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brinn
It seems that the U.S. and much of Europe has become obsessed with deficits, debt reduction and austerity. The question for debate is simple:

What do you see as the negative economic effects of persistent deficits?
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Hobbes
What do you see as the negative economic effects of persistent deficits?

That's easy. Eventual economic collapse. Governments are no different than any other entity..they can't keep spending more than they make forever. Eventually, the debt becomes large enough that financing it becomes problematic, and those purchasing the bonds start demanding higher rates, causing ever larger deficits, causing rates to go even higher--and the death spiral begins. The only way out of that spiral is to print enough money to pay off the debt to a manageable level, causing inflation to jump dramatically. Given that much of our debt resides overseas in China, and the Chinese won't much appreciate have so much of their investment depreciate in value, WWIII could potentially ensue. That 'negative' enough?
akaCG
What do you see as the negative economic effects of persistent deficits?

At some point, a nation (just like a household) reaches a point of indebtedness when its lender(s) will not only refuse yet another request for yet another "just to tide me over" loan, but will find it really, really difficult to resist bursting out into open laughter while doing so.

Belshazzar
In addition to what was said above, interest needs to be paid on the debt. As deficits (and in turn national debt) increase, interest goes up and will eventually reach the point where it will be more expensive than anything else on the budget. And we have to pay taxes on it.
Hobbes
QUOTE(Belshazzar @ Nov 4 2010, 10:11 PM) *
In addition to what was said above, interest needs to be paid on the debt. As deficits (and in turn national debt) increase, interest goes up and will eventually reach the point where it will be more expensive than anything else on the budget. And we have to pay taxes on it.


We had actually hit that point some time ago. It is only the artificially lowered interest rates since then that kept the interest on the debt from exploding the budget. Interest rates won't stay this low forever. Given that, and the projected $20 Trillion debt by 2020, interest on the debt is expected to $1 Trillion annually. Add that to the current $700 billion structural deficit (deficit we accrue based on past obligations with no new spending) and the deficit, with no additional or increased spending, will be $1.7 Trillion. That's about equal to current revenue. What do you think we'd call someone who's credit card payments equalled their income? Bankrupt...and then some.

QUOTE
At some point, a nation (just like a household) reaches a point of indebtedness when its lender(s) will not only refuse yet another request for yet another "just to tide me over" loan, but will find it really, really difficult to resist bursting out into open laughter while doing so.


That is the point that Greece et al were nearing earlier this year. If you look at the various metrics that were applied to them (debt to GDP, deficit to GDP, etc)...we are in the same place they are already. The only difference is that investors still had confidence in us, whereas they lost it for Greece. Note that there are already rumblings of lowering our credit rating, which is the beginning of the inevitable crash. What constantly amazes me is that this impending doom doesn't raise much of a blip on the radar screen, even though it completely dwarfs all the other problems that do. Everyone is complaining about the speedbump, while ignoring the bridge being out. We are going to get our comeuppance for this, and when it comes, since we've ignored it for sooooo many years, its going to be a beast.

FWIW...reports are out the debt commission (do we really need a commission to tell the numbskulls in Washington they're spending too much? If they can't figure that out for themselves, they should immediately resign as being too incompetent for their position) has already taken entitlements, the looming additional $70 Trillion in unfunded liabilities, off the table. To me, this calls into question their aptitude for the job assigned to them as well. We'll just get another whitewashing with steps deemed 'politically acceptable' which do nothing to actually address the problem. You heard it here first! smile.gif
Dingo
What do you see as the negative economic effects of persistent deficits?
Deficits would be less of a problem if we spent the borrowed money wisely. If the money were spent to become energy self-sufficient and ecologically sustainable and turned us toward a peace time locally based economy then inevitably the debt would diminish to zero. Our growing deficits are due to bad political decisions, which include bad economic and environmental ones. The deficits are only a symptom. It's the bad politics that are leading us to a debtor's crash.
Hobbes
I think that's very true, Dingo. Our structural deficit is due to politically expedient decisions made that had long term financial ramifications that were just completely ignored.

There is a very simple cure for this. Force the government to enact separate loans for each new expenditure--fund them like projects. That way the true cost of each program would have to be calculated with the legislation, or else no funding could be provided. Politicians don't do this for that very reason. Projects of the type you propose, which would essentially be investments, would be quite easy to both justify and fund using this method. 'Pork' projects would not. But when you roll them all up into some homogenous general fund, they all get lost--as does the actual money spent, which is why we have a $700 billion structural deficit.
brinn
What do you see as the negative economic effects of persistent deficits?

I hope some of you have an open mind and are at least willing to contemplate a different perspective. Let me explain why I, and many functional finance advocates, believe that the problem of the deficit is completely overblown:

Many of the concerns raised above are relics from when the US was on the gold standard. The US dollar is now a non-convertible, floating, fiat currency and because it is backed by nothing tangible, save for the ability of the currency to extinguish US tax liabilities, it is a completely different animal than any convertible currency.

The US government is the monopoly issuer of the US dollar and, because it has the ability to issue currency at will, there is functionally no solvency risk, nor can there be any solvency risk unless the US makes a political decision to default either through maintaining a hard and fixed debt ceiling or through some other act of congress. The only true restraint is inflation.

Chairman Greenspan made the following comments at the opening of the annual Economic Symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., on August 29, 1997.
Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.
That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy's expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance.


Combine this fact with the fact that the US has no foreign denominated debt (all US debt is denominated in US Dollars) and I’m assuming that no one will disagree that the US can effectively “print” as much currency as is needed to service any debt it currently possesses.

With just this single simple observation we are already moving away from the common view that government finance is analogous to financing a household. The key difference is that households (and states) are users of the currency and as such are constrained by revenues. A household or state must generate income through wages, taxation, debt issuance or other means before it can spend. The sovereign issuer of a currency, like the federal government, is not revenue constrained and must actually spend before it can tax. Without the issuance of US dollars (federal government spending) there would be no US dollars to tax. Again, please understand that I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence (inflation is ultimately the only meaningful consequence) but only attempting to establish some basic terms where we can agree before continuing the conversation. I’ve got to go to work but I’ll try to add more later.
AuthorMusician
What do you see as the negative economic effects of persistent deficits?

I don't. It's a number game that gets linked to production. Conservatives seem okay with deficits when Republicans are in charge and become all in a tizzie about deficits when Democrats are in charge. That's a political game linked to the number game.

Another part of the number game is investing. We just went through what a mess that can become, and we'll probably go through it again.

What's wrong with comparing this number game to a household budget is that the household cannot make the rules for the number game. It's either play the game or drop out altogether. The government can change the rules.

Several variations on rule changes have been tried. I don't think that all the variations have been tried, but I'm not smart enough to come up with something else. It's the difference between driving a car and inventing another mode of transportation. I am sure that there are other ways to get from point A to point B, but I don't know what they are.
lederuvdapac
QUOTE(brinn)
The US government is the monopoly issuer of the US dollar and, because it has the ability to issue currency at will, there is functionally no solvency risk, nor can there be any solvency risk unless the US makes a political decision to default either through maintaining a hard and fixed debt ceiling or through some other act of congress. The only true restraint is inflation.


Technically, this is correct. But inflating away the debt is essentially admitting that you are insolvent anyway. The choice for the United States is quite clear. Either we admit that we made mistakes, that the federal government made promises it cannot possibly keep and default - or - we will inflate away to devalue our debt and simultaneously destroy our currency and economy. We are definitely going for the latter option. Paying off the debt is impossible. Paying for future entitlements is impossible. Inflation is the stated and intended policy. People need to get this through your heads. I don't care if you are Republican, Democrat, or whatever. You need to understand that it is the expressed and explicit policy of the central bank and the Congress to create inflation and steal your money. Not literally of course. They can steal your money without ever having to reach into your pocket. They just steal your money's value and bring down the economy around us.

QUOTE(brinn)
With just this single simple observation we are already moving away from the common view that government finance is analogous to financing a household. The key difference is that households (and states) are users of the currency and as such are constrained by revenues. A household or state must generate income through wages, taxation, debt issuance or other means before it can spend. The sovereign issuer of a currency, like the federal government, is not revenue constrained and must actually spend before it can tax. Without the issuance of US dollars (federal government spending) there would be no US dollars to tax.


While again, technically correct, there is a nuance I would like to address. The US government isn't the sovereign issuer of currency, the Federal Reserve is. There is the appearance of an independent central bank that holds a monopoly on the currency and they can issue the currency via their discount window. So although the Federal Government spends $4 trillion, the actual money supply is much higher than that.
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brinn
Leder,

For my purposes I am simplifying things by consolidating Central Bank and Treasury operations and referring to them as the Fed. The distinction between the two makes no difference to my arguments. Also I’m assuming that you agree that solvency is not an issue but that inflation is.

What I want to do first is establish that the national debt (the sum of the cumulative annual deficits) is merely the accounting offset for private sector savings and that can be done with a simple analogy that is originally attributed to Warren Mosler. I first encountered this analogy on Prof. Bill Mitchell’s Website “Billy Blog”.

Imagine the economy is a household which is comprised of you (the parent) and your kids. You the parent are analogous to “government” and the kids comprise the non-government or private sector. As the government you decree that you will offer 100 of your business cards per week to the kids if they agree to tend the garden on a weekly basis.

Naturally, the kids resist as they have no use for worthless business cards so you create demand for your “currency” (the business cards) by establishing a tax that can only be extinguished by remitting them. You declare that the kids will need to pay you 100 business cards per week to remain living in your household.

Immediately, by imposing a tax obligation in the currency of issue (the business cards) you have created a demand for the currency and created the conditions to allow you to transfer private resources (the kid’s labor) to the public sector (your garden). However, also note that you must spend the 100 cards each week before the kids can pay the tax of 100 cards. This illustrates that government spending must precede taxation and that taxation is not a revenue source for the government (i.e. taxing or taking your business cards from your kids does not allow you to spend your cards in the first place). You are the monopoly issuer of your cards and you are never financially constrained in your business cards (the currency).

This arrangement is analogous to a fiat currency like the US dollar. You can then extend this analogy and begin to track your currency transactions via a spreadsheet. This eliminates the need to “print” more business cards. Your spreadsheet represents “bank entries” which record all the outflows (spending) and inflows (taxation). If you make an error and add an extra zero to your spending one week, you wouldn’t have to “print” 900 new cards but your kids would be better off by 900 cards because it would show up as a deposit in their account.

