Free Market is signalling that the US has too little debt

[Sarpedon]

You could look at the bond market as being analogous to the coffee shell mulch business. The use of coffee shells as mulch is a clever, profitable and environmentally friendly way of using something that was previously a waste product. If the coffee shell mulch were to become popular, we could expect the price on them to rise. However, that does not mean that the supply would naturally increase, as the supply is dictated by the more capital intensive business of growing and selling beans for coffee. The shell-mulch people just don't have much influence on that process; they are merely taking advantage of a resource that process makes available.

Similarly, the capital and political intensive process of borrowing money dominates the bond market to such an extent that the demand for the bonds themselves is only of secondary influence. A smart government might borrow when the getting is good, but more likely the borrowing will occur when politically advantageous, regardless of the bond market.

 

[dismal]

You could look at the bond market as being analogous to the coffee shell mulch business. The use of coffee shells as mulch is a clever, profitable and environmentally friendly way of using something that was previously a waste product. If the coffee shell mulch were to become popular, we could expect the price on them to rise. However, that does not mean that the supply would naturally increase, as the supply is dictated by the more capital intensive business of growing and selling beans for coffee. The shell-mulch people just don't have much influence on that process; they are merely taking advantage of a resource that process makes available.

Similarly, the capital and political intensive process of borrowing money dominates the bond market to such an extent that the demand for the bonds themselves is only of secondary influence. A smart government might borrow when the getting is good, but more likely the borrowing will occur when politically advantageous, regardless of the bond market.

You don't think the people who hold trillions of dollars of US Treasury bonds are more willing to sell (aka supply them to the market) them as the price goes up?

 

[Horatio Parker]

From a couple of months ago:

In the first six months of this year, foreign central banks sold a net $192 billion of U.S. Treasury bonds, more than double the pace in the same period last year, when they sold $83 billion.
China, Japan, France, Brazil and Colombia led the pack of countries dumping U.S. debt.
It's the largest selloff of U.S. debt since at least 1978, according to Treasury Department data.
"Net selling of U.S. notes and bonds year to date thru June is historic," says Peter Boockvar, chief market analyst at the Lindsey Group, an investing firm in Virginia.

Why?

Many countries have been selling their holdings of U.S. Treasuries so they can get cash to help prop up their currencies if they're losing value.
The selloff is a sign of pockets of weakness in the global economy. Low oil prices, China's economic slowdown and currencies losing value are all weighing down global growth, which the IMF described as "fragile" earlier in the year.

http://money.cnn.com/2016/08/16/news/economy/central-banks-debt-dumping/

 

[dismal]

From a couple of months ago:



Why?

Many countries have been selling their holdings of U.S. Treasuries so they can get cash to help prop up their currencies if they're losing value.
The selloff is a sign of pockets of weakness in the global economy. Low oil prices, China's economic slowdown and currencies losing value are all weighing down global growth, which the IMF described as "fragile" earlier in the year.

http://money.cnn.com/2016/08/16/news/economy/central-banks-debt-dumping/

ZMFOG there is too much SUPPLY!!!11@1!

 

[Horatio Parker]

The very next line:

Despite all the selling by these countries, private demand for the bonds has sky rocketed. Demand is so high that the U.S. can afford to pay historically low interest rates. The 10-year U.S. Treasury hit a record low of 1.34% earlier this year, before bouncing back to about 1.58%, currently.

 

[dismal]

The very next line:

Despite all the selling by these countries, private demand for the bonds has sky rocketed. Demand is so high that the U.S. can afford to pay historically low interest rates. The 10-year U.S. Treasury hit a record low of 1.34% earlier this year, before bouncing back to about 1.58%, currently.

Oh, well sounds like the price changed to equilibrate the supply and demand.

Who could have guessed.

 

[laughing dog]

The very next line:

Oh, well sounds like the price changed to equilibrate the supply and demand.

Who could have guessed.

Obviously you are. Unless you can show that no one went away with fewer bonds they wished to purchase at the price, there is no way to know that the market was "equilibrated". That is basic ECON 101.

 

[SimpleDon]

http://www.marketwatch.com/story/tr...ly-3-week-high-as-oil-stocks-waver-2016-07-13

Is the Market's treasury bond price signalling wrong?

