"The way this entire arrangement evolved had the structure of a Ponzi scheme. China and other countries invested money in various kinds of American financial securities including government bonds. This has helped keep interest rates low in the US. This helped Americans consume more. The money found its way back into China (like a return on a Ponzi scheme), and was invested again in various kinds of American financial securities, helping keep interest rates low and the consumption going.
Foreign countries have an incentive in keeping this Ponzi scheme going."
TLDR: When nearly all parties have a vested interest in continuing to kick the can, the can will likely be kicked for a very long time.
But it's wrong. It's a good description of a how a Ponzi scheme works, but in a Ponzi scheme that's all that happens - there's no actual economic activity taking place. The US, by contrast, has a very large and productive economy.
Also, bear in mind that the treasury borrows at a fixed interest rate. When you hear of rates going up, that's the rate that will have to be paid on future bond issues. With inflation as low as it is right now, it makes good sense to borrow. In fact, we should be borrowing more, probably much more, and investing it in major infrastructure upgrades that would yield higher economic gains over the lifetime of the bond than the puny rates of interest we pay on current borrowings.
Funny how at the end of the 90s, we had set things up to pay down the national debt, and how one of the issues in the 2000 election was what to do with the projected surplus. I believe it was Gore Vidal who referred to the "United States of Amnesia."
Well, one would assume that had the US not stumbled into 2 expensive foreign wars we probably wouldn't be in the situation we are in now. We went into massive debt during WWII as well we just weren't able to borrow the money from foreign markets, we had to settle for US war bonds.
That's true -- although it highlights just how ridiculous the decision-making around those wars was.
In World War 2 the United States was facing other world powers who were capable of converting their entire economies to war purposes; in 2001, the United States was facing a tiny pocket of wealthy and determined radicals who would occasionally try very hard to blow something up.
Stumbled implies some sort of accident. If I trip on the sidewalk, break my arm, and go into debt with the medical bills, that is a stumble (figuratively, and literally ;). If I blow all my cash and go into debt paying for cool tats to increase my street cred, that isn't a stumble (figuratively, or literally).
> In 1917 (and during World War I) the Debt Ceiling Law was passed, which allowed the executive branch to issue bonds and take on other debt without Congressional approval, as long as the total debt fell under the statutory debt ceiling.
I find it interesting that a law which was passed nearly 100 years ago to free up the executive branch from being constrained by congress has now resulted in the executive branch being bent over a barrel by congress.
Consider the alternative -- every bond issue would require congressional approval.
Congress isn't going to cede it's power to control spending -- the debt ceiling is a hack that gives the President the autonomy to operate while continuing to give Congress the power of the purse.
True. But that is only one alternative, not "the" alternative.
Take Australia. The government proposes a budget and the senate reviews it and after making any changes they decide are required and the government agrees, it passes.
In the situation where a deal can't be made and the senate blocks supply of money to the government the "politically neutral" governor general can dismiss the government and force an election.
Because it's a pointless measure--If $X legally must be spent, one would generally assume that's permission to spend $X. Denmark at least keeps theirs set high enough (for now) to avoid any political stances and shenanigans around it.
But being a percentage of GDP and not a set amount of euros, the effect of this limit is quite different from the US. During a recession, the GDP obviously goes down (tautologically speaking), so the limit can be breached without borrowing a single euro more.
It's basically a mandate for governments to act in a procyclical way instead of a countercyclical one as reason would suggest. Fortunately, that makes the mandate so obviously stupid that no one really cares about it during a recession or in other special circumstances (like the German reunification)
Because it's a very strange and harsh instrument to put a hard limit on the amount of debt. Why is taking on $X of debt okay, but $X+1 is illegal?
In every other country, public debt is kept in control the same way everything else is: by the opposition parties raising hell when it gets out of control. For this to work, of course, you need to have more than two viable parties.
The good times will keep rolling for quite some time. 12% of the debt is held by the Fed (aka. they printed money), and inflation is still 1.5%.
The solution to our fiscal woes is simple: we keep printing money. Eventually the markets will tire of this, and interest rates will go up. When that happens, companies and rich individuals will have a disincentive to hoard money and will begin to do something with it, which may increase inflation and interest rates more. The risk is that countries, companies and wealthy individuals will stop hoarding funds and start spending money, further increasing the money in circulation.
The gamble is whether this happens before or after the demographic bubble that is weakening the ability of schemes like Social Security to fund their benefits. Once the boomers go away, the entitlement programs will be more self-sufficient.
The demographic bubble is just starting to hit though. The cost of boomers retiring will be felt from 2010-2030. If it is already unsustainable, or getting there, it can only get worse if left in its current state.
That's a very interesting theory, and quite plausible.
But higher inflation is not necessarily a boon, since it would further encourage people to borrow money and consume, while punishes those who save and invest.
Also, it doesn't necessarily push people to invest their money in start ups, they may choose to invest in things that can keep up with inflation, like properties and gold.
One problem with inflation is that wealthy people and corporations own a lot more assets like real estate, factories, patents, brand names, mining rights etc. while common people put their savings in fiat-denominated bank accounts and sometimes questionable debt instruments through their pension funds. So inflation is going to take a toll on a lot of middle class savings and old age survival funds for regular people.
