This subject has come up on another thread where it is . It seems like it should have a dedicated thread.
I think most of us learned early on that too much debt leads to bankruptcy, or a related form of ruination (with a notable exception of Donald Trump). But personal debt and national debt don't appear to have much in common. The U.S. has a big, and growing, debt that is definitely not on track to ever be paid off. My common sense has long expected that such a scenario unavoidably results in inflation - in fact, we can easily verify steady and exorbitant inflation for a century or more. What can you buy with a penny anymore (why do they even exist?).
When I got my first car at 16, gas cost 27-1/2 cents per gallon (and that wasn't cheap to me). It's now more than ten times that amount, an increase of 1000%, or about 20% per year. (Is that math right?). 20% inflation (based on the beginning price) per year, is that hyperinflation? Is anyone admitting that we have had a 20% annual inflation rate for the past 50 years?
How does this House of Illusion keep functioning?
Maybe the mass delusion that the Trumpers have so diligently brought to our consciousness is just the tip of the iceberg...
I'm not a financial guru. But I think that inflation actually helps the debt or stabilizes it. Who it hurts are those who hold the bonds and whatever on the debt. If I have a debt of 100 dollars, inflation hits at whatever percentage and I wait long enough, the dollar I have today worth half of what it was when I incurred that 100 dollar debt, when I pay off my 100 dollar debt off, I'm doing so with money that worth 50 cents on the dollar, half of what it was worth when I first borrowed the 100 dollars.
Does that make sense?
Then there is the question of the interest rate paid by the government on the debt. Extremely low at present, but could rise at any time. In 2020 interest payment on the national debt was 345 billion. In other words 10.1% of the total revenue received by the federal government in FY 2020.
So 10% of all revenue received went to paying interest on the debt which means that 10% of all money taken in by the government doesn't go to help anyone other than those who hold the debt.
It seems to me, there is a point of no return here. Or a point where the dollar becomes basically useless.
By the way, I remember when I got my first car paying 19 cents a gallon and when gas wars occurred, gas was as low as 11 or 12 cents a gallon. I'd say it's all relevant. I was making 95 cents an hour working in an old pig iron foundry when not working on the farm. Then I got drafted and the army was a piece of cake compared to what I was doing prior to being drafted. I made it a career. active duty and then made it a second career as a civilian working for the army. In other words, 3 dollars for a gallon of gas today is probably the equivalent to 19 cents back in the early 1960's.
You are assuming that those who own our debt get their money back. Not really. What happens is that they get interest on their bonds, etc. (talking about bonds issued by the United States of America) The interest goes up and down based on what the current interest rate is as defined by the Federal Reserve. If one is reducing their bonds they typically sell them off. If, for instance, we don't pay the interest, and so they try and sell their bonds it means its really time to put all your money into land of one sort or another because your money value is on the decrease. The object is to change your money into something of value instead of faith.
Unfortunately, even though all the experts say we are just dandy, our direction is not a comfort. I sincerely hope they are right.
I like your explanation and agree. A house down here that would cost you 200,000 last year has risen to 250,000. Inflation or is it because Georgia is getting a huge influx of people from the New York and the Northeast? Probably both.
Compound interest formulas aside, the fact that prices increased by ten times over 50 years, and we blithely accept that as ‘normal’ inflation, is a wonder to me. Why should ever increasing prices occur in the first place?
Why should out of control inflation cause the ruination of a nation?
Is this a function of free market Capitalism, or Socialism, or just human insanity?
Why do the birds go on singing? Why do these eyes of mine cry?
Yep, you are right. The real point, however, is all about inflation regardless of how high. We will know we have a really bad problem if any of our major bond holders start selling off our bonds. THEN we run for the hills! I suspect the real problem is that ANY inflation rings all sorts of bells. We will see. I can remember when we had interest rates at 10%. Inflation was brought under control and interest rates started down. The retired, who had invested their money in bank paper, were very upset....
We fret about our bonds, and the Chinese dumping them. But most US debt instruments are actually held by US citizens and US institutions. And people the world over want to buy US bonds and notes, because those are the safest investment in the world. If the Chinese dumped all their US debt quickly, it might depress the price. The people and institutions that bought it on the way down would be very happy within a few months, having acquired a discounted high-quality investment at the expense of China!
Don't forget, for every seller, there is a buyer who thinks they are getting a deal. The best deals are had when a seller is selling for some reason besides thinking the asset has reached maximum price.
My contextual curiosity continues to be aroused by the elephant and the 800 pound gorilla that are accepted as normal house guests - costs have increased by ten times in 50 years, and the national debt increases steadily in the realm of $trillions.
Why? Does it matter? What will happen?
Is the only play to keep one’s head down and focus on competing at gaming the system even though the casino is rotting away?
I doubt that very much. Even countries that don't like the US much buy US debt, and not so they can join some mass movement to destroy the US. Nobody likes China all that much, either. If China started dumping, then other people have to be buying. You can't sell something people don't want to buy. So China has to ask a much lower price to sell their US debt. Rich people and other countries buy $100 worth of bonds for $90. Once China is out of bonds to sell, the price goes back up to $100, because US debt is backed by the ability of the US government to collect taxes. China just gave 10% of it's US debt investment to everybody who bought those bonds. China is poorer and the buyers are richer.
