The Sovereign Debt Train Wreck
The Sovereign Debt Train Wreck – US Debt Is Still A Problem
Satyajit Das
December 1, 2011
~~~
Greece and the other debt burdened European countries are merely the first carriages in the derailment of the “Sovereign Debt” Express train service.
The failure of the congressional super-committee to reach agreement on $1.2 trillion in budget cuts means that addressing the problem of US public finances is unlikely in the near term. The failure also casts doubts on the ability of US policy makers to overcome political differences to take actions to stabilise US government debt with potential consequences for the US and global economy
At Debt’s Door…
Ralph Waldo Emerson wrote: “The World owes more than the world can pay.” The US certainly owes more than it can repay. US government debt currently totals over $14 trillion.
The US Treasury estimates that this debt will rise to around $20 trillion by 2015, over 100% of America’s Gross Domestic Product (“GDP”). Even these dire forecasts rely on extremely robust assumption about US growth around 5-5.5% per annum. Lower growth will translate into higher debt levels.
There are other current and contingent commitments not explicitly included in the debt figures reported by the government. Since July 2008, the US government has supported Freddie Mac and Fannie Mae (known as government sponsored enterprises (GSEs)). This totals over $5 trillion in additional on or off-balance sheet obligations.
The debt statistics do not include a number of unfunded obligations – the current value of mandatory payments for programs such as Medicare ($23 trillion), Medicaid ($35 trillion) and Social Security ($8 trillion). Projections show that payouts for these programs will significantly exceed tax revenues over the next 75 years and require funding from other tax sources or borrowing.
In addition to Federal debt, US State governments and municipalities have debt of around $3 trillion.
US public finances deteriorated significantly over recent years. Pimco’s Bill Gross observed: “What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”
In 2001, the Congressional Budget Office (“CBO”) forecast average annual surpluses of approximately $850 billion from 2009–2012. Instead, the US government has run large budget deficits of approximately $1 trillion per annum in recent years. The major drivers of this turnaround include: tax revenue declines due to recessions (28%); tax cuts (21%); increased defence spending (15%); non-defence spending (12%) higher interest costs (11%); and the 2009 stimulus package (6%). German finance minister Wolfgang Schäuble told the Wall Street Journal on 8 November 2010 that: “The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base.”
Drowning by Debt…
No borrower can incur debt on this scale without the complicity of its lenders.
The US government holds around 40% of the debt through the Federal Reserve ($1.6 trillion), Social Security Trust Fund ($2.7 trillion) and other government trust funds ($1.9 trillion). Individuals, corporations, banks, insurance companies, pension funds, mutual funds, state or local governments, hold $3.6 trillion. Foreigner investors hold the remainder including China ($1.2 trillion), Japan ($0.9 trillion) and “other”, principally oil exporting nations, Asian central banks or sovereign wealth funds ($2.4 trillion).
Until the global financial crisis, foreign lenders, especially central banks with large foreign exchange reserves, led by the Chinese, increased their purchases of US government debt..
These reserves arose from dollars received from exports and foreign investment that had to be exchanged into local currency. In order to avoid increases in the value of the currency that would affect the competitive position of their exporters, the exporting nations invested the reserves in dollar denominated investment, primarily US Treasury bonds and other high quality securities. By the middle 2000s, foreign buyers were purchasing around 50% of US government bonds.
During this period, emerging countries, such as China fuelled American growth, both supplying cheap goods and providing cheap funding to finance the purchase of these goods. It was a mutually convenient addiction – China financed customers creating demand for exports and America received the money to buy cheap Chinese goods. Asked whether America hanged itself with an Asian rope, a Chinese official told a reporter: “No. It drowned itself in Asian liquidity.”
Following the global financial crisis, foreign purchases have decreased to around 30% of new issuance. Around 70% of US government bonds (US$ 0.9 trillion) have been purchased by the Federal Reserve, as part of successive rounds of quantitative easing.
Foreign Alms…
Historically, America has been able to run large budget and balance of payments deficits because it had no problems in finding investors in US treasury securities. The unquestioned credit quality of the US, the unparalleled size and liquidity of its government bond market ensured investor support. Given its reserve currency and safe haven status, US dollars and US government bonds remained a cornerstone of investment portfolios.
The US dollar’s share of world trade and investment is extraordinary and out of proportion to its economic role. The dollar remains the principal currency for invoicing and settling trade. 85% of foreign exchange transactions involve the dollar. 50% of stock of international securities is denominated in US dollars. Central banks hold 60% of their foreign exchange reserves in dollars. All this is despite the fact that the US’s share of global exports is only 13% and foreign direct investment is 20%.
