Serious Question: What Actual Economic Problem is the Deficit Causing?

[cthulu2016]

There is widespread assumption, even among Democrats, that our deficit causes or contributes to some actual economic problem today.

But nobody will say what it is.

It can be said to contribute to political problems, since it is something many people believe causes real-world economic problems. But that is like saying that evolution causes bad science education because people have bad psychological reactions to evolution.

Our current deficit can be said to be unsustainable in the longest term, but that does not mean it is causing a problem today.

So what is this secret, malign and REAL economic effect?

What actual effect of the defecit is causing what problem?

Anyone?

[msongs]

1. it causes democrats to fall in line with republican strategy nt

[NoOneMan]

2. Debt in most forms accelerates the velocity of capital...

beyond what that economy can naturally support. If that capital/energy does not build the economy to a state that it can support that velocity level and pay the debt, then further debt must be incurred to support this economic overshoot, ad infinitum. In essence, using debt as a crutch for economic activity that is not focused on building the economy will create an inherently unstable system that cannot stand on its own legs. In such a case, the moment that debt cannot be expanded, the economy will collapse

[Warren Stupidity]

4. given that we have historically low interest rates

our borrowing right now is a bargain we should be taking advantage of to invest in future growth and development, not a frankenmonster we should be running in horror from.

[NoOneMan]

9. In the context of "economics", perhaps, but only if...

That capital is actually used in a manner that builds the economy to the point it can support that capital velocity in the future. Unfortunately, if past debt is any indication, I wonder if injection in any form can do this as our economy is almost entirely dependent on debt (not just national debt) to carry on. We saw in 2008 what happens if there is a significant contraction in credit.

Now, in the context of science & the environment, we should be doing everything we can to reduce energy and capital consumption of our civilization, as we are approaching (or past) sustainable tipping points.

[lumberjack_jeff]

15. Western society has been predicated on the idea that wealth is a precious and finite resource

Capital has been given preferential treatment, to the expense of labor and their ability to consume.

So now we have a huge debt and zero interest rates. Capital is clearly amply abundant, and in search of something to invest it in. The obvious solution is to invest it in labor and infrastructure, better to do it with taxes rather than more borrowing, but if taxes are raised, there's no compelling reason to go on a debt-reduction kick.

[HereSince1628]

5. "will create an inherently unstable system"

which is fine mathematically, but may mean nothing over time as the matrix of associations (assumptions) may be more dynamic than an eigenanalysis of a snapshot of prevailing conditions.

Airplanes are workable tools, not because they are inherently stable, but because their instability is subject to manipulation in changing conditions. I rather suspect that the economy is very much the same...no one want's to crash, everyone wants to manipulate it along a trajectory that serves their goals.

[NoOneMan]

7. Correct me if I am wrong...

But it appears that you are suggesting we can keep tinkering with it over and over again, building a bigger and more unstable system, infinitely. Correct?

What happens though if the soft "science" of economics ever comes face to face with the hard science of physics, an no matter how many numbers we fudge to let debt sustain an unsustainable economy, physical energy will not be available to command in the number necessary?

While economics is a fantasy religion that can to some extent be manipulated (though crashes have surprised the most keen wizards), these economic systems are certainly still subject to the laws of thermodynamics. You can create money and debt out of thin air, but not energy.

[HereSince1628]

20. What I am suggesting is that the economy is malleable and is manipulated

And the manipulation of economic instabilities is guided by sundry choices based on perception of circumstance. And I don't believe that precludes effects of availability of resources or energetics that subsidize it.

[NoOneMan]

21. So that creates a problem

Yes, I agree with your point, but I also suggest that if we can consistently keep the behemoth lurching forward and growing via manipulation, then the effects of it ever falling off the track (in the inherently unstable system) grow larger. Its takes just a series of missteps or a drop in the availability of resources to derail it in a disastrous way. Essentially, our human discount factor is causing us to create a larger and larger problem that we, one day, might have to deal with.

