55% of the US National Debt Is the Result of Repaying Debt with More Debt(thesoundingline.com)
thesoundingline.com
55% of the US National Debt Is the Result of Repaying Debt with More Debt
http://thesoundingline.com/taps-coogan-55-of-the-us-national-debt-is-the-result-of-repaying-debt-with-more-debt/
93 comments
The notion this can go on indefinitely with no repercussions just bc the debt is denominated in our own currency doesn’t square with reality. Everything has a cost.
The limits are the resources that are available for sale in your country - goods, labour, services. Ultimately this is limited by the available natural resources.
It’s all about the real economy - to the money issuer the debt is just an accounting detail.
It’s all about the real economy - to the money issuer the debt is just an accounting detail.
The big cost of the national debt is that we have stuff now instead of later.
That’s only true of external debt. I.e. debts owed to other currency areas. Government debt is just the number of funds from the currency originator (central bank) to it’s distributor (treasury). Both institutions are a subject of the nation state, which is controlled by the government. So it’s not a “debt” in any colloquial sense of the term, neither is it an intergenerational transfer, since the souvereign nation state is an institution that both creates and enforces it’s own currency... which by definition implies it can create as much money (“debt”/“credit”) as it seems fit.
Yeah, "instead of later" would have been better constructed as "instead of waiting".
that cost would be inflation, but inflation is not even close to unreasonable levels. In fact, 2% ish inflation is healthy, so the "cost" is really more of a benefit at this point.
I often wonder how many people have thought about inflation as a tax on the poor. It hurts those with less discretionary funds the most. I also think it's ridiculous what the government does and does not include in it's inflation calculation(s).
Inflation is not a tax...
Inflation also reduces the value of old debt in relation to current income.
Inflation also reduces the value of old debt in relation to current income.
That is partly because of the petrodollar BTW.
> That is partly because of the petrodollar BTW
No, it's not. It's because Americans are massive consumers. We buy things, domestically and internationally, with U.S. dollars which in turn fuels demand for U.S. dollar-denominated assets. Attributing the dollar's hegemony to its use in commodities pricing reverses cause and effect.
No, it's not. It's because Americans are massive consumers. We buy things, domestically and internationally, with U.S. dollars which in turn fuels demand for U.S. dollar-denominated assets. Attributing the dollar's hegemony to its use in commodities pricing reverses cause and effect.
Foreign demand for USD does in effect lower US govt borrowing costs given our situation of having a fairly large trade deficit as well. Petroleum is one example of foreign USD demand (china buys oil with USD, for example), as are central bank reserve holdings, real estate transactions in Argentina, and I'm sure there are other examples as well. These foreign demands for USD in effect lower our borrowing cost as it prevents the USD from being dumped, eg, prevent a devaluation of the USD by foreign holders of USD, which allows us to keep interest rates low and thus finance a large deficit cheaply (so the govt keeps doing it).
> Foreign demand for USD does in effect lower US govt borrowing costs
This is correct. But petroleum trading in dollars is an effect of the dollar's hegemony, not a cause.
Every dollar transaction contributes to the dollar's network effects. But petroleum's contribution is small and overstated. Petrodollar hypotheses are closer to conspiracy theories than useful models.
The U.S. dollar is underwritten, ultimately, by American consumption. About 15% of American imports are petroleum [1][2], so it's a significant factor. But it's not special in any particular regard.
[1] https://traderiskguaranty.com/trgpeak/what-are-the-top-10-u-...
[2] https://wits.worldbank.org/CountrySnapshot/en/USA/textview
This is correct. But petroleum trading in dollars is an effect of the dollar's hegemony, not a cause.
Every dollar transaction contributes to the dollar's network effects. But petroleum's contribution is small and overstated. Petrodollar hypotheses are closer to conspiracy theories than useful models.
The U.S. dollar is underwritten, ultimately, by American consumption. About 15% of American imports are petroleum [1][2], so it's a significant factor. But it's not special in any particular regard.
[1] https://traderiskguaranty.com/trgpeak/what-are-the-top-10-u-...
[2] https://wits.worldbank.org/CountrySnapshot/en/USA/textview
Well, it dates back to when the gold standard ended in 1971, and then there was the oil crisis in 1973 etc.
> it dates back to when the gold standard ended in 1971, and then there was the oil crisis in 1973
The U.S. dollar was put at the centre of the Bretton Woods system in 1944 [1] because the United States, at the end of WWII, (a) held a global nuclear monopoly and (b) was the sole industrial power not bombed to the turn of the century. The dollar thus took its central place in global trade. That, in turn, led to oil being priced and traded in dollars.
[1] https://en.wikipedia.org/wiki/Bretton_Woods_Conference
The U.S. dollar was put at the centre of the Bretton Woods system in 1944 [1] because the United States, at the end of WWII, (a) held a global nuclear monopoly and (b) was the sole industrial power not bombed to the turn of the century. The dollar thus took its central place in global trade. That, in turn, led to oil being priced and traded in dollars.
[1] https://en.wikipedia.org/wiki/Bretton_Woods_Conference
As I understand it, the USD's strength is a function of the petrodollar. The petrodollar is supposedly a function of the U.S. military power.
IIRC a old PBS doc about Saudi Arabia explained that the Saudi's were made and offer that [they] couldn't refuse to 1) price in and accept USD; and 2) supply @ at price levels deemed reasonable by the U.S. Obviously, they've lost some ability to control price w/the advent of the technology and the futures exchanges, but still...
