Why can't the US live within their means?

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Not so. The inherent use of gold as a medium of exchange is that it is durable (not subject to rot, rust or decay), quantifiable (10% gold won't have the value of pure gold), and of finite quantity (for all practical purposes).

Using any other means of exchange must deal with those three issues. Fiat/debt money is backed by nothing, can be created at whim. It's value is zero and only works if the other party believes it has value. How do you guarantee that a $20 bill will buy anything? I suppose you could use the force of law, but ultimately, we see again and again that if people don't believe in the value of money, they will not accept it and you get an underground economy that backs value with stuff people know are valuable.

Except gold is subject to its market--supply/demand. If you're lucky to have a few dollars at a time people can't get rid of gold fast enough, its perfect. But if things are going well, you buy a little expensive gold, you can kiss all that value goodbye when the bottom falls out of the economy.

Aside from making jewelery, dental fillings and finishing for electrical contacts what can you use gold for in the absence of a market? Like I said, it has little or no intrinsic value. It is of value primarily as a trade good. It has several virtues which you have pointed out that makes it a very apt trade good, but on a desert island gold is not worth much.

ruveyn

^ Well, if you are extremely ingenious, you could try and smelt it, but you'd need a natural source of heat for that...

Or you "could" try to harness lightning in such fashion as making a lightning rod >< But yeah. A gold ingot will not get you very far without someone willing to trade something for, as ruveyn implied.

Money is not subject to rot, rust or decay. The $1,000 that I have invested in my savings account will still be $1,000 tomorrow. It will have depreciated due to the action of inflation, but my investment is based on the risk that my rate of return will exceed the rate of inflation. If I don't like those odds, I can always buy shares in IBM, invest in US Savings bonds, T-bills, gold, oil futures, or chips in Reno.

My ounce of gold might be worth $1,000 tomorrow, or it might be worth $50. It's worth, like the worth of my $1,000 is determined by the market.



Repeating that currency is backed by nothing does not make that statement any less false.

What is partially correct is your fear that currency can be created at whim. Indeed, the Federal Reserve can issue $1 trillion tomorrow if it were so inclined, and as surely as the law of supply and demand rules the market place, the value of those dollars would collapse. But this is precisely why Central Banks do not issue currency willy-nilly, and why the foreign exchange market exists.

If a Central Bank of a pegged currency were to pull this manouver (e.g. the People's Bank of China), then the government of the PRC would be forced to expend its US dollar reserves to maintain the dollar peg. Once those reserves were exhausted, the government of the PRC would be forced to float the RMB, or devalue.

A gold-standard currency is just as likely to be the subject of devaluation pressure as a floating currency is likely to be the subject of exchange rate pressure.

I agree with xenon, although it seems our political masters in the UK agree with you (pbcoll). Under the current monetary system, the US national debt (what is it now, $12 trillion?) will never get paid off. It just gets continually deferred (effectively) and continually grows bigger. Same goes for the UK, Japan, Germany etc ...
So the money raised through government borrowing is different to the money raised through private borrowing, i.e., since repayment keeps getting deferred the money is "effectively" debt-free. And increasing the amount of debt-free money in circulation benefits the economy, (although unfortunately the things governments spend that money on are often useless or actively harmful).
That doesn't stop me thinking the system is absurd. And if a government wanted to print themselves out of debt, they could do - gradually (or in moderation as you [pbcoll] put it) - by buying back government bonds as they mature each year.

There are a few things to bear in mind:

1) The US government is only one piece of the entire US economy. While the US government has significant debt, the debt to GDP ratio is still well under 60%. If you make $100,000 per year and owe $60,000, that debt is easily sustainable.

2) US government debt is not static. Each year old debt is retired and new debt is acquired. The government is, through interest payments, rewarding investors in US government debt. As long as the federal government's revenues are capable of keeping up with the borrowing cost, and the debt to GDP ratio remains stable, the system is not in significant jeopardy of collapse.

3) The crucial factor in government debt is not it's scope, but the extent to which the obligations (both public and private) are owed to entities outside the economy. US savings bonds held by Americans, and US government commercial debt held by US institutions is all money that the United States owes to itself. It is external debt that is the danger sign. Sustainability of external debt (in other words the ability to meet your obligations to external debt holders without resort to debt rescheduling) relies on external debt being less than about 150% of export revenues, or 250% of overall revenues.

