Global Debt: Living In A Free-Lunch World

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Global Debt: Living In A Free-Lunch World

Global Debt: Living In A Free-Lunch World by John Mauldin, Mauldin Economics

Nobody Understands Debt
Foundational Presuppositions
Debt Is Money We Owe to Ourselves – Sort of
There Ain’t No Such Thing as a Free Lunch
Mrs. Watanabe’s Bonds
Home Gearing Up for SIC

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“Everyone is a prisoner of his own experiences. No one can eliminate prejudices – just recognize them.”

– Edward R. Murrow, US broadcast journalist & newscaster (1908 – 1965), television broadcast, December 31, 1955

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“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”

– The McKinsey Institute, “Debt and (not much) Deleveraging”

The world has been on a debt binge, increasing total global debt more in the last seven years following the financial crisis than in the remarkable global boom of the previous seven years (2000-2007)! This explosion of debt has occurred in all 22 “advanced” economies, often increasing the debt level by more than 50% of GDP. Consumer debt has increased in all but four countries: the US, the UK, Spain, and Ireland (what these four have in common: housing bubbles). Alarmingly, China’s debt has quadrupled since 2007. The recent report from the McKinsey Institute, cited above, says that six countries have reached levels of unsustainable debt that will require nonconventional methods to reduce it (methods otherwise known as defaulting, monetization; whatever you want to call those measures, they amount to real pain for the debtors, who are in many cases those least able to bear that pain). It’s not just Greece anymore. Quoting from the report:

Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression, debt continues to grow. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007. Global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points (see chart below). That poses new risks to financial stability and may undermine global economic growth.

This report was underscored by a rather alarming, academically oriented paper from the Bank for International Settlements (BIS), “Global dollar credit: links to US monetary policy and leverage.” Long story short, emerging markets have borrowed $9 trillion in dollar-denominated debt, up from $2 trillion a mere 14 years ago. Ambrose Evans-Pritchard did an excellent and thoroughly readable review of the paper a few weeks ago for the Telegraph, summing up its import:

Sitting on the desks of central bank governors and regulators across the world is a scholarly report that spells out the vertiginous scale of global debt in US dollars, and gently hints at the horrors in store as the US Federal Reserve turns off the liquidity spigot….

“It shows how the Fed’s zero rates and quantitative easing flooded the emerging world with dollar liquidity in the boom years, overwhelming all defences. This abundance enticed Asian and Latin American companies to borrow like never before in dollars – at real rates near 1pc – storing up a reckoning for the day when the US monetary cycle should turn, as it is now doing with a vengeance.”

Ambrose’s parting takeaway?

[T]he message from a string of Fed governors over recent days is that rate rises cannot be put off much longer, the Atlanta Fed’s own Dennis Lockhart among them. ‘All meetings from June onwards should be on the table,’ he said. [This is from a regional president whose own research suggests GDP growth in the first quarter of 1%! – JM]

The most recent Fed minutes cited worries that the flood of capital coming into the US on the back of the stronger dollar is holding down long-term borrowing rates in the US and effectively loosening monetary policy. This makes Fed tightening even more urgent, in their view, implying a ‘higher path’ for coming rate rises.

Nobody should count on a Fed reprieve this time. The world must take its punishment.

Ouch! Please sir, may I have another? Punishment indeed. Ask the Greeks. Or the Spanish. Or… perhaps there is punishment coming soon to a country near you!

I began a series on debt a few weeks ago, and we return to that topic today. I believe the fundamental imbalances we are seeing in the world (highlighted in the two papers mentioned above) are the result of the massive increases in global debt and misunderstandings about the use and consequences of debt. Too much of the wrong kind of debt is going to be the central cause of the next investment crisis. As I highlighted in my February 24 letter, the right type of debt can be beneficial. However, as the McKinsey Report emphasizes,

High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.

Read that again. This isn’t the Mises Institute. This is #$%%*# McKinsey. As establishment as it gets. And they are clearly echoed by the BIS, the central banker’s central bank. Unless this time is different, they are saying, the high levels of debt are the reason for slowed growth in the developed world, a point we have highlighted for years in our research. There is a point at which too much debt simply sucks the life out of an economy.

Nobody Understands Debt

A useful starting point for today’s letter is Paul Krugman’s lament that “Nobody understands debt.” But to borrow a phrase from Bill Clinton, it really depends on what your definition of “debt” is.

Paul Krugman has actually written two New York Times columns entitled “Nobody Understands Debt.” The first, and more nuanced, one was published on January 1, 2012; and the second one appeared last month (on February 9). It is a constant theme for him. If you want a short take on what at an uber-Keynesian believes on debt, these columns are a good place to start. (Paul [may I call him Paul?] is as good a representative of the neo-Keynesian species – Homo neo-keynesianis – as there is, an interesting subset of the human genus.) In our musings on debt, we are going to look at these two essays in the effort to understand the differences between those who want more government spending and increases in debt and those who favor what is now disparagingly referred to as austerity.

I choose Krugman not because of any need to disparage him (he does write some rather good essays) but because he writes remarkably clearly for an economist, he has an extensive body of public work to choose from, and he says many things about debt that I think everyone can agree with. The differences between his positions and mine can, however, be pronounced; and I have spent some time trying to discern why reasonably intelligent people can have such significant disagreements. My goal here is to be respectful and gentlemanly while trying to expose the foundations (there is a pun here, soon to be revealed) of our disagreement.

To do this, we are now going to step out of the economic realm and move a little farther afield. Some readers may wonder at the journey I am am about to take you on, but this diversion will be helpful in explaining Paul’s and my different approaches to debt. We’ll return to our central theme by and by. Stick with me.

Foundational Presuppositions

One of the things I learned in my religious studies (yes, I did attend – and graduate from – seminary as penance for what must have been multiple heinous sins in my past lives) is that disagreements are often driven not by the “logic path” of an individual’s thoughts but instead by their core presuppositions. Presuppositions are often more akin to tenets of faith and insight than they are to actual, provable observations or facts. They are things assumed to be true beforehand, ideas taken for granted. Sometimes our presuppositions are rooted in prejudice, but more often than not they just arise from normal human behavior. Often, presuppositions are formed because of beliefs stemming from other areas of our lives or imposed by society. Your basic presuppositions, what “everyone” knows to be true, can lead to absurd conclusions. If you believe, as people did in Galileo’s day believed, that the Bible teaches the earth is flat and that the Bible is the authoritative source for understanding physical geography along with everything else, then it is logical to believe you can sail off the end of the Earth.

We are, as the great journalist Edward R. Murrow said, “prisoners of our own experiences.”

