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Old 12-16-2011, 04:45 PM  
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Originally Posted by rivalarrival View Post
And your understanding of debt never seems to include the recognition that the money we are paying now was actually received and put to work in the past. Your arguments suggest that debt is simply the throwing away of money; you ignore that it was actually spent on providing services to Americans, building infrastructure upon which the American economy functions. Failing to spend that money back then would mean a smaller, weaker economy now.
The $330 billion we are paying to service the debt could build a lot of infrastructure, or buy a lot of hot dogs and bananas for those on the dole. Instead it buys nothing and the number will increase as interest rates rise again. But that's just the tip of the iceberg, the 41 cents on the dollar being borrowed keeps adding to both deficit and debt and of course no-one is talking about the unfunded liabilities. The argument of spending now and paying back with inflated dollars only applies in times of inflation and IF we were really paying back, we never pay back!
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Old 12-16-2011, 06:26 PM  
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Well, when you start tossing away trillions what another 330 billion.
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Old 12-16-2011, 07:02 PM  
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Originally Posted by Eddie_T View Post
The $330 billion we are paying to service the debt could build a lot of infrastructure, or buy a lot of hot dogs and bananas for those on the dole. Instead it buys nothing and the number will increase as interest rates rise again.
Thank you for clearly demonstrating the problem. I will do my best to again explain to you why you're wrong. You state:

Quote:
Instead it buys nothing
The $330 billion we are paying back HAS ALREADY built a lot of infrastructure; bought a lot of hot dogs and bananas. It was borrowed, the borrowed money was spent acquiring things that our elected legislators determined we needed, and now it's being paid back. It's built $330 billion (in 2011 dollars) worth of infrastructure and/or purchased a lot of hot dogs, bananas, etc.

Now, yes, interest is constantly increasing the DOLLAR AMOUNT of the debt. However, inflation is constantly decreasing the REAL VALUE of that debt. The net effect is practically nil.

If the government were hemorrhaging money by taking on debt, the people buying up that debt should be showing quite lucrative returns. This isn't the case. T-Bills are very stable, low-risk investments.


Quote:
But that's just the tip of the iceberg, the 41 cents on the dollar being borrowed keeps adding to both deficit and debt and of course no-one is talking about the unfunded liabilities. The argument of spending now and paying back with inflated dollars only applies in times of inflation and IF we were really paying back, we never pay back!
I'll tackle the "IF we were really paying back, we never pay back" part first.

Suppose you could guarantee a 3% dollar gain on the market value of a $100,000 house per year.

Suppose you're offered a loan at 3% effective interest to buy this home. You buy it on January 1st, 2012. I could figure out the exact mortgage amount using typical figures, but it doesn't really matter because of what we're doing at the end. Let's say you pay a total of $10,000 in principal, and 3% interest is another $3000.

On the 15th of December, 2012, your home has a dollar value of $103,000; you now owe $90,000 in principal; you have $13,000 in equity.

On December 31st, you're offered the opportunity for a cash-out refinance of 100% loan-to-value. Translated: You take out a loan of $103,000, retire the $90,000 balance on your old loan, and pocket $13,000 - the same $13,000 you paid out over the year.

On January 1st, 2013, you've lived in a house for a year, you own $103,000 worth of house, and you owe $103,000 worth of loan. Your net dollar expenditure is 0, and yet you have something to show for it - the value of having lived in a house for a year. Huh. How did you do that? (If we scale government interest, and inflation down, you'd actually be paying a couple hundred bucks a year in interest. That's a pretty good deal in my book - try renting a $100,000 house for a couple hundred bucks a year.)

Now, if your lender allows you to refinance every year for these same terms, how long would it be before your net annual cost was anything but $0?


The question then relates to the other issues you raised. You asked us what happens when interest rates rise or inflation rates fall. You should have asked IF that could even happen first.