Sigh. So much writing and yet his logic train goes off the rails right out of the station.
The crucial difference between what the U.S. is doing and a Ponzi scheme is that the U.S. is actually generating income, to the tune of 1/4 of the world's economy. That income stream is missing in a Ponzi scheme. Paying off maturing debt by refinancing it with new debt is nothing unusual--corporations do it all the time. It's fine because there is the underlying income stream.
Now, the fact that it's not running a Ponzi scheme doesn't mean the U.S. can continue borrowing forever. Creditors might get nervous if the debt levels get too big relative to the income stream. What the U.S. has to worry about is not how much debt it's taking out now. What the U.S. has to worry about is some other country becoming a more attractive place for the world to stash its cash.
The US doesn't really even have to worry about another country becoming more attractive to park its cash; its financial obligations are still all denominated in dollars and the Federal Reserve can still continue to print them. The only real concern is that if there are deep structural problems the economy it might have to raise taxes to combat inflation (simultaneously cutting the deficit) even in an environment where there's no economic growth. As you point out, the US economy is plenty big enough to pay down debts with tax takings instead, but the government might have to hurt the economy to do so.
Right, but my point was that we get to consume more than our GDP because we're an an attractive place to park cash. When that ends, we can pay off our dollar-denominated debts but we won't be able to keep spending more than we generate.
That's in theory. In practice the shock that ending that will cause will end any hope the US has of paying back it's debt, or even the interest on it, immediately. So it will cause an immediate default and destroy the economy that promised to pay it back in one fell swoop. There's no way out of that situation that doesn't involve reneging on repayment. Either directly (any sovereign nation, like the US, can simply legislate it's debt away like Greece -partially- did, and counterintuitively investors have no choice and will immediately reinvest, again, like Greece demonstrated)
So the US, like every other nation on this planet (barring a few, but only a few exceptions), has zero hope of ever paying back it's debt. So it won't.
That doesn't mean the illusion can't last a few more decades or even a century or two (though only a few states managed to make it last even a single century, the most famous being the Roman republic).
The reason that everybody's happy with this state of affairs is that it allows, at this moment, an economy that's factors larger than it would otherwise be.
This situation came to be as an "accident" (that has happened hundreds of times before in history), and there simply is no conceivable way out. Anybody who can rattle the boat risks losing big, even if it's monetary interests are protected, so the situation keeps existing until someone really, really goes too far.
The interest on the national debt is $260 billion per year, on nearly $17 trillion in debt, for an effective interest rate of 1.5%. If that interest rate were to rise to 1980 levels, for instance, at 6% [2] that would be an annual interest payment of over $1 trillion/year.
In order to come up with an extra $700 million per year, the government would have to raise taxes by 25%. Possibly more depending on economic factors.
Now that I have run the numbers it seems that this is not as much of a Ponzi scheme as I thought but it still seems pretty bleak. Has anyone seen this video[3] of Japan's debt problem?
Note that the U.S. holds fixed-interest debt. If interest rates go up it will be forced to refinance at higher rates, but it will happen over some period of time. The weighted average maturity of the debt right now is over 5 years, so it's not like it'll be an extra $700 billion all of the sudden.
In any case, a worrying level of debt does not make something a Ponzi scheme...
"This money printing adds to the money supply. This excess money can ultimately lead to high inflation with excess money chasing the same amount of goods and services."
I'm in the process of writing a blog post on this. For now, the printing hasn't led to an increase in the money supply. Banks are holding record amounts in reserves and aren't lending the way that they were in 2008, so the money supply hasn't increased.
So either the entire QE money has gone into reserves or banks are parking money at the Fed that they used to lend to each other until 2008. I wonder which one it is.
35 comments
[ 2.7 ms ] story [ 75.8 ms ] thread"The way this entire arrangement evolved had the structure of a Ponzi scheme. China and other countries invested money in various kinds of American financial securities including government bonds. This has helped keep interest rates low in the US. This helped Americans consume more. The money found its way back into China (like a return on a Ponzi scheme), and was invested again in various kinds of American financial securities, helping keep interest rates low and the consumption going.
Foreign countries have an incentive in keeping this Ponzi scheme going."
TLDR: When nearly all parties have a vested interest in continuing to kick the can, the can will likely be kicked for a very long time.
Also, bear in mind that the treasury borrows at a fixed interest rate. When you hear of rates going up, that's the rate that will have to be paid on future bond issues. With inflation as low as it is right now, it makes good sense to borrow. In fact, we should be borrowing more, probably much more, and investing it in major infrastructure upgrades that would yield higher economic gains over the lifetime of the bond than the puny rates of interest we pay on current borrowings.
Funny how at the end of the 90s, we had set things up to pay down the national debt, and how one of the issues in the 2000 election was what to do with the projected surplus. I believe it was Gore Vidal who referred to the "United States of Amnesia."
