Why Doesn't the US Just Default?

[Britanania]

You know, at the end of the Napoleonic wars, Britain's debt to GDP ratio was over 300%. That didn't stop them from being the preeminent superpower for the next century. Debt is not the determinative factor on a country's level, although it can contribute negatively depending on other circumstances.

But even if defaulting is your strategy to deal with it (a bad one) announcing it will only exacerbate the effects.

I believe British debt also reached 200% at the end of WWII, and Britain remains a rather powerful and important state today

[Trotskylvania]

I don't understand why the United States keeps borrowing money. We constantly spend more than we take in and never pay back what we owe and go further and further into debt. If we keep borrowing we will end up like Greece and default.

If the the company I work for ran its finances like the government we would be bankrupt very quickly. Many people also have to choose between paying rent and eating. No one should have to make that choice yet the government borrows money like it grows on trees.

If the government can just borrow money and never have to pay it back why bother having income tax? Or why not just print all the money we need?

Also US Treasury debt is viewed as a risk free asset and no one ever believed the United States wouldn't pay its debts and the world financial infrastructure is based around it. This is stupid. No investment should be risk free. Why would having risk involved in treasury bonds be a bad thing?

The United States should stop spending so much money and not raise the debt ceiling the next time it comes up and start cutting things we don't need like ridiculous defense budgets and useless scientific research and other things. If it were up to me I would default on the debt not pay our interests payments and start running the country with tax revenue alone and introduce risk into Treasury Bonds. The global economy and financial system wouldn't be so intertwined anymore and we would go back to simpler time. Plus if the US defaulted it would likely wallop financial markets worldwide and trigger other sovereign debt defaults and end the world's addiction to debt.

Your thoughts NSG?

Let's detangle this mess one bit at a time.

First off, the notion that the USFG doesn't pay back its debts is erroneous. The USFG debt isn't like some constantly increasing credit card balance; it consists of bonds, not loans. The bonds the government sells have fixed repayment schedules, meaning the debt is constantly being serviced. Eventually those bonds will mature and be retired.

The notion that this borrowing is unsustainable is similarly erroneous. The US wouldn't have such a favorable credit rating if investors the world over did not have confidence that the US would remain solvent for the forseeable future.

Furthermore, the government isn't a company. The government manages the macroeconomy of the country, and it has the power to control the money supply. The USFG's debt burden is actually not that historically high, still less than 100 percent of GDP. Compare to at the end of WW2, when public debt was 220 percent of GDP. The debt burden only makes sense when it is compared to the actual size of the US economy.

As I already explained to you, the government is constantly paying back the debt. And while the US does benefit from seignorage; which is to say the ability to generate revenue through control of the money supply, there are clear limits to how much it can be used before you start running into clear problems of inflation.

It's considered risk free because the kinds of events that could stop repayment are sufficiently drastic that investors would be having far bigger fish to fry: events like global nuclear war, asteroid impact, etc.

You can't balance the budget by just hacking away at it with reckless abandon. You'll cause a collapse in aggregate demand, resulting in recession and further decreases in tax revenue. And we should be thankful it's not up to you, because the US defaulting on its debt would not only be unconstitutional, it would lead to the largest economic depression in human history, a collapse of the global economy caused by trillions of dollars of assets evaporating that would make the Great Depression look like a slow day at the office. The US credit rating would be reduced to junk bond status. Treasury bonds, which are vital to economic stability of pensions, retirement accounts, and even Social Security, would have exorbitant interest rates. Few would invest in them for years, perhaps even decades, because of the default.

You can't end the world's addiction to credit. Credit is part of the engine of capitalism. You can't have capitalism without credit. Your scheme is the quickest path to world communist revolution though, so go ahead, make my day.

[Quokkastan]

No I didn't. What is your opinion of my OP?

Just what exactly do you mean by going back to simpler times exactly?

The time of "made up" when government budgets weren't ridiculously convoluted.

[Ngelmish]

You know, at the end of the Napoleonic wars, Britain's debt to GDP ratio was over 300%. That didn't stop them from being the preeminent superpower for the next century. Debt is not the determinative factor on a country's level, although it can contribute negatively depending on other circumstances.

But even if defaulting is your strategy to deal with it (a bad one) announcing it will only exacerbate the effects.