US bonds have an intrinsic value floor because they pay competitive interest. Even if the price drops, owners don't have to sell and can keep on collecting that interest. Damaging the US by dumping their debt is not something China can do. Some moron demagogue like Trump could do it by refusing to honor US interest obligations, but that's not up to China.
I hope you are right although I don't think its gonna happen. I watched a guy on TV this morning explain the why over the inflation concerns. Seems that a lot of prices are going up all over the world. He also said that will probably stop pretty soon but, in the meantime .....................
I'm not saying there won't be inflation. That's a pretty normal consequence of government spending a lot of money while lowering taxes. If you have a mortgage at 4% and there is 4.1% inflation for the year, you win!. I saw it coming from a mile away. That's exactly why I moved my Roth IRA all into stocks about a year ago. (Back when it looked like the end of the world and we were all going to die.)
But I am saying there will be no China sell-off, no "Deep Do-Do", no world-wide effort to drive the US government into bankruptcy, etc. Sure, people in other countries don't like what the US does sometimes, but they like China and Russia even less. Mongolia and Crimea are annexed occupied territories. Uighurs are being held in concentration camps.
My mind is still in the orbital realm on the concept of inflation (and debt, though it is so far a minor subject in this thread).
I’m getting the idea that inflation is a symptom of a flawed economic system, as there seems to be no intrinsic value in it. I have spent some time and effort searching for ‘what is the cause for inflation’, as in why does it exist, but the explanations I have found have all been narrow transactional descriptions.
None of that scratches the itch of what continually inflating prices really mean.
My thoughts are speculative and I am not sure about any of it. I used to be, then I went to predictit.org with ten dollars, I won some, lost some, and, in the end I lost it all. It was productive in that I learned that, basically, I didn't know sh*t (I was terribly upset for at least 5 minutes!)
I just don't do real good with prognostication (but do kinda admire that word). It would be interesting to rate prognostications here and see how good everybody's abilities in this regard. If somebody is right all the time we can all get rich!
I, for one, am holding my breath and would be delighted if somebody came along who could really do it!
Inflation is a means of lowering debt automatically. I had mortgages in the past, and after a decade or two, they were very easy to pay off because of inflation. Of course this requires fixed-interest loans, with inflation higher than the interest rates. I wonder of this is related to the Jubilee concept form the Middle Ages in Europe.
Inflation is complex. Consider Venezuela. They have the highest inflation, I think, in the world. They don't have too much money so much as faith has been lost in their money. It takes thousands of their money to buy one American dollar! The Socialists took over and, literally, destroyed their economy. Took them from the 6th richest country in the world to being flat out bankrupt. They no longer have much production, no food, no medicine, just a lot of people and many have abandoned the country as well.
I am not sure but, I suspect, money is no longer really backed by anything but faith and when that goes its the end until somebody gets it together and, again literally, starts all over again. Given the troubles we are currently happening, where many are losing faith in government and the current political system, we could join that club unless we are careful.
Another one of them; "In the fullness of time ......" deals.
You are almost right which your reference said. Oil price was the problem and Chaves was the solution and Chaves was a Socialist and just went too far. Then he died and they got Maduro who, I think, was simply not qualified and has proved that (he was also a Socialist). Going too far as one of the serious diseases of politics. We are getting a bit of experience in this, right now (as far as I am concerned). Once a politician takes a stand, especially a popular one with some true believers, the ride begins. Trump tried that and failed (but he is still trying).
Again - I believe that Maduro is incompetent (I think he was a bus driver or something). I also think he is a tool of the military which is completely corrupt. "Bad Management" is a serious understatement!
It's pretty lame Socialism to need Capital to operate. A proper Socialist State would give everybody what they need and take whatever it needs to keep the trains running, etc. What would money be used for? (Unless it wasn't really Socialism...)
Cash is just a very handy way of keeping track of everybody's contributions. You could do without it by keeping track with a huge database, Those are essentially what we already have with automatic deposits and credit card bills. Not keeping track of it somehow, is a recipe for disaster. Human beings are not perfect, honest, angels!
Each giving to their ability, and taking according to their needs, doomed Communism right from the start. Nobody is that altruistic, even if they think they are.
I'm reading another interesting book, "Indian Givers", by Jack Weatherford (1988). I'm only in the first chapter titled "Silver and Money Capitalism", and the context is the Conquistadors looting the Americas. What happened was the immense quantities of silver taken to Europe were mostly turned into coinage, which drastically increased the money supply. One of the effects (among many) was inflation - caused by increasing the physical money available and an associated decrease in its value.
It actually made me laugh! Humans are sooo predictable.
It did have the effect of concentrating power in the royals who controlled the mints. They didn't just hand all that silver to everybody. They bought stuff with it. The peasants didn't have any silver coins. Maybe had never even seen any! The people it hurt were non-noble rich people who had a treasure stash of silver coins.