Ahh, remember the good old times under Clinton when we were actually paying off the debt. What happened then? They mocked Al Gore for his plans to pay off the debt (remember all the "lockbox" stuff) and then we got a president that promised tax cuts and drastically increased federal spending, and added a couple of wars just for fun. Now there is absolutely no danger of paying off the debt.
By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD. Just set the risk free return to zero and you can use all of your old formulas. Yes several bank departments would not be able to make money for absolutely zero risk as they do now. Oh well, I suppose the banks would have to do what they are supposed to do, i.e., calculate risk properly.
But of course it is all academic now. Because it is unlikely to ever happen. Paying off the debt means doing something to help the future generations of Americans and it is doubtful any president would do such a thing, and if he did he would probably have to face a lot of angry voters who do not give a shit about the future generations as happened with Al Gore.
Actually, we did start to pay off the debt but this was at the very end of the Clinton administration. If you'll look closely at the graph you supplied you'll see this. Note that the first Bush budget wouldn't be until 2001.
The debt wasn't being paid off at a great rate but it was being paid off and the person's main point that you responded to is correct. We were well off financially until some very irresponsible actions by the Bush administration.
I disagree with the point about us never being able to pay off the debt. It can be done and there are historical examples of countries with higher debt/GDP ratios that were paid off.
Note: When talking about debt of a country people generally mean the debt of the government. There was a budget surplus at the end of the Clinton presidency and this is what people usually mean when they claim a government was/is "paying off the debt".
According to the Congressional Budget Office there was a decrease in 2000/2001. According to the NPR story and the original graph you linked to there was a decrease at this time.
According to your CBO link, debt held by the public decreased. I'm not disputing this point. However, debt held by the public is only one component of federal debt.
The other kind of federal debt is intragovernmental debt; that is, debt which the federal government owes to itself. This category includes the Social Security Trust Fund.
And that does not really count. If government department A owes 10 dollars to government department B, the total net government debt does not change. So yequalsx's data is correct for the purposes of the present discussion.
If you borrow from your 401K, you're borrowing from yourself, and you eventually have to pay it back. It's money that you owe, to be paid with funds that can either be used to buy jelly beans or put back in your 401K.
If the government borrows from Social Security, it takes that money out of itself and spends it out in the economy. SS and the government has a smaller pile of cash, and the government owes itself. When the money is put back, it's with funds that could either be used to buy bullets or put back in SS.
Why does it not really count if you're actually paying back the social security trust fund? They can borrow from it, surely it also counts as debt. Just because you say it's going from department a to b doesn't mean there aren't real implications for that money being owed or not.
It's perfectly possible to balance the budget, create a surplus and start paying down the debt, and have the debt still increase because the interest exceeds the surplus. This is what happened under Clinton, he created a surplus and started using it to pay down the debt but it wasn't big enough to stop the growth. Had Bush stuck to Clinton policies, it would have been.
We could pay off the debt if we wanted to; it definitely is possible.
The question in my mind is - if a country like the US has the ability to print the world's reserve currency, isn't it beneficial to run a small deficit to increase GDP? I don't see any problems running small deficits, of course large amounts of public debt are rarely ever a good idea.
It is absolutely beneficial, in most cases, and it's not even a question of having the world's reserve currency.
A look at sectoral balances helps to analyze this: the government's budget deficit is equal to the non-government's (private plus external sector) budget surplus. That's just a basic accounting fact.
So if the non-government sector desires to be in surplus (as it usually does), then the government must run a deficit. If it tries to run a surplus despite the non-government desires, there is a conflict, and someone will have to budge. Usually, the first ones forced to budge are those with the least economic clout. The result tends to be large scale unemployment.
There is nothing inherently bad or good about government deficits (I dislike the sentiment that is so often voiced by politicians, who frame the deficit and debt as a moral issue - those are just numbers in computers, for Bob's sake! Unemployment, poverty, those are issues where morals come into play). It's simply that given the typical long-term private sector behavior, a long-term government deficit is the pragmatic and economically responsible thing to have.
How soon we forget. At the end of the Clinton years, government surpluses were treated as a frightening inevitability by Fed Chair, Alan Greenspan:
Mr. Greenspan said he was concerned that if the government did not begin to curtail its revenue, it would have more money than it needed when most of its debts were paid, leading to an accumulation of cash that he opposed. He said the government needed to start planning soon because there was $750 billion of debt that would not mature by 2011, so cash accumulation would begin by then, based on current projections, even though some of the debt would remain unpaid.
It would be interesting to see a country like the US buy so many bonds of another country that it effectively owns the other country in the end. A nice capitalist way to expand your country.
Government Bonds are not like equity. You could own every single Treasury Bond and still not have any claim of ownership. Obviously governments still try to appease the bond markets but that is not due to obligation, it is self interest.
How so? China owns ~10% of US treasury bonds, which makes them the largest single holder of Treasury Bonds. This does not mean they bought anything other than a promise for repayment at a stated rate.
http://www.treasurydirect.gov/NP/BPDLogin?application=np
This site records debt to the penny, daily. There's a fair amount of up and down in such a measure, as you might expect. There are certainly (long-ish) periods during Clinton's presidency where the total debt, as well as debt held by the public, decreased from the day at the start of the period to the day at the end.
That is not a good measure of debt. Government debt is only meaningful as a fraction of GDP (large countries have more debt than small ones, e.g.). So in this case you want this graph:
http://research.stlouisfed.org/fred2/graph/?g=2TG
which is (Gross Federal Debt)/(Gross GDP), and was clearly decreasing.
The distinction between gross and public-held debt is also not very useful. The difference between them is government debt held by parts of the government, which is money that the government owes to itself. Public-held debt was decreasing even more:
http://research.stlouisfed.org/fred2/graph/?g=2TI
When it comes to talk about paying back the debt, that 2TG graph is misleading, though. Throughout the entire period of debt reduction starting in 1950, the government did not pay down its debt. Instead, the economy was growing.
So the graph is misleading in the sense that some people may draw the conclusion that government has used austerity measures, run surpluses, to reduce its debt. In fact, the government did not run surpluses during those periods in which the debt-to-GDP ratio was reduced so drastically. It ran deficits, which helped an already growing economy further along.
Implementing austerity is not going to start a sudden and drastic drop of debt-to-GDP measures in the current economic climate. If you honestly care about debt-to-GDP (why, btw?), you'd do better to stimulate the hell out of the economy.
I wish I could upvote this a hundred times. You cannot, by definition, simultaneously maintain a trade deficit and reduce the sum of public and private debt.
Deficit's include investments. If China where to buy 100 billion in US stock and then receive payments on that stock forever it could maintain a continuous trade imbalance with minimal impact on the US economy over the long term. In the wider context, with continuous inflation the US can export an ever growing amount of USD without changing the ratio of USD in the US vs other countries. And in those terms there is little reason not to do so as long as other countries want USD. In some ways exporting constantly inflating USD is the best trade relationship possible because you get non US goods for what amounts to free money.
Ron Paul wants to cut $1 trillion in the first year, and end the wars. That would go a long way to paying off the debt. Plus he was against increasing the debt limit, so he's the only one who truly realizes the debt problem, and that the country might implode if they keep spending as they do, with no cuts whatsoever.
