Lootifer wrote:Yes but the actual amount of debt stays the same in terms of debt/gdp ratio then while the government is still setting fire to 200 bil, its doing so in a sustainable manner.
IE: If the $200 bil the government is spending over and above its income is resulting in GDP growth of equal or larger amounts then there is no economy theatening problem*
* thats not to say theres no issues with this way of doing things, there certainly are (insert BBS rant); there's just no "AMAGAH OUR CHILDREN ARE GOING TO BE CRUSHED BY DEBT" kind of apocolypse.
I disagree.
1) GDP The problem with GDP is that government spending is included alongside (generally voluntary) consumption and investment. Say, you have consumption and investment totaling $100 billion. Let's say the government borrows $100 billion and throws all of it into producing a gazillion tricycles (let's ignore net exports). GDP would clearly increase with the government spending.
We would have a GDP of $200 billion, but what does that really mean? We got a gazillion tricycles that the government mandated as necessary, and $100 billion in debt that must eventually be repaid (I'll address defaulting below). How is a gazillion tricycles beneficial to the economy--compared to the alternative uses of that $100 billion? Would you say that the GDP of this economy ($200bn), 50% of which is tricycles, means that this economy is healthy?
Of course this economy isn't healthy. My point is that we have to be careful when we use GDP as a signifier of a healthy economy because the measurement of GDP doesn't reveal the sustainability/health of that economy.
2) Debt, Default, and DevaluationAnother point is that whatever the government spends, it must be repaid--either through taxation or repayment of debt. Also, the expansion of the money supply from deficit spending is countered by a decline in the relative value of the US dollar. In other words, we don't get something for nothing. Consequences matter and are inevitable.
The USG can continue deficit spending (probably for 30 years with no problems); however, that debt must repaid--or the US can default on this debt, which would very likely lead to other devastating consequences (for one, a sudden significant increase in interest rates would occur).
2b) [Reserve-currency Status] And note, throughout this scenario, we're assuming that the US dollar retains the
same reserve-currency status (i.e. everyone is hunky-dory using dollars to facilitate transactions between different nations of different currencies). Currently, about 90% of all international transactions use US dollars. What happens when this drops to 50%? Those US dollars over time shift away from markets that don't value the US dollar and into markets which still value using US dollars for these transactions; however, this increased supply of US dollars into these markets further devalues the US dollar within these markets. As more countries drop the US dollar like it's hot, then more US dollars are also dropped into the US economy. Depending on the speed of this "drop it like it's hot" phenomenon, the US could experience either high inflation or hyperinflation, which would suck big time.
3. Public ChoiceCurrently, nearly all US politicians are incentivized toward continuing deficit spending and are ineffective in curtailing government expenditures because to do otherwise would be politically suicidal. If you want to get voted and remain in power, you need to provide the goods. The US government runs at a loss, so the only way to provide the goodies is to borrow money and spend (i.e. deficit spending). Reducing these goodies frustrates voters, who will very likely kick your ass outta office and vote in someone who will play the game to their liking.
Not Sure What to Call This OneAlso, voters generally aren't too savvy with understanding cause-and-effect over the long-run. Most Americans have no idea what I'm talking about, which may explain why so many Americans are not really concerned about the current situation. Gaining short-term benefits are valued more so if the costs are long-term (this especially holds true if the long-term costs are unknown to the voter). Within their limited knowledge, it is rational for the elderly to elect politicians who will refuse to cut social security payments. It is rational for the beneficiaries of Medicare and Medicaid to vote for politicians who will refuse to cut Medicare and Medicaid.
Politicians signal to voters that they'll provide the goodies, and the voters will rationally respond--given their limited knowledge of the situation. That is, these voters are unaware of or hardly value the long-term costs compared to the more valued short-term gains. This in turn creates this institution (i.e. rules of the game) where it is conducive for politicians to continue deficit spending yet remain ineffective in mitigating or avoiding the eventual consequences.
ConclusionThe US government for now is stuck in this path toward continued deficit spending while being unable to effectively address this problem. If it remains on this path, then the eventual consequences will hit us very hard.
by Night Strike on Thu Apr 12, 2012 9:47 pm 
Night Strike