Presuppositions (we all have them) are at the heart of all sorts of irrational behavior that we are learning about from the growing understanding of behavioral economics. Not only can we demonstrate that humans are irrational, we are predictably irrational. That irrationality was actually bred into us when we were a young species, dodging lions and chasing antelopes on the African savanna. But what were useful survival traits two million years ago can now be problematic in modern society. Our presuppositions can lead us to errors in investing and cause all sorts of societal problems. Bluntly put, presuppositions can come seemingly out of nowhere and bite you on the ass.

Presumably, if two people start with the same presuppositions, then logic and reasoning should allow them to come to agreement about their conclusions. (Yes, I know, it’s not quite that simple, but I don’t want to write a book on presuppositionalism here. Van Til did that, and it is unreadable. So work with me.)

Long-time readers know that I also send out a weekly letter called Outside the Box. It features the work of other writers I find interesting. I often send out material that I don’t necessarily agree with but that makes us think. If you can’t read something you disagree with and know why you logically disagree, then maybe you need to examine your own presuppositions and possibly arrive at different conclusions.

I think the difference that Mr. Krugman and I have on debt basically comes down to our presuppositions. I suspect they impact other aspects of our lives similarly. Like me, Mr. Krugman grew up on science fiction and still keeps up. He credits reading science fiction as a youth with his ultimate choice of economics as a career. In a very real sense, so do I. But I was more influenced by Lazarus Long (a recurring character in the books of Robert Heinlein) than Hari Selden (the genius who saves the galaxy in Isaac Asimov’s brilliant Foundation series.) The former is distrustful of government, while the latter assumes that humanity is better off with a few brilliant people running the show, if behind the scenes. (I say “people,” but after following the exploits of Hari Selden for a few decades, we learn that the real masters are technocratic robots.)

While I agree with Krugman that the Foundation trilogy may be the finest science fiction books ever written (and still highly recommend them to anyone wanting to jump into science fiction), they are a poor manual for the organization of government.

Two years ago Krugman wrote this about Asimov’s trilogy: “My Book – the one that has stayed with me for four-and-a-half decades – is Isaac Asimov’s Foundation Trilogy, written when Asimov was barely out of his teens himself. I didn’t grow up wanting to be a square-jawed individualist or join a heroic quest; I grew up wanting to be Hari Seldon, using my understanding of the mathematics of human behaviour to save civilisation.” (This is an excellent review, by the way, and I encourage those who are interested to read it.)

Am I cooking up a simplistic analogy? Perhaps not, since our presuppositions actually show up in our views on economics. It is Hayek versus Keynes (though admittedly you get better writing and plot lines when you read Asimov and Heinlein than you do when you peruse our economic giants). Asimov, as my friend (and Science Fiction Hall of Fame writer) David Brin wrote,

… was quite liberal and progressive. His Robots universe, however, kept toying with notions of technocracy – a concept of his youth – in which the best and brightest over-rule the hot-tempered and irrational masses…. [H]is fiction cycled around an ambivalence about humans’ ability to govern themselves with foresight and wisdom.

Heinlein, on the other hand, would be called a libertarian in today’s world. He was committed to absolute freedom and individual responsibility mixed in with patriotism, mixed in with some personal eccentricity.

(David Brin is one of the world’s true experts on Heinlein and Asimov and knew them both well. He told me in a recent conversation that they each recognized the weaknesses in the philosophies that underpinned their created worlds, if those worlds are taken to their logical conclusion. Ironically, in their novels, both authors end up espousing a sort of neofeudalism. Asimov, however, became very uncomfortable later in life with the technocratic, omnipresent government that dominated the Foundation Trilogy.)

The fundamental difference in Asimov’s and Heinlein’s views, and in the views of Keynes and Hayek, is the power of individuals and markets versus the power and influence of government. So let’s take a look at some of Mr. Krugman’s views on debt; and then you can see whether you agree with his assumptions and in general with Keynes and much of academic economics today, or with Hayek. This topic may take a few weeks to cover fully, but it’s important. Your assumptions about how the world works will translate into investment decisions. Ideas have consequences, and nothing is more fundamental to the way you interface with the world of macroeconomics today than your views on debt.

Debt Is Money We Owe to Ourselves – Sort of

“High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions.”

– The McKinsey Institute, “Debt and (not much) deleveraging”

I rather suspect that Paul Krugman would take issue with the statement above, given his column of February 6, 2015, entitled “Debt Is Money We Owe To Ourselves.” Let’s look at his first couple of paragraphs:

Global Debt

Antonio Fatas, commenting on recent work on deleveraging or the lack thereof, emphasizes one of my favorite points: no, debt does not mean that we’re stealing from future generations. Globally, and for the most part even within countries, a rise in debt isn’t an indication that we’re living beyond our means, because as Fatas puts it, one person’s debt is another person’s asset; or as I equivalently put it, debt is money we owe to ourselves – an obviously true statement that, I have discovered, has the power to induce blinding rage in many people.

Think about the history shown in the chart above. Britain did not emerge impoverished from the Napoleonic Wars; the government ended up with a lot of debt, but the counterpart of this debt was that the British propertied classes owned a lot of consols.

Consols are a type of British government bond that are perpetual in nature, in that they are interest-only bonds. They were first issued in 1751 and eventually financed the Napoleonic wars. There are multiple other instances where governments amassed large amounts of debt to finance wars and were able to pay the debt down over time. Think the US after the Civil War and World War II. Proponents of such massive government debt issuance will point out that growth was not constrained in 19th century Britain or after the Civil War or World War II in the US.

Krugman contends that “the problems with public debt are also mainly about possible instability rather than ‘borrowing from our children’.” He completely dismisses this latter idea as nonsensical rhetoric (his words).

So, do historically high levels of debt drag down growth, as McKinsey and the Bank of International Settlements assert, or do they not? In general, I think they do, but I would agree that sometimes it depends on the type of debt and the situation. Certainly you can find examples where nations took on huge debts and there was still adequate growth in the wake of doing so. But in the overwhelming preponderance of cases, when governments and/or the private sector have taken on too much debt, there has not only been a drag on growth, there have  also been devastating financial crises and deep recessions or depressions.

As I tried to make clear in the last letter, not all debt is bad. There are times when debt can be actually quite productive, whether it is personal or governmental debt. But the issue hinges on the difference between good debt and bad debt and on who owes debt to whom.

Very simply, “bad debt” is debt, whether private or public, that cannot be repaid from current cash flows. All debt is “good” until the moment it is defaulted upon (both legally and realistically).

Further, it is intuitively obvious that if a country or company is using current cash flows to repay debt that was incurred for nonproductive purposes, that limits its ability to use that cash for other purposes. Assuming the other purposes are important to further growth, then growth is constrained, and options are reduced.