Balanced budgets as a long term policy are a fine thing, and absolutely a good idea. Austerity in the face of recession is madness. This is the Greece/Portugal/Ireland solution, and it's a terrible one. Paul may be one of the few politicians to earnestly care about the first issue; but he's yet another tea party whackjob with his head in the sand about the second.
Actually if you look at the economic growth of the 'austerity' countries it has been better than the economic growth of the 'stimulated' countries. They are both feeble, but Austerity is marginally outperforming stimulating at the current time, and down the track it will beat it hands down.
Yes, it sucks either way, but when debt is the problem, more debt is not the cure. 'Stimulating' is just borrowing future funds to try and get things going now, which, at best, just moves the problem down the road.
Many people are quick to try and string up politicians who point out the truth. Sadly this means the politicians who push the problem forwards and reassure people are the ones that get voted in. And the problem gets pushed further down the track and gets even more malignant.
Greece is a smoking ruin and getting worse. The UK was outperforming Ireland until the new UK government started swinging a chainsaw around in an ideologically-based austerity drive, and now its growth has vanished.
Ireland is improving (hello from Cork) in relative terms because it genuinely had nowhere further south left to go. 20% of the population is on the dole, property prices are down 60% from 2007 and are still falling, mobility of potential jobseekers has been curtailed by the fact that they can't sell up and move because their mortgages are worth twice what the house is.
We also took the old government out back and swung an axe into its head in February. The party of government for 80% of the entire history of Ireland as an independent state is now polling in fourth position. Its erstwhile coalition partner is within the margin of error of zero.
You cannot but imperil private sector growth by removing massive amounts of cash from the economy all at once[1]. Public employees spend that money they're paid.
Couldn't it go either way though? I mean ultimately it just depends on what returns they can get. My impression is that the New Deal in the Depression gave good ROI because the infrastructure improvements opened up new avenues of growth. However if you have massive corruption like in Greece then you're probably better off with austerity.
When you build the Hoover dam and the interstate system, yes.
When you loan money to stimulate defense contractors, non-competitive solar manufacturers and for all sorts of other boondoggles and build bridges to nowhere, no.
The problem is that the process of spending on infrastructure rarely is positive in most places for a whole host of reasons. Therefore, austerity is better because it avoids malinvestment. Doing nothing is better than wasting capital.
If you borrow money to spend, the spending has to create more return than the cost of the borrowed money, or the money is wasted. This is true in the case of the individual, the company and the government. Individuals rarely invest money for greater returns (think : new cars), companies that last always invest for greater returns, but governments have few incentives to do so.
They would much rather make a big splash and announce jobs now, than worry about whether or not they are creating something worthwhile.
The problem, of course, is always in measuring the positive returns of large public spending. But again, in times of over-borrowing, governments should always err on the side of caution.
Honest question: why "austerity in the face of recession is madness" for the countries in Europe, but it is the only proposal given by the IMF to Mexico in 1996 and Brazil in 1996-2000?
Austerity plans are always a tough pill to swallow, and they can cost elections - as it did to Cardoso's sucessor in 2002 - but I fail to understand what is this madness you are talking about. If it were not for the economic policy that forced a surplus in the Brazilian budget, I don't think they would be in the (calmer) situation they are today.
The IMF regime was utter madness and disaster for Brasil. It resulted in a freefall of the Brasillian gdp. GDP growth only happened after Brasil removed and loosened IMF restrictions in the mid 00's.
Wrong in all accounts. The GDP never actually fell. Average growth in 1994-2002 was actually just shy of 3%/year. Not good, but never negative.
As for the boom that came afterwards: Lula kept the basis of the economic policy started by Cardoso. In was only in the last two years of Lula's second mandate (2009-2010) that they tried to loose a little bit on government spending (as a way to fight contagion by Housing Crisis), and inflation had shown signs on creeping up again.
And even that increase in spending was only possible due to the austerity policies from the previous 15 years that allowed the country to grow their reserves. Had they not followed the IMF rules, they would be in the same situation that Greece/Portugal/Ireland/Italy are today.
And this is why politicians can lie with statistics.
GDP in dollars fell in 1998 due to changes in the exchange rate. The price of the dollar went from BRL 1.2 to 1.98 in a matter of a week.
Further, the spike that you see in your chart after 2002 was due to the dollar hitting an all-time high of BRL 4.00 when Lula was elected, and there was huge speculation in the market. After he took office and kept the monetary policy, the market calmed down and the BRL has been rising in value since.
Had the price of the dollar kept stable during these years, you would see a curve that shows exactly the numbers I mentioned before.
The IMF has not been kicked out of the country. Debts with the IMF were paid, but the monetary and economic policy is still there. The Brazilian Central Bank still recommends austerity policies for government spending. They still have the highest interest (inflation adjusted) rate in the world. Your cute chart does not prove anything.
P.S: It's in times like these that I really hate voting in discussion forums, and makes me even less of a believer in "the rule of the mob". You are completely wrong, but your cheap jab managed to convince a couple of uninformed people that what I said is worthy of a down vote.
This is GDP in current US dollars. Not in what US dollars were at the time. This is the only way to meaningfully compute GDP. Of course the choice of US dollars is arbitrary. But if you do some math you would realize that if you calculated it as GDP in current BRL you would get exactly the same curve.
But the only way to meaningfully measure GDP is to measure it against a single unchanging metric, and that's what they did here. Otherwise a country could double its GDP by simply devaluing its currency by half.
Are you sure about that? The chart is showing a growth in GDP of 21% in 2007-2008. The growth rate in 2008 was ~5%.
More importantly, it looks like it works the other way around. If you are devaluing your currency in half, your GDP in dollars (or whatever means of comparison you use) will be cut in half, not double. This is what your chart is showing. It will be a bigger number in the domestic currency, but then it doesn't mean anything because you are just changing the scale.
Anyway, we are arguing over details. The larger point is that the economic policy mandated by the IMF is still largely in place, and whenever the Brazilian government tried to increase government spending, a short growth burst was experienced with a very long bust.
Lula gave a 1001 speeches saying that "they were breaking free from the IMF", but in the end it is just political bullshit: interest rates are still high and it is the only instrument the Central Bank is able to use to keep inflation under control. This is pretty much the IMF "formula".
Update: looks like you are correct that they use current dollars. It still seems a misleading chart. Take a look at http://goo.gl/BCNIo and you can see the numbers I was mentioning.
The IMF does not exist for the well-being of (former) third world countries. It exists for the well-being of its masters, i.e. the US and Western Europe. This explains most of the policies that the IMF likes to push on developing countries.
Note that IMF-type policies of austerity can theoretically "work", if there are sufficient net exports. Even when domestic demand is savaged by austerity measures, the economy can grow by producing goods for the US and the EU at cheap prices. But net exports-led recoveries are a typical case of fallacy of composition: if there is a world-wide recession, then going for net exports will fail (unless we somehow manage to export to Mars...).
The problem facing the US and EU these days is that people seem to have forgotten that austerity was only ever a policy meant for the others.
José Serra, Fernando Henrique Cardoso's successor, actually lost the ellections not because of IMF policies was in place. Cardoso's party (PSDB) showed clear disregard for social problems - a considerable part of the population was so poor that they could barely buy any food, they didn't care about IMF, they had other basic needs.
Luiz Inácio da Silva, on the other hand, was clearly a candidate of the people, he'd go to great lenghts to assure people that his duty was to put food on the table of those very poor people, while not screwing up middle class brazilians.
