Most Western Countries are in a Debt Crises, so who's the creditor?

Economics Economics Questions
1

This is something that’s been very hard to grasp.

  1. Is the debt that governments have the same as the debt that people have?

  2. US has unfunded liabilities of like 60 trillion. How is this even possible? Who is the creditor?

  3. I’m asking these questions because, when I hear Austrians talk about government debt, I get the impression that ‘wealth is destroyed’ instead of the more intuitive ‘wealth will be transferred from one group to the other’. Is there something I’m missing here?

  4. I also get the impression that all governments in the world can be in debt. Previously I thought that was impossible because I was stupid enought to think governments can only borrow from other governments. But now I know they can borrow from corporations as well.

My ad hoc theory:

Governments borrow from private entities. Size of government debts can seem unbelievably large because of inflation. Austrian say ‘wealth is destroyed’ instead of ‘wealth is transferred’ because if the government pays a creditor (submarine building) corporation, for example, hyperinflation will result which will be bad for the submarine building corporation(everybody is so poor they can’t even get food much less buy a submarine). Or government must levy higher taxes which will make everybody poor and reduce the demand for submarines. In any case, both creditor and debtor eventually lose. Therefore, wealth is destroyed.

Crap, I’ve been racking my head for a long time now trying to understand this.

2

This includes stuff like pensions promised to people. So it is just a promise to continue to redistribute. What they owe to the future pensioners is not money, but service - shaking down producers on their behalf.

3

Is not only a redistribution, Private production, is by nature more efficient than public production, and there’s where wealth is destroyed. Not to metion, about the temporal distinction between consumption and investment (I’ve read it in Spanish, not know the exact name in English).

4

"1. Is the debt that governments have the same as the debt that people have? "

Pretty much. The Govt borrows money from whoever has it to lend, say the Chinese. They promise to repay it with interest.

Of course, the difference between people and the govt is when the time comes to collect the money. Say in 3 years from now the Chinese come over and say “OK, time to pay up. Give us our TRILLION dollars back.” Where will the govt get a trillion dollars? They have three possibilities.

One is to say, “Sorry Charlie Chan, go whistle for your money. We are broke and can’t repay you.” This is what the Greeks will have to say if no one bails them out and pays their debts for them, or lends them money to repay their debts. Not much the Chinese can do about it, except never lend us any money again.

Another is to tax the US citizenry to the tune of a trillion dollars more than they are taxed now. This is probably political suicide for whoever does it, not ot mention an invitatioon to riots.

Another possibility is to find a sucker willing to lend the US govt a trillion dollars,maybe even the Chinese themselves if they are stupid enough.

Last thing, and the most likely, is to just print another trillion dollars, put it in asuitcase, and hand it to the Chinese. This is probably what will happen. Of course this will create high inflation, but what does the govt care?

“2. US has unfunded liabilities of like 60 trillion. How is this even possible? Who is the creditor?”

As other posters wrote, these are promises to pay up medicare and social security when they time comes. Also there’s giving half a trillion to the FDIC should they need it, also Freddie and Fanny, and I believe GM. A trillion here, a trillion there, after a while it’s a lot of money.

“3. I’m asking these questions because, when I hear Austrians talk about government debt, I get the impression that ‘wealth is destroyed’ instead of the more intuitive ‘wealth will be transferred from one group to the other’. Is there something I’m missing here?”

One way wealth is destroyed is when the time comes to repay. If the govt repays its debt by printing money, all the existing money loses value because of inflation. Thus purchasing power of EVERY SINGLE PERSON with dollars is destroyed.

Another way wealth is destroyed is because there is only so much money to lend. If the govt borrows it, then private businesses cannot. Their needs for money, which they use to increase production and create wealth, are not met.

Yet another way wealth is destroyed is by wasting money on weapons. What can be more wasteful than taking valuable resources, putting them on a plane, and dropping them out of the plane to explode. We waste about a trillion dollars a year doing this.

