Let me first address order of operations…The government spends first then it finances that spending. That’s what the debt ceiling debate is all about. A purely political argument about paying bills on money already spent, but this is a minor point.
You must understand that bonds, the instruments that the government uses to finance “debt” and the dollars the Fed create are two forms of the same thing? They are both obligations of the US government. As such, bonds are just a tool to remove liquidity so that further spending does not create inflation.
Saying that dollars are obligations of the Fed is the same thing. The Federal Reserve is the government (despite the protestations here). The Fed cannot create money on its own, ex nihilo (it must secure collateral to balance it’s “ledger”) nor can it spend outside its function as the CB (to provision itself). That is, It can’t purchase goods and services from the private sector unless those goods and services are consistent with its function as a CB. US Treasuries are the primary means of collateral held by the Fed and until QE, collateral held by the Fed was overwhelmingly in the form of US Treasuries. Treasuries are created by the Federal government without having to hold specific collateral. Having said that, in theory the Fed could take actions (or refuse to) that Congress felt wasn’t in the interest of the nation and while Congress cannot dictate to the Fed (rules that Congress created) It can dissolve the Fed if Congress felt it necessary (not something Congress could legally do with say, Goldman Sachs).
The Fed only has the autonomy the Congress allows it to have. When I walk my dog, I can’t pick and choose what he sticks his nose in, but I can choose whether or not he get’s that chance. Saying that because the dog can make decisions on the end of his leash is not the same as being free to do what he wants.
In a bit more detail…
US dollars are a liability (in the accounting sense only) of the government. Total government liabilities can only be lowered by running a federal surplus (taxing more money away from us than they spend into the economy).
Bonds, reserves, and cash/coins are all government liabilities. (Reserves and cash/coins are actually liabilities of the Fed, but as I said the Fed is part of the government.) They are completely interchangeable - Treasury issues bonds, the Fed buys those bonds with reserves that it creates on the spot (The bond creates the justification, the collateral, for the dollars the Fed creates), and the reserves are held as commercial bank assets in the private sector. The Fed can also sell bonds and reverse the transaction. Finally, commercial banks exchange reserves for cash/coins (and vice versa) as customer demand to hold cash dictates.
It costs the government nothing to issue bonds, and it costs the government nothing to exchange one type of liability for another. This is simply how governments with fiat currencies operate. Any “debt” suggested by bonds is illusory; the government does not need to gather up pre-existing dollars, or any other resource, in order to meet their bond obligations. This is all done by changing entries on a ledger.
Now you point to private sector cash creation. Cash created is a reflection of reserves created. The private banking system is limited both by the reserves the government, vis-a-vi the Fed, creates and the publics desire to borrow.
As QE has soundly illustrated, you can create all the reserves you want, it will not necessarily result in money created outside the banking system.
The Government recognizes revenue, and increases its deficits on a monthly basis. There are even revenue and expenditures it recognizes on a daily basis.
In months where spending will end up exceeding tax revenue, the Government sells more bonds to cover the difference. There’s usually a deadline put into place to ensure it creates & sells those bonds in time.
In July of 2011 for instance, the Government predicted $203 Billion in revenue for August, while it had authorized itself to spend $307 billion in that same month.
The debt ceiling debate during that time, was whether the Government could sell bonds by August 2nd to cover the difference. If it did not, spending would have to be lowered to match revenue.
This could have meant a roll over of our debt that was coming due that month and paying it off partially in a different month. This involves the Treasury department entering the debt markets to purchase new securities at a higher interest rate. Since it’s servicing current debt, this isn’t looked at as “new debt” and doesn’t violate the debt ceiling.
Or, it could involve cutting services, de-authorizing expenditures of Government agencies on their operations. Capital projects halt, offices shut down, furloughs go all over the place.
The matching of revenue in such an instance tends to involve the latter, but as the extreme case of the 1979 default shows (and the interest rate rising by 60 basis points), the former too can happen.
But the Fed does not supply the Treasury with money to pay its bills.
The Treasury has to borrow from someone. Every time. And it has to recognize the borrowed money in their accounts before they spend it. Every time.
It can’t spend money it doesn’t have. If the Fed isn’t giving it money, then there is no way for the Treasury to create it.
The only money the Treasury is authorized to create itself is coinage, and that is a minuscule component of the monetary supply, <2%.
The government, in effect, borrows from the Treasury. Which is just another way of saying that the government creates and spends its own money, at no real cost.