The US financing strategy is based on the “balance of financial terror”.
China, the major investor in US government bond investors, finds itself in the position that John Maynard Keynes identified: “Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed.” Over recent years, Chinese concerns about the US debt position has become increasingly shrill.
In 2010, Yu Yongding, a former adviser to China’s central bank, mused: “I do not think U.S. Treasuries are safe in the medium-and long-run…Only God knows how much value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves.” In 2011, a Chinese government spokesperson could only “hope the US government will earnestly adopt responsible policies to strengthen international market confidence, and to respect and protect the interests of investors.” In 2010, US Treasury Secretary told a gathering of Chinese students that US government bonds were “safe” investments, eliciting derisive laughter.
But China has America right where America wants China!
Existing investors, like China, must continue to purchase US dollars and government bonds to avoid a precipitous drop in the value of existing investments. This allows America time to correct its deteriorating public finances and reduce its borrowing requirements. It also allows increases in domestic savings to reduce reliance on foreign investors. The US Federal Reserve remains a buyer of last resort, although the long term consequences of this “printing money” strategy remains uncertain.
For the moment, this tenuous strategy appears to be holding. Demand for Treasury securities from investors and other governments has continued. Domestic investment, primarily from banks who are not lending but parking cash in government securities, has been strong. US government rates remain low. The government’s average interest rate on new borrowing is around 1%, with one-month Treasury bills paying less than 0.10% per annum. This has allowed the US to keep its interest bill manageable despite increases in debt levels.
In effect, the US requires artificially low interest rates to able to service its debt. Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the US faces a debt crisis: “It’s not something that is 10 years away. It affects the markets currently…It is possible that the bond market will become worried about the sustainability [of deficits over $1 trillion] and we may find ourselves facing higher interest rates even today.”
The current position is not sustainable in the longer term. Unless the underlying debt levels and budget deficits are dealt with the ability of the US to finance itself will deteriorate. The US treasury must issue large amounts of debt almost continuously – weekly auctions regularly clock in at $50-70 billion unimaginable a few years ago. America’a ability to finances its need may not continue. As English writer Aldous Huxley observed: “Facts do not cease to exist because they are ignored.”
Debt Calm…
The solution to the US debt problems lies in bringing budget deficits down, through spending cuts, tax increases or a mixture of both.
In 2011, the major categories of government spending were defence (24%), social services (44%), non-defence discretionary (25%) and interest (7%). Interest costs, currently around 7% of total spending, are expected to increase by as much as three times driven mainly by the increase in the level of debt. The major increase in spending will come from social service entitlement programs. If current policies are maintained, pensions and health care for the retired (Social Security and Medicare) and health care for the poor (Medicaid) will increase from 10% of GDP in 2011 to 18% by 2050.
Winding back military overseas commitments and also reduced stimulus spending, assuming the economy and employment improve, will help reduce the deficit. But any significant reduction in government spending requires decreased spending on defence and entitlement programs as well as tax increases. US Federal revenue is around 15% of GDP (down from 18-19%). Comparative levels of government tax revenues are Germany (37%) UK (34%) and Japan (28%).
The task is Herculean. Government revenues would need to be increased 20-30% or spending cut by a similar amount. In a nation where 45% of households do not pay tax (because they don’t earn enough or through credits and deductions) and 3% of taxpayers contribute around 52% of total tax revenues, it is difficult to see the necessary changes being made.
Reducing the budget deficit and reducing debt may also mire the US economy in a prolonged recession. In 2009, students at National Defence University in Washington, DC, “war gamed” possible scenarios for bringing the US debt under control. Using a model of the economy, participants tried to get the federal debt down by increasing taxes and reducing spending. The economy promptly fell into a deep recession, increasing the budget deficit and driving government debt to higher levels. This is precisely the experience of heavily indebted peripheral European nations, such as Greece, Ireland, Portugal, Spain and Italy.
As one participant in the National Defence University economic war game observed about the process of bringing US public finances under control: “You’ll never get re-elected and you may do more harm than good.”
Extortionate Privilege…
Given the magnitude of the US debt problem and the lack of political will, the most likely policy is FMD – “fudging”, “monetisation” and “devaluation”.
There is no shortage of creative ideas of financing government debts. Bankers suggested the US issue perpetual debt, that is, the government would not be obligated to pay back the amount borrowed at all. Peter Orzag, former director of the US Office of Management and Budget under President Obama and now a vice-chairman at Citigroup, suggested another creative way to correct the problem – lotteries. To encourage savings, banks should offer lottery-linked accounts offering a lower rate of interest, but also a one-in-a-million chance of winning $1million for each $100 deposited.
