Under gold standard, debt = savings, correct. But with government fiat, I not sure thats the case. Fed bought what, billions of USG debt, without saving this money first, they just printed it. Its not like they earned that money and instead of consumption they invested it into federal debt.
No, one party's debt is still another's savings basically, even with a fiat currency. These caveats apply:
* If we're talking private debt or debt from governments other than the fiat-issuer level then there's some risk of default which means the savings could be lost.
* Without a gold standard, increase in fiat currency can diminish savings through inflation.
But simply: savings in gold ≠ savings in fiat currency, but they are both savings still.
> Without a gold standard, increase in fiat currency can diminish savings through inflation.
That's true with a gold standard as well, since all that means is that printed currency is backed by a peg to gold, usually with some form (perhaps not open to all currency holders, though) of redemption pledge.
It's even true with non-debased gold currency, not just gold-backed representational currency, as demonstrated by the Spanish colonial experience.
Remember, when the Fed buys a bond from the Treasury money gets printed, but the Treasury has to pay the bond back and as that happens slightly more money gets destroyed.
The amount of debt the Fed owns changes over time, it doesn't increase continuously. It tends to just maintain a fixed amount of it. It's been going down slightly lately:
Educate me -why would that be the case? Don't banks lend out money on a fractional reserve basis- that is, money that nobody really has deposited in a savings account? Unless we are counting the value of the loan as "savings". Perhaps what I am missing here is that "savings" is really just another kind of debt with the arrow pointed the other way.
..If that's the case, it's interesting that we consider savings to be something solid and real but debt to be something which is speculative and can be cancelled, considering that they're really the same thing.
Presumably would be $233T less the interest rate that the debt was lent at, right?
So if the average debt is created with a 4% interest rate, there is ~ $9 Trillion more in debt than there is in savings. That's almost half the entire market cap of the S&P 500. Unsettling.
My understanding: bank credit isn't fiat currency. It can be paid back with other credit effectively. But at the end of the day, it's possible, of course, to have absurd debts and credits from banks that will be impossible to ever repay.
If I loan you $1 at 1000% interest daily, then after a short time, you are just going to default on the loan, period. There's no way you'll pay it back. So, yeah… at some point, even if you got another loan to pay the loan and etc etc. the whole house of cards will crash at some point if it's too much credit based on nothing. That house of cards could be just me never getting paid back, oh well. But if I convinced tons of other people to give me products and services that I then had debt for based on the idea that I have this expectation of your payback… then the house of cards could reach through the whole economy eventually.
It's still enforced legally but tempered by bankruptcy laws. It's backed by the supposed (hoped for) future productivity of the debtor. Or by real property (like a house in the case of a mortgage).
It is backed by the fact there is plenty of demand for it. The demand comes from the fact that people need to attain bank credit to pay off their debts to the banks.
This is very evident when you think of how banks used to work: they would actually issue paper notes denominated in the desired unit of account (the national currency). To pay back your debts (or else suffer the consequences), you had to acquire and return the notes to the bank. That generated demand for the notes. People who were not banks would start accepting the notes because of the demand.
Then banks decided they could make money by accepting notes from other banks as payment (for a fee). At the end of the day, banks would exchange and retire notes collected this way.
Because of interest, net debt obligations are always greater than net amount of issued credit. There is never enough money in existence to pay off all debts at a given time... unless more debts are created to pay them off.
Sure. The same quantity of money can be spent more than once.
Say that you're playing Monopoly (with house rules that allow personal debts), and the total supply of cash on the board is $300, divided up evenly among 3 players. Through previous transactions, Alice owes Bob $400, Bob owes Charlie $600, and Charlie owes Alice $200. Total debt on the board is $1200, 4x the supply of total cash.
Now imagine that Charlie pays Alice $100 to cancel half his debt. Alice now has $200 cash, and gives it to Bob to cancel half her debt. Bob now has $300 cash, and gives it to Charlie to cancel half his debt. Total cash on the board is still $300, all in the hands of Charlie, but total debt has been reduced to $600, only 2x the total money supply. (Note also that Charlie now has all the cash on the board and he can pay off his total debt with just 1/3 of his cash, which puts him in a very good negotiating position relative to the other players. This is how deflation - caused here by a decrease in total debt levels - tends to be very bad for debtors.)
Remember that everyone's debt is someone else's asset. If you own T-bills, that means the government owes a debt to you; part of the governments $13T national debt is your savings. If you have money deposited in the bank, then your neighbor's mortgage debt is indirectly your savings (going through the bank's balance sheet first). If you have both rewards points and a credit card balance, the rewards points are a debt from the credit card to you and the balance is a debt from you to the credit card company, and they get netted out when you redeem the points.
Debt really is a measure of two things:
1. The complexity of the financial system, for debts that are netted out between participants.
2. Wealth inequality, for debts that are not.
Both of those are increasing rapidly throughout the global financial system.
> Is it theoretically even possible for all debts to be paid with the given supply of money
Yes, because money spent (to pay off a debt or otherwise) doesn't vanish in a puff of smoke, someone has it, and they can then use it to either pay off debt or buy goods, and the person who gets it then can use it to pay off debts or buy goods, and so on, ad infinitum.
It only causes inflation if (A) the currency distribution was already providing adequate aggregate buying power for existing supply, (B) growth in real wealth and productivity isn't happening along with the increase in currency, and (C) taxes aren't increased to offset the new money.
If the debt being repaid is in local (national) currency, perhaps but less likely than if it is in foreign currency.
If it is all local, then it becomes a question of whether the nation has the production capacity and investment opportunities to absorb the additional currency in circulation.
If it is all most mostly foreign, the exchange rate can go haywire leading to any imports exploding in price. And if the nation then is relying on imports for some stable or other, things can go very badly very quickly.
Marginal amounts of inflation are required for fiat currency to remain liquid. If currency were deflationary, people would be encouraged to hoard it. A deflationary spiral[1] is one example of what can happen in a deflationary market. Inflation is a feature; not a flaw.
Mild to moderate inflation is usually considered useful in paying back debt, as the constant dollar value of the debt decreases.
Even with the low inflation we've had over the last 20 years, if you borrowed $1000 in 1997 with 0% interest and wanted to pay it back now, the 1000 "2018 dollars" you'd pay would only be "worth" 655 "1997 dollars".
The real danger is in deflation, which causes the constant dollar value of the debt to grow.
I think it's much more complicated. The US government has been printing tons of money in the form of "QE" and "QE2", but with little or no inflation. I believe the reason is that all of this money has not ended up in the hands of the general public in the form of higher wages.
When all of our wages collectively go up, you can bet the cost of goods will also go up, with no change in affordability since the same amount of your work in man-hours is needed to both produce and purchase the goods.
I think we are long overdue for wage inflation, even with the associated cost increase of goods. The positive affect of it is to make fixed rate loans less burdensome. Why enslave ourselves to the past?
> The US government has been printing tons of money in the form of "QE" and "QE2", but with little or no inflation.
Well, QE happened right after the crash of 2008. In that crash, something like $4 trillion evaporated, much of it in the real estate market. The Fed created something like $4 trillion with QEx. That wasn't inflationary. However, it prevented the crash from being deflationary and destroying everyone who was in debt.
> The US government has been printing tons of money in the form of "QE" and "QE2"
“printing” is inaccurate, and more importantly “has been” should be “was”; the series of rounds of QE (QE1-QE3) ended in 2014.
> When all of our wages collectively go up, you can bet the cost of goods will also go up, with no change in affordability since the same amount of your work in man-hours is needed to both produce and purchase the goods.
This would be a tolerably reasonable argument based on the (inaccurate in both cases, but understandable) ideas that prices are entirely driven by supply-side concerns, and ultimately all costs are labor cost, in the case of a global wage increase, but domestic wage increase won't have that effect in a global market even with the inaccurate assumptions that would justify that conclusion for a global increase.
Well QE is still going on in that the fed still holds all of the assets it bought. Here is an article from last September saying that the fed is starting to sell (or not turn over) the assets:
Of course I agree with you on the global wage increase, I ignored the fact of multiple currencies.
I kind of think that all prices are related to (possibly delayed) labor costs, along the lines of "how much work do I have to do to buy it?" and "I'll extract that oil for you only if you are willing to pay at least what I have to pay my employees to do it".