Treasury issues bonds; private sector buys those bonds; then the government spends the proceeds right back into the economy. The net result is no change in the amount of money, but an increase in bonds (which the private sector happily holds as assets) and an increase in aggregate demand (from the spending). The operation has shifted dollars from savings to spending, where they are far more useful, while not taking away from savings at all, since the savers now hold bonds. Government liabilities have increased, and private sector assets have increased by the same amount.
And no private sector assets have been tied up or otherwise made unavailable for spending. If I were to loan you $20, my spending power has gone down by $20 until you repay me. That is not true when the government “borrows” to deficit spend.
The Fed effects monetary policy by adjusting the makeup of government liabilities held by the private sector, but it doesn’t change the total. The Fed buys bonds in exchange for reserves when they see fit to do so. The ease with which they make this exchange - in either direction - should illustrate that bonds, reserves, and cash are all government liabilities, and are all interchangeable. In QE, when the Fed purchased Treasury bonds, the government internalized its own debt, replacing bonds held by the private sector (“debt”) with reserves (“money”), another government liability. That’s not something that you or I can do. It proves that government debt is illusory. It’s not true debt at all.
The cost to the economy is an opportunity cost and false signals; instead of the private sector spending that money and adding to our production, the Government spends it, and almost none of it assists the economy.
The issue here is quality of consumption, and this makes a clear difference.
During WWII, war bonds were sold to finance the war. This had a diminishing effect on the economy, as all money raised by these bonds were translated into one-off consumption, that did nothing to increase domestic production.
The entire economy, along with the rationing, was in a persistent state of austerity. People lived at a far lower quality of life than they had before the war, with far less products and services to buy, and it continued until the war ended.
This of course is an extreme example, but Treasury bonds differ only in severity, not in kind: the money these bonds raise is largely wasted, and production is not enhanced. Enhancement that would have occurred, had the money been used in privately-issued bonds.
I again bring up the example of Japan; they have internalized their debt for decades, appropriating Japanese savings in order to keep stimulating and persisting their current spending.
The net result has been recessions for decades, as none of this spending enhanced their underlying economic condition. It just creates the illusion of wealth creation, while the system in actuality wastes wealth hand over fist.
It does, and it creates false signals. Government spends money on things the economy naturally would not.
Obsolete technology no one in the commercial sector uses, roads in places that no one travels, war infrastructure that serve to wreck havoc in foreign locals.
These all create signals that actors in the private sector chase after… and it results in each government dollar spent, attracting private-sector dollars to follow after, all to create nothing. Nothing of value, nothing that enhances production, and all of it economic activity that ceases, once the Government stops paying for any of it.
Like the boot factory we built in Afghanistan.
Now let me qualify here, this is not to say that the Government has never made, nor will not go on to create wealth for people.
If you spend large amounts of money, you’re bound to make something of value for someone.
My point is that the average quality of its consumption is low, and on the whole, does not improve production or wealth in our economy. The reason being, because Government does not inherently understand any better than anyone else, how to do this, and do it sustainably; to create things that can exist without its support.
It’s because the Japanese Government bankrolls so much, that they’re simply entrapping themselves more and more long term. Spending they can’t sustain, to create things that can’t exist without that spending.
“The cost to the economy is an opportunity cost and false signals; instead of the private sector spending that money and adding to our production, the Government spends it, and almost none of it assists the economy.”
If there was an “opportunity cost,” it would mean that the money, labor, or materials would have been used for some other enterprise. You can make a case for that during WWII, but not today. We aren’t running short of anything. The private sector wasn’t going to invest (real investment) that money, and they weren’t going to use it for consumption. When the yield is this low, that argument just isn’t reasonable. And besides, every one of those dollars returned to the economy as government spending. You cannot claim that every one of those tax dollars would have been spent or invested had they not been taxed away. That’s in addition to deficit spending, which, as I explained above, is a straight addition to aggregate demand.
As for the quality of government spending, two points: one, the government buys services that the private sector needs and wants, but will not buy on its own (roads, courts, bureaucracy, dams, etc.). Two, once that money has been spent, it is in the hands of consumers, and nobody ever complains about the quality of consumer spending, or the investment that seeks to capture it - even though I can come up with dozens of examples of useless, one-off consumer spending. If it results in economic activity, the “quality” of spending or investing really doesn’t matter much. People buy food, and people also spend money at tanning salons. Both are economic activity. Does the money invested in the tanning salon prevent other, “better,” investment?
Give me one solid example of opportunity cost and/or “false signals” caused by government spending. I don’t believe that either one exists in reality.
Japan has not been in a decades-long recession. By many measurements, Japan’s economy is doing just fine. Unemployment is very low. Productivity is still very high. Their standard of living is very high as well.