As governments printed money to service their debts, US Post issued 44-cent first class “forever stamps” that had no face value but were guaranteed to cover the cost of mailing a first class letter, regardless of how high that cost might be in the future. Between 2007 and 2010 the public bought 28 billion forever stamps. The scheme summed up government approaches to public finance – US Post was cleverly hiding its financial problems, receiving cash up-front against the uncertain promise to pay back the money somewhere in the never, never future.
Debt monetisation – printing money – is the second option. The US Federal Reserve is already the in-house pawnbroker to the US government, purchasing government bonds in return for supplying reserves to the banking system. Expedient in the short term, its risks debasing the currency and setting off inflation. The absence of demand in the economy, industrial over capacity and the unwillingness of banks to lend have meant that successive rounds of “quantitative easing” – the fashionable moniker for printing money – have not resulted in higher inflation to date. But the longer term risks remain.
Monetisation is inexorably linked to devaluation of the US dollar. The now officially confirmed zero interest rates policy (“ZIRP”) and debt monetisation is designed to weaken the dollar.
On 19 October 2010, US Treasury Secretary Timothy Geithner told the Financial Times: “It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity and Competitiveness. It is not a viable, feasible strategy and we will not engage in it.” The facts show otherwise.
Despite bouts of dollar buying on its safe haven status, the US dollar has significantly weakened over the last 2 years in a culmination of a long term trend which with minor retracements. In 2007 alone, the US dollar weakened by about 8% improving America’s external position by $450 billion, as US foreign investments gained in value but its debt denominated in dollars were unaffected.
On a trade weighted basis, the US dollar has lost around 18% against major currencies since 2009. The US dollar has lost around 30% against the Swiss Franc, 25% against the Canadian dollar, 37% against the Australian dollar and 16% against the Singapore dollar over the same period.
US dollar devaluation makes it easier for the US to service its debt. In the balance of financial terror, it forces existing investors to keep rolling over debt to avoid realising currency losses on their investments. It also encourages existing investors to increase investment, to “double down” to lower their average cost of US dollars and US government debt. The weaker US dollar also allows the US to enhance its competitive position for exports – in effect, the devaluation is a de facto cut in costs. This is designed to drive economic growth.
Valery Giscard d’Estaing, French Finance Minister under President Charles de Gaulle, famously used the term “exorbitant privilege” to describe the advantages to America of the role of the US dollar as a reserve currency and its central role in global trade. That privilege now is not only “exorbitant” but “extortionate”. How long the rest of world will allow the US to exercise this “extortionate privilege” is uncertain.
No Exit …
The US is in serious, perhaps irretrievable, financial trouble. Peter Schiff president of Euro Pacific Capital, identified the state of the Union with characteristic bluntness: “Our government doesn’t have enough spare cash to bail out a lemonade stand. Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover.”
There is a lack of political or popular will to take the action necessary to even stabilise the position. The role of US dollars and US government bonds in the financial system mean that the problems are likely to spread rapidly to engulf other nations. As John Connally, US Treasury Secretary under President Nixon, beligerently observed: “Our dollar, but your problem.”
Minor symptoms, often increasing in frequency and severity, can provide warning of a life threatening problem in a key organ, such as the heart. Since 2007, the global financial markets have been providing warnings of an impending serious crisis. Private sector credit problems have spread to sovereign nations. Debt problems of smaller nations have flowed on to larger nations. The problems are gradually working their way to the issue of US debt. Without rapid and decisive action, which seems to be unlikely, a major organ failure within the global economy is now inevitable.
Th magnitude of the problem and its effects are so large, market participants would do well to heed Douglas Adams famous advice in The Hitchhikers Guide to the Galaxy. Find dark glasses that go black in the case of a crisis and a towel to suck on.
~~~
Satyajit Das is the author of Extreme Money: Masters of the Universe and the Cult of Risk (2011) and Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives – Revised Edition (2010)
© 2011 Satyajit Das All Rights reserved.
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December 1st, 2011 at 8:34 am
Well done, Satyajit Das. I saw this yesterday, too:
The Western world has run out of ideas and is “finished financially” while emerging economies across the world will continue to grow, David Murrin, CIO at Emergent Asset Management told CNBC on the tenth anniversary of coining of the so-called BRIC nations of Brazil, Russia, India and China, by Goldman Sachs’ Jim O’Neill.
