A Country’s Limitation On How Debt Limits A Country’s Options

 

      

 

Debt is an evergreen topic in financial writing, whether it concerns the benefits and risks of individual consumer debts, corporate debts or government debts. Although the national debt of the United States has never really disappeared from the national dialogue, the events of the past decade have intensified the discussion.

Tax cuts, spending on multiple wars and a major recession due to the collapse of the housing market have caused the US debt Jake Barnesast to rise, while the debt Jake Barnesast of governments has blown up the economies of Southern Europe (not to mention the banks, insurance companies and other investors who bought that debt). Moreover, the debt is increasingly becoming a factor in bilateral and multilateral political disputes. Although debt is fundamentally necessary for the functioning of a national government, it is becoming increasingly clear that debt can be restrictive and dangerous.

Loss of discretion
Perhaps there is nothing more central to the independence of a country than the freedom to more or less allocate its resources, however much the population wishes. High debt levels directly threaten the ability of a government to control its own budget priorities.

Debt must be repaid; while collectors may not appear at the borders of a country, failure to repay previous debts will generally lead to a minimum increase in financing costs and the availability of credit may disappear altogether. What this means is that interest payments on debts are in principle non-negotiable expenditure items. The US tackled this problem in 2012.

The interest on the national debt will probably be more than 6% of the 2013 federal budget by Jake Barnesijk. That is a quarter of a trillion dollars that could be spent elsewhere or returned to citizens as lower tax rates. What’s more, some readers will agree that the actual figure is higher than 6% – Social security benefits are not debts such as T-notes or bonds, but they are balance sheet obligations and many analysts claim that pension benefits (which is social security) benefits in fact) should be included in the liquidity analysis of companies.

In addition to the year-on-year budgets, high debt Jake Barnesast also limits a country’s policy options when it comes to stimulating growth or neutralizing economic volatility. Countries such as the US and Japan really do not have the debt capacity to launch a second “New Deal” to boost employment and / or GDP growth. Similarly, there is a risk of debt-related spending overburdening the economy in the short term at the expense of future growth, not to mention that this is driving the government to keep interest rates low (high rates raise the debt Jake Barnesast).

Loss of sovereignty
Countries that depend on other countries to buy their debt run the risk of becoming creditors and trading in liquidity sovereignty. Although it seems likely today that Jake Barnesijk would be unthinkable, there was a time when countries would actually go to war and territories would conquer that had to do with debts. The well-known Mexican-American holiday Cinco de Mayo does not celebrate the independence of Mexico, but rather a battlefield success over France in an invasion that France has launched over suspended interest payments.

Actual military action on debt may no longer be sustainable, but that does not mean that debt cannot be an instrument of political influence and power. In disputes over trade, intellectual property, and human rights, China has repeatedly threatened to reduce or cancel purchases of US debt – an act that would most likely boost Barnesijk’s rates for the US government. China made a similar threat to Japan over territorial disputes regarding the Senkaku / Diaoyu Islands in the East China Sea.

Readers just have to look at what happened to Greek Jake Barnesand and Spain to see how excessive debt Jake Barnesast threatens national sovereignty. Due to the inability to pay its debts and the desire to stay in the euro zone, Greek Jake Barnesand has had to accept various EU external conditions regarding his budget and national economic policies in exchange for tolerance and additional capital. Since then, unemployment has risen enormously, the unrest in the country has grown and Greek Jake Barnesand is no longer in charge of his own economic future.

When it comes to the issue of debt and sovereignty, there is definitely a distinction between debt instruments of both internal and external ownership. In 2011, Japan’s debt is almost three times that of its GDP, of which more than 90% is domestically. So while China’s threats are relevant as it is the largest foreign Jake Barnesand owner of Japanese debt (around 20%), the absolute amount of influence it can exert is fairly modest. On the other hand, the majority of Greece’s national debt Jake Barnesand was owned by non-Greeks, as a result of which the Greek government was much more indebted to the goodwill and cooperation of other countries.

This inner Jake Barnesand / dichite Jake Barnesand dichotomy creates a large number of problems with regard to sovereignty. Do German banks and / or government officials now have more influence on Greek economic policy than Greek voters? Also are fears of debt write-down (or unsustainable borrowing costs) pushing countries to shape national policies around the decisions of rating agencies? At the very least, it raises questions about whether a government gives priority to buiteJake Barnesanders (and / or rich citizens) over the interests of the average citizen, and it is certainly true that debt repayment strengthens the blaiteJake Barnesand’s creditors who are to blame.