You're inverting cause and effect. The petro link to the dollar is because the US was the first major oil nation, it had a relatively dependable currency, and it developed the world's largest market economy. The dollar didn't become standard due to oil, oil (and most every other commodity) became priced in dollars because of the might of the US economy.
Japan's debt being overwhelmingly domestic, priced in yen, is also not due to the petroyen (which doesn't exist).
Japan's debt being overwhelmingly domestic, priced in yen, is also not due to the petroyen (which doesn't exist).
Articles like this are killing us, because they reinforce a false analogy that the federal government is like a business or a home. This is killing us politically. Its a shame.
This is the way modern monetary systems work (sovereign fiat money). Its healthy and totally normal. Federal debt is not debt that private citizens are liable for. A treasury security is like a CD, or savings account. Since the Federal Government Complex ( including the Federal Reserve Bank) can issue currency to infinity, there is no problem here. When a treasury security expires or is redeemed, they merely changes numbers in a spreadsheet. 99% of the time those "funds" are moved back into a new treasury security. There will always be demand for interest bearing risk free government debt.
go read http://neweconomicperspectives.org/ its all there.
This is the way modern monetary systems work (sovereign fiat money). Its healthy and totally normal. Federal debt is not debt that private citizens are liable for. A treasury security is like a CD, or savings account. Since the Federal Government Complex ( including the Federal Reserve Bank) can issue currency to infinity, there is no problem here. When a treasury security expires or is redeemed, they merely changes numbers in a spreadsheet. 99% of the time those "funds" are moved back into a new treasury security. There will always be demand for interest bearing risk free government debt.
go read http://neweconomicperspectives.org/ its all there.
> Since the Federal Government Complex ( including the Federal Reserve Bank) can issue currency to infinity, there is no problem here
You just broke central bank independence, and with it the political independence of monetary policy. Historically, that leads to rampant inflation. The federal debt isn't like household debt. But it can't be printed into infinity. The U.S. government's debt incurred as a result of fiscal policy (i.e. not including the Federal Reserve's debt, which technically includes every dollar bill) has real consequences in constraining the government's taxing and spending power without tripping up inflation.
You just broke central bank independence, and with it the political independence of monetary policy. Historically, that leads to rampant inflation. The federal debt isn't like household debt. But it can't be printed into infinity. The U.S. government's debt incurred as a result of fiscal policy (i.e. not including the Federal Reserve's debt, which technically includes every dollar bill) has real consequences in constraining the government's taxing and spending power without tripping up inflation.
Government debt isn’t “debt” in the classical sense. Let me suggest an analogy: a bank lends you a loan at intrest, but no expiry date. You can pay back the loan at any point in the future. Not only that, the bank has no ways of enforcing you to pay it back through legal action. On top of that, you are infinitely credit worthy, you can get as much loans as you want, including loans to cover existing loans. Would you consider this a “debt”. The answer is that it’s nothing like a debt in any meaningful sense of the term, it is merely a label used because of accounting convention.
Could you “print”* an amount of money several times the world GDP and get inflation?
That depends whether te money is circulated at all. Inflation is not a function of the money stock, it happens when sellers collectively mark up their price above current market rate. This is easier to do with rising expectations of higher return. The money stock is not some magical denominator on top of a real goods numerator.
*(it’s really just incrementing a number in a database, zero production cost, so print is another misnomer)
Could you “print”* an amount of money several times the world GDP and get inflation?
That depends whether te money is circulated at all. Inflation is not a function of the money stock, it happens when sellers collectively mark up their price above current market rate. This is easier to do with rising expectations of higher return. The money stock is not some magical denominator on top of a real goods numerator.
*(it’s really just incrementing a number in a database, zero production cost, so print is another misnomer)
Forget the currency aspect, which is nothing but a distraction. What matters is the balance between production and consumption. Without debt one must first produce goods before one can consume. Individuals can get around this by taking out loans, borrowing the opportunity for consumption in the present from someone else with a positive balance. For society as a whole, however, there is no avoiding it: goods which have not yet been produced by someone are not available to be consumed. Introducing new currency in order to fund consumption disrupts the balance, since there is no production to offset the consumption. The result is that society becomes poorer; capital is consumed without replacement, productivity falls, and goods become less affordable. (By this I refer not not only to rising prices, but to prices rising faster than wages, a increase in the cost of goods even after adjusting for the change in money supply.)
> Inflation is not a function of the money stock, it happens when sellers collectively mark up their price above current market rate.
The term "inflation" has multiple definitions. Yours is popular in political circles but is not very useful as an economic indicator because it conflates ordinary changes in prices due to supply and demand of goods and available production capacity with changes due to shifts in the money supply. The general increase in prices which results from consumption of capital is nothing like the change in prices which accompanies a deliberate increase in the supply of money. The former is a useful economic indicator which suggests a need for more saving and prudent investment, while the latter offers nothing but noise and tends to encourage malinvestment and waste.
> Inflation is not a function of the money stock, it happens when sellers collectively mark up their price above current market rate.
The term "inflation" has multiple definitions. Yours is popular in political circles but is not very useful as an economic indicator because it conflates ordinary changes in prices due to supply and demand of goods and available production capacity with changes due to shifts in the money supply. The general increase in prices which results from consumption of capital is nothing like the change in prices which accompanies a deliberate increase in the supply of money. The former is a useful economic indicator which suggests a need for more saving and prudent investment, while the latter offers nothing but noise and tends to encourage malinvestment and waste.