Under the conditions above, the household budget would be balanced each week: You spend 100 cards and the kids pay you 100 cards to extinguish their tax liability. Note that the kids will be unable to accumulate any cards (that is, save) because they can only get access to the volume of cards that you make available via spending.

If you want to teach your kids to save you will either need to increase the business card wage for their labor while leaving your tax unchanged, ask them to do more labor each week and thus increase their wages while leaving your tax unchanged or keep paying them the same amount for the same labor and lower your tax. Let say you provide them with 120 cards per week as wages (government spending) but keep the tax at only 100 cards. Your budget will now be running a deficit of 20 cards per week but the kids can now save 20 cards per week because your spending (the government spending) has provided the “finance” for the savings. As the weeks go by the kids could accumulate more and more savings (numbers in the spreadsheet would increase) and you would soon see that the non-government saving over time is the exact record of the cumulative deficits being run by you (the government). Same as the US economy.

Extend the analogy further; Your kids now want to make more money (cards) and earn a return on their savings. As it stands, the only way they will be able to do that is if you decide to pay interest on their savings. This is equivalent to you offering them a government bond (a bit of paper saying that if they deposit their savings with you each week that you will pay them back at some future time plus some interest paid, of course, in business cards). Your issuance of debt establishes a non-zero rate of interest in your household and increases the kid’s wealth. Note that you were not forced to issue the bond to enable you to continue to run a deficit. The bond simply replaced non-interest bearing savings (reserves in our “banking” system) with an interest-earning asset (the bond).

Work the analogy backward and you can see how a federal surplus reduces private sector savings. Any surplus must be met by either:

a) A demand for more work to earn the shortfall – noting that the household has now reduced employment levels (in hours) and there is some underemployment creeping in. If you chose to reduce your deficit by not employing one of your kids you would have generated unemployment.

cool.gif A sale of private possessions to get some cards. In this simple case, It is likely that the kids would offer your bonds (the bits of paper) for sale to get the funds. So the surplus begins to eat away at your kids wealth.

or

c) A reduction in savings that are not being stored in bonds.

Regardless of the response, the budget surplus strains your kid’s liquidity and forces them to reduce wealth. If you kept running budget surpluses, your kids would eventually run out of assets and their labor would be underutilized.

If you are at all interested in learning more yourself, I would recommend you google Bill Mitchell (Billy Blog), or Warren Mosler (The Center of the Universe). Both are at the forefront of functional finance or Modern Monetary Theory as it is commonly known (although it’s really neither modern nor theoretical). Also check out New Economic Perspectives which is the website of the University of Missouri, Kansas City’s economics department.

If this discussion gains any traction I’ll address inflation concerns later.
Hobbes
QUOTE(brinn @ Nov 5 2010, 06:19 AM) *
What do you see as the negative economic effects of persistent deficits?

I hope some of you have an open mind and are at least willing to contemplate a different perspective. Let me explain why I, and many functional finance advocates, believe that the problem of the deficit is completely overblown:


Your analysis doesn't indicate why it is overblown. No one has said that the U.S. will default on its debt (although that is an option).

QUOTE
The US government is the monopoly issuer of the US dollar and, because it has the ability to issue currency at will, there is functionally no solvency risk, nor can there be any solvency risk unless the US makes a political decision to default either through maintaining a hard and fixed debt ceiling or through some other act of congress. The only true restraint is inflationhation


Exactly. What level of inflation are you comfortable with? What level of inflation will those foreign entities holding our debt be happy with? The concept of carrying wheelbarrows full of money to buy a loaf of bread is not that far fetched--it has happened both here and elsewhere around the world before. Does the accompanying devaluation of savings (already something Americans don't do enough of) a good thing? I agree that the government can do this. However, one shouldn't neglect the fact that there are very large negative consequences of doing so--including, as I mentioned, heightened potential of WWIII ensuing.

QUOTE
The sovereign issuer of a currency, like the federal government, is not revenue constrained


Which is EXACTLY the problem.

QUOTE
and must actually spend before it can tax.


Not true. Sufficient currency exists for the economy to function, and therefore for activities to happen which can be taxed, without any additional government spending. Further, money can be injected into the economy through the Fed (we've been doing this the last couple of years already), again without the government having to spend anything.

Here's the real problem I have with those advocating the deficit is no big deal. It just encourages more deficits. Eventually, as you state, rampant inflation will be the result. We've seen what impact that can have in the Weimar Republic in Germany after WW I. Note the woman shoveling money into the fire to keep warm...and tell me--is that image really 'overblown'?

QUOTE(AuthorMusician)
What's wrong with comparing this number game to a household budget is that the household cannot make the rules for the number game. It's either play the game or drop out altogether. The government can change the rules.


No, not really, they can't. They can shuffle the shells around alot, but reality will always catch up with them in the end. Again, we've seen this start to happen already, in Greece, Spain, etc. Near chaos resulted, only mitigated when other countries stepped up and fixed it. They could do this because Greece has a relatively small economy. We're in about the same position as Greece. Who's the big brother out there that's going to save us? That entity doesn't exist.

QUOTE
What I want to do first is establish that the national debt (the sum of the cumulative annual deficits) is merely the accounting offset for private sector savings


Disagree. Rather, it is the running sum total of governmental fiscal incompetence.

The word 'merely' doesn't even belong in a sentence with something totalling tens of trillions of dollars of an obligation. It just doesn't. You think that woman shoveling money into her furnace felt this was 'merely the accounting offset for private sector savings'? I would suspect anyone telling her that then would have been roundly slapped, and rightfully so. This, in fact, is a perfect example of why we should never (never never never never) let those in the ivory tower make decisions for those of us who aren't. Reality gets ignored in the ivory tower, where they can play with numbers and formulas, and just ignore the nasty realities that get in the way of their cozy mathematical manipulations.
Dingo
My first comment added for clarification.

QUOTE(Hobbes @ Nov 4 2010, 11:39 PM) *
QUOTE(Dingo)
What do you see as the negative economic effects of persistent deficits?

Deficits would be less of a problem if we spent the borrowed money wisely. If the money were spent to become energy self-sufficient and ecologically sustainable and turned us toward a peace time locally based economy then inevitably the debt would diminish to zero. Our growing deficits are due to bad political decisions, which include bad economic and environmental ones. The deficits are only a symptom. It's the bad politics that are leading us to a debtor's crash.

I think that's very true, Dingo. Our structural deficit is due to politically expedient decisions made that had long term financial ramifications that were just completely ignored.

There is a very simple cure for this. Force the government to enact separate loans for each new expenditure--fund them like projects. That way the true cost of each program would have to be calculated with the legislation, or else no funding could be provided. Politicians don't do this for that very reason. Projects of the type you propose, which would essentially be investments, would be quite easy to both justify and fund using this method. 'Pork' projects would not. But when you roll them all up into some homogenous general fund, they all get lost--as does the actual money spent, which is why we have a $700 billion structural deficit.

"Force the government to enact separate loans for each new expenditure-". How do you pay off a military project or a school? A road I could see because you could apply tolls. One problem is in determining the real public cost of the project. Depending on what cost basis you apply you could determine say gasoline generating $15 dollar a gallon or more in public costs. That would include military, environmental and health costs projected into the future. I have no problem with the principle of treating each public outlay as a loan that needs to be paid back. I just don't see how to make it practical.
brinn
QUOTE(”Hobbes”)
Your analysis doesn't indicate why it is overblown. No one has said that the U.S. will default on its debt (although that is an option).
It is overblown because it is necessary for private sector liquidity. If the government begins to run a surplus when aggregate demand is collapsing it will exacerbate the situation and likely result in deflation.


QUOTE(”Hobbes”)
What level of inflation are you comfortable with? What level of inflation will those foreign entities holding our debt be happy with? The concept of carrying wheelbarrows full of money to buy a loaf of bread is not that far fetched--it has happened both here and elsewhere around the world before. Does the accompanying devaluation of savings (already something Americans don't do enough of) a good thing? I agree that the government can do this. However, one shouldn't neglect the fact that there are very large negative consequences of doing so--including, as I mentioned, heightened potential of WWIII ensuing.
Are you truly concerned with hyperinflation in the US? Hyperinflation is largely a result of a collapse of supply. Inflation is very well understood and can be managed via taxation, and monetary and fiscal policy. What is our rate of inflation currently? What is Japan’s rate of inflation?


QUOTE(”Hobbes”)
Not true. Sufficient currency exists for the economy to function, and therefore for activities to happen which can be taxed, without any additional government spending.
Sure, the government can run temporary surpluses but a consistent surplus will result in a collapse of demand as private sector wealth is eroded. It’s an accounting identity and can’t be debated.

QUOTE(”Hobbes”)
Further, money can be injected into the economy through the Fed (we've been doing this the last couple of years already), again without the government having to spend anything.
Can you clarify how the fed injects money into the system without spending?

QUOTE(Hobbes”)
Here's the real problem I have with those advocating the deficit is no big deal. It just encourages more deficits. Eventually, as you state, rampant inflation will be the result.
in a sense I agree but it’s much too simplistic to state that the deficit is all bad. In our current environment we need a larger deficit (either through targeted spending designed to create jobs or through drastic reductions in taxes) but as soon as private sector demand is restored and unemployment is drastically reduced, spending can be reduced and taxation levels can be raised to limit inflation.

QUOTE
We've seen what impact that can have in the Weimar Republic in Germany after WW I. Note the woman shoveling money into the fire to keep warm...and tell me--is that image really 'overblown'?
It’s not overblown, just not applicable. Weimar Germany’s hyperinflation was due primarily to three things: The requirement to pay reparations in a foreign currency, A positive feedback mechanism in the wage/price index that was negotiated by the strong labor union in Germany resulting in spiraling wages, and the occupation of the Ruhr region which was the manufacturing heart of germany which effectively shut down production. None of these conditions are present in the US. Again, what is our inflation rate?

QUOTE(”Hobbes”)
Again, we've seen this start to happen already, in Greece, Spain, etc. Near chaos resulted, only mitigated when other countries stepped up and fixed it. They could do this because Greece has a relatively small economy. We're in about the same position as Greece. Who's the big brother out there that's going to save us? That entity doesn't exist.
We are in no way shape or form analogous to Greece. Greece is part of the European currency union and is therefore not sovereign in their own currency. They are revenue constrained and need to tax or borrow to spend. All economies in the ECU share this risk. It is a flawed system. Other countries did not step in and fix Greece. The European Central Bank began buying their debt which supported them. It is analogous to the US federal government providing funding to a state.