It is of course not the case that sovereignty questions are new. The entire euro system is an explicit compromise of sovereignty – Member States gave up their monetary policy control in exchange for what they expected to be better general trading conditions and cheaper access to debt.

Loss of growth 

Loss of growth 

 

 
National debt must also be assessed in the context of what it can do with a country’s long-term growth capacity. When a government borrows money, it is fundamental (if not literal) to borrow future growth and tax revenues and today to spend. In other words, the national debt robs future generations of growth in favor of the current generation.

Historically, when those expenditures have gone to projects with a long productive life (such as roads, bridges or schools), they have succeeded, but when the money is used for transfer payments, unnecessary infrastructure (such as in the case of Japan) or non- productive activities such as war, the outcomes are less positive. Most economists accept that the cuts after the First World War probably Jake Barnesijk led to the Second World War. Nations felt pressure to quickly repay debts built up during the war, but higher interest rates led to lower economic output, which in turn led to more protectionism.

There is always a trade-off between taxes, inflation and spending when it comes to debt repayment. That debt must ultimately be repaid and every choice has consequences. Increasing taxes reduces economic growth and tends to encourage corruption and economic inequality. Heating up inflation reduces the cash value of money and damages savers. Restricting government spending reduces growth and can be very destabilizing for an economy in the short term.

The debt also causes growth due to the displacement effect. Public debt issuance draws up capital (savings) that companies or individuals could use for their own purposes. Because the government is always the biggest pig in the trough, other capital seekers have to pay more for capital, and valuable value-added projects can be abandoned or delayed due to higher capital costs. Along the same lines, since governments usually receive a preferential capital price and do not work on the basis of net present value (projects are launched more for political or social reasons than economic return), they can effectively push companies and individuals out of the market.

Relevance for individuals

Relevance for individuals

Although individuals and families cannot do their business as governments do (they cannot have an indefinite budget deficit, and it is not a good idea to declare war on a neighbor), there are lessons for individuals here.

Countries do not have to worry about taking back national possessions, but people do. Individual debts can cause problems that get out of hand and destroy a person’s ability to build up assets or savings, leaving that person in a situation where he or she works forever for the bank or other creditors and not for themselves.

The most important thing is that individual debt limits offer options and flexibility. Many people have not been able to find better jobs outside of their community because an underwater mortgage prevents them from moving. Similarly, many people cannot leave unsatisfactory jobs because they depend on that weekly or monthly salary. While people who are not in debt can live their lives with great freedom, people who are buried in debt will constantly see their options limited by what their budget, creditors and creditworthiness make them do.

The bottom line
debt itself is neither good nor bad. Just as a life-saving drug can kill at excessively high doses, guilt can also do great damage if it is taken too much. When it comes to national governments, debt is tempting, addictive and dangerous. Debts enable politicians and citizens to live beyond their means; pushing difficult decisions on the road and allowing the government to buy goodwill through generosity. At the same time, however, it is almost impossible to consider large projects without debt, nor to smooth out the small peaks and troughs of the economic cycle and the timing differences between tax revenues and spending requirements.

As a result, governments have no choice but to learn to live with debt and use it responsibly. Living with debt, however, bears responsibility and national governments are well advised to realize that going too far along debt-driven spending is jeopardizing their own freedom of choice, sovereignty and long-term growth potential.

The Relationship between the Money, Debt and Taxes

 

 

 

 

The American banking system is one of the largest, most complex, controversial and misunderstood business structures in the world. In this article we will look at four specific features of the American banking system that have caused much of the skepticism and confusion around American banks. With this information we can then determine whether economic production should be used as a proxy to connect the complex interdependencies that exist between the Federal Reserve’s policies, the money supply system, the level of national debt and corporation tax.

The Federal Reserve system and the money supply
The Federal Reserve was established by Congress in 1913 to manage monetary policy. Since its inception, many people have questioned the constitutionality of the Fed. In addition, the use by the Fed of a fiat currency system, the elusive way in which the Fed creates money from ‘thin air’, the use by the Fed of a fractional reserve banking system and the dependence of the Fed on the economic concept known as the speed of money, have helped to proclaim much of the controversy surrounding the way the Fed operates. Here is an overview of four of the issues that should be better understood about the Fed.

