It came down for 37 year, then the national debt went out-of-control the year the supply siders’ took power. Are we trapped between national debt and recession. The patriots of World War II showed us the way.

Category: Video

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

49 Responses to “Supply Side National Debt”

  1. MayorQuimby says:

    Fallacious nonsense.

    If we knew we were going to nominally increase GDP 100 percent or at least, if there was a high probability of doing so, we can certainy ram up spending and get out of this mess.

    But that’s NOT what Krugman and others suggest. They suggest ramping spending without ANY plan whatsoever. Since WW3 is not coming anytime soon, where oh where are we going to get a nominal increase sufficient to handle enormous spending increases of ten or more trillion dollars?!

    All we will do is race towards default.

    So while the republicans might deserve more of the fiscal blame, ramping spending is not only going to fail but fail miserably.

  2. lunartop says:

    Interesting but it misses the point. It’s not the level of government debt that is the problem its the level of private debt. That of course brought about by a banking system that is incentivised to create unsustainable levels of private debt without regard for how it is used.

  3. MayorQuimby says:

    The point is the level of underlying real economic growth off of which everything runs. Insufficient growth + exponentially growing debt = default.

  4. CTB says:

    MayorQuimby, are you supposing that the ratio of debt/GDP somehow does not take into account real economic growth?
    Or, do facts get in the way of your articles of faith?

  5. MayorQuimby says:

    That makes no sense. Debt to gdp is debt to gdp. Please explain yourself.

    Debt can be incurred only if it can be paid back over time. You can’t take on a $100,000 loan with 0$ in salary right?

    So let’s go one step further. We cannot incur $10 Trillion of debt unless we are supposing we can have $10 Trillion plus interest in GDP. Obvious, but it would seem you and others suggest we incur the debt and then…

    …JUST FIGURE IT OUT!

    How American. And it has worked in the past because the economic capacity to service debt ie the real economy was growing by leaps and bounds. But we are peaking nominally and even if we are not, there is no way we are going to repeat the last 65 years.

    But you suggest we incur record amounts of debt with absolutely NO PLAN as to how to pay them back.

    In WWII, it was much simpler as war is the most stimulative economic mechanism out there. But there is no major war now. We can’t even get a minor one started.

    So…you are suggesting we take the maxed out credit card, and then add a second one and can somehow get the bond market to sit by and absorb all that inflation with negative real rates.

    It is insanity.

    Another $10 Trillion in debt would push rates past 6% – 8% if not higher. We’re paying $400 billion in interest this year alone with 2% – 3% rates. Rates screaming higher would mean we are essentially borrowing trillions to pay people trillions to do nothing (Social, Medicaid, pensions etc.).

    The whole system is a giant dollar dilutive, anti-productive house of cards and it will collapse to nearly zero in a matter of a couple of years if anything along these lines is tried.

  6. Moss says:

    Capitalism is not self sufficient. It needs more.. More credit, more consumption, more spending more resources to ‘grow’. The Malinvestment fostered by debt, both private and public is now what we are left with. The problem is that the politico-banking aristocracy is loath to allow the true value of these ‘assets’ on the banksters books to reach equilibrium. This would hurt the top percentile who also happen to be the main constituents of the political class.

    Bush Sr. was correct about Supply Side doctrine. The chart simply proves that.

  7. MayorQuimby says:

    Moss-

    You are really sidestepping the very basic issue here. We overspent as if our gdp was going to grow exponentially in perpetuity! That’s all there is to it really.

  8. paulie46 says:

    @MayorQuimby said…

    “That makes no sense. Debt to gdp is debt to gdp”
    Debt to GDP as a measure makes no sense – debt is a stock, GDP is a flow. They are unrelated.

    “Debt can be incurred only if it can be paid back over time. You can’t take on a $100,000 loan with 0$ in salary right?”
    The American worker earns $15 Trillion per year. How much can we afford to borrow having that much income?

    “But you suggest we incur record amounts of debt with absolutely NO PLAN as to how to pay them back.”
    The National Debt is in Treasuries, assets that are cash equivalents. They were exchanged for assets that were cash. In many cases Treasuries are worth more than cash (they earn interest and are risk-free).
    There is no payment schedule, only interest payments and interest rates are set by the Fed, period. See Japan for example, where their “debt” is way greater than ours and they are able to “finance” it at 1%. Why aren’t they paying 6% to 8%?

    The National Debt is the amount of money to the penny that the federal government has created since it began creating dollars. It includes all of the dollars held by the public plus all of the dollars held by foreign companies that have done business with the U.S. There is no taking it back. Paying off the National Debt is impossible and it makes no logical sense to think of the National Debt in the way we have been taught. (take a look at theM2 money supply plus dollars held by foreign entities at the Federal Reserve website).

    “So…you are suggesting we take the maxed out credit card, and then add a second one and can somehow get the bond market to sit by and absorb all that inflation with negative real rates.”
    Looks like they are falling all over themselves to do just that even after the S&P downgrade.

    “Another $10 Trillion in debt would push rates past 6% – 8% if not higher. We’re paying $400 billion in interest this year alone with 2% – 3% rates. Rates screaming higher would mean we are essentially borrowing trillions to pay people trillions to do nothing (Social, Medicaid, pensions etc.).”
    The U.S. Government does not need to borrow to spend – it creates money out of thin air and has for 40 years. We “borrow” to match deficit spending dollar-for-dollar because of an arcane law that was relevant when we were on the Gold Standard but not now. In order to “borrow” $14.6 Trillion dollars the money had to exist first – where did the money come from? Answer: bank reserves that the government had to create before it could borrow the money back. Your are dinging the government for borrowing but not giving them credit for the money creation.

  9. Frilton Miedman says:

    Only one person above noted the massive elephant in the room, consumer debt, which parallels the above chart, but is a bigger problem for consumption.

