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Are there any professional economists that say that the US can (now) raise taxes and/ or cut spending [like slash military spending] so as to run a really large surplus for many years and thereby pay off the National Debt?

I'm thinking $400B per year for 50 years to pay off the about $20T debt. If revenues fall then taxes and spending are to be raised/cut so that the surplus stays at close to $400B every year.

I know that all MMT economists would say that within 5 years (or 2 years) there would be a Recession and it would get worse every year until the surplus was replaced with a deficit.

But, what do other economists or schools of economics think of this?

:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

In the other thread I was asked if there were any professional economists who supported my claim that a large surplus [combined with a large *negative* balance of payments and a low gold mining rate] will very soon result in a Recession. I answered L. Randel Wray [an MMTer] and he changed the question to add "credible" because MMT is not credible in his eyes.
. . So, I asked him the question above. It seemed like a fair question since he claimed it was totally possible and really easy. I didn't even add the "credible" stipulation. So, far he hasn't replied. Maybe he is doing research online. So, I'm asking you-all to help him.

He might call foul because I provide actual numbers instead of his words like "large surplus" and "for many years". But, actual numbers seem more fair to me. My numbers were $200B for 100 years though, and he wanted a larger surplus.

BTW --- I personally can't think of a credible economist who says a large surplus will lead to a Recession because I don't know enough about all the current schools of economics and am not good at finding such info on the internet. I feely admit that.

 
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I'm not sure about naming people but I feel like you've maybe got things slightly backwards here?
THere are lots of economists in the kenyesian tradition who would say that if you are running a surplus whilst the private sector is shrinking or in trouble, that will lead to recession.
You can run a surplus (and indeed by orthodox keynesian methods you should do) when the private sector is in growth, this will not lead to a recession.

So it's not the nature of running a surplus that leads to recession, it's that you need the public sector to be running counter-cyclical to the private sector, so at the moment, running a surplus (or increasnig that surplus) would lead to recession because the private sector is not in a good state, and running a surplus means less spending in the economy, which means recession (since the reduction in public sector spending is not going to be offset by increases in private sector spending).

I might have misunderstood what you are saying/asking here though?
 
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US debt is not 20 trillion, it is around 14 trillion. The other 6 trillion is intragovernmental debt which is a ridiculous concept. If you owe your wife $1000 that doesn't put your family an extra $1000 in debt.
 
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sfox wrote:
US debt is not 20 trillion, it is around 14 trillion. The other 6 trillion is intragovernmental debt which is a ridiculous concept. If you owe your wife $1000 that doesn't put your family an extra $1000 in debt.

I agree with this, unless I guess if my wife borrowed the $1000 dollars from an outside source to loan to me. But then that just seams like a silly way to do bookkeeping.
 
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sfox wrote:
US debt is not 20 trillion, it is around 14 trillion. The other 6 trillion is intragovernmental debt which is a ridiculous concept. If you owe your wife $1000 that doesn't put your family an extra $1000 in debt.

I think you mean things like the Soc. Sec. Trust Fund, right?

I'll assume your answer is, yes.

I think I may disagree, let's see if I can explain it and convince you.

The SS-TF is about $3T or $4T, right? it is held by one agency and paid to it by another agency as necessary, right?

It is not paid out of tax dollars it is paid out of new borrowing. That is the bonds held by the SS-TF are redeemed and new bonds sold to get the cash at the end of the day to cover the kited checks the SS Admin. wrote. If there were a dedicated new tax just to redeem the SS-TF bonds then it would be different and I would agree with you that it is stupid for a wife to lend money to her husband and count that as part of the family indebtedness. But, what if the wife has no income so she has to go outside the marriage to borrow to pay her husband back. Now, was her debt part of the total indebtedness?

This goes to or hits on the other thread and your reply there. Are dollars Gov. issued IOUs that are always destroyed when they are deposited at the Fed.? Or does it make some sense to go ahead and deposit them and then re-spend them?

Does this make any sense? Really, I want to know.

 
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Any classic or Keynesian economist would say that the government could pay off the debt.

Now the issue is if we should pay off the debt. Of course should is a not a question Economics should answer, but rather what would the results be.

