Frank solves the national debt

[Claeren]

Let me put it another way, how good are higher interest rates?

Do they help you pay off your car or house faster?

Do they help you finance your new company?

Do they make you more internationally competitive?


Because interest rates are directly tied to debt.

The more debt you have the higher those rates are. Inversly, the lower the debt the lower the rate and the easier it is for individuals and companies to attract investment.

The $400,000,000,000+ in Canadian debt and $8,000,000,000,000+ in American debt are all dollars that are not available to you or the people who employ you. In order to attract dollars for their use they have to BEAT the government rates/(investment attraction factor, so to speak) and therefor costs them (and you) money.

If your employer spends 5% instead of 3% for 100,000,000 in capital the extra $2,000,000/YEAR is potentially coming out of your pocket.

If you have to pay 6% instead of 4% on your $200,000 mortgage you are forced to pay an extra $4,000/YEAR to finance it.

When you start compunding those numbers over time it is an even larger amount....



An odd combination of world factors have kind of blinded us lately to the relationship but it is there (It is even mentioned in some of those entry level econ courses you mentioned). And at some point when Asian financing of American debt (of ALL forms) is pulled back there will be a severe day of reckoning and at that point just how bad debt is will become VERY evident, and EVERYONE, around the world, holding debt, WILL feel the pain.... happy thoughts indeed...


Claeren.

[Coolsurfer79]

Originally posted by Claeren@May 22 2005, 09:35 AM
Let me put it another way, how good are higher interest rates?

Do they help you pay off your car or house faster?

Do they help you finance your new company?

Do they make you more internationally competitive?


Because interest rates are directly tied to debt.

The more debt you have the higher those rates are. Inversly, the lower the debt the lower the rate and the easier it is for individuals and companies to attract investment.

The $400,000,000,000+ in Canadian debt and $8,000,000,000,000+ in American debt are all dollars that are not available to you or the people who employ you. In order to attract dollars for their use they have to BEAT the government rates/(investment attraction factor, so to speak) and therefor costs them (and you) money.

If your employer spends 5% instead of 3% for 100,000,000 in capital the extra $2,000,000/YEAR is potentially coming out of your pocket.

If you have to pay 6% instead of 4% on your $200,000 mortgage you are forced to pay an extra $4,000/YEAR to finance it.

When you start compunding those numbers over time it is an even larger amount....



An odd combination of world factors have kind of blinded us lately to the relationship but it is there (It is even mentioned in some of those entry level econ courses you mentioned). And at some point when Asian financing of American debt (of ALL forms) is pulled back there will be a severe day of reckoning and at that point just how bad debt is will become VERY evident, and EVERYONE, around the world, holding debt, WILL feel the pain.... happy thoughts indeed...


Claeren.

Interest rates are not tied to debt at all. They are determined by the Bond and Money markets. The government can affect interest rates by changing the money supply. I have never heard the interest rate being affected by the level of debt. Actual experience confirms this. As the US debt has increased their hasn't been much change in interest rates. In fact they are still very low. Japan is experiencing an extreme debt crunch andtheirinterest rates are practically 0%.

As for your questions.

No, higher interest rates do not help you pay things off faster.
No, higher interest rates do not help you finance your new company.
Yes, higher interest rates do make you internationally competitive.

Did the last one surprise you a bit? Well if we have higher interest rates then we will be an attractive place for foreigners to invest money because they will achieve higher returns. That is why an increase in interest rates lead to an increase in the Canadian dollar. higher interest rates lead to more demand for Canadian investments and for those people require Canadian dollars, so demand for Canadian dollars increases. The lower the interest rate the less foreigners will want to invest in Canada. For foreigners investing in Canadian companies debt levels and interest rates do not matter at all.

That 400 + billion in Candian debt is held by Canadians. The government chose to spend more money then they had so they issued bonds. I got some bonds. Those bonds pay me returns. Much like bonds that companies issue to pay for various projects. That debt means the government has spent more then it had. When they service that debt I get the money, and then I do something with that money. They got the extra cash from Canadians and they give back even more. The debt servicing represents an INCOME to me and the people who employ me. And ofcourse people have to beat government rates to get my money. Why shouldn't they? The government gives a lousy rate, but it is extremely safe.

