Four Ways Out

Posted by $ Abaco 7 years, 11 months ago to Economics
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I recently was listening to a smart economist. He said there are three ways for the United States (or any country) to get out from a massive pile of debt like ours:
1). Grow the economy.
2). Inflate our way out of it.
3). Assign losses.
4). Default

The fourth is the one I added. What are your thoughts on this? Assigning losses is called "austerity" in the news lately. Nice-sounding word. I expect inflation. I don't expect any growth in real GDP above the growth in population. Default is a last resort...a massive resignation.

I think we'll see further real restrictions, probably in the form of means tests, for Social Security. Sure, you paid into it. Here's a quarter - go call somebody who cares. We'll see inflation. So, I'm predicting mainly 2 and 3.


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  • Posted by edweaver 7 years, 11 months ago
    4 will be the result of too much 2 & 3 in my opinion. Grow the economy it the only way out and I don't see that happening.
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    • Posted by MinorLiberator 7 years, 11 months ago
      Grow the economy and hope for the best is the only moral way out. Doubt that will be the approach. I'd guess start with 2), but I doubt (not completely) even the idiots in government would let it get to the hyperinflation stage, so eventually some form of 3). And you forget 5): Not a solution, but what will be part of the process: "assigning blame"...
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  • Posted by $ CBJ 7 years, 11 months ago
    None of those four methods will get the U.S. out of its “massive pile of debt” without taking the necessary first step:

    1). Stop borrowing money!

    Without this step, growing the economy will not make the debt go away; inflation will devalue the dollar and lead to even more borrowing, in a continuing vicious circle; “assigning losses” (partial default) will increase perceived risk and make the cost of future borrowing dramatically higher; and default will make further borrowing impossible and leave pure money-printing as the only remaining option.
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    • Posted by $ blarman 7 years, 11 months ago
      I would argue that they wouldn't need to borrow it if they weren't spending it. They need to stop creating outlays for moneys they do not expect to bring in.

      I have long been in favor of eliminating the future-based budgeting we do now and go to a past-based budget. In other words, you can't spend more money - including debt service - than was actually brought in in taxes the last year. You could even go back two years to give full time for analysis, etc. That way the only way government budgets would grow is if the economy itself was growing.
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  • Posted by term2 7 years, 11 months ago
    Government debt is not much different from private debt. If you get into serious debt personally, you can make more money and pay it off, you can cut your expenses and pay it off, or you can restructure your debt either partially or completely (bankruptcy).

    The government has additional powers to essentially "steal' money from citizens to pay off the debt they created. The government can "tax" the citizens and just take the money, or they can print more paper money, pay off the debt, and leave the citizens with less wealth than they thought they had.

    The federal government "defaulted" already under president Nixon when he took us off the gold standard back in the 70's. So, the idea of having restructuring is NOT new at all. Foreign countries took a haircut on the dollars they held back then, and since then all of us who hold dollars have taken a haircut through inflation.

    It would be better actually if we just admit that our country is bankrupt, and we move on.
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    • Posted by $ TomB666 7 years, 11 months ago
      You are absolutely correct!

      While you and I know the country is bankrupt, no one in a position of power would ever admit to having caused this. Recall how Rand wrote about this in Atlas - the government is still looking for John Galt to bail it out.
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      • Posted by term2 7 years, 11 months ago
        I agree. Look at the blowback that Trump got when he talked about the US government needing to restructure its debt. Thats what I like about Trump- he just comes out with the truths that our establishment wants to hide from us.
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    • Posted by vggrafe 7 years, 10 months ago
      Good points, and I agree on your last one (unhappily). The US government debt has a very important difference from private debt. The interest rate on private debt is not affected by whether you make more money. But the interest rate on US government debt is historically and logically tied to economic growth, so if you grow the economy (make more money) you also pay higher interest, and the higher interest overwhelms the increased taxes from growth. More complete discussion at http://thecognitist.blogspot.com/2016....
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      • Posted by term2 7 years, 10 months ago
        There shouldn't BE government debt at all, I think. It just distorts the economy through the printing of money that they do when they can't finance the debt.
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  • Posted by CircuitGuy 7 years, 11 months ago
    You have an unstated premise that we will "get out from it". We should define that. I'll call it debt (not counting SS obligations)-to-GDP ratio < 20%. By that definition, I say we'll probably never get out from it.