I believe British debt also reached 200% at the end of WWII, and Britain remains a rather powerful and important state today

Not such a great argument in the sense that Britain's world power decreased at the end of WWII, partially from the fact that they were economically overextended. But the point remains that debt in itself is a poor measure of these things.

[Benuty]

Just what exactly do you mean by going back to simpler times exactly?

The time of "made up" when government budgets weren't ridiculously convoluted.

Then they would need to go back in time to when the Articles of Confederation were in use.

Surely they would be happy.

[Britanania]

I believe British debt also reached 200% at the end of WWII, and Britain remains a rather powerful and important state today

Not such a great argument in the sense that Britain's world power decreased at the end of WWII, partially from the fact that they were economically overextended. But the point remains that debt in itself is a poor measure of these things.

Well, that wasn't really because of debt, it was the end of colonialism, but the point remains debt=death

[Quokkastan]

I believe British debt also reached 200% at the end of WWII, and Britain remains a rather powerful and important state today

Not such a great argument in the sense that Britain's world power decreased at the end of WWII, partially from the fact that they were economically overextended. But the point remains that debt in itself is a poor measure of these things.

The US debt after WWII was also larger then it is currently. Not arguing with you, just thought it was worth pointing out.

[Sack Jackpot Winners]

First off a country is by no means a corporation, and there are people who actually count on that debt (other nations). The debt ceiling itself is a moronic idea since it forces us to go through this issue over, and over again.

Why is it a moronic idea? And how to other nations count on our debt?

IIRC, not much of our debt is held by other nations. Most of it is US banks. You would literally be bankrupting the entire financial system.

[Greed and Death]

You know, at the end of the Napoleonic wars, Britain's debt to GDP ratio was over 300%. That didn't stop them from being the preeminent superpower for the next century. Debt is not the determinative factor on a country's level, although it can contribute negatively depending on other circumstances.

But even if defaulting is your strategy to deal with it (a bad one) announcing it will only exacerbate the effects.

I am not sure India would be happy about turning their country into a opium producing factory, nor the Chinese being forced to import all the opium we can get India to produce.

[Greed and Death]

You know, at the end of the Napoleonic wars, Britain's debt to GDP ratio was over 300%. That didn't stop them from being the preeminent superpower for the next century. Debt is not the determinative factor on a country's level, although it can contribute negatively depending on other circumstances.

But even if defaulting is your strategy to deal with it (a bad one) announcing it will only exacerbate the effects.

I believe British debt also reached 200% at the end of WWII, and Britain remains a rather powerful and important state today

I needed a good laugh thank you.

[San Lumen]

Why is it a moronic idea? And how to other nations count on our debt?

IIRC, not much of our debt is held by other nations. Most of it is US banks. You would literally be bankrupting the entire financial system.

How would you bankrupt the entire financial system? Is the rest of the world that dependent they can't function without US Treasury debt? Whose brilliant idea was it to base the entire global financial system around one country's debt?

[Britanania]

I believe British debt also reached 200% at the end of WWII, and Britain remains a rather powerful and important state today

I needed a good laugh thank you.

Member of the G7, fourth highest military expenditure in the world, cultural powerhouse. UK is doing pretty well, in spite of once having a large debt. Sure, it isn't the Empire on which the Sun never sets anymore, but it's not like we're talking about Greece or God forbid Syria here

[The Liberated Territories]

Who paid for the debts of WW2 you may ask? The rich, of course - with a 90% tax rate in some cases. The rich are willing to pay a lot of money if it is in their interests, for example, existential. The economic boom afterwards, was not caused by those tax rates - but rather as a result of America being one of the few strong nations after the war. Imagine your competition being literally destroyed.

[Ngelmish]

You know, at the end of the Napoleonic wars, Britain's debt to GDP ratio was over 300%. That didn't stop them from being the preeminent superpower for the next century. Debt is not the determinative factor on a country's level, although it can contribute negatively depending on other circumstances.

But even if defaulting is your strategy to deal with it (a bad one) announcing it will only exacerbate the effects.

I am not sure India would be happy about turning their country into a opium producing factory, nor the Chinese being forced to import all the opium we can get India to produce.