Now pretty much all schools of Economic Thought would agree that paying off the debt entirely, would have huge negative consequences to the US and Global economies.

I would say that as long as the servicing of the debt is not too large, then the debt is not constricting. It's kind of like a mortgage.

Trade surpluses, well, we give other countries money to get stuff. We have more stuff. They have more money. Why is this intrinsically bad?

If we can continue to grow at a healthy rate none of these issues should be a problem.


We should however reduce our debt and our trade deficit by growing the economy.
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Back in the late '90s during the Clinton administration we had budget surpluses and they looked like they would continue. The financial industry was growing worried - US government securities (bonds, t-bills) were crucial instruments in investors' portfolios, and they were worried these securities were going to grow too scarce.



Anyway, we don't need to pay off the national debt entirely. It's at manageable levels now. There are some negative repercussions to paying it off entirely. Not saying let it explode - but it is not a significant problem right now.

Also, everybody should quit making analogies between national debt and household debt. They ain't the same.
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Steve1501 wrote:
sfox wrote:
US debt is not 20 trillion, it is around 14 trillion. The other 6 trillion is intragovernmental debt which is a ridiculous concept. If you owe your wife $1000 that doesn't put your family an extra $1000 in debt.

I think you mean things like the Soc. Sec. Trust Fund, right?

I'll assume your answer is, yes.

I think I may disagree, let's see if I can explain it and convince you.

The SS-TF is about $3T or $4T, right? it is held by one agency and paid to it by another agency as necessary, right?

It is not paid out of tax dollars it is paid out of new borrowing. That is the bonds held by the SS-TF are redeemed and new bonds sold to get the cash at the end of the day to cover the kited checks the SS Admin. wrote. If there were a dedicated new tax just to redeem the SS-TF bonds then it would be different and I would agree with you that it is stupid for a wife to lend money to her husband and count that as part of the family indebtedness. But, what if the wife has no income so she has to go outside the marriage to borrow to pay her husband back. Now, was her debt part of the total indebtedness?

This goes to or hits on the other thread and your reply there. Are dollars Gov. issued IOUs that are always destroyed when they are deposited at the Fed.? Or does it make some sense to go ahead and deposit them and then re-spend them?

Does this make any sense? Really, I want to know.

No, it doesn't make sense at all. The so called social security trust fund represents a promise to pay for something in the future. That promise does not have to be fulfilled as social security payouts could be reduced. It is a fictional creation. Just because you write it down and you pay interest on the fictional debt doesn't make it real debt.

The future liabilities for Social Security are just that, future liabilities. That isn't debt. If you are going to count future payments for Social Security as debt, why not also count future payments for medicare/medicaid, future payments for salaries of government employees, future payments for military equipment, future payments for world war 3, and future payments for disaster relief for the future hurricanes that will inevitably show up?
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wifwendell wrote:
Also, everybody should quit making analogies between national debt and household debt. They ain't the same.

No one was claiming they were, it is an analogy. An even better analogy for the fictional intergovernmental debt would be to say a family is $2000 in debt because a husband promised his wife that they would take a vacation to hawaii next year.
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wifwendell wrote:
Back in the late '90s during the Clinton administration we had budget surpluses and they looked like they would continue. The financial industry was growing worried - US government securities (bonds, t-bills) were crucial instruments in investors' portfolios, and they were worried these securities were going to grow too scarce.



Anyway, we don't need to pay off the national debt entirely. It's at manageable levels now. There are some negative repercussions to paying it off entirely. Not saying let it explode - but it is not a significant problem right now.

Also, everybody should quit making analogies between national debt and household debt. They ain't the same.

I totally agree, they are not the same at all.

May I add?
1] MMT actually says [or said 2 years ago at least] that those surpluses are a cause or the cause of the Recession known as the Dot Com Bubble.
2] MMT is wrong in a way when it says that in all of US history there have been 7 [I think is the number but you can think of it as X] periods when the US Gov. ran a surplus for a few or several years running and in every single case this period ended when there was a bank Panic or a Recession or Depression. MMT makes a point of repeating "In every single case". As if this proved their point.
. . But it doesn't prove the surpluses cause some Bank Panics and Recessions. It proves that surpluses end when a Bank Panic makes tax revenues fall. Still it is an interesting point. And MMT argument does make a lot od sense for how surpluses cause Recessions [to use the modern term].