QUOTE(”Hobbes”)
The word 'merely' doesn't even belong in a sentence with something totalling tens of trillions of dollars of an obligation. It just doesn't.
Hobbes, You do realize that the trillion dollar debt that you reference is really the sum total of all savings held by the private sector, no? You do realize that the "deficit could be repaid tomorow by moving the funds held in Bond accounts at the fed back to reserve accounts at the fed. Voila, Debt paid!

With the massive stimulus and two rounds of QE where’s the inflation you’re so concerned about? Do you think it’s a coincidence that our last budget surplus ended in 2001, and was reported as the longest surplus since 1927-1930. Do those dates ring a bell? Is it a mere coincidence that the first six US depressions followed the first six sustained budget surpluses? Is it a coincidence that in 1836, President Jackson actually paid off the federal debt and the worst depression on record followed.
It’s time to rethink your position. The situation isn’t what you think it is, despite how much the “logic” may appeal.
Belshazzar
QUOTE(Hobbes @ Nov 5 2010, 09:18 PM) *
Here's the real problem I have with those advocating the deficit is no big deal. It just encourages more deficits. Eventually, as you state, rampant inflation will be the result. We've seen what impact that can have in the Weimar Republic in Germany after WW I. Note the woman shoveling money into the fire to keep warm...and tell me--is that image really 'overblown'?


Yes, you can only devalue your currency so much before something like that happens. My grandfather grew up in the Weimar Republic and he used to say that people would joke about papering their walls with marks because it was cheaper to do that than to buy wallpaper. Of course, we haven't gotten to that level yet, but if we ever do, hopefully China will consider us "too big to fail" and we'll get a bailout. laugh.gif
Curmudgeon
What do you see as the economic effects of persistent deficits?

I have an image in my mind. Was it John F. Kennedy that pointed to Richard Nixon and said, "Would you buy a used car from this man?"

Whenever I have purchased a car, it always seemed that the salesman had to get the sales manager's approval. As I never met the sales manager, I always took it as a euphemism for, "Yes! Time for a cup of coffee!"

Lately, I hear that China and other foreign governments are picking up our debts. (In History class in High School, we were told that it was the Rockefellers and the like who financed the nation through the world wars.) Foreign corporations are funding the Republican political campaigns. Somewhere in the back room, I have an image of Karl Rove having no interest in politics, government, or power. I have a vision of him as the sales manager who is approving the deals and pocketing a commission. If he felt any ownership for this country, he might be concerned; but I think that he just sees his bank balance growing. It doesn't occur to him that if the Chinese foreclose on our mortgage, he won't have a country to live in...

Let's propose an alternative that we can sell to the wealthiest 2% of the American population. If they invest in Savings Bonds, T-Bills, Republicoins, or whatever; we'll pay them a higher interest rate than we pay foreign investors, and the interest earned will be tax free if the loans are held in America by American citizens or corporations that can prove 90% or better American ownership. They can hold onto the notes, and use them as collateral for borrowing the money they need from American banks, etc., to finance factories, payrolls, etc. The nation will still be in debt to the wealthiest Americans. That's already how we finance our cars, our homes, our educations. As a society, we are accustomed to being in debt. It is only the wealthiest that really fear that their granchildren will actually have to pay off the national debt. If they're holding the notes, they'll want to collect the interest and discourage the government from prepaying the balance.
brinn
QUOTE("Curmudgeon")
Lately, I hear that China and other foreign governments are picking up our debts. (In History class in High School, we were told that it was the Rockefellers and the like who financed the nation through the world wars.)...

...If he felt any ownership for this country, he might be concerned; but I think that he just sees his bank balance growing. It doesn't occur to him that if the Chinese foreclose on our mortgage, he won't have a country to live in.

...It is only the wealthiest that really fear that their granchildren will actually have to pay off the national debt. If they're holding the notes, they'll want to collect the interest and discourage the government from prepaying the balance.


Curmudgeon,

China does not fund the US. Sale of treasuries to China, or any other entity for that matter, are not done as a source of funding but rather as a reserve drain allowing the fed to maintain control of short tem interest rates. Without bond sales the overnight rate would be pushed to zero. Keep in mind that the US has no foreign denominated debt but does have foreign holders of our currency. Let me explain further and keep in mind that this description is not theoretical but strictly operational. It's not how the system should work or how people say it works but rather, how it does work.

To understand the accounting behind treasury sales one must first understand that all foreign holdings of US currency are held at US reserve banks. When China sells goods to the US, the dollars that they receive in exchange are held in the US at a US reserve bank. This is a crucial point; the dollars never leave the US banking system. Once the Chinese have these dollars they can buy US dollar denominated goods and services, sell the currency to a willing buyer for another currency, hold the currency in the reserve account (earning 0%) or buy a treasury note or bill which will give them a small interest return on their deposit. If they buy a treasury note the reserve bank essentially moves the money from the reserve account at the Fed (the reserve account can be thought of as a checking account as the owner of the account can remove funds whenever they want. In banking terms a checking account is known as a demand deposit account or DDA as the owner can demand payment of funds at any time) to a T-Bill which functions just like a savings account or a certificate of deposit. A certificate of deposit (CD) is a deposit with a bank that earns interest but that can’t be taken out prior to the agreed upon maturity date, just like a T-Bill.

So the analogy is that the Reserve bank takes these dollars that are held in China’s US reserve checking account and places them in a T-Bill which, for all intents and purposes, is a certificate of deposit. When a regular bank takes $1,000 from your checking account and puts it into a CD the bank has no more nor less funds than it had a moment ago. The difference is that your funds have gone from being available upon demand to being available (with interest) at a set point in the future. Your liquidity has been exchanged for the ability to earn interest. The same dynamic is occurring with the sale of bonds.

So what happens when the bonds are ready to be redeemed? In effect, at the maturity of the T-Bill, the reserve bank takes the balance from the “CD” and transfers it back to the “checking account” of the owner with a small amount of interest added. Debt paid. The fact that the balances never leave the banking system but are simply transferred from one account to the next is the key to understanding that repayment of bonds is not an onerous task that requires the US to collect the funds to make the payment but nothing more than an accounting entry.

Given that explanation, thinking of foreign held treasuries as debt is not entirely accurate as it should be clear that treasuries more closely resemble savings rather than debt. As long as our economy remains healthy and US innovation continues, there will be a demand for our currency as it is the only currency that can purchase US assets. Theoretically, it is possible to inflate our way to the point that our currency becomes undesireable but that would presume that we have no control over inflation which is clearly not true.

Additionally, if China decides to stop buying treauries what will they do with the US dollar reserves they've built up? They can buy US dollar denominated assets, provided they can find a willing seller, or they can sit on them and earn nothing. If they buy US assets, products or services it will do nothing but increase demand in the US economy which is exactly what the US economy currently needs. If they continue to buy treasuries, the act of purchasing treasuries drains liquidity from the system and acts as a necessary offset to inflationary pressures.



Hobbes
QUOTE(brinn @ Nov 5 2010, 10:13 PM) *
QUOTE(”Hobbes”)
Not true. Sufficient currency exists for the economy to function, and therefore for activities to happen which can be taxed, without any additional government spending.
Sure, the government can run temporary surpluses but a consistent surplus will result in a collapse of demand as private sector wealth is eroded. It’s an accounting identity and can’t be debated.


The private sector can generate wealth all on its own--it doesn't need the government for that. That is the myth that government operates under, though--witness the recent stimulus programs, none of which can be economically justified or achieved their indicated result.

It is an accounting identity, though--it is an accounting of exactly how fiscally inept our government is.

Let me ask a very simple question: If deficits are so good, then why, with our constant stream of deficits, don't we have an increasing governmental revenue stream which makes deficits unnecessary?

QUOTE
QUOTE(”Hobbes”)
Further, money can be injected into the economy through the Fed (we've been doing this the last couple of years already), again without the government having to spend anything.
Can you clarify how the fed injects money into the system without spending?


Through loans from banks. What does the Fed EVER spend anything on? It's not a spending entity.

QUOTE
QUOTE(Hobbes”)
Here's the real problem I have with those advocating the deficit is no big deal. It just encourages more deficits. Eventually, as you state, rampant inflation will be the result.
in a sense I agree but it’s much too simplistic to state that the deficit is all bad. In our current environment we need a larger deficit (either through targeted spending designed to create jobs or through drastic reductions in taxes) but as soon as private sector demand is restored and unemployment is drastically reduced, spending can be reduced and taxation levels can be raised to limit inflation.


I'm not stating the deficit itself is all bad--I'm stating that HUGE deficits lead to economic problems. Eventually, an enending stream of even modest deficits will cause problems too. It's unavoidable. Again, consider interest rates. They are artificially low right now, and even with those, we have a $700 billion structural deficit. Interest rates WILL return to normal, and probably even higher, and this will add about another trillion dollars to that. That will put us at close to a $2 Trillion deficit, with no new spending at all, and not considering the impact of all our future unfunded liabilities. Rampant inflation, which you have stated (and I agree) is the 'limiting factor', WILL result.

As for the last part of your statement, spending CAN be reduced...but it never IS. Further, how do you solve the problem when the spending amount you need to reduce is greater than your budget? You can't eliminate more than all government spending. Nor can you tax all money away (which is why comparisons of our debt and deficit to GDP is a singularly ridiculous and meaningless number--it assumes the government can tax at 100%, which of course can never happen.) Hence, you will have an unsolvable problem using only those two levers---again leading to rampant inflation as the only possible result.
QUOTE
QUOTE
We've seen what impact that can have in the Weimar Republic in Germany after WW I. Note the woman shoveling money into the fire to keep warm...and tell me--is that image really 'overblown'?
It’s not overblown, just not applicable. Weimar Germany’s hyperinflation was due primarily to three things: The requirement to pay reparations in a foreign currency, A positive feedback mechanism in the wage/price index that was negotiated by the strong labor union in Germany resulting in spiraling wages, and the occupation of the Ruhr region which was the manufacturing heart of germany which effectively shut down production. None of these conditions are present in the US. Again, what is our inflation rate?


I'm not concernecd with what our inflation rate is, I'm concerned with what it will be. The situation we have would be akin to telling someone on the beach a tidal wave is coming, and having him reply that the water is fine right now. Our inflation rate is low because our economy is weak, and demand is limited. Hardly the go forward position we'd want to maintain, right?

