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Why The Staggering U.S. Debt Load Is Sure To Prevent Economic Growth
The insightful authors of "This Time It's Different" Carmen Reinhardt and Ken Rogoff are at it again, doing a simple yet crucial empirical analysis correlating sovereign debt (both government and external), and inflation (in some case) with GDP growth. It will come as no surprise to anyone that the more indebted a country is, with a government debt/GDP ratio of 0.9, and external debt/GDP of 0.6 being critical thresholds, the more GDP growth drops materially. Alas for the US, which is on the wrong side of this threshold, at the rate Geithner is issuing debt, the US economy will be able to grow organically, and not through stimulus after Keynesian stimulus, only after the administration manages to find a way to reduce its massive and growing debt load. In other words never.
The core findings of the paper:
First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
Why does debt soar? Based on Reinhart and Rogoff research this is the natural response to virtually every financial crisis:
Government debt has been soaring in the wake of the recent global financial maelstrom, especially in the epi-center countries. This might have been expected. Using a benchmark of 14 earlier severe post-World-War II financial crises, we demonstrated (one year ago) that central government debt rises, on average, by about 86 percent within three years after the crisis.
We don't need to know that precisely this is happening to the US right now: as the Fed assumes ever more private sector debt, and the administration pushes ever more problems into the future, both of these activities have to be financed, with the sad result being that every 1-2 weeks the US Treasury is forced to auction a staggering $80 billion + of new debt.
Outsized deficits and epic bank bailouts may be useful in fighting a downturn, but what is the long run macroeconomic impact or higher levels of government debt, especially against the backdrop of graying populations and rising social insurance costs?
Graphically, the relationships of economic growth and inflation to debt load can be seen in the graph below:
As the authors point out: "From the figure, it is evident that there is no obvious link between debt and growth until public debt reaches a threshold of 90 percent. The observations with debt to GDP over 90 percent have median growth roughly 1 percent lower than the lower debt burden groups and mean levels of growth almost 4 percent lower." And a little something for inflationists: "The line in Figure 2 plots the median inflation for the different debt groupings—which makes plain that there is no apparent pattern of simultaneous rising inflation and debt." Yet "There are exceptions to this inflation result, as Figure 3 makes plain for the Unites States, where debt levels over 90% of GDP are linked to significantly elevated inflation." And as the topic of analysis of every economic inquiry undoubtedly is the US, the relationship between inflation and debt load does not seem a definitive one.
A more granular look at the various debt load buckets reveals the following: "Over the past two centuries, debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP). Of course, there is considerable variation across the countries, with some countries such as Australia and New Zealand experiencing no growth deterioration at very high debt levels. It is noteworthy, however, that those high-growth high-debt observations are clustered in the years following World War II."
A detailed look at the US alone is presented below:
It would be interesting to see the administration reconcile this empirical observation with the current plan of solving any and all economic problem by issuing more debt.
A more pronounced relationships between inflation and debt levels becomes apparent when mapping external debt and GDP growth, inflation:
As one can see, the growth thresholds for external debt are considerably lower than for the thresholds for total public debt. Growth deteriorates markedly at external debt levels over 60 percent, and further still when external debt levels exceed 90 percent, which record outright declines. In light of this, it is more understandable that over one half of all defaults on external debt in emerging markets since 1970 occurred at levels of debt that would have met the Maastricht criteria of 60 percent or less. Inflation becomes significantly higher only for the group of observations with external debt over 90 percent.
To see where the US falls in comparison to other countries when comparing changes in the debt-to-GDP ratio, the authors provide the following chart:
Lastly, and especially for the US, the authors also do a longitudinal analysis of private debt-to-GDP. The conclusion will not come as a surprise to deflationists: "Just as a rapid expansion in private credit fuels the boom phase of the cycle, so does serious deleveraging exacerbate the post-crisis downturn. This pattern is illustrated in Figure 7, which shows the ratio of private debt to GDP for the United States for 1916-2009. As the box in the figure illustrates, periods of sharp deleveraging tend to associated with much lower growth and higher unemployment. The magnitude of the current deleveraging episode in the United States has no counterpart in the post-war period. In varying degrees, the private sector (households and firms) in many other countries (notably both advanced and emerging Europe) are also unwinding the debt built up during the boom years. Thus, private deleveraging may be another legacy of the financial crisis that may dampen growth in the medium term."
