Timeline for Why is Greece's debt considered a problem but not US debt, which is much larger?
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| Sep 26, 2018 at 14:12 | comment | added | Dmitriy Sintsov | US Dollars circulate around the whole world, for example there are huge amount of both printed and bank account dollars in Russia. So, when USA prints more dollars, the inflation is redistributed around the whole world population, not just 300m of USA citizens. That makes possible to have huge debts, huge emission but no bank system collapse like happens in Greece. USA also is protected by huge army thus is considered to be much safer investment place than Greece is. Huge money loves the safety. | |
| Jun 25, 2017 at 7:23 | comment | added | RCM | @stevegt Hmm. I grant your first reason is one of the reasons US citizens need dollars (and therefore the dollar has intrinsic value), and your second reason is one of the (many) ways Greece is less creditworthy than the US. But if the US debt had to be paid through taxation only, in uninflated 2017 dollars, I think we would wind up in a default situation somewhere before the current long term bond runs to maturity. But that won't happen, because we actually can inflate as required. But anyway, we can prolly go on forever so ... good night! | |
| Jun 25, 2017 at 7:10 | comment | added | stevegt | @RCM The US dollar's intrinsic value comes from the fact that US residents need US dollars to pay their US taxes. The thing that works in the US (and that's not working in Greece) is that people might gripe but generally do pay their taxes, so it's reasonable to assume that the US treasury will not default, so investors and the Fed are still willing to buy US treasury bonds. When a national treasury starts having trouble collecting taxes, you'll tend to see problems emerge like those Greece is dealing with. | |
| Jun 25, 2017 at 6:50 | comment | added | RCM | @stevegt Of course money and bonds are two sides of the same transaction. But if the Treasury issues new debt, and if the Fed buys it for new money, then what is the effect? The government owns a government bond, and more dollars are on the street. Those dollars create a debt on the Fed books, but to call that debt you have to give dollars to get dollars--it's self-cancelling and not a true liability. But the increase in the money supply is real and was used to offset the (national) debt. All I'm claiming is this is possible for the US but not for Greece, and this difference is important. | |
| Jun 25, 2017 at 6:47 | comment | added | RCM | @stevegt Of course the ECB works (close enough to) the same way as the Fed. That's why I said they can both (effectively) print money (and Greece can't). Sure, there is a liability on the balance sheet--that's a true fact. It is a dollar liability, payable in dollars. Just bring the Fed a dollar and you can demand they give you a dollar. in return. But that is no (real) liability--it's an accounting trick for hiding dilution of the value of money. | |
| Jun 25, 2017 at 6:42 | comment | added | stevegt | @RCM "The US" is not a single institution. The US Federal Reserve works the same way as the ECB. The US treasury works the same as Greece's treasury. Money created by a central bank must be recorded as a liability on the central bank's balance sheet -- bonds purchased on the left, money issued on the right. Likewise, bonds created by a treasury are a liability for the treasury -- money received on the left, bonds issued on the right. Money and bonds are two sides of the same transaction; each are liabilities for their issuers because at maturity the flow reverses. | |
| Jun 25, 2017 at 5:40 | comment | added | stevegt | @MichaelKay The "national debt" is bonds that have been issued by the US Treasury, and has nothing to do with the Federal Reserve, so you were partly right. The Fed is an independent system, owned by US banks, with its own balance sheet. The Fed buys a lot of US treasury bonds on the open market, so it's fair to say that much of the "national debt" is actually owed to the Fed, the banks that own the fed, and the shareholders of those banks. Own any JPM stock? ;-) | |
| Jun 25, 2017 at 5:21 | comment | added | stevegt | @mbrig Answering your question about open market operations -- I was a bank VP, global capital markets. You'll want to do more digging into how the Fed works -- every dollar they create for bond purchases is a liability on their balance sheet. While you can't demand gold for a modern dollar, you can and will demand that the treasury wipe out your tax owed when you give them Fed dollars. The treasury can and will demand that the Fed accept those dollars as payment at bond maturity. The Fed wants those dollars back; they need them to erase that liability on their books. It's a closed system. | |