QUOTE
QUOTE(”Hobbes”)
Again, we've seen this start to happen already, in Greece, Spain, etc. Near chaos resulted, only mitigated when other countries stepped up and fixed it. They could do this because Greece has a relatively small economy. We're in about the same position as Greece. Who's the big brother out there that's going to save us? That entity doesn't exist.
We are in no way shape or form analogous to Greece. Greece is part of the European currency union and is therefore not sovereign in their own currency. They are revenue constrained and need to tax or borrow to spend. All economies in the ECU share this risk. It is a flawed system. Other countries did not step in and fix Greece. The European Central Bank began buying their debt which supported them. It is analogous to the US federal government providing funding to a state.


Absolutely we are. Look at all the metrics used to indicate how bad their governmental finances were, and we are on par on all of them.


QUOTE
QUOTE(”Hobbes”)
The word 'merely' doesn't even belong in a sentence with something totalling tens of trillions of dollars of an obligation. It just doesn't.
Hobbes, You do realize that the trillion dollar debt that you reference is really the sum total of all savings held by the private sector, no? You do realize that the "deficit could be repaid tomorow by moving the funds held in Bond accounts at the fed back to reserve accounts at the fed. Voila, Debt paid!


What funds held in Bond accounts? There are no funds there...the money from the bonds is collected to cover current expenses--there isn't any money in Bond accounts. That's why the bonds are issued, because the government doesn't have the money. If the funds were there...why do they need to keep issuing bonds?

QUOTE
With the massive stimulus and two rounds of QE where’s the inflation you’re so concerned about? Do you think it’s a coincidence that our last budget surplus ended in 2001, and was reported as the longest surplus since 1927-1930. Do those dates ring a bell? Is it a mere coincidence that the first six US depressions followed the first six sustained budget surpluses? Is it a coincidence that in 1836, President Jackson actually paid off the federal debt and the worst depression on record followed.
It’s time to rethink your position. The situation isn’t what you think it is, despite how much the “logic” may appeal.


No, I don't think it is. Flip your logic around. We are currently undergoing the largest deficits we ever have, with the government spending more than twice what it takes in. Is our economy surging ahead? Hardly. If this worked as you say it does...we do we EVER have recessions? We doesn't Japan just spend its way back into prosperity? Do you really think they're undergoing decades of stagnation on purpose?
brinn
QUOTE("Hobbes")
The private sector can generate wealth all on its own--it doesn't need the government for that. That is the myth that government operates under, though--witness the recent stimulus programs, none of which can be economically justified or achieved their indicated result.
Of course private sector can generate goods and services on its own. I haven't claimed otherwise. However, currency is not wealth but is rather and accounting of wealth. It is the score of wealth , not the wealth itself.

QUOTE("Hobbes")
Let me ask a very simple question: If deficits are so good, then why, with our constant stream of deficits, don't we have an increasing governmental revenue stream which makes deficits unnecessary?
Let me answer this question with a question of my own and if you feel it doesn't clarify enough I'll try to expand further. What would happen if the government, in an attempt to pay off the national debt, instituted a 100% tax on all privately owned assets?

QUOTE("Hobbes")
Through loans from banks. What does the Fed EVER spend anything on? It's not a spending entity.
So congress does not enact spending programs? Where did the stimulus come from? Scott Pelley of 60 Minutes asked Bernanke this specific question in March of 2009. The question and repsonse is transcribed below:

QUOTE
PELLEY: Is that tax money that the Fed is spending?

BERNANKE: It's not tax money. the banks have-- accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. so it's much more akin to printing money than it is to borrowing.


QUOTE("Hobbes")
I'm not stating the deficit itself is all bad--I'm stating that HUGE deficits lead to economic problems. Eventually, an enending stream of even modest deficits will cause problems too. It's unavoidable. Again, consider interest rates. They are artificially low right now, and even with those, we have a $700 billion structural deficit. Interest rates WILL return to normal, and probably even higher, and this will add about another trillion dollars to that.
Hobbes, what is the natural rate of interest? I'm assuming since you believe that they are "artificially" low right now that you have an idea of what the natural rate should be. Additionally, reality does not support your thesis. For example, the 30 year treasury as of today it sits at 3.875%. Historically the 30 year was 13.45% in 1981 and has been decreasing ever since. Unless my data is incorrect, the national debt has increased from about $900 Billion in 1980 to over $13 trillion in 2010. But how could this be? How do long term rates decline while the deficit increases? Have rates been held "artificially" low for the last 30 years? Shouldn't the market be punishing the US for our fiscal recklessness by now? It seems that the market has given the US a vote of confidence in complete contradiction to prevailing wisdom on deficits. Odd isn't it? additionally, japan has one of the highest debt to GDP ratios of any developed country on the face of the earth. debt was 170.4% of GDP according to Visual Economics website. A look at Bloomberg today shows me that the 30 year japanese bond is currently 2.00%. Is Japan an exception to the rule as well? I'm honestly not trying to be snarky or sarcastic. I'm just frustrated that the conventional economic wisdom has been dead wrong since nixon took us off the gold standard. The forecasts of high rates and increasing inflation that were predicted have been dead wrong. Rates and inflation have done precisely the opposite of what many conventional economists thought would happen. At some point, if the theories consistently produce incorrect predictions, the theories must be questioned. If every economic forecast must be revised due to "artificial" situations or exceptions to the rule, then what good are the rules in the first place?


QUOTE("Hobbes")
I'm not concernecd with what our inflation rate is, I'm concerned with what it will be. The situation we have would be akin to telling someone on the beach a tidal wave is coming, and having him reply that the water is fine right now. Our inflation rate is low because our economy is weak, and demand is limited. Hardly the go forward position we'd want to maintain, right?
Actually your concerned with what it MIGHT be if we do not control inflation once aggregate demand is restored. Once again, inflation is well understood and is an economic condition that the fed is well equipped to deal with.

QUOTE
[Regarding the similarity between Greece and the US] Absolutely we are. Look at all the metrics used to indicate how bad their governmental finances were, and we are on par on all of them.
The metrics are not comparable as Greece is part of a monetary union and is thus not a sovereign issuer of their own currency whereas the US is. Do you truly not understand that greece is effectively a user of the euro and not an issuer? Can Greece inflate their way out of their debt even if they wanted to? Could Greece allow the euro to depreciate until foreign trade begins to pick up some of their demand? Of course the answers to both questions are no because Greece isn't the only country that uses the Euro. Do you think Germany and Greece share the same desires for the strength of the Euro? Of course not. Joining the european currency has forced the fiscal policies of the member nations into a "beggar thy neighbor" approach.

QUOTE("Hobbes")
That's why the bonds are issued, because the government doesn't have the money. If the funds were there...why do they need to keep issuing bonds?
Incorrect. Bond proceeds fund nothing but rather serve as a reserve drain and allow the fed to maintain control over short term rates. Let me explain.

As you know, banks have to maintain a reserve ratio that is set by the Fed. The reserve ratio limits the amount of deposits that that the bank can lend. For example, if the reserve ratio is set at 10% the banks must maintain 10% of all (not actually all deposits but I’m simplifying for understandability) their deposits on hand. So, for example, a bank has $100 dollars in deposits. If the reserve ratio is 10% the bank must maintain 10% of $100 or $10 in reserves and can lend out $90.

Because deposit and loan levels are changing from day-to-day and minute-to-minute, the calculation of the amount that a bank needs to legally hold for a reserve is a moving target. In effect, the government solved this problem by allowing banks to calculate their reserve requirement based upon a date that had already passed. For example, the bank would calculate the amount of deposits it had on Monday’s date and that would be the reserve requirement for Wednesday. This effectively creates a two day lag as the bank knows two days in advance what the legal reserve requirement should be.

In reality, banks don’t pay much attention to the legal reserve requirement when making loans as banks know they can borrow the money to increase their reserve position should they lend out too much or should deposit levels drop precipitously. As long as the interest rate the bank charges on loans is higher than the rate they have to pay when borrowing money, it makes sense to make every loan that they can. In effect, bank lending decisions are affected by the price of reserves, not by reserve positions. If the spread between the rate of return a bank can get from making a loan and the interbank rate is wide enough, even a bank deficient in reserves will make the loan and cover the cash needed by purchasing (borrowing) money in the funds market. This fact is clearly demonstrated by many large banks when they consistently purchase (borrow) more money than their entire level of required reserves.

So where does the money that banks borrow come from? The first place they can get the money from is other banks that have excess deposits but not enough loans. Going back to our first example, if a bank has $100 in deposits it can legally lend $90 of the money assuming a 10% reserve requirement. If it lends anything less than $90 it will have excess reserves. Banks don’t like to have excess reserves as the excess money does not earn anything for the bank. So instead of letting the excess reserve do nothing, banks will lend these funds to other banks who need cash to meet their legal reserve requirement. The rate that banks charge each other on these loans is strangely called the Fed Funds Rate but it's less confusing to think of this as the interbank rate. When you think logically about this rate you will soon realize that if the banking system as a whole does not have enough reserves to meet legal requirements than, regardless of how the reserves are divvied up via interbank loans, at least one bank will fail to meet the reserve requirement. Given this reality, the interbank loan rate would be bid up to infinity as the banks who don’t hold enough reserves bid against each other to attract money from the banks who have excess reserves knowing that at least one bank will be left short. The opposite is also true. If there are excess reserves in the banking system as a whole the rate offered will be pushed to zero as the banks with excess reserves will continue to offer their excess reserves at lower and lower rates in an effort to make even the smallest return on their excess reserves (which would otherwise earn 0%).

Now, with a rudimentary understanding of how bank reserves work we can begin to talk about Bonds. If the government spends money by buying hammers from the private sector, than the account of the company who made those hammers will increase by the price of the hammers. This also means that the bank that holds that company’s account now has more reserves as its deposit balances have increased. If, through a combination of high government spending, high savings rates (increases deposits and thus reserves) and/or low loan demand, the banking system ends up with reserves in excess of required reserves we now know that the interbank rate will be driven to zero. In order for the Fed to be able to spend AND maintain control over the short term interest rate the fed will need to drain the excess reserves to maintain the funds rate above zero. They do this by draining the liquidity (excess reserves) from the system via sales of T-bills. The sale of t-bills gives the bank a place to park excess reserves and sets a minimum rate for interbank loans. If a bank holds excess reserves the lowest rate that it will be willing to accept if it lends the excess to another bank is the rate that the government will pay on a T-Bill as the bank knows that if it doesn’t lend the funds to another bank in the interbank market it can just place those funds with the government and earn the T-Bill rate.

