Here's why the US doesn't have to pay off its $31 trillion mountain of debt, according to Paul Krugman
By: Jennifer Sor (Business Insider via Yahoo)
He's baaack! Paul Krugman is arguing a technicality in a way that deliberately misleads. That's a favorite for barroom bets and neoliberal flimflams.
The Federal debt is not a loan. The debt consists of notes, bills, and bonds that have been sold. The money obtained from the sale of securities was not borrowed. Those Federal securities have maturation dates and must be redeemed when they mature. So, technically the Federal government has paid off the debt many, many times. That's just as technically correct as Paul Krugman's argument, and, just as misleading.
The debt limit is not about paying the government's bills. The debt limit is really about selling new securities to obtain enough money to redeem maturing securities. It's necessary to create new debt before retiring old debt. The government has to have cash on hand to redeem maturing securities, otherwise the government defaults on those maturing securities. So, prudent executive management of the Federal debt would require retaining a buffer of unsold securities to avoid default. That means the President needs to manage spending to retain a reserve of unsold securities before the debt limit is reached.
If the executive branch managed government finances properly then there would never be a risk of default on maturing securities. Blame whatever President based on political bias but the facts are that every debt limit crisis is due to a President's fiscal incompetence.
S E E D E D C O N T E N T
The US doesn't actually have to pay off its $31 trillion mountain of debt, according to top economist Paul Krugman, hitting back at the idea that government finances can be compared to household balance sheets in an op-ed weeks before the US possibly defaults on some obligations.
Though individual borrowers are expected to pay off debts, the same isn't true for governments, Krugman argued in a column for the New York Times on Friday. That's because unlike people, governments don't die, and they gain more revenue with each passing generation.
"Governments, then, must service their debts – pay interest and repay principal when bonds come due – but they don't necessarily have to pay them off; they can issue new bonds to pay principal on old bonds and even borrow to pay interest as long as overall debt doesn't rise too much faster than revenue," he added.
Though the debt-to-GDP ratio hovered around 97% last year, interest payments on that debt is only around $395 billion, according to the Office of Management and Budget, or around 1% of last year's GDP.
Historically, it's also unusual for governments to pay off large debts, Krugman said. Such was the case for Great Britain, which has largely held onto the debt it incurred as far back as the Napoleonic wars.
Krugman's argument comes amid growing contention over the US debt level, with policymakers still sparring over the conditions they want to raise the country's borrowing limit. House Speaker Kevin McCarthy has said he would reject a short-term debt ceiling increase unless spending cuts are negotiated, having proposed a bill that would slash around $4.5 trillion on spending.
Congress now has less than two weeks to raise the borrowing limit before the government could potentially run out of cash, US Treasury Secretary Janet Yellen warned. A default on the country's obligations could result in catastrophe for financial markets, experts have warned. Krugman has called for the debt ceiling to be abolished, as the risk of a financial crisis offers Republicans a "choke point" on fiscal policy.
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Blame any President to satisfy partisan whims but the fact remains, a debt limit crisis is always the President's fault. Barroom bets and neoliberal flimflams won't change the fact the President has been incompetent in managing the government's finances and has allowed a threat of default.
Don't fall for the flimflam that the debt limit is a borrowing limit, either. The government sells a tangible asset in the form of a security; the government does not borrow money.
That is a very narrow and unrealistic view on things. Remember, in our government the House holds the purse strings.
No, it doesn't.
Does the House require the President to spend public money - or - does the House give the President permission to spend public money? The President's budget proposal is a request, after all.
A valid argument can be made that the non-discretionary portion of the budget is a requirement. But what about the discretionary portion of the budget?
President Johnson and Nixon along with Congress have the most responsibility for the fiscal imbalance that has gotten us to our current debt.
Medicare and Medicaid was enacted in the mid-1960s, and then both were expanded in the early 70's and SS benefits were indexed to inflation.