> Well QE is still going on in that the fed still holds all of the assets it bought
If that was true, it wouldn't be QE still going on; QE is a policy to increase the effective money supply by buying assets, holding assets isn't increasing the money supply, it's just not decreasing it. But, also...
> Here is an article from last September saying that the fed is starting to sell (or not turn over) the assets
So, they are actually not still holding all the assets.
I agree, OP was simply illustrating how much of this seemingly scary "debt" is really fancy financial maneuvering rather than something with a strong basis in physical reality/resources.
Like when the stock market crashed in 1929 and suddenly (most) everyone lost everything, even though no real disaster had occurred, and all the factories and farms were still in the same condition they were before.
If we take a closer look at your comment, it also seems to be to be problematically obvious. I mean by that a point so obvious that it partly refutes itself, since if it's correct, too much would follow. You appear to be hand-waving away the entire Great Depression.
For a good HN comment, we need not to stop at the first reflexive response that comes up, but wait until we get past that, at least till the second. If you do that, you'll usually notice an obvious counterpoint to the obvious first point, and then you'll take a bit longer to sort through your thoughts before posting. That's when you're more likely to make a contribution that's useful to others.
Agreed, it's so painfully obvious it's problematic. Human psychology has an interesting habit of ignoring obvious painful truths, as Margaret Heffernan details in Willful Blindness: Why We Ignore the Obvious at Our Peril[1].
"We turn a blind eye in order to feel safe, to avoid conflict, to reduce anxiety, and to protect prestige. But greater understanding leads to solutions, and Heffernan shows how-by challenging our biases, encouraging debate, discouraging conformity, and not backing away from difficult or complicated problems-we can be more mindful of what's going on around us and be proactive instead of reactive."
>if it's correct, too much would follow
Precisely why we subconsciously ignore difficult truths, because confronting them would require surmounting seemingly insurmountable obstacles.
It's true that such moderation comments break some of the same rules they're advocating. But this a necessary evil, for the same reason that many medicines are toxic. If it's any comfort to you, I can tell you after writing 20,000 of them that they are more tedious to write than to read.
Interpretations differ, but mine is that the comment is unsubstantive because it is in equal parts obvious and dismissive. This is the sort of thing whose general purpose is to make the writer, and some readers, get a cheap hit of smart-feeling, while alienating the frankly more valuable part of the audience.
You're right, though, that it really wasn't that bad a case, especially relative to other top comments in this thread. I wouldn't have singled it out except that it was the first one posted.
I agree with most of what you're saying. In this case, I think it's an intellectually meaningful position to point out the fundamental problems with the premise of the initial article. The idea of summing "global debt" as though it means something really is something worthy of that sort of critique and dismissal.
A bad comment would be "this is dumb" or "total debt is a stupid concept". The OP in this thread gave an intellectually clear and logic basis for dismissing the article.
"Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize."
The substance is this: The total value of "global debt" can be misleading -- or entirely meaningless -- when you don't consider all the cancellations in the graph. This is nontrivial when it comes to the network of "every economic entity that currently exists."
Does anyone actually believe that this debt will at some point be payed off? It would be nice if we had different words for debts that actually might someday be resolved and those that clearly never will be.
Apparently, near-100% of politicians and voters believe that "National Debt" is actually something like personal debt and actually can or should be paid off…
You're misunderstanding. The "National Debt" (this only applies at federal level for currency-issuing governments, not state, local etc) is the effective form of the currency itself.
Eliminating the "debt" that a currency-issuing government has in its own currency is the same thing as eliminating the currency.
The U.S. federal government "owes" dollars to creditors kind of like the way the the score-keeper in a game "owes" points to a basketball team.
Debt-backed currency has the fundamental flaw that, because debts charge interest, the total amount of debt will always exceed the money supply. Our currency is structured so that there are never enough dollars to pay off all debts at any given time. Fundamentally, a portion of all debts MUST default, creating a net effect where those who have enough capital to lend will, over time, acquire more and more real property.
Our currency is built to transfer wealth from the have-nots to the haves.
You're conflating things here. Our overall financial system as a whole is as you describe: set up to enrich the powerful and exploit others.
But that is not an issue with the nature of the currency. The way we use "debt" in terms of Federal government "National Debt" is related to the currency and not related to the credit market which is the usurious bulk of our money. Most money flowing around the economy is based in bank-credit and has all the issues you describe. Currency is different. Of course, the particular policies that we enact around the currency (i.e. how we use it) are often about enriching the powerful etc. although some things are at least mixed in that respect.
Do check out https://modernmoneybasics.com/ (I'm guessing you have not because the distinctions that matter here are clarified there in the intro video and in the follow-up links)
I love how leftist put this forward. It sounds so incredibly believable. And, the way it is put, the statements aren't even false. Of course, we're talking about 2 different things. Believe it or not, but economists have in fact split up the "currency creating" debt (balance sheet of the FED, in the US), and "government debt" (issues by the treasury). This got all confused because of one of the QEs, where the FED created a LOT of currency and funded the government deficit with it, but it is still very different. One of the BIG lesson from the 1930s, of course, taught to every economist in the 101 class, was to never let the government finance itself with "currency creating" debt, but ...
This $233T does not include the currency generating debt, nor the double bookings on the banks' balance sheet. None of the debt you're talking about is included in that figure. That's a different figure, generally found under something like "central bank balance sheet".
So congratulations ! You should be in politics. Your comment is entirely accurate, and yet so incredibly misleading, so easily, so effortlessly guiding people to a terribly wrong conclusion.
And yet it is trivial to point out a major inconsistency. If what you say is true, then why would there be any limits on government spending at all ? More currency created by government demand, which we all know is good for the economy ! And yet intuitively ... alarm bells go off. I can clearly see that there are upper limits to government spending where "somehow" this breaks down. There's the extreme examples like Zimbabwe and Venezuela, where inflation destroys the economy itself and it's blatantly obvious the root cause is government overspending. Wouldn't this mean they simply have more economy ? Clearly it doesn't (Assuming you don't follow the lunatic left viewpoint that these are the result of conspiracies). Then there's the cases where government overspending has lead to the currency not being accepted anymore, like Somalia, and to a less extreme extent, Cyprus, Greece, parts of Austria, ... Now of course in those cases it is in fact a conspiracy (by most of the population, central banks, normal banks, ...), and yet they too insist it is because of government overspending. How can this possibly happen ?
And intuitively I have seen what happens with government overspending. It is very visible in European capitals, in some areas where governments or very large companies control all spending and layout of particular areas of the city, in an otherwise capitalist economy. And what you see is always the same : empty, dead "public" spaces that aren't very public at all. Nobody goes there because there is no economy there. There are no cafes, no food, no games, no cinemas, no access to transport, no ... nothing. Nobody goes there (unless the government departments are open, of course).
But the fallacy is mostly in what do we really care about. "Debt" is too abstract. I agree. A name with a big number next to it. Big deal. The distance to proxima centauri is also a name with a disappointingly big number next to it, and yet, I don't see it affecting me.
Ah ! That's a good idea. Big numbers that affect me. Okay, so let's see if this big number would affect the average American ...
Do governments owe interest on government debt ? Yes. Do these interest payments come out of the same pool of money that is used for everything else, say social security or pensions ? Yes. When interest rates go up, does that mean interest payments go up ? Yes. Will that compete/endanger social security spending ? Yes.
Will the government switch to printing money (and therefore "implicitly" and rather massively increase effective tax) to prevent this debt from actually coming due ? (In other words, will there be a point where this debt comes out of YOUR paycheck, whether through continuous interest payments paid through tax, can...
You misunderstand and are also guilty of assuming-bad-faith, one of the main things that undermines the basic potential for any reasonable exchanges (especially online in plain text). You can disagree with something while assuming good faith.
> This $233T does not include the currency generating debt
To be clear: The MMT stuff wasn't a reply to the article but to other people commenting and wrongly conflating the "National Debt" with the article's focus on other debts.
> why would there be any limits on government spending at all ?
You seem to be totally misunderstanding or making out some straw man. Creating currency doesn't even make demand. The only reason anyone demands the currency itself is being forced to pay taxes in it. If you give me $1 million, that doesn't increase my demand for more pants or food or anything. To whatever extent I want a bigger house than I can afford, then giving me dollars could give me the buying power — but only if you don't give the dollars to everyone else too. If I control the same portion of the currency, then my buying-power is unchanged and we just get inflation.
