How did 'rich' economies get so in debt?

I agree in that roads, running water, street lights, healthcare, education etc all cost money, we take all for granted but that is the reason why the "western" world is in debt.

No need to over complicate ... spend more than you have and you're in debt ...
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery"

What people often don't realise is that pooling money (taxes) to make sure the population is overall well educated is a MAJOR driver of the economy. The same goes for infrastructure!

And no, those elements aren't the biggest contributor to the national debt. The largest single-policy contributor to the national debt for example are those ridiculous Bush tax cuts for people who really don't need them. Trickle down economics are a JOKE invented by people who want more money at the expense of the middle class and poor!

Another major contributor to the national debt are those ridiculous wars and corporate subsidies.

The education budget pales in comparison...but of course Fox and friends won't tell you that

Oh, and of course the debt is composed not only of spending, but also income. If you keep on cutting taxes for the top bracket, guess what happens

Or look at Nasa's budget for example. A ton of people say "why do we need to fund that so much...shouldn't we focus on employment and economic growth?". Which of course is just plain stupid if you bother to check out the net $ return for every dollar invested in Nasa. Those discoveries are major contributors to economic growth.

Spending more than you have is definitely a root cause of it...but one party in the US focuses on cutting spending in areas where it actually HURTS economic growth. Poor and middle class people will actually spend excess money from lower taxes, therefore directly stimulating the economy. Wealthier folks (like me) will often spend it in ways that have ZERO effect on the economy. For example, I invested a lot of my excess income in gold...which doesn't help the economy at all. Or currencies of course, which also doesn't help the economy.

The GOP's austerity nonsense is the biggest danger to economic growth the US has seen in decades. Well, if you look at real economic growth that is. If you measure economic growth as the endless bubble machine that is the stock market, then go ahead, vote for those crooks

best way to get in debt: issue 30 year bonds.
that's right, issue bonds on people that are not yet alive

The Untold Story Of How Clinton's Budget Destroyed The American Economy

Read more: http://www.businessinsider.com/how-b...#ixzz272mHD3RN

"The private sector cannot survive in negative territory. It cannot go on, year after year, spending more than its income. It is not like the US government. It cannot support rising indebtedness in perpetuity. It is not a currency issuer. Eventually, something will give. And when it does, the private sector will retrench, the economy will contract, and the government's budget will move back into deficit."

Not even going to waste my time destroying your very lame reasons. Just want to hit on one.

TAXES!

You could tax everyone who makes over $250,000/yr @ 100% and not even come close to closing the deficit let alone touch the debt.

These points of yours that come from an idealogical view are just what the political class wants. It keeps them in power and all of you at each other's throats in a vain attempt at legitimizing your view point.

Read Mises, Hayek, Friedmann, and Rothbard and you will clearly see how the Western model has failed by allowing an independent central bank and the never ending central government manipulation of the economies of all these countries.

How true, indeed !

http://en.wikipedia.org/wiki/The_Money_Masters

http://video.google.com/videoplay?do...18677860424204

A-B-S-O-L-U-T-E-L-Y !

And here is more...

Part 2 :


Part 3:


Part 4:


Part 5 of 5:

Hi All,

I have to make my first post somewhere, and here is as good as any. Interesting to see the wildly varying opinions from people who you *might* think were more economically savvy that the average person. Like one poster above I highly recommend reading the works of Ludwig Von Mises and Murray Rothbard. If you're too busy to buy and read their books there are plenty of articles you can read on www.mises.org

If you're too busy even to do that, then a couple of minutes reading this one article will give you more insight than 99% of the population:

http://lewrockwell.com/hoppe/hoppe29.1.html

Government debt isn't debt in it's true form.

1. The US Fed. Govt. is the "sole manufacturer of US Dollars" (St. Louis Fed)

The government has no need to borrow money when the government is the only entity that can create the money you use. They are the only legal source of currency. Because of this the government must "spend" the money only it can create into existence, otherwise it does not exist within the private sector. This is not only true of the US Govt., but many governments around the world, including China.

2. USD as Reserve Currency

Today, not one single nation on the planet backs their currency in precious metals. In fact, Switzerland was the last nation to abandon this practice around 1999/2000. The gold standard used a fixed exchange rate. The fixed exchange rate allowed trade surplus nations to manipulate, even outright attack the currency valuations of trade deficit nations. Over time trade changes. Deficit nations become surplus nations and vice versa. The current floating exchange rate system allows greater flexibility, allowing more control over monetary situations and operations.

