That is a very low bar though, any country still functional enough to run a printing press can make coupon payments.

The issue is, if someone lends the US enough money to buy a coffee, it is difficult to see why they believe they are guaranteed to get a coffee+ worth of money back.

The numbers are staggering, the economic growth isn't there. The US has a technological edge and a big army, but at the end of the day it is 'just' a country like all the others. At this point, a reasonable observer could conclude that the political process is locked in to running up debt until the interest can no longer be paid. Neither the Republicans nor Democrats are in a position to improve the numbers.

After the '07-'08 era crisis, it seems a legitimate question to ask why the taxpayer should pay their debts if the financiers seem to get a pass when it all gets too hard for them.

The assumption that savings must always have positive real returns, is one of the most weirdly persistent fallacy in economic debates.

Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.

Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for a large part of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.

The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The effect of recency on our collective minds probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.

While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century.

There are good reasons to keep government debt low enough but long term possibility of repayment is not a huge worry when market real interest rates and safe asset returns are very low or negative. In the latter case, you can just wait and let the real debt evaporate through inflation.

>> That is a very low bar though, any country still functional enough to run a printing press can make coupon payments.

This hasn't happened unless you count QE as printing money to pay debt, which would be a pretty serious twist of logic.

>> The issue is, if someone lends the US enough money to buy a coffee, it is difficult to see why they believe they are guaranteed to get a coffee+ worth of money back.

>> At this point, a reasonable observer could conclude that the political process is locked in to running up debt until the interest can no longer be paid. Neither the Republicans nor Democrats are in a position to improve the numbers.

If you think this is actually true, there is a ton of money to be made on the open markets by securing your position with capital. There's plenty of financial instruments you can leverage to back your position.

>> After the '07-'08 era crisis, it seems a legitimate question to ask why the taxpayer should pay their debts if the financiers seem to get a pass when it all gets too hard for them.

This is a legitimate criticism but separate from your other claims. QE is protectionist and massively contributes to inequality (in more ways than just income). I am quite critical of the USG and their economic policies.

Now I can admit that and also admit that the United States is probably the safest credit risk on the planet, primarily due to the hegemony-driven policies we exert globally. You might argue that this is not for long, but I highly doubt this to be true, and the rest of the world acts as if.

> This hasn't happened unless you count QE as printing money to pay debt, which would be a pretty serious twist of logic.

Credit ratings are forward-looking though. The US's financial position is the worst it has ever been - public debt to GDP is on wartime footing in a long period of peace between major powers.

And from my admittedly highly unreliable sources, a number of states aren't in great financial health and there is a pension crisis afoot.

The fact that the US is going to hand out the nominal value of its debt is not comforting in light of this.

> ... there is a ton of money to be made on the open markets by securing your position with capital

That isn't a fair challenge and you know it, there are a lot of ways to lose everything being clever with derivatives even if the macroeconomic assessment is right. Profiting off something isn't the only way to be right about an opinion.

> This is a legitimate criticism but separate from your other claims.

No it isn't. If the US isn't honoring the capitalist system inside their markets, it is legitimately risky to assume that they will treat foreigners with more respect.

There is an argument that they will, but it isn't a sure thing by any stretch. If something does change, by the time everyone admits that it will be far too late for investors.

The US is chronically unable to balance its budget. The first thing to give could easily be foreign-owed debt, because foreigners don't vote.

Everything is relative. Even with all the problems in the US, the world has decided that it is still where they should put most of their trust. Also, having the most powerful military means it can do whatever it needs to keep itself going (not that it necessarily will, but it can, so that adds to the trust).

> any country still functional enough to run a printing press can make coupon payments

Only on bonds in their own currency! Argentina would be in a much better position if they could print dollars.

> 'just' a country like all the others

For this to be a problem the US has to fail in a way that doesn't bring the rest of the developed world down too

At nation scale, lending money does not work like buying coffee.

ITs an entirely different mechanism. Think of the difference between breaking styrofoam apart and pulling atoms apart.

> At nation scale, lending money does not work like buying coffee.

This seems to be the econ 101 answer all modern day Chicago - school influenced economists give out.

Student: if the US has a debt that's more than their current GDP, isn't that bad? If a family had a credit card debt higher than their current salary, we'd say that they were in bad financial shape.

Economist: The macroeconomics of a nation work much differently than a single family's budget.

Student: Well, when the family has no plans to cut expenses, continues to charge more and more each year on the credit card, and their solution involves some vague plan of getting a huge raise sometime in the future, how does this not end in disaster for the family, but turn out fine for a government doing the same thing.

Economist: Running deficits and borrowing money in perpetuity is good for a large country to do, just not for an individual. It is known.

