Why the National Debt will never have to be "Repaid" - Great Reading Material!!

[akphidelt]

Ok, so here is my lecture on why the national debt will never be repaid or never have to be repaid and will be able to grow to infinity. The most important thing to understand in this discussion here is banks. Banks are the funding agent of the US Government. Particularly Primary Dealers. Another thing you will have to understand is basic accounting concepts. So for conservatives, this is probably where you should stop reading and move on to talking about when Obama's next golf game is. The rest, prepare for the best.

So to start off on this magic journey... picture yourself as the government. You control everything and don't need anything in return.

Now picture what a bank does when it makes a loan to one of your residents.

Bank
A | L
Reserves $100 | Deposits (public) $1,000
Loans $900

Now without talking about interest because that's a different discussion, let's assume banks lend at 0% in this example.
So what happens when people pay off $900 in loans

Bank
A | L
Reserves $100 | Deposits (public) $100

So the loan disappears. Pretty simple stuff.

Now what happens when the Bank lends to you (aka the Government).

Picture them lending you $900.

Bank
A | L
Reserves $100 ----------------------| Deposits (public) $100
Loans to You (aka govt debt) $900---|Deposits (you the govt) $900

Ok, now you have $900 to spend. But since you don't need anything you want to give it to the public.

Bank
A | L
Reserves $100 ----------------------| Deposits (public) $1000
Loans to You (aka govt debt) $900---|


So basically you transferred your $900 to the public (aka humans).

Now, the magic of the system comes next. What happens when you have to pay the $900 back?

You have 2 options...

1) Take it from the public (taxation)
2) Borrow $900 from the banks

Let's go with option 1. You take $900 from the public through taxation.

Bank
A | L
Reserves $100 | Deposits (public) $100

The $900 disappears and the public is $900 poorer.

Now, let's say you use option 2... step by step

Bank
A | L
Reserves $100 ------------------------| Deposits (public) $1000
Loans to You (aka govt debt) $1800---| Deposits (you, the govt) $900

You pay off your debt to the banks and the magic happens...

Bank
A | L
Reserves $100 ------------------------| Deposits (public) $1000
Loans to You (aka govt debt) $900-----|



We are back to the beginning. Just a rollover of debt that can happen to infinity. And the only way to ever pay it off is to take it back from the public leaving the public with pretty much nothing. And banks have no reason not to keep lending money that doesn't matter to them. This is why the national debt will never decrease over time and will always increase. Deficits will always get bigger over time. It's just basic mathematics.

Remember this one simple quote... "Government's surplus is private sector's deficit, government's deficit is private sector's surplus."

What a magical system!

 

[BleedingPurple]

So when the government has a surplus they have to give the money back at some point cause the economy will weaken, thus they give out a stimulus to every person, when was the last stimulus?, I think Bush gave it out. So it also is great politically when a new elected president or governor etc is able to give a stimulus since he/she is taking over when people are in more need and able to say here take this, stimulating the economy looking like a hero. Governor Ventura of Minnesota was able to capitalize as well giving a stimulus to everyone shortly after receiving governor status. People immediately fell in love, it's amazing what people will think of you when you kick it back to the people

 

[alex78]

Bleh so this is neverending story... I guess there is equilibrium now as per Games theory, but soon imo will be a breaking point where the simple math will turn wrong.

 

[akphidelt]

So when the government has a surplus they have to give the money back at some point cause the economy will weaken, thus they give out a stimulus to every person, when was the last stimulus?, I think Bush gave it out. So it also is great politically when a new elected president or governor etc is able to give a stimulus since he/she is taking over when people are in more need and able to say here take this, stimulating the economy looking like a hero. Governor Ventura of Minnesota was able to capitalize as well giving a stimulus to everyone shortly after receiving governor status. People immediately fell in love, it's amazing what people will think of you when you kick it back to the people

Well this isn't entirely how it goes down. There's no end of the year accounting for the government. It's an every day affair, they just calculate everything and show it based on increments. So there is never a time where at the end of the year the government has a real surplus or deficit sitting in their account. So if they have a surplus it means that they paid down debt. The stimulus is, like Bush gave is a completely separate transaction and is just calculated in whether the government has a surplus or deficit.

But, the rest of your comment is pretty accurate. Reagan and Bush I (for most of his Presidency) were loved because the economy was growing. No one cares how much the government is spending when the economy is doing great. But when the economy is doing bad, all blame goes on the Government and the push to spend less gets greater based on a lot of illogical fears. It's happened many times in history and will happen many times in the future.

But, since you are interested, the concept of government deficit/private sector surplus applies to the quantity theory of money. The other factor is bank lending.

The Quantity Theory of Money in it's simplest form is GDP = Money Supply * Velocity.

The govt and banks can affect the money supply. The private sector/(some govt spending) effects Velocity. So there is a lot of moving parts. So the reason I say the government should be spending trillions more is because of this...

So you can see the velocity of money has plummeted. Now let's take this in to context. Consider the money supply is $10 trillion and GDP is $15 trillion. That means velocity is 1.5. Now the next year velocity drops to 1.0. So that means, if the money supply does not change, GDP is $10 trillion. Which would be a loss of $5 trillion. That's how much less money the private sector is spending. There is this massive balance sheet recession going on that will require massive government spending in the future.

The Government needs to pour trillions of dollars in to the private sectors balance sheets. We are suffering with out. And it's all just basic mathematics. Has nothing to do with ideologies or ridiculous anti-government beliefs. That's why I really really can't stand the new age Republicans because they are making Obama do what no President has had to do in the past century, except for Eisenhower who in 1937 was forced to cut spending by 20%. It was such a disaster it didn't even last a year. It's sickening that it's so simple yet so political. Crazy.

 

[akphidelt]

This is one of my favorite tools ever. Very difficult at first if you do not understand what's going on, but it does show exactly what I'm talking about. And it will teach you a lot about Quantitative Easing, US style, if you don't know much about it.

If you select "Govt Issues Debt (Banks buy via TT&L)"... then click Run Op. You will see the Govt and Banks balance sheets increase.

Now if you select "Government Spends"... then click Run Op. You will see the Govt decrease and the Households (private sector) increase.

Very fun tool. Explains almost everything I talk about.

http://econviz.org/macroeconomic-balance-sheet-visualizer/

 

[akphidelt]

Bleh so this is neverending story... I guess there is equilibrium now as per Games theory, but soon imo will be a breaking point where the simple math will turn wrong.

Disagree. Math doesn't turn wrong. Subjective thoughts turn wrong. You realize 77 years ago people had the same argument when the debt was $42 billion. You guys are always wrong and math is always right. I'll stick with math.