    There are no hairs to split on the presentation, debt increased as tax loopholes and rates on corporations the wealthy went down, Clinton’s admin was the only one to reverse the trend, but then Bush jr brought it back with a vengeance

    The real kick in the ass, “job creating” corporate tax cuts have failed to incentivize “job creation”, heck, who can blame AAPL for hiring Foxconn with labor rates at $0.49? …so, what the hell, let’s give them a tax break as well for giggles, just in case they get sick of those $0.49 per hour rates.

  10. paulie46 says:

    @Frilton Miedman Says:
    “Only one person above noted the massive elephant in the room, consumer debt, which parallels the above chart, but is a bigger problem for consumption.”

    Agreed.

    Private debt is the elephant in the room but it seems impossible to get anyone to acknowledge it when they are focused on “The National Debt is Gonna Kill Us in ouR Beds”, essentially a non-problem.

  11. MayorQuimby says:

    “Debt to GDP as a measure makes no sense – debt is a stock, GDP is a flow. They are unrelated”

    They are both denominated in the same currency right? So it is a wonderful gauge of how screwed we are.

    “The American worker earns $15 Trillion per year. How much can we afford to borrow having that much income”

    Future income is what matters, not present. When you borrow money you are spending future income…today.

    “The National Debt is in Treasuries, assets that are cash equivalents. They were exchanged for assets that were cash. In many cases Treasuries are worth more than cash (they earn interest and are risk-free).”

    1. Treasuries are not cash equivalents. It depends. They are all forms of credit and debt, look up m0, m1 etc.

    2. They are worth more than cash unless there is risk involved in which case they are just assumptions that you will get paid back when you might not.

    ” Paying off the National Debt is impossible and it makes no logical sense to think of the National Debt in the way we have been taught”

    That is silly. You think surpluses are impossible and worthless? I beg to differ. But it is true we don’t have to pay it off per se. But we DO have to bring them down to manageable and serviceable levels. We CAN always run at a loss so long as we haves a functional economy. But there are limits as to how much of a loss we can service!

    Or do you suggest, as have others, that there are NO LIMITS?!!!

    “Your are dinging the government for borrowing but not giving them credit for the money creation.”

    Irrelevant. You are mistaken about the “thin air” part. Money is created when loans are made but those loans must have collateral. In fact, no dollars are created out of thin air. ALL of them are backed by collateral (past labor) and pledges to pay back (future labor). Which is why certain loans cannot be discharged (student).

    Consequently, inflation is a function of what levels in the credit supply can be serviced by the underlying economy. Debt levels too. The fed cannot “just print” money which is why it hasn’t yet! Printing excess credit is useless because it will always contract and vanish. Why? Because you are giving people new credit which is not payable. The economy won’t be able to handle and service it so defaults will result.

    We see this today with increases in education referrals, foreclosures, shadow foreclosures taking years with which to contend etc. At the same time, you undermine purchasing power of renters and savers which destroys capitol formation by turning their 20 percent downpayment into a 10 percent one. You also push up cost of living which also hames capital formation by making life unaffordable.

  12. paulie46 says:

    @MayorQuimby…
    Irrelevant. You are mistaken about the “thin air” part. Money is created when loans are made but those loans must have collateral. In fact, no dollars are created out of thin air. ALL of them are backed by collateral (past labor) and pledges to pay back (future labor). Which is why certain loans cannot be discharged (student).

    Wrong.

    The Treasury creates money out of thin air when it deficit spends – the only possible way to add net financial assets to the economy. These assets (cash) have no claims on them by any party, they are liquid assets on balance sheets.

    The Fed creates credit through banks. All credit issued to the private sector come attached at the hip with an offsetting liability. Credit adds zero financial assets to the economy. All cash (in the aggregate) on balance sheets came from deficit spending. Currently there is about $9.6 Trillion of these assets in the U.S. economy. The balance is overseas.

    “You think surpluses are impossible and worthless?”

    Surpluses are possible but not necessarily a good thing. In the past, surpluses have most often been followed by a recession since they remove net financial assets from the economy.

    Surpluses in perpetuity would drain all financial assets from the economy i.e. there would be no net liquidity (cash in the aggregate) in the economy. Trade deficits have the same effect and to date have drained nearly $5 Trillion dollars from the U.S. economy. This had to be offset by deficit spending to keep the economy from imploding.

    An economy cannot run on credit expansion alone, in fact it is impossible mathematically. It would result in massive bank failures as people were unable to make their payments (inevitable).

    See what is going on now in the Eurozone for an example of what happens when deficit spending can’t be used as a tool for growth.

  13. paulie46 says:

    @MayorQuimby…
    “Or do you suggest, as have others, that there are NO LIMITS?!!!”

    I didn’t say anything about no limits but you haven’t defined what limits there are if any either.

    I would say the limiting factor would be inflation above what would be considered healthy inflation (I define that as being in the 4% to 5% range).

  14. MayorQuimby says:

    Wrong yourself. Healthy capital formation is what makes deficit spending possible because taxpayers have to finance and fund those deficits. You can pretend the whole thing is just a game of Monopoly but it isn’t.

    Now I’m not saying they cannot print by monetizing debt but doing so is pointless because the whole system runs off the proverbial bottom. Making life more difficult for the bottom is precisely the wrong thing to do.

    As for surpluses…they are wonderful. You have it entirely opposite. Capital formation occurs from savings, not dollar debasement via the fed.

    It is right in front of your face! People are now indebted their entire lives – from 18 to 67 (retirement). Hw do you suggest we can get those me people to ALSO fund an enormous incursion of debt?!

    The whole thing will collapse all at once once the markets realize this fact.

    You cannot ignore private sector household debt as it is all one system.

  15. MayorQuimby says:

    Wrong yourself.