The ad hoc answer you gave is very right, if the payback to the submarine company is with printed money.

5

No, my debts are a claim against my future income. The government’s “debts” are claims against other peoples’ (taxpayers’) income.

It varies, but there are three main categories. There are private bond-holders (foreign and domestic), there are foreign sovereign debt-holders and there is the Federal Reserve. Private bond-holders are non-inflationary, that is, they give up the present use of their own capital in order to purchase government debt. The Federal Reserve’s bond holdings, on the other hand, are inflationary because the Fed simply prints money to buy the government’s bonds (this is not completely true, but it’s good enough for government work). Foreign sovereign debt-holders are also inflationary since they are reducing demand for US dollars (giving up US dollars in exchange for bonds) but not funded by private savings - foreign sovereign bond purchases are funded by foreign tax revenues and foreign inflation.

Wealth is destroyed by the inflationary aspect of the debt and, additionally, by the promise of future taxation implicit in the debt.

They borrow from other governments, private capitalists and “themselves”, that is, they have their central banks print money under the pretense of “loaning” money to them.

I recommend that you go back to basics. Read The Mystery of Banking to understand the basics of money and banking. Once you have a solid foundation in what money and banking is, then it will be easy to understand government bonds. Government bonds are just a kind of “credit-card for governments”.

Clayton -

6

The US government does not really borrow US dollars from US banks to pay for its expenses that are greater than the taxes that they collect.

The US congress periodically passes laws that authorize the Federal Reserve Board (FED) which is a Special Purpose Government Entity created by the Federal Reserve Act via Chairman Ben Bernanke to buy some paper and then print a bunch of new interest bearing paper currency instruments (US Bonds) in varying amounts with the promise of US government repaying these loans in US dollars at the future dates specified (when they become due). This congressional authorized amount of US debt instruments (US Bonds, T-bills, etc.) that is in excess of the value of the Gold Reserves stored at Ft. Knox is normally referred to as the “National Debt” or “Sovereign Debt”. The US Government only has $11B of gold left in Ft. Knox according to the AP Dec. 21, 2009, 3:44PM and this is less than 1% of the “National Debt” or “Sovereign Debt” of the USA.

The FED then auctions off and sell these freshly printed paper US Bonds, and other Debt Instrument Securities at periodic US Federal Reserve Bank public bid auctions AT DISCOUNTS LESS THAN CURRENT VALUE AND/OR PRESENT WORTH to mostly foreign manufacturers, foreign banks and foreign individuals in China, India, Brazil, Pakistan, and other industrialized countries in return for the US dollars that these foreigners earned by making consumer goods for US citizens.

The US government then spends these US dollars, plus US dollars collected by taxation, on various government expenses and acquisitions.

Foreigners continue purchase these freshly printed paper US Bonds (at an increasing discount from face value, current value, or present worth) ONLY because these US bonds can be redeemed by purchasing title to privately owned land, hotels, farms, businesses, casinos and other wealth and assets that were created by previous generations of US citizens and located in the USA, before the de-industrialization of the USA, and instead of redeeming US currency with Gold as other foreign nations do.

These freshly printed paper US Bonds, T-Bills, Dollarsand other security instruments that the US government sells to people in industrialized nations have no value, except that they are redeemable for title to privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous US generations instead of Gold.

The US government is going to have to start printing and selling more and more of these freshly printed paper US Bonds, and other debt instruments to foreign industrial manufacturers faster and faster at greater and greater discounts to get back enough foreign held US dollars from foreign individuals and foreign manufacturers in sufficient quantity to pay for the growing US government expenses that are in excess of our US federal government tax collections and also to pay for all of these new government entitlement expenses.

Productive industrial nations like China, India, Brazil, Pakistan, and other newly industrialized foreign nations have grown wealthy and have secured the value of their currency by producing and creating enough products to support the needs of their populations with their farms, factories and mines, plus earning additional currency, gold, commodities and wealth from foreign nations by exporting additional products that they manufactured in return for foreign currency, foreign gold, title to foreign located assets, and other valuables. The economic health of every other business in that country depends upon their productive industries. These industrious individuals, companies and some governments will soon own title to most of the privately owned assets and other wealth located in the USA.

