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Odie said: "1. I would still like to know what distinguishes government debt from private debt."

Think about the scenario where someone takes out a 10 year loan so that the loan is paid off in 10 years.

Think about the scenario where the gov't takes a 10 year loan and does a transfer to someone. It then taxes that someone so the gov't loan is paid off in 10 years.

Min said: "No, we do not have to adopt vernacular terminology. In fact, if we communicate with the general public while using words in a different sense than that of common usage, we invite misunderstanding."

Exactly. I'd say that is the problem with 30% to 50% of economics.

OK, here is an example of how precise language might help.

Claim: Even if the gov't debt is neutral with regard to the citizenry as a whole at any given point in time, it may be deleterious over time to one or more age cohorts.

First, we have nullified the effect of the idea that "we owe it to ourselves". Second, we do not have to make an arbitrary and crude division between young and old generations, but can look at more precise age cohorts. Third, while we may make further assumptions in an attempt to prove the claim, we are not wedded to any. Fourth, the more precise and modest claim is more likely to receive empirical verification. Fifth, the more specific claim may suggest specific remedies.

Comment: Consider the crude, younger generation - older generation, model. In advanced economies the median age is around 40. So let's say that we compare now with 1975, and that with 1935, and also 1895. There are big differences between societies and economies over such time spans. How much can we conclude?

Also, if the older generation includes people in their 40s and 50s, their prime earning years, then a lot of what we are talking about is not inter-generational transfer, but intra-generational transfer. Speaking about age cohorts seems to be an improvement to me. :)

Min said: "Claim: Even if the gov't debt is neutral with regard to the citizenry as a whole at any given point in time, it may be deleterious over time to one or more age cohorts.

First, we have nullified the effect of the idea that "we owe it to ourselves". Second, we do not have to make an arbitrary and crude division between young and old generations, but can look at more precise age cohorts. Third, while we may make further assumptions in an attempt to prove the claim, we are not wedded to any. Fourth, the more precise and modest claim is more likely to receive empirical verification. Fifth, the more specific claim may suggest specific remedies."

Sounds like a good step in the right direction.

I want to attempt to put that in personal finance terms.

The gov't goes into debt, mostly to get demand deposits. The recipient of those demand deposits gets a benefit. Whoever pays the principal and interest gets a loss. Also, when the gov't goes into debt, it may not be known when the principal payments will be made (the gov't can do interest only loans).

Thoughts?

Nick said: "OK. This is crucial. There's a debt of 10 apples (by assumption). So the young person buys the 10 apple bond, and so only has 50-10=40 apples left to consume. And the old person sells the 10 apple bond, so gets to consume 50+10=60 apples. (He also gets paid interest, but is taxed to pay the interest, so that's a wash). In equilibrium, he must be just willing to consume {40;60}, otherwise there will be an excess supply or demand for bonds. At what rate of interest will {40;60} be his choice? It's where (1+r) = MU(40)/MU(60). (The relative price of two goods must equal the ratio of the Marginal Utilities of those two goods, and in this case the two goods are: beers when young and beers when old.) And with U=log(C), we know that MU = 1/C (because dU/dC = 1/C.). So in the new equilibrium, the interest rate is given by 1+r=60/40, so r= 0.5, or 50%."

Min, let's say r goes to 0%. Also, assume the 40;60 part still holds along with the bonds.

Does that mean U no longer equals log (C)?

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