    The Fed can create credit and hand it to banks but it never enters the economy unless people can post collateral of some kind. They DO NOT CREATE MONEY OUT OF THIN AIR – only POTENTIAL money.

    Goldman could have a quadrillion bucks to lend but if it isn’t being lent, it might as well not exist.

    The Fed can only create an atmosphere of POTENTIAL economic growth and inflation. The Fed is POWERLESS to create sustained asset price levels. Those are a function of the real world.

    You think we are all playing a game of Monopoly when in fact, it is MUCH more substantial than that.

    Deficits, and therefore Fed money lent to the gvmt are backed by THE ABILITY TO TAX. If they cannot get those tax $$$ from the sheeple, then loans to the gvmt are subprime loans. That credit will contract as well if the Fed ever had to take a loss or go broke. You want to see deflation?! How about $.25 cups of coffee. We could go there faster than you can possibly fathom since they simply keep layering levels of credit upon credit.

    Excess credit will always want to contract. Inflation supported by solid economic growth and therefore collateral is what you saw for the latter portion of the post WWII 20th century.

    What w are doing now is not the same thing. We are lending unbacked hundreds of billions to students for example when we have no jobs for them and no means for those loans to be paid back. Many of them WILL contract and I believe TBTF banks and much of the entire banking sector will get wiped out for good.

  16. MayorQuimby says:

    Paulie- Think of it this way – why do you think Bernanke thinks Fed-created inflation will work?

    I’ll tell you why. It isn’t because he can set the price of goods in perpetuity. It’s because by so doing, he forces savers and renters to incur debt to keep up with price appreciation of everything. It’s why Krugman suggested a housing bubble was needed to replace the tech bubble.

    Bubbles force people to take on debt so the credit ponzi can continue. Those in gvmt expect everyone to do what their parents did – live a life of debt slavery.

    And they are correct that people are foolish enough to do so.

    But they have gotten almost everyone that is able to or willing to BE in debt for LIFE, to do so already!!!

    They are now running out of bullets and the situation is serious and turning DIRE. If we can’t grow the REAL economy by leaps and bounds AND get everyone to lever up in a HUGE way SOMEHOW…AND find enough jobs for existing debtors to service existing debt, well…the ENTIRE SYSTEM is FUBAR and will END.

    Not fall. Not crash.

    END.

    Game over.

    New system time.

  17. paulie46 says:

    @MayorQuimby …

    Please read my responses more carefully. I said the TREASURY, through deficit spending, is THE ONLY WAY that net financial assets can be added to the economy, and the sum of all deficits since 1791 equals the National Debt to the penny.

    And I said THE FED CAN ONLY CREATE CREDIT (but cannot control how much credit is issued because that is limited by the availability of credit-worthy borrowers), not financial assets. Which is basically in agreement with one of your statements.

    There is little the Fed can do to help the economy (see QE and QE2). QE3 and QE..n are likely to be equally ineffective.

    We need the only player left standing to fuel growth in the economy. The Federal Government must deficit spend until the private sector can take up the baton, and that will take years. Unless you expect that suddenly the Chinese are going to start buying our stuff with their trillions of dollars. Fat chance.

    Of course we should spend the money on useful things, i.e. pay unemployed people to re-build and build new infrastructure, expand education, expand the energy grid, promote alternative energy technologies, etc.

    The cost of doing these things is nothing. The cost of doing nothing is massive.

    Sorry to see you have such a negative view of what our options are.

  18. paulie46 says:

    @ MayorQuimby…

    “We are lending unbacked hundreds of billions to students for example when we have no jobs for them and no means for those loans to be paid back. Many of them WILL contract and I believe TBTF banks and much of the entire banking sector will get wiped out for good.”

    Here we are on the same page (except for the unbacked part – if they can’t pay the loans back the banks should just take the losses). If I could define the biggest problem we need to solve in the world today (besides ending the wars and climate change) it would be to crush the private banking cartel and force future banks to operate in the public interest.

  19. MayorQuimby says:

    You said money is created it of thin air.

    It most certainly is not.

    Secondly, the gvmt is still spending borrowed money which must be paid back.

  20. MayorQuimby says:

    Paulie, I agree. You can force banks to operate in the public in test by:

    1. Removing the political pressure for the fed to perpetuate inflation by DEMANDING AND FORCING balanced budgets each year. If we live within our means, then we can handle deflation when it is needed after a credit explosion,

    2. Marking to market. Nuffield said there.

    Deficit spending is the main problem. Because we owe so much, we cannot afford severe deflation. Or any deflation really. This just shreds everything and everyone. And people blame Obama but it was Reagan and bush (as well as Obama) who put us in such a f$cked up situation. So the fed is pressured by gvmt to do anything and everything it can to keep asset prices up. If not, gvmt goes broke.

    This is why gvmt intervention is wrong and ultimately hurts us all.

  21. Frilton Miedman says:

    Bernanke didn’t “create inflation”, and any degree that QE bolstered inflation was only a part of the source of inflation.

    Bernanke said plain and clear on 60 minutes last year that he was using QE in light of poor fiscal policy, further stepping outside the traditional non-political Fed role to say we need to repair corporate tax loopholes ASAP.

    Global Agri has been pummeled this year from Adverse weather which has played a major role in inflation, but that aside…

    The fact that the CFTC is dragging feet on futures position limits to prevent recurrences of the oil manipulation of 2007, which Bernie Sanders recently leaked was largely the doing of Goldman Sachs and other TBTF banks, it’s not entirety unthinkable that commodities can be manipulated to sway public consensus for political or policy agenda.

    I.E., if Koch industries wants Obama out, they just manipulate RBOB futures, which in turn slows consumption and job growth and enables opposing campaigns to point at “how Obama failed”.

    If that’s not enough, Greenspan, the “Free market” Ayn Rand protege himself recently pleaded with the House to consider revenues as part of the solution, stating he originally only recommended the Bush tax rates for as long as we still had the Clinton surplus.