Czarist Russia also managed to get about half a century out of debt expansion before collapsing due to other political failures. Debt to GDP historically has never been the sole factor of a nation's decline. And where that decline occurs, there are always other, graver factors at play.

[USS Donald Trump]

I don't understand why the United States keeps borrowing money. We constantly spend more than we take in and never pay back what we owe and go further and further into debt. If we keep borrowing we will end up like Greece and default.

If the the company I work for ran its finances like the government we would be bankrupt very quickly. Many people also have to choose between paying rent and eating. No one should have to make that choice yet the government borrows money like it grows on trees.

If the government can just borrow money and never have to pay it back why bother having income tax? Or why not just print all the money we need?

Also US Treasury debt is viewed as a risk free asset and no one ever believed the United States wouldn't pay its debts and the world financial infrastructure is based around it. This is stupid. No investment should be risk free. The rest of the world uses the United States as a piggy bank because there is no risk involved. Why would having risk involved in treasury bonds be a bad thing?

The United States should stop spending so much money and not raise the debt ceiling the next time it comes up and start cutting things we don't need like ridiculous defense budgets and useless scientific research and other things. If it were up to me I would default on the debt not pay our interests payments and start running the country with tax revenue alone and introduce risk into Treasury Bonds. The global economy and financial system wouldn't be so intertwined anymore and we would go back to simpler time. Plus if the US defaulted it would likely wallop financial markets worldwide and trigger other sovereign debt defaults and end the world's addiction to debt.

Your thoughts NSG?

The United States will borrow money because it makes money on those debts. Don't ask how that works.

If the US Defaults, the interest rates would shoot through the roof so it would be a problem.

[USS Donald Trump]

IIRC, not much of our debt is held by other nations. Most of it is US banks. You would literally be bankrupting the entire financial system.

How would you bankrupt the entire financial system? Is the rest of the world that dependent they can't function without US Treasury debt? Whose brilliant idea was it to base the entire global financial system around one country's debt?

America's.

Its an idea to keep the world from going to war with it. If you declare war on the US, your economy is decimated almost immediately.

[Geilinor]

who cares about your company? the government is not a company. it is not a household either. stop comparing it to them.

it would really really really piss everyone off btw

so what? Why should we keep borrowing and going further and further into debt?

Like Alyakia said, if you have a credit card or a mortgage, you are a debtor.

[San Lumen]

How would you bankrupt the entire financial system? Is the rest of the world that dependent they can't function without US Treasury debt? Whose brilliant idea was it to base the entire global financial system around one country's debt?

America's.

Its an idea to keep the world from going to war with it. If you declare war on the US, your economy is decimated almost immediately.

well that;s completely stupid.

[USS Donald Trump]

America's.

Its an idea to keep the world from going to war with it. If you declare war on the US, your economy is decimated almost immediately.

well that;s completely stupid.

No its not.

ITs fucking ingenious.

Its a better deterrent than nuclear warfare or the prospect of total annihilation from the beast that is the United States Armed Forces.

[San Lumen]

well that;s completely stupid.

No its not.

ITs fucking ingenious.

Its a better deterrent than nuclear warfare or the prospect of total annihilation from the beast that is the United States Armed Forces.

So that's a justification for spending obscene amounts of money on defense?

[USS Donald Trump]

No its not.

ITs fucking ingenious.

Its a better deterrent than nuclear warfare or the prospect of total annihilation from the beast that is the United States Armed Forces.

So that's a justification for spending obscene amounts of money on defense?

What I said is about the politics of money

I did not say anything about defence spending.

[Great Feng]

Politics doesn't work the same way business does.
That's why.

[Britanania]

No its not.

ITs fucking ingenious.

Its a better deterrent than nuclear warfare or the prospect of total annihilation from the beast that is the United States Armed Forces.

So that's a justification for spending obscene amounts of money on defense?

One nation spending more than all the others, so that war becomes obsolete and everyone else can spend on other things? I personally don't have an issue with that

[Neu Leonstein]

Your thoughts NSG?

I think most people think of government debt the way they think about personal debt. But that's misleading. It's similar in that it is a way for the government to bring spending forward, so it can manage at what point in time it spends and at what point in time it taxes, in exchange for a cost. But that's probably the less important part.