Living in Japan for the last 10 years I agree anecdotally this is true. There is a bubble, though, slowly growing that in any other country would be unsustainable at its current size and that is the personal housing debt and government debt. Housing loan rates are less than 1%, most people finance for 35 year mortgages and have 2 generations living in the oversized house on an undersized piece of land - loss of jobs for the primary or only breadwinner would cause huge problems because banks have lent so much in this sector. Government infrastructure costs are very high as well, these highly dense suburban areas that are filled with people paying too much for housing, would be in dire straights if infrastructure wasn’t maintained… but the government doesn’t raise enough in taxes to cover it all, so they cover by more bonds. Japan’s government is far beyond the USA in government debt per capita - and all that debt is largely owned by Japanese citizens.
So imagine this:
government defaults on payments to bond holders
bond holders now loose income they were depending on
bond holders default on housing loans that were just too big because interest rates are artificially suppressed by the central bank and government dictates
banks take losses, shed employees and reduce loans for housing
housing industry (developers) losses sales revenue, forced to reduce workforce
vicious cycle to the bottom.
Japan has been heading toward this for some time. Abe was elected specifically to solve this economic meltdown that was and still is on the horizon. His “three arrows” approach doesn’t seem to have been enough.
There was, the money was taken to spend on Government expenditures, rather than private sector ones.
Government crowds out credit markets leaving less for the private sector to borrow for itself; incidentally not just for us, but for people in other nations as well.
Pretty sure if someone was interested in finding bonds to park their money in, and T-bills weren’t available, they’d look for something else.
It wastes portions of the money in transactional costs and paying off interest; the returning money is never 1:1, and never has been.
Time value of money is also in play; waiting for the Government to spend it, means there was less opportunity in that same time for the private sector to use it. In the meantime, the value of that money decreases.
Then there are again the false signals the Gov’t spending creates.
Many Government projects are the equivalent of seeing the circus come to town, restaurants nearby expanding to meet the new flush of demand… only to see all that new demand disappear once the circus leaves, and the restaurants having gone into debt for nothing.
Government spending creates micro-recessions, where labor and capital have to be relocated to somewhere else where demand is more permanent.
Private sector was building roads before the Government, and still builds them today. I take E-470 everyday to work.
What it doesn’t do is build them in the middle of no where, or **over**build them.
A city that brags about all the highways they have, and continues to build more… despite traffic on their road decreasing year after year.
Oh, and as to Dams? We have seriously built too many. The Bureau of Reclamation, didn’t know how to control itself, and has basically caused mini-droughts all over the country because of it.
Most dams not pay for themselves; they’re simply white elephant infrastructure we didn’t need.
The private sector built dams before too, but they couldn’t compete with how the Bureau did things.
The biggest example would be TARP, it created dozens of these moments, and failed to so much as create $1 worth of activity for each one it spent. Much less the multiplier it was premised on.
So no, consumption is not made equal. Market are better allocators of consumption, as they know better when to stop when they aren’t creating wealth.
But since Government is answerable first to political incentives, not markets, it’s far less sensitive to when it wastes resources.
Half the reason Detroit keeps building roads, is simply so it can continue to take advantage of Federal grants that will keep portions of their workforce employed building roads that… hardly anyone uses.
In addition, these roads end up becoming one giant liability they won’t be able to maintain going forward.
And what do you call averaging 1% growth all this time?
What do you call being in last place among developed Asian economies, nearly all of whom had double the performance?
It’s because of that latter point that we know this isn’t due to convergence; Japan has mishandled itself, and the debt internalization policy is largely to blame. They are essentially a slow-motion version of what is happening in Greece, and they’ve hollowed out their household savings rate in the process.
In Japan, wages are far less sticky. They decline wages, so people end up working more, for less pay, without being let go.
It’s similiar to the Russians right now; their economy was cut in half, but unemployment has remained relatively stable.
The debt averse are shallow thinkers. They start with the conclusion debt is bad. They use the false argument that future generations will have to pay for today’s federal debt. Future generations will only have to pay interest on the debt – the same as the current generation.
Federal debt is de facto perpetuities. Perpetuities are never paid back. Perpetuities earn interest always. The only restraint on federal debt is interest expense as a percent of revenue. The only valid economic argument against federal debt is crowding out of private borrowing. The crowding out argument losses all validity in a system with elevated reserves. Banks have $2.3-trillion deposited at the Federal Reserve earning 1.25% interest.
Debt is mostly bad, because Government planners didn’t know how to project both their future costs, and their
future liabilities.They continually underestimate the former, and overestimate the latter.
