I think listening to each others opinions can be helpful sure...

In this case most economists (Ben Bernanke, Alan Greenspan, Paul Krugman [nobel laureate]) felt the risk of a complete financial meltdown or extended liquidity trap was not worth the benefits of raising the value of the dollar by paying down the national debt.

It's a trade off for sure, but to think that it was an easy desicion for economists who have made their entire careers argueing against government intervention to encourage this action is... I don't even know what to call it. I'm sure the Fed would not have encouraged an action that devalued their assets more than any other alternative, it just doesn't make sense. Hopefully since it appears that the disaster that was in motion (bank runs leading to a depression) did not happen the U.S. will be actually able to make money on the deal since most of the money was given to healthy banks.

As far as the auto industry, I don't know... economic expectations have a lot to do with how the economy does in the short term. Some feel that there are enough americans who would have stopped buying if all three majors went under that it would have also caused a Japan style liquidity trap. Perhaps it is unwarranted optimism that they will pull through, time will tell... If they do we will get our money back just like when George Bush Sr. did it back in the day. Who knows... if it averted a financial disaster even if we don't get the money back it will be worth it IMO. You can't pay off the debt if no one is working.

I know you said you were trying to simplify things 2ndMan but the saving=bad/spending=good mentality is part of the reason Americans were so affected by this recession. Consumerism runs uncontrolled and Americans basically live on credit, but don't have savings to carry them through their rainy days.

Every financially sound person I've interacted with has always stressed the importance of saving, so I'm not about to spend my life savings to help revive a fundamentally flawed economic system. Just my 2 pennies.

PS. Ironically the recession was the best time to invest in stocks, currency, and even property, so maybe my whole argument was hypocritical, but even still I've been led to believe consumerism is evil and its hard for me to see it any other way.

Yea that was the banks fault, lending uncontrollable (though they were being given essentially free credit themselves, so whilst they were irresponsible, you can see why they did it). And I think the recession will educate people a lot on the fact you cant spend money you dont have, thats why we grew so much, and the hit such a huge recession. Its not just Americans either, its basically all of the western world..

Ofc, I save more than I spend, its common sense, people lost that last few years I think. But financially sound people dont help the economy much (not that they should feel an obligation to).

It may seem attractive to invest in a recession, and if youve been smart, it can be lucrative. But its a huge risk, stocks may seem cheap and everyone knows stocks rise and fall, but what if that business goes under the next day, like so many did. Byebye money. Property was cheap, but no-one was buying it. And the printing of the dollars shows how risky investing in currency could have been.

Yep, consumerism could well be evil, but would a communist state be better? idk

Great answers guys, I hate to keep saying this cause it seems there is not an answer for it, but you guys are trained up in this field an Im not. We are definitely talking about two different kinds of spending here. One by the government and one by the people. The people have to borrow money when they want to buy/pay for something if they haven't saved money for it. The government prints money and borrows money to pay for things, I would really like to know what the economists say on how that "printing" of money without assets to back it up or viable means to repay it effects the economy.

2M: In its purest form, yes communism would be better. But human nature does not allow a system like that to stay pure, so the tainted form of communism is what we perceive.

And although investing would be risky if you did it blindly, if you knew what you were doing the risk factor was minimal, especially in the last 2 months. And by currency, I certainly did not mean investing in US currency which is a risky move at best.

GP: I'm not trained in this field but I think everyone has their own solution. Its easy to point out faults AFTER the fact, but to see the consequences a head of time is what is difficult. But its generally agreed upon that increased spending during times of recession is necessary in order to help the economy recover quickly. I understand your concern, but like Obama said, the anger is often misplaced. Don't be mad at the solution, be mad at the problem. So unless we return to the gold standard again, the devaluation of USD is almost inevitable, but I gotta say I'm surprised its held on as long as it has.

