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20130601 USA Government Debts



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It became trivial to hear that US government debts become so huge and that we put our children and grandchildren in economic jeopardy by accumulating this debt. I think it is high time to clarify this thing a little bit.

First of all we cannot put economic future of people not yet born into jeopardy any more then we can eat today lunch prepared two month from now on Monday. Future generations will always be free to cancel this debt or just inflate money so debt will go away. We actually have a good example of it. After WWII the government debt of USA was $251.43 billion in 1945. It was pretty much paid off by 1970 when debt ratio to GDP went down to the prewar level. If one takes into account that average house price was $10.000 in 1945 and $24,000 in 1970 we can say that US borrowed at value of 25,143,000 houses and returned at value of 10,476,250 houses. So our grandchildren can return pennies on dollars and be just fine.

Much more important is that people seems to fail understand that internal debt is just an accounting method to represent wealth transfer from productive people to unproductive. If one think about it the mechanics is pretty simple. US FED creates dollars with which it buys T-bonds from US Treasure. The US treasury transfers these newly created dollars to bureaucrats and politicians who use these dollars to pay themselves and to buy goods and services that nobody would voluntary buy otherwise. A good traditional example would be a bridge to nowhere that nobody would build but government. A good contemporary example would be R&D for technology that nobody would invest into because there is no reason to believe that these R&D will produce anything useful beyond salaries for researches and revenues for contractors.

The net result of this debt is always and inevitably inflation because people who produce useful goods and services get the same dollars for them, that bureaucrats and politicians who do not produce anything useful and waste resources for unnecessary staff. Obviously the dollars paid by productive people represent value of goods and services they produced, while dollars paid by bureaucrats and politicians represent nothing valuable. The net result productive people get for their dollars less of useful goods and services then they produce, while bureaucrats and politicians lots and lots more.

As of now US bureaucrats and politicians (Federal + State + Local) consume 40% of GDP without producing anything valuable, that is something that people would by voluntary. That means that productive people get back 60 cents on dollar in valuable goods and services produced by other productive people in exchange for valuable goods and services that they produce themselves.

It is not obvious for a number of reasons. One reason is the complexity of exchange when people do not have ready option to compare value of what they produce with value of what they consume. This comparison is partially represented by taxes + government debt which is most obvious and therefore causes some pushback. However much more of this inflation is hidden For example increase in productivity that would led to decrease in prices and therefore better return on productive work is completely annulled by increase in government regulation that decreases productively. Another example is when bureaucratic machine takes over some valuable part of economy such as education and makes potentially productive teachers to deliver subpar educational services which by the way politicians on the top of bureaucracy from Clintons to Obamas refuse to use for their own children but insist on use by regular Americans.

So to summarize it in short – the government debt represent current transfer of valuable goods and services from productive people to unproductive bureaucrats and politicians and have no impact whatsoever on future generation except for decrease in current productive investment that could make their life better via new technology like flacking instead of bureaucratic boondoggles like wind energy; or infrastructure in form of bridge to somewhere instead of bridge to nowhere.

The good news is that next generation could be smarter, thru away society structure created by socialist / progressive ideological movements of XX century and create new libertarian and productive structure that would make their life much happier due to abundance of resources.

The bad news is that next generation is being educated by socialist/progressive bureaucrats and politicians with objective to maintain existing structure permanently and even expanding it. If the next generation will continue to buy their junk philosophy, they will continue to pay price in lack of resources ad decrease in quality of life.

The real remedy to government debt in democracy is the economic education of people, which as successful for majority will eliminate this unproductive structure.

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