. . I also point out that it was possible back in the 1800s for the US to have a positive balance of payments and incoming investments and this could help the nation pay the surplus without having all the nation's savings sucked into the Gov. treasury and used to pay off Gov. debt.
. . I also point out that in the 1800s there were a few big gold rushes and gold was money so new gold adds to the money supply and allows the people to pay the surplus without having all their savings sucked up by the Gov. and used to pay off Gov. debt. Maybe at least.

 
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sfox wrote:
Steve1501 wrote:
sfox wrote:
US debt is not 20 trillion, it is around 14 trillion. The other 6 trillion is intragovernmental debt which is a ridiculous concept. If you owe your wife $1000 that doesn't put your family an extra $1000 in debt.

I think you mean things like the Soc. Sec. Trust Fund, right?

I'll assume your answer is, yes.

I think I may disagree, let's see if I can explain it and convince you.

The SS-TF is about $3T or $4T, right? it is held by one agency and paid to it by another agency as necessary, right?

It is not paid out of tax dollars it is paid out of new borrowing. That is the bonds held by the SS-TF are redeemed and new bonds sold to get the cash at the end of the day to cover the kited checks the SS Admin. wrote. If there were a dedicated new tax just to redeem the SS-TF bonds then it would be different and I would agree with you that it is stupid for a wife to lend money to her husband and count that as part of the family indebtedness. But, what if the wife has no income so she has to go outside the marriage to borrow to pay her husband back. Now, was her debt part of the total indebtedness?

This goes to or hits on the other thread and your reply there. Are dollars Gov. issued IOUs that are always destroyed when they are deposited at the Fed.? Or does it make some sense to go ahead and deposit them and then re-spend them?

Does this make any sense? Really, I want to know.

No, it doesn't make sense at all. The so called social security trust fund represents a promise to pay for something in the future. That promise does not have to be fulfilled as social security payouts could be reduced. It is a fictional creation. Just because you write it down and you pay interest on the fictional debt doesn't make it real debt.

The future liabilities for Social Security are just that, future liabilities. That isn't debt. If you are going to count future payments for Social Security as debt, why not also count future payments for medicare/medicaid, future payments for salaries of government employees, future payments for military equipment, future payments for world war 3, and future payments for disaster relief for the future hurricanes that will inevitably show up?

I am collecting Soc. Sec. now. I can tell you that *I* feel just as much positive that the Gov. *must* pay me what it promised as any bond holder feels about the Gov. paying him/her what the Gov. promised to pay in the future. this is especially true since they are just borrowing it from some rich guy anyway, and will never really pay it back. They'll just keep rolling it over until they can't.

There your argument used back against you.

Does this get you to reconsider?

All debt is just promises to pay in the future and all can be reniged on.

 
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costguy wrote:
Any classic or Keynesian economist would say that the government could pay off the debt.

Now the issue is if we should pay off the debt. Of course should is a not a question Economics should answer, but rather what would the results be.

Now pretty much all schools of Economic Thought would agree that paying off the debt entirely, would have huge negative consequences to the US and Global economies.

I would say that as long as the servicing of the debt is not too large, then the debt is not constricting. It's kind of like a mortgage.

Trade surpluses, well, we give other countries money to get stuff. We have more stuff. They have more money. Why is this intrinsically bad?

If we can continue to grow at a healthy rate none of these issues should be a problem.


We should however reduce our debt and our trade deficit by growing the economy.

"Why is this intrinsically bad?"

It isn't. Neither MMT nor I say that it is. What MMT says is that in the sector balances definition foreign trade is the 3rd sector and if money is coming into the nation because of trade then there is more money in the nation. This money can be used to pay the additional taxes that are creating the surplus. Without this extra money the people will find it harder to pay those taxes and in fact according to MMT eventually a *continued* surplus will always suck money out of the economy until the people stop spending and this causes a Recession.