GP, I know what your saying. If you were talking about a household budget what your talking about would make perfect sense. Let me put it this way... If you had three people, one guy never takes out a loan, never under any circumstances. One guy takes out loans but never pays them back and thus has to wait seven years before he can borrow again. The last guy borrows as much as he can and only pays the minimum balance on his enourmous number of credit cards but always pays on time. The Japanese economy would essentially be the first example, the Argentinian economy would be the second and the U.S. economy would be the third. My question to you is who has the best credit? Who has the most stuff? Who has the worst credit? Who has the least stuff? When you give someone a loan (let's say as the Chinese have essentially done with us) you look at the ability to pay. The first thing someone does is they run your credit. The second thing someone does is look at the amount of debt you HAVE to pay each month vs. how much you make each month. If you look at how low our taxes are (relative to other countries) the bet that people who are buying U.S. currency at a alarming rate like the Chinese are is that we CAN pay our bills if we had to.

Now if we look at your initial question, how does borrowing more money in the specific case of the bank bailout or car industry bailout affect the economy? Well in the short term to be honest, not at all. There are very few people who have some kind of vested interest in "calling in all their loans at once". In other words they are not printing money, they are printing bonds which are sold on the open market by the Fed. If it wasn't for the fact that people all over the world (for example if you lived in Argentina you try to get american dollars as quickly as possible before your money becomes worthless) buy U.S. bonds and dollars we couldn't keep "getting by month to month making minimum payments" so to speak.

The reason that it doesn't have an immediate effect is the same reason that you taking out a loan actually gives you better credit as long as you pay the bill. Well, it's not quite that simple... actually when the Fed sells these bonds they essentially have two ways they can use bond selling (I'm simplifying a little here) one is to pay down the debt as you suggest. The other is to manange the interest rate. The Fed buys up U.S. bonds to drive up the interest rate (thus increasing the incentive to invest in the U.S.) or selling bonds (thus decreasing the incentive to invest in the U.S.) what you are attributing to the U.S. debt is actually micromanaged four times a day by the Fed (Ben Bernanke). This controlls inflation (I won't go through it all trust me it does, it's the main function of the Fed as opposed to the seventies when they didn't realize the negative effects of inflation on the economy and thus almost put us in the poor house) as well as investment in the U.S.

In the long run however this can lead to a situation where you cannot pay your monthly bill and like Argentina growth in your country is slowed to a halt because you cannot borrow any more.

Think of it this way, if you suddenly borrowed a huge sum of money for a McDonald's in a good area would your credit go up or down? Well as long as you paid your bill it would go up. As long as your income goes up your credit goes up, not down.

Sounds good huh? Everything is gonna be o.k.? Not quite that simple, when the baby boomers die there's gonna be one heck of a lot less money floating around this country since there will be a lot less people (they make up most of our population) this means less taxes and maybee our "children" can't pay the bill (actually GP it's not our children, it's you and me that will face this problem pretty soon, next twenty years or so) at that time there will be an economic drama that makes what we are going through look like nothing.

How do we solve it? Well, we could increase immigration to the point that we ofset all the old people dropping off. We could increase taxes. We could just not pay the bills. We could just keep printing more bonds.

Here's the real bottom line the dollar is actually worth the amount of physicall capital there is in the U.S. (factories, tractors, things that make things) the only way to not go through serious hardship is to increase the amount the U.S. can produce thus increasing the U.S. income.

I know what your thinking that's why we should buy back all those bonds, If we pay off the debt completely then it will drive up interest rates and thus incourage investment, well here's why that would be catasrophic for our economy. If we payed off the debt all at once (even if we could) it would create a situation where the fed puts a whole lot of money in the system (here's where your printing money agrument actually kicks in) thusly creating a situation where the dollar is virtually worthless because there's so much of it. This would actually have the opposite effect that your thinking it would. See when we increase the debt, we actually increase the DEBT not the amount of money floating around. We increase the number of bonds, when we increase the number of bonds we actually decrease the worth of owning U.S. debt (the interest rate) and stop inflation. What your suggesting would actually increase inflation (which is why the guy before Alan Greenspan got fired and why the dollar got "devalued" in the first place) the absolute adhearence to not taking out debt (like Japan) can lead to a situation where you cannot manage interest rates and therefore cannot stop the interest rate from spiralining downward until there is no incentive to spend (if the interest rate is essentially zero, how do you encourage people to spend?) on the other hand you can be absoultutely rigid in your attempts to control inflation (by controlling interest rates) like say, the Euro but then if there is a bump in the economy you lose the ability to "smooth out the bumps".