If taxes must be increased to pay off the debt, that limits the cash available to finance further private-sector growth, which is far and away the largest source of growth for the economy. Only if you contend that government spending per se and in general is an engine of growth can you argue that it makes no difference whether spending is public or private.

While certain types of government spending are conducive to growth (think infrastructure development, education, scientific research, and law enforcement as examples), only a small portion of US federal government spending falls into those categories; so the preponderance of federal spending does not enhance productivity. I think the bulk of academic research supports that conclusion. That is not to say that some government expenditures for nonproductive uses are not proper or necessary, but that’s a different argument for a different day. (A social safety net comes to mind.)

You can’t contend that there is not a cost, in terms of private-sector productivity, incurred by taxes. That is not saying that a particular tax expenditure may not be worth the cost. Some government expenses are vital to public well-being and to a stable, properly functioning economy. Just be clear that there is always a cost. The negative slope of the curve when growth is plotted against taxation rates is quite clear. At some point, high overall taxes and high debt become a drag on growth (in terms of GDP, not effects on individuals, although you can make that argument). Think Europe. And Japan.

Most periods of high government debt that were not a drag on growth followed wars, when previously massive defense spending was radically decreased and the resulting extra income was then used to reduce the debt. Further, wars are the epitome of nonproductive spending, even when they are necessary for survival. A cessation of hostilities and the returning of soldiers to productive activities will in and of itself increase productivity and GDP, and that growth in turn increases the ability of an economy to pay back debt! That scenario is significantly different from a period where government debt, incurred to fund current consumption, is allowed to increase beyond the ability of cash flows to pay off the debt.

Greece is now in the latter situation. Rogoff and Reinhart detail over 260 other such episodes in history, where countries incurred insupportable debt and were forced to default in one manner or another. Default can take several different forms: deferral, restructuring of the terms to the detriment of the creditor, outright refusal or the inability to pay, etc. Monetization is a form of default that we will deal with shortly. From the point of view of the creditor, if you have to change the terms in such a way that you get less than you originally bargained for, even if that is the best outcome under the current circumstances, you will now have less money than you expected to have. You can call it what you like, give it all sorts of pretty names, but it means that a debtor did not live up to the terms originally agreed upon.

Mrs. Watanabe’s Bonds

It is time to take up the question of whether government debt is just money we owe to ourselves. Let’s take a real-world example of a nation that has incurred a very large debt that it increasingly struggles to make payments on and yet essentially owes the money to itself. I refer to Japan.

Japan has amassed a debt that is roughly 250% of GDP, far higher than that of any other country. The government has been able to grow such an outsized debt precisely because its citizens have, either directly or indirectly through their pension funds, been willing to purchase that debt. It is estimated that up to 95% of Japanese bonds are owned by the Japanese themselves (directly or through institutions). The rest is primarily in the steady hands of other central banks and a few funds with position mandates.

There is no country anywhere that can truly be said to owe more “to themselves” than Japan does. To sort out whether debt that we owe to ourselves is truly not a problem, let’s drop in at the home of the proverbial Mrs. Watanabe, who, it just so happens, is being paid a courtesy visit by Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda. Let’s listen in:

Kuroda [bowing]: Mrs. Watanabe, we are here today because we have a national crisis. Previous Japanese governments have run up a rather large debt, and we find ourselves in the unfortunate position of not being able to repay that debt unless we monetize it. But since we owe that money to ourselves, and since you are us, we thought we might ask if you, along with all your neighbors and friends, would be willing to forgo payment so that we can reduce the national debt. We realize this will make things more difficult for you in your remaining years, but it really is for the good of the nation.

Abe: Can we count on your support? And of course we would like you to vote for us in the next election.

Mrs. Watanabe: Honorable Prime Minister, my husband and I have worked very hard all our lives. We have done exactly as good Japanese citizens should do. We saved our money, invested in government bonds, and now we’re depending on them for our retirement. We need those bonds to be paid in full in order to have enough to buy our rice and miso soup and sake. In fact, listening to what you say, I think I need a cup of sake to calm me down. Pardon me for a moment.

[Mrs. Watanabe serves sake to her esteemed guests, takes a stiff gulp herself, then stands and draws a deep breath, bows, and looks the Prime Minister in the eye.] Let me be very clear. I fully expect to be able to cash in my bonds when I need the money. Further, I expect my pension to be paid in full in exactly the manner I was promised. If your administration cannot fulfill those promises without endangering my life, then I and my many friends will make sure that you are not allowed to continue in public office. Good day, gentlemen.

Now I know that is not the way the conversation would actually go. Mrs. Watanabe is a very polite Japanese lady who would never speak so directly to her Prime Minister. Nevertheless, I suspect my version of the conversation has captured the gist of what she was actually thinking.

And of course Abe-sama and Kuroda-sama know better than to ever have that conversation, because that is essentially the reaction they would expect to get from their citizens. In fact, a survey conducted a few years ago confirmed that less than 13% of Japanese citizens would be willing to sacrifice for the good of the nation when it came to their government bonds. So much for Japanese solidarity.

So Abe has had to choose between Disaster A and Disaster B. Rather than suffer a deflationary collapse, Disaster A, he has chosen Disaster B, the monetization of his debt. Which is precisely what Professors Krugman and Bernanke have suggested that Japan should do, although under the guise of quantitative easing, with the aim of creating inflation. So now Japan is experimenting with the most monumental quantitative easing ever undertaken by any developed country in the history of the world.

So how’s that quantitative easing thingy working out for Japan? Inflation should be going through the roof by now, right? Well, not so much.

Japan’s annual core consumer inflation ground to a halt in February, the first time it has stopped rising in nearly two years, keeping the central bank under pressure to expand monetary stimulus later this year. Other data published on Friday didn’t offer much solace with household spending slumping [2.9% y-o-y, for 11 straight months of decline] even as job markets improved, underscoring the challenges premier Shinzo Abe faces in steering the economy toward a solid recovery.

While the Bank of Japan has stressed it will look through the effect of slumping oil prices, the soft data will keep it under pressure to expand stimulus to jump-start inflation toward its 2 percent target.” (Reuters, March 27)

Aside from not being able to generate inflation, the Japanese economy is doing as well as can be expected and better than it has in most of the past 25 years. But the Japanese government desperately needs 2% inflation and 2% real growth in order to be able to deal with its debt, if it is not to be forced into outright monetization.

So the economy is doing kind of all right, and Japanese quantitative easing has been a roaring success, right? Perhaps from the perspective of the Japanese elite, its politicians, and of course its economists, but not, perhaps, from the perspective of Mrs. Watanabe.