Student: well eventually the family's interest payments will be more than they actually make, leaving nothing left for actual expenses. At that point, their card is canceled and they have to sell all their stuff, move out of their home, and crash with the parents. And nobody lends to them again for a long time, and only at high rates. How does a nation avoid this outcome when the math is the same?

Economist: Trust us <waves Jedi hand>.

I get the feeling we're going to someday look at today's accepted macroeconomic theories, and wonder just WTF we we're thinking.

> Student: How does a nation avoid this outcome when the math is the same?

Economist: As I have told you multiple times by now, it isn't. That is what we taught you in first year. You can't simply arbitrarily scale up models from lemonade stand to international trade. Things are not all linear, simplifications in one model are simply not valid in another model.

Arguments like these always strike me as similar to "if evolution, then why are there still monkeys". Maybe you are right, everything is really simple and everybody else has been too stupid to see it. Or maybe people are right when they tell you that you don't quite understand what you are talking about.

there are many facts about computers that seem trivial to me, but would take weeks of background to even begin to explain to my intelligent friends in other fields, so i can accept that there might be some complex topics in other disciplines where you just have to take the experts at their word. that being said, are there any economists here who can ELI5 the actual difference between private and public debt?

I've been experimenting with explaining this - here is the current draft.

An ordinary borrower has a number of ways they can get in to trouble - like losing their job and so being unable to repay a loan. The government avoids all that because government writes the law and it controls the creation of currency so it can always choose to technically not have a problem.

These changes make it almost meaningless to assess a government's debt in norminal terms (eg, 'the debt is $x trillion!' isn't actually a concern, because the government as a body can simply create $x trillion if it wants. Wish I could do that :P).

So we have to look at the governments debt in real terms, at which point we need a completely different model than a small time player, who is mostly concerned with by nominal issues. Then you run in to the issue that in real terms, nobody agrees on anything - which is why the economy is run with a nominal currency system. But there are people, like me, who think in real terms the US of today is a completely different beast from the US of the 1970s. There are massive demographic and political differences.

thanks for the stab at an explanation.

it sounds like you're saying that the debt load vs GDP is important, but the relationship in nominal terms doesn't say much. is that an accurate reading?

Yes. But even then it is a bit difficult to speak with certainty because governments choose the tax rate and as long as the army stays intact can recover from nearly anything.

In this context, I believe debt load to GDP for the US after WWII, and that didn't cause a problem. The concern is that the US has a debt load consistent with a world war and conditions that are really quite favorable. So the obvious questions are "at what point does this get paid back?" and "in like-for-like real terms, assuming politicians are cynical and greedy, is there any reason to believe this debt will be honored?".

You make it sound like the answer to the student’s question is something like: “Government debt is different because it’s in a currency that the government can arbitrarily create. The government can force its subjects to use this currency through the power of taxation and in the worst case, military occupation and martial law”

This sounds like an interesting statement. What are the main differences in lending money at nation scale vs. local bank (or payday loan)? We can agree that both lenders are in it to improve their economical/financial stance? Beyond possible political levers, I can't think of how they are that much different.

The US is critically reliant on creditors rolling their debt. At one point the music will stop. They will then likely inflate the debt away rather than miss a payment but this biggest accumulation of peace time debt in history will end in tears somehow.

There have been multiple pauses of music and it hasn't really done much to the USD. The argument that the music will stop requires there to be a new conductor and financial instrument that can replace the USD and the role that the United States plays in the world economy. The EUR was the closest thing we've had in my lifetime, if you don't count all the ridiculous goldbug rushes we've had in the last five decades - the same people saying the exact same thing you are, who have been perpetually wrong when compared to any other type of financial instrument such as the S&P500 or more recently, VTI.

I am no fan of carrying enormous amounts of debt. I critically disagree with the United States economic and fiscal policies of the last twenty years, including most quantitative easing initiatives.

But if you think the AAA credit rating is somehow fake or corrupt, no metric-driven analysis that even remotely resembles fairness would agree with you. Only theories like "the music will stop" do.

The phrase, "cleanest shirt in the laundry basket" comes to mind. Relatively speaking, the US is in a much better place than others, even if it isn't perfect.

There are countries in the EU who manage budget surpluses. Its why the EU can bail out Greece and soon Italy. Its not impossible.

Cryptocurrency will replace the dollar. A world currency free of any nation’s policies is too attractive. Transferring all your wealth to it allows the rich to escape all these massive debts that have been accumulated by governments and the financial system. This flip will be quite violent as the money moves from one sector to the other and is called hyperbitcoinization, although I don’t believe bitcoin will necessarily be the actual coin used.

how many times Lehman defaulted before Sept 2008? how many people believed Lehman could go bankruptcy that month?

btw, you are talking about credit ratings made by agencies that consistently rated Lehman's products as AAA.

Sounds like you have found a market opportunity to make a lot of money. Congratulations.