Wednesday, July 12, 2017

A few subtle issues about economics that folks seem to be missing

A lot of people are clinging to the idea that somehow massively crashing the economy will cause the Fed to forgive all debt, thus ending the massive credit crisis that looms over the future. The reason people think this is that they are extending poorly thought out ideas from personal scale micro-economics to the macroeconomic performance of the country as a whole.

A lot of people are drawn to the notion that personal finance is a good analogy for national economic behavior. There is a similarity but it's actually very different at the national scale.

The correct mapping between your personal debt picture is and the national debt picture looks something like this.

1) You get a salary, the government gets taxes.

2) You borrow from your credit card company/bank, the government borrows from the Fed by selling bonds.

3) You make a payment on your debts, the government pays the dividend on the bond.

4) You pay taxes to the government, the government pays for social services that benefit you (in the US this is mostly social security and medicare).

It is best to view the entire economy as a "debt trafficking" operation. You borrow from someone else and that someone borrows from you.

So if you think that crashing the economy through some Trumpian nonsense will lead to your personal debts being wiped out, that might happen but... that will also completely wipe out your earnings and since you won't be paying any taxes, the government will have no money with which to pay for those social services you are receiving.

This effect is sometimes called deflation. And here is where it gets interesting, since you and your government will at this point need to borrow money from somewhere to survive (o/w you won't be able to buy food and the govt won't be able to pay its employees) - your or your govt's debt history will factor into any creditor's calculation.

Historically deflation has occurred in various places and the resulting debt restructuring has always been accompanied by extremely high interest rates because lenders have to confront the fact they are taking on greater risk. You basically end up with predatory lenders at that point. You never come out of a bankruptcy without a interest rate hike or massively higher insurance premiums.

So even though it should wipe out your debts, the economic crash could just as easily cause you to go even deeper into debt.

The Trumpers are slowly coming around to the reality that the man that they voted for is something entirely different from what they thought he was, but they are still clinging to the stupid ideas of dodging their debt. It was idiotic ideas of this kind that led them to Trump's door in the first place.

Liberals need to understand that Trump isn't the worst thing that can happen, there are far worse things out there.  This won't end even if the book closes on the Trump saga. The underlying idiotic behavior will continue.

What Trumpers need to get that it is nice to be able to fantasize about what life would be like if  you didn't have all that debt... but if you actually end up in a situation where you backed off on debt servicing, you'd quickly spiral down an endless black hole of debt.

If you still don't believe me, just ask the first black people you see on the street and ask them what that is like.

Or go to the nearest refugee center and ask the people coming from war torn countries in the world what a debt trap feels like.


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