Voila, the Fed now has the ability to spend any amount without having to worry about the banks having excess reserves and thus driving the interbank rate to zero. The government can now spend any amount while still maintaining a positive overnight lending rate (known as the target rate). So, if the government wants to lower liquidity (reserves) it can either increase taxes (thus lowering bank reserves) or it can sell T-bills. If it wants to add liquidity to the system it can spend (run a deficit) or buy T-bills from the private sector (thus giving the private sector money in exchange for their existing T-bill savings). The mechanism works both ways.

I know this is a long post and I hope you stuck with me through this as I've attempted to make it as simple and understable as possible. To summarize, if the central bank (the fed in the US) has a positive target for the overnight lending rate, it formerly needed to provide an interest-bearing alternative to, what were then, non-interest-bearing bank reserve accounts. This was typically done by offering securities for sale in the open market to drain the excess reserves. Central Bank officials and traders recognize this as "offsetting operating factors" since the sales are intended to offset the impact of fiscal policy that would cause the Fed funds rate to move away from the Fed’s target rate. In nations like the US, Japan, and others, where interest was not paid directly on central bank reserves, the penalty for deficit spending and not issuing securities was not (apart from various self-imposed constraints) bounced government checks but a zero percent interbank rate, as is the case in Japan today. The overnight lending rate is the most important benchmark interest rate for many other important rates, including banks’ prime rates, mortgage rates, and consumer loan rates, and therefore the interbank rate (known as the Fed Funds rate) serves as the base rate of interest in the economy.

It is also interesting to note that the fed began paying interest on reserves in 2008 thus bonds don't even effectively serve the purpose of establishing an overnight rate anymore as the interest rate on reserves accomplishes the same thing.

I know this all sounds heretical but it is completely and 100% operationally consistent with how our monetary system functions. Are you open minded enough to at least consider that what you think you know may be inaccurate? If you are, check out the following PDF from Warren Mosler. The Seven Deadly Innocent Frauds of Economic Policy. It's a long read but a very important one.

P.S.
Thanks for the interesting discussion Hobbes. I appreciate the lively interaction.
Maybe Maybe Not
QUOTE(brinn @ Nov 6 2010, 09:49 AM) *
When China sells goods to the US, the dollars that they receive in exchange are held in the US at a US reserve bank. This is a crucial point; the dollars never leave the US banking system. Once the Chinese have these dollars they can buy US dollar denominated goods and services, sell the currency to a willing buyer for another currency, hold the currency in the reserve account (earning 0%) or buy a treasury note or bill which will give them a small interest return on their deposit.
Even though the "dollars" remain in the U.S., held at a U.S. reserve bank, do the Chinese not expect that a certain value adheres to those dollars? I mean, we can't just decide the dollars they "have" are worth less than they were when the Chinese obtained them and expect no protest? Can we?
brinn
QUOTE(Maybe Maybe Not @ Nov 6 2010, 06:04 PM) *
QUOTE(brinn @ Nov 6 2010, 09:49 AM) *
When China sells goods to the US, the dollars that they receive in exchange are held in the US at a US reserve bank. This is a crucial point; the dollars never leave the US banking system. Once the Chinese have these dollars they can buy US dollar denominated goods and services, sell the currency to a willing buyer for another currency, hold the currency in the reserve account (earning 0%) or buy a treasury note or bill which will give them a small interest return on their deposit.
Even though the "dollars" remain in the U.S., held at a U.S. reserve bank, do the Chinese not expect that a certain value adheres to those dollars? I mean, we can't just decide the dollars they "have" are worth less than they were when the Chinese obtained them and expect no protest? Can we?


They can protest but what else can they do? Declare war on us? Stop exporting to the largest consumer market on the planet?

By holding US dollars they are assuming all the risk that any holder of the currency assumes (inflation chief among them) but, in addition to the inflation risk, foreign holders also have other political risks. Do you recall back in 2005 when Chinese Oil company CNOOC tried to buy American oil company Unocal? They ended up withdrawing their $18.5 billion offer due to American political resistance to allowing the Chinese to own these strategic US assets. This is a clear example of the political risk that the Chinese assume by accumulating US dollars. Effectively the US possesses a seller's option to provide goods and services to China in exchange for their dollars. Possessing a US dollar does not give you a right to US goods and services but rather gives the seller of US goods and services an option to sell (option meant in the financial sense; like a stock option). In other words, we don't have to exchange any goods and services for those dollars if we don't want to.

If we paid China off, basically moving their saved dollars from a time deposit (US treasury) to a demand deposit (China's reserve account) all we would be doing is giving the Chinese liquidity in dollars. As I mentioned above, the Chinese would then have an option to buy US dollar denominated goods and services or save those dollars at a 0% interest rate (sure they could exchange them for another currency but then the new owner of the USDs would be in the same position as China just was with a choice of whether to spend or save them). If the Chinese (or whoever they sell the currency to) choose to buy dollar denominated goods and services, that will increase US demand and boost production.

If we owed China Yuan, the situation would be much more dire. We cannot create Yuan thus China would have a real claim on goods and services as the US would need to sell goods and services to acquire yuan to settle with China.

So given this, the obvious question then becomes "What advantages does China get from selling us goods and services for US dollars"? The answer: The act of exporting to the US helps keep chinese domestic employemnt up and their economy running. In addition to the US dollar, the Chinese are acquiring a host of other currencies and will continue to do so as long as as they need to run a current account surplus to support domestic production. Additionally, they maintain a large currency reserve in USD which allows them to keep the yuan pegged to the USD thus making their exports more attractive.

Hope that helps.
lederuvdapac
QUOTE(brinn)
Stop exporting to the largest consumer market on the planet?


Yes. You are under the false assumption that our consumption is the driver of the world economy. This is wrong. We are the caboose. The producers are the engine of the economy. China has 1.3 billion consumers. If the Chinese finally allow their currency to appreciate - something that will happen anyway since the US is pursuing a policy of intentional devaluation - every Chinese citizen will get the equivalent to a giant pay raise. They don't need us. They can consumer their own products. This WILL happen eventually. The developing world will decouple from the US economy and continue to go strong. We are the world's largest debtor. We can't pay off our debts. Eventually the world will figure this out.
brinn
QUOTE(lederuvdapac @ Nov 6 2010, 08:15 PM) *
QUOTE(brinn)
Stop exporting to the largest consumer market on the planet?


Yes. You are under the false assumption that our consumption is the driver of the world economy. This is wrong. We are the caboose. The producers are the engine of the economy. China has 1.3 billion consumers. If the Chinese finally allow their currency to appreciate - something that will happen anyway since the US is pursuing a policy of intentional devaluation - every Chinese citizen will get the equivalent to a giant pay raise. They don't need us. They can consumer their own products. This WILL happen eventually. The developing world will decouple from the US economy and continue to go strong. We are the world's largest debtor. We can't pay off our debts. Eventually the world will figure this out.


Who has the largest GDP on the planet? And what happens when the yuan appreciates and the trade surplus begins to shift in our favor? You're assertion that we can't pay our "debts" is patently false. The "debt" could be paid tomorrow with nothing more than an accounting entry. Operational fact. Not economic theory.
lederuvdapac
QUOTE(brinn)
Who has the largest GDP on the planet?


The US for now. But what does that matter? GDP includes government spending and consumption. Consumption is a consequence of economic growth, it is not the driver of it. We are only able to consume because we borrow from places like China, Japan and Saudi Arabia. Once the borrowing stops because interest rates rise, the party is over.

QUOTE(brinn)
And what happens when the yuan appreciates and the trade surplus begins to shift in our favor?


Why would that happen? What are we going to export? Why do you assume that the US would be the ones who be doing the exporting instead of another developing country in Asia or Africa?

QUOTE(brinn)
You're assertion that we can't pay our "debts" is patently false. The "debt" could be paid tomorrow with nothing more than an accounting entry. Operational fact. Not economic theory.


It would destroy our economy! The debt is insurmountable without causing massive depression. Our debt obligations far exceed our ability to ever pay it. Either we would raise taxes to such absurd levels that it would leave nothing for the productive economy or we would inflate away our debts which would destroy our currency and make our savings and capital evaporate. There is no easy way out of it. We can have an honest strategic default on our debt or we can choose to destroy our currency. Those are the options.
Maybe Maybe Not
QUOTE(brinn @ Nov 6 2010, 06:55 PM) *
Maybe Maybe Not: "Even though the 'dollars' remain in the U.S., held at a U.S. reserve bank, do the Chinese not expect that a certain value adheres to those dollars? I mean, we can't just decide the dollars they 'have' are worth less than they were when the Chinese obtained them and expect no protest? Can we?"

They can protest but what else can they do? Declare war on us? Stop exporting to the largest consumer market on the planet?


Wow. Seriously? You might be surprised what people (and countries) will do when pushed too far. (I won't be.)

I agree that there are complexities to the situation that might restrain the Chinese (or anyone else) from taking action lightly. But I agree with Hobbes from his post #2 in this thread - war isn't out of the question.
skeeterses
QUOTE(brinn @ Nov 5 2010, 11:41 AM) *
It seems that the U.S. and much of Europe has become obsessed with deficits, debt reduction and austerity. The question for debate is simple:

What do you see as the negative economic effects of persistent deficits?

If asked this question 25 years earlier under Reagan's term, the typical American would not care. In fact even with the current state of America's economy, I don't think the typical American is thinking about the possibility of a complete financial collapse, though I wouldn't rule that out.

I think it boils down to Envy. I'm sorry to mention that word because some other posters have accused me of that when I talk about issues such as the disparity between the rich and the poor in America, but I can explain nonetheless. Throughout the economic crisis of the past 5 years, the Government has given hundreds of billions of dollars in bailouts to companies that American taxpayers feel are unworthy and in the midst of those bailouts, some of the bailed out companies have continued paying lavish salaries and benefits to their top employees. That kind of distrust has helped waken a lot of Americans up to a lot of other financial issues in the Government such as Sweet Heart contracts, High Salaries for politicians, and the suspicion that some Civil Servants are being paid middle class salaries for unproductive work.