If it is not conceivable to continue this, and impossible to transition to a naturally sustainable economy, then I would suggest that perhaps a organized economic disaster of an economy of size X is better than an accidental one of an economy of size X+ (growth over time, as time approaches infinity)

[cthulu2016]

8. I concede theoretical unsustainbilty in some time frame.

I am, however, hard pressed to identify any real-world economic benefit to reducing the deficit in 2013-2014.

[NoOneMan]

11. The only benefit I put forth...

Is that by reducing the velocity of capital in the economy (which is what taking money out of the economy to pay debt does), we will consume less energy and emit less carbon dioxide in the environment immediately. That is another can civilization likes to kick down the road.

Civilization's debt problem is actually linked directly to its energy consumption problem. When the first form of debt was created (via the granary at the advent of agriculture), that is when things exponentially swung out of control.

[cthulu2016]

12. I agree that a global depression would probably reduce CO2 emissions

[NoOneMan]

16. The Great Recession proves this point

Unfortunately, that being an "accident" (not gracefully orchestrated), people were in pain and are clamoring to "fix" that reduction.

[HiPointDem]

24. And the danger of increasing the velocity of capital is? Your explanation takes

it for granted that increased velocity of capital is problematic without saying why.

All you're really saying is the debt might not be able to be paid back because the country might not produce enough.

[NoOneMan]

37. I did not say its always problematic

Its only problematic in the case that the economy is not built to sustain this velocity without further intervention (as it adjusts to depend on it). In such a case, the economy becomes "hooked" on further debt for further growth, or alternatively, faces a crash caused by deficient demand if the will to increase debt ever declines (and a political shift could cause such a disaster).

IOW, debt fuels an artificial level of economic activity that people's well-being depends upon without guaranteeing the economy can continue to meet their needs in the future. The longer the indebted state is continued to accelerate growth, the worse the consequences will be when (or if) there is ever a withdraw of debt-based capital from the system (because there will be growing gap between the natural velocity level the economy will support and the artificial level everyone has adjusted to depend on).

Debt doesn't even have to be paid back (though doing so can be beneficial if your intent is to withdraw capital from the economy when the natural economy increases). Rather, the more important to focus is what happens when debt is incurred without building a sustainable system, and how it impacts the system in the future.

Outside the hokey context of economics though, "increasing the velocity of capital" is always dangerous, as that capital represents energy (and thus, carbon emissions)

[robinlynne]

3. none. FDR wasn't worried about the deficit when he fixed our economy.

[NashvilleLefty]

39. well, actually, he did succomb

to Republican cries and as a result delayed the recovery.

When RW sources claim that FDR didn't bring us out of Depression but that WW2 did, remind them that WW2 is what allowed FDR policies to come to fruition.

Yes, WW2 is what brought us out of Depression/Recession, because WW2 allowed FDR/Keynesian policies to take root.

[Sekhmets Daughter]

6. What happens when you have more debt than you can handle?

When all of your credit cards are maxed out, and it takes over half of your take home pay to meet your debt obligations?

Some argue that because the US can "print" it's own money, we really don't have debt problem. So what happens when your dollar is worth 1/1000 of a cent? For people on fixed incomes that means living under a highway overpass and dumpster diving for their meals.
For most everyone else it means having just enough to survive, but little else.

Even Paul Krugman, arguably the most liberal of economists, recognizes that we have to deal with the deficit eventually...as soon as the recession is behind us. The Social Security Trust Fund holds far more of our debt than does China... What happens if there is not enough money to pay that debt? Who will lend us the money to cover it? And, if we find a lender, how much interest will we be forced to pay?

If the US goes broke, the rest of the world goes broke with us...we are the drivers of the world economy. You certainly don't see Greece becoming the engine of the global economy do you?

[cthulu2016]

10. I will repeat the question: What Actual Economic Problem is the Deficit Causing?

Causing.

Not speculation about what may happen.

Causing.

Since Dr. Krugman has been dragged in here, Krugman would agree with the OP so he's a terrible advocate for disagreeing with the OP.

