WP: (Wonkbook): On debt, the conventional wisdom vs. the markets

[Tulane Skins Fan]

In Washington, 2011 was all about dangers posed by America’s deficits. Republicans said deficit reduction was priority number one. Democrats mostly went along. But in the markets, the story was precisely the opposite. As Daniel Kruger reports in Bloomberg, demand for American debt was stronger in 2011 than in any year since 1995. It's cheaper for the U.S. to finance its debt today than it was when we last had surpluses. For all that Washington is sure we're borrowing too much, the signal from the markets is that we're borrowing too little, that they wish we would borrow more.

This is not, to be fair, a bet on America's economic strength. It's a judgment about the rest of the world's economic weakness. U.S. Treasuries are what savvy investors buy when they're in a canned-goods-and-ammunition sort of mood and they think gold is overvalued. But though that makes the demand we're seeing more depressing, it doesn't make it any less real.

http://www.washingtonpost.com/blogs/ezra-klein/post/wonkbook-on-debt-the-conventional-wisdom-vs-the-markets/2011/12/27/gIQAxwmJKP_blog.html

I'm still not an economist, but this article makes a lot of sense to me. Its a big reason I've been against a balanced budget amendment - at least in the form its been proposed so far. Its also a good explanation of how our government's debt is not what is killing the economy. In fact, "savvy investors" seem to think our goverment is a pretty safe bet still.

[Madison Redskin]

The national debt isn't "killing our economy" right now, but the storm clouds are gathering. If we intend to keep servicing our debt and would like avoid future downgrades, we better start finding ways to cut spending and increasing revenue. The Tea Partiers might be kooky, but their basic message (i.e., cut spending) is right IMO.

[Fergasun]

We're not a savvy enough country to cut work on our debt. Politically, it's obvious... politicians have given us words, with very little action... and I don't see it as something voters are pissed about. Are we going to be seeing huge Tea Party rallies again? I feel bad calling the Tea Party frauds, but I haven't seen much energy out of "grassroots" except for 2009-2010. Once the GOP took the House, and a GOP member appears poised to dump Obama, it seems like they have been pretty quiet.

[Tulane Skins Fan]

The national debt isn't "killing our economy" right now, but the storm clouds are gathering. If we intend to keep servicing our debt and would like avoid future downgrades, we better start finding ways to cut spending and increasing revenue. The Tea Partiers might be kooky, but their basic message (i.e., cut spending) is right IMO.

Probably true. But we have time, and we need to use tha time wisely. It seems logical to me that reducing our ability to run a deficit is the wrong way to get the economy going. We can't run deficits forever, but we can and should do it at this point.

The big problem with all this is that from 2000-2008 we should have been running surpluses to cover our asses. Whoops.

[Prosperity]

A recession/depression is the worst time to start paying off your debts. It's like losing your job and then thinking, ****, I better use up my savings to pay off my credit card bills ASAP. On the other hand, at some point you have to do it, or you can't borrow money anymore. If we had the integrity to make a plan to pay off our debt when we are prospering again then it would obviously be better to wait to pay off our debt then. We don't but the plus side of the economic down turn is that people are ignorant enough to believe that economy is suffering because of the national debt so that misdirected anger can channeled for a useful purpose. But without that anger we may not have the political will to get out of our quagmire before we really do reach a point of no return. So if we are to return to prosperity before we take care of our debt then we'll probably forget all about the debt and kick then can further down the line.

[Madison Redskin]

A recession/depression is the worst time to start paying off your debts. It's like losing your job and then thinking, ****, I better use up my savings to pay off my credit card bills ASAP. On the other hand, at some point you have to do it, or you can't borrow money anymore. If we had the integrity to make a plan to pay off our debt when we are prospering again then it would obviously be better to wait to pay off our debt then. We don't but the plus side of the economic down turn is that people are ignorant enough to believe that economy is suffering because of the national debt so that misdirected anger can channeled for a useful purpose. But without that anger we may not have the political will to get out of our quagmire before we really do reach a point of no return. So if we are to return to prosperity before we take care of our debt then we'll probably forget all about the debt and kick then can further down the line.