Government directs things by unevenly creating currency, and unevenly taxing. By sending checks to people who take certain actions (building infrastructure, investing in whatever the government wants to subsidize) and taxing stuff to discourage (tobacco, pollution…), the government influences what happens or not.
But that can only go so far (the government could give one guy a check for solving all diseases, but that doens't make it possible). And the government can be controlled by special interests who direct things for their power and profit. The government can also aim to subsidize or penalize certain things but have unintended consequences that completely undermine the goal.
There's nothing about government spending (or taxing) that makes it good or bad inherently. It's just a matter of the actual effect of the policies.
You could make an evidence-based argument that most of the government direction is interference in the market and mostly causes problems and is negative. Whatever your position, it's a question of policies and effects. The facts of fiat currency spending and taxing don't change.
Do governments owe interest on government debt? Yes. Do these interest payments come out of the same pool of money that is used for everything else, say social security or pensions? NO, there is no fixed pool of money. The federal government issues currency, it doesn't have it. When interest rates go up, does that mean interest payments go up? Yes. Will that compete/endanger social security spending? NO — the federal government will NEVER EVER have a check bounce. SS cannot be insolvent or go bankrupt. The problem is that, to use Warren Mosler's example, if we have 300,000,000 retired folks and 1 working guy, the problem is not whether we can pay him enough to take care of everything.
Currency actions (spending and taxing) can only go so far toward changing real facts on the ground where it matters.
> …prevent this debt from actually coming due…
That's a non-issue. There is no such thing as the National Debt becoming "due". There's no basis to even talk about that, it's not a thing and can't be.
The "National Debt" is literally private savings. Wiping out the "Debt" is the same as wiping out the private savings of the currency.
> The only reason anyone demands the currency itself is being forced to pay taxes in it.
And yet half of Africa and significant parts of South America use dollars. Not because they're taxed in dollars.
> If I control the same portion of the currency, then my buying-power is unchanged and we just get inflation.
Nope. There's a lot of exceptions to that. If I were to give you a million dollars, and you invest it in "making a better mousetrap" and make the portions of America that people want mouse-free actually mouse-free (increase in value), and get them to pay 2 million dollars do you for that. One million repays the original million. One million is your profit. And one million is in houses that don't need repairs anywhere near as quickly as before, that's the reason people bought those mousetraps in the first place. That's growing value, and it's a win-win for everyone involved.
Second big exception is government (the FED in the US case).
Third big exception is banks.
> the government influences what happens or not.
True, but the government could just as well just legislate all of these things out of existence. And with the same problem. Too much tax on alcohol and bootlegging becomes the norm. Outright outlawing alcohol has the same result.
> There's nothing about government spending (or taxing) that makes it good or bad inherently. It's just a matter of the actual effect of the policies.
Yes there is. Government spending is inherently non-productive (in the economic sense of not resulting in future economic growth). At best it is artificial demand. That means money spent by the government is used once, and then it's gone. That's why you can compare paying taxes with buying alcohol (and drinking it).
Money invested by the private sector is far, see the mousetrap example above.
> You could make an evidence-based argument that most of the government direction is interference in the market and mostly causes problems and is negative. Whatever your position, it's a question of policies and effects. The facts of fiat currency spending and taxing don't change.
Nope. I don't have to. It is very much part of economic canon that governments don't invest. They are just unproductive users of funds. Most government activities are strictly negative for the economy for obvious reasons. They may be a necessity, but that doesn't make them any less negative. Let's take car registrations as an example. That requires tax, or the system would get flooded. And it requires employees, desk spaces, pencils, ... and the net result of that, at best, is that people obey the law. Nothing of value got produced at all.
Whilst there are exceptions (like infrastructure), they do not form a decent percentage of the budget.
> That's a non-issue. There is no such thing as the National Debt becoming "due". There's no basis to even talk about that, it's not a thing and can't be.
I have quite a few treasury certificates that certainly seem to have a due date. Perhaps I need new glasses. Importantly for your argument, they will get new interest rates and the payments will be different on this date, and of course the government needs to still have an acceptable credit rating. So they certainly come due in the same sense that debt on a credit card comes due.
> The "National Debt" is literally private savings. Wiping out the "Debt" is the same as wiping out the private savings of the currency.
I don't get where this comes from. This is flat out wrong. The national debt is generally defined to be what the Treasury owes (usually not including other governments like municipalities), and has nothing to do with banks, other than that they own some of it.
(Note of course that in the mousetrap example it's not just your buying power that changes, but everyone's. Everyone gets the ability to buy the new mousetrap, something of value that just didn't exist before (and the value of that new thing exceeds the value people pay for it, after all that's why they're paying for it). So despite people paying you their buying power actually increases, and so does yours. That is why the economy works. Perhaps it's easier to imagine this happening if it's a computer rather than a mousetrap)
First, thanks for going back on topic and avoiding assumptions-of-bad-faith. We do largely agree, and communicating about these things is not easy. Consider that all of this is challenging practice of making sense of one another through this SHITTY communication medium.
> And yet half of Africa and significant parts of South America use dollars. Not because they're taxed in dollars.
That's not interesting or surprising. All you need is some people to be taxed and thus need a currency in order for it to have initial value. This tax-based value goes back to eras of kings long before modern capitalism. E.g. give soldiers some currency, tax some non-soldiers. The non-soldiers now have to figure out how to get the currency from the soldiers by doing something the soldiers want (providing them food, etc.) Even someone neither getting the currency or taxed could easily recognize that they could do something the soldiers want, get the currency, and then get the taxed-folks to do something for them.
The whole premise is that taxation makes some people demand the currency which is enough to create entire markets of demand. Taxation to induce demand for currency is a primary mechanism for creating markets as an alternative to the problems of top-down over-planned economies (better to just get others to figure out in an open market how to feed the soldiers than to make a top-down bureaucracy to plan every aspect of serving the soldiers' needs).
If I happen to know someone who knows someone who needs to pay taxes in Yen, then I know if I get some Yen, I could exchange it with my friend for something from them, they could exchange it etc.
Without taxes, we don't get fiat currency value, we only get credit-backed money (IOUs that get passed around essentially) and commodity-backed money.
The fact that USD is the dominant currency has to do with a ton of factors including U.S. military actions around the world that keep oil in dollars and such.
> exceptions…
Well, the profit focused thing doesn't itself create more currency. If I get a million dollars at the same day that everyone else's dollars grow by the same ratio to their previous holdings, it only causes inflation. I won't then have any more capital to invest than I did originally.
Obviously, if I put capital toward real wealth creation, everyone is richer. So, if increase in dollars overall is going along with actual growth in productivity, then we won't see inflation, and then it is real growth in wealth (and in dollars) as you say. But if the same investments happened without any growth in dollars, the wealth would still be there, we'd just risk deflation if it got extreme enough…
The banks etc. can create credit but not currency. MOST of the money in our economy is credit.
> Government spending is inherently non-productive (in the economic sense of not resulting in future economic growth). At best it is artificial demand.
That's separate from the inherent facts of the currency. It could be (for sake of discussion, I'll accept it) true that artificial demand, i.e. the skewing of the market by the government is always bad. Many argue that there's such things as market-failure and externalities etc. that call for correction by government actions. The point is that this is a separate discussion. Whether government interference in the market is ever good or never good (it's clearly not always good, that's undeniable), it is the effect on demand and on the market that is good or bad, not the government spending itself even though it is largely (but not exclusively) through spending and taxing that government influences the market.
> money spent by the government is used once, and then it's gone
That's false. Money spent by the government is gone only when it is taxed away. If it is spent and untaxed, it stays in circulation (or just in savings).
Look 90% of your remarks are based on the misunderstanding that treasury bonds create currency. They do not. That was one of the rules introduced after the 1930 disaster.
Your argument is dependent on the financial system as it existed in, not even the 20th, but the 19th century. Taxes do not "delete" dollars. Treasury bonds do not create dollars. None of that is true.
The FED balance sheet, and the private fractional reserve banking is the ONLY thing that creates money in the united states (and similar systems exist in Europe, and other developed economies). There is NOTHING ELSE, and certainly not treasury bonds, that creates either credit or currency.
Second misunderstanding is about government spending. The point is not whether it distorts the market. According to Keynesian THEORY the point is to distort the market, so I do not think that government spending is bad in that regard. According to Keynesian practice ... let's not go there.