It’s a meme at this point, when we see States take out POBs to cover shortfalls in pensions, only to call for ridiculous interest returns (8%?) the market won’t possibly give them, a shortfall in their budget materializing anyway, and the State’s budgetary latitude gradually collapsing as they have to cut back on services to pay for those bonds.
When they could have instead used that money to pay for other goods and services.
Paying interest on goods & services rendered in the past, to people who are largely now dead, does nothing to help the currently living.
This is the problem facing Metropolitan centers that are going broke: they’re having to cut back on services, to pay the proceeds to retired workers for services they rendered decades ago. Cutting back on services makes their cities look like disaster areas, and people leave; leaving them with even less tax revenue to cover the cost of servicing the bonds.
That debt does nothing for them, hence the fierce court battles to restructure it.
Two: you’re forgetting that Gov’t spending creates false signals in the economy, and it replaces signals of private spending for all the money it borrowed. This has a micro-recessional effect.
It’s also part to why they had chronic credit shortages in Europe; everyone was busy propping us up.
Public debt on it’s own is a normal occurrence, but too much Public debt is bad, because it leaves a Government systemically vulnerable to any extreme revenue changes, which can come about simply by making one too many erroneous predictions.
It’s becomes an anvil, precariously balanced on a string.
And they wouldn’t loan it out. Because those bonds meant they didn’t have to in order to make money. They could sit back, rake in money, with no risk. Precisely what they wanted to do, but precisely what the economy needed less of.
Norm? It’s all too easy to come up with theories that sound rational, or meet a narrow range of experience.
It is far hard to answer to the totality of experience. You haven’t done that here.
I get that people around here fail to answer you in a respectful manner, but that doesn’t give you an excuse to laud knowledge over them. Be better than that.
There is a distinct difference between the states and the federal government when it comes to funding spending. States are constrained like any other business or household, the Federal Government is not.
That’s not true at all. At a minimum, everything the government purchased in the past that is still here, is being used today, and if that good or service is being used then it’s useful and something we don’t have to purchase today.
Again, we’re not talking about state debt, but federal government debt as they have entirely different constraints.
Where the money is spent is a political decision and as such, I agree it matters where money is spent. Should we fund more tanks or education, or can we do both?
One of the problems is that people don’t understand constraints on spending.
The government is a consumer of goods, tasked t provision itself. What’s “false” about that?
Explain the “micro-recessional” effect, please?
You cite a 7-year old article that claims the following:
The phenomenon in which public entities push private borrowers out of the market is often referred to as “crowding out.” The result usually is higher borrowing rates and more difficult choices for investors who have to make sure they’re not putting their money in assets that are sensitive to interest rate moves.
While that problem specifically has not hit the market full bore yet, the signs for intense credit pressure are there.
Yet it never happened. There has been no “crowding out” of credit.
There is no “crowding out” because banks don’t lend reserves. The Fed (pre-2008) regulated the level of reserves. If there was less liquidity it’s because the Fed feared inflation pressure, not a shortage of reserves. The Fed can add and remove reserves (liquidity) as it pleases.
The real constraint that the Fed acts on is real labor and real resources and the inflation pressure created by demand for resources relative to supply is what the Fed responds to, not the level of reserves. The Fed can moderate that.
Now, the Government can “crowd out” real resources. It can purchase real resources and employ real labor cause real shortages in those markets which I agree can have real effects on business. But one of the Fed’s mandates is price stability, thus crowding out of real resources would seem to go against the Feds mandate and since Congress delegated that mandate, it would seem to apply to Congress as well.
Basically, if there is a shortage of reserves it’s because there is inflation pressure driven by demand that exceeds the economies capacity to supply. The Fed can respond by raising rates and decreasing liquidity in markets causing rates to rise (again, pre-2008). Today, the Fed can simply raise interest paid on reserves.
I won’t argue the ineffectiveness of QE as a solution. It was driven by the belief in the Quantity Theory of Money supported by Freidman and the Neoliberals. The experiment has shown that Neoliberal policy is an abject failure.
Agreed, but they would have lent that money with risk if the returns justified it. 3, 4 5%?
The middle class, which is the foundation of any strong economy borrows money to make purchases on things of real value. The problem is the middle class came out of the great recession drownding in private debt. As a group, the middle class spent years paying down debt and rebuilding credit.
QE drove rates to the floor which served to encourage the wealthy and corporations to leverage money to make money rather than to spend it on things that create jobs.
When rates rise to 3-4-5%, I think you’re going to see a massive sell-off as companies and individuals deleverage.
