The General Economics Thread

The U.S. government is a currency issuer. Unless we hang ourselves via some kind of arbitrary, misguided legislative policy (as nearly happened in 2012), it is by definition impossible for us to "run out of money".

It is true that the national debt is a staggeringly incomprehensible figure, but it's also a largely meaningless figure in the sense of fiscal solvency. Most of it is money owed by the government to U.S. citizens and/or to the government itself; if anyone tells you that we owe $20,000 per citizen or whatever the number is, tell him that we are also equally creditors of that amount. We are both borrower and lender, which any math teacher could demonstrate adds up to zero.

In short, the debt does not add to or subtract from our national wealth at all.

It is true that some of that debt is held by foreign countries (the much ballyhooed "China will own us" hysteria), but it's equally meaningless to say that they have any kind of claim on our sovereignty as a result. The dollar is the reserve currency of the world economy; every other country on Earth invests in it as a place to keep their savings. We are, essentially, the world's banker.

Correspondingly, we also hold a lot of foreign currency assets; in fact, the net of interest we pay out and interest we receive very nearly equals zero. But the real reason it doesn't matter is because a massive loss of the dollar's value would be catastrophic... not for us, but for anyone holding dollars.

China's economy is so leveraged at the moment that a major drop in the value of their dollar holdings would probably make it implode, which is what would happen if there were suddenly a move around the world to stop buying dollars. We own China, not the other way around.

The favorite analogy of the debt panic-mongers is the household credit card. "We've run up too much credit card debt and will have to pay it back!" However, households are cash-flow constrained, while a sovereign government is not. It is true that we take in a certain amount of taxes and have a certain amount of expenses, one of which is the service on the debt. But we've already seen how the Federal Reserve can create brand new dollars at any given point in time. Normally it credits those to the reserve accounts of the major banks in return for U.S. bonds, but it could always simply credit them to itself and use them to pay the bills.

Imagine that, rather than dollars, you give people scraps of paper with I.O.U. written on them, guaranteeing that at some future point in time they can trade those back to you for something they want. There is no limit to the number you can issue, and they have no inherent value other than what people expect to be able to get for them. Every "Bonsai-buck" you issue is a debt you incur, but the value of that debt is entirely subjective.

Also, if the value of your "Bonsai-buck" changes, it doesn't affect you at all; it affects other people. You can always pay whatever amount of bucks someone wants for a thing because you have an infinite amount of them. But if your bucks gain or lose value, it changes the net worth of everyone else.

edited 4th Mar '14 8:32:03 AM by Fighteer

Isn't China buying gold then, to avoid that problem?

Hardly. Gold is a commodity just like wheat or oil. There is a finite quantity of it whose total value is far, far less than the amount needed to sustain global commerce should the dollar suddenly collapse.

China buying gold as a hedge against the dollar losing value is roughly equivalent to your grandma using her Social Security money to buy gold because Bill o'Reilly made her scared of inflation. It's meaningless in the grand scheme of things, and really only hurts your grandma because she is giving up liquid assets for illiquid assets.

Should Armageddon come, you can't eat gold any more than you can eat a $20 bill.

edited 4th Mar '14 8:40:27 AM by Fighteer

China, last I checked, is showing signs of a real estate bubble about to crash (essentially due to 30 or so years of extensively rapid industrialization coming home to roost). And trying to pivot to a consumer economy from a manufacturing economy.

I'm pretty sure purchasing Gold won't help with the hangover effects of either.

Worse comes to worst, you can use greenbacks as kindling. You'd probably get more nutrition from a $20 bill than a lump of gold too, though I can't recommend eating money, as it's usually filthy. OTOH, gold's pretty useless.

edited 4th Mar '14 7:52:59 AM by Achaemenid

Gold has significant industrial value and also makes shiny things that people like to wear. It's highly malleable and conductive, which makes it ideal for such uses. It's not accidental that it was used as money for a long time.

However, if we really suffer a catastrophe that regresses us all the way back to subsistence farming or hunter-gatherer lifestyles, having a working money supply will be the least of anybody's problems. You'd be talking about a die-off of a minimum of 90% of the global population.

Anything less and there would still be enough infrastructure and government remaining to guarantee some stability.

edited 4th Mar '14 8:34:17 AM by Fighteer

I meant - if we have a total societal collapse.

I feel that anyone who discusses that possibility in any kind of serious way doesn't really understand the scale of such an event. I'm not saying that you fall into that category, but it's one of those situations where a lot of people who really ought to know better are acting very silly. Among other things, by imagining that they'd survive to eventually spend their hoarded gold or whatever.

More on topic, that kind of collapse would throw out the rules of modern economics largely because the structures they depend on would cease to exist and might not exist again for quite some time. You wouldn't need to worry about the principles of managing fiscal policy with a fiat currency in a sustained demand slump; you'd be too busy trying to eat.

edited 4th Mar '14 8:28:47 AM by Fighteer

In a major crisis, supplies to help people survive (clothes, food, anything which generates power, and weapons) will become money.

Don't we have a trope for this? Can't seem to find it.

edited 4th Mar '14 8:41:18 AM by tclittle

It's a basic barter system. The idea is discussed in After the End, but I don't know offhand if there's a specific trope for it. See Scavenger World, also.

edited 4th Mar '14 8:45:53 AM by Fighteer

Radio Shack to close 1,100 stores.