Spending on SS and Medicare happens automatically, not subject to annual appropriations made by Congress.
The government sells debt instruments that can be redeemed at maturity for cash. Hence the need to issue new bonds to repay the old ones.
So yes, the government definitely does borrow money.
Yep, that's what I said.
When did selling tangible assets become a loan? Corporate stocks are not loans. So, why are bonds different?
When that tangible asset is a bond.
Corporate stocks are ownership interests. Bonds are loans.
When you buy stock in ABC, Inc, the company does not owe you money. It may decide to declare a dividend and distribute profits to the owners, but it doesn't have to. Your profits come from a combination of dividends (if there are any) and the capital gain made from selling the shares at a higher price than you paid for them.
When you buy a bond from ABC, Inc, you loan them money and they owe you that money back when the bond matures. Many corporate bonds are "callable", meaning ABC, Inc can give pay back the money you gave them at any time prior to maturity, and you must surrender the bond.
The company can choose to pay a dividend on the stock, they are required to pay interest on the bond. In the event the company declares bankruptcy, the bondholders get paid first. The shareholders get paid last, if ever.
If you own a bond issued by ABC, Inc, you can sell it just like you can sell stock that you own. You're simply transferring the debt obligation to another party in exchange for cash. US Treasuries are similar, in that they can be bought or sold on the secondary markets.
So yes, it's definitely a tangible asset, in the same way the promissory note associated with a mortgage is a tangible asset. But they're definitely loans.
That's incorrect. The bond holder owns an interest in a portion of future tax revenue. Those who buy government securities pay hard cash, at discount prices, for a guaranteed yield. That's really not a different transaction than someone buying an interest in future corporate profits paid out as dividends. The biggest difference is that bonds provide a guaranteed return while stocks do not. That's why bonds are considered a safer investment than stocks (or mortgages).
Government securities are traded much the same way as commodity futures.
No they don't. Current bondholders are being repaid with newly borrowed money, which is the whole problem with Krugman's bullshit.
For zero-coupon bonds, that's exactly correct. They buy a debt instrument (bond) at a price lower than the face amount (discount), loaning money to the US govt as they do so. They are then repaid the face amount of the bond, and the difference between what they paid and the face amount is the interest.
It's still a debt instrument. You're still loaning money.
It absolutely is.
.
You'll lose your investment advisor license saying stuff like that. Bonds are only guaranteed if held until maturity, and even then are only as good as the credit rating of the issuer. US Treasuries are the safest on the planet because of the 14th Amendment, but you can still lose money. See "Silicon Valley Bank" for more details.
Bonds represent zero equity (ownership) of the company. So if you own an ABC Inc, bond and the company quadruples in size, your bond doesn't change value. Your stock shares will probably appreciate dramatically.
Krugman is correct...
Krugman is technically correct while being technically incorrect. Krugman uses misleading language to deliberately misinform. That's how flimflams work.
Flimflamers ridicule truth and truth tellers!
Except for the bonds held by SoSec, the Federal debt is not older than 30 years at any given time. The Federal government is required to redeem notes, bills, and bonds when they mature. The Federal government has paid off the debt many times. The problem is the Federal government has been creating new debt obligations to retire old debt obligations.
Yep, it's a technicality but it's correct. And the fact that the Federal government has actually paid off the national debt many, many times is just as misleading as Krugman claiming the government never has to pay off the debt.
The US national debt is comparable to an American family's long-term mortgage or to a big corporation's long-term debts, only on a tremendously larger scale. The roads and the bridges and the building and the planes and tanks and missiles and even national parks owned by the US government are its security and are ultimately worth much much more. There is no need to pay them off any more than a business would operate without credit. Imagine families not being able to have mortgages. Paying off our national debt would also be wildly inflationary. Our debts are a part of the world's monetary systems, the same as all government's debts/bonds are, just with way way better security...
Security the gop is threatening to devalue.