“I still subscribe and I’ve spoken about it regularly on this show that this is the moment when the Western world realizes it is finished financially and the implications are huge, whereas the emerging BRIC countries are at the beginning of their continuation cycle,” Murrin told CNBC.
We need our liberal policy advocate friends to join together with the rest of America in admitting that we cannot borrow our way out of this hole.
It’s not about being harsh or being cruel, we have to admit failure of the social welfare state, the perversion of the fiscal system to support the social welfare contracts, and return benefits programs to the state level where they are forced to be managed in a balanced budget environment, compete with other states’ ideas, and do not pervert the role of federal regulators into public welfare officers. The Constitution specifically omitted the power of benevolence spending at the federal level for the very reasons we see manifested now: This power is abused into a vote-buying scheme instead of a scheme to help the truly needy, lowest earning 5 or 10% of our citizens. A recent vote on a balanced budget 7 YEARS INTO THE FUTURE confirmed the criminality of the system: it was soundly defeated, as it was in 1995. A large group of citizens simply demand their representatives do no levy full taxes to pay for the benefits they want.
Public charity and state level benevolence programs, as granted by the Constitution, is going to have to replace the government role, this model worked for hundreds of years.
December 1st, 2011 at 8:35 am
Satyajit Das said
Th magnitude of the problem and its effects are so large, market participants would do well to heed Douglas Adams famous advice in The Hitchhikers Guide to the Galaxy. Find dark glasses that go black in the case of a crisis and a towel to suck on.
Reply:
———
You’re the man on this subject. Love your insights and explanations. I agree it’s a big assed problem.
It’s also going to cause a huge amount on market volatility over the next few years. I think I understand the dynamics and they allow for predictable patterns. If I am fortunate, I plan to profit immensely from the misery of others, yet do it without engineering a liquidity crisis.
I also think the problem will be solved over time. Just not quickly or without a lot of screaming and tantrums. Heaven forfend, people will eventually actually have to pay for their desired living standard, even rich ones. Plus pay the bill prior generations stuck them with.
December 1st, 2011 at 8:43 am
If people had simply paid their taxes, very little of this would have happened. There are many wealthy people who would rather loan the government money at nominal rates of interest and run up the debt indefinitely rather than pay taxes. But when the real estate/credit bubble burst worldwide and deficits grew out of control, the lenders worried about being made whole.
I say, let them take a haircut equivalent to all the taxes they should have been paying for the past forty years and we’ll all get through this thing just fine. They may have to sell off some yachts and planes, and palaces to pay their expenses, and maybe some of their shares of stock, which would be priced within reach of the rest of us, but that’s just paying the piper, after having called the tune all these years.
http://bonalibro.us
December 1st, 2011 at 8:47 am
@amboycharlie – the Democrats soundly voted against a balanced budget amendment last week that would have squarely put the taxes for all the benefits on paygo. They also voted against a BBA in 1995.
Twice the Republican have brought a BBA to vote, and twice the Democrats have defeated it.
Only one group of Americans is interested in not paying for benefits, bro. It’s not the rich. It’s the folks twice voting against codifying into law the levying of taxes for every benefit.
December 1st, 2011 at 8:51 am
Total Debt (Governmental, Corporate and Personal) vs GDP (now at record highs of 350%)
http://www.bullandbearwise.com/DebtOverGDPChart.asp
This is a graph that shows the situation well. This graph only goes to 1946 but this graph previously peaked at 190% of GDP in….1931. Then the debt as a percent of GDP fell all during the depression as debts were written off. Even during the war (II) the total debt didn’t climb like it has since, my guess is that since people and to a certain extent corporations couldn’t buy stuff, the total debt remained tame. This doesn’t include all of the off books stuff like SS, Medicare and the like.
Looking at this, do you suppose things are going to change? My guess is yes and in ways that are unplanned, unpredictable and very painful. We are certainly in an excessive debt situation (my definition is having debt that can never be paid off). So you either write the debt off as in the Great Depression or you inflate your way out of it which seems to be the current course. But infating in an uncontrolled manner can lead to all kinds of bad situations as in toppling of governments etc.
No easy answers, no easy solutions, what will be will be.
December 1st, 2011 at 8:52 am
I dunno if I agree with this. The thesis seems to be that if the government debt of a nation exceeds its GDP, its goose is cooked. If a household operated under those rules, 99+% of people would never buy mortgages, as in nearly every case, the aggregate household income is exceeded by the mortgage debt, many times over.
But people are not governments, and cannot print money. So the situation seems even better for governments, looked upon through those eyes.
OTOH, governments typically are not in the wealth creation business, and can only raise revenue by taxing the parts of their economies that DO increase wealth. So the rules in this comparison are not even close to equivalent. Apples and hot dogs instead of apples and oranges.