The reasons that Americans should be questioning the Federal spending lies partly in the fact that people who work in the Federal Agencies, and the Federal Contractors, are in the solid middle class range with most of the health benefits paid for, enough vacation time and money to travel, and retirement benefits if an employee works long enough. All that, while many Americans outside the beltway are losing their middle class lifestyle. If the Federal Government cannot fix the economy in terms of growing the middle class again or delivering justice to the White Collar crooks on Wall Street, the rest of America will become very wary of supporting a big bureaucracy. As much as I would like the see the Federal Government fix the economy, I do not expect them to create 20 million office jobs, nor do I wish to see the Government try such a thing.
brinn
QUOTE(lederuvdapac @ Nov 6 2010, 07:31 PM) *
We are only able to consume because we borrow from places like China, Japan and Saudi Arabia. Once the borrowing stops because interest rates rise, the party is over.

We do not borrow from China, Japan, nor Saudi Arabia. What we are doing is financing a foreign desire to save in US dollars. The relationship is much more akin to a consumer depositing funds in a bank. The US is effectively the bank and China, Japan and Saudi are the consumers. They take their US dollar earnings (not Yuan, Yen or Riyal) and buy a bond because their choices are limited to earning a positive interest rate or earning zero. The same reason you place your dollars into a savings account at a bank. As you know, deposits held at a bank are held as liabilities on the bank's balance sheet. The bank owes you these deposits back thus the bank is "borrowing' from you in exactly the same manner that the US "borrows" from China, Japan, and Saudi. So the question then becomes, when was the last time you heard of a bank shutting down because they were attracting too many depositors?

QUOTE(Leder)
QUOTE(brinn)
You're assertion that we can't pay our "debts" is patently false. The "debt" could be paid tomorrow with nothing more than an accounting entry. Operational fact. Not economic theory.


It would destroy our economy! The debt is insurmountable without causing massive depression. Our debt obligations far exceed our ability to ever pay it. Either we would raise taxes to such absurd levels that it would leave nothing for the productive economy or we would inflate away our debts which would destroy our currency and make our savings and capital evaporate. There is no easy way out of it. We can have an honest strategic default on our debt or we can choose to destroy our currency. Those are the options.


Just as the Bank always shutters their doors when they repay your savings account by moving your balance to a checking account, right?. Once the "debt" is "repaid" (effectively moved from the fed reserve bond accounts to the fed reserve "reserve" accounts) it is possible that liquidity would need to be drained from the system to avoid inflation (done via, more bond sales, increased taxation or increased rates) but that would only need to be done if the holder of the funds (China for example) decides to spend their dollar holdings by purchasing dollar denominated US goods and services. With all due respect, strategic default or hyperinflation are only considered reasonable options because of a lack of understanding of how the monetary system actually works. Once one gains an understanding of reserve accounting and sectoral balances the economics become much clearer, more logical and straightforward. Your assertions were once accurate but inapplicable after 1971 when the US converted to a completely non-convertible, floating fiat currency. Your citing gold standard theory and advocating gold standard policies in a fiat currency environment.


Maybe Maybe Not
QUOTE(brinn @ Nov 7 2010, 10:53 AM) *
We do not borrow from China, Japan, nor Saudi Arabia. What we are doing is financing a foreign desire to save in US dollars. The relationship is much more akin to a consumer depositing funds in a bank. The US is effectively the bank and China, Japan and Saudi are the consumers. They take their US dollar earnings (not Yuan, Yen or Riyal) and buy a bond because their choices are limited to earning a positive interest rate or earning zero. The same reason you place your dollars into a savings account at a bank.
And the dollars deposited in our bank by others are then essentially loaned back to ourselves to finance a government that is spending way more than it takes in. The effect is the same as a loan although the financial reality may be more complex.

So when those others ask for their deposits back and we don't have anything to give them, or the bank says the billion dollars they put in are really only worth 8 or 9 hundred million, those others get upset.



QUOTE(brinn @ Nov 7 2010, 10:53 AM) *
As you know, deposits held at a bank are held as liabilities on the bank's balance sheet. The bank owes you these deposits back thus the bank is "borrowing' from you in exactly the same manner that the US "borrows" from China, Japan, and Saudi. So the question then becomes, when was the last time you heard of a bank shutting down because they were attracting too many depositors?
Really? That's an accurate description of what's happneing? Other countries are "rushing" to deposit all their money in the U.S.?

What's happening is that some big customers with a lot of money already deposited are getting skittish about the bank's solvency and hoping it doesn't fail.
akaCG
QUOTE(brinn @ Nov 5 2010, 07:19 AM) *
... I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence ...
...

Why not?
brinn
QUOTE(akaCG @ Nov 7 2010, 11:31 AM) *
QUOTE(brinn @ Nov 5 2010, 07:19 AM) *
... I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence ...
...

Why not?

Operationally, it could. Functionally, it would cause inflation.
akaCG
QUOTE(brinn @ Nov 7 2010, 12:39 PM) *
QUOTE(akaCG @ Nov 7 2010, 11:31 AM) *
QUOTE(brinn @ Nov 5 2010, 07:19 AM) *
... I’m not claiming that the US can print $1,000,000 for each and every citizen without consequence ...
...

Why not?

Operationally, it could. Functionally, it would cause inflation.

How about just $45,000 (per citizen share of U.S. National Debt)? Or just $15,000 (per citizen share of U.S. debt held by foreigners)?

At what point does the "functional finance" model, upon leaving the "frictionless" world of theory, crash headlong into the "immovable object" of reality (e.g. "Stop diluting the value of the money I've worked so hard to make, or else!!!") and ceases to function (pun intended)?
brinn
QUOTE(MMN)
Really? That's an accurate description of what's happneing? Other countries are "rushing" to deposit all their money in the U.S.?
Yes, what I wrote is an accurate description. Your interpretation of what I said is not. What other countries are "rushing" to do is to sell their goods and services to the US consumer. Once they have sold their goods and services they have no choice but to "deposit" their funds in the US reserve bank as that is how the payment for goods and services in US dollars clears. They have no other option if they are accepting US dollars. Their choice is then to convert their reserve balances to treasuries and earn interest or leave the funds in their account and maintain liquidity but forego a return on their holdings.

QUOTE(MMN)
And the dollars deposited in our bank by others are then essentially loaned back to ourselves to finance a government that is spending way more than it takes in. The effect is the same as a loan although the financial reality may be more complex.
No. It may appear that bond proceeds and taxes are funding our spending but they are not. Both taxes and bonds sales are liquidity drains but are not necessary for funding. What does it mean to loan ourselves something that we can create at will? Go back to my analogy of the business cards and the household. Does the father need collect business cards from his kids in order to issue more?


QUOTE(akaCG)
How about just $45,000 (per citizen share of U.S. National Debt)? Or just $15,000 (per citizen share of U.S. debt held by foreigners)?

At what point does the "functional finance" model, upon leaving the "frictionless" world of theory, crash headlong into the "immovable object" of reality (e.g. "Stop diluting the value of the money I've worked so hard to make, or else!!!") and ceases to function (pun intended)?
This has been done before. What were Bush's 2008 tax rebate checks but exactly this on a smaller scale? Aside from the moral hazard of such a course, it would likely allow private households to deleverage significantly. It would boost aggregate demand and the increased demand would likely begin to lower unemployment levels. Once employment levels have increased and the output gap decreases any additional spending would be inflationary. The government would need to increase taxes and increase rates to drain liquidity and dampen economic activity. Inflation will not increase while unemployment is is this high and subsequently, the output gap is extremely large. Only spending in excess of the economy's ability to produce will produce inflation.
Maybe Maybe Not
QUOTE(brinn @ Nov 7 2010, 02:36 PM) *
QUOTE(MMN)
Really? That's an accurate description of what's happneing? Other countries are "rushing" to deposit all their money in the U.S.?
Yes, what I wrote is an accurate description. Your interpretation of what I said is not. What other countries are "rushing" to do is to sell their goods and services to the US consumer. Once they have sold their goods and services they have no choice but to "deposit" their funds in the US reserve bank as that is how the payment for goods and services in US dollars clears. They have no other option if they are accepting US dollars.
So they want the U.S. consumer, they just don't trust the financial intermediary they must go through to do so?

What's the difference? If they don't believe they're getting a fair shake from the financial intermediary, the whole thing falls apart. (Especially when they realize the buying power of the people they're selling to is being artificially propped up by their own money.)

Trust is a must.



QUOTE(brinn @ Nov 7 2010, 02:36 PM) *
[
QUOTE(MMN)
And the dollars deposited in our bank by others are then essentially loaned back to ourselves to finance a government that is spending way more than it takes in. The effect is the same as a loan although the financial reality may be more complex.
No. It may appear that bond proceeds and taxes are funding our spending but they are not. Both taxes and bonds sales are liquidity drains but are not necessary for funding. What does it mean to loan ourselves something that we can create at will?
We can't create it at will. Not without consequences. You've said so yourself.

There is no free lunch.
brinn
QUOTE(MMN)
So they want the U.S. consumer, they just don't trust the financial intermediary they must go through to do so?

What's the difference? If they don't believe they're getting a fair shake from the financial intermediary, the whole thing falls apart. (Especially when they realize the buying power of the people they're selling to is being artificially propped up by their own money.)

Trust is a must.


Based upon the trade deficit I'm seeing no lack of trust in the US currency. But let's assume that the dollar begins to lose value because foreign holders begin to sell the dollar for other currencies. What happens to the relative value of goods and services produced by a nation when the value of their currency drops? I'm sure you know that the goods and services produced by the country with the weaker currency become more affordable for nations with a stronger currency. This shifts the balance of trade in favor of the weaker currency. Agreed? If the value of the US dollar drops, our exports become more attractive and the "evil" trade deficit begins to shrink. This is currently, exactly the goal of the Obama administration as they try to coerce China to unpeg the Yuan and let it float freely. Does it not trouble you that what you fear (foreigners not wishing to save in our currency) is currently the explicit goal of our foreign economic policy with China?

The real wealth of a nation is all the goods and services it produces plus all the goods and services it imports minus all the goods and services that are exported. This is essentially known as the real terms of trade and, currently, it is heavily weighted in the US' favor. If Obama's efforts to get the yuan to float are succesful our trade defict will shrink and our real terms of trade with China will suffer.

QUOTE(MMN)
We can't create it at will. Not without consequences. You've said so yourself.

There is no free lunch.


We can create it at will if we understand how to manage the consequences of our actions. Question for you MMN: Why hasn't all the stimulus and two rounds of QE failed to move inflation?

