The fiscal fun never stops does it? Since many of the financial issues of the U.S. just got kicked down the road a little more, it’s probably not too late to talk a little bit about the national debt.
Specifically, I want to address the idea that having debt as a nation is inherently evil. It’s not.
Having Debt Keeps an Interest in our Country
Oddly enough, “Weird” Al and Humor U (BYU’s stand-up comedy club) have done an excellent job at helping us understand why [manageable] debt can be good.
“Weird” Al brought us the song “Why Does This Always Happen to Me?”
In the second verse, it says:
I was driving down the highway
When all the traffic slowed to a crawl
There was a 12-car pile-up, everybody dead
And I saw brains and guts and vital organs
As well as my friend Robert’s disembodied head
And I thought…
“Poor Rob, I just had lunch with him…”
“Hey, wait a minute…”
“He still owes me money, what a jerk!”
Well, there’s five bucks
That I’m never gonna see again
Plus now, on top of everything else
It looks like I’m gonna be late to work
You see, when people owe you money, you want things to be at least good enough for them that you can get your cash back. Humor U’s Aaron Woodall talks about this and a few other things:
Perhaps a little exaggeration, but I sure like it!
Essentially, when a country (like China) owns a huge amount of debt of another country (like the United States,) the first country (China) will not want to see the other country go bankrupt. At this point, China has not yet lost the “800 Billion dollars” (now about 1.2 Trillion dollars) referred to in the Humor U clip, but if the U.S. declares bankruptcy, China will, at best, see a small fraction of that debt.
A Little Game Theory
This article (from PBS of all places) gives a good, concise description of what happens if a country cannot pay its debts. Essentially, the country can default and the lenders will receive whatever the country has in its treasuries, or the country can “repudiate,” meaning the bankrupt country “sticks it” to the lenders who end up with nothing. Either option means less money for the lender.
Applying this to game theory, we can come up with some ideas on when a lending country might think it was worth it to press for the demise of its lendee.
This first chart, like all the others, provides the resulting payoffs for each action with the U.S.’s payoffs on the left, and China’s on the right. So long as the U.S. continues paying the required amounts on its debt, it will continue, as it has, receiving money fairly easily and paying a low interest rate on them. China will get its expected returns, everyone wins at least a little bit. If the U.S. were to default or repudiate, it would have very ill long term effects for the U.S., more grand than any money saved on its loans. China would not receive its money, and would also see negative returns.
The second chart theorizes that China may benefit to a degree greater than the money lots from its debts if the U.S. were to go bankrupt. Perhaps China would then be poised to take a larger role in world activities and exercise greater power and influence.
In this particular scenario, it’s assumed that the money it would grab from the U.S. treasuries in the “default” scenario would be of reasonable worth to China and help clean out the U.S. enough to amplify its power. However, if the U.S. decides to repudiate its loans, China gets none of the loaned money which is of less value to China than if it were to go on happily collecting.
The third chart theorizes an out come where China would be satisfied by either collecting its loans, or by enjoying solely the political influenced gained by a repudiation from a bankrupt U.S., but would be thrilled to receive everything in a default.
In all scenarios, I kept the U.S.’s “payoffs” at -1 for both repudiation and default because, although it would keep more money in a repudiation, it would lose that much more credibility and capacity to borrow money in the future.
This is all theoretical of course. What matters is the true “payoff” values for the countries. This is also a grand simplification; China has decisions it could make to influence the game which would consequentially alter its own and the U.S.’s payoffs. All of this does help us understand the details of what’s going on, and understand why it might be good for the U.S. to have China own lots of its debt.
We can attach some real numbers to the game as well: for China’s payoff to be positive in the case of a U.S. default, the political and economic benefits would have to exceed 1.2 Trillion dollars. That’s a hefty sum of money, requiring some intense benefits.
Alexander Hamilton, one of our “founding fathers,” had a balanced view of debt:
“A national debt, if it is not excessive, will be to us a national blessing” (found here from Brainy Quote)
So there’s the key. Debt can be a blessing, but it must be kept to a “manageable” proportion. How we define “manageable” is a bit of a mess as far as I can tell. At the very least, I have nothing very insightful to say on it at the time, except that if we go bankrupt, we didn’t manage it.
Here is another article from the Anchorage Daily News that gives another argument as to why debt is good (and should never be fully paid off.) I haven’t vetted it thoroughly, but if you actually read to the end, you might be interested in hearing more about the other side of debt.
The problems with debt are real, but it’s another issue that’s not black or white (just very, very red sometimes.)
Keep seeking truth.
You may also be interested in:
Federal vs. Household Budgets
Self-Interested Does Not Mean Selfish
10 Weird Songs That Get Stuck In My Head