Debate question

[Brett85]

I've been hanging out with my relatives over the holidays, and I have a cousin who's basically a liberal socialist. He made an argument that the national debt isn't a big deal since the vast majority of the debt is actually owned by United States citizens. What is the best response to that argument?

[Agorism]

Well that means we can afford to extend the Bush Tax cuts then.

[Austrian Econ Disciple]

I guess he has never heard of bankruptcy...Also, most of our debt is either held by foreign entities (Governments, banks, etc.), or by the Federal Reserve. Similarly, under our monetary system debt means an expansion of the money supply, which again, causes tremendous damage (ABCT). Also, I might add that a simple elucidation of complex systems under simple constructs easily validates this along a step by step causal-realist approach. If I borrowed one million dollars tomorrow, my finances would look great, and under the current trend of economic thought, I would be thought of as rich, and a boon to the economy. However, in reality, I will become broke, poor, and my property will be taken by the bank who is given new money printed out of thin air by the issuing authority the Federal Reserve, who holds a monopolist stranglehold via legal tender laws and other draconian measures (Therefore, it is deduced that it cannot be said that either; debt makes us more prosperous, and that debt 'isn't a big deal'. If he wants us to go bankrupt then by all means, think it is no problem). In other words, if the trend continues the banks and corporations will rob us of our property and become even richer, while we become poorer. I don't want my property stolen from me, so I'll take a pass. If he loves corporations and the banks, then he will love the debt.

[emazur]

http://en.wikipedia.org/wiki/United_States_public_debt
The US debt in the hands of foreign governments was 25% of the total in 2007,[19] compared to 13% in 1988.[20] Despite the declining willingness of foreign investors to continue investing in US dollar denominated instruments as the US dollar fell in 2007,[21] the U.S. Treasury statistics indicate that, at the end of 2006, non-US citizens and institutions held 44% of federal debt held by the public.[22] About 66% of that 44% was held by the central banks of other countries, in particular the central banks of Japan and China. In May 2009, the US owed China $772 billion.[23]

In total, lenders from Japan and China held 44% of the foreign-owned debt.[24] This exposure to potential financial or political risk should foreign banks stop buying Treasury securities or start selling them heavily was addressed in a recent report issued by the Bank of International Settlements, which stated, "'Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely."[25]

So if foreigners own 44% of the debt, the U.S. holdings at 56% should be considered the "vast majority"? Let's suppose 100% was held by U.S. citizens. Since we shouldn't worry if we "owed it to ourselves", why not go on a massive buying spree so there would be airports every 10 miles, high speed rail up the wazoo, a house on every lot, and a chicken in every pot? If "we owe it to ourselves" is a free pass, why not ask your cousin to borrow $1000 from every household in his neighborhood and spend it on a new car and his own mcmansion? It wouldn't be borrowed from foreigners after all. Hell, make it $10,000 from every household. Why not? Regardless of who he owes the debt to, interest has to be paid, and as the amount of borrowing goes up and up, so too does the percentage of his income going towards paying the debt, and if he keeps borrowing more and more eventually he will have no money left to pay for ANY of the crap he bought on borrowed money, much less the necessities of life. If he argues that the U.S. is different b/c it can print money, ask him why it doesn't just print up a quadrillion dollars and buy mansions for everybody? If he doesn't know why not, ask him if he's ever heard the word "inflation", and if so, how about "hyperinflation"?

There is one difference about foreign held vs. public held debt. A foreign nation with high holdings can use its leverage as a weapon and hyperinflate another's currency, leaving its economy in tatters. With a wrecked economy, good luck paying for national defense

"Dollar is a National Security Issue" (written by a former Treasury official)
http://www.washingtontimes.com/news/2009/oct/16/dollar-is-a-national-security-issue/
The ability to cripple the U.S. economy by massively devaluing the dollar is the type of "asymmetric warfare" that the People's Liberation Army has discussed openly in recent years. This is not to suggest that the People's Republic wants to destroy the dollar, nor that doing so would come without cost. But such power would clearly give China tremendous leverage.

[sailingaway]

I've been hanging out with my relatives over the holidays, and I have a cousin who's basically a liberal socialist. He made an argument that the national debt isn't a big deal since the vast majority of the debt is actually owned by United States citizens. What is the best response to that argument?

Is he suggesting that citizens shouldn't get their money back at full value?

[Koz]

I would say what's the difference? The government still has to pay the service on the debt. When interest rates rise eventually it will be crushing. Is he saying the government can stiff the owners of the debt if they are citizes? Ask him if he is buying treasuries.

I doubt the US will go bankrupt, the currency will implode before that. I think that is a worse problem.

[Brett85]

Is he suggesting that citizens shouldn't get their money back at full value?

I'm not exactly sure what he was saying. But I've also heard many far left economists make the same argument that national debt is not a big deal since we "owe it to ourselves." I found this article that addresses it.

http://www.thenewamerican.com/index.php/economy/commentary-mainmenu-43/4375-is-our-national-debt-nothing-to-worry-about