Wiseacre
Retired USAF Chief
O wow. I really have to repost most very first post....?
Your wrong about borrowing. For two main reasons.
1. Ok imagine this scenario. Productivity in country A is $1 trillion. Country A borrows $500 billion from country B. Country A uses that $500 to build roads, planes, buildings, etc, etcs. Productivity in country A is now $1.5 trillion. The $500 billion is money that was not in the economy of country A prior to the borrowing.
But now country A has a $500 billion debt, which it must service and pay back. How come you're so quick to ignore the costs of borrowing? Over time, it adds up, no?
Okay, now let's look at another scenario, this time country A borrows $500 billion from country B and invests it in a bunch of Solyndras and Evergreen Solar companies that go bust a year or two later. For the first year when country A got the $500 billion it's productivity goes up $500 billion, great! But now it's a few years later and the investments didn't pan out. Now we're back to $1 trllion in productivity and we also got that $500 billion debt we have to service. Not so hot.
Yes the effect of borrowing is neutral over the long term. But the point is that government can raise production in the short run very easily.
2. Government can actually make investments. The internet is a result of money the military spent to create ARPANET, the first internet. The human genome project in the 90's, the basis of amazing new disease treatments, was funded almost entirely by the US government. Government first harnessed nuclear power. So now that we know government can make investments, lets think about how it borrows.
I wouldn't say the gov'ts track record on investments is all that hot. Been awhile since they've hit a homerun.
Thats more of an opinion. I would call the internet and mapping the human genome historic investments. Very recent too, within about the last 20 years.
The government borrows money from the bond market. The amount of interest the government pays on the bonds it issues is proportional to how risky they are. The government currently pays very low interest rates on money it borrows, historical lows in fact. So think about an investors options. He can invest his money in a treasury bond for 10 years and get a 1.86% return, or he could invest in equities and realize returns maybe even 10% in a single year. The only reason an investor would choose a very low yielding bond over a high yielding stock is if he thought the stock was risky. So the fact that there are even buyers for treasuries at an interest rate of 1.86% indicates that those investors are unwilling to risk their money in more riskier activities like venture capital.
So if government borrowing results in meaningful investment, then that is a net positive. Its money spent on production, that would have otherwise been saved. The question is if government can spend in a way that money meaningfully, that those rick-averse bond holders would not have spent it on. I would argue that its very possible.
I wouldn't.
Someone investing money any security that will only yield 1.86% over 10 years is someone who isnt going to invest in much else. If the government hires a single person they have already allocated the money better than the bond-holder would have, because the bond-holder most likely wouldnt have invested it at all if the treasury hadnt been there as a safe haven asset.
And remember that number 2 only really has to apply to domestic bond holders. Any bonds issued to non-domestic holders are flows of capital into this country, at least temporarily.
Debt is debt dude. Foreign debt has to be serviced just the same, and rolled over. Did you see the interest rates that Italy, GERMANY, France, and other EU countries had to pay lately for their soverign debt bonds? Flows of capital coming in can dry up pretty fast.
Firstly, my point was just to show that government is capable of net in-flows of capital in the short term. Secondly, you have no idea about europe even in the slightest bit.
Italy, Germany, and France are all fiscally sound nations; they are still solvent. Italy is paying a price for not having a lender of last resort, and france and germany are seeing their yields rise because investors are determining what interest rate they would need if the euro disappeared.
LOL, you sound like Barney Frank a few weeks before the crap hit the fan in 2008. And BTW, aren't you being a bit presumptious about what I know? Do you want a serious discussion or a pissing contest? I think I'm done here.