I think the reason that so many large corporations are sitting on hundreds of millions or billions of dollars is that they know when the deleveraging begins, where ever it ends their survival will depend on how much cash they have saved today.
Not in the sense that there are real appreciable limits to what people will lend you if you spend irresponsibly.
That’s been hounding Greece for nearly 9 years; a place no one had confidence could pay back bonds they dispensed.
By contrast, the best example of nations, the ones most capable of taking care of their people, are those like Norway, who build Sovereign funds. This is not debt, but an endowment, that pays for public expenditures, and comes with none of shortfalls that debt creates.
Yes it is, as it would be with a bridge you built 40 years ago that is now in disrepair, but which you no longer can pay to fix. A Govenrment that wastes their money on labor or other infrastructure they didn’t need, but must pay the debts for anyway, diminishes both the number and the quality of the services that the Government can provide.
Wasting money, is wasting money. It is never a good thing. And if wasting money prevents you from meeting people needs in the current time, it is a tragedy.
Government are not excused from spending responsibly, and budgeting appropriately.
As a Government puts contract into effect, it creates signals that private suppliers follow… until the contracts run out, the private actors find the money exhausts itself, and now they have to reorganize to find where money in the economy actually exists.
It’s the equivalent of a Restaurant starting to build an expansion based on business they’ve been getting… while the circus is in town.
Once the circus leaves, the restaurant will be in debt, and may even have to close to pay off those debts, resulting in a diminished economy, when things would have been fine had they not made an expansion to start with.
Ergo; Government spending makes for collateral damage, simply because it is spending that cannot last, nor targets actual wealth creation.
What they say further down is my point:
At the same time, banks have been loathe to put money on the streets as long as they can borrow at historically low levels and use Treasurys to protect capital while still seeing considerable yield.
“Instead of making loans, banks are just playing the yield curve,” Larson says. “We have such a tasty-looking spread between short-term and long-term rates, some money that otherwise would go toward lending is rebuilding balance sheets.”
This is precisely what happened. Banks sat on their hands, refusing to lend to the private sector, because they could get what they needed through lending to debt-riddled public authorities.
Between helping a Government service past debts, and helping the economy make new loans for new business ventures… which do you honestly think helps the economy get back to the swing of production?
Nor will I; this is the chief disagreement I have with Monetarism. While the idea wasn’t put into practice the way Friedman advocated, I don’t believe it would have worked even if it had been.
Which is good; we should not seek to prevent interest hikes when they should have occurred. We only prolong damage and failure in the market when we do so.
Here we totally agree, but then the question has always been, what are the constraints on spending?
Greece has no control over the creation of its currency. In that sense, it’s almost exactly in the same situation that US states are. This is distictly different than the situation that the Federal government finds itself in.
So I admit, I’m not as familiar with Norway as I am with some other systems, but Norway has a 1 trillion Kr. debt.
Now you added the words “Sovereign funds”. Can you explain what this is in the context you are using it. I mean, I think I know what it means, but I’m curious if we have the same understanding.
Here is where we have to establish the constraints on spending as that directly reflects on the definition of “waste”.
You act like companies that supply the government hold a single contract and then rely only on the revenue from that contract and when it ends the company suddenly flounders on the brink of insolvency.
Come on Slim, your smarter than that (or you think I’m dumb). Any reasonably sized company knows not to put all their eggs in a single basket. They diversify. They have private and government branches. Within government, there are thousands of organizations, some wich increase and others that decrease.
The contracts don’t “run out”. Sure individual contracts may expire, but overall the amount the government spends just maintaining infrastructure is massive. Government spending is hovering around $4 trillion with an average of $500 billion in net new spending each year.
Furthermore, the companies in question that supply to the government knows the risks ahead of time and price their bids accordingly.
Lastly, private companies do the same thing. A company like version can hire the services of a specialized company and later decide to move in another direction. This isn’t something unique to government.
Your argument just doesn’t hold water.
When the federal government services past debt, it doesn’t take anything away from anyone. Again, if we’re talking about the states that’s a different issue.
But this line of debate is really a lot deeper than we’re addressing here. QE was a failure, something I’m sure we agree on. It retarded the yield curves as your article points out, something I agree with, but the money created via QE could have been used to bail out Main St. Rather than Wall St. Since main St was so deep in debt, much of it would have flowed straight to Wall St. anyway and both issues (public and private debt) could have been addressed.
Prevent? What do you mean prevent?
There is no such thing as preventing rates from rising, only falling. If the Fed did nothing, in this economy under current conditions and rules, the rate would fall to zero. If the Fed is ever preventing anything it’s a lower rate, not a higher one.