The more important role of government debt is as a safe asset. The idea is that all of us also want to be able to shift our spending around over time. We want to be able to consume only part of our income (or sometimes more than our current income) and save or borrow the difference. Again, because someone else is taking some risk in the process (and is giving up on consuming some of their current income), that costs a bit of money in interest.

But people don't particularly like risky things that much. We all have varying risk tolerances, right? But not too many of us would be keen to put all our retirement savings into that blood pack delivery start-up our neighbour's daughter just came up with. We want to be able to put money into something that has a predictable return and where we can be pretty sure that we will actually be able to spend the money in the future.

In your everyday experience, you just put the money into a bank account. It provides a predictable return, and when you want the money back you take it. The government even guarantees that you'll get it back (to a point) in case the bank fails. But what does the bank do with the money? It has to provide interest, so it has to put it somewhere. A part of the money might go into a blood pack start-up - but not that much. Even if you split the money and invest in many different start-ups, you might introduce a lot of uncertainty into the return you can expect. Uncertainty is risk, and risky banks is not popular with everyone.

Also, if the bank invests all the money in business loans, how is it going to get it back on the day you arrive to withdraw your deposit? It has to be able to meet sudden withdrawals by holding something that it can quickly sell for a fairly predictable price. Your cash is the most liquid thing there is - you can immediately exchange it for goods and services with anyone else (the government even has a law that says people in its jurisdiction have to accept that cash). Anything you buy with the cash is less liquid: maybe you can do barter with it, and maybe you can sell it to get cash and then use that. But how quickly you can do that and how much cash you will receive is uncertain too.

But some things you (or a bank) buy are more liquid than others. If you buy a tailored suit, chances are you'll have a hard time finding someone who wants it. It'll take longer and you'll probably have to accept a lower price. If you buy a box of Oreos, then it might be much easier to find someone who wants some: everyone knows what they are, and almost everyone can use them. So you can rank different things you can buy (i.e. assets) by how liquid they are.

So the bank wants to invest a bunch of the cash it collects in something that is a) safe, so it can be pretty sure it won't lose the money, b) liquid, so it can be pretty sure it can sell it quickly if it needs to and c) pays some sort of return so that it can help cover the interest it has to pay you for your bank account.

Government debt is that asset. It's absolutely central to how modern capitalism works. US government bonds are about as close to actual money as you can get without using actual money. All sorts of financial institutions use US Treasury bonds as a money-like asset. They buy and sell them, they borrow and lend them. They borrow using Treasuries they borrowed from someone else. They lend Treasuries to raise cash which they use to buy other things.

In a way, that's because the role of the financial system is to transfer savings from people with more income than they want to consume right now to people who want to buy or invest in something but don't have sufficient income to do it right now. That requires trusting the other side to give back the money when the time comes. The entire system requires that people trust one another - and by using US Treasuries as the collateral and money in that process, it introduces the trust people have in the government as the all-important middle man that mitigates the risk and makes people do these trades.

In fact, there is a big industry in manufacturing more safe assets (some people say that's all finance really does), and much of that is just trying to find new creative ways of using either the safety or the liquidity of government bonds to produce new combinations of assets that can meet the safe and liquid requirements. One way to think about the financial crisis is that it was a massive shock to the supply of these safe and liquid assets as people realised that asset-backed securities and the structures made from them don't really qualify in a pinch, and as they stopped lending out what remaining safe assets (e.g. US Treasuries) they had.

So knowing all of that, you can start to appreciate the sheer amount of damage a default on the most safe and most liquid part of the entire system would do. It would be like a financial crisis, but orders of magnitude worse.

And this is now completely in the realm of fantasy, but even assuming that this initial shock and collapse could be overcome, what would take the place of government debt as safe assets? How would a financial system work in which the government was not in some way or another the main manufacturer of the most safe and liquid things we can put our money in?

[Sack Jackpot Winners]

How would you bankrupt the entire financial system? Is the rest of the world that dependent they can't function without US Treasury debt? Whose brilliant idea was it to base the entire global financial system around one country's debt?

America's.

Its an idea to keep the world from going to war with it. If you declare war on the US, your economy is decimated almost immediately.

Which is what makes it a brilliant idea. If you're in the US or one of their allies.