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There is a good side and a bad side to debt. A big part of the issue is what you are investing in. Bombs add little to productivity compared with roads and bridges. Currently isn't our financial downturn a result of too much credit? I think your just looking at the good side of debt when related to good investment.

"But the lack of fiscal discipline in the United States is undermining the value of the American dollar, thereby lowering the value of the U.S. Treasuries in foreign banks. As the dollar's value drops, other nations' willingness to keep investing cannot last, says Nouriel Roubini, an economics professor at New York University."

"Roubini says time is critical because the worse debt becomes, the more vulnerable America is to shocks in the global economic systems — another spike in oil prices, another major terrorist attack, another major military conflict."


Then there is an even darker side of debt;


“I believe that banking institutions are more dangerous than standing armies… If the American People ever allow private banks to control the issue of currency… the banks and corporations that will grow up around them will deprive the people of their property until their children wake up homeless on the continent their fathers conquered.”

Thomas Jefferson

“If you want to remain slaves of the bankers and pay for the costs of your own slavery, let them continue to create money and control the nation’s credit.”

Sir Josiah Stamp

muirgeo: Productivity isn't the only reason you might want to buy something. Bombs certainly don't add productivity, but they do add security (or at least defense and deterrence.)

Also, it's certainly true that worse debt is, well, worse, but I think the point Steve is trying to make here is that a debt equal to 40% of our GDP is a pretty safe level of debt. Nobody would blink an eye at investing in a company simply because its debt is 40% of its revenue, so I suppose I agree with him there.

Frustrating to me...really frustrating is this damned focus on accounting machinations and useless metrics. (well, not totally useless but annoying).

See, we get all wrapped around the axle on the bottom line and funding of this and that and neglect the top line. You know how many times I've been though this in big corporations? Too many. Knee jerk reaction to cut this or that and more often than not it's just not the fat, it's the muscle and, indeed, the bone.

I'm not advocating willy-nilly recklessness when it comes to growing a business or the economy but taking risks is what growth is all about.

It's new ideas, new solutions, new products...some will hit big, many will flat out bomb. But, damn it, that's what gets things moving.

You want to have real serious problems? Adopt a hunker down mentality. That'll make what we're in right now look like easy street.

Debt is the reason for he fall in the value of the dollar and the rise in gasoline prices. Debt is being paid by the working class and the profits are being confiscated by those with access to finance and banking instruments that rip off consumers and taxpayers and use the government (again the taxpayers) to bail them out.

Debt maybe OK but the debt we really owe is unaccounted for and it's bad debt as it is purchasing little of useful value when it's going to make multi-billionaires a little richer.


I have never said it's impossible to have too much debt. I agree with several economists who have said it's possible for deficits to be (a) too large, as well as (b) too small. I don't go as far as some keynesians who say that virtually any kind of government spending is desirable stimulus that reduces unemployment in an economy with slack capacity -- a blanket assertion that implicitly includes bombs and bullets, by the way. Instead, my position has been that it's not the money, it's what we get for the money that's important. Money spent on bombs used in an unnecessary war (Iraq? Vietnam? Spanish-American?) uses up the bombs immediately, so we don't have anything to show for the money. Equally bad is money *not* spent to beef up embassies in Kenya and Tanzania against terrorist attacks; result was a bigger surplus on the one hand (the money), plus many dead diplomats (what we got for not spending the money).

Focusing on eliminating the bad investments is important, and that gets a lot of attention, especially in election years -- because polarization is what politics is all about, and the definition of "bad investment" is strongly related to one's chosen ideology. What gets insufficient attention is debate about what types of spending have been, and would be, "good" investments. For example, I'm with the vast majority regarding the money spent on the last and arguably best New Deal program, the 1944 GI Bill: it was one of the best peacetime investments ever made by the federal government. The productivity of the college-educated generation it created was a major reason for the economic growth that took debt from 120% GDP in 1946 to one-third of that two generations later.