In World War 2 the United States was facing other world powers who were capable of converting their entire economies to war purposes; in 2001, the United States was facing a tiny pocket of wealthy and determined radicals who would occasionally try very hard to blow something up.
http://en.wikipedia.org/wiki/History_of_United_States_debt_c...
> In 1917 (and during World War I) the Debt Ceiling Law was passed, which allowed the executive branch to issue bonds and take on other debt without Congressional approval, as long as the total debt fell under the statutory debt ceiling.
I find it interesting that a law which was passed nearly 100 years ago to free up the executive branch from being constrained by congress has now resulted in the executive branch being bent over a barrel by congress.
Congress isn't going to cede it's power to control spending -- the debt ceiling is a hack that gives the President the autonomy to operate while continuing to give Congress the power of the purse.
Take Australia. The government proposes a budget and the senate reviews it and after making any changes they decide are required and the government agrees, it passes.
In the situation where a deal can't be made and the senate blocks supply of money to the government the "politically neutral" governor general can dismiss the government and force an election.
This has happened once:
http://en.wikipedia.org/wiki/1975_Australian_constitutional_...
It's basically a mandate for governments to act in a procyclical way instead of a countercyclical one as reason would suggest. Fortunately, that makes the mandate so obviously stupid that no one really cares about it during a recession or in other special circumstances (like the German reunification)
In every other country, public debt is kept in control the same way everything else is: by the opposition parties raising hell when it gets out of control. For this to work, of course, you need to have more than two viable parties.
The solution to our fiscal woes is simple: we keep printing money. Eventually the markets will tire of this, and interest rates will go up. When that happens, companies and rich individuals will have a disincentive to hoard money and will begin to do something with it, which may increase inflation and interest rates more. The risk is that countries, companies and wealthy individuals will stop hoarding funds and start spending money, further increasing the money in circulation.
The gamble is whether this happens before or after the demographic bubble that is weakening the ability of schemes like Social Security to fund their benefits. Once the boomers go away, the entitlement programs will be more self-sufficient.
Edit: This post is an interesting case where people upvote it because of the title and then flag it after they read the comments.
But higher inflation is not necessarily a boon, since it would further encourage people to borrow money and consume, while punishes those who save and invest.
Also, it doesn't necessarily push people to invest their money in start ups, they may choose to invest in things that can keep up with inflation, like properties and gold.
The crucial difference between what the U.S. is doing and a Ponzi scheme is that the U.S. is actually generating income, to the tune of 1/4 of the world's economy. That income stream is missing in a Ponzi scheme. Paying off maturing debt by refinancing it with new debt is nothing unusual--corporations do it all the time. It's fine because there is the underlying income stream.
Now, the fact that it's not running a Ponzi scheme doesn't mean the U.S. can continue borrowing forever. Creditors might get nervous if the debt levels get too big relative to the income stream. What the U.S. has to worry about is not how much debt it's taking out now. What the U.S. has to worry about is some other country becoming a more attractive place for the world to stash its cash.
So the US, like every other nation on this planet (barring a few, but only a few exceptions), has zero hope of ever paying back it's debt. So it won't.
That doesn't mean the illusion can't last a few more decades or even a century or two (though only a few states managed to make it last even a single century, the most famous being the Roman republic).
The reason that everybody's happy with this state of affairs is that it allows, at this moment, an economy that's factors larger than it would otherwise be.
This situation came to be as an "accident" (that has happened hundreds of times before in history), and there simply is no conceivable way out. Anybody who can rattle the boat risks losing big, even if it's monetary interests are protected, so the situation keeps existing until someone really, really goes too far.
Apres nous, le deluge. (google this sentence)
The interest on the national debt is $260 billion per year, on nearly $17 trillion in debt, for an effective interest rate of 1.5%. If that interest rate were to rise to 1980 levels, for instance, at 6% [2] that would be an annual interest payment of over $1 trillion/year.
In order to come up with an extra $700 million per year, the government would have to raise taxes by 25%. Possibly more depending on economic factors.
Now that I have run the numbers it seems that this is not as much of a Ponzi scheme as I thought but it still seems pretty bleak. Has anyone seen this video[3] of Japan's debt problem?
[1]: http://www.usdebtclock.org/
[2]: http://www.usgovernmentspending.com/year1980_0.html - It appears that the government spent on interest about 6% worth of its total debt.
[3]: http://www.youtube.com/watch?v=Njp8bKpi-vg
In any case, a worrying level of debt does not make something a Ponzi scheme...
I'm in the process of writing a blog post on this. For now, the printing hasn't led to an increase in the money supply. Banks are holding record amounts in reserves and aren't lending the way that they were in 2008, so the money supply hasn't increased.
The money supply has indeed increased: http://research.stlouisfed.org/fred2/series/M2/
Perhaps you are thinking about monetary velocity, which is decreasing: http://research.stlouisfed.org/fred2/series/M2V
Where, M=money supply V=times money changes hands in one-year P=price level Q=GDP
The assumptions for this model are often missed, and include:
These two assumptions are unlikely to be true in these times.Current excess reserves are nearly $1.9 Trillion
Excess Reserves Source (FRED): http://research.stlouisfed.org/fred2/series/EXCRESNS