In case anyone was wondering what the issue with Greece and gov debt debates are about, here's a quick summary
(money=currency=debt)
You can say there's two types of governments: those that use money and those that issue money. Countries that use the Euro, US state govs, and YOU are examples of money users- you use someone else's unit of currency. Money users can go bankrupt by borrowing too much
Money issuers like the US, Canada, and UK can create money out of thin air. It's
impossible for a debt issuer to go bankrupt. The risk of creating too much debt is that the value of the currency will go down (ex. inflation)
Inflation is the percent change in the value of currency. Too much or too little inflation can wreck an economy, the US goal is 2%
(we're at 0.6%!). Inflation is simply the money flowing in the economy divided by the amount of stuff (goods, services, assets) purchased. So if you add more money in the economy inflation rises, and if the economy makes more stuff without more money then inflation falls.
An economy can't grow without increasing amounts of circulating money. Savings don't affect inflation
It's important to understand what government debt is: private money. Total gov debt = total private surplus. US gov debt is all the dollars in the US plus all dollars in every other country. The economy can't grow without more government debt. So when a gov cuts spending they're cutting the amount of money in the private sector. This is deflationary (negative inflation) and is what's killing Greece and other Euro net importers
Look at the graphs and you'll see that gov debt is a mirror of private surplus+foreign surplus
http://www.macrobusiness.com.au/wp-content/uploads/2011/03/US-sectoral-balances.gif
https://kkalev4economy.files.wordpress.com/2012/10/financial-balances.jpg?w=490&h=346
Nations that are net importers (import more than they export) are at a big disadvantage if they're a currency user because it's a drain on the private sector. The gov spends money but a lot of it goes out of the country, so they have to tax or borrow more to make up for the money leaving. You'll notice the wealthiest Euro govs are net exporters, and the ones that are in trouble are net importers
This is what happened to Greece. They're a high net importer so money drains out and the gov has to tax and borrow more. Greek people traditionally don't pay taxes so this lead to Greece borrowing a lot. By borrowing more and more they drove up the price (interest rate) which made it more expensive to borrow
Here's the important part
This can't happen to a money issuer country because they
can't tax or borrow. When the US gov taxes your money it gets deleted from your bank account (they shred physical cash). Poof! It doesn't go anywhere, but it gets marked down on the national account table. +1 gov debt -1 private surplus. Taxes reduce inflation! Taxes take money out of the economy which reduces inflation
When the US borrows money they issue a bond at their own interest rate. The US chooses how much it pays to bond holders, unlike Greece which is forced to pay the market interest rate. This isn't "borrowing" money, in fact it's impossible for a money issuer to borrow their own money. What this does is create the market interest rate and pays bond holders which affects inflation
But hold on...you've always heard that the US has to tax and borrow in order to spend. This used to be true when we were on the Gold Standard, but that was officially disbanded in 1973. This misconception is partly due to how the US Treasury funds itself. Long story short it has the option to mark taxes as credits, issue bonds to the Fed (central bank), or telling the Fed to create money (freely and without limit)
When you hear anything about the US going bankrupt it's due to misunderstanding. We have a "debt limit" which is a relic of the old Gold Standard, but the debt limit must constantly be raised every time it's reached because otherwise we're all fucked: the gov stops issuing money and the economy instantly collapses. The debt limit must constantly be raised if we want the economy to grow because you can't grow without new money. Why do we have a debt limit?
So in conclusion, if you live in a money user nation that's a net importer you're doomed to a weaker economy because money is being drained out which the gov has to pay for, but can only pay for in the long run by taxing people. If you live in a money issuer nation then the "size" of the gov debt doesn't matter, inflation is the issue. If inflation is too low the gov spends more and if it's too high they tax more
(US inflation is 0.6%!)These two systems are completely different from eachother which is the source of confusion
