Businesses are all leveraged to some degree ranging from 10% to 90% leverage depending on the type of industry. I'd like to open this up to discussion on the financial aspects of government spending. Many people wish the government had zero debt and I dont believe that's ideal.
I believe this is a bipartisan issue and should be considered political in nature, even though it relates to the government.
If one were to look at the US Government as a "business entity" then it would make sense to have some degree of leverage on it. After all, imagine there was ZERO debt. Then the government could issue some 30 year bonds at 4.5% and invest that into the infrastructure of the country through public education, roads, economy stimulus, etc. In theory the rate of return (ROI) should be greater than 4.5%.
In fact, for a business, it makes sense to leverage as much as possible if the ROI is going to exceed the weighted average cost of capital. So as long as a government economist can predict a 5%+ ROI on infrastructure spending, then it makes sense to borrow at 4.5%.
A few other points to consider:
1) A business gains value in leveraging with debt financing through a tax-shield. With the current 35% corporate tax structure, it means that borrowing at 10% really only costs about 6.5%. The US Government does not gain tax-benefits from borrowing
2) The US Government can issue more "equity-financing" by increasing immigration and allowing foreigners to become shareholders in our entity. They will get "dividends" through public goods and infrastructure use, and their equity capital comes in the form of their tax dollars.
3) In business, it's always cheaper to use debt-financing than equity-financing, so if that applies to our analogy it's cheaper to issue bonds then it is to open our borders.
A few points for further discussion:
1) Can someone smarter than me use numbers like GDP, and tax dollars collected per year in order to calculate the leverage ratio of the US Government?
2) Are there any flaws to this analogy?
3) How would YOU calculate the ideal amount of debt the government should be in?
Then the government could issue some 30 year bonds at 4.5% and invest that into the infrastructure of the country through public education, roads, economy stimulus, etc. In theory the rate of return (ROI) should be greater than 4.5%.Absolutely! The problem however is the failed supply siders' belief that debt should be use to finance taxcuts, regardless if the taxcuts actually went to infrastructure type of investments or worthless pursuits (such as speculation in real estate). The US Government does not gain tax-benefits from borrowingWell, for the end investors the interest of treasury bonds are taxable income. In business, it's always cheaper to use debt-financing than equity-financing, so if that applies to our analogy it's cheaper to issue bonds then it is to open our borders.You mixed up required return vs actual cost. Equity can cost nothing if there is no dividend. And a company without any debt can not go bankrupt. How would YOU calculate the ideal amount of debt the government should be in?There is a safety issue. I think anything up to 1/2 of GDP is safe. Above 100% it becomes really worrisome. Calculation is meaningless, just like the proof that the market is capable of reaching an equilibrium based on supply and demand functions.
nycll said: The US Government does not gain tax-benefits from borrowingWell, for the end investors the interest of treasury bonds are taxable income.
This is an interesting point I failed to consider. *IF* the government is issuing bonds to US Citizens who hold the bonds in taxable accounts, then the government will receive tax-payments on the interest. So if the tax rate is 25% and the bond yield is 4% then the real cost of capital is 3% because the government gets 1/4 back. However most debt seems to be going to the Chinese Government. The interesting point to note is that it's cheaper for the government to issue debt to it's citizens then to issue debt abroad.
nycll said: In business, it's always cheaper to use debt-financing than equity-financing, so if that applies to our analogy it's cheaper to issue bonds then it is to open our borders.You mixed up required return vs actual cost. Equity can cost nothing if there is no dividend.
You are missing the true "costs" associated with equity financing. To illustrate my point, I will say that my parents offered to loan me $100k to get my MBA at 0% interest and I could pay them back "whenever." That certainly sounds cheaper than the 8% loans I took out. However now if I decide to get a job making $40k per year after grad school, guess what kind of crap I get to deal with from my parents? The 8% student loans from the government are cheaper, because they won't bitch at me for my life decisions I make based on the money I borrowed from it.
Equity shareholders are owners of the company and have voting rights. Issuing new shares dilutes the value that current shareholders have. It also brings in new voters to please. Additionally, there is no tax-shield involved so the opportunity cost of the forgone tax-shield adds to the expense of equity-financing.
If you didn't understand my analogy, by accepting $100k at 0% from my parents, they would have become equity-share holders in my career with voting rights on what jobs I could take for the rest of my life.