    Bottom line, the only way out of more printing and actual job creation (not promised, or low wage) is for us to offset the loss in middle class revenues by returning at least to Clinton’s rates

    In other words, we have to accept the failure of “trickle down” and affect fiscal policy to create real trickle down in it’s place.

    A return to Clinton’s rates at the top to subsidize infrastructure and other real job creation while giving the middle class a chance to deleverage along with a massive overhaul to corporate loopholes that amount to economic suicide.

    Otherwise we continue the ridiculous political dance, name calling and melodrama of trying to do anything else, which inevitably means more printing….voters on both sides have already made their voices heard on the popularity of taking it out on Medicare or Social Security.

  22. paulie46 says:

    @MayorQuimby…

    I can’t figure out what economic framework you operate within – my guess is Austrian school.

    I have had this discussion with many Austrian proponents and the discussion inevitably settles into one about deflation and how it can be good for us if we only would embrace it. I’m not buying it. Examples please.

    Demanding balanced budgets would destroy the economy. Money in the form of cash (liquid assets) would not exist in the economy in the aggregate, or if we stopped deficit spending now financial assets would be limited to $9.6 Trillion minus the trade deficit each year. at the current rate ($500 Billion) there would be net zero financial assets within 20 years. This is simple arithmetic i.e. accounting.

    In a growing economy without expanding financial assets the nominal value of things would have to decline over time (persistent deflation). This is unworkable. The economy grows by virtue of population growth and increases in productivity.

    I said in my last post that an economy cannot exist on credit alone, there would not be enough money to make all of the transactions necessary for the economy to function and barter is not an answer.

    Oh, and the government can’t go broke. Every financial expert/market god weighed in on this during the Debt Ceiling debate and the consensus was that we can always afford to pay any liabilities denominated in our own currency.

    Until you can get past that we will continue to go in circles.

  23. MayorQuimby says:

    I’m no Austrian! I detest gold. Actually, I prefer macro economists to austrians.

    But both are misguided.

    Don’t you see that you cannot have your cake and eat it too?

    You most certainly do NOT destroy economies with balanced budgets!

    I have no idea where you get this from but it is utter nonsense. The economy..ie the things we grow, manufacture and build (and sell) operates apart from all the monetary bs and what not.

    So….you could be correct or incorrect. We could grow with deficits or with surpluses. It is all a function of a dynamic and fluctuating reality.

    But there IS absolutey no reason to say that a balanced budget means slow growth!!!!

    The problem is that you are suggesting that gvmt step in when the private economy falters and it is RIGHT HERE that we made our fatal mistake. We went up to the event horizon and passed it instead of turning back. So we are on a course towards bankruptcy.

    Keynes himself suggested running surpluses during booms to be tapped into during busts. Absolutely NO ONE out there in the economics history books suggested a greater exponential rate of spending than growth! Third grade math suggests you end up bankrupt quickly!

    And these exponentially growing deficits REQUIRE exponential underlying growth and or inflation.

    So you are putting the economy in a lose lose situation. Either we incur unpayable debts and go broke or we cut the budget and embrace a depression. Ironically, the former is the better situation IMO.

    But once again, asset prices are not a function of what the almighty fed determines. The fed can affect things temporarily but over the long term they are powerless.

  24. paulie46 says:

    @Frilton Miedman Says…

    “voters on both sides have already made their voices heard on the popularity of taking it out on Medicare or Social Security.”

    Taking money out of Medicare or Social Security won’t help the deficit anyway. Most of the deficit comes from loss of tax revenue because of the bad economy ($600 Billion), increased transfer payments, i.e. unemployment payments and food stamps ($200 Billion )and the ongoing wars ($200 Billion). The structural deficit is about $600 Billion – covering the trade deficit and growth.

    We are providing the currency for the foreign sector as well as for the U.S. economy.

  25. MayorQuimby says:

    Your financial asset requirement is silly. You have it in reverse. Financial assets are a RESULT of REAL economic activity not the reason for it!

    You are suggesting that credit drives the economy. I suggest the economy drives itself and sustainable credit growth is the manifestation of an underlying real economic expansion.

  26. Frilton Miedman says:

    Paulie, to simplify, the wealthy and corporate special interest money that runs our government, especially after “citizens united” is doing everything in it’s power to avoid two things.

    1-Stimulus/printing, which devalues the dollar, a way of dispersing wealth and reversing the damage done through disparity, particularly heavy in the last decade.

    2-Taxing, the more direct route to undo said damages.

    Hence we hear fear mongering over cookie cutter phrases like “big government” or “socialism” pumped to us through big money campaign propaganda and the politicians on their payrolls.

  27. MayorQuimby says:

    Don’t forget $400 billion in counting in debt interest!

  28. MayorQuimby says:

    “Oh, and the government can’t go broke. Every financial expert/market god weighed in on this during the Debt Ceiling debate and the consensus was that we can always afford to pay any liabilities denominated in our own currency.”

    History is litter with fools who thought THEY were different. Of COURSE we can go broke. Pying back debts in worthless dollars is the same thing. And if bernanke ever does print for real, that’s what will happen…hyperinflation. $10 a gallon gas etc.

    By suggesting such absurdities you undermine your own credibility. Clearly the world isn’t that simple or we would all be speaking LATIN right now. ANY one, or thing can go broke. And we ARE going broke because we have no capacity to handle current debts much less support the mandatory growth in credit REQUIRED by our monetary system.

    The game is over. And a new game will begin.

  29. paulie46 says:

    MayorQuimby Says:
    August 28th, 2011 at 3:26 pm

    I’m no Austrian! I detest gold. Actually, I prefer macro economists to austrians. [Thank God]

    But both are misguided. [You don't think macroeconomics is useful?]

