructure may be needed but in reality should be paid for out of a thriving economy.
Why? It seems to me that without the infrastructure maintenance and expansion, it would be harder for GDP to increase. Why cut back on these maintenance projects now when the real value of their cost is lowest? You still don't seem to understand how low an interest rate the government pays on its debt.
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If government spending were such that it stimulated GDP any results would lag the spending to the point that it would be hard to give it credit for the boost. As people go back to work in the private sector the GDP rises as more taxes are paid and government revenues increase. Government spending on unemployment comp, welfare, disability payments, Medicaid, etc drop as people go back to work so the deficit automatically shrinks relative to GDP however the debt remains unless paid down.
Clinton produced a narrow (apparent) surplus at the end of this second term by eliminating the deficit but the debt remained (most fail to point that out). It wasn?t so much by cutting spending but because the economy grew enough to reach near full employment.
Even if Clinton's "surplus" was really a deficit, using the same accounting methods would increase the size of the deficits created by every other president since 1949.
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Our debt problem is not considered serious by many since our spending ability is not limited by the combination of our earning and borrowing ability as our government creates it?s own currency, borrows using bonds denominated in that currency, and doesn?t strap itself to some fixed exchange rate system (like gold standard), so there is no financial limit to the borrowing except for the dangers of super inflation down the line and a lack of confidence in the dollar. The Fed actually returns most of the interest received from the government (I haven?t been able to track where it goes) thus it feeds inflation in the long term.
Every other first-world nation on the planet uses a similar system. We're doing better than most of them. Being fixed to a gold standard created numerous other problems.
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Old 08-23-2011, 11:28 AM  
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I do understand how little the government pays percentage wise on the debt but it still computed to $412,517,504,466.06 just til the end of July for FY 2011. remember even with low interest rates we still owe the principle too. Sure other presidents used the same accounting as Clinton, that doesn't make it right. Doing better than other nations with similar problems offers little solace for our spending/debt problem.

Just for emphasis I totaled the interest payments from 2001-2010, the result $3.768 trillion dollars. Dollars that even a nanny-stater might admit could have been better used than financing China and other note holders.
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Old 08-23-2011, 11:26 PM  
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Originally Posted by Eddie_T View Post
I do understand how little the government pays percentage wise on the debt but it still computed to $412,517,504,466.06 just til the end of July for FY 2011. remember even with low interest rates we still owe the principle too. Sure other presidents used the same accounting as Clinton, that doesn't make it right. Doing better than other nations with similar problems offers little solace for our spending/debt problem.

Just for emphasis I totaled the interest payments from 2001-2010, the result $3.768 trillion dollars. Dollars that even a nanny-stater might admit could have been better used than financing China and other note holders.
The government pays an average interest rate of 3.29%. The current inflation rate is 3.63%. The interest the government pays is quite frequently below the interest rate. (not always, of course, but very frequently) Whenever that is true, the government actually increases its wealth by increasing its debt. It borrows money with a specific real value and it pays it back with money with a real value lower than the real value it borrowed.

Financing China? Nuh uh. The federal government isn't responsible for financing China. Walmart is responsible for financing China.
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Old 08-24-2011, 11:47 AM  
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Originally Posted by rivalarrival View Post
The government pays an average interest rate of 3.29%. The current inflation rate is 3.63%. The interest the government pays is quite frequently below the interest rate. (not always, of course, but very frequently) Whenever that is true, the government actually increases its wealth by increasing its debt. It borrows money with a specific real value and it pays it back with money with a real value lower than the real value it borrowed.

Financing China? Nuh uh. The federal government isn't responsible for financing China. Walmart is responsible for financing China.
But, the government never pays the money back (so the debt and the cost to service it keeps rising) and much of the interest does go to China!
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Old 08-24-2011, 11:07 PM  
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Originally Posted by Eddie_T View Post
But, the government never pays the money back (so the debt and the cost to service it keeps rising) and much of the interest does go to China!
well we were on track to start paying down the debt when bush and the republicans took over...... just saying... reality.....
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Old 08-24-2011, 11:58 PM  
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Originally Posted by RedJeepXJ View Post
well we were on track to start paying down the debt when bush and the republicans took over...... just saying... reality.....
Would we now, what assurance do you have?
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Old 08-25-2011, 07:47 PM  
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Originally Posted by Eddie_T View Post
But, the government never pays the money back (so the debt and the cost to service it keeps rising) and much of the interest does go to China!
They do pay it back - they "service the debt", making the minimum payments. But you were trying to say that they are always borrowing greater amounts.