No . But you are getting there. Yes fiscal policy is the lever that determines the amount ( quantity) of money ( or demand ) driving the economy . Monetary policy is interest rates or the price of money. And ,there is mounting evidence that hight interest rates actually have the opposite of the intended effect . That is, that higher interest rates lead to higher net income to the private sector which is a bit inflationary.
> higher interest rates lead to higher net income to the private sector which is a bit inflationary.
There a paper for this? low interest rates tend to be associated with poor economic conditions, in the extreme liquidity trap or secular stagnation, so this conclusion makes sense though the causal effect is the opposite of what is suggested by your comment... As an example, interest rates (ex fed funds) were really low during the great depression!
There a paper for this? low interest rates tend to be associated with poor economic conditions, in the extreme liquidity trap or secular stagnation, so this conclusion makes sense though the causal effect is the opposite of what is suggested by your comment... As an example, interest rates (ex fed funds) were really low during the great depression!
I agree with this statement: "There will always be demand for interest bearing risk free government debt".
Now go ask investors how they feel about Greek/Argentinian/Venezuelan etc bonds. A country is just a large collection of people and can be thought of as a giant person. They aren't magical creatures / objects. If a country has no steady job and loves wasting money no one will lend it money. Same applies to a business and a person.
If you hold that to be true, then there can definitely be a limit at which point a person will loan money (buy bonds) from a country. Now the question for the U.S is where is that limit, and if we hit it how painful will it be to get back into "healthy" shape.
Just like a 400 lb person being told its time to lose weight or they will die of heart attack/diabetes maybe its better to start eating right and exercising BEFORE you get to that point in life.
Now go ask investors how they feel about Greek/Argentinian/Venezuelan etc bonds. A country is just a large collection of people and can be thought of as a giant person. They aren't magical creatures / objects. If a country has no steady job and loves wasting money no one will lend it money. Same applies to a business and a person.
If you hold that to be true, then there can definitely be a limit at which point a person will loan money (buy bonds) from a country. Now the question for the U.S is where is that limit, and if we hit it how painful will it be to get back into "healthy" shape.
Just like a 400 lb person being told its time to lose weight or they will die of heart attack/diabetes maybe its better to start eating right and exercising BEFORE you get to that point in life.
One might suggest that Greek/Argentinian/Venezuelan bonds aren't risk-free. :)
It's true that the US Govt could print its way out of nominal debt, but there are market constraints on how aggressively it may do so if we want the system to keep working, because stable inflation is a key component in the demand for government bonds. Once inflation stops being stable, your government's ability to issue new bonds is in trouble, because buyers demand higher yields to encapsulate the risk of that uncertainty.
I'm of the opinion that reality is somewhere in the middle - US government debt isn't the same as household debt, but it's not meaningless, either, and I think it does everyone a disservice when we discuss it as being characteristic of either extreme.
It's true that the US Govt could print its way out of nominal debt, but there are market constraints on how aggressively it may do so if we want the system to keep working, because stable inflation is a key component in the demand for government bonds. Once inflation stops being stable, your government's ability to issue new bonds is in trouble, because buyers demand higher yields to encapsulate the risk of that uncertainty.
I'm of the opinion that reality is somewhere in the middle - US government debt isn't the same as household debt, but it's not meaningless, either, and I think it does everyone a disservice when we discuss it as being characteristic of either extreme.
> there are market constraints on how aggressively it may do so if we want the system to keep working
Part of which involves discussing deficit and debt.
Part of which involves discussing deficit and debt.
> There will always be demand for interest bearing risk free government debt.
This is really naive. Question is always at what price? I could argue there is always a demand for the common stock of a company in bankruptcy, just at a really poor price :-). More pertinent, Late 70s US bond market saw a huge decline in the value of government bonds... Though they were never defaulted upon, holding them was not exactly risk free. Fluctuations in price of "risk free" govt bonds can bankrupt traders/investors, eg, LTCM.
This is really naive. Question is always at what price? I could argue there is always a demand for the common stock of a company in bankruptcy, just at a really poor price :-). More pertinent, Late 70s US bond market saw a huge decline in the value of government bonds... Though they were never defaulted upon, holding them was not exactly risk free. Fluctuations in price of "risk free" govt bonds can bankrupt traders/investors, eg, LTCM.
A couple of ways I can think of real quickly that this is meaningless:
1. All money is debt insofar as it only represent goods as services yet to be rendered, an I Owe You as it were
2. If an entity is able to continue borrowing (more and more) money it represents a willingness of lenders to lend, which is a direct representation of their faith in that entities ability to service the debt
3. Whether a nation-state should balance it's budget is more a philosophical question coloured be ideology rather than a pragmatic concern.
4. If you believe the good times are going to keep rolling, and any bad times will, on average, pass relatively swiftly (people do have a tendency to persevere), then not borrowing money results in a lost opportunity cost.
I'm sure someone can respond with some equally convincing reasons as to why nation-states shouldn't run a deficit.
Go!
1. All money is debt insofar as it only represent goods as services yet to be rendered, an I Owe You as it were
2. If an entity is able to continue borrowing (more and more) money it represents a willingness of lenders to lend, which is a direct representation of their faith in that entities ability to service the debt
3. Whether a nation-state should balance it's budget is more a philosophical question coloured be ideology rather than a pragmatic concern.
4. If you believe the good times are going to keep rolling, and any bad times will, on average, pass relatively swiftly (people do have a tendency to persevere), then not borrowing money results in a lost opportunity cost.
I'm sure someone can respond with some equally convincing reasons as to why nation-states shouldn't run a deficit.
