First, let’s address the 800lb gorilla in the room. Conservatives were enraged to the extent that the Tea Party was created because they believed that increases in debt were a fundamental problem that would risk our nation’s future. Fast forward to today crickets
Now the one thing that both parties have agreed on, or at least, they pay lip-service too, is the idea that debt is bad and threatens our future as a nation. The parties go about solving that problem (again via lip-service) in different ways, but what I find really, really, ironic is this president is spending money hand-over-fist and Conservatives everywhere are completely ignoring the debt.
First, I never said that debt was “good” as a rule, it’s not, but it is necessary for a growing economy… Second, if government debt is bad, why is the economy doing as well as it is? If the gov debt is bad, why aren’t people on this forum complaining about the massive rise in gov debt?
That’s not really an answer to your question…
So here, let me try again.
The government creates money when it spends. AS and I (and maybe you too) will go round and round because he’ll claim that the government does not create money it borrows it. RET will tell us banks create it. There’s a little bit of truth in that, but a lot of misunderstanding.
If the government didn’t create the nation’s money, it couldn’t ever borrow it and (under the rules we have now) banks could never lend it.
Think about it, how could anyone pay taxes or buy a bond which can ONLY be done with government money, if the government didn’t create and spend it first?
The reason that deficits are necessary are:
the number of new people entering the workforce increases each month as the population increases. If we go back to 1980, the population has increased by 100 million. If we ran a balanced budget at that time until today, you’d have 100 million more people fighting for the same pile of money (I’ll get to banking in a sec)
Increases in efficiency thanks to technology have reduced the number of people it takes to do work. Go back to 1900 and (IIRC) 90%+ of people were employed directly or indirectly in agriculture. Since eating is paramount to survival, lots of other work that could have been being done, wasn’t. Along comes modern farming and today, something like 2% of people is employed in agro. Where did the other 88% go? Technology freed them up to go do other things. Medicine, science, industry…
One of the reasons we have so much unnecessary work (meaning people make things that we want and not necessarily need) is because we’ve become so much more efficient. Think about accounting before computers. Think about running a company like Sears and Robuck in 1970. Think of the army of accountants it took to keep the books there. Or the army of draftsman it took to build a sub or a plane before the advent of PCs?
Now we can teach kids to do the same thing…
So where did all these people go when their jobs were replaced with a decent laptop and a CAD wiz?
Those people had to find new jobs doing other things, but the next generation of people didn’t do drafting (though a relatively small number do CAD), which meant there were more people to do other kinds of work. Somewhere after WWII we sort of mastered the problem of needs so more people went on to create things we want, excess. These things increased our standard of living.
Today, we’re (on average) 2.5 times more efficient (thanks to technology) than we were in 1980. That means, on the whole, it takes 2.5 times fewer people to do the same amount of work. Now remember we need less people to do the same amount of work AND there are 100 million MORE people today than in 1980. See the potential problem? More people that need work and fewer people needed to do it, UNLESS there is more money driving more demand putting those people to work (as an aside, Japan’s problem is, while technology increases efficiency, their population is decreasing)
If the amount of money in the economy didn’t increase unemployment would increase.
Here’s where RET comes in and tells us that banks supply the nation with money, not the government. He’s not entirely wrong, banks do supply most of the nation’s money. But I’m not certain he understands how and I don’t think he understands the government’s role in banking.
Banks create money, they don’t lend savings of other customers. They do not lend existing money, they RISK existing investor money. This allows the economy to grow dynamically. The idea if “crowding out” fiscal resources isn’t a real thing. The only thing that can be “crowded out” is real resources. Since only a small portion of people default (when the industry is properly managing risk) then the amount of money needed to secure debt is a fraction of what is borrowed (you know this as “leverage”).
When a borrower “borrows” money the bank creates money and deposits it in the borrowers account.
What’s really happening is the borrower creates a fiscal instrument of value (the promissory note) and sells it to the bank. A swap happens. The bank takes the note and deposits it as an asset and creates dollars (debt) and credits the borrowers account. Now this is almost always done so the borrower can acquire something of real value which ensures that money created is represented by something of real value in the world.
After the loan is made:
The borrower has money today and future debt. The borrower’s debt, thanks to interest is slightly higher.
The bank has future money and debt today. Because of interest, the bank has slightly more future money than debt today.
The borrowers promise to repay (the banks “future money”) is an asset. It is deposited and traded and sold like it has the value of the principle+interest of the loan).
Interest is the reward that banks earn for risk. Who takes the risk? The saver or the investor? Banks don’t lend savings, they create money, so it’s not the savers that take the risk. But what if someone fails to repay and there is no/ inadequate collateral, who pays then?
The government? In normal times, investors take the loss.