 
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Steve1501 wrote:
I am collecting Soc. Sec. now. I can tell you that *I* feel just as much positive that the Gov. *must* pay me what it promised as any bond holder feels about the Gov. paying him/her what the Gov. promised to pay in the future. this is especially true since they are just borrowing it from some rich guy anyway, and will never really pay it back. They'll just keep rolling it over until they can't.

There your argument used back against you.

Does this get you to reconsider?

Not all all, the government has substantially cut payouts to social security in the past and they are likely to do it more in the future. This can be done by raising the retirement age, changing the way inflation is calculated, and reducing social security payments based on income or assets.

In any case, if you are going to claim that future social security payments are debt, then the actual US debt is vastly beyond $20 trillion, easily several times that. You don't get to count governmental promises of future payments as debt in once case but not in others, which is exactly why the social security trust fund is a farce.
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sfox wrote:
Steve1501 wrote:
I am collecting Soc. Sec. now. I can tell you that *I* feel just as much positive that the Gov. *must* pay me what it promised as any bond holder feels about the Gov. paying him/her what the Gov. promised to pay in the future. this is especially true since they are just borrowing it from some rich guy anyway, and will never really pay it back. They'll just keep rolling it over until they can't.

There your argument used back against you.

Does this get you to reconsider?

Not all all, the government has substantially cut payouts to social security in the past and they are likely to do it more in the future. This can be done by raising the retirement age, changing the way inflation is calculated, and reducing social security payments based on income or assets.

In any case, if you are going to claim that future social security payments are debt, then the actual US debt is vastly beyond $20 trillion, easily several times that. You don't get to count governmental promises of future payments as debt in once case but not in others, which is exactly why the social security trust fund is a farce.

To paraphrase a different phrase --

The Soc. Sec. TF may very well be a farce, but it is our farce?
Or is it , The Soc. Sec. TF may very well be a farce, but it is the farce we have to workaround?

Yes, the payout can be reduced as long as *MY* payments are *NOT* reduced, or there will be hell to pay at the ballot box. You do understand this, right?

And the difference between the bonds in the trust fund and money that will be collected in the future is clear to me. I paid some of it.!!! And I paid for my parents retirement. Just like future people should pay into the fund to pay for mine. On and on into the future forever. At least until something like an asteroid hitting Kansas happens.

 
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So, so far 1 guy has claimed that many economists think it is easy to take $400B/year out of the economy for 20 straight years and not put it back with spending without causing a Recession. Well that is not what he said but that was the question asked and he said yes. maybe he wants to clarify.

Any one else want to chime in?

 
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Steve1501 wrote:
So, so far 1 guy has claimed that many economists think it is easy to take $400B/year out of the economy for 20 straight years and not put it back with spending without causing a Recession. Well that is not what he said but that was the question asked and he said yes. maybe he wants to clarify.

Any one else want to chime in?


The only way that debt gets paid off is via default or inflation. Maybe we could also pay it off if we just start killing everyone who tries to collect social security or medicare benefits.
 
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Steve1501 wrote:
So, so far 1 guy has claimed that many economists think it is easy to take $400B/year out of the economy for 20 straight years and not put it back with spending without causing a Recession. Well that is not what he said but that was the question asked and he said yes. maybe he wants to clarify.

Any one else want to chime in?



No, I did not say it would be easy, just possible. And it would probably take more than 20 years. (if you want to avoid a recession)

I also stated that it would probably not be recommended, and the better course seems to be to grow the economy while managing the debt.
 
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Quote:


Steps to lower future deficits could also be undertaken now. Both Social Security and Medicare promise future benefits greater than future taxes called for under current law that are earmarked to support them can pay for. Closing these gaps would strengthen the long term finances of these highly popular programs. One can do so either by raising taxes to pay for currently promised benefits or by cutting benefits. So far, the two parties are divided on which of these two approaches to closing the projected funding gaps should be used.

As far as the rest of government is concerned, projected revenues and spending are very much in balance. So, closing the anticipated gaps in Social Security and Medicare would effectively prevent debt from growing faster than GDP. And by assuring financial markets that our nation is dealing with future fiscal challenges, these measures could actually help promote current economic recovery


https://newrepublic.com/article/118284/deficit-isnt-big-prob...

