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Please help me with coming up for an explanation for the national debt discussion. 
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Please help me with coming up for an explanation for the national debt discussion. 
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Mike Norman considers the following as important:
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| Please help me with coming up for an explanation for the national debt discussion.  |
The misinformation is everywhere. It's on the news, it's on CNBC, MarketWatch, zerohedge, etc. It's what we were taught in school. Until the truth becomes general knowledge, most people won't get it.
Mike, banks create money as well when they lend to a borrower which creates a deposit. How does that fit in to your narrative that the government has created all the dollars in existence?
It fits in like this: the dollars created by the bank are temporary dollars: they come with a repayment date for the borrower. The dollars created by the government are "permanent": they don't come with a repayment date and stay in existence until the owner uses them to pay tax.
I agree with the MMT conclusions but the framing can sometimes be too confusing to people when it presents the complete opposite of what they understand about the world. I'm not sure on what the right way is to present this to outsiders, but I often try to pinpoint the area that educated people are going to contest – often about currency crisis. Historically currency crises occur in nations that borrow in USD, which means that depreciation makes it more difficult to pay back their debt and hence it self-perpetuates. This logic doesn't hold for sovereign currency issuing nations, and even if you think there would be falsely reasoned sell off when the level of debt crosses some arbitrary threshold, there'll also be a point where smart money will take the other side of that trade. Currency depreciation is also beneficial because it makes exports more competitive and boost overseas earnings in terms of the domestic currency, so when hedge funds buy the dip it will be a profitable trade. It's interesting how quickly free marketeers abandon their principles when it's politically convenient.
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As the $US is the global reserve currency the treasury must run a deficit to supply the world with $. Surplus countries like Japan, China, Germany etc have $ they mostly invest in Treasuries. Remember they can’t simply deposit those $ at JPM, BA, CITI etc as they’re not deposit insured. Buffett who’s so famous for his stock holdings has $234B in bills (doesn’t want duration risk)
I think in your monopoly example: money has to be provided first to play the game; if more people play the game, more money needs to be created; in real economy, government creates the money first; if more companies, services: demand, is created, more money creation is needed to support that: the economy grows. Now if in the monopoly a person won’t play the game anymore, that extra money would need to be extracted, right? Otherwise there will be inflation & you cannot create more money bcos the latter. That’s where things get complicated, in real economy that would be companies bankrupt, services disappearing, people dying and not enough people are born to replace them… so, in this context: the deficit or fiscal positive flow isn’t good and need to remove dollars form system?? Just wondering
The Government spends the money to buy a widget-then issues bonds to borrow back the cost of the widget and agrees to pay back the cost of the widget plus interest. The Gov. will collect taxes from the person who sold them the widget, which might be enough to cover one interest payment, but never enough to cover the cost of the widget. Unless the Gov. can create money out of nothing-no bond issuance, how would they ever come out even.
Agree with your observations on Yankees. Still fun to watch. Fans and athletes respectfull of each other enjoy the series.
Frame the argument around catastrophic fiat currency failures. What macro factors have to be in place to cause the last several times fiat currency economies of countries failed. What common macro factors created the perfect storm to collapse, Hungary, Weimar Republic 1929, Zimbabwe and others. Explain what extreme macro factors would have to occur to the US economy for US dollars to lose the trust of the people in the USA. Russian collapse, people in Russian used Vodka for money. Weimar Republic, story "A German woman was at the laundry wash business. She had to carry a basket full of money into the business to do her laundry. She left the laundry business with her clothes and when she got home , in horror she realized she left her basket of money at the business. She returned to the business and found the money was still there, but the basket was stolen.
What macro events have to occur to cause the common people of the US economy to lose trust in the woodchips printed by US Treasury and Central Bank. Look at previous examples.
