Europe's Populist Left

[Monoriu]

Yes.  Not absolutely perfect, but definitely very useful.

Huh.

I thought pretty much all serious economists dismiss that metaphor as being ignorant and leading to erroneous conclusions.

... but I guess not?

Their reasoning is?

The the word "debt" is only real commonality.  Governments don't generate revenue in the same way that most people do nor do most people print their own money.  Government also owes debt to itself and it's own people, very few people in the world owe credit card debt to credit card companies they own a significant stake in and while debt is almost always bad for individuals it is not that way for governments.

Surely taking on too much debt is bad for both governments and individuals, as the Greek case shows?

[Eddie Teach]

The problem is a the very nature of the debt is different due the different nature of a person and a government. 

There are differences, but the nature is the same. Both involve paying more later to use money now.

[MadImmortalMan]

A valid question would be what good is the credit card analogy in the first place?

Yeah. Maybe if instead of one credit card, you have millions. And every time you spend, the credit card companies choose to fund the purchase or not. So if you stop paying your credit card bills, then eventually lots of them will stop accepting to fund you, or will charge you a higher interest rate. And if you default, all your credit cards get canceled.

[Admiral Yi]

I'm no economist, but I thought things like reducing debt through (non-hyper-)inflation was not a bad thing, and basically just a fact.

It is a bad thing.  Bond investors care about the real return, which is the nominal yield minus inflation.  If inflation goes up, they'll demand a higher nominal return, everything else being equal.

And they'll charge an inflation risk premium, because your monetary policy will now be viewed as unpredictable. 

[MadImmortalMan]

So it's bad if you're taking on new debt in an inflationary environment--you'll have to pay higher interest. And hopefully not rolling over old bonds at the new rates. Because: face value.

[Martinus]

Because I gather from Sheilbh that cutting their spending has wrecked their economy and from Yi that their debt continues to grow. Barring intervention from a rich benefactor(this does not mean new loans), bankruptcy seems to be the only way out.

Jacob is right though - as I said before, non-hyper inflation is how Western governments got rid of their WWI debt and it was considered pretty desirable.

[MadImmortalMan]

Jacob is right though - as I said before, non-hyper inflation is how Western governments got rid of their WWI debt and it was considered pretty desirable.

They could print.

[Martinus]

I'm no economist, but I thought things like reducing debt through (non-hyper-)inflation was not a bad thing, and basically just a fact.

It is a bad thing.  Bond investors care about the real return, which is the nominal yield minus inflation.  If inflation goes up, they'll demand a higher nominal return, everything else being equal.

And they'll charge an inflation risk premium, because your monetary policy will now be viewed as unpredictable.

If your economy is doing well and you are solvent, the spread between inflation and bond return should not be high or can even be negative.

[Martinus]

Jacob is right though - as I said before, non-hyper inflation is how Western governments got rid of their WWI debt and it was considered pretty desirable.

They could print.

Well, ECB will print now. Anyway, I thought we were discussing theory, not the specific Greek case.  I think most people agree that having monetary union but not fiscal union was not a great idea in retrospect. We are all disputing Yi's and Mono's silly claims.

[Martinus]

Anyway, I think it is important to say that not all debt is alike. Good public debt is money owned by the state to its people - in the form of bonds etc. - as it allows people to lend their excess capital to the government, generating growth at both ends of the equation. On the other hand, if most of public debt is foreign-owned, this tends to siphon the national growth to whoever holds it. And the lower the national growth, the worse the local economy, and the more expensive the debt becomes - leading to a vicious cycle.

[Admiral Yi]

If your economy is doing well and you are solvent, the spread between inflation and bond return should not be high or can even be negative.

Irrelevant to the present discussion.  We're not talking about the real return here, we're talking about the effect of inflation on nominal yields.

[Martinus]

But a lot of people are happy to invest in bonds that are safe even if the net yield (ie adjusted for inflation) is below 0. US treasury bonds are like that, for example.

[Admiral Yi]

But a lot of people are happy to invest in bonds that are safe even if the net yield (ie adjusted for inflation) is below 0. US treasury bonds are like that, for example.

Sure, and they might even be willing to do the same if US inflation picked up.  But I absolutely guarantee you that if US inflation ticked up to 5% folks would no longer be willing to accept 2 and change yield.

[Martinus]

The increased yields apply to only new bonds though, not to the old portfolio.

[Admiral Yi]

That is correct.  So what do you do when you've inflated away your old bonds, and they come due?