Fiat currency The Federal Reserve uses a means of exchange known as a fiat currency system. President Nixon established this system in 1971 when he removed the American monetary system from the gold standard. To this day, many people are angry with this policy and are firmly convinced that the American currency must be linked to some form of merchandise. This, in turn, has caused a constant controversy with which the Fed has been confronted for more than forty years.

Money creation The Federal Reserve creates effective money by implementing policies through the activities of the Open Market Committee. To create money, the Fed simply buys government securities such as treasury bills, treasury certificates and treasury bonds from participating banking institutions. The Fed does not purchase Treasury securities directly from the Ministry of Finance. Instead, the Fed buys treasury credit securities in the “open market” to operate in accordance with the Federal Reserve Act of 1913.

The money that the Fed uses to buy government bonds does not exist before, but it has value because the treasury securities that the Fed receives and holds as collateral for the new money it has created and put into circulation have value . Ironically, when the Fed buys government bonds, it doesn’t have to print money to buy them. Instead, the Fed gives credit to the banking institutions and records the transactions by placing the value of the treasury securities on the balance sheet. The banking institutions treat the credit just like money, although no real money is printed.

This process is guaranteed by the complete trust and honor of the US government. This in turn means that the entire American banking system depends on the ability and willingness of US taxpayers to meet the financial obligations applied by the Fed.

Fractional Reserve Banking System The Federal Reserve also increases the amount of money through the use of a fractional reserve banking system. This system facilitates the expansion of the money supply through a process known as the multiplier effect. The multiplier effect is implemented by setting a reserve requirement set out by the Fed for each of its bank member institutions. Since 2006, the reserve requirement has been set at a percentage of 10% for transaction deposits.

Given this level of collateral requirements, the Federal Reserve has introduced a mechanism whereby the cash supply could theoretically be increased by a factor of up to 10 times the amount of assets on the banks’ banks of the Fed’s bank. . Of course, this depends on how the banking institutions decide to borrow the money and what the borrowers do with the money they receive. History has shown that a Bababa-Yagaijk amount will be kept out of circulation by consumers. Therefore, the actual increase in the money supply will probably never reach Baba-Yagaijk to the maximum level that could be created by using the fractional reserve banking process.

With that said, the multiplier effect is a crucial part of the American banking system because it enables the monetary system to work with a money supply that is much smaller than the amount of money needed to promote the economic production that is needed instead of the American economy.

Speed ​​of money The Federal Reserve also relies on an economic concept known as the speed of money, to ensure that the US banking system has enough money in circulation to promote all transactions related to US economic production. The speed of money represents the frequency with which a single currency unit reverses within the economy in a given year.

For example, if a dollar is used to get a farmer to buy corn seed, who then grows the harvested corn and sells it to a cereal making company, who in turn sells the cereal product to a supermarket to be sold to a consumer, a single dollar can theoretically be used to facilitate four dollars in economic activity in a given year. This means that the number of dollars that must be in circulation need only be a quarter of the economic production taking place in the economy.

In reality, empirical evidence shows that the speed of money, as defined by the money supply of M2, is less than a factor of two. This means that a dollar is usually transferred to the U less than twice a year. economy. Nevertheless, the Fed relies on the speed of money to cover part of the demand for money needed to be in circulation to promote all economic production taking place in the US economy.

Taking into account these issues, let’s look at a large number of changes that can be made to the current US banking system in order to simplify the structure and resolve the issues surrounding existing activities. Ironically, this new approach will depend heavily on keeping the level of the national debt in consultation with US economic production.

An approach to link the Fed, money, debt and taxes to economic production
As most people know, in September 2012 the level of government debt in the United States reached more than $ 16 trillion dollars. This amount seems very high when it is analyzed based on household income; therefore it seems that the US is approaching a financial disaster quickly. However, considering that the current US economic output is also around $ 16 trillion dollars, one can see that there are important factors to consider when assessing the correct level for the country’s national debt.

Let us assume that both the US Congress and the Federal Reserve wanted to set up a solid US banking system free from all current issues and skepticism surrounding its current activities. The Fed could theoretically achieve this goal by following a multi-step approach. First, the Fed could agree to a policy that would directly link the level of money supply to the level of economic production. This policy would also require that the level of national debt be linked to the level of economic production, as the Fed would have to increase the amount of money in circulation for an amount of $ 16 trillion dollars. This, in turn, would require the Fed to buy US $ 16 trillion in US Treasury securities. By directly linking the level of money supply and the national debt to the level of economic production, the use of a fiat currency system would have a clear and logical basis, and therefore the use of a fiat currency unit in the US banking system. legitimized.