So it's your choice. Go ahead and continue focusing on the negatives you'd like to see eliminated (i.e., the bad investments that, coincidentally, all happen to be the fault of the other side). Demonizing one's ideological opponents is what politics is all about -- just be sure to condense your complaints to slogans that will fit on a bumpersticker, because that's also necessary for effective politics. Those committed to the Democrats should employ phrases like "billionaires getting richer," "tax cuts for the rich," and "greedy corporations"; those committed to the Republicans should be sure to use things like "tax-and-spend," "big government," and "godless liberals." And while you're employing those tactics, I'll continue thinking about what might be good investments that would benefit our grandkids -- and I guarantee you those ideas will *not* include refusing to use borrowing to help finance such investments, regardless of which side's political candidate is pandering to the general public's fear of the buzzwords "deficit" and "debt."

"As one generation finished paying off their mortgages, the bankers kept rolling their loans over to the next generation of home buyers"

Good point. I never thought about it that way before.


Very interesting blog. You may like the following quotes in the context of government spending, especially borrowed money.

"There is nothing more permanent than a temporary government program" - Ronald Reagan

"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand." - Milton Friedman

"It is my view that what is important is cutting government spending, however spending is financed. A so-called deficit is a disguised and hidden form of taxation." - Milton Friedman

"If one rejects laissez faire on account of mans fallibility and moral weakness, one must for the same reason also reject every kind of government action." - Ludwig von Mises

"If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely." - Ludwig von Mises

"What the government spends more, the public spends less. Public works are not accomplished by the miraculous power of a magic wand. They are paid for by funds taken away from the citizens." -Ludwig von Mises

"Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other." - Ludwig von Mises

"The only way you can finance a deficit is by inflation. You cannot raise this amount by genuine borrowing. You borrow from banks, which create credit for the purpose. A large government deficit is a certain way to inflation." - FA Hayek

Keynes believed that economic slumps could be cured by government deficit spending, while Hayek argued that those policies would only exacerbate the underlying problem of excessive production capacity.

Infact Hayek who was a student of Mises won a Nobel prize for his theory of business cycle - government deficit spending only leads to a bust.

Excuse my emotional rant but my whole point is that growing the top line (GDP=increased tax revenue=revenue or sales) moves us away from the whole debt discussion. Well, at least it won't be such a myopic one.

I'm tired of pundits, politicians and academics talking about our mature economy, why we can't do this or that...blah, blah, blah. It's like we're throwing in the towel. Yep, just concede it all to China while we fade away.

It's depressing, really. So can we
have some discussion on growth? This is the USA for cryin' out loud. We didn't get to where we are today by being risk adverse.

Take a look at Japan if you really want to see a high debt burden. Then take a look at how Toyota is cleaning up. You think those folks are sitting on their hands?

Excuse my emotional rant but my whole point is that growing the top line (GDP=increased tax revenue=revenue or sales) moves us away from the whole debt discussion. Well, at least it won't be such a myopic one.

I'm tired of pundits, politicians and academics talking about our mature economy, why we can't do this or that...blah, blah, blah. It's like we're throwing in the towel. Yep, just concede it all to China while we fade away.

It's depressing, really. So can we
have some discussion on growth? This is the USA for cryin' out loud. We didn't get to where we are today by being risk adverse.

Take a look at Japan if you really want to see a high debt burden. Then take a look at how Toyota is cleaning up. You think those folks are sitting on their hands?


Reagan should be on Mt. Rushmore, IMO; I think his steadfast conviction prevented a thermonuclear war (...unfortunately I cannot prove the counterfactual, so that will have to remain my personal opinion). Consequently, Reagan gets a pass from me regarding his occasional indulgence in the tempting rhetoric about deficts, debt, and balanced budgets. His actions spoke louder than his words on that topic; preventing a thermonuclear war was a good investment, to say the least. I wish subsequent politicians had had similar foresight and conviction.

Friedman was technically correct that deficits mean higher taxes in the future -- but "higher taxes" does not necessarily mean "higher tax rates"; I wish he had explained more clearly that "higher taxes" also result from unchanged tax rates applied to a larger tax base.

Mises defined "inflation" as an increase in the stock of base money; that's not how most of us define it today, though. We define it as an increase in the price level, which means that (at constant velocity) an increase in the money supply that matches an increase in real GDP results in zero change in the price level. That difference of opinion on how to define "inflation" is one of my fundamental disagreements with the libertarians, with whom I otherwise agree on many points.

