U.S.'s $13 Trillion Debt Poised to Overtake GDP

As long as the debt is payable only in dollars and dollars are available only through fractional reserve banking, it's impossible to ever truly reduce the debt owed to the Fed through any means other than default. We can shift it around (and have been for some time now), but it still exists.

The real kicker is that our economy is dependent on the nonstop creation of new debt. Without it, the money supply dries up and we enter a deflationary recession.

Right. I had the same question about directly comparing the GDP figure versus the debt figure. It'll certainly help if someone knowledgeable lays bare the important factors and how they bear on the "rising debt" issue.

If a country prints more money, then it makes the money it has worth less. So those with large foreign currency reserves in say, US dollars, will be worth less.

Of course, when the US dollar is worth less compared to other currencies, then there is more of an incentive to export and produce locally, rather than import.

I am not convinced of your idea. The economy doesn't always need to grow, and can not always grow. This is how we get bubbles, when things start growing too fast, and it all collapses on itself.

Dude, m_f, you're normally one of my favorite posters on here and you say stuff that makes a lot of sense, but you've got some errors going on on this one:

> But this creates a serious problem for the economy. Because now we've got deflation. And that produces a really big incentive to save. Too big an incentive. Everything will be cheaper tomorrow, so every individual benefits by burying money in the backyard and spending as little as possible.

That's basically just summed up modern macroeconomic thought right there. The problem is, it's wrong for a lot of reasons.

First off, deflation is a good thing - deflation means tomorrow you can get more for the same price. The industry in the most rapid deflation over the last 10 years has been the computer industry - you can much, much more computer for the same money now than you could at any point in the past. This is, by itself, a good thing.

Now, not everything is prone to deflation anyways, and you've got to realize that deflation lowers costs on both the producing and consuming side. So farmers are getting lower prices for their food gradually, but their tools and tractors are getting cheaper too.

But will the economy grind to a halt without new money coming into it? Well, the historical pre-central-banking answer is no of course, but why is that?

It's because people won't put their money under the mattress - they'll try to get their money (and thus, resources) producing more wealth for them.

Under a normal, sane, classical banking system, this is by giving it to a loan banker. What's a loan banker? He's someone you give your money to, who lends it out, but you can only get your money at certain times, not whenever you want. So you give him your $10,000, he says he'll give you back $10,000 + X in one year.

X is the interest you get paid. The loan banker charges the borrower interest for the money. Say, 10%. The borrower has to pay back $11,000 after a year. Then the banker gives, for easy math, let's say 5% to you. So you get back $10,500.

But wait - why doesn't the economy grind to a halt? Because the borrower spends the money, and increases productivity with it, thus paying back the loan. If he fails to, the banker collects the collateral and sells it to recover as much as he can. You risk your money by giving it to the banker, but if his operation is sound, it's not that much of a risk.

Anyway, loan bankers are extinct in the USA, we only have savings-and-loan banks, where you can get your money at any time. A bank where you could get your money at any time used to be called a deposit bank, but they didn't loan your money out for you, they kept it and transferred it to other people for you when you wrote a check. You actually paid to keep your money safe in a deposit bank, whereas loan banks paid you.

Mixing the two - your money is gone and loaned out, but you can collect it any time regardless - this is where the need for central banks originated. There was a landmark legal case in England about whether this mixed form of banking was fraud or not in the late 1600's, and the judge said it wasn't, and that's where today's banking system came from, but I think the judge made a mistake.

Long story really really short, you don't need to inject new money, people will loan it out very carefully into productive endeavors, and that's why all the non-central-banking economies throughout history didn't grind to a halt. True, they get slower growth in most years, but you also don't get the crippling nasty bank crashes that central banking creates.

Galbraith was arguing that the current level of government debt is managable, not that any level of government debt is managable. If your interpretation were true, the government could spend limitless amounts with no tax. Do you think that is a viable scenario?