Go!
> 1. All money is debt insofar as it only represent goods as services yet to be rendered, an I Owe You as it were
You're drawing a false equivalence. A dollar (or a gold bar) does not represent a specific amount of goods or services that any specific counterparty is bound to deliver. So in general no, money is not inherently debt.
> 4. If you believe the good times are going to keep rolling, and any bad times will, on average, pass relatively swiftly (people do have a tendency to persevere), then not borrowing money results in a lost opportunity cost.
On the flip side, creating inflation channels wealth up towards the top, to those who are able to better bear the burden of roundtripping through the inflating assets rather than saving in dollars. Plus the lagging effect of wages means that they only rise after the people earning them are feeling enough pain to demand more.
Even taking the CPI calculation at face value, it does not represent the whole of inflation. We would expect prices in a technological economy to be level or trending downwards, due to basic market optimization. Every time some innovation makes things "cheaper" and yet their real prices still go up, we're getting hit twice!
I'd say the long term effects of centralizing the economy (ie the wealth imbalance we're dealing with now) are more harmful than forgoing a little top-down metric of "growth". We have a "shortage of jobs" precisely because people at the bottom are still stuck chasing 40 hours a week to service debt, rather than having been able to build wealth (ie economic negotiating power) in dollars.
And of course all that too-hot "growth" is occurring by churning through real natural resources, suboptimally even. If you care at all about sustainability or global warming, and you don't look at the US's monetary policy and weep, you need to study deeper.
You're drawing a false equivalence. A dollar (or a gold bar) does not represent a specific amount of goods or services that any specific counterparty is bound to deliver. So in general no, money is not inherently debt.
> 4. If you believe the good times are going to keep rolling, and any bad times will, on average, pass relatively swiftly (people do have a tendency to persevere), then not borrowing money results in a lost opportunity cost.
On the flip side, creating inflation channels wealth up towards the top, to those who are able to better bear the burden of roundtripping through the inflating assets rather than saving in dollars. Plus the lagging effect of wages means that they only rise after the people earning them are feeling enough pain to demand more.
Even taking the CPI calculation at face value, it does not represent the whole of inflation. We would expect prices in a technological economy to be level or trending downwards, due to basic market optimization. Every time some innovation makes things "cheaper" and yet their real prices still go up, we're getting hit twice!
I'd say the long term effects of centralizing the economy (ie the wealth imbalance we're dealing with now) are more harmful than forgoing a little top-down metric of "growth". We have a "shortage of jobs" precisely because people at the bottom are still stuck chasing 40 hours a week to service debt, rather than having been able to build wealth (ie economic negotiating power) in dollars.
And of course all that too-hot "growth" is occurring by churning through real natural resources, suboptimally even. If you care at all about sustainability or global warming, and you don't look at the US's monetary policy and weep, you need to study deeper.
> You're drawing a false equivalence. A dollar (or a gold bar) does not represent a specific amount of goods or services that any specific counterparty is bound to deliver. So in general no, money is not inherently debt.
This is confused. A dollar is a debt/credit dual created by central bank and private finance operations.
A dollar is a unit of monetary accounting, a physical dollar is a token representation of a debt/credit entry inside an accounting ledger.
A bar of gold is a commodity denominated in a monetary value. It is not a token representation of a state enforced contract.
This is confused. A dollar is a debt/credit dual created by central bank and private finance operations.
A dollar is a unit of monetary accounting, a physical dollar is a token representation of a debt/credit entry inside an accounting ledger.
A bar of gold is a commodity denominated in a monetary value. It is not a token representation of a state enforced contract.
Yes, a dollar does represent a coupled obligation of someone out there to collect it (or another dollar) in order to satisfy their debt. I do agree that a dollar is therefore debt-based money.
What I was refuting was OP calling all currency in general "debt" based on it having little "intrinsic use", and therefore only useful for what it can be traded for.
What I was refuting was OP calling all currency in general "debt" based on it having little "intrinsic use", and therefore only useful for what it can be traded for.
> Whether a nation-state should balance it's budget is more a philosophical question coloured be ideology rather than a pragmatic concern
It's a pragmatic concern inasmuch as the lenders's "faith in [the government's] ability to service the debt" in step 2 is not infinite. If you lose that faith, you have to (a) raise rates, (b) impose capital controls, (c) raise taxes and/or (d) force your central bank to monetize the debt. Each of these do bad things to the economy. The national debt isn't like household debt because the government is immortal, but that doesn't mean it's meaningless.
It's a pragmatic concern inasmuch as the lenders's "faith in [the government's] ability to service the debt" in step 2 is not infinite. If you lose that faith, you have to (a) raise rates, (b) impose capital controls, (c) raise taxes and/or (d) force your central bank to monetize the debt. Each of these do bad things to the economy. The national debt isn't like household debt because the government is immortal, but that doesn't mean it's meaningless.
It's true that _government debt_ is not meaningless, but the 55% ratio is meaningless.
Suppose you have a really nice condition Jackson Model C, and, because you're a crazy person you've been driving that damn thing every day since you bought it last century. Unsurprisingly the Jackson is not very reliable, and so you sometimes drive it to the garage where it can be repaired. Now alas the dry batteries in your Jackson are its weak spot, and you find they must be replaced every 100 miles or so. The garage is two miles away.
After you've driven 2000 miles in your Jackson Model C, much of that time with antique car enthusiasts yelling at you that it belongs in a museum, you have replaced the battery about 20 times, each trip to do taking four miles (there and back) and so 80 miles.
