US Public (Govt) Debt a Problem? If so, what do do?

[jefnvk]

The Libertarians are, in my opinion, the only party worth voting for

When they get their act together and get something going, yes. And then, what is to say they don't go back on their promises, and become the new Republicans?

They have been around for about 30 years? And how many federal positions do they hold? One Senate seat, I believe? What makes them think they are going to show up, and win the Presidency. Why not take the millions pumped into the Presidential race, and instead redistribute it to Senate and House races? It would go much further, and they actually have a chance there.

 

[CarbineCaleb]

Our monetary system is based on the Fractional Reserve System. That means that the banks are required to hold only a fraction of the total money they lend out or control. Its a license to print money once you understand how it works.

Is that the same thing as what is called the "Reserve Ratio"?

Reserve Ratio: The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the U.S. is the Federal Reserve. The reserve ratio affects the money supply in a country. This is also referred to as the "cash reserve ratio" (CRR).
For example, if the reserve ratio in the U.S. is determined by the Fed to be 11%, this means all banks must have 11% of their depositers' money on reserve in the bank. So, if a bank has deposits of $1 billion, it is required to have $110 million on reserve.

See: http://www.investopedia.com/terms/r/reserveratio.asp

If so, that doesn't sound to me like banks can print money. It sounds like banks (which lend and invest depositors' money to generate revenues), need to keep some portion of that money onhand - probably for stability and to ensure depositors ready access to cash from their accounts when they need it. Is something else going on?

Investopedia also has a tutorial on inflation, which can be found here:
http://www.investopedia.com/university/inflation/default.asp
Therein, in the section under causes, they write:

Causes of Inflation
Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that's universally agreed upon, but at least two theories are generally accepted:

Demand-Pull Inflation - This theory can be summarized as "too much money chasing too few goods." In other words, if demand is growing faster than supply, then prices will increase. This usually occurs in growing economies.

Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

...which sounds like there are a few root causes, but doesn't sound to me like it's caused by the Treasury printing too much money.

 

[Redworm]

Yes, they've been around since 1971 and have few Congressional seats. But they still ran over 1600 candidates in 2002 and as of 2003 had over 600 in public office (though obviously not all national seats).

http://www.lp.org/organization/history.shtml

To be honest I only recently heard about this party. I've been a fairly uninformed voter since I turned 18 (only four years ago ) and it's understandable why they don't get votes. Most people are like I was, they have no idea who the Libertarians are. You mention "third party" to just about anyone and the first things they think are either Ralph Nader or Ross Perot.

No, it's not a perfect party but I think it's a much better choice than the other two. What's to keep them from turning into Republicans? Nothing....except the American people. But then we all know how eager the population is to disturb the status quo...

 

[Redworm]

In reference to fractional reserve banking:

http://en.wikipedia.org/wiki/Fractional_reserve_banking

and from http://www.libertydollar.org/html/moneyfaq.asp

What is fractional reserve banking?
Fractional reserve banking is the practice that allows all banks under the Federal Reserve system to operate on a fraction of the depositors' assets. This is usually five to 10 percent but lately is closer to zero. In other words, banks create money (credit) from thin air, by making an electronic entry into an accounting database, and lending it out at interest. This is how the vast majority of the $60 billion that commercial banks made in profit, is made.

Here is a simple analogy. Say you have a classic Ford Mustang you wish to sell, and you list it in the newspaper classifieds. Say I come by and purchase it from you for $5,000. I explain to you that I don't really have a place to keep the car, and so I'd like to keep it in your garage until I can build one of my own sometime later on.

You agree, and we part company. I now own the car, but it's still in your garage. I come by about one weekend a month to take the car out for a spin, and everything is fine.

Now you get an idea. Since I only come by on the third weekend of every month, you could "sell" the car again to someone else, as long as that other person agrees only to drive it on the first or second weekend of each month. You find another buyer and "sell" the car to her for another $5,000. You give her a fancy-looking title to the car that you created with a computer and a color laser printer. For a year or so, no problem! She drives the car on the first weekend, you clean it up on the second, and I drive it on the third. You've doubled your money, and no one is the wiser.

But trouble lurks. Eventually I build my garage and ask to have my car permanently. Now you have a problem. You've sold one asset two times, issuing two identical, official-looking titles, and now face a "run" - more than one owner wants the asset.

If that analogy sounds farcical, fictional, or nonsensical, it is because no private citizen would ever consider running a scheme like the above. Anyone caught doing it would be thrown in jail. However, that is exactly what the U.S. Federal Reserve banking system has done and is doing. Your deposits in your bank account do not actually belong to you, and they might not be available if you try to withdraw them! Fractional reserve banks operate on the assumption that everyone will not want their deposits back all at the same time.