As long as the US economy remains productive, and as long as we do not borrow in a foreign currency, and as long as we have the political will to drain liquidity once the output gap shrinks, we'll be fine. Of course, the last requirement in the list is the one we need to worry about most as politicians have shown a tendency to do what is best for them rather than what is best for the country but if the operational realities of the monetary system were more widely understood it wouldn't be difficult to hold politician's feet to the fire if inflation began to increase. Besides, inflation is a long way off and won't become possible until the outgap gap shrinks considerably. Only spending above and beyond the economy's capacity to produce more goods and services is inflationary.
skeeterses
QUOTE(brinn @ Nov 8 2010, 09:19 AM) *
We can create it at will if we understand how to manage the consequences of our actions. Question for you MMN: Why hasn't all the stimulus and two rounds of QE failed to move inflation?

Better yet, why hasn't all the stimulus and two rounds of QE stimulated the economy? You seem to have a very short term memory when you talk about there being "no inflation" despite all the money the Fed has pumped into the economy. Not too long ago, gasoline was selling for over $4/gallon, and before that, houses were skyrocketing in value with all the cheap credit going around.

Your idea about the value of the currencies adjusting via the Free Market and re-adjusting the flow of goods to balance out the Trade Deficit seems like a good idea, except for one thing. International Trade doesn't happen in a Free Market. Most of the Trade Agreements that get negotiated tend to favor politically well connected firms on both sides of the Ocean instead of the market place deciding. Rarely do these imbalances get resolved with happy endings. A lot of "Free Market" economists thought that the Chinese consumers would have loads of cash to buy American products after America running up gargantuan trade deficits with that country for 2 decades now. Instead, a lot of the surplus money ended up going into a Real Estate Bubble over there while a relatively small number of factory owners profited from the trade deficits.
CarpeDinkum
Hi All -

I just want to say I'm enjoying the spirit of debate here. I don't know alot about economics (more cars and computers), but it seems like folks need to get a better handle on how the economy works. Seems like we elect politicians that mainly play to our fears and hopes, but nothing changes for our better. Sol it's boom and bust, with the left saying we have to chop off the right side of the ship and throw it overboard. We get sick of that and elect the Right, who says we have to chop off the left side of the ship and throw it overboard and so it goes until we're ALL left walking the plank. Hopefully nobody will decide that the masts have to go overboard to save the country. Of course, after the left and right sides of the ship are chopped off, maybe everybody will get together in the middle and decide that it's better to come up with a new plan than it is to drown. I don't understand political theory; I'm kind of tired of political pie-in-the-sky on both sides of the fence anyway.

Now, what I understand from what I've been reading is that the U.S. economy isn't based on the gold standard anymore and that the U.S. can't run out of it's own currency or be indebted in it's own currency. I also understand that the Gov't can't spend one way that will fix America forever, just like you can't eat a meal that will satisfy you for the rest of your life.

Please try to keep it simple. Seems to me there's a lot on the line here and while I can't say our elected officials are ENTIRELY out for their own good, it's not going to do us any good to hire politicians to help us get back to work if they don't know how the economy works. From what I've read here, any of 'em that talks about U.S. bankruptcy should get a pink slip, and that damn soon. The changes need to start with us. We can't make proper decisions if WE don't know the facts. Let's lay out some facts, right here.
brinn
QUOTE("Skeeterses")
Better yet, why hasn't all the stimulus and two rounds of QE stimulated the economy?
Simple Answer: Because the stimulus largely went to wall st and banks to help shore up their balance sheets in the mistaken belief that banks weren't lending because they were reserve constrained. I'm an executive at relatively small bank and I can assure you that when we make a loan we don't care about the level of deposits in our bank because we know that if our reserve calculation falls short at the end of the calculation period we can borrow money in the interbank market. When we make a loan all we care about is the spread between our cost of funds and the rate on the loan and the borrower's ability to repay. That's it.

So the reason that the stimulus has had no effect is because it wasn't properly targeted. What we are experiencing is a balance sheet recession where main st. has too much debt. The stimulus did nothing but add to bank reserves and the money isn’t actually getting into circulation. Main Street deleveraging continues unabated. Additionally, high unemployment and idle production capacity exacerbates the situation. As it stands, banks are holding cash, loan demand is weak and velocity is minimal.

Reagrding, QE: Operationally it is a non-event and is likely actually deflationary in nature. QE basically purchases private holding of treasuries and provides cash (reserves in banks). It replaces an interest earning asset with a non-interest earning asset and forces the holder of the cash to seek other areas of investment. It will lower rates further along the yield curve as the feds purchase longer term bonds with this round of QE. Because QE is simply an asset swap and adds no real assets to the private sector it has no net effect on the level of private sector wealth and serves only to lower rates further and force savers to seek alternative investments.

Have to go to work now but I'll respond to your inflation concerns later today.
Ted
QUOTE(brinn @ Nov 4 2010, 09:41 PM) *
It seems that the U.S. and much of Europe has become obsessed with deficits, debt reduction and austerity. The question for debate is simple:

What do you see as the negative economic effects of persistent deficits?

Payment of interest. Which amounts to money lost to the bad habit of overspending. Money spent on interest is not available for other uses and often requires increased Taxes to reduce deficits. Increased Taxes reduce economic activity and may lead to even more borrowing.

The recent election indicates that consumers are not lost on the issue. Out of control and pork barrel spending needs to end – Now

QUOTE
In FY2010, the Treasury Department spent $414 Billion of your money on interest payments to the holders of the National Debt. Compare that to NASA at $19 Billion, Education at $93 Billion, and Department of Transportation at $78 Billion.
http://www.federalbudget.com/


CarpeDinkum
Thanks Brinn. That helps me understand what's going on with QE and why it's not helping restore jobs. The banks are scared to lend and the borrowers are scared to borrow. Can't say that I blame them.

So the Fed just keeps doing the same thing and it seems it's not helping that much. Is there anything else the Fed can do or are they just a one trick pony?

On inflation, it seems that bubbles have had a much more destructive effect on our economy than general inflation has. I'm not sure how to address that so we can head off the next bubble. Seems like there's always the sociopathic element, from the guy that says "I'll get the loan, gut the house and sell the pieces on Craigslist" to the corporate version of the same thing: "I'll bundle the loans, gut the value and sell what's left over to a mutual fund manager". The both of them should be in jail! We need some way of keeping that stuff under control and trusting our elected officials doesn't seem to be getting the job done.


skeeterses
QUOTE(brinn @ Nov 8 2010, 09:08 PM) *
So the reason that the stimulus has had no effect is because it wasn't properly targeted. What we are experiencing is a balance sheet recession where main st. has too much debt. The stimulus did nothing but add to bank reserves and the money isn’t actually getting into circulation. Main Street deleveraging continues unabated. Additionally, high unemployment and idle production capacity exacerbates the situation. As it stands, banks are holding cash, loan demand is weak and velocity is minimal.
...........
Have to go to work now but I'll respond to your inflation concerns later today.

But you do know where the Fed was trying to go with the money, right? I'm assuming that you've been keeping up with the news about housing and the trouble with the carmakers. If people's mortgage payments are worth more than the market values of their homes, shopping and other "consumer activities" can go out the window very fast. Unfortunately, were to actually succeed in bringing housing prices back up, that could have the effect of driving even more people from their homes because of the affordability issue. The reason I mention this is because housing is one of the top economic concerns in this country right now, and many Americans are simply opposed to the Fed trying to prop up housing prices. Other things that have gone up in price are utilities, healthcare expenses, and education costs.

Also, the Deficit is not simply a numbers issue that can be solved by simply rearranging the accounting records. There are various programs like the "War on Terror", the healthcare entitlements, social security, transportation infrastructure, and even farm subsidies. Since you're new to the board, we need to hear your views on the other issues to see which Government programs would help the economy and which ones would simply enrich the lobbyists.
brinn
QUOTE(Skeeterses)
But you do know where the Fed was trying to go with the money, right? I'm assuming that you've been keeping up with the news about housing and the trouble with the carmakers. If people's mortgage payments are worth more than the market values of their homes, shopping and other "consumer activities" can go out the window very fast.
Exactly why it was ill conceived and didn't work. A much more efective way of actually increasing aggregate demand is by lowering taxes. Eliminate FICA for as long as it takes to restore private sector balance sheets and you would see an organic stabilization in housing as people pay down debts and free up more income for mortgage payments (which in turn helps the banks) and for other purchases. QE does nothing as it adds no new net financial assets to the private sector and only changes maturities.

QUOTE(Skeeterses)
Also, the Deficit is not simply a numbers issue that can be solved by simply rearranging the accounting records. There are various programs like the "War on Terror", the healthcare entitlements, social security, transportation infrastructure, and even farm subsidies. Since you're new to the board, we need to hear your views on the other issues to see which Government programs would help the economy and which ones would simply enrich the lobbyists.
In point of fact I've been on the board longer than you. Check my "Join Date". I've just never been a prolific poster.

Regardless, my stance on any of those issues is completely irrelevant as the nature of monetary operations is apolitical. Funding of any of those is not a question of currency but rather a question of the real resources that it takes and the opportunity cost that is lost when those real resources are used for that purpose rather than another. Just as the issue of social security is not whether we will have the money to support seniors in the future but rather will our economy be productive enough to provide the resources for our seniors. Currency is just the method of keeping score. Once one understands how monetary operations function the political decisions of what deserves to be funded can be addressed.


QUOTE(Carpe Dinkum)
Thanks Brinn. That helps me understand what's going on with QE and why it's not helping restore jobs. The banks are scared to lend and the borrowers are scared to borrow. Can't say that I blame them.
You're welcome. Glad at least one person is finding this interesting and not immediately erecting an ideological wall. I'll post more later.

QUOTE("CarpeD")
So the Fed just keeps doing the same thing and it seems it's not helping that much. Is there anything else the Fed can do or are they just a one trick pony?
I'll get back to this.

Maybe Maybe Not
QUOTE(brinn @ Nov 8 2010, 05:07 PM) *
QUOTE(Carpe Dinkum)
Thanks Brinn. That helps me understand what's going on with QE and why it's not helping restore jobs. The banks are scared to lend and the borrowers are scared to borrow. Can't say that I blame them.
You're welcome. Glad at least one person is finding this interesting and not immediately erecting an ideological wall. I'll post more later.
I hope I'm not seen as "erecting an ideological wall."

I think the idea that "trust is a must" is merely a different way to express what Carpe Dinkum has expressed here.