Rathipon
Greedy Member
posted: Feb. 4, 2010 @ 9:42p
What's the ROI on the money the government borrowed to bailout AIG?
Jobs at Goldman Sachs for the bureaucrats once they leave 'public service'?
You seem like a very smart person, but you also seem to devote an inordinate amount of energy to ideas that are totally whack.
phpld
Member
posted: Feb. 4, 2010 @ 10:34p
It's normal to take on debt during a recession. Unfortunately, we also took on debt in the years PRECEDING the recession. NOW we have things like unemployment, reduced receipts from taxes, and state budgets nearly failing. These are things that are going to bring about deficit spending no matter what we do now. It is normal to try to stimulate the economy now. What was not normal up until the last few decades was to cut taxes and spend more money without accounting for it in the budget, and we did this every year leading up to this recession. Very unfortunate.
The debt itself isn't necessarily the problems, its the stupid crap the debt is funding. And I haven't seen anything done by the government producing a 5% ROI (dodging more potholes I can count, dying of boredom in line at the post office, and watching taxpayer money chase failed businesses/individuals).
tripleB said: To illustrate my point, I will say that my parents offered to loan me $100k to get my MBA at 0% interest and I could pay them back "whenever." That certainly sounds cheaper than the 8% loans I took out. However now if I decide to get a job making $40k per year after grad school, guess what kind of crap I get to deal with from my parents? The 8% student loans from the government are cheaper, because they won't bitch at me for my life decisions I make based on the money I borrowed from it.
Equity shareholders are owners of the company and have voting rights.
That's your problem Mr. MBA....
You are confusing your contract terms and emotions..
"whenever" means just that... pay it back "whenever"!
And nowhere did you GIVE them equity and voting rights on your life decisions. That is GUILTY emotions (which I find hard to believe coming from you).
Take the money, do what you want, tell them to frack off... and pay it back when they are dead.
They'll understand, because they have "tripleB" for a son...
Government debt does not have to be repaid with good money, but simply money. When the debt burden becomes too much to handle, they just print massive amounts of money and wipe out the debt. Of course that would cause hyperinflation - a bad thing. On the other hand, there is no more debt to deal with. They can turn around and choke the money supply, which would cause a severe depression. Tough time sets in for a generation perhaps. Then we're back in business again. It's like hitting the "reset" button. People have survived depressions, wars, and plagues, so we will do so again.
I think the problem is even though our GDP to debt ratio seems reasonable... a lot of our GDP is phony nonsense.
70% of our GDP is based on consumer spending which requires asinine policies like encouraging consumers to live paycheck to paycheck, ultra low interest rates, insane amounts of government borrowing and huge stimulus programs, baby boomers not saving enough for retirement, squandering the social security trust fund, government bailing out credit card companies, trying to force banks to make imprudent loans with depositors money that aren't likely to be paid back, paying people to buy cars\houses, etc.
Private debt is also through the roof... a lot of these problems are related. Unless we have serious long term economic growth I think we'll face serious economic re-balancing at some point and this whole bad joke is going to fall apart.
It's a huge and fundamental mistake to compare national government to business because business can pick what it wants and abandon what it doesn't, while government has unavoidable responsibilities plus power to regulate the money supply.
The US debt situation is vastly overrated because the interest costs are very low, the US can easily handle a debt level of even 100% of GDP (Japan's burden is over 200% of GDP), and there are no realistic alternatives -- or even desirable alternatives -- to running big deficits for years to come.
Rathipon
Greedy Member
posted: Feb. 5, 2010 @ 6:49a
No more desireable alternative? What did all that deficit spending do for Japan?
How about as a more desireable alternative we let the mal-investments get shaken out of the system instead of artificially trying to prop up a failed system? And then, once we get through that pain we quit trying to manage the economy and actually let the free market allocate resources?
Who says free market can most efficiently and optimally allocating resouces? It's only been mathematically proven in very idealized models.
chimeer
Cranky Member
posted: Feb. 5, 2010 @ 7:42a
nycll said: Who says free market can most efficiently and optimally allocating resouces? It's only been mathematically proven in very idealized models.
Do you honestly believe government bureaucrats are better at allocating resources? Can you point to some evidence that the government really is better able to allocate resources?
chimeer said: nycll said: Who says free market can most efficiently and optimally allocating resouces? It's only been mathematically proven in very idealized models.