    Don’t you see that you cannot have your cake and eat it too? [what is this supposed to mean?]

    You most certainly do NOT destroy economies with balanced budgets! [see Europe, then explain how an economy will grow without an expanding money supply.]

    I have no idea where you get this from but it is utter nonsense. The economy..ie the things we grow, manufacture and build (and sell) operates apart from all the monetary bs and what not. [Where does the money come from that ends up as liquid assets on balance sheets come from as companies grow then?]

    So….you could be correct or incorrect. We could grow with deficits or with surpluses. It is all a function of a dynamic and fluctuating reality. [Please give examples with numbers preferably. I assume you are familiar with the sectoral balances equation (I-S) + (G-T) + (X-M) = 0, which is true by identity and must hold at all times.]

    But there IS absolutey no reason to say that a balanced budget means slow growth!!!! [see above question]

    The problem is that you are suggesting that gvmt step in when the private economy falters and it is RIGHT HERE that we made our fatal mistake. We went up to the event horizon and passed it instead of turning back. So we are on a course towards bankruptcy. [the private sector cannot function without government spending unless massive unemployment is tolerated. It is mathematically impossible for the U.S. to go bankrupt. We could of course voluntarily refuse to pay our bills but that is a different matter.]

    Keynes himself suggested running surpluses during booms to be tapped into during busts. Absolutely NO ONE out there in the economics history books suggested a greater exponential rate of spending than growth! Third grade math suggests you end up bankrupt quickly! [Keynes admired Abba Lerner's ideas on functional finance and saw great potential in them. Again bankruptcy is not an option. We could have inflation though.]

    And these exponentially growing deficits REQUIRE exponential underlying growth and or inflation. [Deficits are growing at a higher rate than is comfortable (for many) because of changes in the financial system that allows it to siphon off net financial assets at a much higher rate than normal and is not forced to take it's losses when it's bets fail. The financial sector produces very little other than wealth for itself. You use the word "exponential" a lot. Can you show us some examples of what you mean.]

    So you are putting the economy in a lose lose situation. Either we incur unpayable debts and go broke or we cut the budget and embrace a depression. Ironically, the former is the better situation IMO. [There are no un-payable debts - all of our debt is in our own currency and we have an unlimited supply of that currency. Our only enemy is excessive inflation. We only "borrow" because a 100-year-old law says we must and we borrow money that we create out of thin air. Treasuries are created out of thin air also.]

    But once again, asset prices are not a function of what the almighty fed determines. The fed can affect things temporarily but over the long term they are powerless. [The Fed can keep the interest it pays on Treasuries at zero percent if it chooses - it chooses not to. Japans are at 1% and have been for at least a decade.]

    Also, please narrow your argument – this is spreading out like the Big Bang.

  30. paulie46 says:

    MayorQuimby Says:
    August 28th, 2011 at 3:29 pm

    Your financial asset requirement is silly. You have it in reverse. Financial assets are a RESULT of REAL economic activity not the reason for it! [Financial assets can only come from deficit spending.]

    You are suggesting that credit drives the economy. I suggest the economy drives itself and sustainable credit growth is the manifestation of an underlying real economic expansion. [I have suggested the opposite of this in every post but somehow you have missed it. Credit does not drive the economy but it can help fuel growth. Deficit spending (which has nothing to do with credit) is the main driver of growth.

  31. paulie46 says:

    MayorQuimby Says:
    August 28th, 2011 at 3:33 pm

    Don’t forget $400 billion in counting in debt interest! [Chump change. takes a few keystrokes on the Treasury computer.]

  32. MayorQuimby says:

    Paulie-

    First of all, thanks for enjoyable debate.

    “explain how an economy will grow without an expanding money supply.”

    No problem. You don’t! Who says you can grow an economy without limit in perpetuity ad infinitum!

    You write off bad debts, let the system fix itself, deflate as necessary and THEN pick up the pieces and move forward. Holding your hand over a sick person’s mouth to prevent them from vomiting does not heal them!

    “Where does the money come from that ends up as liquid assets on balance sheets come from as companies grow then?”

    Loans are assets. Deposits are liabilities. And I explained that the money is created when a person ‘borrows’ money for a car. The bank makes a new book entry and expands the credit supply IN TANDEM with the real economy having ‘grown’ a car. The two go hand in hand. You don’t just expand the credit supply without anything backing it for to do so means BUBBLE and BUBBBLES contract – ALWAYS!

    “Please give examples with numbers preferably. I assume you are familiar with the sectoral balances equation (I-S) + (G-T) + (X-M) = 0, which is true by identity and must hold at all times.”

    There are no examples necessary! You could be correct or incorrect! If we suddenly find ourselves exploring space and building hotels on the moon, we might look back and REGRET not having deficit spent MORE because REAL economic growth blasts higher! If we don’t get the necessary growth in real economic expansion which is supportive of credit growth then we will regret having deficit spent so much!

    You are borrowing from the future and the future is not yet written!

    “the private sector cannot function without government spending unless massive unemployment is tolerated.”

    It must be. And to embrace reality instead of trying to credit over the mess we’re in means REAL structural problems such as outsourcing come to light and are ADDRESSED…FINALLY!

    “It is mathematically impossible for the U.S. to go bankrupt. We could of course voluntarily refuse to pay our bills but that is a different matter.”

    If I borrow a dozen 4″ tomatoes to make sauce and then pay you back a dozen Cherry Tomatoes, have I paid you back or have I scammed you? Going broke is like dying – it happens to everyone given enough time. USA is not immune to reality I promise you.

    “Keynes admired Abba Lerner’s ideas on functional finance and saw great potential in them. Again bankruptcy is not an option. We could have inflation though”

    No, we can’t. Inflation can only exist if it is supported by real economic growth. If not, it contracts. Why do you think credit contractions occur? What IS “excessive credit” in your opinion? How do you define such a thing?