SO reduce deficits, eventually reduce debt. Not easy, not short.


















 
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Steve1501 wrote:
wifwendell wrote:
Back in the late '90s during the Clinton administration we had budget surpluses and they looked like they would continue. The financial industry was growing worried - US government securities (bonds, t-bills) were crucial instruments in investors' portfolios, and they were worried these securities were going to grow too scarce.



Anyway, we don't need to pay off the national debt entirely. It's at manageable levels now. There are some negative repercussions to paying it off entirely. Not saying let it explode - but it is not a significant problem right now.

Also, everybody should quit making analogies between national debt and household debt. They ain't the same.

I totally agree, they are not the same at all.

May I add?
1] MMT actually says [or said 2 years ago at least] that those surpluses are a cause or the cause of the Recession known as the Dot Com Bubble.
2] MMT is wrong in a way when it says that in all of US history there have been 7 [I think is the number but you can think of it as X] periods when the US Gov. ran a surplus for a few or several years running and in every single case this period ended when there was a bank Panic or a Recession or Depression. MMT makes a point of repeating "In every single case". As if this proved their point.
. . But it doesn't prove the surpluses cause some Bank Panics and Recessions. It proves that surpluses end when a Bank Panic makes tax revenues fall. Still it is an interesting point. And MMT argument does make a lot od sense for how surpluses cause Recessions [to use the modern term].

. . I also point out that it was possible back in the 1800s for the US to have a positive balance of payments and incoming investments and this could help the nation pay the surplus without having all the nation's savings sucked into the Gov. treasury and used to pay off Gov. debt.
. . I also point out that in the 1800s there were a few big gold rushes and gold was money so new gold adds to the money supply and allows the people to pay the surplus without having all their savings sucked up by the Gov. and used to pay off Gov. debt. Maybe at least.



You gotta quit reading MMT. It'll rot your brain.

Also, the gold standard sucked big time. You could look it up. You could also look up the much higher frequency and severity of recessions and depressions in the 1800s, too.
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Demystifying Modern Monetary Theory

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sfox wrote:
No, it doesn't make sense at all. The so called social security trust fund represents a promise to pay for something in the future.


No, it represents the taxes collected from employers and workers to date that have not been spent on benefits. So the government needs a way to store those funds that is low-risk, won't skew markets by investing, and sets aside those funds against future liabilities. The Social Security Trust Fund is much more than a "promise." The fund could hold foreign debt, commodities like gold, or S&P 500 stocks to accomplish the same goal.

It's a very real debt. And we shouldn't allow anyone to treat it otherwise or the fund really goes bankrupt in a hurry.
 
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Steve1501 wrote:
So, so far 1 guy has claimed that many economists think it is easy to take $400B/year out of the economy for 20 straight years and not put it back with spending without causing a Recession. Well that is not what he said but that was the question asked and he said yes. maybe he wants to clarify.

Any one else want to chime in?



To answer your original question - no, I do not think US government can pay off the debt - because I think that it would be politically unpalatable to do so.
Voters like receiving goodies from the government and are disinclined to pay sufficient taxes to fund all the goodies they collectively want. Reduction of goodies received or increase in taxes results in being voted out. Therefore, in democracy, for political reasons debt will generally grow as long as there are willing lenders.

That said, I take issue with your notion that debt repayment 'takes money out of economy without putting it back'.

Thinking for a second about internal debt: Repaying internal debt is simply re-allocating money within the economy from tax payers (or government spending recipients) to government bond holders whose bonds are being redeemed. Just as tax payers could spend or invest the money in the economy, so could the (former) bond holders with their freshly received payoffs.
Similarly, government taking on debt does not in fact 'stimulate' economy - at least not through monetary stimulus because they are just shifting bunch of investments that would otherwise have to go into corporate bonds or some other part of 'real economy' into government spending.
In other words, government borrowing is neither inflationary nor deflationary and whether it is drag or a stimulus on the economy depends on your view on whether private or public spending/investment does more for the long term economic health.

