Debt-o-phobia[W:594]

[JohnfrmClevelan]

Re: Debt-o-phobia

I don't think I did that at all.

Well, you did. And so did Reinhart & Rogoff.

When you have a correlation like that, there are four possible answers:

1. A caused B
2. B caused A
3. Something else caused both A and B
4. The correlation is just a coincidence.

I read R&R's paper. They were more cautious with their conclusions than the media was, but it was clear that they blamed slow growth on the debt ratio, and not vice versa. The media, always on the lookout for sensational stories, and the Republicans, always on the lookout for anything that backs up their professed desire to cut deficits whenever there is a Democrat in the Oval Office, were the ones that really pushed the story line that there was a magic debt ratio, and we were fast approaching it. And it was an easy sell, because everybody thinks that debt is bad, and debt is debt, so this debt must be bad, too.

But R&R never had a good explanation of why growth should slow down at 90% debt-to-GDP. They just saw a correlation. (I thought it was a pretty weak paper.)

But a simple, logical explanation can explain the same data, and the same correlation: slow growth leads to lower-than-expected tax revenues, which leads to higher deficits (because spending really doesn't change that much). And there are some very good papers by some very degreed economists that made that very interpretation.

Now - what is the mechanism by which a 90% debt-to-GDP ration would cause slow growth? Let's put your answer up against my answer, and see which one makes more sense.

 

[Khayembii Communique]

Re: Debt-o-phobia

Greetings, imagep. :2wave:

I agree without spending there is no production, since paying workers for producing is part of that. The problem that we have today is that we are borrowing much of what we are spending from other countries, and they expect to be repaid. If our government limited our spending to what is collected in taxes, we wouldn't have an $18 trillion dollar debt to repay. Why was it necessary for the Feds to print nearly five trillion dollars out of thin air in the past few years on the various QEs? Are we spending too much, and if so, what do we have to show for it?

Treasury debt is paid as it comes due. If we need to pay our debt, we just issue more. Further, we're allowing other countries to finance our trade deficit, which is awesome. What's the problem here?

 

[JohnfrmClevelan]

Re: Debt-o-phobia

Better yet nobody has to pay. I vote for that. Eliminate all taxes and just print more money. I decided I will be satisfied as only a lowly billionaire. So fire up the printing press or credit my checking account. I am ready to retire and tour the world.

OK. You start touring the world, and we'll send you the money later on. Don't want to keep you waiting.

Go on, git!

 

[pdog]

Re: Debt-o-phobia

Better yet nobody has to pay. I vote for that. Eliminate all taxes and just print more money.

If you were following along you'd realize that this is actually a feasible option and it has been explained without contest at several points.

I decided I will be satisfied as only a lowly billionaire. So fire up the printing press or credit my checking account. I am ready to retire and tour the world.

Um is it possible that there exists a point between 0 and 'everybody is a billionaire'??

 

[imagep]

Re: Debt-o-phobia

Better yet nobody has to pay. I vote for that. Eliminate all taxes and just print more money. I decided I will be satisfied as only a lowly billionaire. So fire up the printing press or credit my checking account. I am ready to retire and tour the world.

The government can only print money to the point that it maximizes employment and utilization of our resources, printing beyond that point can create inflation (assuming that the money actually enters circulation).

Eventually, as our technology improves our productivity enough, it is perfectly possible that everyone could live like a billionare, having basically everything that our technology allows us to create, while working few if any hours. For that matter, I already live a standard of living that is higher than the uber rich lived a hundred years ago, with the exception of not having the degree of power over others that they had. I have better food, central hvac, faster transportation, faster communications, better healthcare, etc.

 

[MTAtech]

Re: Debt-o-phobia

Ill give you a big Amen! if you're talking prior to 86' .

Even after 1986, it was better than today.

 

[JohnfrmClevelan]

Re: Debt-o-phobia

Greetings, imagep. :2wave:

I agree without spending there is no production, since paying workers for producing is part of that. The problem that we have today is that we are borrowing much of what we are spending from other countries, and they expect to be repaid. If our government limited our spending to what is collected in taxes, we wouldn't have an $18 trillion dollar debt to repay. Why was it necessary for the Feds to print nearly five trillion dollars out of thin air in the past few years on the various QEs? Are we spending too much, and if so, what do we have to show for it?

