patrick.net

If you look at an interest rate chart the last 30 years it looks like we are going to be enjoying the japan scenario. Endless debt to the moon forever. ZIRP forever.

GDP has been growing at the same rate for around the last 60 years. That is population + population grown * 2.2% productivity gains.

Over all, it's not really possible to push the ENTIRE population to exceed there rates. It's also been said that year over year, this might be about the maximum for a human to maintain.

tdeloco says

Without inflation or a trade surplus, how is it possible to outgrow our debt?

Debt is an indicator of imbalance, but it is not a cancer per se.

For every dollar of debt there is a dollar of savings & investment.

Cancel the debt and you cancel the credit on the other side of the ledger.

One thing that struck me today is that "honest" money has no real mechanism for this kind of redistribution -- the debtors get further and further screwed until they wheel out the tumbrels or do something really stupid like elect a radical populist like Chavez to spread the wealth around forcibly.

The 19th century debate over the Bank of the United States, Greenbacks, bimetallism, was also about breaking the monopoly that hard money holders were exercising with their control of the currency.

Printing money reversed the deflation of the 1820-1910 period.

Between 1820 and 1860 the dollar increased in buying power by 40%. Between 1870 and the dollar increased by 30%.

Now, of course, between 1910 and 2010 the dollar has been inflated away to 8c worth of buying power, but much of this inflation was the price for the postwar readjustment and boom, and the 1970-1983 influx of the baby boom into the economy.

The 1970s were tough, but they would have been disastrous on a tough money economy, where access to new capital was limited to some arbitrary amount of metal we could dig up each year.

chanakya4773 says

WRONG. it can happen if consumption and creation happens domestically

lets assume There is John who grew a banana in Townville and Jack who grew an apple. Both exchanged the fruits and ate it.
Was wealth created ? you bet because john was able to eat a fruit and so was jack. did it impact the trade surplus ..NO.

Let's say Jack and John both had $1 each. Jack paid John $1 for the banana, and John, in turn, paid Jack $1 for the apple. Productive? Sure, I guess. They get to eat for one day. The amount of money in the system did not change, but it's merely just a self-sustaining system. It offers nothing in regards to any debt owed by the system.

Then comes Uncle Sam taxing both of them... say 20%, so each of them are left with 80 cents. They got to eat for one day, but they actually have less money for the next day. Now, this wouldn't be a problem if Uncle Sam, Jack and John, were a closed system and self sustaining. In fact, if Uncle Sam spends it within the system, all of the taxed money would eventually make it back to the Jacks and the Johns within the system.

chanakya4773 says

you can also take another example. John made 2 houses and jack made 2 automobiles and both exchanged one of each . now each one has a house and an automobile.Did the wealth increase ..YES

Ok, so the amount of assets within the system increased, but the quantity of money did not increase (assuming, of course, that no new money was printed). I'm also assuming that all of the material used to build the houses and cars did not come from outside the system, otherwise there is actually LESS money in the system. And if the system owes so much money that the system can no longer repay it, somebody else will end up owning the houses and cars (a forced reversal of the trade deficit -- only hypothetical, since other things can happen in reality).

In fact, it's good that Jack and John produced the cars. Otherwise, labor would be their only means of paying off their debts. If you measure wealth in terms of labor, assets are simply a store of labor. So you're correct that it is wealth creation. I guess the word/term I'm looking for is not "productive wealth creation" per se, but something that increase the system's wealth more than what's internally produced and stored.

In the case of a trade deficit, whoever gets this money should spend it, which would eventually balance out trade deficits and surplus. The thing is, instead of spending the money, this money is lent back to us, and we end up with bigger debts and a persistent trade deficit.

Bellingham Bill says

Debt is an indicator of imbalance, but it is not a cancer per se.

You're right, it's not really a cancer. In fact, any given person can live all his/her life with debt, so long as that debt remains manageable. If a person has massive debts, but always managed to pay the interest (such as never getting laid off or taking a pay cut), then all is well. Of course, a pay cut or a late payment will screw this guy over.

The U.S. debt is at 100%. I'm not sure how much more we can borrow, but eventually we'll reach the limit. So let's say the GDP massively contracts for some reason. I'm not saying it will, this is only hypothetical. Then our country might not be able to make the necessary payments, thereby ending up in default.