Do you honestly believe government bureaucrats are better at allocating resources? Can you point to some evidence that the government really is better able to allocate resources?
nycll will deny your statment, but then always argue that goverment is the answer.
ThePessimist
Ancient Member
posted: Feb. 5, 2010 @ 8:27a
tripleB said: 3) In business, it's always cheaper to use debt-financing than equity-financing, so if that applies to our analogy it's cheaper to issue bonds then it is to open our borders. You must be in a particularly bad MBA program is they teach that it's always cheaper for a business to use debt financing. A company shareholders will require some rate of return. Debtholders will often require a lower rate of return due to the seniority in the capital structure, and then the company saves money on taxes if it's profitable. However, as leverage increases, debtholders require progressively higher interest rates to compensate. There are common ways to estimate the ratio of debt to equity that produces the lowest weighted average cost of capital (WACC) for a company.
Just a business's cost of borrowing goes up with its debt load, usually countries' costs go up with their debt loads. We're in a very unusual situation right now due to the world's perception of the dollar as a safe haven, which is keeping borrowing costs low.
Who said government was better at allocating all the resources in the economy? Didn't central planning fail?
The point is that the free market often fails, and government has a necessary function to perform in the economy. The private market is inherently more efficient, which can sometimes lead to the efficient pursuit of a bubble, at sometimes. That's why george soros asked, "if the market is so efficient, why people like me can make so much money?"
The simple truth is good government actions are good for the economy, and bad ones bad for the economy. For example of good government actions, I'd encourage people to look into the new deal, interstate highway, the internet, and government funded R&D.
nycll said: Who said government was better at allocating all the resources in the economy? Didn't central planning fail?
The point is that the free market often fails, and government has a necessary function to perform in the economy. The private market is inherently more efficient, which can sometimes lead to the efficient pursuit of a bubble, at sometimes. That's why george soros asked, "if the market is so efficient, why people like me can make so much money?"
The simple truth is good government actions are good for the economy, and bad ones bad for the economy. For example of good government actions, I'd encourage people to look into the new deal, interstate highway, the internet, and government funded R&D.
ahh yes brilliant point there.
Other simple truths
"The super bowl winner will be the team with the most points"
wilesmt
Senior Member
posted: Feb. 5, 2010 @ 9:11a
nycll said: There is a safety issue. I think anything up to 1/2 of GDP is safe. Above 100% it becomes really worrisome. Calculation is meaningless, just like the proof that the market is capable of reaching an equilibrium based on supply and demand functions.
The government is the only entity that I know of that doesn't account for it's unfunded future liabilities as debt. When you add in SS/Medicare it looks a lot worse than if you only look at outstanding bonds.
wilesmt said: The government is the only entity that I know of that doesn't account for it's unfunded future liabilities as debt. When you add in SS/Medicare it looks a lot worse than if you only look at outstanding bonds.
That's the core problem. The government doesn't account (accrual count). It simply counts. Which means we are lying to ourselves, just as the Soviets did. Our lies are just more subtle.
Go here, if you want to see the actual accounting statements of the United States. They are prepared using the GAAP and accordingly depressing.
What's worse, half the agencies' accounting statements are "qualified," meaning they failed their audit and cannot be trusted. Here's looking at you DoD. And the opinion on internal financial control was "adverse."
For those of you with an accounting background, feel free to describe what would happen to private corporations (past Sarbanes Oxley!) who couldn't pass audit or were to receive adverse opinions on their financial controls. I can speculate but would prefer the opinion of professionals on the matter.
onechionly
Member
posted: Feb. 5, 2010 @ 9:45a
"For those of you with an accounting background, feel free to describe what would happen to private corporations (past Sarbanes Oxley!) who couldn't pass audit or were to receive adverse opinions on their financial controls. I can speculate but would prefer the opinion of professionals on the matter"
Investors would pull out. Leaving the company with little to no funds to operate.
"The super bowl winner will be the team with the most points"Are you disagreeing with me or just trying to trivialize my statements?
nycll will deny your statment, but then always argue that goverment is the answer.Well, when the market fails, government intervention is the only answer. And the market does fail once a while.
wilesmt said: The government is the only entity that I know of that doesn't account for it's unfunded future liabilities as debt. When you add in SS/Medicare it looks a lot worse than if you only look at outstanding bonds.Unfunded Liabilities is not the same as Debt.