The authors' conclusion should be very carefully considered, especially when the alternative is merely absorbing ludicrous amounts of hopium coming from the administration's TV actor for any given day:
"A general result of our “debt intolerance” analysis, highlights that as debt levels rise towards historical limits, risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs. Even countries that are committed to fully repaying their debts are forced to dramatically tighten fiscal policy in order to appear credible to investors and thereby reduce risk premia...[C]ountries that choose to rely excessively on short term borrowing to fund growing debt levels are particularly vulnerable to crises in confidence that can provoke very sudden and “unexpected” financial crises. Similar statements could be made about foreign versus domestic debt, as discussed. At the very minimum, this would suggest that traditional debt management issues should be at the forefront of public policy concerns...[W]e note that even aside from high and rising levels of public debt, many advanced countries, particularly in Europe, are presently saddled with extraordinarily high levels of total external debt, debt issued abroad by both the government and private entities. In the case Europe, the advanced country average exceeds 200 percent external debt to GDP. Although we do not have the long-dated time series needed to calculate advanced country external debt thresholds as we do for emerging markets, current high external debt burdens would also seem to be an important vulnerability to monitor."
With the US hell bent on testing every cautionary statement in the paper, with the debt to GDP ratio likely to surpass the 100% barrier within a year, we can't wait for the sequel to this paper in the near-future, in which the authors confirm that the U.S. experiment is an abject failure in every aspect of fiscal and monetary policy.
Full must-read Reinhart and Rogogg paper.
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and why the main stream media is not likley to report it
Violating the ‘Rosenthal Rule’: When Reporters Sleep With Their SourcesThe Wall Street Journal reported it on a blog on their website dated January 4. I don't know if it was in the print WSJ or not. Contributor "inoculatedinvestor" had the link to it and a few hours later Tyler posted this piece.
Hey Tyler, when are you going to address that ridiculous 17 year MBS duration "simple calculation"? Here's some free education for you on MBS and duration.
http://en.wikipedia.org/wiki/Bond_duration
This duration is equal to the ratio of the percentage reduction in the bond's price to the percentage increase in the redemption yield of the bond (or vice versa). This equation is valid for small changes in those quantities only.
The units of duration are years, and duration is always[note 1] between 0 years and the time to maturity of the bond. It is equal to the time to maturity if and only if the bond is a zero-coupon bond.
http://www.frbsf.org/econrsrch/wklyltr/2000/el2000-01.html#subhead2
Figure 1 illustrates the relationship between refinancing incentive spreads and prepayments using data on the historical prepayment rates of 30-year fixed-rate Freddie Mac passthroughs. On average, only about 1/4% of the remaining mortgages per month prepaid for those MBS with mortgage coupons well below the prevailing primary mortgage rate, spreads below negative 1-1/2 percentage points. Prepayment rates remained well below 1% per month for other (narrower negative and slightly positive) spreads below 1/2 percentage point. Then, prepayment rates increased noticeably as this spread widened above 1/2 percentage point. For MBS with coupons about 2 percentage points above the current primary market rate, prepayments averaged about 5% per month.
The existence of such a high degree of prepayment sensitivity to the position of current market yields relative to the coupon rates on the outstanding mortgages makes the duration of MBS instruments shift with market conditions, with the degree of shifting dependent on whether the MBS have relatively high or relatively low coupons. The degree to which duration changes with yields is known as the convexity of the instrument. When current yields are low enough to make refinancing potentially attractive to a significant fraction of mortgage borrowers in the foreseeable future, MBS exhibit negative convexity; that is, as yields increase, MBS bond prices become more sensitive to changes in yields. This is the opposite of the case for noncallable bonds with nonzero coupons; such bonds demonstrate a mild degree of positive convexity.