External debt is a little more tricky because paying that off - on the face of it at least - sends the money out of the country which makes it look as if it is taken out of economy permanently.
Here, however, countries that, like USA, can borrow in their own currency have substantial advantage.
Ultimately, dollars held by foreign agents are worthless in themselves. Only true value of the dollar is in the fact that it can be exchanged for goods and services in the USA or with people who eventually intend to exchange it for goods and services in the USA.
Repaying foreign debt than gives foreigners the means to buy more USA products (or invest in privately held USA assets) thus, again, stimulating the economy by the same amount as was taken out in tax to pay the debt off.
In extreme circumstances - of course - foreigners could decide to just sit on the money and not use it, but it would be irrational move on their part as it amounts to holding onto a (slowly) depreciating asset with no return. It is therefore not something that would happen on a scale that is relevant to this discussion.
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bramadan wrote:
Therefore, in democracy, for political reasons debt will generally grow as long as there are willing lenders.

As long as there are willing recipients of government spending there will always be willing lenders. In aggregate, they only have two choices: Hold the reserve balance they received from the government spending which pays almost no interest or buy an US treasury bond that pays a higher rate of interest.

Quote:
That said, I take issue with your notion that debt repayment 'takes money out of economy without putting it back'.

It depends what you consider “money” and who owns the T-bond. In case of the taxpayer owning it (e. g. as part of their retirement portfolio) the government will first tax them the amount to retire the bond. It will then transfer the tax proceeds back to repay the bond which will then be destroyed. While the taxpayer first had a T-bond and a deposit as assets it only will have the deposit after that repayment. With a narrow definition of “money” you are right. Nevertheless, the private sector lost a financial asset; their “wealth” is now reduced. I walked through the accounting earlier: https://boardgamegeek.com/article/26041711#26041711

If the Federal Reserve holds the T-bond (base) money is actually destroyed:

Fed: assets: T-bond liabilities: US Treasury reserve deposit
US Treasury: assets: reserve deposit liabilities: T-bond

The Fed will deduct the reserve deposit and hand the Treasury the T-bond who will extinguish it. Both parties lost an asset and a liability. Reserve deposits are part of the so-called base money M0.

Quote:
Thinking for a second about internal debt: Repaying internal debt is simply re-allocating money within the economy from tax payers (or government spending recipients) to government bond holders whose bonds are being redeemed. Just as tax payers could spend or invest the money in the economy, so could the (former) bond holders with their freshly received payoffs.

In principal correct when you assume that the wealth status of the private sector has no bearing on its spending and investment decisions.

Quote:
Similarly, government taking on debt does not in fact 'stimulate' economy - at least not through monetary stimulus because they are just shifting bunch of investments that would otherwise have to go into corporate bonds or some other part of 'real economy' into government spending.

Incorrect. The government borrows and spends in the reserve system which are liabilities of the Fed and is a closed system. Only banks have access to it while non-banks borrow in bank liabilities. There is neither a finite pool of savings available for lending nor are banks reserve-constrained. I explained that in detail earlier; see my previous posts which include relevant links: https://boardgamegeek.com/article/24743829#24743829
https://boardgamegeek.com/article/23427689#23427689

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In other words, government borrowing is neither inflationary nor deflationary and whether it is drag or a stimulus on the economy depends on your view on whether private or public spending/investment does more for the long term economic health.

That is at odds with the vast majority of economists. They all advocated for a fiscal stimulus since the financial crisis. Why do a fiscal stimulus when it has no effect on the economy? I somehow get the impression that you belief there is a fixed amount of spending that can only be sliced in different ways but not expanded. As nominal as well as real spending usually increases year-over-year that is certainly not the case. The economy can expand; not just re-allocate what is already around.

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External debt is a little more tricky because paying that off - on the face of it at least - sends the money out of the country which makes it look as if it is taken out of economy permanently.
Here, however, countries that, like USA, can borrow in their own currency have substantial advantage.

It is not so much that they can borrow in their own currency but that the trading partners accept the US-$ as payment for the goods they deliver to us.