    Does assigning losses (#3) mean raising taxes and cutting spending? If so, I predict will manage the debt in the form of responding to a series of mini-crises using #2 and #3. They will never do #4 because #2 is an easier option. The economy will keep growing (#1) independently of this. Item #1 is the only one on the list the gov't can't just decide to do because "the economy" is millions of individuals choosing to help one another in exchange for something they want.

    In my estimation Social Security will keep running as it has. By its nature it takes money from people who are working and gives it to those who are old, disabled, or dead (supporting their minor children). Because people think of it as "saving" money for the future but it's really transferring it, there are a lot of histrionics around the ups-and-downs of how much you pay into it or take out of it.

    I would like to see SS privatized, debt reduced, and less leverage in general in the economy. It won't happen, so we plod along managing a series of mini-crises.
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    • Posted by ChuckyBob 7 years, 11 months ago
      Although I agree with what you say, since SS has been rolled into the general fund it we will never be privatized since that would show the true size of the short fall.
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      • Posted by CircuitGuy 7 years, 11 months ago
        " will never be privatized"
        You're probably right. I hear about so many people not believing in the program that maybe there's a chance people will say, "just keep what I gave you, if I can not put any more in." I agree, though, it probably won't happen.
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  • Posted by DrZarkov99 7 years, 11 months ago
    The flaw in the reasoning is to place these results in a priority order, only using the others as each higher method fails. I would suggest the solution is "all of the above."

    A bigger GDP is certainly the primary desired solution, but pursuing it in isolation only pushes the end game out further. Reducing government waste and duplication should be accompanying private industry revenue generation.

    Inflation should be a lower priority than spending reductions, and should be kept at a level modest enough to inspire lending and bond purchases. High inflation should be prevented.

    A renegotiation of government bond commitments, as Trump has suggested, is a lesser form of "default." That should be considered with caution, but is worth careful assessment so it isn't an act of desperation.
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    • Posted by $ MichaelAarethun 7 years, 11 months ago
      Just for the fun of it WHAT is the NDP?
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      • Posted by DrZarkov99 7 years, 11 months ago
        According to the World Bank, http://data.worldbank.org/indicator/N... the U.S. NDP is just shy of $15T, compared to a GDP of $17.5T. The formula is a bit complicated, involving GDP + investment in assets + export income - import costs - depreciation of assets. How investment and depreciation are measured is a bit subjective when it comes to a nation-state, but the export/import picture represents nearly $400M of the negative $2.5T between GDP and NDP. Fun enough for you?
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        • Posted by $ MichaelAarethun 7 years, 11 months ago
          Yes you are the first that's come up with a good source. My point was the old simple formula Gross minus expenses equals profit or equals money left to use for other things. For a country the size of ours 2.5 trillion after expenses which includes one trillion interest on the national debt and adjusted for the loss of buying power or value of the dollar doesn't seem like anything to celebrate. IF it was adjusted for loss of the worth of the dollar which is I believe depreciation perhaps?

          I see a lot of hoorah about GDP all the time but it doesn't explain how much a continuous debt on deficits that will not be repaid as we think of it is going to cost not generations ahead but grandpa, grandma and retirees who can't make it up save by working for WalMart. Its great we have one major corporation that is socially conscious enough to provide jobs for retirees who got screwed by the government devaluation and repudiation the last time. Why do I say that? Was it counted in the COLA adjustments? NO! it was not. So that one percent or zero percent last year really wasn't truthful was it? NO

          Still want to vote Socialist again?
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          • Posted by DrZarkov99 7 years, 11 months ago
            We sing from the same hymnal, my friend.
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            • Posted by $ MichaelAarethun 7 years, 11 months ago
              Thanks did I leave out the cost of money in order to get a loan for a house or a credit card is affected by money available. GDP-NDP = low or high rates as everyone scrambles for whats left. As your candidate that question next time around. WHAT is NDP?