The size of the negative convexity of MBS can be illustrated using empirical duration measures for Freddie Mac 30-year passthroughs. The empirical duration measures calculate duration from the observed average degree of co-movement between actual MBS market prices and Treasury yields in a particular sample period. As illustrated in Figure 2, for deep discount MBS with passthrough coupons about 2 percentage points below the current par coupon, the empirical duration is about 6-1/2%. To put this number in perspective, note that this is equivalent to the modified duration and Macaulay duration of a zero-coupon (non-amortizing, noncallable) bond with a term to maturity of 6-1/2 years. The historical relationships shown in the figure suggest that if current yields drop by about 2 percentage points, narrowing the refinancing incentive gap from -2 percentage points to zero, then duration will drop to about 3-1/2%. Furthermore, the duration of an MBS passthrough can shorten very substantially with a 4 percentage point change in current yields. An MBS with a 2 percentage point coupon premium over the current par coupon has tended to have a duration of less than 1%, about 5-1/2 percentage points less than the duration of an MBS with a 2 percentage point coupon discount.
I suggest the reason for the American exceptionalism is the U.S. central bank is more prone to monetize when debt/GDP ratios go up.
The part about rising risk premia - "debt levels rise towards historical limits, risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs" - is likely Cassandraesque at this point. Short term, the Treasury has been borrowing at negative real rates for more than a year. The inferred inflation premium of TIPS is low. Both data give a perfect opening to a Jimmy-Crack-Cornocrat to scoff:
"Oh, yeah. Just like the Treasury market pushed up short rates to 5% as the budget deficit ballooned. Sure. Investors have been staying away from Treasury paper in droves since the rescue effort, convinced that a T-bill is a certificate of guaranteed confiscation and nothing like a safe haven. Su-u-ure."
The trouble with Mr. Cornocrat is that his case for a new era, in which negative real T-bill rates are seen as an insurance premium for the safe-haven trade, is dangerously plausible right now. Monetarism has already been successfully debunked in academe...
Though not is this forum, as I've long said, "The debt is the problem..."
Intuitively, its clear and simple, when funds are siphoned off to pay interest, less income is available to fund other expenditures.
At the Household level this means saving for retirement, or taking vacations, or other spending and consumption.
At a corporate level, debt service reduces free cashflow available to invest in productive assets and programs to grow a business.
At the National level, debt service redirects tax revenues to interest payments, dis-enabling tax cuts or worthy spending on the public sector projects, however you choose to define worthy.
"Siphoned off"? Why, that's just old-fashioned thinking. I'll bet you don't have a PhD in economics from a top school. You see, I learned everything I need to know about debt from Representative Pete Stark, from the great state of California. He sums it up nicely by saying, almost literally, "The more we owe, the wealthier we are!"
http://www.youtube.com/watch?v=UjbPZAMked0
And, as we all know, the Great State of California is the wealthiest of them all! Aren't we lucky to have such fine intellectual leadership?
Ricahrde
LMAO!
Rep. Stark is a fine example of the type of bassackwards thinking that dug the deep financial hole that this country is now standing in.
"The more we owe, the wealthier we are!" - Typical fiat monetarist banker thinking.
Did you know he was a banker?
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/27/MNOO1367MD.DTL
'Overrated' warningsDemocratic Rep. Pete Stark of Fremont, a former banker, said he probably will not support it (referring to the bailout bill - A_Mac), calling dire warnings of a credit meltdown "grossly overrated."
A perfect example of why the citizens of this country need to drain the swamp (Washington DC). Re-elect NO Incumbent(s)When the U.S. Congress allowed the bankers total power over the issue of the nation’s money in 1913, America began its march to enslavement to world finance. America, once an industrial miracle, is now a debtor nation on the road to serfdom.
Just as international financier Mayer Amschel Rothschild said would happen if he were allowed to issue and control a nation’s money, America’s laws and Constitution have been negated by an elitist money power that now monopolizes the nation’s credit, thereby dictating the growth of the nation and all its creative activities--i.e., America's destiny, her people, her culture, and the nation’s business. It makes monopolies and nations--Home Depots and Costcos and Goldman Sachses, and Israels; it destroys Palestines and Iraqs, Lehmans, and small businessmen., borders, wages and identity.