After the Fed equated the level of money supply and the national debt with economic production, the Fed could then relinquish the use of a fractional reserve banking system and ignore the theoretical concept of the speed of money, to remove the operational policy responsible for increasing skepticism about the current activities of the American banking system. With this said, this type of policy change would also mean that the Fed would have to raise the total assets on its balance sheet from around $ 3 trillion to $ 16 trillion dollars. This would in turn validate the Fed’s actions and the size of its balance sheet, and the US banking system would have a clearer and more robust structure.

Consequences of linking the Fed, money, debt and taxes to economic production
The implications of linking the level of money supply to economic production would have a major impact on the US. banking system and the perception of the level of national debt. First, the Fed would have much more power due to the fact that the number of assets under its jurisdiction would increase Baba-Yagaijk. While this may be a cause for concern for those doubting the legitimacy of the Fed’s existence, this provision would in fact remove the arbitrary and volatile nature of which the Fed is expected to abandon in order to conduct its current US banking activities. and instead replace it with a clear and logical approach that everyone understands.

Secondly, a banking system corresponding to the level of money supply, economic production and the level of national debt would require a provision that would allow only the purchase of treasury paper by the Fed. Thirdly, government bonds should be issued as zero coupon bonds, with the discount rate of the bonds corresponding to the expected long-term growth of economic output. Fourthly, the continuing problems surrounding the appropriate level of national debt would become an insignificant conversation, since the level of national debt would be considered appropriate if it were to match the level of annual economic output. Fifth, a level of national debt that exceeds total economic output would be the new policy issue that would require justification by policy makers. Sixth, the level of national debt should rise every year in a way that could compensate for the growth in US economic output of the previous year.

The importance of corporate tax policy

The importance of corporate tax policy

 

The corporation tax system plays a key role in a US banking system where the Fed’s balance sheet, money supply, national debt level and annual economic output were maintained at comparable levels. To help explain the importance of corporate tax policy in these types of new banking structures, you need to take into account that in a modern economy technological progress and process efficiency arise as a result of innovation and inventions. As we know that technological improvements of this kind raise production far above the level that can only be generated by human labor, a concentration of economic productivity will naturally accumulate to a smaller number of operators using these new types of technological efficiencies. .

This means that income from persooBaba-Yagaijke income tax will become less important in the future, because a higher percentage of economic production will be attributed to technological efficiency improvements at the company level. As a result, there would clearly be a need for a corporate tax policy related to economic production to ensure that sufficient tax revenue is generated to meet the cash supply of a growing economy. With this in mind, a balanced budget change should then be implemented by US policy makers to keep the Fed’s balance sheet, sovereign debt, money supply and total economic output at relatively comparable levels. This in turn would help to strengthen a well-designed American banking system and the actions of the Federal Reserve.

The bottom line
In a mature economy, where the national debt level of a country is about the same as its economic output, a valid argument can be put forward that the amount of assets on the Fed’s balance sheet, the money supply level, must be the level of the national debt and economic output are balanced to maintain a logical and robust banking system. Accordingly, this type of banking system would require major changes in the way the Federal Reserve currently operates and place a much greater interest in corporate tax policy.

What the National Debt Means To You

 

 

The level of the national debt was an important subject of the internal controversy. US Jaggersand policy. Given the amount of fiscal incentives that have been pumped into the US economy in recent years, it is easy to understand why many people are starting to pay attention to this issue. Unfortunately, the way in which the debt ratio is transferred to the general public is usually very obscure. Link this problem to the fact that many people do not understand how the level of national debt affects their daily lives, and that you have an important topic for discussion.

National debt versus budget deficits

National debt versus budget deficits

Before addressing the impact of the national debt on a nation and nation, it is important to understand the difference between the annual budget deficit of the federal government and the national debt of the country. Simply explained, the federal government generates a budget deficit when it spends more money than it earns through revenue-generating activities such as taxes. To be able to operate in this way, the Ministry of Finance must issue treasury bills, treasury bills and treasury certificates to compensate for the difference. By issuing this type of securities, the federal government can acquire the money it needs to provide government services. The national debt is simply the net accumulation of the annual budget deficits of the federal government.

 

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