MaverickM11
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America's Debt: Figment Of The Imagination?

Tue Jan 31, 2006 5:27 am

There is an interesting editorial in the Economist on a paper by two economists at Harvard: Ricardo Hausmann and Frederico Sturzenegger:

http://www.economist.com/displaystory.cfm?story_id=5408129

"At the heart of the argument is a well-known paradox. In the mainstream view, America is now the world's biggest debtor. Thanks to its chronic trade deficits, it stood $2.5 trillion in the red at the end of 2004. And yet it still somehow manages to earn more on its foreign assets than it pays out to service its much bigger stock of debts: $36.2 billion more in 2004."

"...they say there is “something misleading about calling a country that makes money on its financial position the world's largest debtor”."



I'm not sure what to make of it, but I haven't read the actual paper yet but it's intriguing, to say the least.
E pur si muove -Galileo
 
jwenting
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RE: America's Debt: Figment Of The Imagination?

Tue Jan 31, 2006 5:30 am

The US national debt is the largest it has ever been in dollars, IF you don't correct it for inflation and IF you don't take it as a percentage of GDP.
If you do either it's actually pretty decent compared to most periods post the great depression.
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eaglekeeper101
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RE: America's Debt: Figment Of The Imagination?

Tue Jan 31, 2006 6:40 am

Whether it exists or not, I wouldn't mind if somebody gave me 1% of it.
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MaverickM11
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RE: America's Debt: Figment Of The Imagination?

Tue Jan 31, 2006 7:15 am

Quoting Jwenting (Reply 1):
If you do either it's actually pretty decent compared to most periods post the great depression.

This paper is suggesting that it's not even a debt in the first place.
E pur si muove -Galileo
 
ilikeyyc
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RE: America's Debt: Figment Of The Imagination?

Tue Jan 31, 2006 9:34 am

When the trasury department has a whole website dedicated to the public debt, I believe the debt is real. How we pay it back to other countries is the question. I'm sure China would rather be paid back in the form of increased cunsumption of their goods (which makes for a healthier Chinese economy), rather than cash.

http://www.publicdebt.treas.gov/opd/opd.htm#history
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MD-90
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RE: America's Debt: Figment Of The Imagination?

Tue Jan 31, 2006 9:42 am

It looks like even the Economist can publish stranges things.

The real horrifying truth is how many tens of TRILLIONS the federal government "owes" itself due to future Social Security and Medicare obligations.
 
MaverickM11
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RE: America's Debt: Figment Of The Imagination?

Tue Jan 31, 2006 9:48 am

Quoting MD-90 (Reply 5):
It looks like even the Economist can publish stranges things.

I'm sure they do, but in this case their subtitle to the article was "The United States' current-account deficit is a figment of bad accounting. If only. "
E pur si muove -Galileo
 
MaverickM11
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RE: America's Debt: Figment Of The Imagination?

Wed Feb 01, 2006 6:09 am

Quoting Ilikeyyc (Reply 4):
I believe the debt is real.

I'd like to better understand this Harvard paper, nonetheless.
E pur si muove -Galileo
 
Go3Team
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RE: America's Debt: Figment Of The Imagination?

Wed Feb 01, 2006 7:00 am

The way it was explained to me, the US government debt situation is basically interest earned when people invest in savings bonds, T-bills, etc. The only way it would be a problem is if demand for payment exceeds a certain level. If government debt was really a problem, people would not be investing in such things.
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whitehatter
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RE: America's Debt: Figment Of The Imagination?

Wed Feb 01, 2006 7:12 am

Quoting MaverickM11 (Reply 3):
This paper is suggesting that it's not even a debt in the first place.

except that the debt is State debt and assets are privately held.

Or are you suggesting that the assets of private individuals and companies should be taken away to pay the debt? You cannot compare the two, they are apples and oranges. Whoever is doing this exercise is misleading for political purposes which are obvious.

setting off investment against debt in this way is almost like saying these assets are the property of the nation as a whole. Rather Communist don't you think....?

Quoting Go3Team (Reply 8):
The way it was explained to me, the US government debt situation is basically interest earned when people invest in savings bonds, T-bills, etc. The only way it would be a problem is if demand for payment exceeds a certain level. If government debt was really a problem, people would not be investing in such things.

It becomes a problem when there is no market for new borrowing due to currency fluctuations and amount of paper in circulation. If you cannot roll over the bonds as they come due then it's a major problem. The issuer has to either cut expenditure in other fields, raise taxes substantially or pay even higher interest on the notes, which merely magnifies the problem by making an even larger sum payable in the future.

The notes also have a sale value. If a note holder dumps them, their value goes down. That makes new issues harder to place.
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Arrow
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RE: America's Debt: Figment Of The Imagination?

Wed Feb 01, 2006 8:32 am

Quoting WhiteHatter (Reply 9):
It becomes a problem when there is no market for new borrowing due to currency fluctuations and amount of paper in circulation. If you cannot roll over the bonds as they come due then it's a major problem. The issuer has to either cut expenditure in other fields, raise taxes substantially or pay even higher interest on the notes, which merely magnifies the problem by making an even larger sum payable in the future.

Right on the money. The problem will hit when the appetite of other nations (e.g. China) to continue to buy US debt wanes. The Chinese are already nervous about the proportion of those bonds that are in US dollars, and are diversifying to other currencies. If foreign bond holders decide they don't like US issues any more, it could get nasty, with a steep drop in the value of the dollar and a corresponding jump in interest rates. Since this doesn't do anyone any good (least of all those bond holders) the decline will likely be measured.

But the US really does have to stop running multi-billion annual deficits. That will lead to a sticky end one day.
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MaverickM11
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RE: America's Debt: Figment Of The Imagination?

Thu Feb 02, 2006 5:40 am

Quoting WhiteHatter (Reply 9):
except that the debt is State debt and assets are privately held.

You think all of the income is derived from private capital/assets? Wouldn't it have to be government owned assets?
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ctbarnes
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RE: America's Debt: Figment Of The Imagination?

Thu Feb 02, 2006 5:56 am

The amount of money we pay to service the national debt is certainly no illusion. It is the biggest single expenditure in the Federal budget.

Charles, SJ
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MaverickM11
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RE: America's Debt: Figment Of The Imagination?

Thu Feb 02, 2006 6:14 am

Quoting Ctbarnes (Reply 12):
The amount of money we pay to service the national debt is certainly no illusion. It is the biggest single expenditure in the Federal budget.

Yabbut:

Quoting MaverickM11 (Thread starter):
And yet it still somehow manages to earn more on its foreign assets than it pays out to service its much bigger stock of debts: $36.2 billion more in 2004."

How do you square that circle?
E pur si muove -Galileo
 
ilikeyyc
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RE: America's Debt: Figment Of The Imagination?

Thu Feb 02, 2006 6:52 am

Quoting MaverickM11 (Thread starter):
And yet it still somehow manages to earn more on its foreign assets than it pays out to service its much bigger stock of debts: $36.2 billion more in 2004."

But we need to earn money so that we can pay back a bond's principle when it comes due. It is my understanding that "servicing of debt" just means the monthly* payments that are made.

Quoting MaverickM11 (Reply 7):
I'd like to better understand this Harvard paper, nonetheless.

There is something misleading when one has to use a mysterious economic force to try and make sense of economics. I am no economics person, so I interpret what they are saying like so: I paid $320 this month to service the debt on my car. But because I made $2400 this month from my "labor investment" I must therefore be a net creditor (Even though I still owe over $10,000 on the car). Please correct me if I am wrong.
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