If the owner of my company is paying more to service debt I don't care if he is paying that money to me. If I own the bonds then that capital goes into my pocket. And that is why debt doesn't matter if it is held by Canadians.

You can compund those numbers all you want as long as Canadians are the ones buying that debt, because it won't make a difference. Also debt to GDP Ratio is the important number. Don' understand why? Well lets say you are 2 million in debt and only making 100,000 a year. Lots right? Sure is. However if your income explodes because your investments increased uour income to 4 million a year then that debt is a lot less significant. That is what the Canadian government has done.

What you say at the end has some truth to it. Debt isn't a problem until no onw will lend you money. But you should also realize that the debt has greatly decreased in Canada and also that it doesn't matter as long as Canadians hold it.

Also I would suggest some course on Keynesian Macroeconomics.

[Claeren]

Simply, you are wrong.

First, higher interest rates do NOT cause the dollar to rise, it is the opposite. As the dollar rises they raise interest rates to CURB its further rise (or more accurately 'balance growth', but that subtle difference does not properly convey your flawed understanding). Your assertion of the opposite is so far from reality that your final comment about me needing basic econ classes is quite hilarious...


Interest rates are the rate of attraction needed to any given time to attract capital to fund borrowing. The more money that needs to be funded the harder it is to come by and the higher the interest rates in order to attract more.

That is their purpose.

Governments, uniquely, have the option of printing more money as you say, but in the long run the effect is the same. Corporations need to attract more dollars then they otherwise would have and lenders are leary of lending in currency's that are falling in value faster then the rate of return is paying them for their money, etc.

What do you think bonds are? Bond markets are where debt is sold, the rates go up when lenders are not buying the bonds (Or in other words lending) and they need to attract their capital, and they fall when there is a lot of lenders and few borrowers - exactly MY point, not yours...

Lastly, your examples are exactly what i was talking about in my last post and you must be under 25 (or have a very short memory) to take yourself seriously saying such things. American interest rates are low because other nations, many of those nations running trade surpluses v. America, are pooring trillions of dolllars into America because that is where their exports go. For example China gets about $600,000,000,000 in USD in net profit because of the trade surplus they run with America. They then poor this money back into American markets to allow consumers and government to buy more (debt supported) goods from them. If China stopped interest rates would rise swiftly and quickly because someone would have to step in and fund that shortfall in capital. In order to attract that much money interest rates would have to rise 10-20%, easily. Over time more and more people would give capital to fund debt and the rate would drop, but it would take time.

The situation currently is odd, unique, and unsustainable long term. It is a house of cards that must one day fall... As i said earlier (from the mouths of top economists including white house advisors) many are quite concerned because when that day happens it will make the early 1980's look like a walk in the park.

Japan is in a tough situation (and not really directly linked to our discussion, but whatever) where deflation is a much bigger problem then debt. Lots of people are willing to lend, the problem is that people are not consuming (goods or capital). They have a lot of people wanting to lend money and no one wanting to take that money, therefor interest rates are near 0%. Japan is a complex case but it certainly is not one that proves your point, although there is not a scenario that would...

Oh, and which course specifically do you suggest i take? Did you take it? Maybe i should teach it then?


Your average person on the street will borrow FAR more then they ever invest. This means they are punished in having to compete with the government appitite for debt, not rewarded for it. Those who do not need to borrow money for homes, cars, and general borrowing (ie: vise, line of credit, etc.) should then be borrowing money to finance their own new or growing companies - the lower the rates the more attractive and less risky this is. Since by FAR the most growth in any economy is due to small business growth/creation anything that can be done to encourage such behavior is desirable. The lower the government debt, the lower the interest rates, then the stronger small business growth among corporate borrowers and the the stronger the spending among personal debtors.

In hindsight, a world structured as you say it is would be a deflationary and stagnant mess like Japan... way to go!


Claeren.

[SoulOfTheFlame]

Instead...

Lets have a lottery every day. Everyday we'll pick 5 people to execute then take their estates and donate that to the National Debt.

Just as likely.

[Claeren]

There is an excellent article in todays Globe & Mail in regards to inverted bond yields....