    “Deficits are growing at a higher rate than is comfortable (for many) because of changes in the financial system that allows it to siphon off net financial assets at a much higher rate than normal and is not forced to take it’s losses when it’s bets fail. The financial sector produces very little other than wealth for itself. You use the word “exponential” a lot. Can you show us some examples of what you mean.”

    Sure.

    http://www.acting-man.com/blog/media/2011/02/Total-Credit-Market-debt-vs.GDP_.png

    That says it all. The top line WILL contract to the bottom unless the bottom rips north. But the two must eventually come close to alignment. MUST.

    “There are no un-payable debts – all of our debt is in our own currency and we have an unlimited supply of that currency. Our only enemy is excessive inflation. We only “borrow” because a 100-year-old law says we must and we borrow money that we create out of thin air. Treasuries are created out of thin air also.”

    Wrong. Completely wrong. Every dollar is tied to a unit of economic growth both past and future. Every one (except possibly the very first Federal Reserve dollar). Once again – think about the tomatoes…AND $10 gas and what that would do to housing and retail.

    You can’t pour water into a full pitcher. If the economy’s ability to service debt has maxed out, then pouring water IN will force the same amount of water OUT. It’s like trying to inflate a baloon with a hole in it.

    Good luck! And each attempt just widens the hole in the balloon.

    “The Fed can keep the interest it pays on Treasuries at zero percent if it chooses – it chooses not to. Japans are at 1% and have been for at least a decade.”

    The Fed has nothing to do with interest rates. You will see how utterly impotent the Fed is. Go watch the Wizard of Oz and of course…pay no attention to the man behind the curtain!

    Japan isn’t under financial repression. They have been in deflation for 20 years! Their stock market is down 70% from its peak right now. But this is irrelevant. Their real nominal output has grown and their currency has strengthened. Owning a 1% bond isn’t too shabby if the underlying currency goes up 20% is it?!

    As for debt to gdp in Japan – I simply do not know. It is a mystery to me except to say that in deflation, currency is scarce so it is possibly worth the default risk to hold increasingly valuable money. But I need to research this more as it fascinates me.

  33. MayorQuimby says:

    “Don’t forget $400 billion in counting in debt interest! [Chump change. takes a few keystrokes on the Treasury computer.]”

    Hahaha. When we do deflate, people like you will be SCREAMING for them to just PRINT PRINT PRINT! The commodities market already knows this and is just beginning to price in what might be Ben’s response.

    But we should NOT.

    Those keystrokes are bs. The Treasury needs to TAX that money out of us of course. If there’s no integrity to money than commodities don’t go up 100% or 200%….THEY BECOME PRICELESS. I’m talking $100 gas type of thing. You can’t just “print”. You never could!!!!

  34. paulie46 says:

    @MayorQuimby …

    “Loans are assets. Deposits are liabilities. And I explained that the money is created when a person ‘borrows’ money for a car. The bank makes a new book entry and expands the credit supply IN TANDEM with the real economy having ‘grown’ a car. The two go hand in hand. You don’t just expand the credit supply without anything backing it for to do so means BUBBLE and BUBBBLES contract – ALWAYS!”

    You have to keep the car separate from the loan. The monetary system and subsequent accounting only accounts for nominal assets. Whenever a transaction occurs some good is defined in nominal terms. The sum of all transactions =GDP.

    When a loan is made, the private sector agent receives an asset (cash) and an off-setting liability (some number of loan payments). What the money is used for is immaterial. The net financial assets added to the economy is zero (debit=credit).
    This is scalable so we can say that the sum of all loans (debits + credits) created in the private economy increases the net financial assets in the economy by zero.

    Thus, interest payments, which are in excess of the loan balance will eventually cannibalize the economy. This money doesn’t exist and therefore cannot be paid (for the economy as a whole, i.e. in the aggregate). A system will not be allowed that is designed to self-destruct.

    As far as inflation and/or hyperinflation, I’ve been waiting for both for at least 30 years. Wake me up when it happens. I don’t see how it’s possible under current conditions. We can produce way more than we are consuming, and will have to spend a great deal of money before the situation reverses.

    Oh, and taxes don’t fund anything. Taxation merely destroys financial assets, the opposite of money creation. Taxation is un-printing money. If the government collected no taxes it could still spend – there is no operational constraint on creating money. All government spending is creating money.

  35. MayorQuimby says:

    “You have to keep the car separate from the loan. The monetary system and subsequent accounting only accounts for nominal assets. Whenever a transaction occurs some good is defined in nominal terms. The sum of all transactions =GDP.

    When a loan is made, the private sector agent receives an asset (cash) and an off-setting liability (some number of loan payments). What the money is used for is immaterial. The net financial assets added to the economy is zero (debit=credit).
    This is scalable so we can say that the sum of all loans (debits + credits) created in the private economy increases the net financial assets in the economy by zero.

    Thus, interest payments, which are in excess of the loan balance will eventually cannibalize the economy. This money doesn’t exist and therefore cannot be paid (for the economy as a whole, i.e. in the aggregate). A system will not be allowed that is designed to self-destruct.”

    You cannot separate the two at all. They are intertwined which is once again, why certain loans are not dischargeable (because there is no collateral with a student loan for example). The car keeps the bank solvent for should the depositor want his money, the bank can repo the car and still maintain solvency. Without the car, the credit is just fantasy money that will vanish as easily as it appeared when the bill comes due.

    I have proof too btw. Every person that is 30 months late on his mortgage. Every student loan that is deferred. Every refinanced loan including sovereign debt. Then there’s this:

    http://wallstreetpit.com/81545-majority-of-americans-dont-have-funds-on-hand-for-1000-emergency

    “When a loan is made, the private sector agent receives an asset (cash) and an off-setting liability (some number of loan payments). What the money is used for is immaterial. The net financial assets added to the economy is zero (debit=credit).