There is no current malign effect of the deficit and there would be current malign effects to reducing it.

So why would anyone in their right mind want to reduce it?

The fact that the same thing would not be true in a different world goes for almost everything. In a world without gravity the chair I am sitting in would make no sense. In a world where turkey was deadly poison a lot of us would have made a terrible mistake yesterday.

But the answer to "What Actual Economic Problem is the Deficit Causing?" is, "none."

Can the deficit cause a problem in a different world? Yes.

In the future there will be a different environment with different implied right answers and in that different world there may be a real-world benefit to deficit reduction.

But in the world you and I live in today there is not.

[NoOneMan]

13. This depends on if you see famine and global warming as an "economic" problem

If debt is the mannerism in which a system drives infinite, exponential growth, and exponential growth causes overshoot/death/disaster, the you must concede that the debt is the fundamental driver of these problem.

But since economics is a fake science, it can include or exclude any real world problem from being its concern

[cthulu2016]

14. If the goal is less economic growth then I concede your point.

Reducing the deficit in today's world is an excellent way to achieve lower economic growth.

[Sekhmets Daughter]

18. So is your point...

No problem today so to hell with next week? Next month? Next year?

[HiPointDem]

26. The rest of the world *is* 'broke'. Everyone is in debt. Where did all the money go?

[sabrina 1]

28. That's what I'd like to know. That is the mystery. Where IS all the

money? Every COUNTRY is in debt, but what the private individuals who have so much obscene wealth they don't know what to do with it?

Which Country eg, is everyone else indebted to? IS there such a country? Does China owe anyone?

And how did we get into debt in the first place? Why, with all the resources we have in this country, was it ever necessary to borrow from anyone?

Seems to me, and I can only relate to how I view debt, if you can't afford something, don't buy it. So what were buying that we couldn't afford that caused us to have to go borrow from someone else?

Or is debt itself a 'commodity'. Is the entire world in the business of 'debt' rather than the business of producing something people can actually use?

[Egalitarian Thug]

34. It's no mystery at all. We have gigantic sinkholes of incalculable fortunes and corporate hoarding.

That's where the money is. There is so much unproductive money sitting in these unregulated, shadowy oceans of liquidity that the system itself is starved of capital and literally insolvent. Nobody wants even wants to talk about it, let alone explore available solutions.

[upaloopa]

17. Too much money goes to service the debt rather than social justice. The borrowed money went to

guys like Cheney and Romney and we have to pay it back with interest.

[HiPointDem]

27. percent of theus budget spent on debt service is declining, not increasing.

[Please proceed]

19. It causes Republicans to get a hard on

That lasts longer than four hours. Okay that's a medical problem not an economic problem.

[Igel]

22. Back up to 6/2008.

What actual economic problem was the housing bubble causing?

Why, none.

So it couldn't be a problem. At least not short term. And, to be sure, on 7/15/2008 it still wasn't a problem, so we were right to think it wasn't anything to be worried about. At all.

Except that the adults should have been spotted the problem years before and reined it in. (And there were suggestions to do precisely that. They were shouted down because, well, there wasn't an actual short-term problem that the short-term thinking politicians seeking to be elected in the short-term had to worry about.)

That's the problem with short-term thinking. You're too busy looking up and proclaiming that there isn't any problem about to hit on you the head that you get clothes-lined. The future is nearer than we think.

1. When there is a problem, it may take the form of "no new credit for you, Uncle Sam." At precisely the time we need it. Greece redux.

2. Interest rates won't stay low forever, and low interest rates only help you when you're issuing new debt. When you're rolling over old, formerly new debt you get the new interest rates. And since we're unlikely to pay down the old debt while racking up the projected $600 billion/year deficits that means we'll be rolling over today's debt at high interest rates. We already paid $220 billion or so in interest in 2012. About as much as we paid on Medicaid. That's going to go up. The better the recovery, the faster we don't have interest rates near 0%.