The market is signaling that there is high demand for Treasury bills, nothing more. You can reach many conclusions from this, but I don't think that it says that we have too little federal government debt. Looking at the economy as a flow of money that has to balance, simple cash flow accounting for the macroeconomy, the federal debt is primarily a function of the size of the trade deficit (or surplus).

Among the conclusions that can be made are that a high demand for Treasury Bills is that there is there is too much financial capital available, more than can invested directly in the economy, more than can be "invested" in the stock market, which is largely just a form of savings, that the banks are not actively seeking more funds to loan, and more than can buy corporate bonds. The country is awash in excess capital.

Also the dollar is strong compared to the euro and the pound as a result of the uncertainty surrounding the Brexit. And much of that money is buying T-Bills.

The best that you can say about the strong demand for Treasury bills and the federal debt is that the people who put their money where their mouth is know that there is zero chance that the federal government can go bankrupt.

In the middle and long term it is telling us that to grow we have to raise wages which will lower profits, the source of the excess capital.

 

[SimpleDon]

People buy US bonds because they think they are safe. Rising prices signify demand for safe savings, not demand for more US debt. If the US debt rises too much, the bonds would no longer be safe.

That too. In the middle view, T-Bills are just another form of money. T-Bills are used to buy things around the world, very expensive things.

 

[SimpleDon]

People buy US bonds because they think they are safe. Rising prices signify demand for safe savings, not demand for more US debt. If the US debt rises too much, the bonds would no longer be safe.

They will always be safe because alternative is just unimaginable

It is not just that, it is impossible. The federal government debt is also the vast majority of the savings in the country. The only way that you could pay off the debt is by destroying the savings. Or to run a high trade deficit, that is to let the consumers in other countries pay off your debt.

 

[SimpleDon]

The MMT people say it's a debt swap, not a borrowing operation, since the US doesn't accumulate reserves of foreign currencies.

So only US govt debt, in the form of currency or bank reserves, is accepted as payment for Treasuries. A swap of non or low interest govt debt for interest bearing govt debt.

With investment down, there's lots of reserves sloshing around looking for yield. Sarpedon is correct.

But the better argument for increased govt spending is the high unemployment rate.

Yes, exactly.

Debt creates money. Debt is money. Money is debt. The federal government creates money buy spending money than it takes out of economy as taxes, by deficit spending. If the federal government runs a surplus it destroys money because it taxes more than it spends.

Federal government deficits will reduce unemployment if these are unemployed people who want to work at the wage* rates offered. Otherwise, the deficit spending will create inflation.

So no, deficit spending isn't always desirable. But we are a long way from the point that it would be undesirable right now.

Show

Everyone is concerned with unemployment, and inflation. But conventional economics and the widely understood basic economics, Econ 101, doesn't even take into account the main structural factor that effects these two, the distribution of income.

Conventional economics treats the income distribution as an immutable, "natural" result of the economy. But it isn't, the income distribution is largely determined by the fiscal policies of the government, who they tax and how much they tax them for one. And possibly more important, how much the government favors either the employer or the employees in wage negotiations. Currently the government comes down firmly on the side of the employers, which results in lower wages and higher profits. Other policies also play a part in determining the income distribution, including, trade policies, the minimum wage, and others, all of which currently favor lower wages.

The idea that the income distribution is the primary structural factor determining unemployment and inflation is easy to understand, in my opinion. If you have an income distribution favoring profits over wages you will have more income going to the rich and less going to everyone else. The rich have a greater propensity to save and a lower propensity to consume. This results in lower aggregate demand, lower inflation in the economy because the income is being taken out of the economy, lower employment, higher unemployment and lower growth in the economy.

* Wages includes salaries, I am always called on this point.

 

[SimpleDon]

https://www.nationalpriorities.org/campaigns/us-federal-debt-what/?gclid=CKmdoZHCxs8CFU-VaAodEMUKmg

As of December 15, 2015, the U.S. is $18.8 trillion in debt.

With a given population of 320 million it means that every man woman and child will have to pay out US$56,250.00. So a family with 2 children (any age) will have to pay US$225,000.00

If that's too little debt, then what is a high debt; US$1 quadrillion.