So, when someone gives you $100, and you give them back $97, they somehow benefited? Because that is essentially what is happening with government debt, although it's closer to a couple pennies gained per thousand dollars borrowed.

All you are seeing is the interest rate. You're still not considering the inflation rate.

This is a very simplified scenario: Gold is currently valued at $1759.15/oz. Suppose you took out a loan today, at 3.29% interest, and purchased an ounce of gold. Ignoring all other market forces and relying solely on inflation (current rate is 3.63%) after a year, that ounce of gold will have the same "real value" as it did the day you bought it. But, it will be worth $1823.01


You will owe 1817.03. You will have assets valued at 1823.01. Where did the $5.98 difference come from? If you don't sell the gold and don't retire the loan for another year, you will owe 1876.81 and have a gold nugget valued at 1889.19. Where did the 12.38 come from? Who "lost" that money that we gained?


The answer is "the lender". At the beginning of the year, he had enough money to purchase an ounce of gold. At the end of the year, he did not. At the beginning of the year, we took the money and bought the gold; at the end of the year, we returned an amount of money less than what was needed to purchase an ounce of gold.

If we shave off 1/12th of the gold, sell it each month, and make the minimum payment due on a 12-month loan, we will decrease our return on this investment, but we still come out of the deal possessing greater real value than what we borrowed.


In these conditions, whether you take out such a loan to buy an ounce of gold or hire a plumber to unclog a drain, or a builder to construct a bridge, or a contractor to provide an unmanned aerial vehicle, you receive the "real value" for the borrowed money, and the money you use to pay back the loan has a lower real value than what you borrowed.

No, these conditions do not always exist. Where the inflation rate is lower than the interest rate, the government does ship "real value" to lenders, but not nearly as much as you think, and very often it is importing "real value" from lenders.

Again, smart household finances do not scale up to the federal level. Smart household finances demand that we pay down interest-bearing debts quickly. The reason for this, though, is because consumer debts are (almost) invariably higher than inflation rates or reliable return on investment.
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Old 08-25-2011, 09:35 PM  
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RA, that is a well thought out answer.
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Old 08-26-2011, 10:29 AM  
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RA, that is a well thought out answer.
Thank you, Havasu. It's just another point of view.

I should have stressed, though, that the condition of interest > inflation is not guaranteed, and that in practice the margins are much narrower than the situations I presented. Using the gold analog, if the inflation rate drops to 2.5%, the cost to borrow that 1759.15 for a year is about 19.88, or about 1% interest. Of course, when the inflation rate rises to 5.6% (the highest figure I could find in recent history), we would be increasing our wealth by $34.65 of "real value" on that $1759.15 "debt", for an effective interest rate of -2%. (people PAY 2% for the privilege of lending money to the government)

In the long run, the margin between government interest rates and inflation is razor thin. In the long run, we don't ship our assets overseas, nor do we import much "real value". What we get is an effective interest rate on "real value" of right around 0%.

Investors know this. Nobody really thinks that t-bills are a high-performing investment. People buy t-bills for security and stability. The know that t-bills tend to track inflation rates in the long run. They know that the money they pull out of t-bills will be worth as much as the money they put in to t-bills. You won't get rich buying t-bills, but you won't lose real value on your money either.

There ARE good reason to avoid deficit spending, but shipping wealth overseas is not one of them. Maintaining our credit rating is one of them. Maintaining our appearance of stability and security. It is important that we maintain our ability to borrow anything we want for any reason we want, with money that is, for all intents and purposes, interest free. If we reach the point of borrowing where investors worry that we won't be able to pay back our debts, we will have created a global economic catastrophe. This is why the debt ceiling crisis was so dangerous. The political wrangling created more anxiety in the marketplace than the increase in debt that required the ceiling to be moved.
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