Hey cap'n. As a social conservative by reason and a fiscal conservative by faith (I know, I know..thats supposed to be the other way around) I have a few questions.
I have been doing do some personal study recently trying to bend my head around how economics really work for the first time in my life. I have some questions on debt.
I always thought of debt as a bad thing (and still do) but now I'm starting to wonder. Debt as I understand it, is owed by the government and secured by the ability of taxpayers to pay it off. Since this means we become in affect endentured servents for the life of our nationl debt, It seems bad. But then I thought, we all assume debt for one reason or another. I may take out debt to start a new business or for a school loan. Governments likewise issue bonds to make certain investments to, such as in infistructure. If these investments contribute to the growth of the economy, and therefore reap greater tax revenues as a result of greater domestic product, then the debt which the government assumed would have been a good investment. If however the overall effect of the money spent from assuming the debt results in less return, then the debt never should have been assumed. Is this a correct understanding of how debt works? And if so, then how much of our national debt was invested in areas which will reap a positive return and how much were poorly invested? Is there a chart to reflect this? Or am I totally misundestaning the concept of why we have debt?
No, you’ve hit it right on the head and have a way better than average understanding of debt.
You are right, if debt is used as an INVESTMENT and the investment yields a higher rate of return than what is being paid in interest, this is to the benefit of the borrower.
Thus, if you as an individual borrow money to buy a business or pay for an engineering degree, this is a good thing as it will allow you to produce not only more wealth for yourself, but the wealth necessary to pay back the loan.
Transfer the same concept to corporations. Medtronic can borrow money at 7%, invest it in its operations which roughly provide 20% return. This provides creditors with a healthy and stable 7% return, while providing the shareholders with the remaining 13% return.
Transfer the same concept to a larger entity like government and you’re right. If the government borrows money to build roads, infrastructure, power plants, etc. that increases the efficiency and capacity of the economy to produce wealth, grow and thus pay taxes. Ireland is a perfect example of this as well as the Asian Tigers.
Contrast that with pissing it away.
As individuals we now borrow money against our home, leveraging up our debt in our houses to invest? Hell no, we piss it away on consumer goods like SUV’s and plasma screen TV’s.
Transfer the same concept to corporations. Northwest Airlines in 1990 was bought out by a guy called Al Checci who borrowed roughly $5 billion to purchase it and threw in only $10 million in equity of his own money. You don’t borrow $5 billion to purchase as something as volatile and unprofitable as an airline.
Transfer the same concept to governments. Argentina was loaned $132 billion to build up its infrastructure and to become the next Japan. It pissed it away on education, government projects, fat salaries for public sector workers who did nothing and pay offs for regional and provincial government heads. It should be no surprise they defaulted and have not provided the return to pay back its lenders. Africa is another great case. Estimates of $600 billion has been loaned or given to Africa to be what? Crass and cold as it may sound, what wasn’t stolen by corrupt regimes or warlords went to keep dying people alive for another couple years. It didn’t go into the infrastructure or anything long term that would help the economy produce more wealth. It just was pissed away on temporarily feeding people that had no chance anyway.
Ok, having said all that, Where does America stand with it's debt...are we waiting on a big return, or did we piss it away on Johnson's great society, the new deal, and the social spending of the 80's and 90's?
Well if you look at our government debt as a percent of GDP it isn't too bad. Looking at about 50%.
Consumer debt as percent of GDP has skyrcoketed, I had the figures here somewhere, but it's bad, even worse than the growth of debt in the government and it's for nothing as noble as investments or businesses. It's all for consuming goods.
Regardless, it's not the current debt we have now as much as it is the future debt the Baby Boomer generation is going to saddle us with as they retire. Social security, medicare, medicaid and projected pension benefit obligations are estimated to load us up with another $42 trillion.
Estimates vary wildly, but I'd say our future debt to GDP is going to be around 400%.
Of course, this will crush the economy because you'd have to tax at such an excessive rate that nodboy would work.
Effective socialism will exist, and the left will tout this as a perfect example as how capitalism failed.
The irony of course being that socialist policies like social security and mecidare will be to blame for the demise.