Government spending is bad because it inherently is not an investment in future wealth production. It is like the car registrations. It can "avoid" (to an extent) negative externalities of certain markets, like the police preventing theft to an extent, but it inherently does not produce. If everybody followed the law, government would be superfluous : in theory, under that condition, you could simply close the government up tomorrow, and nothing would change. THAT's why government spending is bad, and should take a back seat to private investment. Because in theory private investment leads to future wealth creation, whereas government spending is economically the equivalent of buying booze and drinking it.
> …or well, if all the treasury bonds were cashed in and no more issued (so it wasn't moving debt around but actually paying it off), then we'd all need real dollars like
This is my main issue with your line of thinking. No. Very simply, no. The two are different. FED balance sheet versus treasury bonds. They're like whales and teapots. They are entirely different things.
I'm not literally claiming that treasury bonds are USD or create them directly, but every time anyone gets a bond, they act the same as if they have dollars in savings. They aren't liquid USD, but your bonds you have saved mean you have that savings and don't need to save as much in other forms.
As long as people trade in bonds for more bonds, the creation of USD can be delayed indefinitely. But if everyone went to cash in their bonds all at once, it would force the government to effectively print USD because they would not opt to default instead.
The only other alternative would be to increase taxes (or reduce new spending) to avoid the net increase in USD. And, I guess that's what people think about when they worry about future generations being liable for the debt. But the point is that it would just be stupid for policy-makers to sabotage the citizenry just to keep from creating USD.
In the case of the debt coming "due" because enough bonds are cashed in at once, the policy decisions around that would be about coming up with the right spending and taxing plan to keep things going okay. That's where all the challenges lie. But among the tools that are available for what to do include the ability to (e.g.) print new dollars to give to all U.S. taxpayers (or just citizens?) to offset all the new dollars going to China etc.
So, China cashes in their bonds. Now they have a ton of USD they could save or spend etc. — maybe we think it's a safe calculation to undermine their spending power by giving more USD to citizens. Maybe we think that will undermine China's trust in the future (but they are already cashing in their bonds, so maybe they lost trust already). Maybe we tax exports to China… maybe that's a terrible idea.
There's all sorts of ways to fuck this up, and maybe it is a problem currently that we're spending via issuing Treasury Bonds instead of printing more money now (i.e. we are delaying dealing with the issue of printing money). There's real concerns.
But the one concern that doesn't exist is the one that we will default. However we avoid defaulting, it will have policy effects, and that's where we should be discussing what effects we should aim for and where unintended consequences may lie etc.
There's at least an argument that we should screw China in the long-term rather than screw our grandkids. We don't have to literally default on the debt, we can just devalue it by allowing inflation at the same time as we give new USD to citizens (or just let citizens keep more of what they already get by cutting taxes). Etc. etc. none of this part is simple.
> Government spending is bad because it inherently is not an investment in future wealth production
But that's not the definition of whether something is good or bad. It's also not a direct investment in future wealth production if I consume something, and we don't say that all consumption is bad. Most consumption is bad at being investment.
So when government spending is not an investment in future wealth production, what is it? It's, as we seem to both understand, a market distortion and/or wealth redistribution of some sort. Obviously, in any perspective where "the point is to distort the market" the idea is to distort it from worse to better. No theory says that any distortion is good
To reiterate my point: It's not like if the government prints money to pay off the Treasury Bonds that it would actually cause inflation. The fact that the Bonds are out there is already somewhat accounted for in the economy in the way that people get and save the bonds.
So, turning them into USD if necessary wouldn't be the same as printing USD with nothing to offset it. The choice to print USD while the bond values in the world go away is effectively negligible. That's the core issue, whether or not the action in the end is to print USD or go in other directions.
I don't get how I'm ever going to tell you that government bonds do not in fact print money. What you're describing has nothing to do with government bonds.
> > Government spending is bad because it inherently is not an investment in future wealth production
> But that's not the definition of whether something is good or bad. It's also not a direct investment in future wealth production if I consume something, and we don't say that all consumption is bad. Most consumption is bad at being investment.
True. To put it another way "you can eat your seed corn". Perfectly reasonable as long as things keep growing. What was our GDP growth rate again ?
There's an analytical and prescriptive component to "Modern Monetary Theory." People like Cullen Roche have argued that the analytical side is correct, but don't share the prescriptive views. He calls that Monetary Realism.
Whether the debt is a "good thing" or not must be separated from whether the analysis is true.
Furthermore, it is possible for the government to simply print money without debt.
It is also possible for the federal government to acquire zero-interest loans, given that everyone knows it has the magic printing press, so long as everyone is convinced that it will honor the bonds.
That is why it is able to force bond yields to extremely low levels, even during a major recession.
FWIW, the vast majority of all the MMT stuff I've seen ends with stating that because the facts are what they are, the questions about what to do are all policy questions. It then does not go on to prescribe what policies to pursue, aside from the fact that the authors of the MMT stuff may themselves have political views expressed elsewhere.
I think MMT is best considered to not have any prescriptive component. I see the idea of one more often from critics of MMT looking for something to attack than from MMT itself.
That said, I'm just one reader with a limited scope of experience… but my view is that there ought not be prescriptions within MMT, and I'm happy I don't generally see any.
I respectfully disagree. There are a lot of statements like "deficits are good" and "we need to raise aggregate demand" and "there should be a Job Guarantee."
There are strong prescriptive and value-laden keynesian overtones. I don't want to name names, but just search for the "Job Guarantee," for instance, and you'll see lots of writing about it.
No MMT reasonable person ever says "deficits are good" are some prescriptive statement. The point is that deficits can be good, are often good, and are normal. The message is that having deficits or not should never be considered in itself good or bad, it's only in context that we can make such a judgment.
I do recall seeing MMT folks describe "full employment" as a policy goal that the government should have, so you're right there. I think that ought to be left out from MMT. Whether or not that is a good goal is independent from the facts of how fiat currency works.
Incidentally, I happen to believe that tying distribution of basic necessities to employment is unethical and economically destructive (it promotes make-work and even destructive broken-window-fallacy type crap).
You can easily split up the statements, and see things much more clearly.
"deficits are good". What are deficits ? Well government taxes X dollars, and governments spends Y dollars, on skyscrapers, computer systems, ... and Y > X.
That means 2 things. One, short term, one, long term. Short term there is at least Y - X more demand in the economy. That means more production is needed. That's great ! And no worries, every rightist on the planet will agree with that. More demand, more need for goods. That's great, that's excellent.
Long term, there is the problem that the government doesn't produce anything. If the government buys something (with some exceptions like infrastructure that represent like 5% of the budget at best) it's only a user. That means that if I pay $1000 in tax, or buy bottles of whiskey for $950 and drink them all, I have made the same contribution to the economy.
Deficit spending means that while I paid $1000 in tax, the government bought $1200 (for example) in bottles of whiskey, and drank them. It used the money for non-productive purposes (in the sense that they won't generate extra economic activity in the future).
In fact it's worse, since it's pretty much both throwing $1200 down the drain, in spending that I'm sure someone will enjoy but is ultimately useless, AND $200 in a loan that interest will come due on. But, if demand is anemic, the short term boost can matter more than the long term costs.
If instead I spent $1000 buying equipment for a coffee stand near a park in my neighborhood, and run that business, however. People would have access to coffee in the local park, and that would generate income, a job, ... That's the kind of spending we want : spending that grows the economy.
> That means that if I pay $1000 in tax, or buy bottles of whiskey for $950 and drink them all, I have made the same contribution to the economy.
No, that would be just bad accounting. If you pay $1000 in tax, then there's $1000 less currency. If you consume $1000 in goods, then while there's less of the good, there's likely some profits through the supply chain and anyway the currency goes to the people who supplied the good and exists for them to use again.
But the rest of what you are saying is true. The question about spending is always what do we spend on…
> It is also possible for the federal government to acquire zero-interest loans, given that everyone knows it has the magic printing press, so long as everyone is convinced that it will honor the bonds.
And let's not forget that what Greenspan did, lend the government money with interest, then pay the interest to the treasury department is very different from interest free loans.
VERY different I tell you !
VERY !
Well, not that different.
> That is why it is able to force bond yields to extremely low levels, even during a major recession.
Unfortunately that does mean that an ever increasing proportion of the effort and work of actual people goes to work that has no utility for society, and at some point it starts actually preventing people from doing useful work (because their income would be cut significantly compared to when they're doing useless work, paid by loaned money).
