How Much Debt is Too Much ?

article = none, personal opinion.

I was online on some forums , discussing the american debt problem and how some people wanted to raise the debt and others didn't , and someone asked me , "how much debt is too much ?".

This is actually a valid question that comes up time and time again. So I thought I'd put it in my blog.

Modern nations do seem to live in a debt riddled condition. How much debt can they take ?

To fully understand this question , let us examine the price of coca cola over the history of it's existance .

Or more simply, in 1950 , coca cola was 5 cents a bottle
In 2013 it's $2.00 a bottle.
Over the course of 63 years, the price has increased 40 fold.

Interestingly , thats a lot of inflation , but it doesn't seem to have seriously harmed our society.

So , what are the mechanics of this inflation , and specifically , where does debt fit in to the picture ?

Debt is a slippery concept in a world where inflation exists. You see, debt is a set number of dollars, like , say , 100. But inflation is the "size" or "value" of that dollar shifting. When Inflation exists, the value of the dollar decreases. This , interestingly enough , has the side effect that the "Value" of your debt shrinks , even though the specific number of dollars of your debt does not.

So what is the primary source of inflation ?
It's where the government doesn't have enough money. So first , it borrows some from the bank. Specifically , the bank that it owns (if that doesn't strike you as wacky , nothing will) . Second , it will decide to print more money.

Oh for the ability to print more money. If I could print more money , I'd never go bankrupt.

Ok. For example , I have a currency , I'm going to call it Tokens. There are 1000 Tokens in exsitance.
They are worth my entire set worth , which doesn't change. 
Bob has 100 Tokens in the bank. He's saving them for a rainy day.

After a while , I get into trouble I owe money. I owe Frank 100 tokens.
So I decide I will print more Tokens. I will print 100 more tokens.

There are now 1100 Tokens in existance.  They are worth my entire wealth , which hasn't changed.
This means that tokens have shrunk , they are now worth only 1000 / 1100  of the previous tokens, or 91% of the original tokens. (90.909090..%)

Bob has 100 Tokens in the bank. But they have shrunk , they're only worth 91% of their previous value. by printing tokens, I have taken 9 tokens from Bob.

Frank is now paid 100 Tokens in the new currency , which means I have only paid him 91% of what I owed him.

If you are thinking we stole savings from Bob  , and underpaid Frank , you are absolutely correct !

So how much debt is enough ?

That depends on Frank , doesn't it ?

First question. Who is Frank ? Frank is an accountant with a bizarre view point.  Whats so bizarre about his point of view ?

He honestly believes the currency he's working in doesn't change in value.
And he's legally required, by the standards and practices of accounting in his country , act in this manner.  He can't charge an extra 9 tokens on his debt because I printed more money. He has to pretend that he lives in a fantasy universe where that didn't happen.

And why does he believe that ?
Well ... because I told him to. You see , not only am I the one printing money. I'm the one making up laws to control the debtors. I'm the one collecting the taxes.

If you get the feeling that I'm just crudding people over every time they turn around ... yep. That would be me. Your standard western government.

So , how much debt is enough ?

Hmm... actually , if I take it slow , I can keep the "Tokens" growing smaller and smaller for pretty much forever , can't I ? I mean if a 40 to 1 decrease in value doesn't even upset people  , because I spread it out over 60 years , I can keep going forever that way can't I ?

My total debt can be 33% of the tokens in circulation. If it gets higher ...

you got it.

Print more tokens.