Becuase gold is no longer the reserve, USD is now acquired in it's place. Thus, the "reserve" is in dollars worldwide rather than in gold.

3. Critical commodities

Critical commodities are paid for with reserve currency. Formally gold, now the US Dollar. Oil, natural gas, steel, precious metals, must all be purchased with US Dollars. With the exception of a few countries agreeing to transact in their own currencies with each other for Oil. Other than that, the things that build a countries infrastructure all must be paid for in US Dollars. This creates worldwide demand for US Dollars that in theory will never go away.

When a country like China exports to the USA they are paid in US Dollars. This goes for all exporters the the USA. With that said, lets move on to national debt.

4. National Debt - Not What You Might Think

The national debt is made up of two columns. Public debt and foreign debt.

Public Debt

Why is the public debt so large? The answer is actually quite simple. Every time a US citizen, business, or bank purchases US bonds it gets applied to the public debt side of the national debt. However, that is not why the number is so large. Everyone with a job that reports their income is adding to the national debt. FICA taxes are taken from everyone's paycheck, given to Social Security Trust Funds, who are then required by federal law to purchase US Bonds. The bonds are deemed "special" in that they can be exchanged for cash at any given time. The amount of FICA tax is almost equal to income tax, and EVERYONE pays it. The notion that half of Americans pay no taxes is political B.S. If you work, you pay FICA and FICA is not refunded back to you.

So, with that said it becomes very easy to see how the "debt" has become what it is, and it will continue to grow. Also keep in mind that the USA expands by approx. 2 million new economic participants on a yearly basis. That is 2 million new participants paying FICA every year.

Because the US Fed. Govt. is the sole supplier of US Dollars it is impossible to become insolvent. There are those that argue inflation, but as 2 million new participants flood in each year, demand for currency increases and currency supply goes down.

Foreign Debt

Foreign countries create currency just like the USA does. So why do we owe them trillions of dollars? It's because they're taking the USD they earned exporting goods to the USA and they're purchasing US bonds with it. Technically, they have only one need for USD, and that's to purchase critical commodities. Rather than store physical currency, they simple have accounts with the federal reserve upon which they withdrawal when needed.

There seems to be an awful lot of misunderstanding on this matter… but FXTradeX6 has got the answer… government debt is not the same thing as private sector debt in most “rich” countries. The same can’t be said of Eurozone countries because they gave up their Sovereign currencies in favour of the Euro… hence the mess they are in.

To continue on from what FXTradeX6 said… the reason the “debt” is so large is because government deficit spending is directly linked to private sector savings. When it comes to the national accounts the deficit of government is equal to the current account deficit plus the private sector balance.

This in itself is a fairly dense subject which is why most fail to understand how the monetary system really works… but let’s simplify it right down to basics.

Let’s ignore external balances to make it easier… let us also go back to square one… no money, no jobs, no debt. We are a new country and I am the government. Being that we have decided to operate fiat currency (as I have no gold!) I am the only person legally able to create money.

As government I tell you that I am going to offer you (the private sector) 100 DanUK dollars a month to build infrastructure… and you tell me that you have no interest in DanUK dollars… until I tell you that in order to remain in my wonderful country you will have to pay 100 DanUK dollars a month in tax. So you weigh up your choices and decide that you want to stay and set about your new job… your tax obligations have legitimised my currency and given it value.

In this modern age I don’t even have to print my money… I simply credit your bank account electronically when you have completed your work and debit it when I take my tax payment. Everything is running nicely… but you decide you want to take some time off from work… how can you do this when you have obligations to meet? You need to save money and the only way to do that is to earn more money than you pay out… I will need to pay you 150 DanUK dollars a month if you want to start saving 50 DanUK dollars a month.

Based on our current terminology and understanding I will have to run a deficit in order for you to save money… I am happy to do this because I can create as many DanUK dollars as I need to, so I run a deficit which creates the “debt”.

But you get a little concerned… you hear David Cameron (or someone else who doesn’t understand macroeconomics) saying that government deficits are bad and must be stopped… so you call on your government to balance it’s budget. I say “ok.. I want to keep my loyal subjects happy” and I reduce my spending and hike taxes. I go back to paying you 100 DanUK dollars a month but I increase my taxes to 120 DanUK dollars a month.