I somehow doubt that europe has 200% external debt of its gdp?! Who should have lent us such amounts of money? We have lent eastern europe too much money. Europes advanced economies as a whole have a more or less even balance of trade and without a trade deficit, I think it's difficult to owe someone such amounts of money.
+1 Europe is nowhere near 200% debt. Japan is, though. It will approach 200% this year.
you clearly do not understand what external debt is....
and if the authors are incorrect about the debt
ratio for europe please correct it for us...
well
External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country.
http://en.wikipedia.org/wiki/External_debt
I have no idea what the exact number is, but the net sum of external debt should be close to zero. Only nations with a trade deficit can accumulate external debt. Core europe has a more or less balanced trade balance.
Your statements on European external debt are incorrect.
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt
The United States deserves no praise, but European nations have a much higher external indebtedness ratio as a % of GDP.
This is not an original thought on my part, but still is too seldom mentioned:
Why are we even comparing debt to gdp when gdp is not a measurement of national income or assets? Rather it is an approximation of economic activity, and not necessarily productive activity at that.
Bingo.
Debt to "income" for an individual makes sense.
Counting GDP as if it were a country's "income" is not analagous.
I agree with you.
I read this blog daily because it is one of the best. I'm scared to death of what is happening in the markets and worry that the government will, in their infinite wisdom, procure my savings and/or 401K's for their enjoyment. What can I do about this? stop adding to it and invest overseas? How??????
I've got no debt, 6 months of cash ready, PM's in my possession. what else can I do????
We rolled our 401k actually 301k lol into a self directed IRA and bought property with it, you can also buy gold. I saw the take over of our savings coming in May of 09, we just closed on 14 acres.Whew !
I thought of gold in an IRA but am afraid that that is a sitting duck for a desperate government... they will eventually go to tax, confiscate anything they can... perhaps not property owned through it I hope for your sake.
Do you have long term storage foods? Reliance on the Just-in-Time inventory delivery to your grocery store leaves you exposed to a disruption in supply. Canned foods require rotation and an eat what you store, store what you eat mentality, otherwise you throw away your investment.
How about firearms to protect your family, your food, and your PM's?
Or a generator to keep your fridge and freezer running?
My 4 G's of preparedness: Grub, Gold, Guns, Generator.
Gas?
Get all you can out of all your pensions, mutual funds, everything this government will
be controlling. Maybe get some or all assets out of the country before it is too late.
Prepare to flee or fight.
I've printed the paper and will read it in depth (as I've read their book). Even your summary above highlights the important risks we face.
One methodological note: Rather than using the interval column graphs re debt/GDP, I wish they would have used a scatter diagram & trendline with regression. It would give a better picture of the trend (which is irregular in the column diagrams)and the reliability of the conclusion.
Contra Rogoff:
spending by private citizens is constrained by the sources of available funds, including income from all sources, asset sales and borrowings from external parties. Federal government spending, however, is largely facilitated by the government issuing cheques drawn on the central bank. The arrangements the government has with its central bank to account for this are largely irrelevant. When the recipients of the cheques (sellers of goods and services to the government) deposit the cheques in their bank, the cheques clear through the central banks clearing balances (reserves), and credit entries appear in accounts throughout the commercial banking system. In other words, government spends simply by crediting a private sector bank account at the central bank. Operationally, this process is independent of any prior revenue, including taxing and borrowing. Nor does the account crediting in any way reduce or otherwise diminish any government asset or government’s ability to further spend.
Alternatively, when taxation is paid by private sector cheques (or bank transfers) that are drawn on private accounts in the member banks, the central bank debits a private sector bank account. No real resources are transferred to government. Nor is government’s ability to spend augmented by the debiting of private bank accounts.
In general, mainstream economics errs by blurring the differences between private household budgets and the government budget. Statements such as this one from reputed economist Robert Barro that “we can think of the government’s saving and dissaving just as we thought of households’ saving and dissaving” are plain wrong.