"Distinguished Professor of Economics", Krugman isn't merely technically correct!
He is 100% spot on explaining it for you.
Of course, flat-earthers will ridicule him...
Do you think that Debt-to-GDP is a useful metric for analyzing the debt?
Do you think that there is a limit or negative impact by continuously increasing the size of our debt compared to GDP?
This year, the cost of servicing our debt is about $400B or around 7% bof all federal outlays. Do to our spending and inflation, next year will be worse. What do you see as an upper limit on how much of our budget should be used to simply pay for servicing our debt?
No, I think raising taxes is also an option.
Balancing a budget is not a magic trick...
"Economics is just math" - William Clinton
Supply Side Voodoo Economics is what blew up our deficits and national debt...
That is incorrect. Trading in bonds is much like any other commodity trading. Government securities are a commodity.
Buying government securities is really no different than buying corn futures, prepaying for an iPhone, buying an annuity, or buying life insurance. Government notes, bills, and bonds are nothing like a home mortgage.
Paul Krugman is depending upon the ignorance of the general public to present a technically correct but misleading argument. Krugman is playing a bar trick. When Krugman compares government debt to home mortgages then Krugman is outright lying to the public and the public is too ignorant to know any better.
Buying bonds is like buying a mortgage.
They pay interest and have due dates...
They are bought and sold and traded...
US bonds are secured by the US assets.
Nothing you said contradicted me at all.
Of course it is, do you expect a Dem sponsored legislation anytime soon? Didn't Obama sign two major tax cuts in 2010 and 2013? "This agreement will also grow the economy and shrink our deficits in a balanced way – by investing in our middle class, and by asking the wealthy to pay a little more."
No, about 30% of our fiscal imbalance is due to legislation passed during LBJ's tenure and another 30% passed during Nixon's reign. Sometimes it takes decades to see the effects.
Liars Figure and Figures Lie. Explain This!
No. Like really, fully, almost incredibly.... no.
When a person buys a house, they pledge the home itself as collateral against the loan. At no point is any public property pledged as collateral against a US Govt bond.
US Govt bonds are backed by the US Constitution itself.
Yes. There is. Every bond the US Treasury issues has a maturity date, when the holder of that bond is repaid. So yeah... there is definitely a need to repay them.
Real estate would cost a lot less than it does. But that has less than zero to do with US Govt debt.
Way better security.... unless they can't strike a deal over the weekend. But they will. Because as crooked as these bastards are, they're not all complete morons.
I needed a laugh today.
Let's be clear... you think raising other people's taxes is also an option.
No, I think it is an option for everyone...
Raising taxes is half a budget solution.
They hurt some way worse than others.
Just the same as spending cuts will do
Government notes, bills, and bonds sold to the general public do not pay interest.
You kind of butchered that. It's "Figures don't lie but liars figure"................
I didn't attribute a quote. It was all mine.
No care to explain the graph for Drinker?
Because it totally contradicts his bullshit.
You think US bonds don't pay dividends?
Dividend is just another word for interest!
Not at all.
Medicare and Medicaid enactment 50 years ago and their expansion 40 years ago set up ourt current fiscal imbalance.
How much more are you personally willing to pay?
He is correct. They don't pay dividends.
No. It isn't. They are very different things.
Little known bit of trivia....
In 1966, the Ways and Means Committee projected that Medicare would cost $12 billion by 1990. It was actually $107 billion.
Today, Medicare and Medicaid combined are about 20% of the federal budget.
Krugman is considered a flake by many.
He should not be a god to those on the left who will never understand finance.
And I remember when Krugman predicted dire things under a Trump economy.
Funny, he didn't seem to predict the runaway inflation we all got to experience under Joe Biden.
That's because he is a partisan shill.
Paul Krugman: Always Wrong, Never in Doubt
Paul Krugman: Always Wrong, Never in Doubt (yahoo.com)
It just cracks me up the way some people seem to worship Krugman for no apparent, logical reason.