So, it's not right to blame PSDB's failure on ellections on the IMF policies, it was they ignorance of the more urgent people's needs (not to talk about they selling huge state enterprises priced like bananas, corruption scandals, etc. that got people really tired of PSDB rulling the country).
Ron Paul is the only candidate in the election with a voting history to back his beliefs. He may say some crazy things, but at least he's honest, and on the up and up.
I'll take a dishonest politician who votes for the right things over an honest one who is wrong any day of the week. Paul is a nut. The fact that he's right about a handful of things doesn't mean much: stopped clock, yada yada.
I don't think that someone is a liar because they don't always vote in line with their beliefs. There are good reasons for occasionally voting for things that are not 100% inline with what your goals are for one particular issue. Sometimes compromises need to be made in one area to make progress in another.
Ron Paul is somewhat an illogical idiot.. ever hear of the 1920s crash? We got out of that situation by guess.wait for it.. debt spending in ramping up to fighting WWII..
You do forget or skip over 12 long years of massive spending and borrowing in order to try and get the economy going. Spending and borrowing that, by any objective measure, achieved very little in economic terms.
When excessive debt is the problem, no amount of spending can cure it. The debt must be paid down or written off, most likely a combination of both.
Sadly your type of thinking is pervasive because it sounds so compelling. But while nobody in their right mind runs up a credit card thinking that this will somehow make them richer, there persists a widespread belief that borrowing and spending somehow makes a country better off. It doesn't, and it won't.
If anything positive is to come out of all of this, it might be the final discrediting of borrow and spend programs created in the name of Keynes. It will hopefully be the death of the widespread belief that you can borrow or tax your way to prosperity. Perhaps someone will come up with a kindergarten rhyme to teach children not to believe in free lunches.
Not sure what your point is. The Great Depression didn't end for the U.S. until World War II had begun and the U.S. had embarked on a massive public spending program - buying weapons.
GDP rose during the war, but it felt like a depression. What good is an increase in GDP if basic foodstuffs need to be rationed and people are getting killed? The recovery actually came in the post-war boom when government spending was slashed and 5 million people left military operations and joined the civilian workforce.
No, you want lots of people to enter the workforce and be productive.
The growth happened after the government spending (ie, military) was wound down. It was the retiring servicemen and women wanting to get on with the rest of their lives that caused the productivity boom.
Really? You think that the government spending lots of money on the war is not what got us out of the Depression? Of course the boom happened after the war was over. During the war... there was a war on. All that effort was getting dropped on Europe instead of raising the standard of living in the US. People may not have had a lot material luxuries during the war, but they sure weren't unemployed.
The point is that it wasn't just us borrowing more money. We did that for 12 years with no real success. The war brought huge amounts of demand for our goods from all over the world.
No, the war brought huge amount of demand for goods from the U.S. Government, which wanted tanks and fighters and artillery shells. This demand created full employment and economic rebound - during the war. Even - gasp! - women were sucked into the labor force.
After the war, the U.S. was in a great position to supply the world, having an economy running at full steam and no war damage to repair. But the Great Depression ended as war began, due to demand for military equipment.
Yes, the economy was soaring thanks to the technology and housing boom.
You can pretend that our economy revolves around who's president and what political party system they belong to but no matter how hard you pretend it still isn't true.
Last I checked the "Bush tax cut" was a real bill, championed by one particular party, passed via a vote that went broadly along party lines, and signed by a president of that party whose administration worked hard to put his name on it. The guy in the other party, as I remember, wanted to do something like "save social security now".
Those are real policies, and they have real impact. You can pretend that they don't and that politics is all a "game", but no matter how hard you pretend it isn't true. (Sure, it's mostly a game, but at the margins it's important stuff, and not well served by bland internet cynicism).
Certainly the policies of the government in place can have an effect but for the most part that effect is not felt immediately and many times it can be years and years before any policy change ripples down to cause any type of drastic change in the economy.
Suggesting that Clinton was responsible for the takeoff of internet companies in 2000 and the housing boom is silly. He was a major beneficiary of a great economic time.
Not Clinton, but you could make a case that Gore was responsible. There is a lot of noise laughing at him for supposedly saying he created the Internet, but he did co-sponsor an important bill in 1988, and was honored with a Webby Award in 2005 for contributions to the Internet.
Don't be dense, the parties have a lot of power in the economy.
The crash of 2008? Many economists wisely point to Republican-led market deregulation, notably the repeal of Glass-Steagal in 1999, as the causes.
Considering that Democrats fight for stronger regulation and pass them (Dodd-Frank... even if that one is DOA), while Republicans fight for deregulation, it's a bit off to imply that the party has no effect on the economy.
That's a huge ideological difference and one that has significant effects on the economy, even in the short-mid term.
Many economists wisely point to Republican-led market deregulation, notably the repeal of Glass-Steagal in 1999...
Um, Gramm-Leach was supported by a majority of both Dems and Reps. Clinton signed it.
The only major dispute between the parties was over whether to make CRA compliance a precursor for banking mergers. (I.e., banks can't merge or acquire if they don't lend to enough minorities.)
As far as I know, Bush's main forays into finance were Sarbox (increasing regulation), his ill-fated attempts to more strictly regulate Fannie and Freddie, and various laws pushing more people into homeownership (again, increasing regulation). Could you point out any acts of Republican-led market deregulation, ideally from the past 10 or so years?
> Um, Gramm-Leach was supported by a majority of both Dems and Reps. Clinton signed it.
While this is true, of those who opposed it, the vast majority were Democrats. 58 Democrats opposed it, only 6 Republicans did. The Republicans also controlled both houses and wrote the legislation so they certainly deserve more blame.
Repealing Glass-Stegal set the fuse by allowing banks to flip loans into the market offloading their risk, but it was the change in the net capital rule (http://en.wikipedia.org/wiki/Net_capital_rule#The_net_capita...) in 2004 under the Bush administration that lit the match and kicked off the crisis by creating a massive amount of potential credit that led to the banks handing out loans like candy to anyone who'd take em knowing they could immediately flip the loan and pocket the profit with little risk.
Repealing Glass-Stegal set the fuse by allowing banks to flip loans into the market offloading their risk...
Glass-Steagall has nothing to do with the secondary market for mortgages. Banks were flipping loans in the early 80's. This is how Salomon Brothers became famous.
...the change in the net capital rule (http://en.wikipedia.org/wiki/Net_capital_rule#The_net_capita...) in 2004 under the Bush administration that lit the match and kicked off the crisis by creating a massive amount of potential credit that led to the banks handing out loans like candy to anyone who'd take em knowing they could immediately flip the loan and pocket the profit with little risk.
I don't think you understand what you are talking about. Flipping is always low risk, regardless of whether you mark to market or mark to model.
All the modified NCR rule would have done is allowed banks to hand out loans like candy and not flip them.
> Glass-Steagall has nothing to do with the secondary market for mortgages.
The repeal of Glass-Stegall let them flip loans to the market while their funding was FDIC insured since they were gambling with depositors money, something they didn't have access to before that. That makes flipping more attractive because you're insured by the FEDS.
The net capital rule change amplified this ability making handing them out like candy attractive; what good is a ton of credit if you don't leverage the shit out of for all you can.
> All the modified NCR rule would have done is allowed banks to hand out loans like candy and not flip them.