I observe that you've used 80% of the life of a battery just on driving to and from the garage to replace the batteries.
Like this 55% of national debt statistic, my observation is at once true and completely meaningless.
Suppose you have a really nice condition Jackson Model C, and, because you're a crazy person you've been driving that damn thing every day since you bought it last century. Unsurprisingly the Jackson is not very reliable, and so you sometimes drive it to the garage where it can be repaired. Now alas the dry batteries in your Jackson are its weak spot, and you find they must be replaced every 100 miles or so. The garage is two miles away.
After you've driven 2000 miles in your Jackson Model C, much of that time with antique car enthusiasts yelling at you that it belongs in a museum, you have replaced the battery about 20 times, each trip to do taking four miles (there and back) and so 80 miles.
I observe that you've used 80% of the life of a battery just on driving to and from the garage to replace the batteries.
Like this 55% of national debt statistic, my observation is at once true and completely meaningless.
1. True for this discussion, but I still feel that it's important to point out that this is just one option. Money can have intrinsic value, like making it out of gold coins.
2. True, but NOT in this case. The US government finances it's own debt. So the US borrowing more does NOT represent a willingness (of anyone but the US government) to borrow to the US government. This is true for most/all governments worldwide.
3. True, with MAJOR caveats. If we're talking about 5%, -5%, then sure. If we're talking about a 50% shortage, then we're in the danger zone. If a government finances it's spending to a significant extent ... well there's no historical examples of it ending well. Even "when it works" it's very bad for the people living under such governments. Likewise, it's very bad for a government to run a large surplus.
So 3 only applies for "small" values of unbalanced.
4. Sadly, not true. This is a myth coming from the fact that the financial world effectively rewrites history to "erase" bankruptcies. If you reintroduce them it becomes clear that if you owned a global debt index, say, you'd be screwed.
(so, sorry mr. Bogle, you're only right for very recent history (given "too big to fail") and frankly, you know damn well that you're wrong for the long term).
2. True, but NOT in this case. The US government finances it's own debt. So the US borrowing more does NOT represent a willingness (of anyone but the US government) to borrow to the US government. This is true for most/all governments worldwide.
3. True, with MAJOR caveats. If we're talking about 5%, -5%, then sure. If we're talking about a 50% shortage, then we're in the danger zone. If a government finances it's spending to a significant extent ... well there's no historical examples of it ending well. Even "when it works" it's very bad for the people living under such governments. Likewise, it's very bad for a government to run a large surplus.
So 3 only applies for "small" values of unbalanced.
4. Sadly, not true. This is a myth coming from the fact that the financial world effectively rewrites history to "erase" bankruptcies. If you reintroduce them it becomes clear that if you owned a global debt index, say, you'd be screwed.
(so, sorry mr. Bogle, you're only right for very recent history (given "too big to fail") and frankly, you know damn well that you're wrong for the long term).
There's a lot of talk about how the Federal Gov't isn't like a household or business. It is different, but not to extent that people who preach that like to pretend.
That aside, I wonder what opportunities and paradigm shifts we are missing out on by being ok with all this debt, good or not.
The American gov't is so far in the hole that it doesn't have ANY wealth! What if we built up a Sovereign Wealth Fund such that we could completely eliminate taxes and fund all government activities from the interest? What would that world look like?
That aside, I wonder what opportunities and paradigm shifts we are missing out on by being ok with all this debt, good or not.
The American gov't is so far in the hole that it doesn't have ANY wealth! What if we built up a Sovereign Wealth Fund such that we could completely eliminate taxes and fund all government activities from the interest? What would that world look like?
The government should just run deficits for financing projects and use tax for redistribution and inflation control, like it does today. The issue today is excessive private sector money creation and lack of federal deficits to offset the debt overhang created by private finance.
sovereign wealth funds underperform the market. They are the best solution out of a field of very bad solutions for what to do when your country has been struck by the resource curse. If you were an individual it would be like winning the lottery (lots of people's lives go totally down the shitter after winning the lottery). Setting a goal for your government of setting up a sovereign welath fund would be kind of like the average individual who hasn't won the lottery making a goal of setting up a trust fund, and getting the money to do so by working at mcdonalds instead of going to college (or some other more valuable alternative). The significant difference between this individual example and the government is the government is a worse decision maker than the individual since it can only make decisions by committee (or in a dictatorship by one uninformed individual who can't possibly be aware of everything going on in his/her country). Therefore the government should stick to the happy path (taking on college debt or equivalently funding basic social services/national defense/regulatory oversight through debt instruments).
Funding the government on interest is going to require more than 100T in capital.
US GDP is 18T, which means we only need 5 years worth of GDP.
If we saved/invested a surplus each year equal to the amount we reduced the public debt under Clinton in the year 2000 - $230 billion and assumed the 4% annualized returns - the same rate you're requiring for your 100T figure - for 75 years, we'd have 100T.
If we saved/invested a surplus each year equal to the amount we reduced the public debt under Clinton in the year 2000 - $230 billion and assumed the 4% annualized returns - the same rate you're requiring for your 100T figure - for 75 years, we'd have 100T.
It's an interesting point and something that we should talk about. But the article doesn't really make the case that this is a waste of money. If it was advantageous to take on the debt in the first place, it might also be worthwhile to keep the debt on the books now. Presumably there is an interest rate at which it will stop being worth servicing the debt, but I don't really know where that point is.
well the game will continue until you cant service your debt payments anymore. Then you default. Crisis, pain, recession. Rinse then repeat.
https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises
https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises
There's an alternative to defaulting on debt and that is to pay it off. Is there even a case to be made that we are in or near a crisis?
