Why is Greece's debt considered a problem but not US debt, which is much larger?

  • Greece's and other southern European countries' debt has been considered a problem since the 2008 crash, and austerity measures have been forced to the people.

    However the United States also have a colossal debt, yet I have never heard of it being a problem or that the United States requires austerity measures.

    I have no idea how accurate they are, but the US debt clock displays a debt with 14 significant numbers in US$, while the Greece debt clock "only" displays a debt with 12 significant numbers (also in US$). Other sources state $32,000 per capita for Greece, $56,000 per capita for USA.

    I know that the population of Greece is much less than in the U.S., however I do not think it matters to people "lending" money to the governments - In both cases it seems extremely unlikely that this money will ever be refunded. Also Greece receives more tourists each year than it's own resident population (15 million tourists for 11 million residents) so it's hard to compare.

    A minor nitpick, but there are plenty of people in the United States who *do* consider it a problem - however, the answers below should give you a clear indication of why other countries in the world don't consider it a problem that requires intervention.

    `In both cases it seems extremely unlikely that this money will ever be refunded` Do you mean to say that you think the US and Greece are extremely likely to default on their debt? That's how I read this. It's not extremely likely, or somewhat likely, or any kind of "likely". If there was the remotest chance, interest rates would be much much higher.

    "In both cases it seems extremely unlikely that this money will ever be refunded" - note that it doesn't matter if the debt will ever be paid of for lenders - only that all payments are made on time. It is similar as with credit card - they don't care if I'm having balance on it as long as I'm paying minimal payment and my debt-to-income ratio does not go too high. It might not be prudent to run balance (though goverment debt is more like mortage or college loan as in it may be benefitial to take as investment).

    **"_In both cases it seems extremely unlikely that this money will ever be refunded_":** This is very clearly false; people who have US bonds are getting their money back, consistently and on-time. You could buy a bond yourself if you'd like; then you'd own part of the US debt, and in all likelihood, get paid back the promised amount at the promised time.

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    Also note that even countries with a rather low debt-to-GDP ratio and a downward trajectory in nominal terms still roll over their debt. They simply borrow a little less than they pay back in any given year. The way the debt is structured is a technical issue, unless you are forced to there is absolutely no reason to let the fact that a particular bond reaches maturity dictates the pace of debt reduction. In fact, that's also true for large companies.

    If A has $30k in debt, and B has $300k in debt, we should worry more about B's debt, right? But what if B is Bill Gates, who we're sure will pay back the money, and A is a homeless person who lives off of charity? This extreme analogy is in no way meant as disrespectful towards Greece, but it does highlight that _worrying_ about debt is correlated to _the financial viability of the debtor_, because that directly translated into knowing how likely it is for the debt to be paid off.

    @Flater Why would Bill Gates borrow money in the 1st place? If he does I'd be afraid he's a Bernard Madoff kind of rich, which in fact isn't rich at all, and I'd be just as worried to get the money back.

    @Bregalad: The analogy is flawed there. Individuals do not start off with debt (basically because the parents cover for their childhood costs, until they are self sustaining); countries do not have parents and immediately accrue debt by their mere existence.

    I would like to answer this question, but don't have enough reputation. If you want to understand the issue, look into IPSAS and the FT articles about it. Using proper accounting measures, Greece's debt is really quite low. It's only naive measures that make it look bad.

    @akvadrako This question was protected because it made it to the Hot Network Question, which unfortunately usually brings a rain of answers (when few high-quality answers are preferable). If you have new information that isn't already in the 13 existing answers, maybe it would be worth unprotecting the question for you. However if you just want to add some new minor information maybe existing one of the existing answers would be more appropriate. Or maybe this case should be discussed on meta.

  • RCM

    RCM Correct answer

    5 years ago

    It's going to be difficult to really choose a "best answer" here since to some extent the factors involved, and especially which ones are "most important" is going to be a matter of opinion. And this is because economics is not a settled science in the way that physics or chemistry are, such that there are "correct answers."

    That said, while it has already been noted that many people DO consider the US debt to be a big problem, and relative population and relative GDP do certainly matter. The one I'd emphasize above all has mostly just been mentioned as an "also" reason.

    And that is ... the denomination of the debt. The US can print dollars. Greece cannot print euro. You don't have to think this through very hard to see that this means the US can ALWAYS pay its debt in dollars, while Greece cannot say the same in euro.

    Now, if the US prints dollars to pay its debt, that can cause inflation, but the cost of inflation is borne by everyone while the cost of default is borne by only the bondholder. This is not only a difference, but a vast difference--one which is easily large enough to change the result.

    In the case of Greece, and countries like Greece, default on sovereign debt causes the banking system to fail, which is an existential problem for a modern economy. In the case of the US, and countries like the US, high inflation erodes wealth and creates various pernicious incentives, but it (almost) never causes the banking system to fail, although in very extreme examples it has been seen to do so occasionally, for example you could look at the Weimar Republic between WWI and WWII.