Now you (the private sector) have a problem. In order to meet your new tax obligations you will have to make a choice. Ignoring the possibility of selling your services to another country (for simplicity sake) you will either have to use some of the wealth you have saved in order to meet your obligations or you will have to get into debt borrowing money to meet your obligations. If I (government) carry on running a budget surplus then you (private sector) are going to get into long term difficulty.

Can you see how this relates to the current situation?

Let’s add back in the external sector… you decide you are going to make up your deficit by selling your goods or service to another country; but what if the country you are selling to is thinking the same thing? What if you are already importing more than you export? Compounding the problem even further.

So the lesson here is that the balance of the private sector (essentially our debt or savings) plus the current account (money flowing in or out of the country) equals exactly the government budget deficit (or surplus)… as shown in the chart attached below…

There is a lot of hot air about budget deficits at the moment but in accounting terms you can see that there is a lot more to budget deficits (or the “debt” we face) than most people realise. Most of it is political scaremongering but the thing to realise is that government debt is not the same thing as private debt, in fact when you consider as an example that 80% of the UK government debt is owed to the UK people you can think of it more as national saving than national debt.

Well done. I was going to go on with a similar example, but didn't want to make my post so long nobody would have the patients to read the whole thing. lol

Although the above post is excellent, it's perhaps missing the point a touch. There's no such thing as a free lunch and money owed must be paid by someone to someone else, whether now or in the future. The collective term 'we' is totally misleading! If the government inflates the currency (transferring wealth from savers to themselves) to reduce the debt burden in real terms then the savers pay. If the government defaults then bondholders take a haircut. If the government borrows to meet its committments then tomorrow's taxpayers have to pay it back. None of these things are fair (in my view). The origin of the problem under discussion lays with fiat currency itself and the fact that governments can create it. If a currency cannot be created at will and can only be acquired at great effort (e.g. gold) then this severely limits the government's abillity to get itself into financial problems as it has to play by the same rules as everybody else.

With the power to create fiat currency the government is no better than any other counterfeiter.

Under precious metal backed currencies, currency is issued in relation to the amount of metals in holding. Precious metals are not an infinite resource. They can run out. The number of people in any particular country on the other hand keeps increasing. Under a metals backed system a shortage of currency becomes a real problem as it leads to recession and ultimately depression. That's why no one follows backing currency in metals. The alternative is dismal economic growth and extremely high unemployment.

Think of it this way. All money, whether it's in the form of gold, dollars, or even sea shells, is just a means of transacting for goods and services. It all serves the same purpose. A means of exchanging one thing for another.

The pwobwem soow, wif tat is, when I'm buying a gallon of gas at 3 seashells a gallon and I make 20 seashells an hour at a 40 hourweek, and the gov't decides to restrict refining of gasoline (supply) to drive the price to 30 seashells a gallon, while I am still making only 20 seashells an hour. then the price comes back down some for a while, but then when crude goes back up, I notice, at the same price for a barrel of crude, but gasoline is now 38 seashells a gallon, that means there's inflation, thanks to the central bank of Atlantis manufacturing seashells so the gov't can promise somebody who didn't plan aheadlazy a carefree retirement in exchange for their lifetime vote.

Greengriff,

Thank you for your comments… the point I was trying to address was that most people misunderstand government debt as being the same as private debt, and it would seem that from your comments I didn’t make the point strongly enough.

I do not mean this rudely or disrespectfully but you are still thinking of government debt in the old fashioned “gold standard” way of thinking which no longer applies. From your comments you obviously favour a return to the gold standard, which I disagree with as a failed system that we have progressed from… but that is a whole other debate!

Sticking with the “debt” for the time being… to really get into the subject we should first be clear about the banking operations that take place when governments spend (and issue debt).

In your reply you mention that the government could default on it’s debt… for the sake of this argument let’s assume that this will not happen (as there is no reason for a sovereign currency issuer to default other than for political reasons). You mention also the government could inflate the currency (which I assume you mean they could “print” to pay it off) or borrow more. In order to tackle this we need to realise that the government already “prints” before it borrows… well actually it doesn’t print but let me continue…

The prevailing narrative suggests that in order for a government to deficit spend they must first borrow the money to pay it’s bills. Under the current system this is a major misunderstanding… this only applies to countries in the Eurozone… the UK, US, Japan, Australia etc are all currency issuers and do not borrow the money it is entitled to create.