Banks need to keep capital equal to about 10% of their liabilities. When the economy crashed, the value of those assets took a nosedive, and banks found themselves undercapitalized and therefore unable/unwilling to lend. The Fed stepped in to buy these assets (MBSs, etc.) at face value, in an attempt to prop up the price of the assets, and allowing the banks to re-capitalize with better assets. That took a lot of dollars.

 

[JohnfrmClevelan]

Re: Debt-o-phobia

You didn't watch either video did you.

I watched them both, and they were ridiculous. Anybody studying economics at Duquesne University should be screaming for their tuition back.

 

[Critter7r]

Re: Debt-o-phobia

I watched them both, and they were ridiculous. Anybody studying economics at Duquesne University should be screaming for their tuition back.

I think he actually had a good point with his "number of dollars / amount of goods & services" equation. Though he fails to note that the denominator in that equation can increase to meet an increase in the numerator without inflation because our utilization is not at capacity.

 

[polgara]

Re: Debt-o-phobia

Treasury debt is paid as it comes due. If we need to pay our debt, we just issue more. Further, we're allowing other countries to finance our trade deficit, which is awesome. What's the problem here?

Greetings, Khayembii Communique. :2wave:

Treasury debt interest is paid as it comes due. We aren't paying down the debt, and as that debt continues to grow, we pay more and more interest. Those interest payments take away monies that could be used for badly needed infrastructure updates, most importantly on our grid, which all of us use every day in one form or another. We've seen what happens when blackouts occur - ATMs don't work; any food in your freezer thaws and if it can't all be eaten at once it's thrown out; you can't pump gas for your car; grocery stores' cash registers don't work, and so forth.

We are not immune to the rules of Economics 101 - I wish we were - but there has not been one civilization in history that has survived by issuing more debt to pay existing debt on a continuing basis, and that's what we're doing, but it will eventually stop, perhaps sooner than anyone imagines.

Our trade deficit is "only" in the hundreds of thousands and it fluctuates between countries from time to time - our debt is $18 trillion and climbing, and it's constant, and it's now more than our GDP, so we can't ever repay it.

I consider all those things BIG problems. :shock:

 

[JohnfrmClevelan]

Re: Debt-o-phobia

I think he actually had a good point with his "number of dollars / amount of goods & services" equation. Though he fails to note that the denominator in that equation can increase to meet an increase in the numerator without inflation because our utilization is not at capacity.

But even then, you would have to take into account where all of those new dollars were. If it happened like a stock split, and everybody that had $10 now had $20, maybe you would see something approaching instant inflation. But if those new dollars all go to the top, that's not going to result in 2x demand.

It only works on an island. Two guys, one coconut tree, a certain number of shells they use for money.... otherwise, there are too many variables.

 

[Khayembii Communique]

Re: Debt-o-phobia

Greetings, Khayembii Communique. :2wave:

Treasury debt interest is paid as it comes due.

Both interest and principal on bond payments are made as they come due. Bond principal is paid when bonds mature. The aggregate number just doesn't change because we issue new bonds that replace those which have matured.

We aren't paying down the debt, and as that debt continues to grow, we pay more and more interest. Those interest payments take away monies that could be used for badly needed infrastructure updates, most importantly on our grid, which all of us use every day in one form or another.

This is incorrect. Interest payments aren't "taken" from anywhere. They're created out of thin air. If the government wanted to spend money on badly needed infrastructure updates, our grid, etc. then it could just pass the appropriations bill decreeing as such.

 

[JohnfrmClevelan]

Re: Debt-o-phobia

We are not immune to the rules of Economics 101 - I wish we were - but there has not been one civilization in history that has survived by issuing more debt to pay existing debt on a continuing basis, and that's what we're doing, but it will eventually stop, perhaps sooner than anyone imagines.

Well, you are in luck, because the textbook for Economics 101 hasn't changed since we were on the gold standard, even though the economics of fiat currencies are very, very different than gold. Econ 101 (at most colleges) is usually a bunch of garbage.

For instance, when the govt. needed more dollars in the gold standard days, they had to borrow some of them back, because they couldn't issue more gold-convertible dollars than they had the gold to cover. So they issued bonds, which promised more gold-backed dollars at a later date. This came with some risk, because coming up with the gold was no sure thing. And the bond yields reflected this risk.

Today, they still issue bonds, but since fiat dollars don't come with the promise of gold convertibility, there is zero risk of the government being unable to meet its debt obligations - it's only more paper dollars, which cost nothing to produce. Today's bonds are considered risk-free for this reason, and the low yields reflect this.