> There's an alternative to defaulting on debt and that is to pay it off.
I think it's in one of my CFA books -- definitely in other materials I have or have viewed--, but I think the point of the game is to trade as much intrinsically worthless fiat for extrinsically valuable stuff as possible. If and/or when one exhausts one's ability to trade the fiat, then one is supposed to walk away a winner, so to speak.
This sort of came yesterday in a C-Span program, when a caller essentially asked what backs the USD.[1]
[1] https://www.c-span.org/video/?448590-3/washington-journal-ch...
I think it's in one of my CFA books -- definitely in other materials I have or have viewed--, but I think the point of the game is to trade as much intrinsically worthless fiat for extrinsically valuable stuff as possible. If and/or when one exhausts one's ability to trade the fiat, then one is supposed to walk away a winner, so to speak.
This sort of came yesterday in a C-Span program, when a caller essentially asked what backs the USD.[1]
[1] https://www.c-span.org/video/?448590-3/washington-journal-ch...
Amen. You have to compare assets vs debt, and then you have to compare asset growth projections vs debt growth projections, as any responsible finance thinking would go. Even then US debt provides a market function, so debt on a governmental level is quite different than say household or corporate debt.
To wit, US assets value in something like the 240 trillion dollar range, though I’m sure you could find wide variance to such measurements given the complexity of the US asset holdings.
To wit, US assets value in something like the 240 trillion dollar range, though I’m sure you could find wide variance to such measurements given the complexity of the US asset holdings.
I was much more sad when I initially thought this was talking about the debts of individuals.
Consumer debt is at all time high as well.
https://www.newyorkfed.org/microeconomics/hhdc.html
https://www.newyorkfed.org/microeconomics/hhdc.html
Private sector debt is at the highest level in recorded history. This is why the post 2008 recovery was so sluggish, since on average every unit of currency circulated has to pay for a fraction of the debt servicing cost. If it stops doing this a crisis will occur, which will either be contractionary or bubble financed by creating new debt to finance old debt. The national authority, with it’s monopoly on coercion can use it’s power to declare debts null and void (this happens all throughout history), create new currency free of debt (pure credit) and spend it into the economy. It can also create an artificial hyperinflation to reduce debt burdens, instate a new currency region altogether (money is simply legal tender subject to the laws the state dictates for it), etc
With inflation, GDP growth, and population growth, that is generally true at any time.
I briefly searched for inflation-adjusted debt per capita but couldn't find it.
There is the federal debt to GDP ratio, which is 105%. This is at least a 50-year high[0]. FRED's household debt to GDP data doesn't go back very far, but we can see it's off the highs off 2008[1]. (edit: added household debt to GDP)
[0] https://fred.stlouisfed.org/series/gfdegdq188S
[1] https://fred.stlouisfed.org/series/HDTGPDUSQ163N
There is the federal debt to GDP ratio, which is 105%. This is at least a 50-year high[0]. FRED's household debt to GDP data doesn't go back very far, but we can see it's off the highs off 2008[1]. (edit: added household debt to GDP)
[0] https://fred.stlouisfed.org/series/gfdegdq188S
[1] https://fred.stlouisfed.org/series/HDTGPDUSQ163N
> I briefly searched for inflation-adjusted debt per capita but couldn't find it
You're looking for household debt to GDP [1]. It is a real (versus nominal) statistic because it's a ratio between two nominal terms. It also communicates financial health better than a per-capita term, since it measures against production.
[1] https://fred.stlouisfed.org/series/HDTGPDUSQ163N
You're looking for household debt to GDP [1]. It is a real (versus nominal) statistic because it's a ratio between two nominal terms. It also communicates financial health better than a per-capita term, since it measures against production.
[1] https://fred.stlouisfed.org/series/HDTGPDUSQ163N
I managed to find that - thanks!
A few other interesting angles: Household Debt Service Payments as a Percent of Disposable Personal Income[0] (10.3%, near 40-year lows), Consumer Debt Service Payments as a Percent of Disposable Personal Income[1] (5.9%, near 40-year average), Personal Saving Rate[2] (3.2%, near 50-year lows).
[0] https://fred.stlouisfed.org/series/TDSP
[1] https://fred.stlouisfed.org/series/CDSP
[2] https://fred.stlouisfed.org/series/PSAVERT
A few other interesting angles: Household Debt Service Payments as a Percent of Disposable Personal Income[0] (10.3%, near 40-year lows), Consumer Debt Service Payments as a Percent of Disposable Personal Income[1] (5.9%, near 40-year average), Personal Saving Rate[2] (3.2%, near 50-year lows).
[0] https://fred.stlouisfed.org/series/TDSP
[1] https://fred.stlouisfed.org/series/CDSP
[2] https://fred.stlouisfed.org/series/PSAVERT
Part of the problem might be that it became harder for folks to obtain debt (mortgages specifically).
What happens if the US inflates away the national debt?
The interest rates go up on the new debt instruments issued to make payments on the old debts.
Weimar :)
This reminded me of a documentary I watched quite a while ago:
The Money Masters - https://www.youtube.com/watch?v=HBk5XV1ExoQ
I always wondered which parts are an accurate description of the current monetary system and which are unfounded conspiracy theories.
Where are these interest payments going to? Who profits off the US being perpetually in debt?
