Obama Says U.S. Long-Term Debt Load ‘Unsustainable’ (Update2)

[longeyes]

We know the numbers are unsustainable, untenable, mind-boggling.  But right now, for most Americans, they are just that: numbers.  In a year or two the numbers will become hard daily reality, and the political process will engage in earnest.  I don't think extrapolating the numbers or the policies is meaningful.  We are talking about national and personal survival; when that becomes obvious to the average citizen all bets are off.

[FTA84]

I also know a lot of the opposition doesn't care, they just want us to be more "fair". Who cares if a rising tide lifts all ships?! Some of those ships get lifted more than others and that's WRONG! So, instead, they plan to sink as many of the ships as possible so we all suffer equally.

It's their health plan, too.

Excellent analogy.

I honestly don't know how we can avoid massive inflation unless somehow the government stops spending so much money.

I don't know either.  Right now, both sides are finally talking about it, so I am hoping that maybe it will be the hot button issue in 4 years that the repubs campaign on.  Much like ending the Iraq war was much of the basis for the dems 2008 campaign.

[longeyes]

Hot button issue?  That's a bit understated, I think.  How much civil order do you think there will be in a nation with 15 per cent a year inflation?  You will have tens of millions of desperate people.  We will not be talking about anything resembling a normal political process at that point.  We will be talking about Third World politics, probably by machete.

[Racehorse]

I honestly don't know how we can avoid massive inflation unless somehow the government stops spending so much money.

I'm seriously starting to wonder if I should buy a lot of stuff on credit now as a kind of hedge against the inflation that is almost a sure thing. Maybe it's time to get a bigger house, a couple new cars, and a house full of furniture, all on credit. Then when inflation gets bad, it will be easy to pay off.

My aversion to risk and debt probably won't let me do it, but I'm wondering if that might be the smart way to "invest" right now.

[longeyes]

You won't have to pay anything off.   Irresponsibility is the new currency.

[makattak]

Hot button issue?  That's a bit understated, I think.  How much civil order do you think there will be in a nation with 15 per cent a year inflation?  You will have tens of millions of desperate people.  We will not be talking about anything resembling a normal political process at that point.  We will be talking about Third World politics, probably by machete.

15 percent?

That's bad, but we've had that in the US before.

It causes problems, but not massive unrest.

Double that, though, and things start getting bad. Make it persist and things will likely get really bad.

[Strings]

I've been thinking about that (and was talking with dad about it). I'm beginning to wonder if all the ammo/gun shortages we're seeing are really panic buying based on potential bans. I'm starting to worry just a bit that it's people stockpiling for "unrest"...

[RevDisk]

I've been thinking about that (and was talking with dad about it). I'm beginning to wonder if all the ammo/gun shortages we're seeing are really panic buying based on potential bans. I'm starting to worry just a bit that it's people stockpiling for "unrest"...

Well, if you shoot all the looters, you won't have much more unrest.  So what's to worry about?

[CNYCacher]

There is no one in Congress that wants to put the brakes on spending.

[RevDisk]

Yep. As an economist those numbers are very frightening. (As they would be to anyone who understands their implications.)

I honestly don't know how we can avoid massive inflation unless somehow the government stops spending so much money.

Every third world country that can't pay its debt does one or both of two possible options.  Default or hyperinflation.  Only two options that exist.

[makattak]

Every third world country that can't pay its debt does one or both of two possible options.  Default or hyperinflation.  Only two options that exist.

Yep. And that's what we'll become if we do either of those.

[longeyes]

Yes, we have had 15-20 per cent before, but when I said 15 per cent that was just a "high inflation" number I tossed out.  At that rate the value of your assets is halved in under five years.  But we don't know what the real numbers will be (and that's assuming we can trust official CPI data; I don't).  I suspect 15 per cent will just be act one. at the current rate we are expanding funny money.  Combine high inflation with high unemployment and massive unrest is far from unlikely.

[Headless Thompson Gunner]

15 percent?

That's bad, but we've had that in the US before.

It causes problems, but not massive unrest.

Double that, though, and things start getting bad. Make it persist and things will likely get really bad.

I've often wondered if the correlation between the size of the money supply and the value of money is quantifiable.  Does doubling the money supply cause the value of money to drop by half?  More than half?  Less than half?

Or, to put it another way, just how much to do you have to expand the money supply in order to get a given amount of inflation?

Do you know of any economic studies or theories that seek to answer this sort of question?

[Headless Thompson Gunner]

Yes, we have had 15-20 per cent before, but when I said 15 per cent that was just a "high inflation" number I tossed out.  At that rate the value of your assets is halved in under five years. 

No, under 15% inflation the value of assets remain the same (all else equal) while their prices double in 5 years.  Cash loses its value under inflation, which is why you hold hard assets instead.