Which is what I said; I wasn't implying that the flipping was related to the net capital rule.
Whoa... tell that to the folks who worked at Bear Sterns and Lehman during 2007/2008. This is precisely why all of the major banks needed a bail-out. The risk models all automatically assumed that these instruments would maintain their liquidity, but when that capital dries up, it turns into a game of musical chairs.
When your business model fundamentally relies upon a liquid market for short-term credit[1], you typically end up in bankruptcy court when/if the music stops (unless of course you threaten the entire financial system and get a government bail-out).
When the institutions you rely upon for credit lose faith that you can repay your debts, you're sunk. Mark to whatever, that only matters with long-term debt.
Whoa... tell that to the folks who worked at Bear Sterns and Lehman during 2007/2008.
Bear collapsed because they held huge long bets on housing with high duration. In contrast, companies like Goldman (mostly short term strategies) survived just fine.
I agree that they have power but as I said above that power is usually not felt immediately.
My top comment comes off like I'm a big time republican and that couldn't be further from the truth. I just want to point out that the great economy that Clinton benefited from was not his creation.
I tend to agree that some of the deregulation did contribute to the crash in 2008. Some of that same deregulation also, very likely, contributed to the boom in the early 2000's.
>Yes, the economy was soaring thanks to the technology and housing boom.
The big housing boom started post-Clinton. It was intentional, to get us out of the 1999 tech crash.
Clinton benefited from the tech boom and the end of the cold war. (Bush I got hammered by the post-war transition recession, which ended before the election.)
The banks could not only have done more risky investments. Americans seem to keep forgetting that they are not the only country in the world. American bank can still invest in foreign bonds. There are other countries which also happen to have a better security rating at the moment, you know?
You could still issue treasuries. As long as we're not experiencing deflation (the Fed is supposed to target 2% inflation), there's plenty of room for the government to borrow money at negative real interest rates, which it should be happy to do even if running surpluses.
Other countries deal with surpluses with sovereign wealth or rainy day funds, but you could just as easily envision rebating a surplus as fully-refundable tax credit "dividends".
The Fed is doing a miserable job of targeting 2% inflation if it's supposed to do that. Even in the face of a week economy and so forth, it's barely managing to hit 1.5% for inflation expectations.
Then again, they don't actually have an official inflation target, so...
I see no reason the Fed wouldn't go for outright deflation if they thought they could get away with it. They seem to be really happy with their current tight money policy. :(
I don't know where this 1.5% inflation figure is coming from. I am seeing a 10-40% (or more) increase in food prices when shopping for groceries. Bottle of hydrogen peroxide used to cost $1.69 a year ago, now costs 2 dollars. I don't belive this 1.5% figure, it does not match what I observed.
Think about it, how could it be that it is only 1.5% inflation when the size of the money supply is doubled or tripled?
It's a little more complicated than that. For one thing, people use the word "inflation" to mean two different (but somewhat related) things. When you or I say "inflation" what we really mean is an increase in the cost of living. But even beyond that everyone has a different cost of living - I bought a house this year, and I paid about half what I would have paid three years ago. When the government reports CPI this is part of the calculation.
For the Fed, "inflation" means an increase in the overall money supply. You get an increase in the money supply when people borrow money, and you get a decrease in the money supply when people pay off (or default) on loans. In a macro-economic sense we've been going through a period of pretty severe deflation since the housing market crashed, which is why the Fed is desperately pumping money into circulation. For all the gory details see here:
Actually, house prices are not factored into the CPI per se. The CPI is based on a basket of goods for an urban consumer who rents (so does include rent). If you don't fit that profile, the CPI may well not have much applicability to you....
Aslo, the Fed is not desperately pumping money into circulation. For example, they're paying interest on reserves (that is, paying banks to park money in accounts at the Fed). If they were trying to get money into circulation, the wouldn't be doing that, or would even be charging interest on excess reserves. Both policies have been used by central banks in the past; in fact the Fed didn't use to pay interest on reserves until the recent bank crisis started.
> I don't know where this 1.5% inflation figure is coming
> from.
For inflation expectations? TIPS spreads.
The actual inflation rate is determined based on a basket of goods, which may or may not match your consumption patterns. Of course things get complicated by substitution effects, hedonic adjustments, etc. I don't know that I believe the official number any more than you do. But the fact is that the official number is what the Fed is supposed to target.
Note that groceries are explicitly excluded from "core" inflation calculations in the US because they're subject to severe supply shocks which have nothing to do with the value of money or inflation, by the way.
> how could it be that it is only 1.5% inflation when the
> size of the money supply is doubled or tripled?
Trivially, if everyone keeps their money under a mattress. We're not quite that bad, but not much better off right now, either.
The "amount" of money is the total outstanding dollars multiplied by the number of times it changes hands (the "speed"). When the economy slows down, the government borrows money and spends it on stimulus, where they hope it will circulate, changing hands as many times as possible.
> By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD.
Depends on what you mean by paying off the debt. If you pay off the debt by just issuing a sufficiently large amount of reserves at the Fed to do so, then yes, I would agree. Then you just transform one form of government liability (treasury bonds) into another form of government liability (reserves). No problem there.
But if you're actually talking about eliminating net government liabilities, you're missing the point. Here's why:
Individuals in the private sector want to accumulate net financial assets, if only to save for retirement. Every financial asset is somebody else's corresponding financial liability.
But retirement funds & co. are huge. Who is going to incur the necessary net financial liabilities to correspond to them? Private entities? Why would we allow private entities to run up that much debt? Also, with private entities you always have the problem that people might change their mind about their credit-worthiness.
The federal government, on the other hand, is at the top of the pyramid of liabilities (see e.g. here: http://neweconomicperspectives.blogspot.com/2011/09/mmp-blog...), and they can easily incur and sustain the required net financial liabilities to allow the private sector to save in net financial assets.
So government liabilities play an important role in the stability of the financial system.
If you run down the federal debt, you end up in a situation like the Eurozone, where the entity at the top of the pyramid of liability (i.e. the ECB) does not incur sufficient liabilities (and in fact, does not have the mandate to do so, for good reason) to support a stable financial system. The debt crisis is a direct result of this flawed setup, and you would be wise to avoid copying it in the US.
Take a close look at the graph. The debt starts going down for 3 years (at the peak of the market) and they make the assumption that that's going to keep happening for the next 14 years? Yay for gov't estimates.
Second, I think the fact that the market crashed in 2000 might have a little something to do with gov't deficits as well.
Total US debt (in dollars, not as a fraction of GDP, which is a horrible measure) increased every year through Clinton (and basically everyone else in modern history).
Is it more useful to talk about "Total US debt" than "US government debt"? When I first read your comment, I thought you were making the point that the article was misleading because it was using a fraction of GDP as a measure, when it in fact the main feature graph is measured in trillions of dollars.
To a lay reader like myself, it would easily lead to confusion if people talk about different numbers without making the distinction clear. Is there a well known relationship between government debt and private debt? Or is talking up Total US Debt just a distraction from the article, which talks about Government Debt?
I wasn't recommending holding the trade deficit constant, I was isolating the relationship between public and private savings. And if I ever say "all other things being equal," I'm not actually recommending that all other things be made equal.
Nominal debt seems like a pretty horrible measure. By that measure, Greece is much better off than the U.S., because its debt is a fraction of the size. Of course, it also has a smaller population and a smaller GDP--- exactly why it makes sense to report debt at least normalized by population, and probably, better, by GDP.
