So I was using the US debt clock to explain to someone our extreme debt problem: http://www.usdebtclock.org/ It states that we have 114 trillion in unfunded liabilities alone. He responded that this must be "pure bull" because that is more money than the entire money in the world currently in circulation. Can someone explain to me: 1. How this is possible (the more detail the better) I am going to assume this is, in part, related to printing of fiat money? 2. If this has happened before to countries, in history. 3. What this means for our economy/debt if we are in debt more than there is money in the world. Any help here would be appreciated, thank you.
Never underestimate the global monetary system’s ability to increase the monetary supply overnight.
The nature of a fiat fractional reserve system means that the debt is largely "monetized". It's being traded as if it were money, and not merely the promise of money in the future. This is because there isn't really any real money.
The debt is being treated as if it were money. The nature of the system means that it can never be paid back.
Consider three people, Alice, Bob and Carl. Assume Alice has 100$ and Bob and Carl have none.
Alice now lends Bob 100$, Bob lends 100$ to Carl and Carl lends 100$ to Alice. Repeating this circle will create three times the credit than money in circulation. But this is no problem because every credit is just one part of a transaction: The other part is the asset of the creditor, the promise to get 100$ back. In total, these cancel each other out.
We see that it is no problem that there is more debt than money, because debt is just one side of the coin. We see further that this phenomenon can occur in an commodity-based currency too.
Of course, in reality there is interest to pay, but that will not change that much in the picture above. Assume everyone has to pay a certain amount of interest X. Alice pays Carl 100$, Carl pays Bob 100$, Bob pays Alice 100$. Alice pays Carl X, Carl pays Bob X, Bob pays Alice X. Again, we see that this can occur in commodity-based currencies too.
Finally, let us examine the two-person economy: Alice lends Bob 100$ with 3% percent annual interest. Bob will have to produce something that Alice values more than the interest in dollar from Bob. Bob will have to make sure he can pay back the credit and Alice also is interested in getting her money back: There is risk involved. If she does not get her money back, that is, Bob can not pay back, Alice has lost her investment, that is life. There is no paradise.
To sum up: It is possible to have more debt than money in any monetary system, since credit and money are not the same thing. It is not in all cases bad, it can be sometimes entirely rational to have more credit than money in existance.
Ok. I understand now. Thank you for the great answer! I know this wasn't part of the original question but I have one last question I need some assistance with. The US debt clock says that Medicare liabilities are 79 trillion. http://www.usdebtclock.org/ The number on there states: "Medicare is based on current Tax and Funding inputs and on projections using these assumptions, and future demographic shifts in the U.S. Population" Source: Federal Reserve when you hover over it. I cannot seem to find the source of this Federal Reserve document via google search, and I am wondering how they are coming up with 79 trillion. Someone told me "That's the shortfall if we assume the United States continues to exist until the world is consumed when the sun goes red giant on us." Though this obviously sounds hyperbolic and illogical, why would the Federal Reserve crunch the numbers like that? However, at the same time, I have more reason to believe this 79 trillion figure is not accurate because of this FiscalTimes article: http://www.thefiscaltimes.com/Columns/2010/08/20/Tax-Burdens-of-Unfunded-Benefits.aspx To highilght the important parts: According to the trustees report: "Now we turn to Medicare’s 2010 report. It shows enormous improvement in the program’s long-term costs as a result of the Affordable Health Care Act. Starting with Part A, we see that Medicare’s actuaries are projecting no long-term deficit whatsoever. Last year’s projected deficit of $36 trillion has literally fallen to zero (p. 85). Part B’s finances also show significant improvement, with the long-term deficit falling from $37 trillion to just $12.9 trillion or 1.5 percent of GDP. Medicare Part D’s finances are unchanged. The long-term deficit is estimated to be $15.8 trillion or 1.1 percent of GDP. Putting these numbers together, we see that Medicare’s unfunded liability fell from almost $90 trillion in 2009 to less than $30 trillion, a two-thirds improvement in one year. As a percent of GDP, the taxpayers’ obligation has fallen from 6.8 percent to 2.6 percent. Throw in Social Security’s unfunded liability, estimated by its actuaries (p. 65) this year at $16.1 trillion, or 1.2 percent of GDP in perpetuity, we see that the potential tax increase from entitlement programs has fallen in half, from 8 percent of GDP to 3.8 percent. That still means a possible income tax increase of 38 percent, but that’s a lot better than 80 percent." So this is saying that we tens and tens of trillions in potential liabities from the Medicare liabilities due to Health Care Reform in 1 year. Obviously I am skeptical about this. There was also a memorandum by the actuaries mentioned on the 2nd page of this article, that says this math is debatable, but it still acts as if it is much lower than 74 