This idea of "smoothing out the bumps" of the economy is completely different than the "push the economy with Government spending" idea that people thought would work in all circumstances back in the seventies. The problem with this idea is that if when the economy is low you "push" it what does that mean that you HAVE to do when it gets too hot? You have to slow it down otherwise there will be a crash. That's the problem with our system. I forsaw the housing collapse over two years before it happened and everyone said I was crazy. My proffesors thought I was crazy, my family thought I was crazy. I forsaw the banking crises at least a year before it happened, again everyone thought I was crazy. Then when it happened everybody was like "oh of course". Well, my "optimism" is not really optimisim. It's an observation, whenever there is a significant increase in consumer confidence after a recession it means the economy is about to recover (in the U.S.). Could this time be diffferent than every other time on the sine curve of economic ups and downs. Yeah, it could be... but then again how much has America really changed since I don't know the sixties? You might say a lot, I say about ten percent of the population is signigicantly different and that ten percent are trained to be consumers even more than any other previous generation and therefore the economy will rebound in six months to a year. Unemployment will be back to "normal" levels within one to two years.

Now I know what your saying why aren't I rich if I saw this stuff coming? It's because I never act on it, it's just a guess just like most economics, an educated guess. Like I was pretty sure when the car companies were down to $1 I should have picked up some stock cause the Gov was gonna bail em out. I could've made a lot of money like Warren Buffet did if I had acted on that "guess". Actually, I feel pretty stupid that I didn't in retrospect.

officially. the longest post on warbeats.

^ Nope my little "beef" with MY5TEREY had a longer post .. trust me.. that ish was going too farr o.O'

it would create a situation where the fed puts a whole lot of money in the system

I actually thought that is what was happening, so your saying that's not the case? The feds are selling bonds not printing cash?

Exactly! The Fed does not print money (they are not a Government organization, Ben Bernanke [the chair] is approved by the president but not a Government agent, he works for the banks and therefore can buy and sell bonds like any private citizen but can't print money just like any other private citizen, the Fed is actually the Federal Bank not a federal agency]) and we haven't used that method for controlling the economy since the seventies.

The secratary of the treasury prints money and it is not used as a means of controlling debt (like in Argentina => EXTREMELY HIGH INFLATION!!! Unfortunately we figured this out the hard way during the stagflation of the seventies) cause of the exact effects that you pointed out. Some countries still do it (China/India for example) for other reasons. If you devalue a currency then goods become cheaper to import for other countries and you can encourage growth of your physical capital infastructure this way but it usually only works in the case of a controlled (comunnist) economy or when the population is extremely frugal (Japan) and even then eventually it leads to all the problems you mentioned. If you do not have a situation where there is very little physical capital (factories, tractors ect.) then there is no point to devaluing the currency. There are some in this country who propose this solution to our trade imbalance but for the exact reasons you pointed out most people think it wouldn't be a good idea in this country. So we do not use printing money as a way to control the economy, only as a secondary function to keep interest rates from going through the roof (less money, more people lead to high money demand and high interest rates which leads to high inflation... like the seventies) so we have to print money sometimes but only to keep up with money demand.

The problem with the debt your talking about is that the baby boomers are eventually gonna die and who is gonna keep paying off the bonds at that point? The analogy would be if everything your family "owned" was bought with mortgages and then they didn't have the income to pay it off they lose everything. Then you get in a situation like France where you need immigrants to pay taxes but socially people don't want immigrants. They are paying their bills but they got a whole other set of problems that makes the "uncivility" of the U.S. pale in comparison (IMAO). What will happen then? Your guess is as good as mine....