    When a loan is made, new credit enters the system temporarily until the loan is paid back. A person must go out and ‘do something’ in the real world (ie grow a pumpkin, fix a car) and that pumpkin growing business becomes the collateral for more credit growth. Financial assets therefore grow in tandem with the growth in real world assets. Which is the way it should be.

    But the chart I posted (which you conveniently ignored) shows that credit has grown MUCH more so than the very real world assets that back all credit creation!!!

    This means we are in shitsville. Why do you think the crash of 2008 was so ferocious? Why do you think the markets in August crashed so ferociously? EXCESS credit wants to contract and the Fed is pressured by gvmt (especially in an election year!) to STOP THIS AT ALL COSTS!!!

    What President wants an 80% market crash on their watch!!!

    But without an 80% growth in nominal gdp, we will see credit contract to burn off excess debts which cannot be paid.

    Look at that total debt chart again.

    “Oh, and taxes don’t fund anything. Taxation merely destroys financial assets, the opposite of money creation. Taxation is un-printing money. If the government collected no taxes it could still spend – there is no operational constraint on creating money. All government spending is creating money.”

    1. Taxes fund the creation of money. You can only borrow money from the market which is taxable. If not, the gvmt goes broke. Same as Greece. Our having the Reserve currency means we are CONSTRAINED in printing, not allowed to print more. It means our money HAS to be backed by real shit. 3rd world countries ‘print’. If we ever do, then you will see $10 gas and everything go to shit overnight. The authorities won’t let that happen so they will default and people like Krugman will be SCREAMING IN ALL CAPS for hyperinflationary unbacked printing of dollars.

    So will most liberals, market participants (maybe even Barry), pension recipients and senior citizens. There will be ENORMOUS pressure on gvmt to print money. But they won’t be able to without destroying things altogether.

    “All government spending is creating money.”

    Nope. You can say it a thousand times and a thousand times it is no. Gvmt can only spend that which can be taxed out of people in the future and not a penny more.

  36. MayorQuimby says:

    “As far as inflation and/or hyperinflation, I’ve been waiting for both for at least 30 years. Wake me up when it happens.”

    It just did. Look at the past 15 years. Tuition, housing, gas, food – EVERYTHING has gone up MANY times wage growth. This is the very definition of hyperinflation but in a credit based system. Bernanke the genius thinks he can sustain hyperinflated price levels with more credit. It is the single most ridiculous concept I’ve come across. It’s like saying you can cure a hangover with alcohol or eat yourself skinny.

    Incomprehensibly stupid.

  37. Frilton Miedman says:

    Alan Simpson summed the problem, and a large portion of the solution in one sentence in a recent NYT article reflecting on his findings in the Simpson-Bowles commission –

    ” The tax code is riddled with annual tax breaks amounting to $1 trillion”

    That’s right, $1 TRILLION PER YEAR in tax breaks.

    Article – http://www.nytimes.com/2011/08/03/opinion/the-debt-crisis-merely-postponed.html?_r=1

  38. Frilton Miedman says:

    MayorQuimby Says:
    August 28th, 2011 at 5:15 pm
    “….. Bernanke the genius thinks he can sustain hyperinflated price levels with more credit.”

    No, by his own admission, he does not.

    One more time, “the Bernanke” is countering the stupidity of corporate special interest puppets in D.C.

    Again, he specifically cited the need to revamp corporate tax loopholes and better fiscal policy, he went as far as to say his best chances with QE & monetary policy would only be to stabilize the already stagnant growth.

  39. MayorQuimby says:

    Bernanke from 2002:

    “First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.6 Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.”

    1. The Fed MANDATE as set forth in 1913 is to ensure that we have “STABLE PRICES”. Not mildly inflating. STABLE. Inflation by definition IS too much liquidity – always. It is NEVER supposed to happen AT ALL.

    2. At any rate – if the collateral for loans deteriorates, then the credit supply should as well. Maintaining or forcing inflation in such a situation is HARMFUL, not helpful.

    “Second, the Fed should take most seriously–as of course it does–its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to “fire sales” of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.

    1. He suggests that the answer to a bubble is to keep prices high. Ridiculous. If something is OVERpriced, it needs to correct downwards. Supply v. demand. Simple enough. Don’t tell him though. He’s “smart”.

    “Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.

    “May.” Remember that.

  40. ilsm says:

    Great video, one more point. Wall st arbitrageurs and been running treasury and the fed since Nixon.

  41. paulie46 says:

    @MajorQuimby…

    I asked you to narrow your argument and you expanded it. We haven’t even settled the fundamental issues.

    “You cannot separate the two at all.”

    [When you are counting money you do. The economy is defined in nominal dollars. GDP is in nominal dollars. All Government reporting and record-keeping is in nominal dollars. The relationship between value and money has nothing to do with national accounting, so when we talk about the National Debt we are talking about nominal dollars. Dollars from 1791 count the same as dollars from 2011.

    The link you provided shows Total Credit Market Debt Owed (TCMDO).

    http://www.acting-man.com/blog/media/2011/02/Total-Credit-Market-debt-vs.GDP_.png

    The chart includes all debt public and private. We have already noted that private debt is the elephant in the room totaling more than two times public debt (public debt was never intended to be repaid – read history).
    Private debt is unrelated to deficit spending.

    “Taxes fund the creation of money. You can only borrow money from the market which is taxable. If not, the gvmt goes broke. Same as Greece.”

    Money cannot be taxed until it is first created. Chicken and the egg argument but it’s clear which one has to happen first here. You cannot tax that which does not exist.