All rich and poor all have the same fear, will my woodchips (USA fiat currency) I am afraid all people all levels in the US. will lose trust in the USD, No more store of wealth. Answer this fear.
this is what most of the economist talk about debt,,
1. Calculation of U.S. Federal Debt
Components of U.S. Federal Debt
• Debt Held by the Public: Money borrowed by the government from outside sources, including individuals, corporations, foreign governments, and financial institutions. This debt is raised by issuing Treasury securities (bonds, bills, and notes).
• Intragovernmental Holdings: Debt that the government owes to itself. For example, surplus funds in programs like Social Security are invested in Treasury securities, which creates debt held within the government.
Annual Budget Deficits and Surpluses
• When the government’s annual spending exceeds its revenues (taxes, tariffs, fees), it creates a budget deficit. To cover this gap, the government borrows money by issuing Treasury securities, adding to the federal debt.
• Conversely, if there were a budget surplus, the government could use it to pay down the debt. However, budget surpluses are rare, and deficits are more common, which leads to a gradual increase in the debt.
Interest on Existing Debt
• The government also pays interest on its existing debt, which adds to the total debt amount if the government has to borrow more to meet these interest obligations.
• The amount of interest varies based on interest rates set by the Federal Reserve and the maturity structure of the debt.
2. Ways the U.S. Can Pay Off the Debt
Paying off or reducing the national debt is challenging due to the scale of the debt and the consistent budget deficits. However, there are several ways that the U.S. government could approach paying it down:
A. Achieve Budget Surpluses
• To reduce debt, the government would need to consistently run a budget surplus rather than a deficit. This would require either increasing revenues, decreasing spending, or both.
• Achieving surpluses would allow the government to gradually pay down existing debt over time.
B. Increase Revenue
• Raise Taxes: Increasing taxes, particularly on higher-income earners, corporations, or certain transactions, could raise revenue. However, higher taxes can impact economic growth and may face political resistance.
• Boost Economic Growth: Policies that encourage economic growth (such as investments in technology and infrastructure) can lead to higher GDP, which increases tax revenues. More robust economic growth generates higher income and corporate taxes without necessarily raising tax rates.
C. Decrease Spending
• Reduce Government Programs: Cutting back on discretionary spending (e.g., defense, healthcare, education) or reforming entitlement programs like Social Security and Medicare could decrease the debt burden.
• Reduce Waste and Inefficiencies: Streamlining government operations and reducing unnecessary expenditures could help, although these cuts alone may not be enough given the scale of the debt.
D. Inflation and Economic Growth
• Allowing Inflation: Moderate inflation can reduce the real value of debt, as it increases nominal GDP while the debt’s nominal value remains the same. However, excessive inflation can harm the economy and increase borrowing costs.
• GDP Growth: If the economy grows faster than the debt, the debt-to-GDP ratio will decline, making debt more manageable. A lower debt-to-GDP ratio improves investor confidence and makes it easier to finance and service debt.
E. Issuing Long-Term Debt at Low Rates
• By issuing long-term Treasury bonds when interest rates are low, the government can lock in lower borrowing costs and reduce the impact of rising rates on the cost of servicing debt.
Answering the below questions will help you understand more about US Debt.
1. What is U.S. National Debt?
• “What exactly does it mean when we say the U.S. has a national debt?”
• “Who does the U.S. government owe money to?”
2. How Does the U.S. Government Borrow Money?
• “How does the government borrow money to fund its spending?”
• “What are Treasury bonds, bills, and notes, and why are they important in the context of debt?”
3. Why Does the U.S. Have Debt?
• “Why does the U.S. government keep borrowing money instead of balancing its budget?”
• “What are the main reasons the debt keeps increasing?”
4. What are the Types of U.S. Debt?
• “What’s the difference between ‘debt held by the public’ and ‘intragovernmental holdings’?”
• “Which parts of the government contribute the most to the national debt?”
5. How Does U.S. Debt Affect Me Personally?
• “How does the national debt impact everyday Americans?”
• “Will having a high national debt affect my taxes or government services in the future?”