It is not possible to pay off the national debt. Everytime we have tried to pay off even a part of the national debt it has resulted in a major depression within two to four years. Why? To pay off the debt the government has to run a budget surplus, they must tax more than they spend. There is no way to pay the relatively higher taxes than to reduce the accumulated private savings in the economy, or by increasing private debt. Both increase the desire of the consumer to shift money received as income from consumption. The economy takes multiple hits, government demand decreases, private demand decreases, private savings decreases, private debt increases, all of which will bring on a recession within a couple of years. If you continue to try to pay off the debt the recession quickly cascades into a depression. Unemployment reduces aggregate demand and tax revenue while increasing government spending for relief. If you believe that no one would be stupid enough to increase taxes or to decrease spending look up "austerity" or "liquidation" as an economic policy.

There are two major reasons for our current national debt, tax cuts for the rich not balanced by spending cuts and a high trade deficit. The tax cuts have reduced tax revenue and the trade deficit results in money going overseas, money that has to be replaced by government money creation, that is by the federal government running a budget deficit. Otherwise, the money removed by the trade deficit will be replaced by increased private debt. Increased private debt increases consumption and decreases private savings.

Both of the policies above are the products of neoliberalism. The tax cuts for the rich is obvious and the increased trade deficit is the result of "globalization" undertaken to lower wages in the US.

 

[laughing dog]

https://www.nationalpriorities.org/campaigns/us-federal-debt-what/?gclid=CKmdoZHCxs8CFU-VaAodEMUKmg

As of December 15, 2015, the U.S. is $18.8 trillion in debt.

With a given population of 320 million it means that every man woman and child will have to pay out US$56,250.00. So a family with 2 children (any age) will have to pay US$225,000.00

If that's too little debt, then what is a high debt; US$1 quadrillion.

It is not possible to pay off the national debt.

It is possible to pay off a national debt. The question is under what conditions, if any, does it make sense.

But any analysis of debt per capita that does not also incorporate assets per capita is comparing apples to oranges, and is both economically and financially inappropriate.

 

[ksen]

I'll be willing to write a check for my per capita portion of the debt once I get my per capita portion of assets signed over to me.

 

[dismal]

I'll be willing to write a check for my per capita portion of the debt once I get my per capita portion of assets signed over to me.

Careful, you'll write a check for $50,000 and they'll send you a used toilet seat from a nuclear sub.

 

[ksen]

That's why i said i want my portion of assets before I write a check for my portion of the debt.

 

[dismal]

That's why i said i want my portion of assets before I write a check for my portion of the debt.

OK then:

Careful, they'll send you a used toilet seat from a nuclear sub and you'll write a check for $50,000.

 

[SimpleDon]

Psssst...that is $13-14 trillion held privately. And within that there is also roughly $2.6 trillion sucked up by the Federal Reserve's magical money tree.

https://www.treasurydirect.gov/govt/reports/pd/mspd/2016/opds092016.prn


Or if one prefers articles:
https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124

An interesting article here containing statistics etc.
This rose sharply when the US bailed out the banks

http://www.usgovernmentspending.com/recent_debt

Government debt in the United States has steadily increased from $2 trillion in the mid 1980s to over $19 trillion today. But as a percent of GDP it has grown from 55 percent to over 100 percent of GDP today.

Government debt, including gross federal, state, and local, reached $3 trillion in 1987, and then breached $4 trillion in the recession year of 1990. In the 1990s debt reached $5 trillion in 1992, and $7 trillion at the peak of the business cycle in 2000. Debt breached $10 trillion in 2006 and $15 trillion in 2010. Gross debt, including all levels of government, exceeded $20 trillion in 2014.

Chart 4.12: Government Debt as Percent of GDP
Viewed as a percent of Gross Domestic Product (GDP) government debt shows a different aspect. At 55 percent of GDP in 1985, debt increased as a percent of GDP until the mid 1990s when it peaked at 78.7 percent of GDP in 1995. Then a steady decline in debt as a percent of GDP set in for the rest of the 1990s, declining to 68.8 percent of GDP in 2000. But debt resumed a climb in the 2000s reaching 78 percent of GDP at the peak of the business cycle in 2007.
In the Crash of 2008 government debt increased sharply to bail out the banks and to provide “stimulus” to the economy. Debt reached 101 percent of GDP in 2009. But debt is expected to plateau at about 120 percent of GDP in the next few years.

This correct, but incomplete. Yes, government debt ballooned in the last fiscal year of the Bush administration, but not due to the bailout the banks, finally we made a small profit on the various bailouts on the 750 million dollars financed by adding it to 2009's deficit and the trillions of dollars deposited in the banks to stabilize them was magic money created by the Fed that didn't add to deficit and that was always the government's money, in the same way that your money that you deposit in the bank is still yours.