And at some point ... people realize this is what's happening. Rapidly and suddenly.
The worst of it is, despite > 4 TRILLION dollars injected in the economy by Obama (and a little by Bush and Trump), the economy is barely at the point it was before the crisis.
By this I mean that there are important indicators that have more or less recovered (e.g. GDP), and important indicators that have not even recovered at all (e.g. Participation levels).
But even the most positive indicators have recovered to the level the government claims it has. There has not, at all, been 2-3% average growth since 2009. At all. I don't understand why people believe that.
Credit comes with interest. So I feel like that reframing should include whether having the government perpetually pay a few lucky people and companies a systematically increasing proportion of taxes is a good thing.
yeah sure, i wonder though if interest is a necessary feature of credit.
the interest is charged to cover the demand, the risk, and inflation. with government, the risk is low. inflation is by and large the government's alternative to borrowing. and demand i guess is mostly when the borrower needs the credit more than the lender needs to park the cash.
but in the case of government, I guess the demand is weighted against the lender.
In the case of government, everything is weighted against the lender.
For instance, what the US government did in 1971 ? Government: "We are going to pay X in gold for every one of Y you have", Investors: "Okay, pay up", Government: "We were going to pay but instead confiscate all of it" ...
That's supposed to be the most reliable government on the planet (and it wasn't the first time it did that, and it won't be the last).
The sad truth is that when you calculate things out, bonds by large corporations (average of S&P500) are in fact more reliable than bonds by the US government, and whilst I haven't checked, I strongly suspect bonds by every other government. Mostly because corporations can't just choose to cancel contracts and bonds, and therefore don't. So they're mispriced. In reality the risk of the US government is, given the published default risk, A2 or A3 rating at best, and should therefore carry interest rates lower-bounded by that grade, or about 4%. And of course the "risk-free" interest rate should be added to that, to make something like 5.5% or so. That is, of course, only for Federal bonds. Actual interest rates are something like 1%, mostly because the "independent" government agency called the FED "chose" to buy government bonds at that rate.
So you see, the government has already done a great deal of what you're saying, and lowered the interest rate it's paying a great deal, in a very unfair way. Essentially, in the long term, and assuming the previous century will be similar to the next, you should expect to lose something like 40-60% of the money you lend the US government (because of the next default). And if you reinvest dividends, or keep the proceeds in dollars, of course, 100%.
The issue is that if you don't give people any incentive to be economically productive (because that's exactly what interest rates at 0% do) then ... they won't be.
oh sure, agree government is not perfectly reliable, as you point out. you are probably right about mispricing.. of course government bond is less likely to disappear altogether than any one corporation. and the bonds are just used to leverage further lending. the rate doesn't matter as much as the published (low) market risk.
but anyway, the gp was discussing issues with government taking or holding debt indefinitely.
I was just pointing out that government can use it's power and position to nullify the political issue of interest on debt that you rightly brought up.
from the lender point of view that is not a great deal, but I don't see why interest needs to be an integral part of government debt.. as it can, and as we seem to agree, mitigate the risk, demand and inflation factors I mentioned. through fair means or foul.
and if the market declines the offer, the government can increase the supply of money.
Debt is the American way, we've been in debt since well before the country was officially founded. And our founding fathers all had issues with personal debt. When George Washington was elected our first President he was flat broke and had to take out a loan to afford the trip from Mount Vernon to his own inauguration in New York City. (Washington DC didn't exist yet.)
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[ 3.1 ms ] story [ 123 ms ] thread* If we're talking private debt or debt from governments other than the fiat-issuer level then there's some risk of default which means the savings could be lost.
* Without a gold standard, increase in fiat currency can diminish savings through inflation.
But simply: savings in gold ≠ savings in fiat currency, but they are both savings still.
That's true with a gold standard as well, since all that means is that printed currency is backed by a peg to gold, usually with some form (perhaps not open to all currency holders, though) of redemption pledge.
It's even true with non-debased gold currency, not just gold-backed representational currency, as demonstrated by the Spanish colonial experience.
Remember, when the Fed buys a bond from the Treasury money gets printed, but the Treasury has to pay the bond back and as that happens slightly more money gets destroyed.
The amount of debt the Fed owns changes over time, it doesn't increase continuously. It tends to just maintain a fixed amount of it. It's been going down slightly lately:
https://fred.stlouisfed.org/series/TREAST
..If that's the case, it's interesting that we consider savings to be something solid and real but debt to be something which is speculative and can be cancelled, considering that they're really the same thing.
So if the average debt is created with a 4% interest rate, there is ~ $9 Trillion more in debt than there is in savings. That's almost half the entire market cap of the S&P 500. Unsettling.
At the same time, though, the ratio of debt-to-gross domestic product fell for the fourth consecutive quarter as economic growth accelerated.
So, not all doom and gloom.
Most of the economy would grind to a halt. Our current economy runs on debt fundamentally.
For instance when interest is charged on a loan, the money needed to pay the interest fee is not created by the bank.
If I loan you $1 at 1000% interest daily, then after a short time, you are just going to default on the loan, period. There's no way you'll pay it back. So, yeah… at some point, even if you got another loan to pay the loan and etc etc. the whole house of cards will crash at some point if it's too much credit based on nothing. That house of cards could be just me never getting paid back, oh well. But if I convinced tons of other people to give me products and services that I then had debt for based on the idea that I have this expectation of your payback… then the house of cards could reach through the whole economy eventually.
This is very evident when you think of how banks used to work: they would actually issue paper notes denominated in the desired unit of account (the national currency). To pay back your debts (or else suffer the consequences), you had to acquire and return the notes to the bank. That generated demand for the notes. People who were not banks would start accepting the notes because of the demand.
Then banks decided they could make money by accepting notes from other banks as payment (for a fee). At the end of the day, banks would exchange and retire notes collected this way.
Say that you're playing Monopoly (with house rules that allow personal debts), and the total supply of cash on the board is $300, divided up evenly among 3 players. Through previous transactions, Alice owes Bob $400, Bob owes Charlie $600, and Charlie owes Alice $200. Total debt on the board is $1200, 4x the supply of total cash.
Now imagine that Charlie pays Alice $100 to cancel half his debt. Alice now has $200 cash, and gives it to Bob to cancel half her debt. Bob now has $300 cash, and gives it to Charlie to cancel half his debt. Total cash on the board is still $300, all in the hands of Charlie, but total debt has been reduced to $600, only 2x the total money supply. (Note also that Charlie now has all the cash on the board and he can pay off his total debt with just 1/3 of his cash, which puts him in a very good negotiating position relative to the other players. This is how deflation - caused here by a decrease in total debt levels - tends to be very bad for debtors.)
Remember that everyone's debt is someone else's asset. If you own T-bills, that means the government owes a debt to you; part of the governments $13T national debt is your savings. If you have money deposited in the bank, then your neighbor's mortgage debt is indirectly your savings (going through the bank's balance sheet first). If you have both rewards points and a credit card balance, the rewards points are a debt from the credit card to you and the balance is a debt from you to the credit card company, and they get netted out when you redeem the points.
Debt really is a measure of two things:
1. The complexity of the financial system, for debts that are netted out between participants.
2. Wealth inequality, for debts that are not.
Both of those are increasing rapidly throughout the global financial system.
Yes, because money spent (to pay off a debt or otherwise) doesn't vanish in a puff of smoke, someone has it, and they can then use it to either pay off debt or buy goods, and the person who gets it then can use it to pay off debts or buy goods, and so on, ad infinitum.
If the debt being repaid is in local (national) currency, perhaps but less likely than if it is in foreign currency.
If it is all local, then it becomes a question of whether the nation has the production capacity and investment opportunities to absorb the additional currency in circulation.
If it is all most mostly foreign, the exchange rate can go haywire leading to any imports exploding in price. And if the nation then is relying on imports for some stable or other, things can go very badly very quickly.
[1]: https://www.investopedia.com/terms/d/deflationary-spiral.asp
Even with the low inflation we've had over the last 20 years, if you borrowed $1000 in 1997 with 0% interest and wanted to pay it back now, the 1000 "2018 dollars" you'd pay would only be "worth" 655 "1997 dollars".
The real danger is in deflation, which causes the constant dollar value of the debt to grow.
