USC-Col 2006-Honors Finance/Econ Grad MD

The Beginning of the Endgame for Monetary Policy, Redux

I have to disagree Jolly-rancher, the governemnt can't increase debt. Debt is money earned. In other words, the government must pay off those obligations in some form. When they don't, we are just artifically creating money to people. Instead of the natural exchange of goods, services, and currency to pay for those services, we have the exchange of goods and services on borrowed funds. Thus our dollar can not be worth as much as it would be if our obligations are paid off. If we can't guarantee what tax revenues and other methods used to pay off debts and U.S. obligations, when the time is needed we will have to print money to pay for our obligations and in addition our backing of the "full faith" of U.S. money on our treasuries will be downgraded because we may not in the short term raise enough money to pay off the obligations. I'll break it down in mortgage fashion. Say you take out a mortgage for $100,000, you're liabilities at the time is actually $100,000, and your assets are 100,000. Thus your net worth or equity in the home is zero. If you pay off 20,000 dollars in the home, you're liabilites are 80,000 and if the housing value is still the same, the equity is now 20,000. If you take out a uncollateralized loan steadily for the next 20 years for home improvements, 10,000 per year then you owe 200,000 and maybe your home is worth substantially less, but you have liabilities that are worth more than home, so you're actually in a worse position then you were to start out with. And no one can trust you to pay off all your debts, and your net worth is in the negatives because of the substantial liablities, you have. If an accident happened, and you needed a quick loan for 10,000 at year 21, you mostly likely won't get it, because no one's going to trust you at the point to loan you money and you don't have the net worth to collateralize the loan. The same can be applied to the government. It is a necessity to pay off some the debt limits so are backed by full faith of the U.S. government holds true, and the dollars which needs to be worth something in the U.S. economical system, can eventually increase in value. If the person above printed out money to pay off the obligations than that would be counterfeitiing, and that would place them in prison for crimes that affect the U.S. The same can be said for the treasury if it didn't issue loans, and it just paid off its debt using newly minted money. It just wouldn't be a crime, just a misfortunate incident for the dollar.