The crux of my argument is that resources are finite. The fact that nominal spending is unlimited doesn't change this. The government won't "run out of money" but if it is in debt it will be forced to make payments to bondholders. These aren't payments that the government would choose to make if there was no debt and the government had complete flexibility of how it would allocate its resources.
Resources are finite, yes, but bond holders don't hold representations of resources, they hold money. Bonds are theoretically useful to the government because they are theoretically much slower money than cash. By that logic they function like willful taxation, only with a personal payout. I'm not sure they actually slow things down--the lack of bonds (via QE) seems to be slowing things down.
But the thing I don't understand with your argument is that you acknowledge an economic truth, resources are finite, and a financial truth, nominal dollars are infinite, but then somehow hocus pocus dollars are finite.
Your credit card analogy is fairly accurate in my understanding (or misunderstanding as the case might be) of the national debt.
In terms that I can understand here is an example of how I think it goes: China manufactures goods that are sold to American businesses. China is paid in dollars. China uses the dollars to buy bonds from the US Govt. The US Govt. pays interest on the bonds. The bonds are also sold to anyone else in the world who wants to buy them. There is not really any other option for dollars, no real competition as the US is still the safest place to reinvest. The US Govt's access to the bond funds fuels spending and the US economy in general. The cycle repeats and feeds upon its own success.
The fear to me is what happens if the above cycle stops? To me it is like flipping houses - I buy a house and sell it to Joe and make 10%, Joe sells it to Bill and makes 10%, and on and on. Everyone makes money on the action even though nothing of value has been made or added until finally someone realizes that the house is not worth that much and won't buy it. This leaves the last guy holding the bag and he goes down.
I believe the low interest rate is bad in that it discourages savings and responsibility and promotes leaving beyond your means. I personally pay cash for everything I own and am debt free. My land and farms were paid in cash as will my house when it is constructed next year. This to me is security, no matter what happens I have real stuff. If instead I borrowed I'd be living large but if anything went wrong I'd be overextended and crashing. I get penalized by the tax code and inflation for being what I consider to be fiscally responsible. If I borrowed I could pay off today's debts tomorrow with dollars that are worth less than they are today.
The dollars are being created at the Fed and the banking system with the quantitative easing policies. This flow of cheap dollars fuels the rise in the market even though nothing real is actually being produced, just the action on the prices. When this stops there will be consequences.
With China and the debt what happens if they want to be paid back the principle instead of just the interest? Is that possible? If it were to occur where would the dollars come from?
Please tell me where I am off base in my understanding as this is a subject I am woefully ignorant in.
So here's how it works:
Most money in the US is in the banking system. Physical cash is an obvious exception. Money in banks are ultimately held, electronically, at the Fed. So are bonds. The Fed has unlimited of both. If China went eminent domain on all its various businesses and organizations that together hold $1 trillion of our debt (after you add in their gov'ts central bank's holdings too) AND THEN could demand US bonds as cash tomorrow (it legally can't, period, but pretend it could) then the Fed would say "okay, here's $1 trillion in treasuries wiped from our books and now you have $1 trillion fed notes".
That's it.
They would go from already having $1 trillion in 100% US insured, interest paying money to having $1 trillion in somewhat insured, negligibly interest paying money.
What would happen to the Fed? Nothing. The US economy? That depends on what China would do with that cash. Their economy might be in trouble since treasuries back their money internationally and they use our dollars to issue good loans that procure technology from outside their country.
So they'd probably use that cash to buy the bonds back.
There are some alternatives: they could
- sit on the less-insured cash that pays less interest.
- they could buy US goods (hooray $1 trillion demand stimulus!).
- buy a butt ton of oil, but have nowhere to stick it.
- invest in US production (hooray $1 trillion demand stimulus!).
- they could stick it in a sovereign wealth fund.
Nowhere in this scenario does the US experience any particular pain, except maybe a sovereign wealth fund that causes a financial markets bubble. But that's their risk foremost.
Now with regards to quantitative easing: I said it in this thread earlier, but QE is the Fed trading money for mostly money. Most of QE is treasuries being bought for cash. It happens on the bank level and the banks receive a small profit buying treasuries and then selling them back to the Fed, so they play along. But really bonds are better money than cash in a lot of ways so it's adding very little.
QE probably is fueling a stock boom but that's not because their's more money in the system, it's because the bonds are gone. I.e. cash is insured up to $250,000. What if you own more? You used to be able to buy bonds, but the bonds are gone, so you deem stocks a better asset than uninsured cash.
Finally, with regards to living beyond means.
There's a real economy. That's our physical resources: our people and their skills, our factories and infrastructure and other capital, our land and its bounty, etc. And then there's money. Money is not a part of these real resources. Money's use is that can efficiently organize these resources among people. This makes money a social construct.
Money is the ultimate social capital because even if you don't trust me, you can trust money can be used for all things. As long as everyone has to pay taxes in dollars, everyone wants their income in dollars. So it's a good proxy for resources. But it isn't resources.
If we have unused real resources, like people and factories, and we go a year with those people unemployed, then that's a year our economy lost forever with regards to those unused resources.
Meanwhile, we can't actual have an economy that physically uses more than it physically has. That's not possible. I don't have three arms. I can't be two places at once.
The only way the real physical economy can "live beyond its means" is if our economic activity is destroying itself physically--people work to exhaustion, the environment is destroyed, we eat our seeds, etc.
None of that is national debt.
If we have national debt and we have to pay it later (we don't but let's pretend we do) what's better? Having years of real economic growth with better infrastructure, better technology, healthier happier people, and then a bill comes due and figure out a way to pay the money cost that allows us to continue to maximize our real economic production? OR "saving money" and allowing our bridges to crumble, people to go hungry, and technology to be less.
I think you get it. The debt itself has the problems that Farm Boy articulates, in that right now its structured to favor the wealthy. But it imposes no constraint on us that we don't mistakenly choose to put on ourselves. Money is only as real as its social power times the real economy its meant to represent, and if we hold back our real economy to save made up numbers, we did it wrong.
I'm not willing to toss that logic entirely. It does make a sort of sense.
one moment you're saying the Fed doesn't have nearly that much power to set rates, another moment you're saying that it exercises near complete control to not only set rates but to dictate who gets what money and how that money is spent.