When all of our wages collectively go up, you can bet the cost of goods will also go up, with no change in affordability since the same amount of your work in man-hours is needed to both produce and purchase the goods.
I think we are long overdue for wage inflation, even with the associated cost increase of goods. The positive affect of it is to make fixed rate loans less burdensome. Why enslave ourselves to the past?
Well, QE happened right after the crash of 2008. In that crash, something like $4 trillion evaporated, much of it in the real estate market. The Fed created something like $4 trillion with QEx. That wasn't inflationary. However, it prevented the crash from being deflationary and destroying everyone who was in debt.
“printing” is inaccurate, and more importantly “has been” should be “was”; the series of rounds of QE (QE1-QE3) ended in 2014.
> When all of our wages collectively go up, you can bet the cost of goods will also go up, with no change in affordability since the same amount of your work in man-hours is needed to both produce and purchase the goods.
This would be a tolerably reasonable argument based on the (inaccurate in both cases, but understandable) ideas that prices are entirely driven by supply-side concerns, and ultimately all costs are labor cost, in the case of a global wage increase, but domestic wage increase won't have that effect in a global market even with the inaccurate assumptions that would justify that conclusion for a global increase.
https://www.ft.com/content/caf45d6a-9e28-11e7-8cd4-932067fbf...
Of course I agree with you on the global wage increase, I ignored the fact of multiple currencies.
I kind of think that all prices are related to (possibly delayed) labor costs, along the lines of "how much work do I have to do to buy it?" and "I'll extract that oil for you only if you are willing to pay at least what I have to pay my employees to do it".
If that was true, it wouldn't be QE still going on; QE is a policy to increase the effective money supply by buying assets, holding assets isn't increasing the money supply, it's just not decreasing it. But, also...
> Here is an article from last September saying that the fed is starting to sell (or not turn over) the assets
So, they are actually not still holding all the assets.
Just stand in a circle, and each person passes a pretty pebble to their left, and an IOU for $223 trillion to their right...
Like when the stock market crashed in 1929 and suddenly (most) everyone lost everything, even though no real disaster had occurred, and all the factories and farms were still in the same condition they were before.
For a good HN comment, we need not to stop at the first reflexive response that comes up, but wait until we get past that, at least till the second. If you do that, you'll usually notice an obvious counterpoint to the obvious first point, and then you'll take a bit longer to sort through your thoughts before posting. That's when you're more likely to make a contribution that's useful to others.
Agreed, it's so painfully obvious it's problematic. Human psychology has an interesting habit of ignoring obvious painful truths, as Margaret Heffernan details in Willful Blindness: Why We Ignore the Obvious at Our Peril[1].
"We turn a blind eye in order to feel safe, to avoid conflict, to reduce anxiety, and to protect prestige. But greater understanding leads to solutions, and Heffernan shows how-by challenging our biases, encouraging debate, discouraging conformity, and not backing away from difficult or complicated problems-we can be more mindful of what's going on around us and be proactive instead of reactive."
>if it's correct, too much would follow
Precisely why we subconsciously ignore difficult truths, because confronting them would require surmounting seemingly insurmountable obstacles.
[1]https://www.amazon.com/Willful-Blindness-Ignore-Obvious-Peri...
Interpretations differ, but mine is that the comment is unsubstantive because it is in equal parts obvious and dismissive. This is the sort of thing whose general purpose is to make the writer, and some readers, get a cheap hit of smart-feeling, while alienating the frankly more valuable part of the audience.
You're right, though, that it really wasn't that bad a case, especially relative to other top comments in this thread. I wouldn't have singled it out except that it was the first one posted.
A bad comment would be "this is dumb" or "total debt is a stupid concept". The OP in this thread gave an intellectually clear and logic basis for dismissing the article.
The substance is this: The total value of "global debt" can be misleading -- or entirely meaningless -- when you don't consider all the cancellations in the graph. This is nontrivial when it comes to the network of "every economic entity that currently exists."
https://modernmoneybasics.com/ (simplistic but largely accurate intro)
Eliminating the "debt" that a currency-issuing government has in its own currency is the same thing as eliminating the currency.
The U.S. federal government "owes" dollars to creditors kind of like the way the the score-keeper in a game "owes" points to a basketball team.
Debt-backed currency has the fundamental flaw that, because debts charge interest, the total amount of debt will always exceed the money supply. Our currency is structured so that there are never enough dollars to pay off all debts at any given time. Fundamentally, a portion of all debts MUST default, creating a net effect where those who have enough capital to lend will, over time, acquire more and more real property.
Our currency is built to transfer wealth from the have-nots to the haves.
But that is not an issue with the nature of the currency. The way we use "debt" in terms of Federal government "National Debt" is related to the currency and not related to the credit market which is the usurious bulk of our money. Most money flowing around the economy is based in bank-credit and has all the issues you describe. Currency is different. Of course, the particular policies that we enact around the currency (i.e. how we use it) are often about enriching the powerful etc. although some things are at least mixed in that respect.
Do check out https://modernmoneybasics.com/ (I'm guessing you have not because the distinctions that matter here are clarified there in the intro video and in the follow-up links)
This $233T does not include the currency generating debt, nor the double bookings on the banks' balance sheet. None of the debt you're talking about is included in that figure. That's a different figure, generally found under something like "central bank balance sheet".
So congratulations ! You should be in politics. Your comment is entirely accurate, and yet so incredibly misleading, so easily, so effortlessly guiding people to a terribly wrong conclusion.
And yet it is trivial to point out a major inconsistency. If what you say is true, then why would there be any limits on government spending at all ? More currency created by government demand, which we all know is good for the economy ! And yet intuitively ... alarm bells go off. I can clearly see that there are upper limits to government spending where "somehow" this breaks down. There's the extreme examples like Zimbabwe and Venezuela, where inflation destroys the economy itself and it's blatantly obvious the root cause is government overspending. Wouldn't this mean they simply have more economy ? Clearly it doesn't (Assuming you don't follow the lunatic left viewpoint that these are the result of conspiracies). Then there's the cases where government overspending has lead to the currency not being accepted anymore, like Somalia, and to a less extreme extent, Cyprus, Greece, parts of Austria, ... Now of course in those cases it is in fact a conspiracy (by most of the population, central banks, normal banks, ...), and yet they too insist it is because of government overspending. How can this possibly happen ?
And intuitively I have seen what happens with government overspending. It is very visible in European capitals, in some areas where governments or very large companies control all spending and layout of particular areas of the city, in an otherwise capitalist economy. And what you see is always the same : empty, dead "public" spaces that aren't very public at all. Nobody goes there because there is no economy there. There are no cafes, no food, no games, no cinemas, no access to transport, no ... nothing. Nobody goes there (unless the government departments are open, of course).
But the fallacy is mostly in what do we really care about. "Debt" is too abstract. I agree. A name with a big number next to it. Big deal. The distance to proxima centauri is also a name with a disappointingly big number next to it, and yet, I don't see it affecting me.
Ah ! That's a good idea. Big numbers that affect me. Okay, so let's see if this big number would affect the average American ...
Do governments owe interest on government debt ? Yes. Do these interest payments come out of the same pool of money that is used for everything else, say social security or pensions ? Yes. When interest rates go up, does that mean interest payments go up ? Yes. Will that compete/endanger social security spending ? Yes.
Will the government switch to printing money (and therefore "implicitly" and rather massively increase effective tax) to prevent this debt from actually coming due ? (In other words, will there be a point where this debt comes out of YOUR paycheck, whether through continuous interest payments paid through tax, can...
> This $233T does not include the currency generating debt
To be clear: The MMT stuff wasn't a reply to the article but to other people commenting and wrongly conflating the "National Debt" with the article's focus on other debts.
> why would there be any limits on government spending at all ?
You seem to be totally misunderstanding or making out some straw man. Creating currency doesn't even make demand. The only reason anyone demands the currency itself is being forced to pay taxes in it. If you give me $1 million, that doesn't increase my demand for more pants or food or anything. To whatever extent I want a bigger house than I can afford, then giving me dollars could give me the buying power — but only if you don't give the dollars to everyone else too. If I control the same portion of the currency, then my buying-power is unchanged and we just get inflation.
Government directs things by unevenly creating currency, and unevenly taxing. By sending checks to people who take certain actions (building infrastructure, investing in whatever the government wants to subsidize) and taxing stuff to discourage (tobacco, pollution…), the government influences what happens or not.