I also noticed a few minor errors in what i said but whatever... debt is bad... when things like international currency yields are being drawn into the discussion isolating for any variable is difficult... :P

From CS Monitor:

He was referring to the $412 billion budget deficit and the approximately $600 billion trade deficit the US ran in 2004. A trade deficit must be financed by other nations willing to hold US currency. And foreign investors have also been buyers of federal debt in recent years, helping to keep US interest rates low. But the trend in these deficits now looks unsustainable to many. If those investors sour, even somewhat, on holding US debt, the Treasury may need to offer higher interest on its bonds. The ripple effects, in turn, could dampen US economic growth.

Claeren.

[Coolsurfer79]

Originally posted by Claeren@May 22 2005, 10:36 PM
Simply, you are wrong.

First, higher interest rates do NOT cause the dollar to rise, it is the opposite. As the dollar rises they raise interest rates to CURB its further rise (or more accurately 'balance growth', but that subtle difference does not properly convey your flawed understanding). Your assertion of the opposite is so far from reality that your final comment about me needing basic econ classes is quite hilarious...


Interest rates are the rate of attraction needed to any given time to attract capital to fund borrowing. The more money that needs to be funded the harder it is to come by and the higher the interest rates in order to attract more.

That is their purpose.

Governments, uniquely, have the option of printing more money as you say, but in the long run the effect is the same. Corporations need to attract more dollars then they otherwise would have and lenders are leary of lending in currency's that are falling in value faster then the rate of return is paying them for their money, etc.

What do you think bonds are? Bond markets are where debt is sold, the rates go up when lenders are not buying the bonds (Or in other words lending) and they need to attract their capital, and they fall when there is a lot of lenders and few borrowers - exactly MY point, not yours...

Lastly, your examples are exactly what i was talking about in my last post and you must be under 25 (or have a very short memory) to take yourself seriously saying such things. American interest rates are low because other nations, many of those nations running trade surpluses v. America, are pooring trillions of dolllars into America because that is where their exports go. For example China gets about $600,000,000,000 in USD in net profit because of the trade surplus they run with America. They then poor this money back into American markets to allow consumers and government to buy more (debt supported) goods from them. If China stopped interest rates would rise swiftly and quickly because someone would have to step in and fund that shortfall in capital. In order to attract that much money interest rates would have to rise 10-20%, easily. Over time more and more people would give capital to fund debt and the rate would drop, but it would take time.

The situation currently is odd, unique, and unsustainable long term. It is a house of cards that must one day fall... As i said earlier (from the mouths of top economists including white house advisors) many are quite concerned because when that day happens it will make the early 1980's look like a walk in the park.

Japan is in a tough situation (and not really directly linked to our discussion, but whatever) where deflation is a much bigger problem then debt. Lots of people are willing to lend, the problem is that people are not consuming (goods or capital). They have a lot of people wanting to lend money and no one wanting to take that money, therefor interest rates are near 0%. Japan is a complex case but it certainly is not one that proves your point, although there is not a scenario that would...

Oh, and which course specifically do you suggest i take? Did you take it? Maybe i should teach it then?


Your average person on the street will borrow FAR more then they ever invest. This means they are punished in having to compete with the government appitite for debt, not rewarded for it. Those who do not need to borrow money for homes, cars, and general borrowing (ie: vise, line of credit, etc.) should then be borrowing money to finance their own new or growing companies - the lower the rates the more attractive and less risky this is. Since by FAR the most growth in any economy is due to small business growth/creation anything that can be done to encourage such behavior is desirable. The lower the government debt, the lower the interest rates, then the stronger small business growth among corporate borrowers and the the stronger the spending among personal debtors.

In hindsight, a world structured as you say it is would be a deflationary and stagnant mess like Japan... way to go!


Claeren.

I'm sorry you though I was saying that you needed basic economic courses, I actually feel that you have a fairly good grasp of basic level economic principles. the course I was talking about is actualy a 300-level course. It is on Keynesian economics and deals with a number of models to explain economic output. I took Econ 315 in my last year at the Uinversity of Alberta(2004) and recieved a B+.(I'm not an expert by any means) and I hold a minor in economics. I also believe that economics doesn't hold all the answers but I am trying to keep our discussions to economic principles. I also think in many of your points you may be thinking about inflation.