And only 780 million dollars of the debt spread over three years was due to the stimulus. The vast majority of the ballooning debt was due to decreased tax revenues due to the second largest recession in 150 years.

Show

And this glosses over the very simple fact that the bailouts of the banks and the stimulus were needed. Wall Street's and the banks' malfeasance, helped along by the reluctance of the libertarian Bush administration to regulate them properly, was what had caused the financial crisis. We needed the bailouts of the banks because we needed solvent banks to prevent the economy from sliding into a full depression and we needed the banks to recover from the recession that we did have.

While it would have been morally satisfying to have allowed the banks to go bust and to have instead bailed out the the victims directly, the mortgagees who suffered the loss of their homes because of the bad mortgages, it would have added years to the recession. The stimulus was also needed. We just needed a larger and a better executed one. But is unrealistic to think that a country in which most of the economists and most of the people of both political parties believe in the myth of the self-regulating free market could plan for the repeated failures of that market.

Here is a curve of the national debt as a percentage of the GDP.

​

It is obvious from this graph when the problem of runaway debt started, the early 1980's. When it subsided for a while, early 1990's and then it started back up again, the early 2000's moderately until it accelerated off with the great recession only to moderate recently. What happened in ~1980 that caused this? Anyone.

 

[SimpleDon]

It is not possible to pay off the national debt.

It is possible to pay off a national debt. The question is under what conditions, if any, does it make sense.

But any analysis of debt per capita that does not also incorporate assets per capita is comparing apples to oranges, and is both economically and financially inappropriate.

I don't know if you read more than the single line of my post that you quoted. I will assume not.

I don't think that calculating the national debt per capita is very illuminating. It doesn't seem to be used for anything other than scaring people. And comparing the national debt, ~20 trillion dollars, to the national assets, ~3.1 trillion dollars is equally useless because the national assets are illiquid, to say the least. The best seem to be to compare the debt to the GDP, ~18 trillion dollars because if you were to try to pay down the debt you would do so by reducing GDP.

What you say about debt per capita and assets per capita is correct when you are talking about paying off an external debt. When your company owes money to the bank, an external debt, then what you said is true, the important considerations are how much debt do you have versus how much are you are worth.

But the national debt is still largely a debt that we owe to ourselves, an internal debt, if you will. The same debt that you are trying to pay off is also an asset for someone else in the country. The only way to pay off the debt is to destroy the asset. In fact, the national debt instruments, government bonds, are the vast majority of the national savings. This what you would destroy by trying to pay off the national debt, the national savings.

In practical terms the only way that you can pay off the national debt is to run a budget surplus, to raise taxes relative to spending. And for the government to take the surplus money generated and to buy a back the bonds that are outstanding or to not issue new bonds to replace the ones that mature.

Debt creates money. Paying off the debt destroys the money that had been created.

The drag on the economy of the increased taxes or reduced government spending, a distinction without a difference, combined with the loss in confidence from the destruction of the private savings is a sure recipe for a depression, which is what has happened the seven times that the US has tried to pay down the national debt.

Show

Part of the national debt is held by countries as a result of the clearing of our rather substantial trade deficit. Conversely you could also pay off the national debt by running a large trade surplus. If you could run it without destroying world trade. See the Tariff Act of 1930, commonly known as the Smoot Hawley Act before trying this.

So, the times that we could pay off the national debt are limited to when we have high levels of inflation, when we want to eliminate money in the economy. To belabor the point, when the federal government runs a budget deficit it creates money and spends it into the economy and it increases demand. When it runs a budget surplus it removes money from the economy and it decreases demand. Tax increases are the most effective inflation fighters that exist.

But this isn't the complete story.

Show

If you can stick with me for just a while longer I will try to explain what I have finally just come to understandard. Because you have a good grasp of orthodox economics, I value your comments.

Inflation isn't created by the Fed printing too much money, sorry Irwin Fischer's money quantity theory of inflation and Ron Paul's conspiracy theories. And demand exceeding supply only creates inflation in the short term, the modern, industrial economy reacts to increase supply relatively quickly. Demand exceeding supply is what Keynes called "semi-inflation."