3. One possible outcome of the continued expansion of the money supply that credit provides is price increases. That certain reduces the worth of the public debt. It also reduces the worth of pensions, savings, and a lot of other things. Good to be a borrower when the CPI is going ballistic. Bad to be owed money.

[HiPointDem]

23. good question.

[FarCenter]

25. If the debt is too large, when interest rates go up, all the taxes will go to paying interest

There will be no revenues left for other programs like SS, Medicare, Medicaid, defense, etc.

[unblock]

29. that's quite theoretical when interest rates are astonishingly low.

the reality is that the markets are telling us that the current levels of debt are simply not remotely a problem.

in fact, the markets are telling the government it should borrow more.

[Egalitarian Thug]

32. Less than 2.5%, yeah. Any more Reich-wing talking points you want to put out there? n/t

[cthulu2016]

33. Our debt is mostly fixed rate, like a fixed rate mortgage

We have borrowed a couple of trillion at 2-3% fixed rate for 10-30 years.

If interest rates go up it will be because inflation is up which means the total $ of government revenues go up, and meanwhile we are still paying off notes at tiny interest, and using inflated dollars to do it.

Bonus.

[FarCenter]

41. Why is US Debt So . . . Immature?

The United States is borrowing about $1 trillion a year, give or take, from global markets. We are told not to worry about this because interest rates are so low that people are practically paying us to take their money. This is true, but it is radically incomplete. That borrowing is relatively short term borrowing, with most of the debt falling due within five years. And unlike consumer debt, US federal debt is not self-amortizing; all of our government borrowing is in the government equivalent of an interest-only mortgage. When the note matures, we have a big balloon payment to make, at which point we can either start paying down the debt--i.e., running a surplus--or we can roll over the debt, borrowing more money to pay off the old bondholders.

http://www.thedailybeast.com/articles/2012/11/20/why-is-us-debt-so-immature.html

Chart of the Day: Lengthening the Average Maturity of Outstanding Treasury Securities

By: Colin Kim 6/11/2012

Page Content
​Since the depths of the financial crisis in late 2008, Treasury has lengthened the average maturity of outstanding marketable Treasury securities by nearly 32 percent.

In fact, the average maturity of outstanding marketable Treasury securities (63.9 months in May 2012) is now at its highest level in a decade. It is also above the 30-year historical average of 58.1 months between 1980 and 2010.

http://www.treasury.gov/connect/blog/Pages/Chart-of-the-Day-Lengthening-the-Average-Maturity-of-Outstanding-Treasury-Securities-.aspx

Although the longer maturity Treasury bonds cause the average maturity to be about 5 and a half years, there is a huge amount of Treasury Notes and Bills that have to be rolled over in 3 months to 5 years.

[Egalitarian Thug]

31. Not the deficit spending per se, but where we are flushing the majority of this money is

counter productive. Absurd to the point of stupidity spending on our military is probably the biggest, followed by the government's phobia of putting money where it will help the people that need it. Corporate welfare, which comprises the majority of the non-personnel DoD budget is right up there as well.

[davidn3600]

35. Inflation

When spending is moving father than actual growth, it leads to inflation.

We are spending money but we are not growing. A simple problem is we just don't make anything in American anymore. We are not seeing any real sustainable job growth or productivity. If the government keeps trying to baid-aid that problem by pumping more and more money into the system, we will see inflationary pressures. And this is going to hurt the poor more than anyone.

Im sure you see it in your own budget. Things today cost more than they ever used to. Energy costs are going up. Food prices in the grocery store is going up. Meanwhile our wages are not going up. The only jobs being created are low-skilled and service workers. We are not seeing any of the middle income jobs coming back that were lost during the recession. And that's going to hurt all of us in the short and long term.

[ThomThom]

36. interest on interest on interest

eventually your whole budget is debt
we still haven't paid off the money Reagan borrowed

[joshcryer]

38. We pay almost half a trillion a year on interest.

Interest. About $1500 a year from every person who lives here.

[cthulu2016]

40. And what bad effect is that having on the current economy?