SS/Medicare benefits are breakable promises. If Congress wants, Congress can pass a law tomorrow to reduce those benefits.
Pensions are unbreakable promises. Private companies often used unrealistic return assumptions (8%) in pension projections. That isn't so different from ignoring "unfunded" liabilities.
puckah18
Greedy Member
posted: Feb. 5, 2010 @ 10:32a
Your shareholder analysis is uberly flawed.
In the case of a corporation, any dividend and returns to shareholders are are evenly distributed by the class of equity they hold. In the case of the US, every shareholder has different shares to the quoted income, what the government is doing right now is simply robbing 1 class of shareholders to fund special payouts to another class of shareholders. That gets an F in corporate governance.
This effect is amplified by how the additional debt is used; the debt is used to fund tax cuts. This is equivalent to corporate recap to pay special dividends to shareholders. Then you add in the uneven distribution of profit, that equals EPIC FAIL.
nycll said: Unfunded Liabilities is not the same as Debt.
SS/Medicare benefits are breakable promises. If Congress wants, Congress can pass a law tomorrow to reduce those benefits.
Pensions are unbreakable promises. Private companies often used unrealistic return assumptions (8%) in pension projections. That isn't so different from ignoring "unfunded" liabilities.
So here's a crazy idea: why don't we record them as debt as long as the promise is on the books. And then when we renege, we take it off the books. Under this wild scheme, we would recognize expenses when they are incurred rather then payed out. Now where have I heard of that before?
enc0re said: nycll said: Unfunded Liabilities is not the same as Debt.
SS/Medicare benefits are breakable promises. If Congress wants, Congress can pass a law tomorrow to reduce those benefits.
Pensions are unbreakable promises. Private companies often used unrealistic return assumptions (8%) in pension projections. That isn't so different from ignoring "unfunded" liabilities.
So here's a crazy idea: why don't we record them as debt as long as the promise is on the books. And the when we renege, we take it off the books. Under this wild scheme, we would recognize expenses when they are incurred rather then payed out. Now where have I heard of that before? I totally agree with you the Unfunded Liabilities should be recorded--however as Unfunded Liabilities--in the books, and pulished in Budget Congress and the whole country sees every year. Overly generous benefits in SS and medicare are undue burdens to the younger working people and future generations. However, the younger people aren't adequately aware of the issue, nor they vote as often as the older people do.
enc0re said: nycll said: Unfunded Liabilities is not the same as Debt.
SS/Medicare benefits are breakable promises. If Congress wants, Congress can pass a law tomorrow to reduce those benefits.
Pensions are unbreakable promises. Private companies often used unrealistic return assumptions (8%) in pension projections. That isn't so different from ignoring "unfunded" liabilities.
So here's a crazy idea: why don't we record them as debt as long as the promise is on the books. And the when we renege, we take it off the books. Under this wild scheme, we would recognize expenses when they are incurred rather then payed out. Now where have I heard of that before?If you are going to do that, then we should also record our future tax receipts as assets. Of course, both of these things would be asinine to do, but at least you would be talking apples-to-apples.
cheezedawg said: If you are going to do that, then we should also record our future tax receipts as assets. Of course, both of these things would be asinine to do, but at least you would be talking apples-to-apples.
Yes, that would be the point of accounting. However, as you may have noticed when reading the official Financial Statements of the United States I linked above, the future tax revenues do not begin to cover the liabilities. That's this "unfunded liability" thing we keep harping about. Which should be recognized and be on the books.
Who says free market can most efficiently and optimally allocating resouces? It's only been mathematically proven in very idealized models.I don't mind receiving red for my above statement, because I know the typical FW poster probably never heard of Arrow–Debreu theory, or other worthy attempts by research economists to prove the market can achieve an optimal allocation of resources. Most of the work were done by the Chicago School. However, the most influential Chicago School economist, Milton Friedman, really didn't bother with difficult job of actually proving the market is efficient. He simply made a quantum leap by claiming it as self-evident. If you look at Friedman's actual economics work, such as his study of the Great Depression, it really has little to do with whether the free maket or the government is better at doing things. In fact, institutionalizing the need of a central bank proactively manipulating the money supply is nowhere near what the pure free market ideology calls for.