She has seen the purchasing power of her currency drop by 33% in the past few years. That massive hit on her spending power affects her directly when she goes to buy imported goods, and it affects her indirectly through the high cost of all the energy Japan must import. When your buying power is reduced in retirement – and Japan has a rapidly aging population – I don’t think you can call that a roaring success.

The truth is, the Japanese government is passing on the pain of 25 years of running up too much debt to Japanese savers and retirees. I think the value of the yen is likely to drop another 50% (at least) before Japan can allow the market to set interest rates. They are going to print more money than any of us can possibly imagine. (I have documented on numerous occasions why Japan cannot allow interest rates to rise. Higher rates would be an utter disaster for the country.)

Quantitative easing seems like a Free Lunch World to many politicians and even to many economists, who should know better. But it is not a free lunch for Mrs. Watanabe. It is her lunch, scarfed from her table. And it will not be a free lunch that’s served in Europe as Mario Draghi eases and European savers watch the yield of their bonds and the value of their currency erode.

There Ain’t No Such Thing as a Free Lunch

There ain’t no such thing as a free lunch (TANSTAAFL). Quantitative easing comes with a price. The question is, who will pay it? The unprecedented financial repression that we are seeing in the world has been foisting the cost of bailing out bankers and stock market investors onto the aching, sagging backs of savers and retirees. Some might consider that an acceptable outcome, given that the global financial system has recovered, after a fashion, from the Great Recession.

But Paul Krugman and his neo-Keynesian colleagues, including most central bankers, seem to think they’re living in a free-lunch world. They are either not aware or do not care who is picking up the check.

No matter how debt is reconciled, whether through the normal means of it being paid back or through some type of default, workout, or monetization, someone ends up paying. Oftentimes, there is simply no choice but to resort to some type of debt reconciliation. You can’t squeeze blood from a turnip, especially a Greek turnip. (Another pithy economic lesson I learned from my dad.)

Which leads us to a topic we will take up in a future letter if not next week: how much debt is too much, and how do we avoid getting to that point? Stay tuned.

(Trivia: The maxim “There ain’t no such thing as a free lunch” dates back to the 1930s. The phrase and its acronym are central to Robert Heinlein’s 1966 science fiction novel The Moon Is a Harsh Mistress, which helped to popularize it. The free-market economist Milton Friedman also used the phrase as the title of a 1975 book, and it shows up in economics literature to describe opportunity cost.)

Home Gearing Up for SIC

Surprisingly, other than a few personal day trips here and there, I am home for the next month until I leave for San Diego for my Strategic Investment Conference. You really should consider coming, as this is the single best macroeconomic conference in the country. I say that without reservation. Find me a conference lineup that it is better at any price. If I listed just the people we have lined up to moderate the question-and-answer sessions, they would constitute a fabulous conference in their own right. I am simply thrilled by the massive intellectual firepower that is going to be in the room. Plus, we just finalized Peter Diamandis to speak Thursday night. My friends and Hall of Fame science fiction writers David Brin and Vernor Vinge, two of the best futurists on the planet, will be there to ask Peter questions and to push back, and they will all mingle with you before dinner. You really don’t want to miss it. The conference is April 29 through May 2. There are just a few places left.

It’s time to hit the send button. I am truly interested in your comments, positive or negative, on this letter in particular, as I hope to develop it into a longer piece on debt. I always read the comments you post beneath the letter on our website. Have a great week!

Your admittedly eccentric analyst,

John Mauldin

subscribers@mauldineconomics.com

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15 COMMENTS

  1. Here I expected nothing less than a concise, to the point response from kart_125cc and instead I get a response that nearly fills my entire computer screen! Call me disappointed! You must be paid by the word, kart!

    As for your point: “That’s the point of the article – debt is in fact not this magic fairy dust that enables people to get stuff today rather than waiting until tomorrow when they have earned the money to buy it, without cost (a free lunch) as so many people seem to think it is.” you must have read a different article as this article was about government debt not private debt.

    You see, the government as a sovereign taxes to generate income, it does not have to “earn it”. Taxed income is as close to magic fairy dust you can get. Maybe your read a different article about personal finance?

  2. “I have yet to get a check from someone buying a bond. The money goes into the Treasury.”

    The government is in the business of spending money. It is spent on schools, national defense, emergency services, etc which touches and benefits all the citizens. Because you are an idiot, you think the government just borrows money for the sole purpose of collecting dust at the Treasury and paying me a dividend? So the government is not a prolific spender but now a prolific saver? I doubt that’s really your point of view.

    Where did I say you shouldn’t be paid for what you lent? Um, nowhere

    Yes you did and I quote: ” Are you going to give back any of your proceeds from those bonds? Didn’t think so” and “That has to come out of some taxpayers pocket. You gonna give it back to them? Didn’t think so.”

    “What purpose do you think an economy serves that is not in the services of that?”

    Now you’ve shifted from money = goods and services to “the purpose of the economy”. I see that you’ve abandoned your position that money = goods and services and I will acknowledge your concession of the point.

    “What it means is that your feigned (or real) inability to grasp the simple meaning of a simple statement shows that you’re too stupid to have any real debate with.”

    Since you’ve resorted to a flurry of ad hominem attacks and completely ignored my explanation of marginal utility (that money has none and goods and services do), your statement is ironic.

  3. Let me make a reading suggestion for you that you might find informative.

    How an Economy Grows and Why It Crashes (Peter D. Schiff)

    It’s a very good book that is written to a level that there is some hope you might be able to grasp the concepts. There’s even cartoon drawings to help break up the monotony of having to read words and sentences and understand them.

    And I can recommend more materials of a more academic nature if you get through that.

  4. I will ask this question of the author: if there is too much debt why are interest rates so low?

    Clearly you do you not understand the Fed, what it does, and how it does it. You seem to think that interest rates are solely determined by market forces. If interest rates were in fact determined solely by market forces, then you would be correct. But everyone (except apparently you ) understands that the Fed manipulates interest rates contrary to market forces. Why do you think people are calling for the Fed to raise interests rates? If the Fed can raise them by fiat and decree, then clearly it’s not a market driven price. Which renders you point invalid.

    To answer your question, they are so low because they have been manipulated by the Fed rather than being allowed to be determined solely by market forces. Manipulation of interest rates contrary to market forces is basically the Fed’s go to tool in their tool box. Apparently you are unaware of that. So now you know.

    Why are purchasers of debt willing to lend money to the government at such low rates?

    Because when you want a (ostensibly) low risk place to park your money, what other option is there? What are you going to do? Put it in a safe and collect only dust? 2%, while essentially robbery, is still better than 0% is it not? And don’t say “so put it into something like the stock market” because if people were willing to take on that risk with that money, then that’s what they would be doing. Duh.