Bellingham Bill says

For every dollar of debt there is a dollar of savings & investment.

Cancel the debt and you cancel the credit on the other side of the ledger.

Historically, countries have gone to war due to economic conflict. I'm praying that we're past those ages.

In the case that all of the debtors are the country's own citizens, one or a combination of two things may happen:
1) The country defaults and screws over its debtors. You'll have some very unhappy citizens.
2) The country prints lots of money. And, as we know, inflation is a form of taxation. All of the country's citizens take a hit.

PockyClipsNow says

If you look at an interest rate chart the last 30 years it looks like we are going to be enjoying the japan scenario. Endless debt to the moon forever. ZIRP forever.

They can sustain this trend for a long time, but it can't go on forever. Japan's debt is now at 225%. I don't know how much money can they borrow, but there has to be a breaking point somewhere. Since 95% of Japanese debt is owed internally, they'll end up with massive internal taxation default or no default. Of course, I'm assuming that they don't kick up their productivity and have a massive trade surplus that pays off their debt.

Which leads me to another question. Japan is the 4th largest trade parter of the U.S., so are we going to be affected in the event of a Japanese default? I guess the same question goes for Europe.

The reason I'm asking is because of the following:
1) Inflation: Many people, including Bernanke, are against inflation. In fact, Bernanke recently stated that he won't tolerate inflation to boost employment.
2) Trade Surplus: People seem to be against a trade surplus altogether because it would diminish our quality of life.
3) More Debt: People are against borrowing more money simply because we already owe so much.

Inflation hurts all dollar holders; and who would want that? We don't want our lifestyle, relatively exuberant compared to other countries, to be diminished. People don't want to take measures to enforce a trade surplus because it is "protectionism." Protectionism hinders growth, which is the main reason people are against it. Of course, who wants even more debt? In terms of increasing debt, there has to be a breaking point somewhere. We don't have to pay off our debts. We just have to keep it manageable.

I don't think people realize that one (or a combination) of the three above has to happen. Each one is painful, and I don't claim to be an expert. It is possible I've missed something, which is why I'm asking. But unless someone comes along and shows me a working solution that isn't a combination of the three, then saying no to all three is like having your cake and eating it too.

Equilibrium would require zero or negligible trade deficit, meeting our debt interest payments, and spending within our means.

tdeloco says

The U.S. debt is at 100%. I'm not sure how much more we can borrow, but eventually we'll reach the limit. So let's say the GDP massively contracts for some reason. I'm not saying it will, this is only hypothetical. Then our country might not be able to make the necessary payments, thereby ending up in default.

The $10T debt we've run up is about half-owned by our trading partners who have been recycling their trade surpluses back to us to support their weak currencies.

The other half, slightly overgeneralizing more, has been borrowed from rich bastards who should have been taxed instead.

The other $5T you're counting is debt owed to gov't pension funds, $2.6T of which is social security.

The top 10% of America owns 80% of the productive assets in this country so they're good for the $2.6T they owe the SSTF -- they're going to need to start repaying ~$100B/yr pretty soon now . . .

The top 5%'s share of income has risen immensely:

and the debt take-on since then is not unrelated.

We're not Greece, we can print currency to pay our sovereign debt -- a soft default, but not a default.

We've got to turn our $600B/yr trade deficit around somehow, so maybe some soft defaulting would be a good start.

(It would be better if we could reduce our reliance on oil first though)

GDP is not going to massively contract unless something weird happens on the order of Pearl Harbor or a zombie apocalypse.

As I said, our debt is indicative of imbalances but if we reverse these imbalances we'll be OK. Unfortunately, the benefactors of these imbalances are running a pretty good propaganda operation to defend their position and We The People aren't quite able to see through the bullshit yet.

The main problem is still trade deficit.

1 Chinese are taking a loss to make the trade and increase their dollar reserve.

2 Chinese government prints more money because the dollar reserve increased.

3 This inflated money causes the Chinese real estate price to go up.

4 All Chinese think they are rich because of the real estate prices. They are more willing to trade with US.

5 Go back to 1 and the cycle continues.