National debt, get out your checkbook

[Gisella]

Practically speaking, they can't foreclose.

However, if there isn't money to pay them back, one of two things will happen: Either the bonds will have to be refinanced at a higher rate of interest (to reflect the increased risk due to the U.S. not having enough cash to cover its debts) or China will sell the bonds at a reduced face value. Which will crush the value of any other new or existing U.S. bonds, and drive the dollar downward sharply. Either way, it's bad news for the U.S. of A.

Realistically, if the Chinese expect the U.S. dollar to drop 15% over the next 3 years, and they hold (for example) a 3-year bond with a 4% coupon, they're LOSING money on the transaction. So they'll sell the bond for (approximately) 3% less than its face value. Sell enough of these, and the U.S. dollar will drop about 3%. Which revises the dollar's 15% drop over 3 years to an 18% drop. Now you have to re-evaluate the 3-yr, 5% bonds. And so on...

That's a simplified example, but hopefully y'all get the idea.

In your oppinion..what can the US do to be out of this mess???

 

[Gisella]

Large private banks were required to join the federal reserve system by law and the Federal Reserve itself is managed by a presidentially appointed (and largely independent) Board of Governors.

Than the Federal Reserve is not the nations 'safe'...I thought it was...

Sorry about my ignorance...thanks for your patience about many posts of mine...I'm learning with you guys...

:smile:

 

[rob_just_rob]

In your oppinion..what can the US do to be out of this mess???

I don't know.

Balancing the budget would be a good start. Do that, and the debt-as-percentage-of-GNP will shrink, assuming the GNP growth rate is positive.

Encourage people to save and discouraging borrowing. Raising interest rates would do that. Of course, raising interest rates also has the effect of increasing the cost of servicing the debt, and slows down the economy when the economy is already looking a little frayed.

Raising taxes would take money out of the system, easing inflationary pressures. And that would also make it easier to balance the budget.

Cutting back on the military budget would help a lot, considering military equipment adds very little to the economy or to the nation's wealth (compared with building schools, for example).

The problem is that a lot of the steps I (and others) propose help the situation in one way, but hurt it in another way (e.g. raising interest rates).

 

[SpeedoGuy]

Than the Federal Reserve is not the nations 'safe'...I thought it was...

Sorry about my ignorance...thanks for your patience about many posts of mine...I'm learning with you guys...

:smile:

These are all opportunities to inquire and learn. We all gain much by reading the contributions of the thoughtful and knowledgeable posters here.

Cheers.

 

[joyboytoy79]

Than the Federal Reserve is not the nations 'safe'...I thought it was...

Sorry about my ignorance...thanks for your patience about many posts of mine...I'm learning with you guys...

:smile:

Gisella,

Your ignorance is not willfull. In fact, you seek to remedy it. I see no need for you to apologize, as your inquisitive nature is quite refreshing.

Indeed, i think the board is better for the questions you post here. Thank you so much for being you!

 

[madame_zora]

Gisella,

Your ignorance is not willfull. In fact, you seek to remedy it. I see no need for you to apologize, as your inquisitive nature is quite refreshing.

Indeed, i think the board is better for the questions you post here. Thank you so much for being you!

Additionally, I am always impressed by your willingness to ask tough questions in a language that is not native to you. Well done girl, and I learned a few things through this myself.:biggrin1:

 

[AlteredEgo]

(One big reason the U.S. is pursuing a policy of confrontation with Iran is that Iran is considering selling oil in Euros. If enough oil-producing countries start selling oil in Euros, oil-purchasing countries won't need U.S. dollars anymore and the value of the U.S. dollar will drop like a brick. That's another discussion, though).

I did not iknow this! i also did not know that oil could only be bought in USD.

 

[AlteredEgo]

Than the Federal Reserve is not the nations 'safe'...I thought it was...

Sorry about my ignorance...thanks for your patience about many posts of mine...I'm learning with you guys...

:smile:

A lot of us learn things we did not even know we did not know because of the questions you ask.

 

[SpeedoGuy]

Bumping this thread back up because of this:

GAO Chief Warns Economic Disaster Looms

It goes along with with the oft published observation that Americans are accumulating far too much debt and not saving enough.

It also goes right along with my personal observations. I see my neighbors' lifestyles and I just have to wonder. They all have bigger homes than me, bigger (and newer) cars, boats, RVs, lots of kids and all the trappings of the affluent suburban life in 2006 America. Yet, at the same time, I know they don't make as much money as I do.