[MicroBalrog]

THe problem is that value of money does not in fact drop proportionately to money supply. Sometimes it does, but it's not as simple - for example, if your economy is shrinking at the time for whatever other reasons affect the economy, then obviously the money supply expansion will result in a greater inflation. But it's not always so and I'm sure mak can explain it better than I can.

[Headless Thompson Gunner]

THe problem is that value of money does not in fact drop proportionately to money supply. Sometimes it does, but it's not as simple - for example, if your economy is shrinking at the time for whatever other reasons affect the economy, then obviously the money supply expansion will result in a greater inflation. But it's not always so and I'm sure mak can explain it better than I can.

That's why I'm curious about a quantifiable relationship between supply and inflation.  Subjectively, we know that increasing the money supply relative to everything else lessens money's value.  But what exactly is the relationship between the two?  It can't possibly be as simple as MV=PQ (if it were inflation and deflation would be historical oddities).

I can reasonably guess that the relationship isn't linear, much less one-to-one.  And obviously you'd have to control for all of the other factors at play, too.

Still, knowing what the relationship isn't doesn't tell me what it is.  Does anyone know it?  Is it even knowable?

[longeyes]

No, under 15% inflation the value of assets remain the same (all else equal) while their prices double in 5 years.  Cash loses its value under inflation, which is why you hold hard assets instead.

Most people do not hold significant quantities of "hard assets" of the type that would really insulate them against inflation.

And since when is cash not an asset?  Pensions, debt instruments, annuities--all those will be killed by high inflation.  And stocks don't do well in a high-inflationary climate.  You will recall what happened to the market by '74 perhaps...?

[Headless Thompson Gunner]

Inflation simply changes the unit of measurement.  Anything measured by cash (anything but cash itself) will rise with inflation.  More or less, and all else being equal.

I think it's that "all else being equal" part that's tripping you up.  Inflation is never the only economic factor at play in a given time period.  For instance, stocks did poorly during '74, but that probably had more to do with the oil shock, recession, war, social unrest, and high taxes of the time.   Stocks did quite well in the high inflation of the late '90s, when money was cheap and available but there wasn't any recession or oil shortages or confiscatory taxes or malaise.

I also think lots of confusion stems from using CPI increases as a proxy for measuring inflation.  But that's a whole 'nother can of worms.

[longeyes]

...that probably had more to do with the oil shock, recession, war, social unrest, and high taxes of the time...

As if all these are not looming in our current future?

It wasn't my intention to get into a debate with you about economics.  Inflation may be a two-edged sword, but it is, that said, a sword that sharpened too much beheads its user.

Inflation distorts the investment process and makes managing businesses very problematic.  It is also deadly for lenders, and unless we all intend to be only borrowers we should be seriously worried about the implications of that for not only our economy but our society.

By the way I don't use the CPI if I can help it.  In my view the CPI seriously understates inflation.

[MicroBalrog]

Inflation simply changes the unit of measurement.

In a word, no.

The money supply is not increased equally along the entire economy. Essentially the "new" money is distributed via a ripple-effect, which enables the people who get their hands on it first (large financial institutions, for example), utilize it at a greater value than the people that get it last, which usually causes a temporary inflationary boom and a spike in consumption.

[makattak]

In a word, no.

The money supply is not increased equally along the entire economy. Essentially the "new" money is distributed via a ripple-effect, which enables the people who get their hands on it first (large financial institutions, for example), utilize it at a greater value than the people that get it last, which usually causes a temporary inflationary boom and a spike in consumption.

Austrian Business Cycle, very well done.

[Headless Thompson Gunner]

In a word, no.

The money supply is not increased equally along the entire economy. Essentially the "new" money is distributed via a ripple-effect, which enables the people who get their hands on it first (large financial institutions, for example), utilize it at a greater value than the people that get it last, which usually causes a temporary inflationary boom and a spike in consumption.

All of what you describe boils down to inflation being a change in the unit of measurement, more or less.

[CNYCacher]

All of what you describe boils down to inflation being a change in the unit of measurement, more or less.

WIth the side effect of wealth transfer to the people who use the new money first

[MicroBalrog]

WIth the side effect of wealth transfer to the people who use the new money first

Moreover, your money loses even more value for knowledge that it will continue to inflate.

Suppose I inflate money to a point  of issuing $10 per every $1 that perviously existed. The $10 are now slightly less valuable that the one-dollar bill used to be, because people have reasons to believe I will inflate more in the future.

[86thecat]

"U.S. Long-Term Debt Load Unsustainable" may- if we are very lucky- be Obama laying the groundwork to his faithful socialist followers that congress (or his handlers in the shadows) won't allow him to follow through with much of the socialist agenda proposed during his campaign.

Maybe they are beginning to understand the real threat of free citizens removing the current government from power.