If interest rates on t-bills were forced to rise, t-bills would become a more desirable investment, and people would pay more and more for them. These market forces would tend to reduce interest rates and/or increase inflation rates to match. The market forces at work tend to lock t-bill interest to inflation, making them STABLE, LONG-TERM INVESTMENTS. Not the hyper-performers you imply they would become with higher interest rates, nor a loss-leaders during deflationary periods. STABLE INVESTMENTS that tend to match inflation in the long term.


Again, your stated understanding of debt is severely deficient. Your advice is good for personal debt, where interest rates are invariably much higher than inflation. That same advice is extremely poor when applied to government debt. The worst thing that could happen is what the GOP did this past summer - threatening default and shaking investor confidence in the stability of government debt, all over specious and arbitrary issues.

Now yes, there are other issues at work, but NONE of the reasons you've given for why the debt should be kept low are valid. Not one. At least pick a valid one if you're going to insist on pushing the issue.


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Originally Posted by oldognewtrick View Post
Well, when you start tossing away trillions what another 330 billion.
Hopefully, you now see how silly that statement is.
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Old 12-16-2011, 11:29 PM  
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Originally Posted by Eddie_T View Post
Your lengthy explanations never seem to address ............
Enough words will actually hide the facts sometimes. At least there isn't an endless cut and pasting of WWW pics!
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Old 12-16-2011, 11:52 PM  
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Originally Posted by Hillman View Post
Enough words will actually hide the facts sometimes. At least there isn't an endless cut and pasting of WWW pics!
Ideas should be reduced to their simplest forms - but no simpler. You, my friends, should have stopped reducing a little earlier.
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Old 12-17-2011, 01:55 PM  
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RA you have totally lost it, the $330 billion is not paid back it is the cost to service the debt. The debt is not only growing but 41 cents on the dollar of the $330 billion is borrowed money. We are borrowing money just to pay the interest on the debt which is a bit of a losing proposition. Should we borrow enough to pay the debt off instead of just servicing it? That would push spending our way out of debt to the limit!

I love the following analysis:
Quote:
Originally Posted by teaberryeagle View Post
Lesson One and Lesson Two

Why the U.S.was downgraded:

•U.S. Tax revenue: $2,170,000,000,000

•Fed budget: $3,820,000,000,000

•New debt: $ 1,650,000,000,000

•National debt: $14,271,000,000,000

•Recent budget cuts: $ 38,500,000,000



Let's now remove 8 zeros and pretend it's a householdbudget:

•Annual family income: $21,700

•Money the family spent: $38,200

•New debt on the credit card: $16,500

•Outstanding balance on the credit card: $142,710

•Total budget cuts: $385

Got it?



OK now Lesson # 2:

Here's another way to look at the Debt Ceiling:

Let's say, you come home from work and find there has been

a sewer backup in your neighborhood....and your home has

sewage all the way up to your ceilings.

What do you think you should do?

Raise the Ceilings, or
Pump out the sewage
Your Choice is coming November 2012
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Old 12-17-2011, 03:55 PM  
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Originally Posted by Eddie_T View Post
RA you have totally lost it, the $330 billion is not paid back it is the cost to service the debt.
Go back to my example of buying a house. The cost to service the debt in that example was $3000, the inflation rate increased the price of the house by $3000. On January 1, 2012, the real value of your 100k debt is "One House" On January 1, 2013, the real value of your 103k debt is "One House". The *dollar* amount changed, the *real value* stayed the same.


Quote:
The debt is not only growing
The dollar value of the debt is growing according to the interest rate on the debt. The real value is not. The real value is growing at the interest rate minus the inflation rate, which in the long-term is right around 0%.

Quote:
but 41 cents on the dollar of the $330 billion is borrowed money. We are borrowing money just to pay the interest on the debt which is a bit of a losing proposition. Should we borrow enough to pay the debt off instead of just servicing it? That would push spending our way out of debt to the limit!
Let's say you're right. You suggest that we are hemorrhaging money, throwing it hand over fist at our creditors. All our taxes are being paid straight to the people who lent us money. What ROI are these lenders receiving from these loans?