The nominal value of the debt is not a good measure because it disregards the fact that the value of a single unit (the dollar) changes over time, and doesn't reflect the difficulty in paying it off (i.e. % of national GDP).
It's also a bit of apples-and-oranges when you compare the nominal debt of one country with another without looking at the differences in GDP between the countries, i.e. the size of each country's economy.
Because we can increase GDP (via public spending, yay!) and make our debt situation look like it's improving. Look, nominal total debt may not be perfect either, but saying Clinton reduced debt is factually wrong. In every year, we spent more than we had. Debt increased. They all do it.
The debt dollar is a horrible instrument that will not end well. We may be decades off, but it's gonna be ugly.
The nominal value of public debt is an unreliable measure. Ireland's national debt was €30bn in 1987 and €36bn in 2002. But in the same period it went from around 128% of GDP to 32% of GDP.
The Gingrich Congress, not Clinton, controlled spending and gets most of the credit for the improved budget situation. That plus tax revenue from a massive tech bubble.
Spending increased more slowly from 92-94 before the Gingrich congress came to power, than it ever did afterwards. And Clinton didn't have to shut down the government to do it.
Clinton never shut the government down. Clinton did not have the power to shut it down. Why are you changing history? I don't understand why people do that.
The congress passed continuing resolutions that would have kept the government running. President Clinton vetoed the resolutions, so there was no money for operations. That caused major portions of the government to shut down. unless you are really trying to parse the words, I'm not sure why it isn't fair to say Clinton shut the government down.
The basic premise of this article is suspect. The US would still issue enough T-Bills to provide stability even in a zero-debt scenario... it would simply buy other safe, long-term assets to hold.
If, for example, the US were borrowing money at 3% by issuing T-Bills, it would just buy a basket of high-grade foreign and corporate debt at 3.5% and earn a spread of 0.5% while continuing to provide adequate liquidity of T-Bills.
Australia faced the same issue over the period 2006-2009 when the national debt became a surplus. The bond market didn't implode as this article would predict. Rather the govt simply continued to issued bonds and bought other assets to keep the market alive.
The bond market actually did very well - in 1998 there was approx $167BB of govt debt issued while in 2008 there was $480BB.
>The basic premise of this article is suspect. The US would still issue enough T-Bills to provide stability even in a zero-debt scenario... it would simply buy other safe, long-term assets to hold.
The US has no reason to issue T-Bills in a zero-debt scenario, through. The only reason that the US government has to sell bonds like T-Bills is to make up for the difference between income(taxes and fees) and costs. If the budget is completely balanced, there is no reason for the government to sell off bonds of any form, since they would need to pay them off with interest at a later date.
True, but if you had zero debt it might well be appropriate to issue some. for example, suppose you want to build a vast new infrastructure project; it may make more sense to borrow to do so if the cost of capital is lower than the opportunity cost of waiting for the money to accumulate.
You're right. State and city-level governments do bond sales for this exact reason.
However, I was assuming that the size(and budget) of the federal government is large enough that if it were completely balanced, and all debt was paid off, they would have enough surplus cash(or the ability to redirect funds) to invest in a large-scale project like that. Short of another world war, I don't think that there are really any projects that would absolutely require this kind of immediate investment by the public.
To lift a line from one of last year's best films: You mustn't be afraid to dream a bit bigger, darling.
You can always go bigger, and in such an incredibly desirable position as you describe, the potential economic feedback loop from going even further with investment in infrastructure and public services is too big to ignore.
Imagine an alternate universe in which there is still a Glass-Steagall act, the Bush tax cuts were never passed, the Afghanistan and Iraq wars were never started, the financial crisis was limited to a few isolated dominoes, and the US is on track to pay off its sovereign debt completely by 2016. We could build a competent, national network of high speed rail without borrowing anything. Or, we could borrow again and build a world-class rail network, invest heavily in education, transform the nation's healthcare system, revitalize NASA... There is always room for more investment.
Also, this is a really depressing fantasy to return from.
That's a fantasy which could never have come to pass in any universe. The only reason the budget was in surplus (technically) is the economy was so white hot revenue was coming in faster than Congress had anticipated. As soon as this was apparent, our legislators were falling all over themselves to spend money on their pet pork projects.
We would have ended up in the hole anyway, since the revenue burst was bubble induced and destined to go down. But even if that wasn't true they would never have allowed the surplus to continue.
Even then it was imaginary, because the growth in Social Security and Medicare spending was always going to outstrip revenue under the rosiest of scenarios.
But by doing that, you have an inherit risk of potentially getting a worse return than the bonds you issued. The government shouldn't be in the investment management industry. They already have enough issues trying to manage the country.
Ask the people that bought gold in the late 70s how safe their investments were. Gold prices crashed in 1981 and never rebounded until the gold bugs returned in the mid-2000s.
Commodities and currencies fluctuate against each other. Over longer terms, the value of currencies tends towards zero. Everything depends on the time frame you are looking at.
Dollars originally were redeemable in gold. But because of inflation of the money supply (i.e. creating more dollars) the US didn't have enough gold to pay their outstanding debt (i.e. the dollars out there being held by other countries).
So Nixon was forced to sever the dollar's tie with gold in 1971. At that point the dollar is a fully flexible (or fiat) currency.
Look at the price of gold in that chart since 1971.
That's not the value of gold going up. It's the value of the dollar going down.
Gold supply is relatively stable. It takes investment and time to mine new gold, so only a small amount is introduced into the economy each year.
New dollars are added to the economy at a terrifying rate. Every fiat currency in the history of mankind has always gone to zero.
It could, but fun fact: The US dollar is also a US government liability. (Technically, it is usually listed as a liability of the Fed, but since the Fed is part of the government, that's really just a smokescreen.)
So you would be exchanging one liability of the government for another one. If you are so blasé about high levels of outstanding government liabilities in the form of cash (imagine the amount of physical bills that would have to be printed! ;-) ), then why not just stick with what works today, namely high levels of outstanding government liabilities in the form of debt?
I don't want to pick on you specifically, but man would those discussions on HN be more fruitful if people were aware of basic facts in macro-economic accounting.
Australia paid off all of it's federal public debt in the mid-2000's. By 2007 the Federal government had no net debt. That is - the net position of the governement (savings-debt) was zero.
This didn't mean that there were no securities on issue - the need for an active market in government debt meant that there were still securities outstanding, but these were offset by liquid assets that could be sold to buy back the debt if necessary. I don't know what the surplus money was invested in, but one of the leftovers from that period is a 'Future Fund' which is a very large pool of investment funds held in trust for the future pension needs of the public service. That is - the money was separated out from the general revenue pit and put aside to pay out the retirement benefits of the people employed by the government itself. I do know that this fund is a diversified fund like any other, and invests in different styles and classes of securities.
Of course, a change in government since that period and a drop in revenues from the financial crisis means this is no longer the case. But for that brief period it was a very good place to be - income tax rates were going down every single year and the economy had an unbroken 13 year period of real growth in wages and productivity.
You don't need public debt to function properly. Australia is a perfect example of this. In fact, a lack of public debt is a good thing as it allows a government to either return taxes via lowering tax rates, or invest the surplus for the inevitable rainy day, or, to build productive infrastructure if that is what they choose to do.