    Greece’s problem is nothing like ours. Greece doesn’t have it’s own currency. This is a game-changer. In order for the government to function they must borrow Euro’s from someone else. The are stuck with whatever financial assets they had at the moment they switched to the Euro. Since then a deficit in Net Exports and interest payments have been draining away their wealth to the surplus countries. Greece is being cannibalized by the surplus countries and now have to start selling off national assets at fire-sale prices to pay their debt.

    I think they should default and go back to the Drachma. Painful but less so than trying to stay in the Euro which cannot succeed without major structural changes that are politically not likely to happen (in the Eurozone).

  42. paulie46 says:

    @MayorQuimby…

    “Nope. You can say it a thousand times and a thousand times it is no. Gvmt can only spend that which can be taxed out of people in the future and not a penny more.”

    Then how did the stock of dollars grow from ~$250 Billion in 1946 to $14.6 Trillion in August 2011? Some 14.3 Trillion dollars that didn’t exist got spent. Who was it borrowed from?

    I think you need a refresher course in basic arithmetic. 5th grade level should give you the tools.

  43. MayorQuimby says:

    “Private debt is unrelated to deficit spending.”

    Not true. The same people who can barely make their mortgage payment are now being asked to incur tens of thousands more in sovereign debt responsibilities. It won’t work. The whole thing runs off the bottom!

    “Money cannot be taxed until it is first created. Chicken and the egg argument but it’s clear which one has to happen first here. You cannot tax that which does not exist.”

    The assumption is that the economy will grow and create more fractional credit which can then be taxed. When that “endless” expansion snapped in 2008, gvmt stepped in and tried to pick up the slack. But the gvmt does not just print. It can’t. But what it IS doing is the next best thing – allowing defaultees to stay in their homes without paying. Allowing banks to hold worthless ‘assets’ at par. Injecting credit via gvmt expenditures etc.

    Don’t forget – the guy with $100K in cash can EASILY be outbid on a home by the guy with $20K who offers to pay $200K!

    “Greece’s problem is nothing like ours. Greece doesn’t have it’s own currency. This is a game-changer. In order for the government to function they must borrow Euro’s from someone else. The are stuck with whatever financial assets they had at the moment they switched to the Euro. Since then a deficit in Net Exports and interest payments have been draining away their wealth to the surplus countries. Greece is being cannibalized by the surplus countries and now have to start selling off national assets at fire-sale prices to pay their debt.”

    You have this backwards. Because we are the reserve currency, foreign debt investors (read central banks) want to buy bonds backed by taxation of dollars originated by fractional lending (sound lending). They are NOT investing in worthless paper. What person in their right mind would EVER hold bonds for 2% for TEN YEARS that are not backed by ANYTHING other than ink???!!!

    “Then how did the stock of dollars grow from ~$250 Billion in 1946 to $14.6 Trillion in August 2011? Some 14.3 Trillion dollars that didn’t exist got spent. Who was it borrowed from?”

    It was borrowed AGAINST the labor by tens of millions of Joe and Jane Sixpacks. Our parents borrowed that money into existence with all their mortgages, credit cards, car loans and business loans. Credit expansion and capital formation occur at the individual level.

    “I think you need a refresher course in basic arithmetic. 5th grade level should give you the tools.”

    Google “fractional lending”…

  44. paulie46 says:

    @MayorQuimby…

    “Google “fractional lending”…”

    I know what Fractional Reserve Lending is. It’s also bogus since that’s not how credit is created in the real world. It’s still something from nothing but again, we are not talking about borrowing.

    “It was borrowed AGAINST the labor by tens of millions of Joe and Jane Sixpacks. Our parents borrowed that money into existence with all their mortgages, credit cards, car loans and business loans. Credit expansion and capital formation occur at the individual level.”

    Borrowed from where? It didn’t exist yet.

    Loans CANNOT add net financial assets to the economy so all those mortgages, credit cards, car loans, and business loans could not have created $14.3 Trillion in financial assets. Loans add $0.00 wealth to the economy. Go out and borrow some money and see what it does to your balance sheet. If you buy a car the “value” will be offset by a liability equal to the payment stream. This liability will end up being much larger than the price you paid.

    Where did the money come from? Who do we owe? How much does it cost to turn Treasuries (Financial assets) back into cash (financial assets) of equal value? Inquiring minds need to know.

    You do realize that now those $14.6 Trillion dollars are sitting in bank accounts in America and the world belong to the holders – no strings attached. They don’t have to pay it back to anyone. If they don’t make money they don’t have to pay taxes (except on the interest).

    Are you saying that all that wealth has to be paid back – that Grandma doesn’t really have any savings? She worked all those years for nothing?

    Why would we borrow funds from private citizens (that they don’t even have yet) to fund deficit spending when all money is created by keystrokes (or ledger entries) at the Treasury?

  45. wally says:

    “But that’s NOT what Krugman and others suggest. They suggest ramping spending without ANY plan whatsoever. ”

    No they don’t. You just made that up and said it.

  46. paulie46 says:

    …”Let me begin with a nation’s sovereign credit rating. When there is confidence in the integrity of government, monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies and can guarantee or stand ready to guarantee the obligations of private issuers as they see fit. This power has profound implications for both good and ill for our economies.
    Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.
    That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”…

    Allen Greenspan at the Economic Symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., Aug. 29, 1997

  47. MayorQuimby says:

    ““But that’s NOT what Krugman and others suggest. They suggest ramping spending without ANY plan whatsoever.
    No they don’t. You just made that up and said it.”

    “The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance.To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

    and his defense:

    “It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”

  48. MayorQuimby says:

    Wally-

    The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance.To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

    and his defense:

    “It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”

  49. victor says:

    @ MayorQuimby &paulie46. Your back and forth debate is instructing, I learned quite a bit. One question: are our economic problems (twin deficits, national debt etc) mainly political or structural? And, where does demographics come in? The West, Russia and Japan dont have enough babies and 3rd world is responsible for all population growth. Bye bye Western Civilization?