When the government has to pay it’s bill it does not look at it’s bank account to determine whether they have enough to meet their obligations – the treasury simply credits the reserve accounts of the commercial bank account it aims to pay which is held at the central bank… this is done electronically… no physical money is “printed”.

Now the commercial bank’s assets (the deposit) and liabilities (the equity) increase on the balance sheet. The opposite end to this is when a government taxes and removes the assets/liabilities. When a budget deficit is run the net result is that bank reserves rise and private wealth goes up.

Now I hear you (or someone!) ask… if that is true, why do government’s “borrow” money to spend?

First… we have established that the government spends first – it does not borrow to spend. However central banks across the world target an overnight interest rate in the interbank market. Commercial banks compete between themselves to lend to other banks that do not have sufficient reserves in the interbank market and when there are excess reserves in the system the interest rate is driven down (by market pressure). In order to support the target interest rate the central bank carries out “open market operations” (buying/selling government debt)… in this scenario they sell debt to drain liquidity thus reducing competition in the interbank market… supporting higher prices (interest rate).

As a result of the financial crisis most central banks now guarantee a return (minimum interest rate) anyway thereby eliminating the need to drain liquidity. Also something that has amused me is that Quantitative Easing is basically the opposite… increasing liquidity by buying back debt and increasing reserves. What that means is that if the banking system really was struggling with liquidity rather than invoke QE they could simply freeze the open market operations that drain liquidity in the first place. But that’s another story!

So hopefully what I have explained here is that the government doesn’t borrow to spend and that there is no need for “tomorrow’s taxpayers” to pay off our debt. The system simply does not work that way. All a budget deficit really means is that the private sector is increasing it’s net wealth… it does not mean that the country is racking up debt it cannot pay… it does not mean the UK or US etc is going to go bankrupt.

Now I am not saying there is such a thing as a free lunch… the government is not able to make us all rich and everything will be ok. Not at all – there is the risk of inflation, however this must be valued in respect of spending and productive capacity not simply as a matter of spending on it’s own.

All I am saying is that government debt is not debt in the way we traditionally think of it… governments are not financially constrained… they can spend without borrowing.

This means rather than using monetary/fiscal policy to target gold levels or fixed exchange rates it means the government is in a better position to support it’s economy in times of recession etc! The principal purpose of this would be to maintain employment (for example by paying for infrastructure development) whilst the private sector recovers. Although that is becoming a little more politics than economics so I shall end there!

I'm sorry I don't fully understand what you are trying to say... however I believe you are still misunderstanding the nature of government deficits. Please read my reply to greengriff... particularly the section on how the banking operations take place to understand this a little better.

The debt problem grew like a seed from the decision to trade massive amounts with China without terms of trade to ensure a level playing field and protection of both parties. The result has been almost totally destructive for US other than provide consumers with low cost low quality goods. US is primarily a consumer nation with mass credit access to buy unlimited products from PRC. However China's cheap labour, controlled currency, soft laws, soft regulation, copyright infringement culture, etc etc/... allows goods to be produced on a mass basis in China at much lower cost than US could ever compete with. Consequently employment and related small business declined in US as it could not compete, while US consumers borrowed more and more to buy PRC imported goods - totally ignoring loyalty to US business and economic stability. The flood of consumer spending-money entering the system created a false economy, and the more consumers wanted, the greater the debt and mortgage market grew (including subprime deals). Consequently debt became highly leveraged. PRC accumulated a massive surplus now tagged to USD and Bonds which it now wants to sell and sees it as an asset that US should pay. US employment suffered and all the other issues. The debt crisis eventually hit with overleveraged collateral loans and fraud exposed. Deleveraging is now the theme. But still to this day PRC has a controlled currency and all the same common elements that gave it the advantage over US originally - the entire problem, like a tree that grows initially from a seed, was created by the desire of US to engage with PRC in trade on an unbalanced basis....that original decision should be the focus of assessment as to how this all came about. The question is, how could it ever have happened when there are so called experts in economics and other sector specialists who all saw that PRC had a trade advantage from the beginning, that it would lead therefore to loss of employment in US and other industry sector declines. The writing was on the wall from inception and so were the consequences - yet the US never once stopped or suggested trade be curtailed. Was it the greed of all the credit and money men making their cut. The sale of debt derivatives. Or what? The answer should be discovered and blatantly not ignored otherwise history will repeat itself.