But when we step back and examine the historical record, it seems that, empirically, when governments run debts in excess of 150% of GDP, they are headed for a national default. Not a certainty, but the correlation is so strong that only a politician, or an idiot (redundant) would ignore it.
Still, 150% is quite different from 100%. MANY nations (including this one) have run their national debt up past 100% and managed to get it back under control without default. But not past 150%. Few achieve that record.
December 1st, 2011 at 9:01 am
It is never the absolute magnitude of debt but the ability to service debt that is the driver of default.
December 1st, 2011 at 9:02 am
The larger problem — MUCH LARGER — is the cloud of unregulated, unaudited leveraged debt encircling the global economy, orbiting at the speed of electricity. The estimates we have all seen place the size of the aggregate CDS debt at upwards of 10X the global GDP.
When that pile of jenga blocks falls apart, it will be something to behold, as they are all tied to each other by the strongest force in the universe, the “sanctity of the contract”.
December 1st, 2011 at 9:12 am
The world’s next banking crisis may result from their use of derivative products, particularly debt Credit Default Swaps. The balance sheets of many American banks contain rapidly increasing volumes of CDS (think insurance) on Europe’s sovereign debt as shown here:
http://viableopposition.blogspot.com/2011/12/european-debt-credit-default-swaps-next.html
Should a major Eurozone nation default, there could be a cascading tsunami felt throughout the banking industry because it is entirely possible that banks simply could not pay what was owing on the CDS, similar to what happened to AIG in 2009 – 2009.
December 1st, 2011 at 9:25 am
45% of Americans do not earn enough.
We have yet to fully move past the blaming/anger phase to progess to the barganing phase.
December 1st, 2011 at 9:36 am
Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base.
———————-
Peter Schiff needs to preface “disintegration” with “deliberate”.
December 1st, 2011 at 9:57 am
A sovereign nation with it’s own fiat non-convertible currency can print money at will. It doesn’t “really” have debt – certainly not in the private household sense of the word. We went off the gold standard years ago. We can always pay for our “debt” unless the politicians decide they don’t want to pay. It appears to me that many of the ideas presented in the article are based on old (gold standard) paradigm’s.
Don’t interpret my words in that I support unlimited money printing. I do not. Just say’n.
December 1st, 2011 at 10:05 am
What constantnormal and midlife said.
People who say something like “the US certainly owes more than it can repay” either do not understand how the fiat monetary system of a country with its own currency works or, as is likely the case with Satyajit Das, they are being misleading in pursuit of an agenda that does not include educating their audience.
The US can never owe more than it can repay by definition. The only question is how expensive that gets.
December 1st, 2011 at 10:40 am
[...] The Sovereign Debt Train Wreck is good reading, especially if you don’t already know the extent of the sovereign debt crisis (sovereign debt is government debt, e.g. US Treasuries, German Bunds, UK Gilts). Among the many good points is something that is obvious once he said it, but I didn’t really think about. If China turned all the US dollar they get for selling us cheap stuff, they would be buying the yuan (officially the renminbi), driving the price up. That would increase the price of their goods, reducing their exports. So they buy US dollar denominated assets — US Treasuries, and increasingly US stock and companies. Also land in Africa, whose sellers would rather have US dollars than their local currency. This entry was posted in Fundamentals, Happy Days, Unhappy Days. Bookmark the permalink. ← Another Way to Deal with Bankrupt Banks [...]
December 1st, 2011 at 10:47 am
Just dont understand why this enormous liquidity wall isnt being extended and passed along the financial system then…
@RW: see mate i agree with you till the point of hidden agenda..conspiracy theories apart humans behave in certain patterns and needs are being satisfied today.. therefore this extra liquidity not being passes to the reatil is being consumed at wholesale level to cover for something agree?
maybe what we all consumed previously and couldnt afford?
question is: Who could afford more than others? seems somebody has been working whilst others have been ”pooling” around..
December 1st, 2011 at 10:57 am
I’m tired of reading that the US can just print money at will. No it can’t. There are consequences to everything. All previous currency devaluation has led to the consequences we have today. Any future printing will produce other consequences. You think OWS is a nuisance now? Try imagining what 45 million SNAP recepients will do if food costs increase 20% due to unchecked money printing. Anyone who claims money printing is a solution to debt problems will also be championing the use of the military to keep protesters in check. Think it can’t happen within the next two years?