    And as low as the rates are, this is no “free lunch”. The cost of a 10 year bond to the government is 2% a year which is not “free”. Its just a very low cost.

    I don’t think you understand what people mean when they say “there is no free lunch”. What it means is that when someone thinks they are getting something for free, they in fact aren’t. That’s the point of the article – debt is in fact not this magic fairy dust that enables people to get stuff today rather than waiting until tomorrow when they have earned the money to buy it, without cost (a free lunch) as so many people seem to think it is. You aren’t telling the other anything he wasn’t already making a point about.

  5. You don’t understand. Let me spell it out for you. If I put $100 in Mr. Taxpayers pocket (i.e. buy a bond),

    Ok, now just stop right there – and you say I’m the one who doesn’t understand? You put the money in Mr. Taxpayers pocket? Um no, that’s not where the money goes when you buy a bond. I have yet to get a check from someone buying a bond. The money goes into the Treasury.

    But when the government tax Mr. Taxpayer to get the money to repay that bond, that money is coming out of my pocket. That’s less money I now have. And not only that, on top of that, I have to also pay more taxes to give the government money to also pay you that interest.

    OK. Then why do you insist as a bond holder I should not be paid by Mr. Taxpayer?

    Where did I say you shouldn’t be paid for what you lent? Um, nowhere. Why is it you seem to think to misrepresent what I say is somehow an argument? What I said is that the taxpayer is on the hook to pay you bond – put on that hook by government issuing the bond you hold.

    Why do you insist money = exchange of goods and services?

    What part of production of goods and services -> exchange of those goods and services to get other goods and services you don’t have but want or need -> consuming those goods and services is unclear to you? And the exchange is bilateral with one person’s produced goods and services the other person’s goods and services to be consumed, and vice versa. What purpose do you think an economy serves that is not in the services of that? What makes you think that because some people use the economy to do different things means that those are purposes of the economy. Do people steal? Of course they do – does that make stealing a purpose of the economy? No. For that matter, people stole long before there was money to steal. People inherit property – so what? What does that have to do with anything? Some people win property gambling? So what? How does any of that make the purpose of the economy to be something other than the production, exchange, and consumption of goods and services?

    Umm. Ok. Whatever that means.

    What it means is that your feigned (or real) inability to grasp the simple meaning of a simple statement shows that you’re too stupid to have any real debate with. Clearly you are more interested in demonstrating the initial thesis of the article – the knee-jerk rejection of anything that is outside or unfamiliar to one’s presuppositions. You are a prisoner of your own experiences, you can’t eliminate your prejudices. But you can’t recognize them. You’ve made it clear that you aren’t interested in trying to grasp simple concepts that are outside of or unfamiliar to your presuppositions. You are so closed minded that it causes you to be unable grasp even simple concepts.

    I often have interesting debate with people who are able to grasp the concepts I present and offer interesting and insightful rebuttal or counter argument. So I know the communication/comprehension problem is not me – that means the problem must be you. Really, what I present is not complicates and is quite simple. Yet you seem to be consistently either unable or unwilling to grasp simple concepts as you always respond with something different than what I said.

  6. “For the majority of taxpayers who are not bond holders that will also have to pony up to pay taxes to pay off that debt, how do they get that money back into their pocket? Are you going to give back any of your proceeds from those bonds?

    You don’t understand. Let me spell it out for you. If I put $100 in Mr. Taxpayers pocket (i.e. buy a bond), I receive $2.00 this year (at current rates) in dividend payments from Mr. Taxpayer and he keeps my $100.00. Why do you insist the money only goes one way?

    “Are you going to give back any of your proceeds from those bonds? Didn’t think so. So that’s just money out of their pockets

    But…but…but…as in the example above what above the $100 I gave Mr. Taxpayer (which would also include myself)?

    That has to come out of some taxpayers pocket. You gonna give it back to them? Didn’t think so.

    Some Taxpayers pocket??? I am a taxpayer!

    …who may or may not also be taxpayers too, but that doesn’t change the fact that for those tax payers who don’t hold bonds, it’s money that they are paying that ISN’T being paid to them.

    Ok again, as the example above the $100 I gave to the government in the form of a bond is used to pay for schools, national defense, emergency services, etc that benefits all citizens whether they own bonds are not. Why is this so one sided for you?

    So that he can buy and sell whatever companies he wishes. So that he has financial security in case some investments tank. So that he can buy an island like Larry Ellison

    Warren Buffett has a “low propensity to consume” which means very little of his fortune (like all high net worth individuals) is used from consuming “goods and services”. For Mr. Buffett, he desires money far beyond its marginal utility. In fact, there is no marginal utility on cash which makes it distinct from “goods and services”. You can’t eat a million hamburgers or see a million movies or drive a million cars but you can have a million dollars and still want more money. See how marginal utility makes cash different for goods and services?

    If you aren’t providing a service of some value, then why is someone else willing to pay you for it?

    OK. Then why do you insist as a bond holder I should not be paid by Mr. Taxpayer?

    “They view money as a thing in and of itself that exists on it’s own rather than to facilitate the exchange of goods and services”

    Some people see money as something that should be stolen. Some people inherit money. Some people win money in a lottery or playing poker. Why do you insist money = exchange of goods and services?

    And where things go sideways in when money gets decoupled from that function

    Umm. Ok. Whatever that means.

  7. You mean, as a purchaser of bonds I’m not a tax payer? In your world there are “taxpayers” and then people who hold bonds? Government debt is money we owe ourselves because taxpayers are also holders of bonds.

    A bond holder may be a tax payer. That doesn’t mean that all taxpayers are bond holders. The national debt is some $17 trillion. That’s some $50,000 per capita.

    For the majority of taxpayers who are not bond holders that will also have to pony up to pay taxes to pay off that debt, how do they get that money back into their pocket? Are you going to give back any of your proceeds from those bonds? Didn’t think so. So that’s just money out of their pockets. If you think it’s such a wash proposition, then why don’t you just give up those bonds. Where exactly do you think that money comes from to pay the interest on those bonds? That has to come out of some taxpayers pocket. You gonna give it back to them? Didn’t think so.

    Like I said, saying it is “paying ourselves” is in denial of the fact that for those people who don’t own bonds or don’t own then in comparison to the amount of taxes they will have to pay to pay off that debt, for thoseindividuals that’s money out of their pockets and into those pockets of the bond holders – who may or may not also be taxpayers too, but that doesn’t change the fact that for those tax payers who don’t hold bonds, it’s money that they are paying that ISN’T being paid to them.

    Uh, OK. Lets say Warren Buffett (but it could be any wealthy person). Do you think he spends all his money on “goods and services”? Why do you think he pursues more money when he already has far and above more cash then he could ever exchange for “goods and services”?