What gives? How can that be possible? Simple: Credit. And the fact that they're not saving for retirement. And those unhappy facts are going to be a problem for us all someday.

 

[rob_just_rob]

Bumping this thread back up because of this:

GAO Chief Warns Economic Disaster Looms

It goes along with with the oft published observation that Americans are accumulating far too much debt and not saving enough.

It also goes right along with my personal observations. I see my neighbors' lifestyles and I just have to wonder. They all have bigger homes than me, bigger (and newer) cars, boats, RVs, lots of kids and all the trappings of the affluent suburban life in 2006 America. Yet, at the same time, I know they don't make as much money as I do.

What gives? How can that be possible? Simple: Credit. And the fact that they're not saving for retirement. And those unhappy facts are going to be a problem for us all someday.

Good article - I agree with most of what the author says.

 

[Freddie53]

I want to thank all who have posted here, especially the posts aobut the Chinese and Japanese buying our US bonds or financing our unbalanced budget.

My professor some 30 years ago explained that an unbalanced budget would not hurt our nation as long as:

1. The rate of debt increase was not higher than the rate of increase of the gross national product.
2. That the debt being accumulated was being owed to ourselves that is, our banks, our corporations, and our citizens, but when our own finacial institutions and people don't have the money to finance the budget deficit, we are in the long haul in trouble.

We are there. It is a matter of time before a major crises hits. I disagree though with how the Chinese will deal with our bonds. They will raise the price of their goods sold to us but not enough for us to find markets. They will inlluence our foreign policy and America will do China's bidding rahter than risk a major depression.

Taiwan for instance could be in trouble. China says let us have Taiwan or we will cash all the bonds. WE love Taiwan, but we love our bloated economy even more. Or,

Leave North Korea alone or we will........ Of couse these threats won't see the light of day. They will be whispered to US Presidents close to election day and.......

We can figure out the rest of it.

 

[Gisella]

Bumping this thread back up because of this:

GAO Chief Warns Economic Disaster Looms

It goes along with with the oft published observation that Americans are accumulating far too much debt and not saving enough.


What gives? How can that be possible? Simple: Credit. And the fact that they're not saving for retirement. And those unhappy facts are going to be a problem for us all someday.

"Realistically what we hope to accomplish through the fiscal wake-up tour is ensure that any serious candidate for the presidency in 2008 will be forced to deal with the issue," he says. "The best we're going to get in the next couple of years is to slow the bleeding."

I do think that it would be very important to get the serious situation to the ones who are going to be responsable to pay the debt...the younger generation!!! Kids learn so fast and they will understand the importance of stop spending if they just know what the future holds...

If we put people from generation that went to great recession of the 20's or 30's (?) reminding everyone the realities of a great crises again and again...and do bootcamp as they sometimes do ficctional exercices prepering for real disasters (what the name of that?) just getting use with no excesses of buying superfulous, marathon savings in the pig bank and other 'fun' stuff to get attention...people will start being more serious and regulate their family, personal spending...

I remember at 4 or 5 years old listen so much my Dad telling my mother to balance check books to never give checks that bounce bcause lack of funds, that I embaress my dad in a restaurant as he was giving the check to the waiter I said: "Beware..it may not have funds!"..my dad than try to explain the situation and the check was good... :redface:

Kids are very inteligent we must tell them and teach the truth...poor kids not even got born yet and they have great debt...its not fair!!!

Patriotist is not just loving the flag and etc, the USA symbols ...its not!!!

I'm sad, frustrated and I protest!

 

[DC_DEEP]

Patriotist is not just loving the flag and etc, the USA symbols ...its not!!!

I'm sad, frustrated and I protest!

Ah, Gisella darling, you understand!

Our government needs to handle their finances like the average citizen must. Our "leaders" get to set their own credit limit, and have decided that there is none. They behave like a spoiled teen whose parents gave him/her a credit card with no restrictions, and whose parents pay the monthly bill. Except in this case, the hard-working citizens are the ones who are stuck with the debt. The politicians don't worry about their out-of-control spending, because they don't end up being the ones who end up putting up the cash. The deficit spending must stop. The Congress, who are responsible for all the government spending, must be told that the current mindset cannot continue.

 

[rob_just_rob]

Patriotist is not just loving the flag and etc, the USA symbols ...its not!!!

I almost missed the import of this statement. It's all that needs to be said, really.