Nonetheless, this fraud would become readily apparent if there were ever a run on the banks. If all depositors were to withdraw just 10% of their deposits, the banks would have to close their doors! Even worse, if only 3% of the public withdrew their deposits entirely, we could have a situation on our hands to dwarf the Great Depression.

Beep beep.

 

[CarbineCaleb]

other words, banks create money (credit) from thin air, by making an electronic entry into an accounting database, and lending it out at interest.

Maybe you're right, but it's surprising to me that banks can just effectively create money, and I am trying to learn more at other sources, whether that's correct as stated. I understood that banks loaned out *depositors' money* and also invested it in other investment classes... not that they simply created it as they wanted to. Certainly, I know that everyone's money isn't just sitting at the bank - if it were, there would be no way for them to make money! It's quite something else to say that they *create* money though.

At least in Wikipedia, the opening definition says:

Fractional-reserve banking: In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks of retaining only a fraction of their deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder at interest to obtain income that can be used to pay interest to depositors and provide profits for the banks' owners.

...which still sounds like what Investopedia said...

 

[Redworm]

I'm just quoting the links. To be honest I have such a bare understanding of economics that all I can do is read as many sources as possible and hope to gleam a bit of knowledge.

I do great with high level mathematics but put a dollar sign in front of a number and it's all Greek to me. Hell, I got a B in high school Econ because I agreed to fix the teacher's car and computer as well as paint his mailbox!

 

[Rich Lucibella]

I can't provide a definitive answer on this issue; my B-School days are way behind me.

However, a bit of balance is necessary in looking at Money Supply and lending. For instance, we think nothing of the fact that consumers spend money they do not have....it's called credit.....a promise to pay from future income.

On the other side of that issue, in our system, banks LOAN money they don't "have".

For everyone who argues that we need to be on a Gold Standard, I might agree, but only if you add to that an outlawing of Institutional Consumer Credit. You'd get to buy only what you have coin for. Need a car? Save. Want to own a home? Save a long time.

Finally, Gold or Silver are as much an artificial measure of wealth as paper money....their only value is in what OTHERS will provide to you on receipt. In an emergency, do gold or silver have any practical value to anyone? I'd argue that ammunition is a far better coin; Tool Steel; Furs; Crops; Livestock; Skills.....but "coin" has been in existence for thousands of years.....and it never had any practical value.

Money supply theory is a very complicated issue and has produced many outstanding benefits to consumers....many attempt to simplify it. But few of us, myself included, really understand the nuances of the issue.
Rich

 

[Redworm]

You're right, basing money on precious metals isn't much better than the current system but I believe it's a start. It's either that or we go back to trading chickens

But like you said, few people understand all the intricacies and I'm certainly not one of them. Economics, like string theory, girls in their early 20s, and microbiology, is a nearly unfathomable issue that I can barely comprehend.







scratch that..string theory is a hell of a lot easier to understand than girls my age

 

[CarbineCaleb]

Fractional reserve banking: Ok, well, from what I now understand, there is indeed some truth to what's written at libertydollar.org. However, what they've written is nonetheless very misleading. The folks at your bank aren't just sitting behind their terminals, creating money "out of thin air" as they please.

For more on this, see the nice discussion in Wikipedia on money creation in a fractional reserve system.
http://en.wikipedia.org/wiki/Money_multiplier

In effect, the Federal Government has powers to create money. This is a chain of numerous steps, and the tutorial example is somewhat artificial (and pretty wordy), but still helpful:

1. The government prints a treasury bond. This is simply an IOU, a promise to pay the holder a specified sum of money on a particular date. In this example, let’s say the government issues $1,000,000 worth of bonds. Individual investors, pension funds, mutual funds, insurance agencies, banks, foreign government central banks, can all buy the bonds, effectively loaning money to the treasury. They do this to invest their money and receive interest in return.
2. The Federal Reserve prints a check, in the amount of $1,000,000 and makes it payable to the government. This check is the proceeds from the sale of the bonds.
3. The $1,000,000 is recorded as an asset by the Fed. (money owed to the central bank is called an "asset" by the bank) It is assumed the government, with its power to tax, will make good on its debt (this is why the people buying the bonds from the fed consider it a risk-free investment). The government deposits the check in its own account.
4. The government hires employees and buys things with the $1,000,000, and it does so by writing government checks. These government checks are then deposited in commercial banks. For the sake of simplicity, assume it all goes into one commercial bank, which has a zero balance to begin with.
5. The commercial bank now claims $1,000,000 in new liabilities (the amount on deposit in a bank is called a "liability" by the bank, because the bank has to pay interest to it, amongst other things). In the US, the law allows the bank to lend out 90% of what it has on deposit. This lending of money that it has on deposit is the precise point new money is created, because the depositor still has his money, and the person getting the loan now has money too.
6. $900,000 is lent out on Friday for someone to buy a house. This loan is in the form of a check. The home buyer signs the check and gives it to the seller, who deposits it right back into the bank on Monday. Note however, in real life that money would only come from the bank temporarily, which then would issue its own bonds or use a company like Fannie Mae to issue its own bonds, so that again investors can actually lend the money while the bank is simply a middleman, called a "servicer".
7. The commercial bank now claims $900,000 in new liabilities. 10 percent of that money is put into reserves, and 90% of that, or $810,000 is lent out. As soon as the $810,000 is deposited back into the bank, the cycle repeats and repeats until there is no more money to lend.
8. The total amount lent out to borrowers is $9,000,000. Add that to the $1,000,000 that it still has on deposit and the total is $10,000,000. Commercial banks make profit by charging fees for transactions, and by charging a higher interest rate to those they lend to, than what they pay for the funds. If the commercial bank charges 6% interest on the $9,000,000 it will earn $540,000 per year. If the bank making the loan pays 1% interest to the person who put the money on deposit in the first place it will cost them $90,000 per year. With 90% of that money lent out, if the original depositor wants their money back, the bank has to borrow that money from another bank (or maybe from another source), at rate of interest set by the government (the overnight rate, or the federal funds rate in the US). This is called "asset-liability bouncing", and is a delicate balancing act all banks must work on every day.

So in effect, there is an (not arbitrary, but well defined) amplification of the money in the system that occurs as a side effect of cycles of lending - the reason that amplification can occur is because of this reserve ratio. The inverse of the reserve ratio is the amplification factor. In the US, that's 10, in the EU, that's 50.

 

[CarbineCaleb]

Finally, Gold or Silver are as much an artificial measure of wealth as paper money....their only value is in what OTHERS will provide to you on receipt.

I agree - any coin is just an abstract representation of value - it's an intermediate representation used to allow efficient and arbitrary exchanges of goods and services. Without coin, you're stuck with barter, which has the problem that you can only have a transaction between two parties who wish to exchange the specific goods and services that they hold. Having money allows arbitrary conversions between all goods and services. (Plus it's easier to carry a bunch of bills in your pocket than goats )

Things are of course becoming increasingly abstract - the use of physical (paper) money as a representation of value is on the decline and purely electronic forms are on the rise. I don't see the actual form of value as being real critical - it's the system behind it that keeps things in order.

How about the deficit though?

 

[butch50]

CarbineCaleb

Dang it! I had a long post written out and lost it! My loss your gain.

Try this, take your chart of the Federal debt and superimpose the annual GDP on it, and superimpose the total dollars spent every year in the USA on entertainment of all types.

What you will see is that we are increasing our GDP along with our Federal debt while feeling secure enough to spend our money on entertainment in ever increasing amounts.

Economics is a study of relativity and faith rolled up into one ball of snakes. Relativity in that you have to look at debt in ratio to GDP and with inflation rate to get a true picture of economic health (simplistically speaking). Faith because the real intrinsic value of a $1 bill and a $100 bill is exactly the same - zero. The reason for the entertainment dollars is to show that we are not losing faith in our economy, if we were we would be hoarding our money.

Bottom line is that an economic system is entirely dependent upon the faith of the participants, and as long as we are continuing to show that we are faithful to the system, and that the debt to GDP ratio is climbing somewhat together, then it will work out.

If you look at the GDP to Debt ratio closely you will also see that it has spiked during every war.

 

[CarbineCaleb]

Dang it! I had a long post written out and lost it!

I hate when that happens - often if I try to add a list to a bunch of stuff I've already written, the list mysteriously (at least to me) wipes out my text.

Try this, take your chart of the Federal debt and superimpose the annualy GDP on it

That's a great point, and it is true that as the GDP goes up, our ability to pay off debt rises as well... I will try to find historical data on national debt as a function of GDP.

If you look at the GDP to Debt ratio closely you will also see that it has spiked during every war.

That makes sense... I'll see what I can find and report back

 

[jefnvk]

You'd get to buy only what you have coin for. Need a car? Save. Want to own a home? Save a long time.

One thing I am going to try to do when I actually get out, the only thing that a loan will be taken out for is a house. Car is going to be paid for in cash (well maybe check, but it is still MY money), as is anything else that some may take a loan out to get NOW.