    But if you did look at Weimar you would see what an extreme case it was, Germany having lost WWI and been saddled with huge reparations by the Treaty of Versailles, and the US is nowhere near that situation.

    Bottom line, in Greece you get a collapsed banking system. In the US you get inflation. Many regard inflation as a problem, and rightly I think, but it's not as bad a problem as a collapsed banking system.

    In my view, that is the big "why." It is the one which, so to speak, is a difference in kind rather than a difference in scale.

    The printing dollars to pay debt option really doesn't work (at least not more than once), because the people lending money expect to get back their investment plus some profit. If the US starts printing enough dollars to cover the debt, the value of the dollar will decrease (and the anticipated future value will increase even more), because no one will be interested in getting back "dollars" that are only worth fifty cents. See e.g. Venezuela.

    Printing dollars to pay debt really does work. It works constantly, is happening right now, and has been happening since whenever the US last had a surplus in real terms (Eisenhower days, except maybe one Clinton year). It's true people lending do expect to get back money plus some profit--or they should, if they are rational, which isn't true as often as you'd think--however all that does is lead to inflation, and possibly more inflation after that, which I already acknowledged. But it definitely does work, almost unlimited times, and is in constant use by governments all over the world.

    Here are two cool charts. They show the number of dollars in the economy. Not the value of the economy, just the number of dollars. One is the actual number and one is the number after the banks get hold of it. Bottom line, the US controls it's own fate in these charts and Greece has to rely on what the EU wants to do. Monetary base: https://fred.stlouisfed.org/series/BASE; M2 (base plus some other stuff): https://fred.stlouisfed.org/series/M2

    @jamesqf, printing dollars to pay debt works just fine, it just means that the next time you want to borrow, the lenders will demand more interest to cover the inflation from the dollars that have been printed. It's only when you get in the long-term habit of *only* paying your debt with newly-printed money that you get problems.

    @RCM: If dollars were printed specifically to pay the debt (US: I don't know enough about most other countries to comment), then why would the debt be increasing? Note that printing to pay the debt is something quite different from increasing the money supply. There are supposedly reasons to do that: ask on the economics site for a better explanation than I can possibly give.

    @jamesqf: There is no "if" here. What I have described is happening all the time. To answer your specific question, it is not necessary to print enough dollars to keep the debt from increasing, but only to keep up with interest payments. Technically this is an increase to the monetary base, rather than the money supply, though the two are closely linked. It absolutely IS done to finance the debt (through the mechanism of buying government bonds with new cash). You don't have to agree this is the main difference between the US and Greece, but denying it happens is counter-factual.

    Might be worth mentioning here that the US (almost uniquely) has a large debt that doesn't appear on the balance sheet at all, because there are so many countries that use US dollar bills for everyday internal commerce in preference to their own currency. In principle these countries have lent the US money, at 0% interest, to buy these banknotes, and could sell them back any time they chose.

    This is indeed much more important than the debt/GDP ratio. Euro-crisis countries like Ireland, Spain, Italy have debt/GDP ratios similar to the US. On the other hand, Japan has a much higer debt/GDP ratio than Greece.

    If investors seriously expected the US would significantly ramp up inflation in order to cover its debts, *they would not borrow from the US because the US would be paying back less real value than they were leant.* This certainly does happen—in small, expected, controlled amounts that borrowers factor into their choices to buy bonds. It is not a significant factor in whether or not the debt is perceived as a *problem* because massive inflation is equally, if not more, problematic than defaulting on debt. This states a bunch of true facts, but is absolutely wrong as an answer to the question.

    Not a bad answer, but the US treasury does not and cannot "print money" any more than Greece can. Money is created when a central bank buys bonds, while a treasury creates debt by selling bonds; both do this in the open market. A treasury's ability to repay that debt ultimately depends on its tax revenue -- austerity harms this by slowing the economy. Too many people (including heads of state) get this backwards, with disastrous results. For those interested, Sal Khan has a good set of tutorials at https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking.

    @michaelkay Could you clarify? I'm not sure what you mean. They could "sell them back" in exchange for American goods/bonds/services, but that doesn't cost the US government anything.

    @stevegt The Fed does not require revenue to buy bonds. When it conducts an OMO with a bank, it credits the bank's account and that money is "printed", it doesn't come from anywhere. Greece does not have this option. The treasury can also print actual physical bills, but that's less relevant.

    @mbrig: issuing banknotes clearly creates a debt ("I promise to pay the bearer..."). And it's clearly an interest-free debt. But I may have been mistaken in saying it isn't counted as part of the national debt - I'm happy to be corrected on this.