              Chances are you will get the deer in the head light look and they wil change the subject. That's a sure and certain signal why NOT to vote for someone.
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  • Posted by mia767ca 7 years, 11 months ago
    i'm curious..."2,3,& 4 sound like govt oriented solutions...is "1" grow the economy, grow it by govt pumping???
    zero corporate tax rate...abolish govt regulation...shutdown the Fed, return to the gold standard...reduce govt spending by 90%...sounds better...
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    • Posted by $ MichaelAarethun 7 years, 11 months ago
      Wouldn't take that much 30% cut in spending and in government employees civilian and military would do the trick. If you get rid of the dregs , dross,weak, lame, and lazy.
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      • Posted by mia767ca 7 years, 11 months ago
        when do we start...
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        • Posted by $ MichaelAarethun 7 years, 11 months ago
          At the polls this fall? I'm supporting None Of The Above. As a laugh some local friends and I were discussing where we were to be buried. I'm a fan of cremation if i have to pay in advance as it's cheaper. My second thought is this. Is it not up to whomever is around to pay the bill? I'm quite sure at that point I shall not worry.

          We finally decded on a small patch of desert for the traditionalists and call it Abandonment Acres. For those who fought and were abandoned by their friends and neighbors. Sort of a play on words from a fromal draft notice.
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          • Posted by mia767ca 7 years, 11 months ago
            in ohio right now with my brother and sister...my parents died in 2014/2015...natural causes and had them cremated...finally buried them today in west Virginia...21 gun salute from local VFW unit...dad was marine in WWII...I was Air Force pilot in Vietnam...
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            • Posted by mia767ca 7 years, 11 months ago
              just thru luck I found a couple that winter's here in florida and has a 7,000 acre working ranch/hunter's paradise in Colorado just north of Aspen...it will serve as a nice retreat when the collapse comes...he has an original 1873 Winchester in his gun safe...property goes from 8,000 ft elevation to 11,000...three catch and release fly fishing ponds at different elevations and wild game hunt in the fall...guest house that sleeps 22...200 head of cattle, few sheep, and some pigs and chickens...helped him with some stock he owns (turned out to be $6 mil worth) and had been sitting idle since 2007...hell of a nice couple... his youngest son runs the ranch year round...when the lights are out at night, every star is bright...there are no lights within sight....no neighbors...
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  • Posted by Herb7734 7 years, 11 months ago
    There is a way out, but I doubt if it will be used. It is really quite simple.
    1. Austerity.
    2. Reduce taxes.
    That's it. Austerity means cutting spending except for essentials, like the MILITARY.
    Reduce taxes especially on business, and yes, the rich. Make it profitable to do business in the USA and the great engine created in the 19th and early 20th century will do the rest.
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    • Posted by Enyway 7 years, 11 months ago
      It is beyond me why anyone cannot see that THEY are paying the taxes which are levied against the manufacturers. Anyone who thinks they are not paying the taxes levied against business is an idiot.
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      • Posted by $ MichaelAarethun 7 years, 11 months ago
        COG or Cost of Government column in book keeping is common around the world except the USA. It should go after Legitimate Overhead, sub total , and before Profit or Loss.
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    • Posted by $ MichaelAarethun 7 years, 11 months ago
      Why pick on the military? Because they can't fight back? Why not the real money wasting trash heap of the country such as the welfare system? Why is it always the soldiers fault? How about the ass hole civilians that sent them to war? Why not cut that expenditure?
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      • Posted by Herb7734 7 years, 11 months ago
        I don't know what you can do about the assholes who think that constant, lingering war solves anything. It's the military that should be our #1 concern when it comes to expenditure. They should be the biggest and the best in the world so that even crazies like North Korea would think twice or thrice before even considering an attack. The best way to avoid a war is to demolish your opponent within days, with a well thought-out plan as to what to do with them afterwards, which well may be taking them over until they are deemed safe to us, but keeping a force there to make sure.
        No war if there's a quick victory, and it is possible with today's armament and the will to go all the way.
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        • Posted by $ MichaelAarethun 7 years, 11 months ago
          If you kick ass properly there are no names left to take.