6. What is the Debt-to-GDP Ratio, and Why is it Important?
• “What does it mean when people talk about the ‘debt-to-GDP ratio’?”
• “Why do some experts say that debt is more manageable when the economy is growing?”
7. What are the Risks of High National Debt?
• “What happens if the U.S. debt keeps growing? Are there any consequences?”
• “Can a country as large as the U.S. actually go bankrupt?”
8. How Can the U.S. Pay Off or Manage Its Debt?
• “What are some ways the government could reduce or pay off the national debt?”
• “Would raising taxes or cutting government spending help lower the debt?”
9. What Role Do Interest Rates Play in U.S. Debt?
• “Why do interest rates matter when it comes to national debt?”
• “How do rising interest rates affect the cost of paying off the debt?”
10. Who Owns the U.S. National Debt?
• “Which countries or entities own the most U.S. debt, and why does that matter?”
• “Does it affect the U.S. if foreign governments, like China or Japan, own a significant portion of the debt?”
11. Why Doesn’t the U.S. Just Print More Money to Pay Off Its Debt?
• “Why can’t the government just print money to get rid of the debt?”
• “What would happen if the government decided to print money as a solution?”
12. How Does the National Debt Compare to Other Countries?
• “Is the U.S. national debt higher or lower than that of other developed countries?”
• “What does the U.S. debt level mean on a global scale?”
Ill try, though i agree with you mike. But it wasn't so long ago i didn't.
The united states government uses dollars to create liquidity in the system. Banks actually create the money supply via lending not the government (creation of debt and stocks). The government merely allows this money supply to take a liquid form by lending dollars to banks that have sufficient capital.
Therefore the government debt is just one small chunk of all the assets that money is created against and its the chunk the government needs to pay interest on.
If this debt gets too high the government owes more and more interest to pay it back, which either results in inflation as the CB starts to monetise the debt, or higher taxes. Otherwise the government will default. If you assume government debt accounts for just a fraction of all assets, then it doesnt follow that this debt is “already paid for” instead the government is more like a company operating in a larger system and can “soft default” by getting into an inflation spiral.
This is more like a company that keeps issuing equity to fund itself. At somepoint it needs to be cashflow positive or people will stop holding the stock. Even though it can create as much stock as it likes and its only liability is effectively equity.
The dow is down on the year compared yo real money
Mike I am long gold, Central Banks around the world are ditching USD in swaps since US is not in control regard China, Russia, Iran alliance.Check COT last couple of months Swaps. US looks week since Russia and China can blackmail US no matter if is Trump or Biden in power and nothing happens. So Central banks are hedging their position with China attending BRICS meeting. Ukrainians bleeding and US is inept. Putin announced brick currency backed by gold. Gold might be reserve currency again and in this case God help US economy because nothing will. Countries around the world will use gold/currency for international settlement among them selfs and USD will be just local currency. US is not power anymore since is scared by one Putin and Xi.
What if other entities that are currently taking in the debt refuse to take debt at the interest rate/fed funds rate that is being offered?
7:45 To me the question becomes "what is the global relationship with these countries that have all these bonds? Is there a risk that they could start spending it all into the US economy?" To which I'd say there probably isn't much of a risk and even if there was more of it it could be managed but it's still an interesting question that is to say so what IS the relationship we have and we want to have with those countries and what problems of their own do these countries have that they'd want to accumulate bonds as opposed to do their own deficit spending? Well the US is promoting Monetarism for one but that's not everything that is going on clearly.
Mike, I think people like me can understand that the "debt" is not really a debt after you explained it, but I get stuck on the limits of this money creation. What are the boundaries? We can't just go on printing endless amounts of dollars without producing anything right? Is the limit based on what this country produces? Otherwise, it seems like a giant free lunch.
Mike, I want to go through this exercise with you. But first, can you answer me this please: doesn’t the fed currently carry a balance sheet of US Treasuries like $7-trillion? I used to track this during the financial crisis as I was in the mortgage biz during that time. Thanks!