I think that's great for Australia but isn't the central question what would happen without US public debt? Australian public debt isn't a pillar of the world economy.
If you'd read it properly, you'd notice that Australia kept a pool of debt-in-name-only turning over to serve local financial market needs. About 100 billion AUD IIRC, or ~10% of GDP at the time. The money raised through those particular bonds was never used. It just came in, sat around for a while, and went back out with a very small interest payment attached.
The US could have done the same and I understand that is what this "secret report" recommended.
Economies would adapt - they always have, they always will. Bubbles and tiger economies existed before the US was even a whiff of a dream. It's not like the US is $14T in debt in 2011 and in 2012 it'd be $0T in debt - repayment would take a long time, ample to examine effects and counter where needed.
The money supply, ie. the amount of money in existence, fluctuates. Obviously, paper money is only a small fraction of the total amount of money "stored" in checking acccounts, etc. Money is created through debt. If nobody is in debt, the amount of money in circulation is much lower otherwise.
Does anyone know how much of the money supply is government debt?
I always get dizzy when I try to understand the monetary system. It seems insane. It really shouldn't work at all.
Government debt and fractional reserve banking are two totally unrelated concepts. The latter is what increases money in circulation. Government debt only increases the debt instruments in circulation. Debt instruments, as far as I know, cannot be used to meet reserve requirements.
China, however, has a currency which is pegged to the dollar and backed by the US treasury. As a result, our government debt increases their money supply.
Well, obviously they're not totally unrelated, but I agree they are orthogonal. However, I was asking an honest question, how much of the money generated through fractional reserve banking is public debt? Ie. what's the ratio private/public debt?
MMT has resurged recently in large part due to the evangelizing efforts of Warren Mosler. One of his intros to MMT for the layperson is "7 Deadly Innocent Frauds". For a counterpoint, here is a comprehensive refutation of 7DIF: http://conant.economicpolicyjournal.com/2010/10/refutation-o...
Haven't heard about Warren Mossler before, but yeah, he does seem pretty important figure in MMT circles.
But this so called refutation seems to be totally missing the point. No wonder - it's coming from Austrian. This is like asking Aristotelian about General Relativity. They're Universe apart.
Well, this is yet more evidence, as if anyone needed it, that budgeting for a sovereign nation -- particularly one whose economy the world revolves around -- is qualitatively different from budgeting for a household.
I don't find the assertion that "this would be bad" to be evidence that it would be bad.
Some questions: Would it be bad for a person to be debt free? A household? A neighborhood? A small company? A large company? A city? A state? A small country? A large country?
Why is it good for companies and people to be debt-free, but bad for countries?
Well, the assertion of the report in the main article is that, in essence, the economy revolves around debt, in one form or another. Remember, debt and investment are two sides of the same coin: you can't invest in something without someone else ultimately owing you money (i.e., being in your debt). And U.S. treasury bills are an investment/debt instrument that's hugely important to a lot of people and institutions, particularly the financial institutions that form the base for most of the economy.
Another way to look at it is that it's not just government debt that's important; there have to be some people who owe other people money or the economy doesn't function. The normal process of business institution-building is founded on the idea of loaning money (again, we usually call this "investment," but it's debt at its base). A good way to think about it is that if you are debt free, that's good for you, but if everyone were debt free, we'd still be living in an incredibly primitive economy.
As a private citizen no debt is generally the right way to go, but not always. It really depends on each situation.
A great example is buying a house. If you have the cash for the house that's great, but do you want want to tie up that much money into a single asset especially when the cost of money is so low right now? Other investments might not be that great today, but over the next 15 or 30 years you can probably find an investment that beats the current low rates of 3.75% or below.
The reason why buying a house is considered a good "investement" is because the government/federal reserve keeps creating more money and devaluing the dollar. Under such conditions, the person who borrows a lot of money now will do well. Homes are convenient for this because there is a lot of infrastructure/expertise in place to make this happen (mortgage industry), but the purchase of any large, permanent asset will work.
When you buy a house on credit now, you're spending newly created money. You're purchasing a large asset at current prices (which are set by the current money supply.) As the new money you've injected into the economy circulates, prices rise. But you had the advantage of buying before you injected the new money.
If money were not continually being created, eg if it were backed by gold, then prices would drop over time, because the rate of innovation and productivity gains is greater than the rate of new production of gold. In this scenario, houses should depreciate over time.
Have you ever heard the theory that a little debt is a good thing?
With businesses, investing borrowed money can help the company grow, and give returns greater than the interest on the debt.
With countries, the theory goes, a little debt means other countries have a vested interest in your success or failure. For example, why hasn't China invaded the USA yet? Perhaps they are waiting until they get their ~$4T back! :)
Well for starters, the Chinese don't seem to really be in the business of invading countries on the opposite side of the world, do they? Unlike another little country I can think of...
For example, why hasn't China invaded the USA yet? Perhaps they are waiting until they get their ~$4T back! :)
theoretically it is fairly easy to repay those $4T. you would need some large container ship to transport all of them back to China, but a lot of those go back over Pacific fairly empty anyway.
I think that should make you think about how there is a systemic failure in the global monetary system.
Many crazies advocate abolishing the Fed as they see it enslaving and controlling the entire economy without much supervision and control by the citizens of this country. Not saying they are completely right or anything, but it this is basically a warning or a symptom that something is perhaps fundamentally wrong (I sure don't know well enough how it works, it is just a feeling).
Think of it as what would the drug companies do if all of the sudden there were cheap easy un-patent-able cures for all the chronic diseases. Would they start selling herbal supplements? Go into homeopathy business? Would they invent more 'restless leg syndromes' type diseases. I think it is a bit like that. It shows perhaps there is something wrong with the system & the constraints and incentive are not working they way we'd expect.
I used to work as a technologist in a sleep lab. 'restless leg syndrome' is not some disease to shill drugs. It fucks people up quite badly by preventing them from sleeping properly.
Whether it was either just enough to stop them from getting to the deeper, restorative levels of sleep, or bad enough that they had to get out of bed and walk around for a couple of hours, restless leg syndrome is a clear blight on quality of life. Sure, it may not be fatal (except where increased tiredness is generally), but it's still a significant health issue to be afflicted by.
Hmm interesting. I understood it to be a made-up disease so people can 'talk to their doctors about it' and pay for medications. Basically pharma companies drumming up business by inventing diseases. How common is it? I had _never_ heard of it. I heard of heart disease, cancer, other things, I have plenty of doctors and nurses in my family. Never heard of RLS, until I started seeing commercials about.
Also wouldn't you working in a sleep clinic skew your perspective on how widespread the thing is? In other words you would only see people who have problems sleeping.
Sleep medicine is an extremely young field, beginning in earnest only in the 80s and 90s. It's not surprising that folks haven't heard of sleep disorders. Go back 10 years and ask if people had heard of sleep apnoea and you'll get a lot of puzzled looks too.
Also, I didn't say anything about how widespread it was - I said it fucked people up and it's not a pseudodisease.
It's not to say that there aren't overprescription issues, just don't fall into the Prozac trap - just because something's overprescribed doesn't mean there isn't a real disease around.
From what I and my fiance (pharmacist) have been able to gather about it, RLS only seems to occur in people taking a specific heart medication. So they (Merck I believe) made another drug to treat their own side effects.