Hey cap'n. As a social conservative by reason and a fiscal conservative by faith (I know, I know..thats supposed to be the other way around) I have a few questions.
ReplyDeleteI have been doing do some personal study recently trying to bend my head around how economics really work for the first time in my life. I have some questions on debt.
I always thought of debt as a bad thing (and still do) but now I'm starting to wonder. Debt as I understand it, is owed by the government and secured by the ability of taxpayers to pay it off. Since this means we become in affect endentured servents for the life of our nationl debt, It seems bad. But then I thought, we all assume debt for one reason or another. I may take out debt to start a new business or for a school loan. Governments likewise issue bonds to make certain investments to, such as in infistructure. If these investments contribute to the growth of the economy, and therefore reap greater tax revenues as a result of greater domestic product, then the debt which the government assumed would have been a good investment. If however the overall effect of the money spent from assuming the debt results in less return, then the debt never should have been assumed. Is this a correct understanding of how debt works? And if so, then how much of our national debt was invested in areas which will reap a positive return and how much were poorly invested? Is there a chart to reflect this? Or am I totally misundestaning the concept of why we have debt?
No, you’ve hit it right on the head and have a way better than average understanding of debt.
ReplyDeleteYou are right, if debt is used as an INVESTMENT and the investment yields a higher rate of return than what is being paid in interest, this is to the benefit of the borrower.
Thus, if you as an individual borrow money to buy a business or pay for an engineering degree, this is a good thing as it will allow you to produce not only more wealth for yourself, but the wealth necessary to pay back the loan.
Transfer the same concept to corporations. Medtronic can borrow money at 7%, invest it in its operations which roughly provide 20% return. This provides creditors with a healthy and stable 7% return, while providing the shareholders with the remaining 13% return.
Transfer the same concept to a larger entity like government and you’re right. If the government borrows money to build roads, infrastructure, power plants, etc. that increases the efficiency and capacity of the economy to produce wealth, grow and thus pay taxes. Ireland is a perfect example of this as well as the Asian Tigers.
Contrast that with pissing it away.
As individuals we now borrow money against our home, leveraging up our debt in our houses to invest? Hell no, we piss it away on consumer goods like SUV’s and plasma screen TV’s.
Transfer the same concept to corporations. Northwest Airlines in 1990 was bought out by a guy called Al Checci who borrowed roughly $5 billion to purchase it and threw in only $10 million in equity of his own money. You don’t borrow $5 billion to purchase as something as volatile and unprofitable as an airline.
Transfer the same concept to governments. Argentina was loaned $132 billion to build up its infrastructure and to become the next Japan. It pissed it away on education, government projects, fat salaries for public sector workers who did nothing and pay offs for regional and provincial government heads. It should be no surprise they defaulted and have not provided the return to pay back its lenders. Africa is another great case. Estimates of $600 billion has been loaned or given to Africa to be what? Crass and cold as it may sound, what wasn’t stolen by corrupt regimes or warlords went to keep dying people alive for another couple years. It didn’t go into the infrastructure or anything long term that would help the economy produce more wealth. It just was pissed away on temporarily feeding people that had no chance anyway.
Ok, having said all that, Where does America stand with it's debt...are we waiting on a big return, or did we piss it away on Johnson's great society, the new deal, and the social spending of the 80's and 90's?
ReplyDeleteWell if you look at our government debt as a percent of GDP it isn't too bad. Looking at about 50%.
ReplyDeleteConsumer debt as percent of GDP has skyrcoketed, I had the figures here somewhere, but it's bad, even worse than the growth of debt in the government and it's for nothing as noble as investments or businesses. It's all for consuming goods.
Regardless, it's not the current debt we have now as much as it is the future debt the Baby Boomer generation is going to saddle us with as they retire. Social security, medicare, medicaid and projected pension benefit obligations are estimated to load us up with another $42 trillion.
Estimates vary wildly, but I'd say our future debt to GDP is going to be around 400%.
Of course, this will crush the economy because you'd have to tax at such an excessive rate that nodboy would work.
Effective socialism will exist, and the left will tout this as a perfect example as how capitalism failed.
The irony of course being that socialist policies like social security and mecidare will be to blame for the demise.
Buy Yuan!