          If the world believes you will leave nothing but stacked skulls ....and have the strength, skill, 'will' to do so it will stop wars before they start.

          If you have leaders with 'will' Otherwise you get fifteen years of war and not much to show for it. Or however long it's been.

          the worst part is the war on terrorism was lost the second we had to change our way of life and our values and I see no move to give them back. How did the government get the power? Elected by people who haven't the will be be free and independent citizens and are deserving of serfdom. Serf's breed draftees by the way. Wait until you hear the screaming, whining and crying when that happens. 'I didn't vote for this one to start drafting us,' the plaintive cry of despair.

          I'm the one sideliens laughing my ass off.
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      • Posted by Enyway 7 years, 11 months ago
        As far as welfare goes, I am not an advocate. However, the welfare system, like so many other programs, has been altered to keep people on the program. Gets more votes when the level of people on welfare is higher. Originally, it was designed to help in times of trouble. Now, if you earn a nickle, the government wants half of it. My sister had to go on welfare for a couple of years while she was going to college. Eventually, she worked for Budweiser in engineering. When she retired, her pay was $30 an hour. Not only did the government get back their welfare payments, they got it back 100 fold. Helping someone through rough times is not a problem and, certainly, not the role of the government. The welfare system, as it is, should be eliminated. It was more the help of her husband that got her through. She has now been diagnosed with lung cancer. She is fighting it AND SHE WILL WIN.
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  • Posted by SBilko 7 years, 11 months ago
    Inflating out of it is tantamount to economic destruction. Growing out of it is impossible, because resources are finite. Assigning losses will not work either, because it will slow the economy such that we can't pay off the debt we've already accrued. Default is the only option, and it will also result in economic destruction. We're screwed!
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  • Posted by vggrafe 7 years, 10 months ago
    I don't think that the US can grow its way out of the current debt. The US is such a large factor in the global economy that our interest rate is connected to GDP growth, such that faster economic growth means higher interest rate paid. Our total debt is so large that increased taxes from economic growth are overwhelmed by increased interest payments. More detail at http://thecognitist.blogspot.com/2016.... Interested in other perspectives...
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  • Posted by mspalding 7 years, 11 months ago
    Grow the economy would work if grow the government would just slow down a bit. Default is the best option. Maybe then no one will lend the government money and it will be a much smaller government.
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    • Posted by $ MichaelAarethun 7 years, 11 months ago
      Theiy don't get the most return benefit by defaulting on loans for such things as 'T Bills. They get it from debt repudiation where the old folks and retirees take it in the shortz
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  • Posted by $ sjatkins 7 years, 11 months ago
    I will not take one bit of austerity because I did not create this debt in the first place and I am not receiving my living from the government whose coffers may soon be dry.
    (1) is my first choice and we cannot do it bound so tightly by chains of government.
    (2) kills us as it kills wealth by destroying its measure.
    (3) We need to accept the real losses such huge debt signifies and inevitably leads to. It has been made so huge and works than it would have been by denying reality too long. A large part of it was from not allowing the 2008 mess to unravel.

    (4) At the rate things are going this is nearly inevitable outcome.
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  • Posted by $ jdg 7 years, 11 months ago
    Market interest rates are well above zero for the first time since 0 took office. The interest on the federal debt alone is now going to be over $1T per year. Default in some form is now inevitable (though they'll print the money and pretend they're in compliance).

    Expect another ban on the ownership of gold within the next four years. Probably to include silver this time too.
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    • Posted by $ MichaelAarethun 7 years, 11 months ago
      Ho hum nothing new there. It's time to make the payoffs on Great Recession I or as we call it in oldspeak. Great Bankruptcy I. Thee goes anothere 30% of your retirement buying power. Now go vote for them again. Fools!
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