Mainstream economics uses the government budget constraint framework (GBC) to analyse three alleged forms of public finance: (1) Raising taxes; (2) Selling interest-bearing government debt to the private sector (bonds); and (3) Issuing non-interest bearing high powered money (money creation). Various scenarios are constructed to show that either deficits are inflationary if financed by high-powered money (debt monetisation), or squeeze private sector spending if financed by debt issue. While in reality the GBC is just an ex post accounting identity, orthodox economics claims it to be an ex ante financial constraint on government spending.
The GBC framework leads students to believe that unless the government wants to print money and cause inflation it has to raise taxes or sell bonds to get money in order to spend. People have the erroneous understanding that taxation and bond sales provide money for the government which they use to spend. So if the government increases its deficit (spending more than taxing) then it must be increasing its debt holdings or “printing money”, both of which are deemed undesirable.
However the reality is far from this erroneous conception of the way the Federal government operates its budget. First, a household, uses the currency, and therefore must finance its spending beforehand, ex ante, whereas government, the issuer of the currency, necessarily must spend first (credit private bank accounts) before it can subsequently debit private accounts, should it so desire. The government is the source of the funds the private sector requires to pay its taxes and to net save (including the need to maintain transaction balances). Clearly the government is always solvent in terms of its own currency of issue.
Mainstream economics also misrepresents what it calls “money creation”. In the popular macroeconomics text, Olivier Blanchard (1997) says that government can also do something that neither you nor I can do. It can, in effect, finance the deficit by creating money. The reason for using the phrase “in effect”, is that … governments do not create money; the central bank does. But with the central bank’s cooperation, the government can in effect finance itself by money creation. It can issue bonds and ask the central bank to buy them. The central bank then pays the government with money it creates, and the government in turn uses that money to finance the deficit. This process is called debt monetization.
This is what mainstream economists call “printing money”. However, it is an erroneous conception in terms of the monetary system. To monetise means to convert to money. Gold used to be monetised when the government issued new gold certificates to purchase gold. Monetising does occur when the central bank buys foreign currency. Purchasing foreign currency converts, or monetises, the foreign currency to the currency of issue. The central bank then offers federal government securities for sale, to offer the new dollars just added to the banking system a place to earn interest. This process is referred to as sterilisation. In a broad sense, a federal (fiat currency issuing) government’s debt is money, and deficit spending is the process of monetising whatever the government purchases.
It is actually rather obvious but all government spending involves money creation. But this is not the meaning of the concept of debt monetisation as it frequently enters discussions of monetary policy in economic text books and the broader public debate. Following Blanchard’s conception, debt monetisation is usually referred to as a process whereby the central bank buys government bonds directly from the treasury. In other words, the federal government borrows money from the central bank rather than the public. Debt monetisation is the process usually implied when a government is said to be printing money. Debt monetisation, all else equal, is said to increase the money supply and can lead to severe inflation.
However, fear of debt monetisation is unfounded, not only because the government doesn’t need money in order to spend but also because the central bank does not have the option to monetise any of the outstanding government debt or newly issued government debt. As long as the central bank has a mandate to maintain a target short-term interest rate, the size of its purchases and sales of government debt are not discretionary. The central bank’s lack of control over the quantity of reserves underscores the impossibility of debt monetisation. The central bank is unable to monetise the government debt by purchasing government securities at will because to do so would cause the short-term target rate to fall to zero or to any support rate that it might have in place for excess reserves.
In summary, we conclude from the above analysis that governments spend (introduce net financial assets into the economy) by crediting bank accounts in addition to issuing cheques or tendering cash. Moreover, this spending is not revenue constrained. A currency-issuing government has no financial constraints on its spending, which is not the same thing as acknowledging self imposed (political) constraints.
Once we realise that government spending is not revenue-constrained then we have to analyse the functions of taxation in a different light. Taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.
The orthodox conception is that taxation provides revenue to the government which it requires in order to spend. In fact, the reverse is the truth. Government spending provides revenue to the non-government sector which then allows them to extinguish their taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending. It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector which allows the government to pursue its economic and social policy program.