I found a good site that helps back up my assertion.

http://www.bmo.com/economic/special/bocdol.htm

This is an old report but it suggests a number of methods on increasing the strength of the Canadian currency. Two of the three include raising interest rates and one says to do nothing.

And just to mention Japan, my professor thought their problems were because they had interest rates around 0% when they should have been negative. Then people would be paid to borrow money and output would increase.

I also mentioned the bond market precisely because it is debt. You said debt was never good and I was saying that it serves a purpose. I also wanted to say that if I the employee lent my boss the money that i wouldn't mind if he could pay me less because he would be paying interest on the money he lent me.

I think you should also seperate the personal debt from the national debt because it confuses things a bit. The government borrowing from Canadians is like you borrowing for your parents, thus any interest you pay stays in the family. If you borrow from the bank then it is like the country borowing from foreigners.

I actually think we should break down some of these points because our argument is now all over the map

[Lurch]

First, higher interest rates do NOT cause the dollar to rise, it is the opposite. As the dollar rises they raise interest rates to CURB its further rise (or more accurately 'balance growth', but that subtle difference does not properly convey your flawed understanding). Your assertion of the opposite is so far from reality that your final comment about me needing basic econ classes is quite hilarious...

How is it possible that higher interest rates lower the $ when they increase the attractiveness of $$ flowing into Canada? Interest rates slow growth but make the $ more attractive internationally.

Your average person on the street will borrow FAR more then they ever invest. This means they are punished in having to compete with the government appitite for debt, not rewarded for it. Those who do not need to borrow money for homes, cars, and general borrowing (ie: vise, line of credit, etc.) should then be borrowing money to finance their own new or growing companies - the lower the rates the more attractive and less risky this is. Since by FAR the most growth in any economy is due to small business growth/creation anything that can be done to encourage such behavior is desirable. The lower the government debt, the lower the interest rates, then the stronger small business growth among corporate borrowers and the the stronger the spending among personal debtors.

Complicated way of saying public debt crowds out private investment, but ignores the fact that some level of debt is appropriate in order to finance capital investment by the government. Debt financed program spending is criminal IMO, but the last time Canada did that Mulroney was in charge. Debt-free is inappropriate as well b/c it implies taxes could be lowered while maintaining the exact same level of government services and investment, i.e. optimal capital structure is very rarely, if ever, 100% equity (paid for by taxes, in essence)

[Bend it like Bourgeois]

Originally posted by Lurch@May 24 2005, 09:47 AM


Complicated way of saying public debt crowds out private investment, but ignores the fact that some level of debt is appropriate in order to finance capital investment by the government. Debt financed program spending is criminal IMO, but the last time Canada did that Mulroney was in charge. Debt-free is inappropriate as well b/c it implies taxes could be lowered while maintaining the exact same level of government services and investment, i.e. optimal capital structure is very rarely, if ever, 100% equity (paid for by taxes, in essence)

Exactly. Debt to spread the cost of a bridge over a couple generations is OK. Debt to run the government is not.

I believe our $500-odd billion debt is net debt. Even if it were gone we would still have debt, just debt backed by assets. That's going from memeory though, can anyone confirm that?

The government borrowing from Canadians is like you borrowing for your parents, thus any interest you pay stays in the family. If you borrow from the bank then it is like the country borowing from foreigners.

I don't buy that. Debt held by Canadians does make us less susceptible to international shocks, but other than that it makes no difference.

For starters I'm not sure why paying the interest to Canadains automatically means the money is staying in Canada, but either way it still costs the economy a fortune to gather the taxes to pay the interest.

[Five-hole]

One of my teachers has a theory that were international investors to call in the debts owed to them it would plunge the world into a scary sort of recession. Can any of the more economically enlightened among us confirm/deny?

[Flame Of Liberty]

Originally posted by Coolsurfer79@May 23 2005, 03:29 AM
Also I would suggest some course on Keynesian Macroeconomics.

I am sorry but this is the worst suggestion I have ever heard. If I were you, I would call the university and asked for my money back. Maybe you should do some research on F.A. Hayek and his “Cambridge” debate with JMK. Keynes was destroyed (I almost said owned) and it is utter shame that his “theory” is still being taught.

BTW There is no such thing as "Keynesian Macroeconomics" I assume you mean Keynesian economic theory.