    So that he can buy and sell whatever companies he wishes. So that he has financial security in case some investments tank. So that he can buy an island like Larry Ellison.

    Are you talking about a loan payments? Are you talking about paying the loan off? Who knows?

    Huh? How does it matter? You are repaying the loan. The point is the payments made to repay the loan. The act of handing over payments – you’re paying money. Presumably one does so with the goal of paying it off, so it’s a distinction without a difference to say “paying the loan off.” Why would you keep making payments after the loan is paid off? If the loan is paid of, well that’s simply not the circumstance as the debt is settled at that point, that which needed to be produced has been produced, etc.

    What If I pay the loan off with my bond dividends? Is that paying the loan off with the production of “good and services?” I don’t think so.

    Yes, it is. You are providing the service of credit to others. The interest paid on that debt is what you get in exchange for providing that service. Why do you think they call it “earning” interest? If you aren’t providing a service, then why are you expecting payment for it? If you aren’t providing a service of some value, then why is someone else willing to pay you for it? If someone is willing to pay you for it, then there must be some economic value to it that you created/produced in providing it.

    Are you talking about opportunity cost? Are you talking about loan payments? Why not just say so instead of this nonsense about exchange of goods and services for other goods and services? Your little rant leaves a lot to interpretation. Its comical really, that you make so little sense that you have to paraphrase yourself. I mean, I’m not paraphrasing myself. My words are understandable to anyone

    Opportunity cost? Sure I suppose you could say that. Having to make loan payments creates the opportunity cost of not being able to use that money for other purposes. Am I talking about loan payments? Gee aren’t you the bright penny? You figured that out all by yourself? What part of “giving money to the bank” gave it away? What other interpretation would there be? Frankly I assumed that you had a sufficient degree of intelligence to grasp the concept. I’m thinking I was wrong on that.

    Why not just say so instead of this nonsense about exchange of goods and services for other goods and services?

    Because the exchange of goods and service is the point. The point is that people get distracted from that basic fundamental principle by money. The purpose of money is to facilitate the exchange of goods and services. If it does not serve, support, enable, or provide for the production, exchange, and consumption of goods and services, then what is the point? What I think is the problem is that people lose sight of that. They view money as a thing in and of itself that exists on it’s own rather than to facilitate the exchange of goods and services.

    And where things go sideways in when money gets decoupled from that function.When money is manipulated in ways that impede it’s utility to that end, that is when the economy goes sideways because people are impaired in their ability to utilize money to exchange what they produce fro want they want.

    You are just such a person as you can’t get past your presuppositions that money exists in and of itself to see the basic fundamentality of the exchange of goods and services.

  8. “Um, exactly. And when the money comes out of the tax payers pocket to repay that bond, whose pocket does that money go into – his or yours? That taxpayer isn’t “repaying himself” – he is repaying you out of his pocket.”

    You mean, as a purchaser of bonds I’m not a tax payer? In your world there are “taxpayers” and then people who hold bonds? Government debt is money we owe ourselves because taxpayers are also holders of bonds.

    “Who sets about acquiring money for the sake of possessing that money with no expectation of getting goods and services in exchange?”

    Uh, OK. Lets say Warren Buffett (but it could be any wealthy person). Do you think he spends all his money on “goods and services”? Why do you think he pursues more money when he already has far and above more cash then he could ever exchange for “goods and services”?

    “The problem is that when you finally get the money for that productivity that occurs in the future, people forget that they already “spent” that money on whatever it was they bought with the loan so they blame the bank that they can’t spend that money today.”

    People typically pay loans in payments not in a lump sum. Like I said, when the loan is paid off, I’ve never known anyone to be angry or “blame the bank”.

    “The issue isn’t after you paid off the loan. How did you even get that from what I said?”

    Here, I will help you. Here is what you said:

    “Of course when it comes time to produce those goods and services at that future time in exchange for what you have already consumed, people always seem to forget that they _already_ consumed what they would have bought with that productivity”

    Are you talking about a loan payments? Are you talking about paying the loan off? Who knows? What If I pay the loan off with my bond dividends? Is that paying the loan off with the production of “good and services?” I don’t think so.

    “The only way you can give that money to the bank is to NOT spend it on that consumption – that is consumption (or whatever else you might have used that money for) that you have to forgo.”

    Are you talking about opportunity cost? Are you talking about loan payments? Why not just say so instead of this nonsense about exchange of goods and services for other goods and services? Your little rant leaves a lot to interpretation. Its comical really, that you make so little sense that you have to paraphrase yourself. I mean, I’m not paraphrasing myself. My words are understandable to anyone.

  9. No. As a purchaser of bonds (i.e. government debt), a bond is money I give to the taxpayers in return for a dividend which represent just a small fraction of the value of the bond on an annual basis.

    Um, exactly. And when the money comes out of the tax payers pocket to repay that bond, whose pocket does that money go into – his or yours? That taxpayer isn’t “repaying himself” – he is repaying you out of his pocket.

    No. If I lend money to someone I’m not exchanging my money for goods or services. I’m exchanging it for an interest payment (i.e. money).

    Yes. And why is that you would do that? Could it because that money can then exchanged for goods and services. Who sets about acquiring money for the sake of possessing that money with no expectation of getting goods and services in exchange? What is the point/purpose to money if not use it to get goods and services in exchange?

    What? If I buy a car with a car loan I’m promising to produce a car in the future “for exchange at some future time”? Huh?

    No, you are promising to repay that loan with money. And how exactly do you expect to obtain that money? By producing goods and services which you then exchange for that money. The money is simply a proxy for exchange of goods and services. And for that matter how stupid are you? Who produces the same product for the produce they get? What would be the point in that. The point of exchange is to get something DIFFERENT that what you produce.

    So If I buy house with a mortgage (for most people, their largest debt), I can’t resell it in the future to repay the loan because I’ve “forgotten” that I’ve already consumed it? What?

    God you’re stupid. Sorry but making ignorant statements (whether you are actually ignorant or feigning ignorance) is not an argument.

    People complain that they have to forgo consumption of new stuff because they have to instead give that money to the bank – forgetting the reason why they have to forgo that consumption is because the used that consumption to buy the house. They are displeased that they can’t have that money to go on vacation for example) so they blame the bank for that. Why can they not take that vacation (or whatever)? Because they already got the consumption for the money in the purchase of the house (to use your example)

    What? If you are buying something with a loan you are indeed getting something in exchange for your “productivity”.