Lately, it seems that the people who profess to love their country the most are the ones doing the most harm to it.

 

[DC_DEEP]

I almost missed the import of this statement. It's all that needs to be said, really.

Lately, it seems that the people who profess to love their country the most are the ones doing the most harm to it.

Well said, rob_just_rob. You and Gisella have really hit on one of my hot-buttons.

Yes, I am a patriot. No, I do not support our current government or administration. Yes, I am vocal about my opposition.

The blind sheep who staunchly support Bush and the staunch minority-party supporters both usually have nasty things to say to and about me, but that's because I usually have nasty things to say about party politics. Funny thing is, those who are usually the fastest to call me unpatriotic and coward are the ones whose most patriotic acts in their entire lives have been calling me names. They often have done no military service. They don't bother to do their homework on an issue before taking a stand. They accuse me of "whining, but offering no solutions" when I offer solutions all the time. They are just too lazy, and too busy calling me names, to actually read what I have written.

 

[rob_just_rob]

I was trying to think of a way to encourage Americans to save (other than scaring them with assessments of the likelihood of their benefits being cut later on).

Right now, the problem with saving is threefold: Interest rates are relatively low (which also encourages borrowing), inflation/collapse of the USD is a very real possibility in the near future, and the economy has been largely dependent on consumer spending for some time now.

Nobody wants to save a dollar now when it may be worth 90 cents a year later. If you buy things with a shrinking dollar, you'll still have 100% of what you buy (subject to depreciation and use), even if the dollar subsequently declines to 90% of its current value. Saving has to provide a return exceeding the rate of inflation for people to save. It also has to provide some intangible something that makes saving more attractive than spending immediately.

Anyone have any ideas? Eliminating taxation on savings might help, but that diminishes tax revenues that could be used to pay down the debt. And of course, that's effectively a regressive tax. It would have to be capped at a fairly low amount, and perhaps a low income level as well.

 

[Gisella]

I was trying to think of a way to encourage Americans to save (other than scaring them with assessments of the likelihood of their benefits being cut later on).

Right now, the problem with saving is threefold: Interest rates are relatively low (which also encourages borrowing), inflation/collapse of the USD is a very real possibility in the near future, and the economy has been largely dependent on consumer spending for some time now.

Nobody wants to save a dollar now when it may be worth 90 cents a year later. If you buy things with a shrinking dollar, you'll still have 100% of what you buy (subject to depreciation and use), even if the dollar subsequently declines to 90% of its current value. Saving has to provide a return exceeding the rate of inflation for people to save. It also has to provide some intangible something that makes saving more attractive than spending immediately.

Anyone have any ideas? Eliminating taxation on savings might help, but that diminishes tax revenues that could be used to pay down the debt. And of course, that's effectively a regressive tax. It would have to be capped at a fairly low amount, and perhaps a low income level as well.

Rob...wait a second bcause I want to understand the many approachs to try to resolve the situation...as I trying to understand how a nation like the US got in such a mess...as comming from a country like Brasil and our crises and etc and many tryings to deal with inflation and etc things that I dont know..but I understood that many economists were always being heard in crises situations for long time...than not much an accountant... because I'm reading about the great depression (not recession..dont know the difference..)...my question is what kind of 'economist' school of thought is being applyed in the US ??? Or maybe my question have nothing to do with the situation? Because it seems what is being used is not working...how many approaches there are to resolve the situation? And because of capitalism what approaches do not belong together with it?

If I understood right the 'classic economical liberal' approaches was replaced with Keynesian policies..and than by 70's monetarism and than Keynesian challenged and it became neoliberalism...??? And if I un derstood right this aproach says everybody in the world must have disciplined balanced budget but not the USA ??? How come is that possible??? If I'm not making big confusion about things...of course...:biggrin1:

'The most restrictive definition of neoliberal is "laissez-faire, capital market driven, privatization and trade arrangements." Under this specific form, neoliberalism is a business-conservative policy aimed at enforcing stringent budget discipline on developed and developing nations by requiring, for all but the US , balanced budgets and trade flows. This is based on a specific interpretation of the Mundell-Fleming model and is most associated with the Washington Consensus. In these terms the prominent neoliberals are people such as Steffen Gustavsen, Ronald Reagan, Margaret Thatcher, Robert Barro, and Alan Greenspan. [2].'