| Jun 25, 2017 at 2:50 | comment | added | RCM | I confined my original post to the general concept "the US government can print money" expressly to avoid these details. Now that they have come up, mbrig is correct. Open Market Operations DO create money. It CAN come from nowhere (the Fed gets ownership of a bond, provides money in return, and that money does not have to exist previously). It is NOT a liability (nobody owes anything to anyone as a result of the newly created money). There is no question the US can do this (and does it regularly) and Greece cannot (but the European Central Bank can). | |
| Jun 25, 2017 at 2:38 | comment | added | Jasper | allowing much higher interest rates to be charged. One could argue that the changes to U.S. bank regulations amounted to the replacement of a failed old banking system with a new banking system. By the way, the changes that encouraged syndication of credit card debt and mortgage debt were major contributing factors to the banking system's severe problems in 2008. | |
| Jun 25, 2017 at 2:37 | comment | added | Jasper | The U.S.' high inflation rates circa 1980 nearly did cause the banking system to fail. For example, many savings and loans held mortgages (issued years earlier) that paid interest rates lower than the peak inflation rate. When the inflation rate rose, so did short-term interest rates, and many financial institutions were severely squeezed. Some bet big on real estate developments. Some of these borrowers failed, as did some of their lenders. Others survived because the government radically changed how it regulated banks and savings and loans, including allowing interstate banking, and… | |
| Jun 24, 2017 at 23:05 | comment | added | mbrig | @michaelkay US bills do not have that text on them, so I'm not sure what you mean. The US isn't on a gold standard, so you can't go demand equivalent gold as you potentially could have way back when. What exactly are you saying a foreign government could do with a bunch of US bills? What would "calling in the debt" look like? | |
| Jun 24, 2017 at 22:58 | comment | added | mbrig | @stevegt Except US bills are not IOUs, and haven't been since the gold standard. You can't exchange them for government assets unless the government wants you to. Do you know how an open market operation works? The Fed (or ECB) takes control of suitable collateral from a non-central bank, and then credits the bank's account (which it can then use, lend out, etc). The borrowing bank cannot exchange it's money for the assets it pledged, there is no liability for the Fed (though it can "buy" back the currency, for the collateral, if it wants to). | |
| Jun 24, 2017 at 22:41 | comment | added | stevegt | @mbrig "It doesn't come from anywhere" is incorrect. It's a liability for the issuer. I borrow your rake and give you a post-it note reminder. The note says "bearer gets rake". Your friend later brings me the note, and I have to give him a rake. A central bank like the Fed or ECB does the same thing; we simply use their notes for money. The US treasury performs the service of printing paper bills, but those are not legal tender dollars until the Federal Reserve buys them from treasury, at printing cost, not face value. So no, the US treasury can't "print money" any easier than Greece's can. | |
| Jun 24, 2017 at 22:41 | comment | added | Michael Kay | @mbrig: issuing banknotes clearly creates a debt ("I promise to pay the bearer..."). And it's clearly an interest-free debt. But I may have been mistaken in saying it isn't counted as part of the national debt - I'm happy to be corrected on this. | |
| Jun 23, 2017 at 21:46 | comment | added | mbrig | @stevegt The Fed does not require revenue to buy bonds. When it conducts an OMO with a bank, it credits the bank's account and that money is "printed", it doesn't come from anywhere. Greece does not have this option. The treasury can also print actual physical bills, but that's less relevant. | |
| Jun 23, 2017 at 21:37 | comment | added | mbrig | @michaelkay Could you clarify? I'm not sure what you mean. They could "sell them back" in exchange for American goods/bonds/services, but that doesn't cost the US government anything. | |
| Jun 22, 2017 at 14:00 | comment | added | stevegt | Not a bad answer, but the US treasury does not and cannot "print money" any more than Greece can. Money is created when a central bank buys bonds, while a treasury creates debt by selling bonds; both do this in the open market. A treasury's ability to repay that debt ultimately depends on its tax revenue -- austerity harms this by slowing the economy. Too many people (including heads of state) get this backwards, with disastrous results. For those interested, Sal Khan has a good set of tutorials at khanacademy.org/economics-finance-domain/core-finance/…. | |