@GP Printing money depends on your gold reserve basically. It will kinda dilute it. You will need more dollars for an ounce of gold. The value of dollars decrease, it looses its buying power.
Thus, you'd better not import goods. It's kind of an incentive for national production.
People will be more likely to import from you. It will be good for your exportations(with the same amount of money, they can buy more ).

Only problem is that prices will resettle and will likely to undergo an increase (inflation) and foreign investors will get less than attracted in the USA (why would they want to be paid in dollars if all they get is a decreased buying power ?).


As far as the economy is concerned... Problem is that now, Banks are raising capital but they don't provide loans. So they don't exactly help the recovery of the economy. So the only way is government spending. Meaning the government has to inject some money into the machine so to say. And raising taxes will alow the goverment to get his investment back.

Well I am ignoring all of the consequences and it's a way too simple model here but I guess that's what it is about.

So as you can guess, It mainly depends on the remaining banks which are already making humungous profit (Goldman Sachs for example)
Also what USA needs now is T-Bills (treasury bonds) money with a looow interest rate to fund all they have to do. (and if you noticed, interest rate surely dropped a little) but to get some people to buy those, they have to attract them with a higher one lol..

so when are you guys running for office Ill look for you on the ballot Thanks for all the great responses guys! I have no further questions at this time

We don't have a gold reserve anymore... the dollar hasn't been based on gold since Kennedy did away with that system in the sixties. We use a Fiat money system now. I won't go into it but gold and diluting the dollar hasn't really had anything to do with the worth of the dollar for quite some time.

The "shiny rock" theory of determining a monetary value would not work out well for us if the whole world did it cause there are several countries in Africa that would quickly become the richest countries in the world if the U.S. and Europe switched back to that.  The U.S. in particular would be in trouble cause we don't have nearly the gold stockpiles and reserves of many other countries.  The gold rush in the U.S. has been over for quite some time while there are many other countries that have vast untapped resources in gold.  Besides, in reality gold is not worth that much.  It's kind of like diamonds, if all the diamonds in Africa were mined at a rate that is possible with modern mining techinqes diamonds would be worthless within the year.  That's why DeBiers buys up all the diamond mines, to keeep them scarce.  We figured out quite some time ago what kind of trouble we would be in if we let the worth of our currency depend on how much gold was found in some far off country.  That kind of thing leads to World Wars.  When most of the free countries switched to the fiat system then it is not in the best interest of a country to destroy the very thing that creates worth in the other country, capital (factors of production).  If worth is based on gold in the whole world (which, how you would get the whole world to agree to this I don't know)  we would be in serious trouble. 

However we do use gold as a reserve to "defend" against speculative trading attacks but the chances of a private individual being able to buy enough U.S. dollars to drive up the worth of it and then dumping the dollars to make a profit is well...  not very likely (although it did happen in England so, who knows...).  This is the context in which we talk about the dollars "worth" being tied to gold.  We do keep a fractional amount of gold to sell in this emergency case but again, I don't think it's very likely although some worry that maybee this is what China is up to with the amount of U.S. debt they keep buying with all the money from trades with us.  Again (IMO) it would be much easier for us to start producing things the world wants to buy at a price they want to buy it than to try to "pay off all our credit cards at once".  If people in the U.S. dealt with their personal life this way there would be no student loans and a lot less college students and less people able to produce things that require education...ect.

The worth of the dollar is (I'm greatly oversimplifying here) based (for the most part) on how much physical capital and production capacity we have. It is essentially comparing the GDP of our country to other counties that gives our dollar it's worth. Since China (for example) has been growing it's physical capital at an incredibly high rate they don't have the inflationary problems from printing money that say Argentina has who has not consistently put the loans they have gotten from the world bank into improving their capacity to produce. Human capital also factors in which is why Japan and Germany are able to stay relatively stable without the (some would say) overactive economic manipulation of the U.S. So basically how much we can produce determines the worth of our dollar, which is why investing in factories that can produce things people want around the world and having people educated enough to produce said goods is vitally important to our economy in comparison to debt management. Unfortunately the education system in this country is not keeping up with the rest of the world and let's not even get into how many fewer products we manufacter every year. Another reason besides the baby boomer lessening tax revenue is gonna bite us in the butt later.