    Duh. Jeez do i have to draw pictures for you? The problem is that when you finally get the money for that productivity that occurs in the future, people forget that they already “spent” that money on whatever it was they bought with the loan so they blame the bank that they can’t spend that money today. It’s like getting a movie ticket (getting the loan), watching the movie (spending the money provided by that loan). But then at some point finding that ticket stub (getting paid for your production) and thinking you should get to watch another movie because you forgot you already used that ticket to watch a movie.

    After I pay off a loan, why would I have to do with “less consumption”? Whey would I buy angry? If I pay off my mortgage, I have more money to consume then I did before. Everyone I know who makes their final payment on a car loan, college loan, home loan is happy, they are not angry.

    Are you really that obtuse or are you just trying to be argumentative?

    The issue isn’t after you paid off the loan. How did you even get that from what I said? The point is, While you are repaying that loan, you have to give money to the bank right? And how exactly is it that you have that money available to give to the bank? And to be clear, because apparently I have to draw a map for you, that money I speak of is your normal income. If you spend that money on consumption, you can’t give it to the bank, now can you? The only way you can give that money to the bank is to NOT spend it on that consumption – that is consumption (or whatever else you might have used that money for) that you have to forgo.

    Which goes to why exactly is it those people so happy when they have made that last payment? Because they no longer have to forgo consumption from their income!!!

  10. This is just another debt scold article. I will answer the question the author poses which is when is there too much debt? There is too much debt when interest rates rise sharply which they are not. I will ask this question of the author: if there is too much debt why are interest rates so low? The 10 year Treasure is just above 2% which is slightly below the rate of inflation. Why are purchasers of debt willing to lend money to the government at such low rates? And as low as the rates are, this is no “free lunch”. The cost of a 10 year bond to the government is 2% a year which is not “free”. Its just a very low cost.

  11. So how’s that quantitative easing thingy working out for Japan? Inflation should be going through the roof by now, right? Well, not so much.

    The thing is it should have been going through the roof…assuming it worked as advertised – to increase the money supply in circulation – that is to say, generate more dollars (or yen) chasing goods and services.

    The thing is, it fails to produce inflation not because the naysayers are wrong (they aren’t wrong that more currency chasing the same goods and services produces inflation), fails to create inflation because the advocates for it were wrong and it didn’t do what they said it would. It failed to generate more liquidity in circulation as they said was the intent. So without that currency chasing goods and services as promised -> no inflation.

    The problem here is an obsession over charts and graphs that say thus and so and a failure to grasp psychology. They look at charts and graphs that say when X does this, Y does that. So they say we’ll manipulate X thusly so to cause Y do do that. The problem is people don’t act a way just because a chart says so. People are not just charts and graphs but consider context and environment in their decision making.

    Back to my presuppositions, I describe it as a sort of Heisenberg uncertainty principle. Those charts and graphs were determined by looking at organic behavior in an organic and natural environment. Once you start manipulating that environment, it is no longer that organic and natural environment upon which those charts and graphs were predicated. People are not necessarily going to act the same way in a manipulated environment as in an organic environment just because some chart says they act a certain way in an organic environment. People are not oblivious automatons programmed by those charts and graphs. (well, not that oblivious, anyway).

    And the thing is more importantly and generally, what I call the bunker mentality. That is when people are in an environment of fear, uncertainty, and doubt, (FUD) they tend to hunker down in a bunker mentality, keeping their powder dry, as it were until the storm blows over. This also goes to deflation.

    But when the powers that be start manipulating and manipulating more earnestly – that only creates yet more FUD, and more bunker mentality, more deflation, less economic activity, growth, etc. And that dominates over what some charts and graphs say should happen in an environment absent FUD.

    So the meddling only serves to make the problem worse, opposite what the charts and graphs say. But because the charts and graphs say thus and so, they say that just means yet more of the same is needed. Which creates a vicious cycle. They never stop to question the validity of those charts and graphs in the prevailing environment. They thought they were so clever in creating them, they aren’t about to question them.

    The solution is to reduce FUD and create stability that reduces FUD. People simply are not going to engage in economic activities conducing to growth in an environment of FUD, regardless what the charts and graphs say ought to happen. A stable environment, even a “down” economy, is more conducive to growth and recovery than trying to “fix” it when that just generates more FUD. The sooner people can feel secure in stability, the sooner they will begin to engage in growth activities. The longer the feel FUD, the longer before they will begin to engage in growth activities.

    What we have seen is that in the past with less “help” – the economy stabilized sooner, FUD dissipated sooner, and the people then set about getting back to growing the economy sooner. And what we have seen this time is that there has been so much “help” that it has prevented stability from setting in, even a “down” economy stability, generating and dragging out FUD, such that people have been longer reluctant to get back to economy growing activity. You can’t grow an economy by fiat and decree without people participating in growth creating economic activity. And you can’t make people participate in growth creating economic activity by fiat and decree, regardless what the charts and graphs say the ought to do by fiat and decree. The best (and only thing) to do is to create stability, dispel FUD by not stirring the pot so that people will fell safe to choose to get back to growth creating economic activity.

  12. “The is crap. the fact is that government debt is money that has to be taken from taxpayers and given to those who provided the credit”

    No. As a purchaser of bonds (i.e. government debt), a bond is money I give to the taxpayers in return for a dividend which represent just a small fraction of the value of the bond on an annual basis.

    “But think of it like this: everything in the economy is an exchange of goods and service for other goods and services.”

    No. If I lend money to someone I’m not exchanging my money for goods or services. I’m exchanging it for an interest payment (i.e. money). A huge portion of the economy are people and institutions “rent seeking” with money which is to say they are lending money in exchange for money.

    “So, debt is getting goods and services today with the promise of producing those goods and services for exchange at some future time”

    What? If I buy a car with a car loan I’m promising to produce a car in the future “for exchange at some future time”? Huh?

    “Of course when it comes time to produce those goods and services at that future time in exchange for what you have already consumed, people always seem to forget that they _already_ consumed what they would have bought with that productivity”

    So If I buy house with a mortgage (for most people, their largest debt), I can’t resell it in the future to repay the loan because I’ve “forgotten” that I’ve already consumed it? What?

    “And because they forgot they already consumed it, they get angry that they aren’t getting something in exchange for their productivity – they aren’t getting it because at that point in time, they _already_ got it in the past.”

    What? If you are buying something with a loan you are indeed getting something in exchange for your “productivity”.

    “And what that obviously means is that because they aren’t getting something in exchange at that time, then then, at that time, have to do with _less_ consumption”

    After I pay off a loan, why would I have to do with “less consumption”? Whey would I be angry? On the contrary, If I pay off my mortgage, I have more money to consume then I did before. Everyone I know who makes their final payment on a car loan, college loan, home loan is happy, they are not angry.

  13. Very simply, “bad debt” is debt, whether private or public, that cannot be repaid from current cash flows. All debt is “good” until the moment it is defaulted upon (both legally and realistically).

