video notes on the main points

label Economics
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schedule 1 Day
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https://www.youtube.com/watch?v=t2RaWWW0eyE

Mar 24th, 2015

You need to stop thinking about the debt as household debt. Debt to a nation and debt in your personal finances aren't a 1:1 relationship.

The United States has been in debt pretty much every year since its creation. That's the way it operates. The nation is meant to have some level of debt. Normally we'd measure this debt as a percentage of GDP to account for inflation when comparing just how much debt we're in (since due to inflation the debt is always going up in #'s every year but it doesn't mean we're in more debt than we were before adjusted for inflation.)

Point one is this isn't even historically anywhere near the most debt we've ran up when the numbers are adjusted as a percentage of GDP. We were in MUCH more debt at the end of WW2, the Civil War, and after the Louisiana purchase for example. However after those periods we had some of the best economic periods in US History so a high debt doesn't mean the country is doomed seeing as the last few periods of massive debts we had much prosperity immediately afterwards.

The other thing to think about with the debt is we're not taking a loan from a bank. We issue debt through the sale of govt bonds. We sell these bonds to just about everybody including you and me for really low interest rates. Right now the interest rates on a bond is ~1-2% a very very small return. Why would people buy them? Because they're seen as the safest investment you can make in that people are very confident the US govt will one day pay them back. This is why there was a real problem during the debt ceiling debate because it was basically a debate as to whether we should pay US Bond holders. What would happen if we didn't pay them? Basically it would now be seen as much much riskier to buy govt bonds so there would be less and less demand for them meaning the govt would have to raise the interest rate on the bonds to get anybody to agree to buy them. The more risk you take the higher returns you'd want to see to make that investment. 

Now the reason there's no risk on us not being able to pay back the bonds is because the US govt created the money to begin with and if they wanted to they could simply create more of it or raise taxes to pay the amount it needs(big difference with your personal finances you can't just print money). Both have drawbacks but both are feasible. The govt could simply print 16 trillion dollars tomorrow and pay off its debt if it wanted to. Why doesn't it do this? Because if you print money you have to deal with inflation (a tax on anybody who has US Dollars vs other currencies). The United states has more purchasing power if it doesn't print the money which is why it borrows the money rather than printing it through issuing bonds, to not have to deal with the inflation problems.

Basically the choice is borrow 16 trillion dollars at a 1% interest rate ($16b/yr interest) vs printing it (USD * x% inflation) vs taxing it from citizens (less spending by consumers would contract economy). Right now the govt has decided borrowing is the best way forward and I agree with them

Mar 24th, 2015

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