Good to know. The correlation seemed very strong, so I'm glad to know it's not all just a result of this drug. She came to the conclusion after she noticed every single customer that came in for RLS medicine was taking this other Merck medication. Not proof, but it was there.
I am not trying to say if it would be right, wrong or would fix things, because I don't know. But usually though people who advocate it are into conspiratorial stuff. Maybe more sane people advocate it as well, it is just how I remember hearing it more from.
I'm not a crazy and I advocate the abolishment of the fed. People claim we need them as "a lender of last resort" and then they rally against bailouts. People don't realize that practicing the "last resort" lending is a bailout!
Also, Cantillon effects messing up the economy, putting more wealth in the hands of banking elite, growing the size of government, etc... are other problems made possible by central banking.
> why it's good to have a global economic system that is at great risk if the United States gets rid of it's debt
The banking industry makes money when it issues loans. So it's very important that people keep borrowing. To keep people borrowing from the banks and not from each other or private savings, the banks are allowed to create money and lend it at below-market rates. So in general, it's always a better deal for a borrower to borrow from a bank than from private savings.
The current system is great for bankers, great for government (who can essentially get all the money it wants from the bankers), and great for borrowers. It's bad for people who don't borrow, especially savers.
God forbid nobody could get rich simply by having a lot of money. If that were the case, people might have to actually provide society with a valuable product or service to earn a living!
Exactly. There's no global police force that comes to foreclose on your country when your debt hits a certain level. What happens is that when people have doubts about your ability to pay your debts on time (relative to other investment options,) you have to pay a higher interest rate.
An interesting read, but disquieting since it's mostly speculation and opinion without any real data or any models of debt and the dependencies of the economy on debt. And white papers of this sort appear to be the basis of policy decisions with far-reaching consequences.
Welcome to economics. Trying to model real, functioning economies is a lot like trying to model natural language. We think we understand a lot about it, but there is a level at which we really don't know what's going on. And it doesn't help there _everyone_ involved in an economy is not only willing, but eager to game it.
Economics could (and should) be much more of an engineering science than it is. The math and theories are rather beautiful, but do not have much to do with the real non-linear chaotic world in which we live. For some reason, no one expects that economic theory be predictive in the same sense that we expect of theories in the physical sciences.
It seems to me that a bit of data and a little bit of modeling would have greatly improved the opinion piece this document describes.
It _can't_ be totally an engineering field anymore than language communication can. Trade and marketing are not about maximizing profits or reducing costs, though those are important aspects. It's as much politics and power and sex and violence as it is anything to do with prices and shipping costs. No matter how "good" your models are, people will get funny ideas in their heads and do something completely unexpected.
When Asimov posited his Pyschohistory in the Foundation books he indicated that it could only be statistically useful on populations measured in the _trillions_. And even then it could only work if the methodology were kept absolutely secret from everyone in the modeled society.
What passes today as economic analysis is, in truth, modeling in which the assumptions and the data are implicit and only the conclusions are expressed. Moreover, projections are frequently based upon simple extrapolation of a constructed macroeconomic indicator and rather than exploring the underlying structure. It seems to me that "politics and power and sex and violence" and resource depletion,innovation, FUD, and all the rest is amenable to modeling and that a composite economic model based on systematic analysis is likely to better reflect reality than the process used now.
Asimov's Foundation Series books are enlightened works of science fiction, but they are fiction, not fact. I find is strange that you cite them as if they were seminal works in societal modeling.
I said Asimov "posited", which seems pretty clear to me. FWIW, Asimov has a certain cachet these days among some Keynesian economists.
When you are able to usefully, and predictively model "politics and power and sex and violence" then you will be doing extraordinary work and I'll look forward to you getting your well deserved Nobel Prize. :)
This sort of makes no sense. The Province of Alberta (in Canada) balanced their budget, then paid off all debt in the early 2000s.
They still had the ability to issue debt (and did) because it was the belief that they were a good credit risk that was the reason behind the AAA rating.
It's the difference of knowing what a dollar is worth. Imagine if the US devalued the dollar and paid off their debts immediately with some other currency. All of those bondholders would be mightily pissed. Because their bonds are worth pennies.
Provinces and smaller countries can't do this. The value of their bonds will always be compared to the dollar (unless another currency becomes the standard).
I read the article thinking it was about the following idea, the principle is almost the same, just it's about govt debt not personal debt.
It would of course be too outrageous for most polticians but here's a thing:
When the UK govt bailed out the banks they spent 500billion. The outstanding mortgage debt of everyone in the country at the time was 368billion.
Whilst I know there are many people without mortgages (because they rent) the knock on effect of paying off all the oustanding mortgages instead of recapitalising banks would have done some amazing things: it would have given the whole economy an enormous payrise which would have had an immediate positive effect on high-street retail.
Also because people would not immediately spend all of their new found money it would have gone into savings: recapitalised the banks indirectly. They were always using everyone's savings anyway.
It would have resolved the thing that caused the crisis: that being risky mortgage debt on the banks books. No more mortgage debt, no more unstable banks.
Lastly and probably most importantly, it would have allowed govts to raise taxes to refill their coffers because absolutely nobody would notice, and probably nobody would even care.
"What do you do with the money that comes out of people's paychecks for Social Security? Now, a lot of that money gets invested in –- you guessed it — Treasury bonds. If there are no Treasury bonds, what do you invest it in? Stocks?"
So why couldn't we buy other sovereign debt --obviously stable/safe. It's not as though we're the only ones with debt or safe debt. I don't imagine Germany or Japan or France defaulting.
This part of the article got it wrong. SS money is spent, it is not invested. The SS Trust Fund gets an IOU but there's no asset backing it. That's different from a Treasury bond, which is a real financial asset that is tradeable and marketable.
Also, the US wasn't really running a true surplus, it was still borrowing from SS during this period. The feds use SS to mask the true size of the deficit, and it was only by this phony accounting that the budget was "balanced".
Didn't I read recently that treasury or someone similar basically admitted that Social Security isn't asset backed? That it's a case of funds-in, funds-out?
I know the republican guy got hounded for his 'ponzi scheme' comment but there is an element of truth in that hyperbole. Without new workers contributing SS payments, the recipients wouldn't have anything coming in. So it's not a ponzi scheme as such, but it's certainly not an investment fund either.
That's correct. The Social Security "trust fund" is really just an accounting fiction. Most of the money paid in SS taxes always went right back out to recipients. For awhile the government was collecting more than it was paying out (for demographic reasons) and the surplus was borrowed by the government. But I believe at this point the program has a negative cash flow, so the government will have to issue new bonds to pay off the bonds in the "trust fund".
It's really a lot like your right pocket borrowing from your left pocket.
Linkbait title from NPR. It's clearly not a secret government report, since if it was then it couldn't have been obtained via a FOI request.
It is a genuine concern, though, what would happen if US Treasury Bonds ceased to exist. There's a good argument to be made for the US not completely paying off its debts.
Well, the word secret has multiple meanings. I think it's fair to call this a secret memo, in a fairly broad sense of secret. But I agree that it's misleading, since secret has an additional sense specific to government documents.