If instead of using it to make appreciable outcomes such as making capital improvements, you use debt simply to service yet other debt, the end result is a debt spiral, where you must spend more and more of core revenue, just to service the debt.
That is the absolute constraint. Governments may by insulated from the effects of debt, but they are not immune. Governments who fall into this hole only have three ways out; none of them positive. Default, hyperinflation, or a self-financing of debt that results in decades of economic stagnation.
Nope, I’m talking about downstream effects, and downstream benefactors, ones who can’t immediately tell where the money is coming from, so they don’t have an accurate idea of how long it will last.
This can also include employees who chase after the “opportunity” these contracts seem to give, only for it to dry up the moment the contracts themselves do.
This is precisely what happened with the contracts we gave out under the Stimulus package. Money was spent, people & businesses chased after it, and people were left little to no better off afterwards, having to still find work elsewhere.
Meanwhile, the quality and necessity of the things we built with that money were largely suspect. Wealth was basically destroyed.
This is a distilled example, of what Government spending does more broadly. As I said, consumption is not made equal.
There is quality to spending that should be scrutinized.
When it comes to propensity, It’s not the same, because Governments are lead by people who know far less on average as to what they’re doing.
Politicians are put in charge based on charisma, and the people they appoint are put there based on connections. Merit is shortchanged, if it’s even present at all.
Rational Ignorance; it accumulates far more in Governments than in private companies, because there’s far less opportunities for Government officials to accumulate the right information at the right time.
Their responsibilities are broad, they typically don’t have background in a given issue, they don’t need to have bodies of work or what industry would recognize as “qualifications” before making initiatives, or “investing” in ideas.
They get the benefit of having money & power, with almost none of the scrutiny you’d have to traverse if trying to do the same things commercially.
It’s not that the Private sector doesn’t make mistakes, or doesn’t choose bad or ignorant people to lead them, but that they’re far more sensitive to doing either. After all, they put their own money on the line to do things, not someone else’s. Not unless the Government is underwriting them…
Yes it does; creditors. Our Government did this to European credit markets, when European banks rushed to bolster our finances in 2008, leaving “main street” Europeans in a jam.
Pretty much whenever there is a global or regional financial crisis, people look to invest here which means less credit “there”.
People around the world resent us for this, and I don’t blame them.
But this line of debate is really a lot deeper than we’re addressing here. QE was a failure, something I’m sure we agree on. It retarded the yield curves as your article points out, something I agree with, but the money created via QE could have been used to bail out Main St.[/quote]
Main st was also doing ridiculous things; buying houses they couldn’t afford, buying multiple properties so they’d have one to rent.
They were high on the idea that housing prices had never fallen since WWII, and were convinced that they never could fall, that it would just keep going up and up.
Bailing out people simply encourages bad ideas and behavior to continue, whether were talking about average Joe, or big banks.
You act like debt paid is flushed down a toilet. It’s not. 2/3rds of it stays right here in the US with 1/2 of that 2/3 going right back to the Government as income. The other half is earned by the kinds of people that hold bonds.
The claim that ‘if’ interest rates rise that will cause a spike in debt payments relative to spending just doesn’t hold water and history proves it.
Interest payments as a percent of GDP hit a high of 3.1% since 1940 even when interest rates hit almost 20% in early 1980. The fear that increasing interest rates will cause a massive increase in debt payments relative to GDP is simply unfounded because interest payments are income and increase GDP in proportion.
Show me where this has manifested itself in any real terms. The debt doubled since 2008 yet debt payments are still under 3%. Interest rates hit near 20% in 1983, yet payments as a percent of GDP ticked up in the years that followed about 1%.
The only constraint is productivity. If you create money without the capacity to put it to work, you risk inflation.
You keep saying “governments”. I’m talking about the US.
There is only one way the US government can become insolvent. It chooses to. The other option is that the government loses the ability to enforce its currency regime. But that would only happen if the government ceased to exist as we know it today.
There’s not a single modern example of a functional economy that hyperinflated itself into oblivion due to money creation (as the root cause). Money creation was always the result of external forces.
Venezula is the closest thing in recent times I can think of where the government simply failed to plan accordingly. They relied too heavily on a single export and when the price of that export dropped the money in circulation that used to represent more value was suddenly halved. Combine that with a reliance on food imports and you get a perfect storm.
Stagnation is the result of fear of what you’re talking about. We fear debt, we cut spending and/ or raise taxes. Lower spending means lower incomes. Higher taxes mean lower incomes. It’s self re-enforcing.
Yes, you are correct, I had forgotten about that. They’ve been able to do that since June. Is it any coincidence that the economy just posted it’s first fiscal surplus at about the same time?