If what you are saying has any sort of truth to it, those investors should be pulling in cash hand over fist. Every other investment opportunity should pale in comparison to the opportunity to lend money to the federal government.

If what I'm saying is true, the long-term ROI on government debt will closely match the inflation rate. It should be an incredibly conservative investment, one that is nearly as likely to underperform inflation as it is to outpace it in the long run.

Why are t-bills not considered super performers? Why are they considered ultra-conservative investments if the US government is spending so much on debt?

Quote:

I love the following analysis:

Quote:
Why the U.S.was downgraded:

•U.S. Tax revenue: $2,170,000,000,000

•Fed budget: $3,820,000,000,000

•New debt: $ 1,650,000,000,000

•National debt: $14,271,000,000,000

•Recent budget cuts: $ 38,500,000,000



Let's now remove 8 zeros and pretend it's a householdbudget:

•Annual family income: $21,700

•Money the family spent: $38,200

•New debt on the credit card: $16,500

•Outstanding balance on the credit card: $142,710

•Total budget cuts: $385

Got it?
Yes, you would love that analysis as it implies the same flaw that you are relying on in your arguments. Your position works great for HOUSEHOLD DEBT. Household debt is characterized by interest rates of 2 to 10 times the inflation rate. Yes, servicing household debt - consumer-grade debt - will suck you dry. Paying it off early can save you money in the long run.

There is another type of household debt. In the past, I've had zero-interest debts to pay off. The interest rate on this sort of debt is 0 times the inflation rate. You're actually *earning* real value by waiting to pay it off. Is it better to make a lump-sum payment on a simple, zero-interest debt, or the minimum required payment?

Government debt is closer to the latter than the former. In the long term, the interest rate on government debt is somewhere between 0.9 and 1.1 times the inflation rate. And that is why your position is simply and demonstrably wrong. No matter how many times you state it, your position does not make one bit of sense, and it is because you are ignoring how interest rates on t-bills and inflation rates in the economy are related.

The stated reason for the downgrade had *nothing* to do with any of the figures above. The stated reason pointed at the political turmoil during the debt ceiling "crisis", where the uncertainty of what Congress intended to do had investors scared to do anything.
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Old 12-17-2011, 04:44 PM  
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I don't think my buddy rival understands this is interest to service the debt and not repaying the original borrowed money. We still owe the money. We're not reducing the deficit. When they show you reduced numbers, thats a reduction in increase not an actual reduction of the total deficit.
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Old 12-17-2011, 05:51 PM  
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Originally Posted by oldognewtrick View Post
I don't think my buddy rival understands this is interest to service the debt and not repaying the original borrowed money. We still owe the money. We're not reducing the deficit. When they show you reduced numbers, thats a reduction in increase not an actual reduction of the total deficit.
Yes, I understand this is debt service. Very well aware of that fact.

Imagine you can get a mortage at 3% interest, and you purchase a 100,000 house. What we're talking about is the $3000 paid out over the year to the lender, above and beyond the principal, which we'll say is nothing.

Inflation is also at 3%. We have paid a total of $3000, our principal on the loan is still $100,000, and we have a house with a present day value of $103,000.

Where is the loss you're talking about?

No, homeowners can't get interest rates this low. The government does.

The only time carrying low-interest debt is a problem is in deflationary periods. Do you doom-and-gloomers have anything to say about the likelihood of long-term deflation?


Seriously, someone needs to explain to me why t-bills aren't top performers if the government is wasting so much money servicing them.
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Old 12-17-2011, 06:35 PM  
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Originally Posted by rivalarrival View Post
Seriously, someone needs to explain to me why t-bills aren't top performers if the government is wasting so much money servicing them.
Well, for one thing it's not $3,000.00 it's $330,000,000,000.00. How many days at work will it take for you to pay it off?
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