So today, the money supply can freely fluctuate along with the demand for dollars, with no effect on interest rates. Big difference from the gold standard days, but they still don't teach fiat currency economics in Econ 101, they teach gold-standard economics.

 

[polgara]

Re: Debt-o-phobia

Banks need to keep capital equal to about 10% of their liabilities. When the economy crashed, the value of those assets took a nosedive, and banks found themselves undercapitalized and therefore unable/unwilling to lend. The Fed stepped in to buy these assets (MBSs, etc.) at face value, in an attempt to prop up the price of the assets, and allowing the banks to re-capitalize with better assets. That took a lot of dollars.

Greetings, JohnfrmClevelan. :2wave:

:agree: It sure did! Unfortunately some of those same banks that had to be bailed out are now larger than they were back then! Can we handle another bailout if they start failing again? Where are we going to get the money from? I read a study recently that people are reluctant to spend money these days, choosing to hold on to what they have instead. They aren't getting loans, so banks aren't getting interest, so our economy isn't growing like it should as a result. People are getting nervous, I guess.

 

[Khayembii Communique]

Re: Debt-o-phobia

Greetings, JohnfrmClevelan. :2wave:

:agree: It sure did! Unfortunately some of those same banks that had to be bailed out are now larger than they were back then! Can we handle another bailout if they start failing again? Where are we going to get the money from? I read a study recently that people are reluctant to spend money these days, choosing to hold on to what they have instead. They aren't getting loans, so banks aren't getting interest, so our economy isn't growing like it should as a result. People are getting nervous, I guess.

Nowhere. Thin air. It's completely made up. Numbers in bank accounts are changed and that's it.

 

[JohnfrmClevelan]

Re: Debt-o-phobia

Greetings, JohnfrmClevelan. :2wave:

:agree: It sure did! Unfortunately some of those same banks that had to be bailed out are now larger than they were back then! Can we handle another bailout if they start failing again? Where are we going to get the money from?

Same place. The government can create dollars without limit.

What the Fed did, though, was simply to exchange dollars for assets. Even though they paid more than market value for those assets, the assets paid off. As those assets are maturing, dollars are coming back to the Fed. They didn't give money away - banks didn't get rich on the deal, they just got out from under their undervalued assets.

I read a study recently that people are reluctant to spend money these days, choosing to hold on to what they have instead. They aren't getting loans, so banks aren't getting interest, so our economy isn't growing like it should as a result. People are getting nervous, I guess.

Yep. That's why we need the government to step in and spend more money during recessions, to fill that demand gap. Otherwise, things would just spiral downward.

 

[polgara]

Re: Debt-o-phobia

Well, you are in luck, because the textbook for Economics 101 hasn't changed since we were on the gold standard, even though the economics of fiat currencies are very, very different than gold. Econ 101 (at most colleges) is usually a bunch of garbage.

For instance, when the govt. needed more dollars in the gold standard days, they had to borrow some of them back, because they couldn't issue more gold-convertible dollars than they had the gold to cover. So they issued bonds, which promised more gold-backed dollars at a later date. This came with some risk, because coming up with the gold was no sure thing. And the bond yields reflected this risk.

Today, they still issue bonds, but since fiat dollars don't come with the promise of gold convertibility, there is zero risk of the government being unable to meet its debt obligations - it's only more paper dollars, which cost nothing to produce. Today's bonds are considered risk-free for this reason, and the low yields reflect this.

So today, the money supply can freely fluctuate along with the demand for dollars, with no effect on interest rates. Big difference from the gold standard days, but they still don't teach fiat currency economics in Econ 101, they teach gold-standard economics.

Why does the Fed feel the need to raise interest rates now? I just read today that a Fed Governor stated that they will raise interest rates. They usually only do that when they want to stop inflationary problems before they get out of hand. I don't see inflation as a problem when 50 million people are on food stamps and other government assistance, and seven out of 10 jobs pay less than $30,000 a year. Those people are living paycheck to paycheck now - what's going to happen when they raise interest rates?

 

[JohnfrmClevelan]

Re: Debt-o-phobia

Why does the Fed feel the need to raise interest rates now? I just read today that a Fed Governor stated that they will raise interest rates. They usually only do that when they want to stop inflationary problems before they get out of hand. I don't see inflation as a problem when 50 million people are on food stamps and other government assistance, and seven out of 10 jobs pay less than $30,000 a year. Those people are living paycheck to paycheck now - what's going to happen when they raise interest rates?