Hope people understand my question and what I want to try to understand...because in the end of the day even when workers do their responsable duty and etc...the 'policies/laws,rules/regulations' in high places' may mess up everything or not change the direction of the boat...

PS; Now I understand that the USA 'safe' is in the USA Treasury department..I forgot about it...:wink:

 

[Gisella]

Ah..and PS: I have a need to understand things going back to Great Depression..because of the terrible situation of it and because in my mind the war in Iraque costs is soooo great and great...in my head..that it may reminds me of WWI..???? situation...and I have to understand what it did right and wrong to not do it again...no way! We are in 2006 going up and still dont know how to do economics that makes sense..in a great nation like USA ??? Do not make sense to me..

Thanks...for the patience..ok some of you like my inquisitive ways..but well, I can be a pain in the neck still...take long for me to understand because I dont know basic things.. Bear with me..

Kisses!

 

[rob_just_rob]

I'm not really an economics guy myself, so I won't comment on Keynes, Mundell-Fleming and the other economists' theories.

As far as I can tell, the only really obvious ways to get out of debt are to cut services or raise taxes, or both. If you hike taxes, you take money out of the economy - the taxpayers don't have that money to spend or invest, and the government isn't building anything or employing anyone with the money - they're just paying off debt. So the risk with hiking taxes is that you will slow down the economy or even trigger a recession, which will cut your tax base (a recession will cut taxpayer income).

Cutting services is risky too - the government employs a lot of people. If you cut services, people will be out of work. People out of work can't pay taxes and compete for private-sector jobs, driving down income and boosting unemployment. And people out of work aren't spending or investing (as much as they used to) either. Some government spending cuts impact the economy less than others, of course - cutting foreign aid, for example, would have a smaller effect on the economy than cutting a domestic infrastructure program that 1) employs people and 2) produces a finished product that will help the country, and economy, function more efficiently (hopefully). Military spending is generally a pretty inefficient way to stimulate the economy, because the finished product doesn't produce wealth or make the economy run more efficiently.

(and of course, cutting spending hurts people who depend on the programs being cut - social security, school lunches, and the like)

A lot of the foregoing are generalities, of course. But the only reasonable ways to eliminate a debt are raising taxes and/or cutting spending. Printing more money (inflation) and defaulting can produce some unpleasant side effects...

The trick to raising taxes/cutting spending is to raise the right taxes and cut the right spending. Some believe that if you reduce the taxes on the very wealthy, the very wealthy will take their tax savings and invest them in the economy, thereby creating jobs. There's another school of thought that if you cut the taxes of the wealthy, the wealthy can just as easily invest their tax savings offshore. I personally fall into the second school -the wealthy are more mobile than the poor and the working class, so they're less likely to spend or invest locally than the poor and/or working class are.

 

[DC_DEEP]

As far as I can tell, the only really obvious ways to get out of debt are to cut services or raise taxes, or both. If you hike taxes, you take money out of the economy - the taxpayers don't have that money to spend or invest, and the government isn't building anything or employing anyone with the money - they're just paying off debt. So the risk with hiking taxes is that you will slow down the economy or even trigger a recession, which will cut your tax base (a recession will cut taxpayer income).

If the politicians were really SERIOUS about getting our country out of debt, there are lots of things they could do that have nothing to do with raising taxes or cutting services. There's lots of fat that could be trimmed, just in Washington. Just a thought, but what about starting with a Constitutional amendment that outlaws "unrelated earmark appropriation amendments" on proposed budget legislation? Also, current "spend it or lose it" laws on budgeting for federal agencies, especially in the military, are what have resulted in those $5000 screwdrivers you hear about from time to time.

The trick to raising taxes/cutting spending is to raise the right taxes and cut the right spending. Some believe that if you reduce the taxes on the very wealthy, the very wealthy will take their tax savings and invest them in the economy, thereby creating jobs. There's another school of thought that if you cut the taxes of the wealthy, the wealthy can just as easily invest their tax savings offshore. I personally fall into the second school -the wealthy are more mobile than the poor and the working class, so they're less likely to spend or invest locally than the poor and/or working class are.

I agree. Those in the "wealthy" tax brackets are MUCH less likely to change spending and saving and investing habits due to a change in tax law, especially changes in their favor. Ronald Reagan KNEW that the "trickle-down" theory was flawed when he proposed it back in the 1980s. It sounds vaguely plausible; those in the lower income brackets grasped at that straw, and those in the upper brackets kept silent.