Hayek's essay "The Use of Knowledge in Society" [ http://www.econlib.org/Library/Essays/hykKnw1.html ] was fifty years ahead of its time; it's one of my favorite documents. But, again, public finance is a point of disagreement; deficits per se do not cause inflation. When money and credit grow at the same rate as the real economy, cet par, there is no inflation. And again, I think it's a problem with the definition of "inflation."

Thanks for addressing the issue.

I can understand the economic growth argument as an explanation for expanding debt burden. As long as the economy grows, we are okay expanding our debt because GDP is the denominator of the equation. I get it.

But you still did not answer the question about society's total debt load that I had asked in my comment. If we are going to use GDP as the denominator, then we should add into the numerator all the household debt, which has increased logarithmically since your grandparents day, in addition to the federal budget expenses.

A couple comments:
1) Certainly not all debt is the same. While you may bemoan the "politics" of debt hawks (except Reagan, curiously), some thoughtful commentators are not so much troubled with debt in general, but the uses of debt that are currently being experienced.

I would argue that the "policies" are a large part of the argument. Your grandparents debt that you mention helped to free the western world from true tyranny of the Kaiser, Hitler, Stalin; built land grant universities, the interstate highway system, national parks, etc. Now, our debt goes to living in 5,000 sqft houses we can't afford, etc.

Today's debt goes toward unnecessary war, consumer debt and increasing industry subsidies, which is much different than 60 years ago. Now, we raid the Social Security funds that will be needed in the near future in order to cover these growing unnecessary expenditures. The Iraq war has cost 1.5% of our GDP each year for the last 6 years and the total towards our national debt is large by any standard of previous war debt.

2) You persist in the straw man argument of the fictional "politician" who cries about all debt as being bad. Reagan gets a pass but others do not. Sure, guys like Ron Paul exist on the margin but he is the exception and others will spew campaign rhetoric. The real job of elected officials is prioritizing the expenditures and revenue sources. You engage in snarky comments about one political party, when both parties engage in such malfeasance, and I would argue that the current administration is much worse at prioritizing expenditures than others.

Al Gore's global warming crusade attracts derision while George W. Bush's campaign to destabilize the US's diplomatic relationships with war, rendition and torture is okay. Honestly, which is more costly to us economically?

Thanks again for the lengthy and thoughtful answers.

Grodge: Sorry it wasn't clear. I'll try again.

Society's debt load is a larger subject than government's debt load, and in any case, the latter is the "national debt" that fear mongers are talking about. And to test your straw-man theory, try googling (esp. during election season) "national debt" "federal deficit" "crushing burden" or "children and grandchildren" -- and see if any politicians are quoted in the articles that come up. Then rethink your straw-man theory.

Debt/GDP is an imperfect indicator of a government's debt load. Debt is a stock, GDP is a flow. Debt/assets would be better, but lots of luck valuing the nation's assets, especially the intangible ones the government is responsible for generating and maintaining. In any case, debt/GDP is widely accepted by the economists because it is a simple concept that makes cross-country comparisons easier. Also, GDP is well-correlated with tax receipts -- and a nation's ability to collect taxes determines its ability to borrow.

Again, though, I prefer interest/tax receipts to debt/GDP; it's flow-vs-flow, it's the inverse of times interest earned, and it's more to the point as an indicator of a government's ability to service the debt it has elected to use to help finance its expenditures.

Regarding presidents: I have a strong preference for the ones who, when faced with the tough choice, would rather prevent wars than deficits. That takes courage and conviction; the opposite approach merely requires finger-in-the-wind, opinion-poll "leadership." I'm glad the Soviet Union is defunct and that a thermonuclear war was prevented; I'm unhappy that 911, and therefore the subsequent costly wars, were not prevented.

Regarding my opinion of Bush: he should have listened to Colin Powell, who said either go into Iraq with a *lot* more force, or don't go in. Unfortunately, Powell lost the argument. Result: a war that either shouldn't have been started, or that could have been won more quickly at a lower cost in dollars and lives. We, in my opinion, are now stuck with (1) a president who refuses to communicate effectively with us, presumably (largely) because he is unable to string together two consecutive grammatically correct sentences, and also with (2) a vice president who refuses to fill that important communication gap. Nature abhors a vacuum, and I expect that Obama, an excellent communicator, will fill it.