December 1st, 2011 at 11:22 am
AtlasRocked, you wrote:
When was this exactly that this supposedly “worked”? Please define “worked”. The GULAG system worked too. It worked quite well for many decades. For whom did it work? And how did it look like. What was the reality of life and work conditions for the working classes and the poor at these times?
Incomes in this country (although, I think, it’s a general, worldwide trend) have diverged more and more in recent decades in favor of the ones who get their income from owning capital (i.e., from value actually created by other people who get their income from selling their work force), at the expense of the rest of society, particularly the ones with low incomes. But some people think the working poor and welfare dependent ones in this country still get too much of the pie.
Now, it is quite clear that the class of capital owners and the wealthy ones have an interest in maintaining the status quo and in expanding their income share even more. This is what drives capital accumulation in this economic system. So there is actually a class struggle with antagonistic interests. However, logic says you can’t impoverish large parts of society more and more and do this forever. It will eventually break the social fabric of society, and then there will be consequences.
December 1st, 2011 at 12:10 pm
When Schiff says “Our standard of living must decline”, I wonder whether he really means this literally, i.e, whether it actually includes his own standard of living, or just the one of others who will have to swallow the “tough medicine”.
December 1st, 2011 at 12:33 pm
“Total deficit reduction from utter Congressional failure? $7.1 trillion dollars over the next decade.”
– B Ritholz, esq.
“The failure of the congressional super-committee to reach agreement on $1.2 trillion in budget cuts means that addressing the problem of US public finances is unlikely in the near term.”
-Satyajit Das
“Two men say they’re Jesus, one of them must be wrong.”
-George W. Bush
Who said that ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge were limited to the comments section?
December 1st, 2011 at 1:53 pm
@ brianinla
I think your are missinterpreting my words. I was not making a judgemental statement either good, or bad.
The United States Government is the only source of US dollar currency. There is no other place where you can get it. Every bill and coin in your pocket came from the US Governement at some point in the past. There is no other supplier and it can print/stamp/make currency at it’s own discretion. This is what I mean by “at will”. Blank metal sheets, paper (cloth actually), and some ink is all that is needed.
The US Government does not really “borrow” money because it can MAKE IT.
The fact that the United States sells/issues bonds so that others may invest/save in US dollars does not mean that the US is in-fact “borrowing” money. It can MAKE IT at will.
The gold standard is gone. We no longer need to mine additional gold from the ground to be able to generate more paper dollars. The “link” is gone. We have a non-convertible fiat currency. The US Gubmt is a currency issuer, not a currency user.
December 1st, 2011 at 2:08 pm
@AtlasRocked;
If the GOPsters were so hot on this balanced budget amendment why didn’t they pass it when they had majority in house and senate, as well as a Bush in the white house? Instead they used that opportunity to ram through a tax-cut plan that would turn us from a path to paying down the national debt to one of hitting a debt of 100% GDP.
Aha when the balanced budget amendment could just be loaded up with poisoned pills and work as a propaganda tool they put it on the table, but if it actually risked becoming law that they had to obey – no chance in hell they would propose it. And it appears that there are morons out there who fall for that kind of politics over policy (but you will not find a lot here).
December 1st, 2011 at 2:31 pm
It is probably true that when it comes down to it our government will default on its debt by inflation rather than by outright refusing to pay the debt. An outright default will have granny standing with a piece of paper in hand that represents her money that the government refuse to pay her because of a politicians vote. Default by inflation will have her buying dog food in bulk due to this strange phenomenon that mysteriously comes out every know and then to make your money worth less. It is a lot easier for the responsible parties to claim innocence if they default by inflation, and as a bonus it is fairly easy for the rich to protect themselves against default by inflation.
December 1st, 2011 at 3:02 pm
4xforecasts, no conspiracies necessary, it’s just business I’m sure. In the case of Satyajit Das who does educate WRT derivatives (books, blog, etc) but also works in the risk trade I would imagine that emphasizing increased risk in the system could only improve both businesses. I really have no idea [shrug]
Regardless he is misleading his audience WRT the monetary system or at least indulging in some sloppy metaphors. In concert with the US Treasury there is a US dollar produced for every dollar of US debt but that is a matter of law, not a technical requirement of a fiat system, and there is nothing to stop the Fed from creating more dollars any time somebody unexpectedly wants to redeem more debt than is currently on hand.
Sure, if overdone, that can become expensive WRT financing debt (interest rates go up) and purchasing goods (inflation) but that’s not where we are now since developed economies are in a disinflationary cycle and US dollars are in enormous demand as collateral and safe haven; in fact that’s what the recent combined central bank action is really about, a liquidity swap of euros for other currencies because that’s what European’s want to hold and what European banks need.