    While certain types of government spending are conducive to growth (think infrastructure development, education, scientific research, and law enforcement as examples), only a small portion of US federal government spending falls into those categories; so the preponderance of federal spending does not enhance productivity.

    Or more functionally correct, “good debt” is debt that is repaid from the proceeds that are enabled and produced by the expenditure of that money. Borrow money to build a factory and the sale of the product of that factory repays the debt as well as provide for a revenue stream that would not have been possible without that debt used to build the factory.

    “Bad debt” is then debt that is simply consumed without creating or generating any increase in productivity to provide revenue to repay that debt. That debt can only then be repaid by foregoing consumption in the future in order to have that money not spent on consumption available to put to repaying that debt.

    The problem with politicians is that they perpetrate a classic bait and switch between the two. They “argue” as to how they must incur debt or raise taxes to provide for the “good” debt/spending to promote growth. But then they do the bait and switch and instead put that money to “bad” debt/spending or providing for non-growth consumption at the expense of future consumption or without the promised growth because it was not put to growth producing measures. Growth only pays off in future votes, spending on providing for increased consumption “pays off” in votes today – future costs be damned.

  14. Yes I suppose I agree with the notion of one’s presuppositions. In my case, my presuppositions come from a background in math, science, and engineering. And one of those presuppositions is that of thermodynamics. One of the things that is studied when studying thermodynamics is “perpetual motion machines” or “self-fueled machines” – that is, the debunking thereof. Conservation of energy and whatnot.

    One is presented with a proposal for a perpetual motion machine and one must demonstrate how it violates conservation of energy through application of principles of thermodynamics. Fundamentally the issue is one of accounting for ALL energy flows in the system. The reason that such a proposal would appear to be “self-fueling” is that it fails to account for some energy input or source. By failing to account for that energy source or input, it appears as though it would be creating energy. Thus identifying that unaccounted energy debunks the proposal.

    The thing is, often times such proposals can appear to be quite plausible and compelling. But with a thorough understanding of thermodynamics can one debunk the proposal and prove it either not self-fueling or even simply unworkable with any amount of energy. Eventually one becomes quite adept at immediately seeing the false claims in such proposals almost instinctively.

    So this is my presupposition when it comes to what I call proposals for “economic perpetual motion machines”. When someone proposes some idea that will “jumpstart” or “stimulate” the economy, that immediately sounds like how one would describe a perpetual motion machine. That is it is a proposal that ostensibly “self-fuels” the economy. So with that presupposition, I immediately see how the “energy” of the economy goes unaccounted in those proposals.

    For example the claims of debt as an “economic perpetual motion machine”. What goes unaccounted is that goods and services must still be produced in the future. That production of goods and services in the future for which one does not obtain goods and services in exchange is the missing “economy energy” that makes it look like a “self-fueling” economic perpetual motion machine. And when you focus on the consumption today without the economic input of production of goods and services (that must occur in the future), that looks like it is creating more “economic energy” than is put into it.

    The problem that makes it plausible is that it is human nature to overweight things in the present and underweight things in the future. So since the consumption occurs in the present that gets overweighted in comparison to the lack of consumption in the future that goes underweighted because it is a future thing. As well as not producing goods and services today is overweighted in comparison to the necessary production of goods and services in the future that goes underweighted because that is a future thing. That makes it seem like a “self-fueling” economic perpetual motion machine” It appears as if it is creating more economic value when in fact it is not – it only appears so because of the imbalance between the perceptual weighting of present versus future, if not simply the outright failure to account for the future costs of economic “energy” at all.

    That’s just but one example. I see it as huge problem that in the economic realm, we lack the basic capability to see through “economic perpetual motion machines” and debunk them as fraudulent the same way that we readily see through physical perpetual motion machines with the physics of thermodynamics. What we need is to develop that same grasp of “thermodynamics” in the realm of economics as we have in the realm of physics.

  15. “Debt is money we owe ourselves” – this is a fallacy. It distorts what is true collectively to imply things that are simply falsehoods at an individual basis.

    That is the logic is this: debt is money we owe ourselves because is it debt that is owed by people within the country to other people within the country. So it is money owed by American s to Americans. The fallacy is that this is used to make it falsely sound as though debt is money we take from one pocket and put into another.

    The is crap. the fact is that government debt is money that has to be taken from taxpayers and given to those who provided the credit. There may be some overlap, but it is hardly money from one pocket into the other. It is money out of the tax payers pockets and put into someone else’s pockets. Now, unless you happen to be one of those who provided that credit who’s pocket into which that money will be put – probably not, then it is simply money out of your pocket as a tax payer.

    And yes it is stealing from the future. Basically, everything that is consumed must first be produced. To get something to consume, one must first produce something to be offered in exchange. That is, unless one uses credit so as to get it before having produced something in exchange. IN that very basic sense, debt is unproduced goods and services.

    At some point in the future, one must produce those goods and services in exchange for what one consumed. At that future time though, you will not get anything in exchange for what you produced because you already got and consumed that which would have been received at this time. That is, at this future time – the goods and services you would receive in exchange for your production you have already received and consumed in the past. So, to come back to the present time, that past consumption is today that consumption you would have been consuming at that future time had you not consumed it today. Debt is consuming today what you would be consuming in the future in exchange for that future productivity.

    Perhaps a little confusing jumping back and forth in time. But think of it like this: everything in the economy is an exchange of goods and service for other goods and services. You produce goods and services which you exchange fro goods and services produced by someone else – and they thus exchange their goods and services for yours. This is a basic fundamental principle. Money does not change that, it simply makes it possible to decouple the pairwise exchanges. One exchanges goods and services for money (the other party gets goods and services in exchange for the money they received from the exchange of their goods and services). You then exchange that money for the goods and services you wish to obtain in exchange for your own consumption. It’s still fundamentally exchange of goods and services for goods and services and no amount of cleverness of “economic gimmickry” can change that fundamental economic reality.

    So, debt is getting goods and services today with the promise of producing those goods and services for exchange at some future time. As I said, debt is unproduced goods and services. That debt is then repaid by production of goods and services in exchange for those goods and services received in the past for consumption in the past.

    Of course when it comes time to produce those goods and services at that future time in exchange for what you have already consumed, people always seem to forget that they _already_ consumed what they would have bought with that productivity. And because they forgot they already consumed it, they get angry that they aren’t getting something in exchange for their productivity – they aren’t getting it because at that point in time, they _already_ got it in the past.

    And what that obviously means is that because they aren’t getting something in exchange at that time, then then, at that time, have to do with _less_ consumption. Less consumption at that time because they have already consumed that consumption in the past.

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