trillion. "Although the trustees report represents the official projection for Medicare, its actuaries simultaneously published an unusual dissent suggesting a more likely alternate scenario than the one endorsed by the trustees. According to a memorandum issued the same day as the trustees report, Medicare’s actuaries said the trustees are overoptimistic about certain provisions of current law — upon which the trustees report must necessarily be based — that are unlikely ever to be implemented. In particular, current law requires a sharp cut in payments to Medicare providers in coming years. Under a law enacted in 1997 but always postponed by both Republican and Democratic Congresses, Medicare providers will receive a 23 percent cut in payments on Dec. 1, a further 6.5 percent cut in 2011, and another cut of 2.9 percent in 2012. The actuaries believe that Congress is almost certain once again to override the law with some sort fix. They are undoubtedly correct in believing so. Consequently, spending for Medicare Parts A and B will probably be much higher than the trustees report projects. The actuaries estimate that spending for Part A in 2080 will more likely be 3.87 percent of GDP instead of 2.17 percent as the trustees report projects. Importantly, this is still well less than the 4.96 percent of GDP estimate projected in the 2009 trustees report, an improvement of 1.1 percent of GDP due to enactment of health care reform. For Part B, the actuaries memorandum projects very substantially higher spending than the trustees report does. The trustees project that spending for Part B will be 2.47 percent of GDP in 2080, but the actuaries think it will more likely be 5.07 percent of GDP. The 2009 trustees report estimated Part B spending would be 4.43 percent of GDP in 2080. Looking at the whole Medicare program, the actuaries see spending rising to 10.7 percent of GDP in 2080 from 3.59 percent of GDP this year, while the trustees report sees spending at 6.37 percent of GDP. Total Medicare spending in 2080 was estimated to be 11.19 percent of GDP in the 2009 trustees report." So does anyone know what is actually going on here?? I find this very odd and confusing, especially since it does not seem like the 2009 numbers were debated since I found this: http://www.ncpa.org/images/1856.jpg which is from here: http://www.freerepublic.com/focus/f-news/2475625/posts Thanks again.
How does it happen? Easy - you just go around obligating yourself to everyone even though you can't possibly honor your obligations. Work for the government for 20 years and retire for the next 40 with 80% of your salary? Sure, we can do that! Cradle-to-grave government health care? You bet! Guaranteed retirement income? We got it all covered! Then when it comes time to pay your debts, you just print a sh!tload of "money" and pay it off with worthless paper.
If the banks would let me, I could become indebted for more money than I could possibly make in five lifetimes. The banks don't allow me to do it, but the federal government has it's own private bank we call "The Fed" that will happily cover all the government's debts regardless of how insanely the government overextends itself.
You should watch this short movie . It explains pretty much what you are after and way we continously need to create debt
http://www.youtube.com/watch?v=vVkFb26u9g8
I'd also like to say a few things about Metus' response...
Yes, Metus is right, but think about the implications of that... Alice has the $100 that she loaned out, but everybody still owes $100, and nobody has produced anything worth $100 to add value to their little micro-economy. Unfunded government liabilities are called "unfunded" for a reason... meaning they don't pay for themselves, and require a continuous and increasing supply of tax dollars to be taken from productive people.
Can we just let the US government default of all the debt already? I mean really, what's the worst that can happen?
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Unfunded liabilities are basically just the goodies that politicians promised people without setting aside any money to pay for them. Promising voters lavish entitlements that they are going to get long after the politicians are out of office is an easy way to be popular. And thus they have been very generous in dishing out these unfunded entitlements. Essentially people were promised more stuff than the entire economy produces. These unfunded liabilities are are going disappear simply by not being provided.
Tony Fernandez: Can we just let the US government default of all the debt already? I mean really, what's the worst that can happen? More than half of those currently employed could find themselves without a job in the financial collapse that would ensue. A populist dictatorship would be the best that could happen from then on. The US is way past the point of no return, I’m afraid. If there ever was a bad time for a libertarian President, now it is. The Regression theorem is a memetic equivalent of the Theory of Evolution. To say that the former precludes the free emergence of fiat currencies makes no more sense that to hold that the latter precludes the natural emergence of multicellular organisms. | Post Points: 5
More than half of those currently employed could find themselves without a job in the financial collapse that would ensue. A populist dictatorship would be the best that could happen from then on. The US is way past the point of no return, I’m afraid. If there ever was a bad time for a libertarian President, now it is.