Interest payments go to whoever holds the relevant debt security when the interest payment is made. But since the size of this payment is known in advance and the United States is (so far at least) a good debtor, this will be priced into the security before the payment is made.
In the case of T-bills, this is just baked into the price. The way that works is the US government says OK, a year from now we will give you $1000 for this piece of paper, now, how much will you buy the piece of paper for? And maybe they can find buyers for $985, so they get $985 now (which they can spend on stuff the United States needs, now) and they pay back $1000 in a year, by which time it's very possible that they've benefited by far more than $15 in practical terms.
If you have a generic investment that can't afford to accidentally fall in value massively overnight, but does need some liquidity, particularly if you're American, there's a good chance it's invested in buying these securities, whether T-bills, notes or bonds, because the US government has, so far at least, been good for the money. For example if you're going to need your pension funds in two years, you can't afford to have them tied to the NASDAQ just as the dotcom crash smashes it, but Treasury notes are a much safer place to keep it, even though say MSFT _on average_ makes more money over a long time.
In the case of T-bills, this is just baked into the price. The way that works is the US government says OK, a year from now we will give you $1000 for this piece of paper, now, how much will you buy the piece of paper for? And maybe they can find buyers for $985, so they get $985 now (which they can spend on stuff the United States needs, now) and they pay back $1000 in a year, by which time it's very possible that they've benefited by far more than $15 in practical terms.
If you have a generic investment that can't afford to accidentally fall in value massively overnight, but does need some liquidity, particularly if you're American, there's a good chance it's invested in buying these securities, whether T-bills, notes or bonds, because the US government has, so far at least, been good for the money. For example if you're going to need your pension funds in two years, you can't afford to have them tied to the NASDAQ just as the dotcom crash smashes it, but Treasury notes are a much safer place to keep it, even though say MSFT _on average_ makes more money over a long time.
I believe it is those who own US Treasury Securities.
These are the foreign holdings: http://ticdata.treasury.gov/Publish/mfh.txt
From what I understand, the rest are citizens & US based funds.
These are the foreign holdings: http://ticdata.treasury.gov/Publish/mfh.txt
From what I understand, the rest are citizens & US based funds.
Everyone who buys bonds, so like every retirement account.
The treasury has a one-page breakdown of the kinds of debt. https://www.treasurydirect.gov/govt/reports/pd/mspd/2018/opd... It's not a deep dive but I thought it was a great overview for fitting on one page.
(edit: more recent link)
(edit: more recent link)
19k could be paid off by a single person, has this increased in the last two years?
Me, you (indirectly if nothing else), mutual funds, companies, countries.
Obviously the people who enjoyed the benefits of the borrowed money. Which might have been road users and university students, but actually turned out to be hundreds of thousands of dead Iraqis.
If you lend money to yourself, why not just write the debt off?
Because we're not actually borrowing from ourselves, we're borrowing from future generations. That said, there is no plan (or will) to ever pay back the debt, so the difference is academic. The politicians will just keep borrowing (i.e. spending; it makes zero difference whether the funds come from loans or inflating the currency supply) until there is no capital left to consume.
How can there be no capital left to consume if the borrowed money has no support to back it up? You're saying we're borrowing from future generations which is like saying we're borrowing money from air. If we're borrowing money from non-existent source then there is an endless supply of the money, isn't there?
And if there's no plan to pay it off, then why not just write it off? It makes no difference, the whole effect is psychological.
And if there's no plan to pay it off, then why not just write it off? It makes no difference, the whole effect is psychological.
Money per se is irrelevant; it's what you can buy with it that counts. Normally, to get money you have to produce something; when you spend that money you're claiming your share of what has been produced. If you buy on credit (with intent to repay) then you're committing your own future production capacity towards paying off the loan, with interest. If we want to hand our descendents a world at least as good as the one we received from our ancestors then we need to produce at least as much as we consume—more, actually, since some of that production will need to be dedicated toward the preservation and maintenance of capital (production capacity). If we borrow without any intention of ever paying down that debt, or (equivalently) introduce new money out of thin air in order to fund consumption, then the equation is unbalanced; there is no production to offset that consumption. That implies a reduction in capital investment (again: production capacity), which means goods will be harder to produce and thus more scarce in the future, which means a poorer quality of life for future generations.
> And if there's no plan to pay it off, then why not just write it off? It makes no difference, the whole effect is psychological.
On that point I agree with you. However, I am arguing that we should plan to pay it off, and thus do our part to maintain and improve this world before handing it off to our children.
> And if there's no plan to pay it off, then why not just write it off? It makes no difference, the whole effect is psychological.
On that point I agree with you. However, I am arguing that we should plan to pay it off, and thus do our part to maintain and improve this world before handing it off to our children.
And it breaks my heart that both parties are to blame.
Yes, a real heart-breaker. http://zfacts.com/p/318.html
"Debt Is the Result of Repaying Debt with More Debt"
Actually, you can pay debt only with more debt. This is fundamental to capitalism and reason for it's dynamic and future downfall.
"In order to pay back debt with interest, it is necessary to have economic growth, and financial growth and growth in fossil fuel use are very closely tied." https://ourfiniteworld.com/2011/02/21/there-is-no-steady-sta...
Actually, you can pay debt only with more debt. This is fundamental to capitalism and reason for it's dynamic and future downfall.
"In order to pay back debt with interest, it is necessary to have economic growth, and financial growth and growth in fossil fuel use are very closely tied." https://ourfiniteworld.com/2011/02/21/there-is-no-steady-sta...