This is the most ridiculous idea I have ever heard of. It was probably a project for fun within some circles, that would be all. Here's the reason. US empire like many of her predecessors taxed her subjects. However unlike any other empire in history US has been able to tax her subjects indirectly. When I say subject I do not mean US citizens living within the borders in Northern America, but I mean anyone who carries US dollar bill in his pocket, does trade with US dollar terms and especially buy US treasury bills. These subjects literally subsidize US economy doing just that. Even if US could be able to pay off its debt they would not have stopped issuing loans, why would one want to stop influx of easy money. By creating inflation of money (a.k.a. printing money) US will always be able to pay her debt with lesser value. Same amount but less value.
"What do you do with the money that comes out of people's paychecks for Social Security? Now, a lot of that money gets invested in –- you guessed it — Treasury bonds. If there are no Treasury bonds, what do you invest it in? Stocks?"
Perhaps this is a ridiculous question, I admit I haven't taken a lot of econ. But couldn't they just take the money that comes out of people's paychecks and, you know, keep it? I know that treasury bonds have a very slight overall interest rate, but that interest is paid by tax payers anyway, so if I'm not mistaken it's a net gain of zero.
Former budget staffer here-- this part of the article is factually incorrect.
The government borrows SS taxes but spends the money, and provides a Treasury IOU to the Trust Fund. That IOU is not traded and is unrelated to the Treasury bond market in every way.
I don't know much about the bond market but is a Treasury IOU in the sense you mention really much different than a Treasury bond? I suppose the ability to reneg on the IOU without disrupting the bond market would be a difference. Provided this is true. That is, if the Treasury does not pay the IOU to the Social Security wouldn't there be a repercussion in the bond market? I don't see how a Treasury IOU would be different than a Treasury bond.
Your confusion is based on the fact that there's no such thing as a "Treasury IOU." It's a made-up prejudicial term to trivialize the Treasury bonds held by Social Security, used by people who argue that SS is insolvent.
If the US government selectively defaulted on the Treasury bonds held by Social Security, would there be repercussions on the bond market? I don't know. It depends on whether you would continue to loan money to someone who was stealing from their children's piggy bank to pay off their bills. Maybe, if every other option for storing money was worse. What it would absolutely be was a theft of funds disproportionally levied from low income people to give as a gift to all other bondholders.
Treasury bonds can be sold on the open market. "Treasury IOU"s cannot be sold. SS money just goes into the general fund. SS deductions are just a plain ol' tax.
That's just a meaningless assertion. SS money doesn't just go into the general fund, bonds are issued. That's what the entire discussion was about. When you buy bonds, the money goes into the general fund, too. Is buying bonds a "plain ol' tax?"
Whether something is marketable is meaningful. US bonds are traded on an open market. The securities issued to the SSA cannot be sold on this market or to anyone.
If APPL issued me a promised to pay me back for pizza last night I have... a promise. But if they issue me a bond I could turn around and sell it the next day, depending on whether I trusted APPL or had better uses for my money.
The securities issued to the SSA are functionally equivalent to "IOU"s.
> Is buying bonds a "plain ol' tax?"
The SSA has tons of assets, in non-marketable bonds. What's the point of an asset that can't be sold? It's just an accounting detail. If the bonds never existed the situation would not be functionally different.
I didn't know the difference between an IOU and a bond is that IOUs can't be sold. I'll need a reference to IOU law for that, because I always thought that they only existed as a talking point from the Heritage Foundation dating from somewhere around the beginning of the Bush administration.
edit: You know what functions of government don't hold any bonds? Almost all of them. Are the roads a pyramid scheme? Is all government a pyramid scheme? I still find it tough to believe that there's a group of people who say that:
1. Because the government can selectively default on the bonds held by Social Security if it votes to selectively default on the bonds held by Social Security.
2. Therefore, Social Security is an unsustainable pyramid scheme,
3. Therefore, the government should default on the bonds held by Social Security.
The government can also selectively default on the bonds held by me personally, or by China, or by anyone not named Todd. I can also collect their shares of the rent from all of my roommates, deposit it into my general fund at the bank, spend all the money on crack, then set the house on fire. The point of view of the "IOU" people is that my roommates should vote for me to do that, because once the money was in my bank account it transformed into whimsy and unicorns and at least the commitment to the crack binge and imminent homelessness gives them the certainty to plan for the future.
If the government is defaulting on any bonds, as an American, you have more to worry about than your retirement, namely roving bands of cannibals in the street and nuclear fallout, or that the Peter Peterson Foundation has finally taken back the White House.
I don't think Republicans are evil. I think people who make arguments that rely on renaming something that already has a name, then rely on the connotations carried with that new name to imply that which is to be proven are misguided. I feel I've responded to everything you've said.
None of what I said was intended to imply that Social Security will exist next year. There is a resurgent philosophical contagion that intends to whittle away all government functions until it is purely a police force to protect private property. They could easily succeed.
Why pay off all the debt? What are we saving our credit for? Of course the burden can rise so high that it is prohibitive to growth, but in general credit exists to be used.
But for cashflow. There are investments that need to be made that are beyond the bounds of money on hand, not to mention that even if you can afford to pay up front you might deplete your ability to continue other programs services. This is why we have housing loans, credit cards, and car loans. This is commercial paper. this is national debt.
Well, sure. But the reason we don't have "money on hand" to pay for anything is we're servicing all the debt we racked up in previous years.
Over the long term people who pay off their credit cards every month are in a better cash flow position, which is why I laugh when people say they need cards to maintain their standard of living. Countries are no different.
Now, if you're making an investment sometimes it's worth borrowing money. Businesses do that all the time. Governments do it too, but only very rarely, and they usually end up spending far more past the point of diminishing returns.
And if all of us stopped using credit cards, the credit industry would fail to catastrophic effect. Support your credit card company by going into massive debt. It's for the economy.
I'm not sure why you got voted down for that - perhaps because you just wrote things as if they were stupid slogans. Since what you write is true (well, except you neglect to mention the difference in maturity and interest rate between US$ and Treasuries), let me elaborate.
Both US$ paper bills and US Treasury Bonds are liabilities of the government (where I consider the Fed as part of the government for obvious reasons). I use liabilities in an accounting sense, but you really need the basics of accounting down solidly to understand the monetary system.
Another term for liabilities is debt. So when you have a 1$ bill, the government "owes" you something. Here's where things get a bit confusing, because what exactly does it mean that the government "owes" you 1$?
Well, they have to extinguish the liability in the agreed-upon way. Usually, you extinguish a liability by moving a corresponding asset that is on the same level or higher up in the pyramid of liabilities (see here: http://neweconomicperspectives.blogspot.com/2011/09/mmp-blog...). When I owe you something, I extinguish my liability to you by giving you paper money.
But the government is at the top of the pyramid, so their liabilities can only ever be transformed into either another form (exchanging cash for bonds or reserves or vice versa) or they can be extinguished when you pay taxes.
That takes some getting used to, but nobody said economics was always intuitive.
Anyway money is just a tool to keep the populus occupied. And since without problems or debt there would be no need for governments and banksters, they shall exist to create problems(government) and debt(money) and therefore assure they survival.
By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD. Just set the risk free return to zero and you can use all of your old formulas. Yes several bank departments would not be able to make money for absolutely zero risk as they do now. Oh well, I suppose the banks would have to do what they are supposed to do, i.e., calculate risk properly.
But of course it is all academic now. Because it is unlikely to ever happen. Paying off the debt means doing something to help the future generations of Americans and it is doubtful any president would do such a thing, and if he did he would probably have to face a lot of angry voters who do not give a shit about the future generations as happened with Al Gore.