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Ultimately, dollars held by foreign agents are worthless in themselves. Only true value of the dollar is in the fact that it can be exchanged for goods and services in the USA or with people who eventually intend to exchange it for goods and services in the USA.

Fully agree.

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Repaying foreign debt than gives foreigners the means to buy more USA products (or invest in privately held USA assets) thus, again, stimulating the economy by the same amount as was taken out in tax to pay the debt off.
In extreme circumstances - of course - foreigners could decide to just sit on the money and not use it, but it would be irrational move on their part as it amounts to holding onto a (slowly) depreciating asset with no return. It is therefore not something that would happen on a scale that is relevant to this discussion.

Actually it is very relevant if you understand why the foreign banks lend to the US-government to begin with. It starts with an US company purchasing goods from overseas which ultimately gives rise to the 'trade deficit'. Let’s say Walmart orders $1 million worth of widgets from a company in China. Its bank will transfer that amount from its reserve account to the reserve account of the Bank of China at the NY Fed. The BOC will record that as an asset, calculate the amount in Yuan according to the current exchange rate and credit the customer’s account (the company supplying the widgets) with that amount. The BOC has now a $1 million reserve deposit sitting in its account which pays very little interest. It will therefore purchase a safe and interest-bearing asset such as a T-bond with it. The interest it earns will add to its assets. As banks are tightly regulated they have only a very narrow set of choices what they can purchase with those reserve deposits. They are pretty much restricted to government securities. The BOC certainly cannot go out and just spend that balance on cars, vacation etc. Hence, retiring T-bonds held by foreigners could therefore easily reduce the available funds of the domestic sector without the external sector increasing their spending. An economic downturn will be likely.

In essence, what the BOC does with the reserve deposit is not that different from a domestic bank. When an US citizen receives a payment from the government his bank will receive a reserve deposit from the US Treasury and credit the customer's account. The bank can keep the reserve deposit but will usually try to find an interest-paying asset on the capital markets with the amount that is not a required reserve. It will take into account liquidity, risk, and capital requirements for that asset and therefore adjust its portfolio of assets accordingly.
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Mac Mcleod
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I think a large surplus would actually pay it off pretty quickly if you didn't tank the economy to get the large surplus.

Actually, if we simply limit growth in the deficit to lower than GDP growth, then mathematically we will

a) pay it off eventually.
b) long before that it would shrink to be a teeny tiny portion of GDP.


I.e. say you have a $1,000 debt. If that debt remains at $1,000 (all you do is pay the interest) while your income goes from $3,000 (in 1958) to $120,000 (in 2008) then the $1,000 debt is going to be inconsequential even tho you never paid it off.

Say US GDP is $18 trillion dollars today and the U.S. debt is $19 Trillion dollars. All we pay is interest and 50 years later, US GDP is now $162 trillion dollars. The debt has "shrunk" to 11% of GDP even tho we never paid off a dime of our debt.

Btw, those numbers are not random. GDP from 1980 to 2010 went up by that same ratio.

"All" we have to do is stop running an annual deficit. And that solves the debt problem unless we have an economic crash that lowers GDP. If U.S. GDP starts going down- our debt would eat us alive.

Compound growth over time. A thing since before Ben Franklin sang it's praises.
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Steve
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Olivier wrote,
"In essence, what the BOC does with the reserve deposit is not that different from a domestic bank. When an US citizen receives a payment from the government his bank will receive a reserve deposit from the US Treasury and credit the customer's account. The bank can keep the reserve deposit but will usually try to find an interest-paying asset on the capital markets with the amount that is not a required reserve. It will take into account liquidity, risk, and capital requirements for that asset and therefore adjust its portfolio of assets accordingly."

I think you said, 'The BoC uses the $1M cash [dollars] it has in its account with the Fed. Res. Bank to buy assets that pay interest, but it must [as of now] leave 10% in the Fed. RB as required reserves.

It matters what the assets that it buys are -- to figure out what the effect on the US economy the whole series of transactions will have.

Is this correct?

So, if they are houses this drives up the price of houses in that area.
If it is stocks in S&P500 comps., it drives up the price of stocks.
If it is a US Gov. bond this lends the dollars back to the US Gov.

 
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