The economy overall gains NO new money because every dollar created has an equal principal debt. If the banking system were to settle up all money created would be offset by a principle debt and would return to zero. Of course, the system relies on the fact that the debt will NEVER become due all on the same day and as a result, in the net, new money is added to the economy equal to the amount of debt that is allowed to accumulate for future payment. Banks create what I would call “temporal money” in that it is temporary. From an economics standpoint, if the government’s spending were to stay the same, then for the economy to have more money, new loans would have to exceed loan repayments.
This is exactly what happened in 2008. Private loan repayments decreased…MASSIVELY.
Here, let’s look at the numbers.
(source: https://www.federalreserve.gov/releases/z1/20191212/z1.pdf Page 6)
The Blue Section
Here we see government borrowing and private sector borrowing (at least in nominal terms) about the same. That is, the amount of money the government is creating and the amount created when borrowers take loans is similar.
The Green Section
Then comes, Clinton, who decides to run the Republican playbook (at least the playbook they talk about but never do, they guilt Dems into doing it) and begins to cut government spending. The result on the non-government side is a MASSIVE increase in private debt. If the private sector had failed to increase its debt, the economy would have shrunk. So instead of growing the economy with government debt, we tried to do it with private debt.,
You can see on the government side in the green section, government spending declines relative to the years before. Factor in inflation and it’s even worse.
In 2001 we get a recession and the economy attempts to reset. BUT along comes the dot-com boom and investors are encouraged to keep borrowing and investing in the IT industry. People get greedy and the wheels come off. The economy should have reset BUT we get the real estate bubble and again investors are borrowing like crazy and the economy keeps going.
Se let’s look at some numbers…I’m going to aggregate debt for the same years between the government and the household sectors.
The private sector households borrowed: $2.920 trillion
The government sector “borrowed”: $2.843 Trillion
So these are pretty close to balance between the private and government sector
The private sector households borrowed: $9.266 trillion
The government sector “borrowed”: $1,931 Trillion
So Clinton cuts government spending which in turn results in MASSIVE private sector debt which is why the economy grew even though government debt shrank.
Now let’s look at 2008-2015
The private sector households borrowed: $0.329 trillion
The government sector “borrowed”: $9.086 Trillion
Do you see the pattern here?
Set aside for just a second who is to blame, and just look at the numbers. I mean, it’s right here!!!
See how the government and the private sector flip-flop?
Now just look at the numbers from 1996-2015 and you get?
The private sector households borrowed: $9.595 trillion
The government sector “borrowed”: $11,017 Trillion
If Clinton had never cut government spending, there would have never been a massive and radical shift in debt to the private sector. The private sector wouldn’t have fallen on its face and the economy would have plodded along.
The massive shifts resulted in a LOT of waste which I think accounts for the overall imbalance between the government and private sectors from 1996-2015
Just for fun, let’s look at the economy under Trump 2016-2018 (as that is the numbers we have). As I write this, I’m not sure what the result will be (though I have my suspicions)
The private sector households borrowed: $1.526 trillion
The government sector “borrowed”: $2.698 Trillion
And there you have it, folks.
The private sector is borrowing at a decent pace and the government is outpacing the private sector adding lots of new money.
Now what, historically is the problem with creating money? Inflation?
Again, another talking point proven wrong. Money creation does not, as a rule, create inflation any more than gravity causes planes to crash.
The yellow section, the part where the government doubts are debt is the result of the private sector falling flat on its face because, as a whole, the private sector was massively overleveraged and the government had to add money or the economy and potential the nation we know, would have fallen apart.
Trump is literally running the playbook I advocate. Now what I don’t agree with is who is benefitting most from the government’s spending (or lack of taxes as it were). I’d like to see the massive debt go towards repairing infrastructure as a priority (for example), but Trump is proving my theory, though I don’t think the fundamentals are sound because, as I said, who is getting most of the benefits in this economy. Demand will eventually creator OR private sector debt will begin to increase and we’ll rinse and repeat the cycle that Clinton started.
The private sector is on a healthy clip spending AND the government is spending and the result is microscopic unemployment.
I think things would be even better if more of the money we’re making its way into lower quintiles of the economy, and I hope that’s what Dems do next time they get power, but alas, Republicans will trick them, again, into lowering deficit spending and the private sector will probably react by increasing its debt and overleveraging again.
On paper, Dems will get to say that its there party that cuts debt (as a percentage of GDP) and Republicans increase it. Looking back to the last three Republicans and the last three Dems, the debt as a percentage of GDP has increased under all Repubs and only one Dem.
All that said, debt is neither good nor bad. Speed is neither good nor bad. Gravity is neither good nor bad, but in each case, there are instances where not understanding those forces IS bad.
The problem isn’t debt, it’s our lack of understanding of what it is and how it works.