Where all the money goes is one of those perennial questions but as far as I can tell, in a modern monetary system where money can be destroyed almost as ‘easily’ as it is created (I say easily in scarequotes because it can be painful to the individual as in taxes, bankruptcy, equity losses, etc), a lot of the time money is simply vaporized; just disappeared. Probably a good thing too otherwise we’d be up to our ears in the stuff.
December 1st, 2011 at 3:45 pm
There is no magic ratio of debt/GDP that will be the straw that break the camel’s back. For the U.S. to ever have problems hawking its ever increasing debt load, it will not be related to the numerator of that ratio (see Japan).
Upward trending interest rates, forcing the % of government expenditures allocated to service this debt to choke off economic growth, will bring the problems of this debt mountain to bear.
IMO the point that Mr. Das was trying to bring forth is that not only is there nothing being done and no incentive to change the course, but also that the U.S. government is proceeding to bury its head further in the sand through a policy of competitive currency debasement. Maybe if they dig deep enough they will hit China and build a railroad to more easily import flat screens and iPads.
December 1st, 2011 at 3:45 pm
@Dedude – they did try it when they had majorities, in 1995, but it needs 2/3 majority to pass.
1995_BBA________FOR_____AGAINST
REPUBLICAN______228_______2
DEMOCRATIC_______70_____128
Senate, WHERE IT FAILED, all Dem’s but 1 against it:
REPUBLICAN_______12______51
DEMOCRAT_________34_______1
December 1st, 2011 at 3:47 pm
MidlifeNocrisis, you wrote:
But isn’t this only true if you strictly talk about dollars as currency in the form of bills or coins you can touch? Money and currency is not the same. The US government is the only source of currency, but not the only source of money in the economic system. Everywhere where credit is created money is created. Banks, for instance, create money out of thin air when they create loans. Many transactions today are pure booking transaction, or involve other forms of payment than any that involve real currency. So, the US government is the only source of bills and coins, but not the only source of US-dollars as money, isn’t it?
December 1st, 2011 at 3:59 pm
Debt service for the US govt..IS AT 30yr LOW!
December 1st, 2011 at 4:44 pm
@AtlasRocked:
What’s the problem? Why should anyone vote for such a nonsense-amendment to the constitution in the first hand? I commend the Democrats, if they didn’t.
December 1st, 2011 at 5:35 pm
@ rootless
You have a good point. I am not well versed enough in how credit, reserves, and other related transactions occur to make an informed comment…. So instead of making a fool of myself, I will just say that you ask, what appears to be, a very legitimate question. :-)
December 1st, 2011 at 5:43 pm
@AtlasRocked;
Still doesn’t explain why they didn’t try it with a Bush in the white house.
If it was a serious attempt at changing policy rather than just a bunch of cheep politics they would attempt it whenever they have majorities in both they house and Senate. After all that would be when they had the best chances of passing something.
Furthermore, to make policy rather than politics you would negotiate with the democrats that were most likely to come to your side and make sure that all the poison pills were removed from the proposal.
Now it is a stupid idea anyway, because the federal government needs the ability to spend in economic and military emergencies. You can’t just tell the enemy to come back later when we have created a surplus such that we can afford to fight them.
December 1st, 2011 at 11:28 pm
@Atlas
A balance budget amendment is insanity. If the US government ran a balanced budget in 09 we may have had 40% unemployment and massive social unrest that make everybody worse off. The worse the economy is the fewer receipts the govt takes in, the more it must cut it spending and that makes the economy slow even more. The inverse is also true..In practice this would be WILDLY PROCYCLICAL. It would creat boom/bust cycles that make what the global economy just went through look like a walk in the park!
December 2nd, 2011 at 7:49 am
Regarding the argument that the gov’t needs the ability to accrue deficits in wartime, it would behoove us, I believe, to mandate the gov’t sell war bonds to US citizens to finance any war.
This will put the onus on the wealthy to stand behind any military action, right?
This takes away the argument that the rich are benefiting from the war, and forces the America people to invest in the war if they believe it is just and necessary, right?
That’s a win win for the anti-war crowd.
Deficit spending for economic reasons is massively ignorant. It is a 100% failing idea, no gov’t has ever created economic activity from deficit spending that results in addtional tax revenue to pay down the debt created. FDR’s deficits continually rose until the war started. His Treasury Secretary documented the spending was a failure in his memoirs. We’ve had rising deficits for 30 years, check the treasury’s “debt to the penny” web page, the debt NEVER comes down at all even during the Clinton/Gingrich years.