But that can only go so far (the government could give one guy a check for solving all diseases, but that doens't make it possible). And the government can be controlled by special interests who direct things for their power and profit. The government can also aim to subsidize or penalize certain things but have unintended consequences that completely undermine the goal.
There's nothing about government spending (or taxing) that makes it good or bad inherently. It's just a matter of the actual effect of the policies.
You could make an evidence-based argument that most of the government direction is interference in the market and mostly causes problems and is negative. Whatever your position, it's a question of policies and effects. The facts of fiat currency spending and taxing don't change.
Do governments owe interest on government debt? Yes. Do these interest payments come out of the same pool of money that is used for everything else, say social security or pensions? NO, there is no fixed pool of money. The federal government issues currency, it doesn't have it. When interest rates go up, does that mean interest payments go up? Yes. Will that compete/endanger social security spending? NO — the federal government will NEVER EVER have a check bounce. SS cannot be insolvent or go bankrupt. The problem is that, to use Warren Mosler's example, if we have 300,000,000 retired folks and 1 working guy, the problem is not whether we can pay him enough to take care of everything.
Currency actions (spending and taxing) can only go so far toward changing real facts on the ground where it matters.
> …prevent this debt from actually coming due…
That's a non-issue. There is no such thing as the National Debt becoming "due". There's no basis to even talk about that, it's not a thing and can't be.
The "National Debt" is literally private savings. Wiping out the "Debt" is the same as wiping out the private savings of the currency.
And yet half of Africa and significant parts of South America use dollars. Not because they're taxed in dollars.
> If I control the same portion of the currency, then my buying-power is unchanged and we just get inflation.
Nope. There's a lot of exceptions to that. If I were to give you a million dollars, and you invest it in "making a better mousetrap" and make the portions of America that people want mouse-free actually mouse-free (increase in value), and get them to pay 2 million dollars do you for that. One million repays the original million. One million is your profit. And one million is in houses that don't need repairs anywhere near as quickly as before, that's the reason people bought those mousetraps in the first place. That's growing value, and it's a win-win for everyone involved.
Second big exception is government (the FED in the US case).
Third big exception is banks.
> the government influences what happens or not.
True, but the government could just as well just legislate all of these things out of existence. And with the same problem. Too much tax on alcohol and bootlegging becomes the norm. Outright outlawing alcohol has the same result.
> There's nothing about government spending (or taxing) that makes it good or bad inherently. It's just a matter of the actual effect of the policies.
Yes there is. Government spending is inherently non-productive (in the economic sense of not resulting in future economic growth). At best it is artificial demand. That means money spent by the government is used once, and then it's gone. That's why you can compare paying taxes with buying alcohol (and drinking it).
Money invested by the private sector is far, see the mousetrap example above.
> You could make an evidence-based argument that most of the government direction is interference in the market and mostly causes problems and is negative. Whatever your position, it's a question of policies and effects. The facts of fiat currency spending and taxing don't change.
Nope. I don't have to. It is very much part of economic canon that governments don't invest. They are just unproductive users of funds. Most government activities are strictly negative for the economy for obvious reasons. They may be a necessity, but that doesn't make them any less negative. Let's take car registrations as an example. That requires tax, or the system would get flooded. And it requires employees, desk spaces, pencils, ... and the net result of that, at best, is that people obey the law. Nothing of value got produced at all.
Whilst there are exceptions (like infrastructure), they do not form a decent percentage of the budget.
> That's a non-issue. There is no such thing as the National Debt becoming "due". There's no basis to even talk about that, it's not a thing and can't be.
I have quite a few treasury certificates that certainly seem to have a due date. Perhaps I need new glasses. Importantly for your argument, they will get new interest rates and the payments will be different on this date, and of course the government needs to still have an acceptable credit rating. So they certainly come due in the same sense that debt on a credit card comes due.
> The "National Debt" is literally private savings. Wiping out the "Debt" is the same as wiping out the private savings of the currency.
I don't get where this comes from. This is flat out wrong. The national debt is generally defined to be what the Treasury owes (usually not including other governments like municipalities), and has nothing to do with banks, other than that they own some of it.
> And yet half of Africa and significant parts of South America use dollars. Not because they're taxed in dollars.
That's not interesting or surprising. All you need is some people to be taxed and thus need a currency in order for it to have initial value. This tax-based value goes back to eras of kings long before modern capitalism. E.g. give soldiers some currency, tax some non-soldiers. The non-soldiers now have to figure out how to get the currency from the soldiers by doing something the soldiers want (providing them food, etc.) Even someone neither getting the currency or taxed could easily recognize that they could do something the soldiers want, get the currency, and then get the taxed-folks to do something for them.
The whole premise is that taxation makes some people demand the currency which is enough to create entire markets of demand. Taxation to induce demand for currency is a primary mechanism for creating markets as an alternative to the problems of top-down over-planned economies (better to just get others to figure out in an open market how to feed the soldiers than to make a top-down bureaucracy to plan every aspect of serving the soldiers' needs).
If I happen to know someone who knows someone who needs to pay taxes in Yen, then I know if I get some Yen, I could exchange it with my friend for something from them, they could exchange it etc.
Without taxes, we don't get fiat currency value, we only get credit-backed money (IOUs that get passed around essentially) and commodity-backed money.
The fact that USD is the dominant currency has to do with a ton of factors including U.S. military actions around the world that keep oil in dollars and such.
> exceptions…
Well, the profit focused thing doesn't itself create more currency. If I get a million dollars at the same day that everyone else's dollars grow by the same ratio to their previous holdings, it only causes inflation. I won't then have any more capital to invest than I did originally.
Obviously, if I put capital toward real wealth creation, everyone is richer. So, if increase in dollars overall is going along with actual growth in productivity, then we won't see inflation, and then it is real growth in wealth (and in dollars) as you say. But if the same investments happened without any growth in dollars, the wealth would still be there, we'd just risk deflation if it got extreme enough…
The banks etc. can create credit but not currency. MOST of the money in our economy is credit.
> Government spending is inherently non-productive (in the economic sense of not resulting in future economic growth). At best it is artificial demand.
That's separate from the inherent facts of the currency. It could be (for sake of discussion, I'll accept it) true that artificial demand, i.e. the skewing of the market by the government is always bad. Many argue that there's such things as market-failure and externalities etc. that call for correction by government actions. The point is that this is a separate discussion. Whether government interference in the market is ever good or never good (it's clearly not always good, that's undeniable), it is the effect on demand and on the market that is good or bad, not the government spending itself even though it is largely (but not exclusively) through spending and taxing that government influences the market.
> money spent by the government is used once, and then it's gone
That's false. Money spent by the government is gone only when it is taxed away. If it is spent and untaxed, it stays in circulation (or just in savings).
> That's why you can compare payin...
Your argument is dependent on the financial system as it existed in, not even the 20th, but the 19th century. Taxes do not "delete" dollars. Treasury bonds do not create dollars. None of that is true.
The FED balance sheet, and the private fractional reserve banking is the ONLY thing that creates money in the united states (and similar systems exist in Europe, and other developed economies). There is NOTHING ELSE, and certainly not treasury bonds, that creates either credit or currency.
Second misunderstanding is about government spending. The point is not whether it distorts the market. According to Keynesian THEORY the point is to distort the market, so I do not think that government spending is bad in that regard. According to Keynesian practice ... let's not go there.
Government spending is bad because it inherently is not an investment in future wealth production. It is like the car registrations. It can "avoid" (to an extent) negative externalities of certain markets, like the police preventing theft to an extent, but it inherently does not produce. If everybody followed the law, government would be superfluous : in theory, under that condition, you could simply close the government up tomorrow, and nothing would change. THAT's why government spending is bad, and should take a back seat to private investment. Because in theory private investment leads to future wealth creation, whereas government spending is economically the equivalent of buying booze and drinking it.
> …or well, if all the treasury bonds were cashed in and no more issued (so it wasn't moving debt around but actually paying it off), then we'd all need real dollars like
This is my main issue with your line of thinking. No. Very simply, no. The two are different. FED balance sheet versus treasury bonds. They're like whales and teapots. They are entirely different things.
As long as people trade in bonds for more bonds, the creation of USD can be delayed indefinitely. But if everyone went to cash in their bonds all at once, it would force the government to effectively print USD because they would not opt to default instead.