Not to get off topic but when you look at how efficiently everybody on this site learns music production it seems there must be some way to transfer that to math and science. If we don't figure out more cost effective ways of increasing human capital in this country there is not debt pay down in the world that will save our economy eventually.

IMAO increasing our ability to produce renewable energy is the only way to secure our economic future.  We produce crops at an incredible rate, if we produce algae based biofuel and develop water desalination technologies we can stop giving all our money to people who don't like us, increase the countries paycheck (tax revenues) and eventually overtake the debt by focusing on increasing our GDP.  That again (an impossible to solve problem) assumes we will turn our attention to education and increasing technology beyond what is capable for developing countries again like we did prior to the "golden age" of U.S. economic performance when all the soldiers from WWII came home and went to college.  Most economists agree that this incredible increase in human capital in the U.S. was responsible for the growth of this period not the gold standard since we had it during the depression as well.  We might be "past our prime" when it comes to innovation in this country though...  

on a less serious note, does anyone here find it ridiculous that our entire economic system (and consequently the social and political ills that are caused by it) boil down to our child-like awe for some soft metal, not because it has any intrinsic value (after all, it's chemically much more volatile and scarce than, say, iron), but because it's yellow and shiny? Seriously, that makes me want laugh and cry at the same time. It's funny because it shows just how primitive we are, to ascribe intrinsic value to some metal and to transfer that value to the monetary system which so deeply affects the well-being of us all, financially and socially. Seriously, just pause for a second. How arbitrary and primitive does that sound? I honestly think that if gold was grey, the world might be completely different.
And to top it off, the amount of gold that exists in the world cannot account for the "money" that's "stored" in bank accounts, or the billions if not trillions of dollars that only ever exist in cyber space, in transactions where banks buy foreign currencies and sell them minutes later when they're "worth" rises. It's all smoke and mirrors. When politicians talk about how the economy is "doing better", and "doing worse", to me it sounds like they're talking about some imaginary friend. Except that we know imaginary friends are imaginary. I wonder how many people realise that the economy too is imaginary?

Yeah true, should have voiced it differently. the logic is about the same.
It was just easier to understand with a gold standard logic.
Plus in crisis time, gold usually revert back to its anchor value quality.
But yeah, i just didn't want to go in the details for the sake of comprehension. Yet voiced it like gold was still the standard lol.



@A.G.C I'm afraid the topic on renewable energies will also be a problem. Biomass ? okay but most energies are thought in replacement to oil and actually oil is used a lot for the car industry.

Problem is that cars are mostly going to be electric (and in france, they are already changing all the cars to electric ones in the near future).

The thing is that the most praised technology for that is lithium(batteries) and you can find it mostly in south america and China. There is some lithium sources in the US still but not as important.
So basically on that topic again, it will be hard to battle agains china. (btw that lithium is found in Tibet and that's why I think, there is a lot of problem in that region at the moment.. it's not the only cause but one of them)

@Joaquin : that's the fault of your greatgreat...great...greatgrandather lol.
Anyway, it could be said to be more stupid to base your whole economy on some paper ^^ Whutever, let's chase the paypaaah lol

Don't talk like that... someone will hear you and start freaking out!!!

Shiny rocks are valuable and paper is even better!!!

oops, just read AGC's post on how gold is not a standard! lol. I think I we were typing our answers at the same time, but his probably finished before mine. All the same, the point remains!

The point remains indeed!

This is exactly the point you get to everytime you follow this rabbit hole down to the end.  It's best to keep it to yourself and buy stuff that makes stuff and learn how to make stuff.

Then again, that wouldn't exactly be "ballin'" now would it?

I think we should base it on platinum spinners, that way we would be "extra ballin'" (lmfao)

GP, thanks for your confidence but I wouldn't be any good at that job. I don't "play well with others" (lol).

lol. if only!