December 2nd, 2011 at 9:55 am
So war bonds would not be counted as a deficit????
And if the US was attacked, the rich would rich would immediately come to our aid and invest according to what is right for the country rather than what would give them the biggest profit ???????????????????????????? – my good you are living in another universe.
December 2nd, 2011 at 10:45 am
@Dedude – Yep, you’re right, Dedude, let’s just stick with the benevolence of the current policy, making sure all the middle class, old voters get their medicare and social security, and the young get stiffed with $50,000 of debt a piece, plus all the much larger, undocumented debt we’re hiding in the future medicare and social security off-book obligations. If the gov’t wants to start a war, then just spend the money, don’t raise taxes, let foreigners buy the war debt. Never, ever hold the Democrats responsible for debt, even though they’ve documented they are against a balanced budget with 2 votes against a BBA, and a consistent advocacy of long term, permanent Keynesian spending.
Blame the Republicans, blame the 1%.
You are the forum’s voice for righteousness and caring, bro.
December 2nd, 2011 at 11:33 am
So in your world problems only have 2 solutions:
1. The right one you are advocating.
2. Some idiotic alternative that you invent and presume anybody who is against your idea must be advocating.
You need to get out a little more bro – really.
December 2nd, 2011 at 11:43 am
AtlasRocked,
Since you think the root cause for all the problems in this society is welfare, unemployment benefits, medicare and social security, all these useless eaters in society creating the “debt problem”, “bankrupting this country” and preventing you from living in the world of which you dream, whatever dystopia this may be, let’s just kill them all. This would solve your problem. At least it would be more honest than just letting them rot and starve to death, what you apparently have in mind when you propose to eliminate all the government services for the useless eaters, thinking it “worked for hundreds of years” in this way.
December 2nd, 2011 at 11:59 am
@Dedude – I have little interesting in myself being promoted here.
If all you did was realize your advocacy, your ideas, are fiscally sodomizing our youth with massive documented and undocumented debt, while you cloak yourself in garments of benevolence, defending broad middle class handouts while calling them a safety net, it is a great day for America.
Who are these men of lust, greed, and glory?
Rip off the masks and let’s see.
But that’s not right – oh no, what’s the story?
There’s you and there’s me
That can’t be right
December 2nd, 2011 at 12:52 pm
“If all you did was realize your advocacy, your ideas, are fiscally sodomizing our youth with massive documented and undocumented debt”
I am not the one advocating proven failures such as austerity in the middle of a downturn.
December 2nd, 2011 at 1:10 pm
It looks like AtlasRocked’s arguments have lost now everything what still had been left of logical stringency and substance and their footing is reduced to accusations like, “You are Keynesians. You are bad people.”
December 2nd, 2011 at 3:00 pm
@Rootless – Put yourself in a kid’s shoes for a moment.
Which of us is a 20 year old going to believe – the guy who refuses to talk about the $50,000 of debt he got at his high school graduation ceremony, the one who refuses acknowledge our 2 largest social program “obligations” aren’t even tallied in he debt statement? The one’s whose party is voting against paying now for the goodies we want, while pointing at a tiny minority and saying “it’s their fault” like Harry Christmas in the diner on Dumb and Dumber?
December 4th, 2011 at 8:31 am
China is a poster child for the Austrian school of economics’ theory of the
business cycle. After undertaking the biggest stimulus program the world has ever
seen in response to the global financial crisis, the country is drowning in
unproductive investments financed with credit.
The government spent 15% of GDP largely on public works projects in inland
regions, financed with loans from the state-owned banks. Investment as a share of
GDP soared to 48.5% in 2010, and the M2 measure of money supply ballooned to 140%
that of the U.S.
Now comes the hangover. The public works projects are winding down, unleashing a
wave of unemployment and an uptick in social unrest. The banks’ nonperforming
loans are rising, and local governments are insolvent. The country is littered
with luxurious county government offices, ghost cities of empty apartment blocks,
unsafe high-speed rail lines and crumbling highways to nowhere.
http://online.wsj.com/article/SB10001424052970203833104577071901186892744.html
~~~
BR: Yet kicking the rest of the world’s collective asses at the same time
December 5th, 2011 at 8:22 am
Those Keynesian steroids really juice up an economy. What about the heart damage?
Still waiting for anyone on your forums to post an example where borrowing, either for Republican-style tax cuts or for Democrat-style overspending, paid back the debt created.
Looks like China will be another FAIL example.
And I’m still offering the $50 gift certificate to the restaurant of your choice to find a payback example. You’re all about facts and data pointing to solutions, right?