Awhile back I stopped counting. The people in DC keep announcing another new plan for (insert special interest group or an industry) a few more billions. The budget kept increasing. The debt limit is going up. Eventually I just tell myself to mind my business, take care of my family, read all I can here on FW to squeeze a few more $$ out of something and try to invest wisely. I can write to my senators and representatives. They all seem to be in a trance or too busy running the press and print more money.
JoeFriday
Senior Member - 1K
posted: Feb. 5, 2010 @ 12:56p
brettdoyle said: Private debt is also through the roof... Quite the contrary.
Along with the massive withdrawal of private investment and private demand, it’s now quite obvious why the federal government HAD to step in and be the borrower and investor of last resort to try and fill at least some of that wide gap.
wilesmt
Senior Member
posted: Feb. 5, 2010 @ 1:13p
JoeFriday said: brettdoyle said: Private debt is also through the roof... Quite the contrary.
Along with the massive withdrawal of private investment and private demand, it’s now quite obvious why the federal government HAD to step in and be the borrower and investor of last resort to try and fill at least some of that wide gap.
I don't know, but every day increases my fear that we are heading towards 1937 all over again.
hkgfnt said: Awhile back I stopped counting. The people in DC keep announcing another new plan for (insert special interest group or an industry) a few more billions. The budget kept increasing. The debt limit is going up. Eventually I just tell myself to mind my business, take care of my family, read all I can here on FW to squeeze a few more $$ out of something and try to invest wisely. I can write to my senators and representatives. They all seem to be in a trance or too busy running the press and print more money.So we leave BBB to worry about the national debt? Ain't that a scary thought?
Along with the massive withdrawal of private investment and private demand, it’s now quite obvious why the federal government HAD to step in and be the borrower and investor of last resort to try and fill at least some of that wide gap.
That chart shows how consumers are up to their eye balls in debt and many have lost their jobs. 10% debt growth in 2005... what a joke. Consumers aren't able to take on more debt because lenders know they don't have the capacity to repay it... which is exactly why we're in such a bad situation.
They shopped till they dropped and their credit cards are maxed out so now social dogma says we need the government step in and spend till it drops on their behalf.
JoeFriday
Senior Member - 1K
posted: Feb. 5, 2010 @ 6:53p
brettdoyle said: JoeFriday said: brettdoyle said: Private debt is also through the roof... Quite the contrary.
Along with the massive withdrawal of private investment and private demand, it’s now quite obvious why the federal government HAD to step in and be the borrower and investor of last resort to try and fill at least some of that wide gap.
That chart shows how consumers are up to their eye balls in debt... No, the chart shows Household Debt plummeting over a cliff.
enc0re said: Yes, that would be the point of accounting. However, as you may have noticed when reading the official Financial Statements of the United States I linked above, the future tax revenues do not begin to cover the liabilities. That's this "unfunded liability" thing we keep harping about. Which should be recognized and be on the books.What a silly proposal. NYCLL is exactly right- SS and medicare are not real liabilities. Lets look at the absolute worst case scenario. Say congress does nothing and the SSA keeps paying out the benefits that they are required to until the trust fund is depleted in 2048 or whatever the latest date is. By law the SSA cannot borrow money, so their benefit payouts immediately drop to match their current revenue. The "unfunded liability" vanishes. Similarly, its conceivable that congress could actually get their act together before that to work on a solution. One swipe of the pen to either change benefit levels or tax rates and the liability goes *poof*. Show me a private business that can do that with their liabilities.
brettdoyle said: Private debt is also through the roof... JoeFriday said: Quite the contrary. Actually, US Domestic Debt Growth Is The Slowest Since 1950 brettdoyle said: That chart shows how consumers are up to their eye balls in debt and many have lost their jobs. 10% debt growth in 2005... what a joke... JoeFriday said: No, the chart shows Household Debt plummeting over a cliff. It is sad for a simple factual thing Joe has to say it more than once. Joe is right, obviously, since it is 2010 now.
Brett needs to figure out the difference between the past and present, and use the past tense when describing the past. Now we can move on.
wilesmt said: I don't know, but every day increases my fear that we are heading towards 1937 all over again.That was when the US government tried to balance the budget -- and almost did. Once that effort was abandoned, the GDP started to grow again.
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