The only other alternative would be to increase taxes (or reduce new spending) to avoid the net increase in USD. And, I guess that's what people think about when they worry about future generations being liable for the debt. But the point is that it would just be stupid for policy-makers to sabotage the citizenry just to keep from creating USD.
In the case of the debt coming "due" because enough bonds are cashed in at once, the policy decisions around that would be about coming up with the right spending and taxing plan to keep things going okay. That's where all the challenges lie. But among the tools that are available for what to do include the ability to (e.g.) print new dollars to give to all U.S. taxpayers (or just citizens?) to offset all the new dollars going to China etc.
So, China cashes in their bonds. Now they have a ton of USD they could save or spend etc. — maybe we think it's a safe calculation to undermine their spending power by giving more USD to citizens. Maybe we think that will undermine China's trust in the future (but they are already cashing in their bonds, so maybe they lost trust already). Maybe we tax exports to China… maybe that's a terrible idea.
There's all sorts of ways to fuck this up, and maybe it is a problem currently that we're spending via issuing Treasury Bonds instead of printing more money now (i.e. we are delaying dealing with the issue of printing money). There's real concerns.
But the one concern that doesn't exist is the one that we will default. However we avoid defaulting, it will have policy effects, and that's where we should be discussing what effects we should aim for and where unintended consequences may lie etc.
There's at least an argument that we should screw China in the long-term rather than screw our grandkids. We don't have to literally default on the debt, we can just devalue it by allowing inflation at the same time as we give new USD to citizens (or just let citizens keep more of what they already get by cutting taxes). Etc. etc. none of this part is simple.
> Government spending is bad because it inherently is not an investment in future wealth production
But that's not the definition of whether something is good or bad. It's also not a direct investment in future wealth production if I consume something, and we don't say that all consumption is bad. Most consumption is bad at being investment.
So when government spending is not an investment in future wealth production, what is it? It's, as we seem to both understand, a market distortion and/or wealth redistribution of some sort. Obviously, in any perspective where "the point is to distort the market" the idea is to distort it from worse to better. No theory says that any distortion is good
So, turning them into USD if necessary wouldn't be the same as printing USD with nothing to offset it. The choice to print USD while the bond values in the world go away is effectively negligible. That's the core issue, whether or not the action in the end is to print USD or go in other directions.
> > Government spending is bad because it inherently is not an investment in future wealth production
> But that's not the definition of whether something is good or bad. It's also not a direct investment in future wealth production if I consume something, and we don't say that all consumption is bad. Most consumption is bad at being investment.
True. To put it another way "you can eat your seed corn". Perfectly reasonable as long as things keep growing. What was our GDP growth rate again ?
Whether the debt is a "good thing" or not must be separated from whether the analysis is true.
Furthermore, it is possible for the government to simply print money without debt.
It is also possible for the federal government to acquire zero-interest loans, given that everyone knows it has the magic printing press, so long as everyone is convinced that it will honor the bonds.
That is why it is able to force bond yields to extremely low levels, even during a major recession.
I think MMT is best considered to not have any prescriptive component. I see the idea of one more often from critics of MMT looking for something to attack than from MMT itself.
That said, I'm just one reader with a limited scope of experience… but my view is that there ought not be prescriptions within MMT, and I'm happy I don't generally see any.
There are strong prescriptive and value-laden keynesian overtones. I don't want to name names, but just search for the "Job Guarantee," for instance, and you'll see lots of writing about it.
I do recall seeing MMT folks describe "full employment" as a policy goal that the government should have, so you're right there. I think that ought to be left out from MMT. Whether or not that is a good goal is independent from the facts of how fiat currency works.
Incidentally, I happen to believe that tying distribution of basic necessities to employment is unethical and economically destructive (it promotes make-work and even destructive broken-window-fallacy type crap).
"deficits are good". What are deficits ? Well government taxes X dollars, and governments spends Y dollars, on skyscrapers, computer systems, ... and Y > X.
That means 2 things. One, short term, one, long term. Short term there is at least Y - X more demand in the economy. That means more production is needed. That's great ! And no worries, every rightist on the planet will agree with that. More demand, more need for goods. That's great, that's excellent.
Long term, there is the problem that the government doesn't produce anything. If the government buys something (with some exceptions like infrastructure that represent like 5% of the budget at best) it's only a user. That means that if I pay $1000 in tax, or buy bottles of whiskey for $950 and drink them all, I have made the same contribution to the economy.
Deficit spending means that while I paid $1000 in tax, the government bought $1200 (for example) in bottles of whiskey, and drank them. It used the money for non-productive purposes (in the sense that they won't generate extra economic activity in the future).
In fact it's worse, since it's pretty much both throwing $1200 down the drain, in spending that I'm sure someone will enjoy but is ultimately useless, AND $200 in a loan that interest will come due on. But, if demand is anemic, the short term boost can matter more than the long term costs.
If instead I spent $1000 buying equipment for a coffee stand near a park in my neighborhood, and run that business, however. People would have access to coffee in the local park, and that would generate income, a job, ... That's the kind of spending we want : spending that grows the economy.
No, that would be just bad accounting. If you pay $1000 in tax, then there's $1000 less currency. If you consume $1000 in goods, then while there's less of the good, there's likely some profits through the supply chain and anyway the currency goes to the people who supplied the good and exists for them to use again.
But the rest of what you are saying is true. The question about spending is always what do we spend on…
And let's not forget that what Greenspan did, lend the government money with interest, then pay the interest to the treasury department is very different from interest free loans.
VERY different I tell you !
VERY !
Well, not that different.
> That is why it is able to force bond yields to extremely low levels, even during a major recession.
Unfortunately that does mean that an ever increasing proportion of the effort and work of actual people goes to work that has no utility for society, and at some point it starts actually preventing people from doing useful work (because their income would be cut significantly compared to when they're doing useless work, paid by loaned money).
And at some point ... people realize this is what's happening. Rapidly and suddenly.
The worst of it is, despite > 4 TRILLION dollars injected in the economy by Obama (and a little by Bush and Trump), the economy is barely at the point it was before the crisis.
By this I mean that there are important indicators that have more or less recovered (e.g. GDP), and important indicators that have not even recovered at all (e.g. Participation levels).
But even the most positive indicators have recovered to the level the government claims it has. There has not, at all, been 2-3% average growth since 2009. At all. I don't understand why people believe that.
the interest is charged to cover the demand, the risk, and inflation. with government, the risk is low. inflation is by and large the government's alternative to borrowing. and demand i guess is mostly when the borrower needs the credit more than the lender needs to park the cash.
but in the case of government, I guess the demand is weighted against the lender.
For instance, what the US government did in 1971 ? Government: "We are going to pay X in gold for every one of Y you have", Investors: "Okay, pay up", Government: "We were going to pay but instead confiscate all of it" ...
That's supposed to be the most reliable government on the planet (and it wasn't the first time it did that, and it won't be the last).
The sad truth is that when you calculate things out, bonds by large corporations (average of S&P500) are in fact more reliable than bonds by the US government, and whilst I haven't checked, I strongly suspect bonds by every other government. Mostly because corporations can't just choose to cancel contracts and bonds, and therefore don't. So they're mispriced. In reality the risk of the US government is, given the published default risk, A2 or A3 rating at best, and should therefore carry interest rates lower-bounded by that grade, or about 4%. And of course the "risk-free" interest rate should be added to that, to make something like 5.5% or so. That is, of course, only for Federal bonds. Actual interest rates are something like 1%, mostly because the "independent" government agency called the FED "chose" to buy government bonds at that rate.
So you see, the government has already done a great deal of what you're saying, and lowered the interest rate it's paying a great deal, in a very unfair way. Essentially, in the long term, and assuming the previous century will be similar to the next, you should expect to lose something like 40-60% of the money you lend the US government (because of the next default). And if you reinvest dividends, or keep the proceeds in dollars, of course, 100%.
The issue is that if you don't give people any incentive to be economically productive (because that's exactly what interest rates at 0% do) then ... they won't be.
but anyway, the gp was discussing issues with government taking or holding debt indefinitely.
I was just pointing out that government can use it's power and position to nullify the political issue of interest on debt that you rightly brought up.
from the lender point of view that is not a great deal, but I don't see why interest needs to be an integral part of government debt.. as it can, and as we seem to agree, mitigate the risk, demand and inflation factors I mentioned. through fair means or foul.
and if the market declines the offer, the government can increase the supply of money.