| Jun 22, 2017 at 12:00 | comment | added | KRyan | If investors seriously expected the US would significantly ramp up inflation in order to cover its debts, they would not borrow from the US because the US would be paying back less real value than they were leant. This certainly does happen—in small, expected, controlled amounts that borrowers factor into their choices to buy bonds. It is not a significant factor in whether or not the debt is perceived as a problem because massive inflation is equally, if not more, problematic than defaulting on debt. This states a bunch of true facts, but is absolutely wrong as an answer to the question. | |
| Jun 22, 2017 at 7:53 | comment | added | henning no longer feeds AI | This is indeed much more important than the debt/GDP ratio. Euro-crisis countries like Ireland, Spain, Italy have debt/GDP ratios similar to the US. On the other hand, Japan has a much higer debt/GDP ratio than Greece. | |
| Jun 21, 2017 at 9:31 | vote | accept | Bregalad | ||
| Jun 21, 2017 at 8:36 | comment | added | Michael Kay | Might be worth mentioning here that the US (almost uniquely) has a large debt that doesn't appear on the balance sheet at all, because there are so many countries that use US dollar bills for everyday internal commerce in preference to their own currency. In principle these countries have lent the US money, at 0% interest, to buy these banknotes, and could sell them back any time they chose. | |
| Jun 21, 2017 at 5:17 | history | edited | Brythan | CC BY-SA 3.0 |
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| Jun 20, 2017 at 7:27 | comment | added | RCM | @jamesqf: There is no "if" here. What I have described is happening all the time. To answer your specific question, it is not necessary to print enough dollars to keep the debt from increasing, but only to keep up with interest payments. Technically this is an increase to the monetary base, rather than the money supply, though the two are closely linked. It absolutely IS done to finance the debt (through the mechanism of buying government bonds with new cash). You don't have to agree this is the main difference between the US and Greece, but denying it happens is counter-factual. | |
| Jun 20, 2017 at 5:31 | comment | added | jamesqf | @RCM: If dollars were printed specifically to pay the debt (US: I don't know enough about most other countries to comment), then why would the debt be increasing? Note that printing to pay the debt is something quite different from increasing the money supply. There are supposedly reasons to do that: ask on the economics site for a better explanation than I can possibly give. | |
| Jun 19, 2017 at 23:45 | comment | added | Mark | @jamesqf, printing dollars to pay debt works just fine, it just means that the next time you want to borrow, the lenders will demand more interest to cover the inflation from the dollars that have been printed. It's only when you get in the long-term habit of only paying your debt with newly-printed money that you get problems. | |
| Jun 19, 2017 at 16:58 | comment | added | RCM | Here are two cool charts. They show the number of dollars in the economy. Not the value of the economy, just the number of dollars. One is the actual number and one is the number after the banks get hold of it. Bottom line, the US controls it's own fate in these charts and Greece has to rely on what the EU wants to do. Monetary base: fred.stlouisfed.org/series/BASE; M2 (base plus some other stuff): fred.stlouisfed.org/series/M2 | |
| Jun 19, 2017 at 16:49 | comment | added | RCM | Printing dollars to pay debt really does work. It works constantly, is happening right now, and has been happening since whenever the US last had a surplus in real terms (Eisenhower days, except maybe one Clinton year). It's true people lending do expect to get back money plus some profit--or they should, if they are rational, which isn't true as often as you'd think--however all that does is lead to inflation, and possibly more inflation after that, which I already acknowledged. But it definitely does work, almost unlimited times, and is in constant use by governments all over the world. | |
| Jun 19, 2017 at 16:40 | comment | added | jamesqf | The printing dollars to pay debt option really doesn't work (at least not more than once), because the people lending money expect to get back their investment plus some profit. If the US starts printing enough dollars to cover the debt, the value of the dollar will decrease (and the anticipated future value will increase even more), because no one will be interested in getting back "dollars" that are only worth fifty cents. See e.g. Venezuela. | |
| Jun 19, 2017 at 15:50 | history | edited | RCM | CC BY-SA 3.0 |
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| Jun 19, 2017 at 15:40 | review | First posts | |||
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| Jun 19, 2017 at 15:38 | history | answered | RCM | CC BY-SA 3.0 |