Obama, by the way, even has a chance of getting my vote, depending on the role (and attention) he gives to Austin Goolsby, his U. of Chicago economist -- who, by the way, was muzzled by Obama during the Ohio primary because of his (Goolsby's) attempt to warn the alarmed Canadians that the only reason Obama was bad-mouthing NAFTA was because that's what you have to say in Ohio, even though that wasn't really Obama's true stance. So, you see, because actions speak louder than words, Obama gets a tentative pass from me on his misleading Ohio rhetoric, just as Reagan got a pass from me on his obligatory rhetoric about balanced budgets. Reagan did the right thing anyway; let's see if Obama's rhetoric was merely obligatory, as Goolsby said.

My assessment of politicians depends very little on their party affiliation. Looks to me as if that's the main place where you and I differ.

Thanks again for your insightful dialogue. This is a topic that I have a hard time wrapping my mind around... mainly because the idea of using borrowed capital to finance non-essentials is counter-intuitive to me, but I do see the value in borrowing when needed.

My query, as an avowed non-economist, centers around how we can use just plain old federal budget deficit in the numerator and not include household debt. Let's assume that everybody in the USA has doubled their credit card debt overnight and signed onto mortgages that cannot be paid (I know this could NEVER happen, right?), then the numerator would have increased above and beyond the mere half a trillion we added this year from the federal deficit. How is this factored in when we use these imperfect metrics?

Merely saying the fraction that concerns us is federal gov't debt / GDP seems like we are leaving out a whole swath of debt, namely household debt (and not mentioning corporate debt), that is actually increasing faster than the rapidly growing federal gov't debt.

And I'm not even going to go into how the gov't figures GDP and inflation.

Your current comment about political candidates is more magnanimous than your usual posts and I appreciate that. I liked Ron Reagan and thought he made a good president until his mind went in '85 and he let North and Poindexter sell arms to Iran, but that's another item.

While I was skeptical of Clinton at first, I think he was very similar to Reagan from an economic standpoint, and while much of his conciliation was due to the Republican Congress, I think his middle way approach with Rubinomics was certainly less harmful than other approaches (Nixon's disastrous wage and price controls come to mind and Ford's easy fed and Whip Inflation Now campaign, too).

I'm heartened to see that you view Bush's illegitimate war as an economic blunder... I have wondered why you have found so much time to harp about private citizen Gore's climate prerogatives and have been so silent on our sitting president's criminal crusade to devalue our dollar.

Thanks again.

Grodge: Last try.

Q: When analyzing the result of federal borrowing policy, why analyze merely federal debt/GDP; why not add household debt into the numerator?

A: Same reason that, when analyzing the result of federal tax policies, we analyze federal tax receipts/GDP, instead of adding household income into the numerator.

Hope that helps, because I have now run out of ideas for explaining it.

Thanks, Steve. I admit I'm a slow learner when it comes to economics.

I'm sure this is standard operating procedure from an accounting/ finance standpoint, but it is very misleading and seems dangerous when trying to look at the consequences of various fiscal policies. You have to admit that-- and I think you have in the past-- but is this all that the science of economics has to offer?

Tax receipts equate what is available to the fed gov't for expenditures. It makes sense to use that when evaluating tax policy.

But to make no account of the rapidly increasing household debt when looking at debt burden seems downright dangerous when looking at projections, etc. All that GDP growth that you're counting on is not available to the fed gov't because tons of it will be needed to pay down the massive household debt-- and it will be done in depreciated dollars.

(I'll make a confession: I'm reading Pete Peterson's latest tome, Running on Empty, and it's freaking me out a bit.)

As Always, I appreciate your patience and insight (even if you are an unabashed Republican.)


Think of it this way... if you are valuing a company, and you examine their debt, do you also consider the debt of each of that company's employees?

No. You don't because an individual employee's ability to pay their debt is immaterial to the company's ability to pay its debt. In fact, even if every single employee can't pay their debt, it has no bearing on whether the company can pay it's debt.

The same reasoning applies to reasoning about the 'National Debt'. The numerator in debt to GDP ratios is the Federal Debt, and really should be the Public Federal Debt.

Granted, if everyone in the country suddenly defaulted on their debts, it would probably lead to a lot of bankruptcies and dire consequences for both government (massive decrease in tax revenues) and citizen alike, but each citizen's creditworthiness has nothing to do with the federal government's creditworthiness.

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