CarpeDinkum
Naw MMN, I think you're just trying to understand it all, like me. If we get a good basic understanding of things, then we can make better decisions about who we elect. If we don't, then it's little different than having a company and hiring people don't know how to do the job and won't learn.

What do you think about the Fairtax thing? Seems OK to me (to the degree that we need to be taxed in the first place). I was reading that compliance costs for federal taxes (for individuals and corporations) amount to 20 cents for every tax dollar the government gets. That seems like a huge waste right there. Of course, a lot of compliance jobs would go out the door if we did that, but even if we used 1 penny for every tax dollar to get those folks trained for a different line of business, that would be 25 billion as opposed to 500 billion. Big interim hit to the GDP though...

Does anybody else have any figures on those compliance costs? Does that sound reasonably accurate?
pj4xtrader
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
CarpeDinkum
Yeah, the media has been contributing heavily to the dumbing-down of America. Of course, we have to take some responsibility for running out and tossing McSenators and McPresidents down our throats. Easy to get and politically tasty, but you'd better set some money aside for the triple bypass surgery.
Maybe Maybe Not
QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!
brinn
QUOTE(Maybe Maybe Not @ Nov 9 2010, 06:56 AM) *
QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

MMN,

We have the right to consume all that we can produce plus all that the foreign sector is willing to sell us (note that I say "willing" as foreign desire for US dollars in exchange for their goods and services is completely voluntary). Have you ever heard of the sectoral balances approach to economics? At it's heart, it states that in order for one sector of the economy (private, foreign, or government) to be in surplus another sector MUST be in deficit. In the US both the foreign sector (via our large trade deficit) and the private sector (via private savings) are in surplus. This means that mathematically, the government sector must run a deficit. Simple double entry accounting clearly shows one that not all sectors can be in surplus. So if the private sector wants to save and be in surplus and the US desires to be a net importer and not an exporter, the only sector that can absorb these surpluses is the government. If you prefer that government runs a surplus you can advocate for that but be clear that what you are advocating is for one or both of the private and foreign sectors to be in deficit. With a simple understanding of the real terms of trade and a notion that the US consumer should be saving more, you can think this through for a moment and tell me if driving the private or foreign sectors into deficit to offset the desired government surplus is truly the best course of action.
Mrs. Pigpen
QUOTE(brinn @ Nov 9 2010, 08:30 AM) *
QUOTE(Maybe Maybe Not @ Nov 9 2010, 06:56 AM) *
QUOTE(pj4xtrader @ Nov 8 2010, 10:30 PM) *
brinn thanks for having the courage to fight the deficit terroist tha dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

MMN,

We have the right to consume all that we can produce plus all that the foreign sector is willing to sell us (note that I say "willing" as foreign desire for US dollars in exchange for their goods and services is completely voluntary).


I've been reading this thread with interest, and still honestly have no idea about the logic here. Do I understand correctly that your argument is, as long as foreign companies are willing to sell to us, it doesn't matter how much we owe because they have to hold those dollars after the exchange? Could you site a country that no one is willing to sell goods to because their currency isn't honored? I haven't heard of the "sectoral balance approach" to economics, but I have heard of exchange rates....the US dollar is converted to foreign currency instantly with the push of a button..so goods can be bought, then converted (at whatever exchange rate) just as when I lived in Italy I could go to an Italian money machine and get out cash, INSTANTLY, in euros, even though my bank account was in US dollars. As the value of the US dollar changes with respect to other currencies, the exchange rates start to change and that is reflected in the price of goods, but it's not like those billions in US dollars have to be stored under a gient made-in-China mattress overseas, after the sale of goods, awaiting some blackmarket exchange.
pj4xtrader
What is real economic wealth?

Let us examine life on the American frontier. A family on a farm had no choice but to be self-sufficient. The only way this family could save for their future, would be to amass and maintain a buffer stock of resources, e.g.(grain, seed, salted meats, apple cider and tanned hides). If by some unfortunate circumstance (drought, locust or wind storm) next years crop were damaged or destroyed, the family would have reserves to a degree and would not starve. The families buffer stock would be a measure of their wealth.

Today, due to advances in logistics, communications and the financial sectors, families, feeling less dislocated have come to replaced buffer stocks of usable resources with financial assets, confident that the market will offer those resources in exchange for their financial assets. These financial assets are a measure of a families wealth. What is lost is that these financial buffer stock, in the event of catastrophic crop failure do not offer the same level of security. Surely, no one would argue that it does not matter how many dollars are in your wallet if the market has no food to bare.

Today, the media and our public officials tell us we have a housing crisis yet no homes were destroyed and construction crews go without work. They say we need to better educate our children yet they propose to layoff teachers. Millions go hungry yet the supermarket dumpsters are overflowing with unsold spoiling food.

I ask again, what is real economic wealth?



QUOTE(Mrs. Pigpen @ Nov 9 2010, 09:48 AM) *
QUOTE(Brinn @ Nov 9 2010, 08:30 AM) *
QUOTE(Maybe Maybe Not @ Nov 9 2010, 06:56 AM) *
QUOTE(extruder @ Nov 8 2010, 10:30 PM) *
Brinn thanks for having the courage to fight the deficit terrorist Thai dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

MMN,

We have the right to consume all that we can produce plus all that the foreign sector is willing to sell us (note that I say "willing" as foreign desire for US dollars in exchange for their goods and services is completely voluntary).


I've been reading this thread with interest, and still honestly have no idea about the logic here. Do I understand correctly that your argument is, as long as foreign companies are willing to sell to us, it doesn't matter how much we owe because they have to hold those dollars after the exchange? Could you site a country that no one is willing to sell goods to because their currency isn't honored? I haven't heard of the "sectoral balance approach" to economics, but I have heard of exchange rates....the US dollar is converted to foreign currency instantly with the push of a button..so goods can be bought, then converted (at whatever exchange rate) just as when I lived in Italy I could go to an Italian money machine and get out cash, INSTANTLY, in euros, even though my bank account was in US dollars. As the value of the US dollar changes with respect to other currencies, the exchange rates start to change and that is reflected in the price of goods, but it's not like those billions in US dollars have to be stored under a gient made-in-China mattress overseas, after the sale of goods, awaiting some blackmarket exchange.



Mrs. Pigpen

I have been a currency trader for many years, and I assure you that no financial transaction is complete with the push of a button. When you use a credit or bank card at a department store and they hand you a receipt and your merchandise, on the surface it would appear that the transaction was instantaneous. But the payment clearing process is a bit more complex and in most cases takes a few days be complete.

Every bid to buy a currency must be matched with an ask to sell at a specific exchange rate. Effectively a person or entity in the possession of a currency can only exchange it with a person or entity in the possession of the currency desired at a specific exchange rate. Banks in the interbank system facilitate the transaction by matching bids to asks plus their spread.

Retail Forex traders often believe these transactions to instant because all customer bids were matched with a broker ask and vice versa, all trades only existed within the broker and were never a part of the Forex market.

Your Bank withdraw seemed instant and for the most part is completed relatively quickly because the bank held both dollar and euro reserves and sold you their euro asset for your dollar asset at a specific exchange rate plus the spread that they charge for the service.

What often seems very simple and quick on the surface is often more complex and consumes more time.
Mrs. Pigpen
QUOTE(pj4xtrader @ Nov 9 2010, 12:02 PM) *
QUOTE(Mrs. Pigpen @ Nov 9 2010, 09:48 AM) *
QUOTE(Brinn @ Nov 9 2010, 08:30 AM) *
QUOTE(Maybe Maybe Not @ Nov 9 2010, 06:56 AM) *
QUOTE(extruder @ Nov 8 2010, 10:30 PM) *
Brinn thanks for having the courage to fight the deficit terrorist Thai dominate the mainstream media. Perhaps your efforts can help shift the debate of monetary operations and fiscal policy to the realm of public purpose, instead of the focus on the accounting entries.
Yes. Clearly we have the ability and the right to spend more than we take in year after year after year with no consequences. All we have to do is say that our $13 trillion national debt (a debt to which we add with each year's deficit) doesn't really exist since we owe that debt to ourselves. Magic!

MMN,

We have the right to consume all that we can produce plus all that the foreign sector is willing to sell us (note that I say "willing" as foreign desire for US dollars in exchange for their goods and services is completely voluntary).


I've been reading this thread with interest, and still honestly have no idea about the logic here. Do I understand correctly that your argument is, as long as foreign companies are willing to sell to us, it doesn't matter how much we owe because they have to hold those dollars after the exchange? Could you site a country that no one is willing to sell goods to because their currency isn't honored? I haven't heard of the "sectoral balance approach" to economics, but I have heard of exchange rates....the US dollar is converted to foreign currency instantly with the push of a button..so goods can be bought, then converted (at whatever exchange rate) just as when I lived in Italy I could go to an Italian money machine and get out cash, INSTANTLY, in euros, even though my bank account was in US dollars. As the value of the US dollar changes with respect to other currencies, the exchange rates start to change and that is reflected in the price of goods, but it's not like those billions in US dollars have to be stored under a gient made-in-China mattress overseas, after the sale of goods, awaiting some blackmarket exchange.



Mrs. Pigpen

I have been a currency trader for many years, and I assure you that no financial transaction is complete with the push of a button. When you use a credit or bank card at a department store and they hand you a receipt and your merchandise, on the surface it would appear that the transaction was instantaneous. But the payment clearing process is a bit more complex and in most cases takes a few days be complete.

Every bid to buy a currency must be matched with an ask to sell at a specific exchange rate. Effectively a person or entity in the possession of a currency can only exchange it with a person or entity in the possession of the currency desired at a specific exchange rate. Banks in the interbank system facilitate the transaction by matching bids to asks plus their spread.

Retail Forex traders often believe these transactions to instant because all customer bids were matched with a broker ask and vice versa, all trades only existed within the broker and were never a part of the Forex market.

Your Bank withdraw seemed instant and for the most part is completed relatively quickly because the bank held both dollar and euro reserves and sold you their euro asset for your dollar asset at a specific exchange rate plus the spread that they charge for the service.

What often seems very simple and quick on the surface is often more complex and consumes more time.


Fair enough. I still don't see why a country could not convert currency with relative ease, if not at the drop of a button. I suppose it's similar to the stock market? If you own a million shares you can't attempt to sell it all at once or the stock will go into a death spiral and whatever is left will be worth much less...so you have to do it slowly?

Do you agree then with the premise that as long as foreigners are willing to sell us goods, we have nothing to fear regardless of how much we owe?
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