The structural factor that determines the level of inflation in the economy is the income distribution.

This is really simple. The rich have a greater propensity to save. If you favor profits over wages and high income inequality by lowering taxes on the rich and by not supporting workers in wage negotiations more of the nation's income will go to the rich and into savings and out of the economy. You will have less economic activity, lower effective demand, lower likelihood of inflation, lower growth, less investment, more private debt and more excess financial capital causing instability in the financial sector as the capital chases returns in a moribund economy.

The non-rich have a greater propensity to spend. If you intentionally redistribute income through taxation and you support workers in their wage negotiations to lower income inequality more of the nation's income will go to the non-rich and will be spent in the economy. You will have more economic activity, more effective demand, a greater tendency for inflation, higher growth, more investment, less private debt and less excess financial capital and a more stable financial sector.

The important point is that there is no natural, correct income distribution determined by the invisible hand. Government economic policies of taxation and the support for workers wage demands* determines the income distribution. Not only do we get to determine the income distribution, we have to decide the income distribution.

Econ 101, basic economics, doesn't even try to understand this. Neither does mainstream academic economics, the neoclassical synthesis economics, at least in so far as I can tell.


* as well as possibly hundreds of less influential laws, regulations and policies, including the minimum wage, overtime and workweek regulations, child labor laws, tact encouragement of immigration whether legal or illegal, legal holidays, trade policies, capital controls, etc.

 

[Loren Pechtel]

It is possible to pay off a national debt. The question is under what conditions, if any, does it make sense.

But any analysis of debt per capita that does not also incorporate assets per capita is comparing apples to oranges, and is both economically and financially inappropriate.

I don't know if you read more than the single line of my post that you quoted. I will assume not.

I don't think that calculating the national debt per capita is very illuminating. It doesn't seem to be used for anything other than scaring people.

The per capita debt gives us an indication of how much servicing that debt costs.

But the national debt is still largely a debt that we owe to ourselves, an internal debt, if you will. The same debt that you are trying to pay off is also an asset for someone else in the country. The only way to pay off the debt is to destroy the asset. In fact, the national debt instruments, government bonds, are the vast majority of the national savings. This what you would destroy by trying to pay off the national debt, the national savings.

The nation has no savings. Individuals have savings and most of that is in the stock market, not the US treasury market.

In practical terms the only way that you can pay off the national debt is to run a budget surplus, to raise taxes relative to spending. And for the government to take the surplus money generated and to buy a back the bonds that are outstanding or to not issue new bonds to replace the ones that mature.

Debt creates money. Paying off the debt destroys the money that had been created.

The drag on the economy of the increased taxes or reduced government spending, a distinction without a difference, combined with the loss in confidence from the destruction of the private savings is a sure recipe for a depression, which is what has happened the seven times that the US has tried to pay down the national debt.

I do agree that the debt should only be paid down slowly for the very reasons you indicate.

Inflation isn't created by the Fed printing too much money, sorry Irwin Fischer's money quantity theory of inflation and Ron Paul's conspiracy theories. And demand exceeding supply only creates inflation in the short term, the modern, industrial economy reacts to increase supply relatively quickly. Demand exceeding supply is what Keynes called "semi-inflation."

This makes no sense. Inflation is the change in money supply * the velocity of money/goods supply. To some extent an increase in the money supply will be offset by a slowing of the velocity but every country that tried using the printing press to prop up the budget has seen severe inflation as a result.

This is really simple. The rich have a greater propensity to save. If you favor profits over wages and high income inequality by lowering taxes on the rich and by not supporting workers in wage negotiations more of the nation's income will go to the rich and into savings and out of the economy. You will have less economic activity, lower effective demand, lower likelihood of inflation, lower growth, less investment, more private debt and more excess financial capital causing instability in the financial sector as the capital chases returns in a moribund economy.

Except the rich don't stick their money under the mattress. Rather, in the long run it's invested in something.

The non-rich have a greater propensity to spend. If you intentionally redistribute income through taxation and you support workers in their wage negotiations to lower income inequality more of the nation's income will go to the non-rich and will be spent in the economy. You will have more economic activity, more effective demand, a greater tendency for inflation, higher growth, more investment, less private debt and less excess financial capital and a more stable financial sector.

This is the standard issue of spend now or invest for the future. The left consistently argues for spend now--not realizing that spells a lower standard of living in the future.