I don't think anyone, at least on this board, is suggesting that the federal government should accelerate its debt service payments. People are suggesting that it reduce spending, which causes the federal government to issue new debt. Now probably isn't a good time for massive spending cuts, particularly on the scale proposed by Ron Paul, but it's probably a good time to start reforming entitlement spending (e.g., means testing SS, increasing the retirement age, etc.).

[Prosperity]

Why would you be saving WITH credit card debt? Seems counter intuitive.

It is. But people are dumb. If you want to imagine a less dumb person, switch it w/ liquidating assets.

[GibbsFactor]

A recession/depression is the worst time to start paying off your debts. It's like losing your job and then thinking, ****, I better use up my savings to pay off my credit card bills ASAP. On the other hand, at some point you have to do it, or you can't borrow money anymore. If we had the integrity to make a plan to pay off our debt when we are prospering again then it would obviously be better to wait to pay off our debt then. We don't but the plus side of the economic down turn is that people are ignorant enough to believe that economy is suffering because of the national debt so that misdirected anger can channeled for a useful purpose. But without that anger we may not have the political will to get out of our quagmire before we really do reach a point of no return. So if we are to return to prosperity before we take care of our debt then we'll probably forget all about the debt and kick then can further down the line.

Why would you be saving WITH credit card debt? Seems counter intuitive.

[Prosperity]

Why would you be saving WITH credit card debt? Seems counter intuitive.

It is. But people are dumb. If you want to imagine a less dumb person, switch it w/ liquidating assets.

ETA posts on this board are getting really weird

[Madison Redskin]

It is. But people are dumb. If you want to imagine a less dumb person, switch it w/ liquidating assets.

Dude, are you another ES Jedi? How do people keeping responding to posts that haven't been posted?

[Hubbs]

I'll try to take a "nutshell" approach to this thread.

1) People make comparisons between us and Japan for a reason. The big-picture similarities are there. Some say that we entered a "Lost Decade" in 2007. Others say we actually entered a "Lost Decade" in 2000. There's statistical evidence for both. But either way, we're certainly on our way to building up a national debt level on par with Japan's. And the surreal thing about Japan is that it's the third-largest economy on Earth, and it's all bet on a cold fusion-level event as a means of survival. All of it. Its entire financial system, and its entire pension system, is dependent upon the Japanese government paying what it owes in currency that's worth approximately what current interest rates expect it to be worth. Such payment is impossible for mathematical and demographical reasons without a fundamental economic revelation like the development cold fusion. If that doesn't happen, it's only a matter of time before Japan is forced to choose between severe inflation or a deflationary crush as powerful—if not more powerful—than what was experienced in many countries during the Great Depression. Severe inflation would consume all tax receipts and force the Japanese government to undergo a fundamental reset of its role in its own economy. (Indeed, if you raised average interest rates on the Japanese government's debt by just 2%, interest payments would eclipse tax income.) Japan is no longer a matter of "if." It's a matter of "when." But there are a variety of dynamics which are acting in Japan's favor (in terms of postponing the "when") that simply don't exist when it comes to the good ol' U.S. of A., not the least of which include a strong trade surplus and virtually all government debt being held internally.

2) Tea Partiers (and others) like to say that we're in a "debt crisis" right now. I disagree, for technical reasons that have to do with the OP. I don't define a "debt crisis" as the running up of debt that won't be repaid in expected value. I define a "debt crisis" as the moment when the market realizes that your debt won't be repaid in expected value. There is no market more immune to this event than the United States Treasury debt market. That's why those who have predicted, and continue to predict, the fast and obvious collapse of the American debt market are wrong. The American debt market won't be one of the first to fall apart. If it does, it will be the last. It's the ultimate "safe haven." If it dies, it will do so as the "healthiest sick person in the room," an investment that the rest of the world rushes into before realizing that even this, too, will fail. If it crashes, it will crash to the sound of a choir of voices assuring all of us that there is no safer market than the market for American debt.

[Prosperity]

What are the similarities and differences between our demographics and Japan's ?