This reminds me of selling Bitcoin in order to pay off debt.
more like paying off one credit card with another that has higher APR.
Next big crisis might be a sovereign debt crisis on a global scale. The only question is how long this can continue...until SHTF.
Next big crisis might be a sovereign debt crisis on a global scale. The only question is how long this can continue...until SHTF.
I don't think you read it correctly. What we're doing, indeed what we've done since 2008, was borrow at a historically low interest rate to pay back interest and debt bought at a higher interest rate.
Sadly, if world history is any guide, the problem will be "solved" on the battlefield.
The USA enjoys a unique position with respect to sovereign debt, since it is denominated in our own currency. Also, a great deal of it is owed to ourselves and it has always been the plan of political parties to just stiff future generations. Debt crises might happen but probably not the biggest problem faced by USA. It is odd to focus on borrowing when our country faces numerous acute problems at the moment.
"This interest includes repaying principal."
Stop right there. Something's fishy with the terminology/math/reasoning then, no? If the "interest" includes principal, then what is the interest? It's like saying "Use one cup of flour and water" or "The size of my penis is 6 feet including my height."
Here's what let's do: subtract the principal from the interest. That should leave you with the interest only. Therefore
I - P = I
Subtract I from both sides...
-P = 0
Divide by -P...
1 = 0
This is the axiom of Black Math.
Stop right there. Something's fishy with the terminology/math/reasoning then, no? If the "interest" includes principal, then what is the interest? It's like saying "Use one cup of flour and water" or "The size of my penis is 6 feet including my height."
Here's what let's do: subtract the principal from the interest. That should leave you with the interest only. Therefore
I - P = I
Subtract I from both sides...
-P = 0
Divide by -P...
1 = 0
This is the axiom of Black Math.
That's the way reporting on the repayment of the national debt is done. The point of the article is unchanged. Those familiar with Treasuries will understand
If I run a deficit of 100 dollars, borrow 100 dollars and I repay the loan by borrowing 100 dollars and the interest on both is 10 dollars, than I owe 220 dollars but I only got 100 dollars of real spending.
That is what the article is saying. of the $21.4 trillion in debt, only $14 trillion funded deficits and half of those deficits were the results of rolling debt over.
No funny math at all
If I run a deficit of 100 dollars, borrow 100 dollars and I repay the loan by borrowing 100 dollars and the interest on both is 10 dollars, than I owe 220 dollars but I only got 100 dollars of real spending.
That is what the article is saying. of the $21.4 trillion in debt, only $14 trillion funded deficits and half of those deficits were the results of rolling debt over.
No funny math at all
My point is that it's bad terminology, which I show by proving it leads to bad math. I notice at no point do you refer to the $10 as including part of the $100 in either case, so apparently you agree.
s/This interest includes/These payments include
This is an inevitable consequence of basing the money supply on debt. The Federal Reserve banks are responsible for making money and loaning it out into circulation. There is never enough money to pay back the interest on the loans, so the federal reserve loans out a little bit more every year.
A solution to this quandary was figured out in 2011. Due to a quirk in the laws, the US Government has the ability to issue platinum coins of any value. These 'coins' never have to be paid back. The U.S.'s national debt could be retired by minting a couple "trillion dollar coins":
https://en.wikipedia.org/wiki/Trillion_dollar_coin
The Federal Reserve does a decent job at keeping the money supply growing at less than a hyper-inflationary rate, but the value of our money has collapsed since I was a kid, since we all were kids...
A solution to this quandary was figured out in 2011. Due to a quirk in the laws, the US Government has the ability to issue platinum coins of any value. These 'coins' never have to be paid back. The U.S.'s national debt could be retired by minting a couple "trillion dollar coins":
https://en.wikipedia.org/wiki/Trillion_dollar_coin
The Federal Reserve does a decent job at keeping the money supply growing at less than a hyper-inflationary rate, but the value of our money has collapsed since I was a kid, since we all were kids...
> This is an inevitable consequence of basing the money supply on debt
Not really. The U.S. government ran surpluses in the nineties. This led to hand-wringing as banks imagined a world without Treasuries, which would make collateralisation quite complicated. (We had the same "not enough safe assets" conversation after the financial crisis.)
The U.S. government could wipe out its debt. The Federal Reserve couldn't, as every dollar bill is technically a Federal Reserve note, but that's a different beast.
Not really. The U.S. government ran surpluses in the nineties. This led to hand-wringing as banks imagined a world without Treasuries, which would make collateralisation quite complicated. (We had the same "not enough safe assets" conversation after the financial crisis.)
The U.S. government could wipe out its debt. The Federal Reserve couldn't, as every dollar bill is technically a Federal Reserve note, but that's a different beast.
I'm saying that under the Federal Reserve system, the total indebtedness of the U.S. economy must always increase. If the government starts to pay off its debt, the private sector must increase its debt levels. If the economy doesn't keep borrowing money, the money supply would rapidly collapse, leading to a deflationary spiral.
The only money that never has to be paid back are coins.
Do you have an alternate understanding of our monetary system?
The only money that never has to be paid back are coins.
Do you have an alternate understanding of our monetary system?
This could be a massive problem if the debt was denominated in a currency other than US dollars (which the US Government controls the monopoly currency issuer for). But since all of the US's debt is in US dollars, and they're not constrained by artificial limitations like commodity convertibility or fixed exchange rates, it's just an interesting fact that doesn't actually really matter much.
The real killers are excessive private sector debt, and even worse, debt denominated in a foreign currency.