I know they were limited to deficit spending equal to 3% of GDP, was that lifted?
However, I conceded that in light of this information you are correct, which only serves to prove my point. States cannot self-fund. They are constrained just like a household. Greece and other Eurozone nations were similarly constrained (apparently until recently).
The Federal government is not.
Ok, I see…
What we’re really talking about here is surplus driven wealth. Wealth earned through the sale of things of real value (Norway oil sales) or labor performed (China labor).
It’s funny because I’m reminded over and over that currency isn’t wealth by the people here at RO (I’m not sure if that’s something you’ve said), but here is an example where we’re pointing at a pile of currency and calling it wealth.
In a simplistic sort of way, I’d think you agree that currency is simply a claim on wealth.
So America imports wealth and exports currency and Norway imports currency (in the form of their sovereign debt fund) and exports oil.
If it wasn’t for importers like the US, Norway wouldn’t have what it has.
Everyone cannot be net exporters. This is a simple accounting fact. At best, everyone can be import/ export neutral.
Ironically Norway is trading away something of real value (oil). Something finite, something that, for Norway, may run out some day and when it does, they will have to use some of that money they saved to import it.
Again, so what? Who puts all their eggs in one basket? Sounds like a stupid business plan to me.
Furthermore, I know the “invisible hand” people believe that if the government didn’t spend 1 out of every 5 dollars that someone in the private sector would. That’s just false. Sure some of it might be done by the private sector, but much of it would not, but this is a line of argumentation that’s just too deep and we’re stating in the middle. WE’d need to go back to fundamentals to have this argument effectively.
I won’t argue that massive short-term stimulus is a bad idea for the reasons you cite. If the government had simply bailed out Main St instead of financial corporations which would have been better off as Main St money would end up reducing bank liabilities in the form of loan repayments and with the decrease in debt payments, the middle class could have increased its spending on real wealth increasing profits to companies.
That’s just a meme. I’ve worked in and around government all of my professional life living near DC. The people that run institutions like the US Patent office and NIH for example (two places I’ve worked extensively), were professionals who did their jobs well. I’ve also worked for some of the largest companies in the world and I can tell you, I see very little difference in the day-to-day operations.
I’ve also served on the governing council of a large private neighborhood. When there were decisions to make about things we didn’t know, you consulted experts and discussed options and voted on how to proceed.
The biggest flaw in government is the corruption that retards that process. Something that happened even on the board I served on. The idea that getting rid of or limiting government will reduce or eliminate corruption is a (mostly) Libertarian fantasy. Corruption is the enemy, not government and corruption lives everywhere.
I’d argue that when you move those things out of the light of government into the shadows of private industry, things get worse, not better. What, not enough “light” on government? Well there’s something we should all agree on, yet when “our” parties are in power “we” tend to look the other way. I don’t, but lots of people, left and right do.
Oh, come on. You know how rates are set. If the Fed allowed banks to determine the rate on their own it would fall to zero tomorrow. There are still trillions in reserves floating around in the system. There’s no reason for banks to borrow from each other at interest.
The Fed isn’t “holding the rate down”, they simply aren’t causing it to rise. That’s not the same thing.
People with more cash than they need to pay their own bills don’t put the excess under their mattresses, folks. They put it in banks or invest it in T-bills, stocks, bonds or other places where it will EARN them additional cash. THAT money is then used in similar fashion by those having custody of that money.
Like the Congo dandies, who spend all of their money, and even go into debt, to buy nice clothes; that do nothing to improve their bleak and grinding poverty.
Or one of those contracts through the stimulus I spoke before, where they were buying just slightly smaller tile than usual to renovate national monuments.
Yes, money wasted. Because Government spending will in many cases be of poor quality. We go into debt, to spend money that is simply wasted.
To go to the furthest example, we spend money in poor places like Haiti, billions in fact, but they’re still grindingly poor. Spending money in a place, does not guarantee economic activity, because it all depends on how the money is spent.
Japan disproves it. They show that this method has a flaw; internalizing your debt does have a consequence.
If more and more of your Government, and your economy, becomes just about servicing a public debt, that suffocates what the else the economy could be doing.
Do that for a generation, and you have a series of lost decades of 1% growth or less.
Because USD has the status of reserve currency, but that’s a status that can be revoked, and we’re committing actions that are endeavoring people in other nations to see that it is.
There are at least two avenues this can happen; the cryptocurrencies, which are gathering a large following in Africa and Asia due to lack of traditional banking infrastructure (Africa in fact, leads the world in digital banking usage), or the IMF, who has it as a stated goal, to take the reserve currency status away from us.