This gets me thinking. What would happen if households could create brand new dollars as well? I mean, it sounds like a bad idea, but so does most of the stuff discussed in this thread.

@tclittle: Here you are

@lord Gacek: You'd have a chaotic mess of competing currencies that would, if taken to the logical extreme, result in the breakdown of commerce since nobody could meaningfully understand what he or she had compared to anyone else. For a fiat currency to work, it has to be backed by a stable issuing authority and it has to be accepted in general trade.

FYI, the reason the Federal Reserve doesn't arbitrarily create dollars whenever it feels like it is because there is a genuine risk of instability if the value of the dollar fluctuates too rapidly. Ordinarily, unrestricted money creation would cause "empty" inflation, but right now that is quite simply not a risk. Keynes observed that the normal rules of money change when you hit the zero lower bound.

While the Fed could, in theory, do it, erasing the national debt by waving a magic wand would have severe consequences.

edited 4th Mar '14 9:28:03 AM by Fighteer

Thing about gold, is that its value has actually gone up and up over the years, though keeping pace with inflation for the most part. Interesting behavior.

That's kind of what commodities do, though. They're stores of value because they don't depreciate or suffer from obsolescence.

That's mainly a matter of continuing belief among people that it should have that value. But why not? Natural inflation increases the absolute value of everything. It's the relative value, however, that you should be concerned with. It doesn't matter if a loaf of bread costs 10 times what it did in the 40's as long as you earn 10 times as much money. (Note: I pulled that time frame out of my ass.)

I still think it's strange that something like gold is considered so great. Still, I see why people would invest in it.

Okay, how about some advice then? What kinds of stocks are likely to do well in the future? I invested in 3D printing and marijuana right now.

If you have excess cash to invest, then you have to make a choice. Do you want to speculate on short-term profits, or play it safe with steady, slow growth? Entering the stock market as a small time player is something of a shell game. You don't have any real impact on the market, so you're dancing around hoping that you'll think faster than everyone else who's playing.

It so happens that the markets are riding very high at the moment thanks to the infusions of cash that the Fed has been making. Remember what I said before about how all that money isn't entering general circulation and thus isn't causing inflation? Well, it is circulating somewhere: in the finance and stock markets. And there, we have seen massive booms, with little real value behind them.

I'm not saying a large crash is due, but with so much money chasing so little real growth, there's bound to be bubbles within bubbles growing, just waiting to pop.

I can't tell you what to invest in; you should consult an investment adviser for that. The ideas you floated seem sound enough.

edited 4th Mar '14 2:19:44 PM by Fighteer

A Keynesian who sees a potential crash/bubble burst in the stock market. Austrians point to things like this as proof that Keynesian economics is bad, and yet you're a Keynesian and you see this. I'm very glad.

I do worry that things could crash, though if they do, they could rebuild afterward. I'm not sure what will happen when. I'm wondering if/when I should pull out before putting back in.

It's all basic math. I'd advise you to stop listening seriously to anyone who claims to follow Austrian or neoclassical principles; they have been approximately 95% wrong in everything throughout this entire crisis, with the few right answers being largely due to the parable of the stopped clock.

There is far too much money in stocks already; from a macroeconomic standpoint, you would do better to put your money into real things. Consumption — spending on goods and services — is what we need most right now. The "paradox of thrift" operates fully in the current situation: saving is prudent for the individual, but folly for the society.

That said, if you are going to invest anyway, invest for the long-term. Making short-term bets is a good way to get burned. Think of it as gambling at a casino. Only bet with money you don't need and don't mind if you lose.

edited 4th Mar '14 11:25:03 AM by Fighteer

If you're not expecting a catastrophic collapse of the stock market anytime soon, I generally recommend investing in indexed mutual funds, split with safe assets like US Treasury bonds. If you really want to diversify, you go international, but due to the various additional costs involved in doing so, that's less feasible for individual investors, short of Warren Buffet or the like.

The main reason short term bets are likely to get you burned is at least in part because of the additional transaction costs. That's why it's just not worth it to micromanage portfolios, like some finance types insist on doing.

edited 4th Mar '14 11:26:15 AM by TheyCallMeTomu

Right. Imagine playing slot machines where the payout rate is 105% rather than, say, 95%, but every pull costs you a fee of 10% of your wager (again, numbers made up). It comes down to the same thing in the long run. Sure, some people hit the jackpot, but on the average, you're a loser.

By the way, management fees are the "rents" of the finance industry. They are a major part of the reason why Wall Street billionaires exist.

If you look at the historical performance of hedge funds and other playgrounds for rich people's money, you'll find that they largely do worse than market indexes, meaning that a lot of people are getting very rich off of losing money for their rich buddies. It really goes a long way toward revealing the mentality that prevails among the 1% and the 0.1%.

edited 4th Mar '14 11:48:29 AM by Fighteer

This is an important post that anyone who believes that providing assistance to the poor motivates them to remain in poverty should read. Or even if you don't believe that. Cross-posting with the U.S. Politics thread.

Sergei Glazyev, an aide to Putin, has said that if the U.S. imposes sanctions on Russia, they might stop using the U.S. dollar as a reserve currency and not pay off any outstanding loans to U.S. banks.