By some but then having met him at Trinity College in Dublin he's a fine pub raconteur as is his spouse Robin; both have ample wit to keep one sober and that's a tough thing to do in Dublin.
As to him making either good or bad economic predictions, all economists do.
What a strawman. No one is advocating even thinking about paying off the debt the debt at this time.. Simply not borrowing as much because borrowing costs keep rising as the debt increases and interest rate rises is the goal, at least for those who think social security and other entitlements should be funded.
Krugman is responding to the gop's strawmen!
There wasn't a problem with that during the last administration.
Didn't SEN Biden vote three times not to increase the Debt Limit?
Google it and find out.
Right. Inflation was under control and borrowing was essentially free, so the debt ceiling was extended after bipartisan negotiations. Trump wasn't a dictator who refused to negotiate.
But you think a valid argument is to never do anything about a problem because someone else didn't do something in the past?
Why not raise taxes along with the cuts?
There are 2 sides, income and spending.
Income has never been higher. We don't have a revenue problem.
but go ahead and pass a bill raising taxes without increasing spending and start the negotiations that way. While Biden was promising to do nothing, Republicans passed a bill. Democrats have to do something.
Income? Yes. Tax rates? Historically Low!
We have enough money, we just waste so much of it.
Tax churches and accumulated wealth.
Especially churches with hedge funds...
Agree, the 50% who pay NO federal income tax should pay their fair share, the free ride needs to end for the takers.
Can't say this enough, Fucking Schumer is worthless, if I was from NY I would be embarrassed by this do nothing turd.
Democrats like their Nazi brothers want to steal the wealth of the Jewish people, [deleted]
How do you compare church support of migrants with atheist group support?
Then first we must mandate living wages!
You can't get blood out proverbial turnips!
Crudely stated but an apt comparison. How much gold did Nazis collect from the teeth of their political scapegoats?
Sorry that it missed this as a rhetorical question.
Exactly, employers need to be compelled by law to pay for labor based on employee family size and family needs regardless of the value of their labor.
More like how the gop now takes away from the very poor to benefit the very rich...
Putting things into a current perspective.
That isn't how a living wage is calculated.
Non-sectarian charities pay out way more.
LMAO! You're on a roll today!
Enlighten us as HOW a "living wage" is defined...........and remember geography.................
Lol. The highest tax rate (on the equivalent of 11 million in todays dollars), used to be 7%.
But I get it, Trump's tax cuts made the tax code so progressive that many don't pay any income tax at all.
[Deleted]
The average effective tax rates has barely changed since 1945. The only significant change has occurred for the top 1% from about 40 to about 26%.
[Deleted]
A living wage is whatever democrats think they can get for stupid burger flippers. The sad thing for the deomcrats is they probably get paid more than they are worth, so they have to force wage increases through legislation rather than through merit.
[Deleted]
No worries, I always try to be helpful.
Can't do that, I don't know why people keep suggesting something so damn ludicrous that will never pass.
At the very best, that is simply an ignorant proposal. I can tell how successful that crap was in Europe as most countries that tried it already have stopped it because IT DIDN'T WORK.
Ludicrous, of course.
Really? Based on what we've seen, lowering the amount of taxes collected by the Federal government means states can increase their tax collections. Doesn't that suggest that Federal tax cuts are good for state budgets? The unlimited SALT deduction was intended to support state tax revenue by reducing Federal tax revenue. The unlimited SALT deduction essentially worked the same way as a tax cut for state governments.
So, we should expect that increasing Federal taxes will have an effect on state budgets. And that will impact benefits for the poor, too.
I bet that amount is as elusive as 'fair share' is to liberals!
And helpful you are.
OK, so you really do only want to raise other people's taxes...
Trying and failing is better than not trying at all.
Exactly. You should keep trying .
Keep trying what?
Who has taken what away, exactly?