I don't think they are going to raise interest rates anytime soon. But if they do, it's because there are still plenty of economists that think interest rates have a big effect on the economy (I do not). As you said, inflation isn't a problem today. The economy just isn't all that hot.

If we had a more responsive Congress, the Fed probably wouldn't feel compelled to take much action at all. Unemployment is a fiscal issue, not a monetary one.

 

[polgara]

Re: Debt-o-phobia

Both interest and principal on bond payments are made as they come due. Bond principal is paid when bonds mature. The aggregate number just doesn't change because we issue new bonds that replace those which have matured.



This is incorrect. Interest payments aren't "taken" from anywhere. They're created out of thin air. If the government wanted to spend money on badly needed infrastructure updates, our grid, etc. then it could just pass the appropriations bill decreeing as such.

They may be created out of thin air, but the money is added to our debt load. Both parties have created this problem, and neither seems to have a solution other than to continue doing what they're doing and hope it works out somehow. The Fed is trying to be accommodating, but they have had to buy their own bonds on occasion because they can't sell them. Hell of a way to run a railroad, IMO! :thumbdown:

 

[Khayembii Communique]

Re: Debt-o-phobia

They may be created out of thin air, but the money is added to our debt load.

Again, so what?

Both parties have created this problem, and neither seems to have a solution other than to continue doing what they're doing and hope it works out somehow.

That's because there isn't any problem.

The Fed is trying to be accommodating, but they have had to buy their own bonds on occasion because they can't sell them. Hell of a way to run a railroad, IMO! :thumbdown:

The Fed doesn't issue bonds, the Treasury does. The Treasury never has a problem finding buyers for agency debt. Also, the Fed doesn't buy agency debt from the Treasury.

 

[JohnfrmClevelan]

Re: Debt-o-phobia

They may be created out of thin air, but the money is added to our debt load. Both parties have created this problem, and neither seems to have a solution other than to continue doing what they're doing and hope it works out somehow. The Fed is trying to be accommodating, but they have had to buy their own bonds on occasion because they can't sell them. Hell of a way to run a railroad, IMO! :thumbdown:

But the "debt load" isn't much of a burden at all, as it doesn't cost the government anything to create the dollars to meet its obligations. The net result is that there are some more bonds in existence. That's it! Nobody is cashing them in and buying stuff, but if they did, businesses would love it.

Government debt is the natural residue of capitalism. People save dollars, and bonds are the result.

 

[polgara]

Re: Debt-o-phobia

Again, so what?



That's because there isn't any problem.



The Fed doesn't issue bonds, the Treasury does. The Treasury never has a problem finding buyers for agency debt. Also, the Fed doesn't buy agency debt from the Treasury.

I sure hope you're right, and buyers keep on buying! :thumbs:

 

[AlbqOwl]

Re: Debt-o-phobia

But even then, you would have to take into account where all of those new dollars were. If it happened like a stock split, and everybody that had $10 now had $20, maybe you would see something approaching instant inflation. But if those new dollars all go to the top, that's not going to result in 2x demand.

It only works on an island. Two guys, one coconut tree, a certain number of shells they use for money.... otherwise, there are too many variables.

I have enjoyed a number of stock splits over my lifetime, but I have never seen one in which everybody that had $10 now had $20. Stock splits increase the number of shares but the value of the shares will be 1/2 what they were before the split. Stock splits serve to allow new investors more opportunity to buy shares.

 

[JohnfrmClevelan]

Re: Debt-o-phobia

I have enjoyed a number of stock splits over my lifetime, but I have never seen one in which everybody that had $10 now had $20. Stock splits increase the number of shares but the value of the shares will be 1/2 what they were before the split. Stock splits serve to allow new investors more opportunity to buy shares.

We were discussing the possible effects of doubling the money supply on prices. It was a theoretical point. My point being that, even if the money supply were doubled, that wouldn't mean we all had twice as much money. I really doubt that you or I would see one cent of it. So the effect on prices would not be to double prices - it would depend on who got the new money, and whether or not they spent it.

 

[imagep]

Re: Debt-o-phobia

Why does the Fed feel the need to raise interest rates now? ...

I don't know that they do, it would be crazy to do that, but if they do, it's probably due to political pressure. There is a segment of our population that believes that savers should get money for doing nothing productive.