 

[CarbineCaleb]

Try this, take your chart of the Federal debt and superimpose the annualy GDP on it

Okay, so this is not exactly that... it's a new chart, and I didn't trouble to put in the presidential timeline, because I think the point about debt being bipartisan has been made. This is a chart I made of the US National Debt, as a percentage of GDP:

My first thought when the chart appeared is that it's not as bad as I thought. That's good.

It looks like we had some strong debt in 1940, due to the Depression era public works spending, and then a big spike due to WWII as you suggested. Interestingly, you don't see spikes like that for either the Korean or the Vietnam war though.

Our best position with regard to *scaled debt* since 1940 was in the 1970s (which is before the period shown on my other chart). Unfortunately, since then, we have been climbing again, with just a short lived improvement blip roughly from 1995-2000... that's the Gingrich/Clinton era, and you see it in the other chart as a reduction in debt slope, where apparently the GDP grew faster than the debt for 5 years or so.

Put into this perspective (thanks for prodding me to do some extra homework, Butch50 ), it's not *that* bad. But, things have clearly been getting worse for about the last 30 years, and we can certainly improve. My understanding is that the increases in spending under the current administration are only partly explained by the war - there have been increases elsewhere too!

For those who want to see all the data (they have it for every year from 1940-present), see:
http://www.whitehouse.gov/omb/budget/fy2006/pdf/hist.pdf

 

[CarbineCaleb]

Kudos to butch50

Courtesy of butch50, here is a longer term chart of National Debt as a percentage of GDP, running all the way from 1792 to present!:

The absolute numbers therein will deviate a bit from those on my preceding chart, because they are posting the gross debt, not adjusted debt as I did (adjusted for situations where the government owes itself money).

Also from butch50, and the source of this chart, is an indepth perspective on debt (too long to post here), from "The Skeptical Optimist":
http://www.optimist123.com/optimist/

Thanks butch50!

 

[Waitone]

A few observations in no particular order

--The Federal Reserve is not part of the federal goverment. It is a private corporation which has been given the franchise to be the central bank of the US.

--Inflation exists even in gold based economies. The difference is inflation is generally geographically limited and temporary in nature. Central banks and fiat currencies created systemic inflation.

--Supporters of flat tax schemes will eventually figure out that to be successful the central bank will have to be abolished.

An amazing book has surfaced. It hasn't been in print since 1899. Entitled "Coming Battle" predicts the effects of a central bank on a society. It contains some really interesting financial history of the US. I picked up a copy as a PDF file on the internet.
http://www.google.com/url?sa=t&ct=r...PDF/BankingSystem.pdf&ei=MmQWQ5yGCo-4avynmcsB

 

[Redworm]

Supporters of flat tax schemes will eventually figure out that to be successful the central bank will have to be abolished.

why is that?

 

[butch50]

Here's something interesting:

A study by the National Opinion Research Center at the University of Chicago last month found there are 544 licensed casinos in the United States. The 143 that participated in the study had an average of $110.7 million each in revenue. If those figures apply to all 544 casinos, that's $60.2 billion a year in casino revenues alone.

That's just casinos, doesn't include lotteries, sports betting, horse tracks, etc....Nor does it include the money spent each year on other entertainment such as eating in restaurants, going to sports venues, gym fees, movies, and on and on and on......We do spend an awful lot of money on "things" that have no real value.....

 

[CarbineCaleb]

A couple of thoughts on the long term chart:
- We *are* in a fairly weak position on debt right now, and are heading in the wrong direction
- There is nothing apocalyptic about our position at this moment, because we have recovered from larger national debt in the past (post-WWII)
- I am nevertheless concerned, not only because of the first point above, but also looking ahead to the demographics situation - we face declining work force numbers and increasing senior citizen numbers - that won't make it any easier, so I still think we need to adjust earlier, rather than later. The shorter the period that you make adjustments during, the more drastic/painful that they will need to be. You don't save anything by paying later instead of now - in fact, it should be the opposite.

 

[stevelyn]

First off, get rid of non-essential govt agencies....ATFE, DHS, TSA, FDA.
Seriously cut DOJ, FAA, NPS.
Eliminate foreign aid. We never get a fair return on the money we send to foreign countries.
Bring all U.S. military personnel stationed overseas to CONUS. Turn overseas bases back over to host countries.
Seal up the southern border.
Implement a flat tax as proposed by Steve Forbes so everybody pays and pays the same.
Send the UN off to Zimbabwe and cancel our membership.
Legalize and tax recreational drugs.
Dump the federal reserve system. Why should the govt have to borrow it's own money and pay interest on it?
Go back to the gold standard.