You’re taking this for granted, as if its immutable, but I don’t see that we should. Even this status has a constraint, if not a deadline.
?? No it doesn’t. Without the Government spending money where we don’t need it, chasing after things where it is simply wasted, the economy would grow faster, and more holistically, or as Nassim Taleb would put it, with more anti-fragility.
Venezuela, as you broguht up, is the perfect example of this. It didn’t save money, it blatantly wasted it on projects and labor the public sector didn’t need, hollowing out the private sector.
Thus, when the collapse in oil came, it both had no money to call upon, and no “other” core of their economy to take lead. It economy was highly fragile, because it didn’t spend or save its money with any sort of constraint, or with any ideas for how it would assist their economy in other areas. Ergo, no focus was given to wealth creation.
By contrast, Estonia believes in “Governmental minimalism” , as does Botswana, and the their results have been quite encouraging. Estonia is a silicon valley of Europe, and Botswana is one of the few African nation who doesn’t require aid, and can feed itself. Nations who seek to spend as little as possible, or at least match their spending with a cost-benefit analysis approach, prosper.
Spending for spending’s sake, with no attention paid to what that spending does, is a recipe for simply diminishing yourself.
Uh… the article I gave you was from 2012.
I don’t agree, I think it’s pretty clear that a nation can build funds for such usage, even if you don’t have much in the way of exports yourself. Exports make it possible, but they don’t have to reach Norway or Kuwait’s levels to make sovereign funds themselves possible.
Hong Kong didn’t have many things to export, it basically just became a conduit of trade; a place for other nations to export.
Rwanda right now, which is patterning itself after Singapore, has sought to keep its debt below that of its regional neighbors, and to specifically keep its public debt from crowding out credit from being supplied to private borrowers. They’re building their sovereign fund, partly through exports, and partly through money their own people voluntarily give them.
The result has been that Rwanda today is one of the the African Lions. Surging developing economies who could displace the BRICs, and perhaps even China as a center for manufacturing.
Again, quality, this is the point you keep avoiding. It doesn’t matter if the private sector would match every dollar, because not every dollar should have been spent in the first place.
The Government spends money, where it should not be spent, it builds things, that should not be built. These actions have deleterious effects on our broader economy, as it just results in open rent seeking, with no wealth creation.
And if you have just more spending with no wealth creation, you make your economy more fragile; less able to handle downturns.
For example, Detroit spends millions each year on road construction, it has some the largest, most extravagant highways you’ve ever seen. But it’s a waste, because they don’t have the traffic to justify those roads being there. Much of that construction, is just a make work initiatives, that shouldn’t be happening. The money would be far better spent, or saved, elsewhere.
Spending money to build infrastructure that is underutilized, which you will then have to spend even more money to maintain, is a waste.
No, that’s not my point.
I’m not denying professionalism by people in the Public sector, I’m not denying that they have knowledge.
What I’m doing is drawing attention to Rational Ignorance, and let me focus on that first part, rational, not irrational.
Rational ignorance is the modeling of knowledge you can reasonably expect people not to have, because they won’t of had reason or the opportunity to encounter it; even if its knowledge they need.
Knowledge in the economy is inherently dispersed, it takes time and resources to centralize it. Private actors make for better aggregators of that knowledge, because they are closer to where the knowledge is made. It takes less time for them to both see, and respond to it.
The Localized Knowledge problem, is easily half the reason why command economies don’t function nearly as well as market economies do. It also explains why between the Public Sector and Private Sector, you have a great divergence in the creation and aggregation of Best Practices.
The Public sector is far more likely to voluntarily adopt practices developed in the Private sector, than the vice-versa. And even in cases where the Public sector did in fact develop a Best Practice, it tends to be a lower-grade example of it in execution.
For example? Project Management. It is a discipline that was developed partly by the U.S. navy, and partly by officials looking to manage the contractors on the Hoover Dam, in order to promote proper use of budget scheduling, and holding people or organizations accountable for work overtime.
The U.S. Government is perhaps still today the largest utilizer of this discipline, but it’s not the best example of it, as projects like the F-35 demonstrate, or even just mid-grade contracting on ship construction.
Estonia; Governmental minimalism works. I don’t have to apologetic about this, because this is the honest accounting of what Governmental power can be reasonably expected to do.
I told you before about what the clear limitations on prohibition were, and this is the flip side of that same problem. Efficacy of your policy, will rely on what knowledge and what control you can usefully gather & exert.
There are real world limitations on the utility of Government spending & intervention, limitations that have to acknowledged to be usefully navigated.