    @mbrig "It doesn't come from anywhere" is incorrect. It's a liability for the issuer. I borrow your rake and give you a post-it note reminder. The note says "bearer gets rake". Your friend later brings me the note, and *I have to give him a rake*. A central bank like the Fed or ECB does the same thing; we simply use their notes for money. The US treasury performs the service of printing paper bills, but those are not legal tender dollars until the Federal Reserve buys them from treasury, at printing cost, not face value. So no, the US treasury can't "print money" any easier than Greece's can.

    @stevegt Except US bills are not IOUs, and haven't been since the gold standard. You can't exchange them for government assets unless the government wants you to. Do you know how an open market operation works? The Fed (or ECB) takes control of suitable collateral from a non-central bank, and then credits the bank's account (which it can then use, lend out, etc). The borrowing bank *cannot* exchange it's money for the assets it pledged, there is no liability for the Fed (though it can "buy" back the currency, for the collateral, if it wants to).

    @michaelkay US bills do not have that text on them, so I'm not sure what you mean. The US isn't on a gold standard, so you can't go demand equivalent gold as you potentially could have way back when. What exactly are you saying a foreign government could do with a bunch of US bills? What would "calling in the debt" look like?

    The U.S.' high inflation rates *circa* 1980 nearly did cause the banking system to fail. For example, many savings and loans held mortgages (issued years earlier) that paid interest rates lower than the peak inflation rate. When the inflation rate rose, so did short-term interest rates, and many financial institutions were severely squeezed. Some bet big on real estate developments. Some of these borrowers failed, as did some of their lenders. Others survived because the government radically changed how it regulated banks and savings and loans, including allowing interstate banking, and…

    allowing much higher interest rates to be charged. One could argue that the changes to U.S. bank regulations amounted to the replacement of a failed old banking system with a new banking system. By the way, the changes that encouraged syndication of credit card debt and mortgage debt were major contributing factors to the banking system's severe problems in 2008.

    I confined my original post to the general concept "the US government can print money" expressly to avoid these details. Now that they have come up, mbrig is correct. Open Market Operations DO create money. It CAN come from nowhere (the Fed gets ownership of a bond, provides money in return, and that money does not have to exist previously). It is NOT a liability (nobody owes anything to anyone as a result of the newly created money). There is no question the US can do this (and does it regularly) and Greece cannot (but the European Central Bank can).

    @mbrig Answering your question about open market operations -- I was a bank VP, global capital markets. You'll want to do more digging into how the Fed works -- every dollar they create for bond purchases is a liability on their balance sheet. While you can't demand gold for a modern dollar, you can and will demand that the treasury wipe out your tax owed when you give them Fed dollars. The treasury can and will demand that the Fed accept those dollars as payment at bond maturity. The Fed wants those dollars back; they need them to erase that liability on their books. It's a closed system.

    @MichaelKay The "national debt" is bonds that have been issued by the US Treasury, and has nothing to do with the Federal Reserve, so you were partly right. The Fed is an independent system, owned by US banks, with its own balance sheet. The Fed buys a lot of US treasury bonds on the open market, so it's fair to say that much of the "national debt" is actually owed *to* the Fed, the banks that own the fed, and the shareholders of those banks. Own any JPM stock? ;-)

    @RCM "The US" is not a single institution. The US Federal Reserve works the same way as the ECB. The US treasury works the same as Greece's treasury. Money created by a central bank must be recorded as a liability on the central bank's balance sheet -- bonds purchased on the left, money issued on the right. Likewise, bonds created by a treasury are a liability for the treasury -- money received on the left, bonds issued on the right. Money and bonds are two sides of the same transaction; each are liabilities for their issuers because at maturity the flow reverses.

    @stevegt Of course the ECB works (close enough to) the same way as the Fed. That's why I said they can both (effectively) print money (and Greece can't). Sure, there is a liability on the balance sheet--that's a true fact. It is a dollar liability, payable in dollars. Just bring the Fed a dollar and you can demand they give you a dollar. in return. But that is no (real) liability--it's an accounting trick for hiding dilution of the value of money.

    @stevegt Of course money and bonds are two sides of the same transaction. But if the Treasury issues new debt, and if the Fed buys it for new money, then what is the effect? The government owns a government bond, and more dollars are on the street. Those dollars create a debt on the Fed books, but to call that debt you have to give dollars to get dollars--it's self-cancelling and not a true liability. But the increase in the money supply is real and was used to offset the (national) debt. All I'm claiming is this is possible for the US but not for Greece, and this difference is important.

    @RCM The US dollar's intrinsic value comes from the fact that US residents need US dollars to pay their US taxes. The thing that works in the US (and that's not working in Greece) is that people might gripe but generally do pay their taxes, so it's reasonable to assume that the US treasury will not default, so investors and the Fed are still willing to buy US treasury bonds. When a national treasury starts having trouble collecting taxes, you'll tend to see problems emerge like those Greece is dealing with.

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Content dated before 7/24/2021 11:53 AM