By this measure, the picture is more troubling. External debt of the United States is about $13.5 trillion, or roughly 94% of GDP. Export revenues are about $1 trillion, for an external debt:export revenue ratio of 1350%.

Sustainability of this external debt is maintained by two factors: 1) about 80% of the external debt is US dollar denominated, which means that in the event of a currency collapse, the debt would collapse with it; 2) the appreciation of assets held abroad by Americans.

But the quick and dirty answer about this conundrum is that it has very little to do with the US government's military spending, and a great deal to do with Walmart sourcing goods from China.

You can keep refinancing a mortgage, too, or carry a balance on your credit card forever. That doesn't mean you don't have debt. The more debt, the higher the carrying charges in terms of interest - and that applies to both individuals and governments.

Also, deficits aren't the same thing as debt. Deficits add to the debt. That increases the interest burden in the future, increasing the amount that must be raised in taxes or decreasing the amount that can actually be spent.

Now, it's true that in a growing economy, small deficits are sustainable. As long as the debt doesn't grow faster than the economy - or at least the interest burden on the debt doesn't grow faster than the economy - that growth rate can be incurred as deficits. It's when the deficits get bigger and the debt grows faster than the economy that trouble follows.

I think that figure is a few years old. It's now up to 83%, up from 51% in 1988:

http://useconomy.about.com/od/fiscalpol ... S_Debt.htm

That figure is also growing at about 10% per year. At that rate, it won't take too long to become unsustainable, if it isn't already.

I don't agree that external debt is more important than internal debt. Arguably defaulting on debt owed to foreign governments would have fewer repercussions for the U.S. than defaulting on domestic debt. Default on money borrowed from the social security trust fund, and there could be severe civil unrest.

I do agree it has little to do with military spending, but only because military spending is so small. The biggest culprits are medicare and medicaid and pork barrel spending like agricultural subsidies.

No, psychohist, the figure is from 2009, taken from the CIA World Factbook.

https://www.cia.gov/library/publication ... 6rank.html

The CIA World Factbook figure includes all government borrowings, less repayments denominated in that government's own currency. This is the most reliable method of measuring the actual impact of the government's future obligations to third parties. (If one were to count repayments in US dollars, then you would be double counting, because the US dollars are underwritten by the T-bills issued to issue the currency in the first place).

The figure that comes from the source that you cite includes public debt that is held in intra-governmental hands. Since these are, effectively, interfund transfers, they are obligations that the current account must meet in future years, but are immediately available for the purposes for which the funds were set aside. An example would be social security surplusses held in T-bills. When the Treasury uses tax revenue to redeem the T-bills from the Social Security Administration, the Administration can then immediately use the funds to pay out benefits that it would otherwise be obliged to obtain from general revenues.

Social security benefits are paid out from the trust fund, not from general revenues. When the government pays off debt to the trust fund, that's money not available for general purposes. Ignoring the debt to the trust fund is just a way of faking the numbers to make them look better.

If the trust fund is in deficit, then the trust fund must seek inputs from general revenues in order to meet its obligations. (And it's a debt owned by the trust fund that is the debt in question, not the other way around).

Let's look at it on a more practical level:

Suppose you want to buy a house. The house costs $1,000,000. You have $2,000,000 in a trust account, but you decide to withdraw only 400,000 and to borrow the rest from a bank. So you now have as assets of $3,000,000: a house worth $1,000,000 and a trust fund with $1,600,000 in cash and $400,000 in receivables (the money you took out that you should replace). You also have two liabilities: a mortgage of $600,000 and a payable of $400,000. You are in the same financial position, since this transaction was entirely an asset-liability acquisition.

So when you are looking at your total debt, is it $600,000 or is it $1,000,000? Well, really, it's both. The first figure is the amount that is required in order for you to meet your obligations to third parties, and is the debt that you can be sued to recover. But you are not back where you started until you have put the $400,000 back in your trust account.

As a measure of the stability of US government debt, and the US government's ability to meet its obligations going forward, it is a better practice to discount interfund obligations.