Future generations of our children and future unborn generations of US citizens will have to work hard to pay off these US bonds and T-Bills when they become due and also try to buy back these foreign owned assets if that is even possible.

US citizens apparently believe that we are entitled to sit idle and not work in some dirty factory making the things that US citizens consume, when US citizens can obligate our grandchildren to work and pay for our easy non-productive lifestyle.

This situation might end when the USA runs out of privately owned US property and other assets that foreigners will accept in return for the cash that US citizens paid to foreign workers in foreign factories to make the things that US citizens purchased and consumed.

The US government is living like some creative American families that charge all of their expenses to credit cards, buy new autos, take expensive vacations, buy new designer clothes, eat out at expensive restaurants, rent instead of buying a house, pay the minimum credit card payments every month, and quit working at their jobs.

Most US citizens, including most of my immediate family members are unconcerned about the overall big picture. They believe that the party will go on forever with the citizens of industrialized nations paying the bills for the high lifestyle and excessive consumption of US citizens in return for title to everything of value in the USA. They believe that our government has secret economic policies that they will implement in order to prevent another great depression.

If our economy collapses, there will not be any jobs for anyone at present wages. When we have destroyed the purchasing value of the US dollar, you might make $3,000.00 per hour but a loaf of bread might cost $35,000.00 if you can find one for sale.

7

The discounts/interest rates offered by the public at public FED auctions to purchase our freshly printed US securities by people in industrialized manufacturing nations that have accumulated US dollars will depend and reflect upon the confidence that the USA instills these foreigners by our economic actions.

Many countries are losing confidence in the dollar as the benchmark for world trade and currency values. Other currencies, like the Chinese Yuan with a more stable value, are now being talked about as a replacement for the US Dollar as the benchmark for international currency values. The Chinese Yuan might be the last man (currency) standing after the US government policies destroy the US Dollar.

Foreign entities will very soon own everything of value in the USA and then foreigners will become the major (only) source of employment for US citizens.

The USA population will then become employees; possibly indentured servants; or maybe even beg to become slaves owned by the foreign countries and/or foreign individuals that will own everything of value in the USA in the very near future if the US government continues to destroy the US economy.

US citizens might have no options if they want to feed their families? Our children and our grandchildren might also have to change to the religion (probably not Christian) of the business owner if they want a job.

8

The Chinese Military could possibably enforce the US payment of US government bonds within a few years!

Chinese nuclear technology and capabilities will soon surpass the USA scientific technology. The Chinese now have had the Rocket Guidance technology (purchased from Hughes Aircraft in the 1990’s in return for a political campaign contribution via Chinagate bagman Johnny Chung) for intercontinental ballistic targeting anywhere in the USA (and anywhere else around the world). The Chinese missiles would not fly on course before this technology purchase.

Asian countries are now outdistancing the USA in producing very large numbers of competent scientists and engineers that might be even more creative and more competitive than the US educated scientists and engineers. China, India, Brazil, Pakistan, Taiwan, Singapore, and other industrial foreign nations are producing large numbers of scientific graduates because their technical education process starts early and continues through university levels to produce a large number of very technically qualified young technical graduates, while the USA produces large numbers of MBAs and liberal arts graduates.

Chairman Mao supposedly said something similar to, “Power only comes out of the barrel of a gun”. I believe that Mao was only partially correct because a strong economy is also necessary to arm, feed, support, house, pay and otherwise maintain a strong military force. The soldiers need to be happy, or they might overthrow whatever government might be in power at that particular time. China now has the strong economy and is rapidly building their military technology and military might that will surpass the military capability of the USA in the very near future. France invaded and conquered Mexico when Mexico could not pay off their government issued bonds.

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