This insight allows us to see another dimension of taxation which is lost in mainstream analysis. Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector. The unemployed or idle non-government resources can then be utilised through demand injections via government spending which amounts to a transfer of real goods and services from the non-government to the government sector. In turn, this transfer facilitates the government’s socio-economics program. While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.
Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue. Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work which eliminates the unemployment created by the taxes.
So it is now possible to see why mass unemployment arises. It is the introduction of State Money (which we define as government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment. As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages). Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account through the offer of labour but doesn’t desire to spend all it earns, other things equal. As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment. In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.
So the purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain. Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets). From the previous paragraph it is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment. Keynesians have used the term demand-deficient unemployment. In our conception, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.
For a time, what may appear to be inadequate levels of net government spending can continue without rising unemployment. In these situations, as is evidenced in countries like the US and Australia over the last several years, GDP growth can be driven by an expansion in private debt. The problem with this strategy is that when the debt service levels reach some threshold percentage of income, the private sector will “run out of borrowing capacity” as incomes limit debt service. This tends to restructure their balance sheets to make them less precarious and as a consequence the aggregate demand from debt expansion slows and the economy falters. In this case, any fiscal drag (inadequate levels of net spending) begins to manifest as unemployment.
The point is that for a given tax structure, if people want to work but do not want to continue consuming (and going further into debt) at the previous rate, then the Government can increase spending and purchase goods and services and full employment is maintained. The alternative is unemployment and a recessed economy. It is difficult to imagine that an increasing deficit will be inflationary in a recessed economy because there are so many underutilised resources, both capital and labour.
Indeed, as I continually point out, the first thing that the Federal government should do is offer all the labour that no-one else wants a job and pay them a minimum wage with all the additional statutory entitlements. By definition, the unemployed have no “market price” because there is no demand for their labour. Offering to buy a service for which there is no price is not an inflationary act.
thanks barry, but no thanks....your policies are still bunk with this prolixity as without....
inflation is not an economic problem nor is it precisely a fiscal problem but a monetary one or more pointedly a result of currency debasement....
your closed system of debt and tax slavery is lovely for the plutocrats but for the slaves not such a hot deal....the solution is the destruction of your fabled money system...
the fundamental problem with your fascist system is that increasing government control of the economy and allocation of its resources creates a solipsistic economy which is of value to no one....
finally there is strong empirical evidence that money creation is done by private banks rather than the fed - a topic covered here some months ago....my guess is that it is not so lopsided....
but i will compliment the cia on quite a baroque theory of economics....they really are on top of this economic melt down....
Nonsensical drivel
Please explain Brazil, Argentina, Bolivia, Peru, Ecuador, Zimbabwe, Jugoslavia, etc...and let me anticipate your possible counterargument...not all of them had debt denominated in a foreign currency.
That long winded post would make just a bit of more sense if you assume a country in isolation with no trading partners....are you suggesting a world government and/or world currency??
What is the problem with one world government?
What was paragraph 9 about?
Wha?
You're saying that increased government spending improves GDP because it forces people to earn more to pay their taxes - and that new money is conjured into existence by a need to service the IRS?
Somehow, that doesn't make any sense.
Wow - you almost succeeded in confusing me enough to buy your idiotic conclusion... but not quite.
That's the most convoluted mess of wrongness I've read in quite a while. I hope you're not in any position of power in the real world.
Okay.....good.....should I be long or short?
As my grandfather, Loomis Shackleford, used to say,
"That's a whole lotta' shit to eat just to get a few measly peanuts."
Can't see it sorry.
For one if people decided to transact in another nations fiat, say as they did in the soviet block for so long re: Deutchmark & USD, then you only need enough local currency to extinguish your tax burden - so no amount of local currency being printed (yes just printed) will cause the sufficient purchase of resources - so what does government do with all this paper which no one is accepting? Simple just disburse it across the govt sector so that now bureaucrats are earning millions in local fiat, but have to spend it all to get the equivalent resources in the foreign fiat everyone is using.
Sorry to be longwinded but this has happened before, a lot - inflation DOES NOT lead to full employment, ask Zimbabwe.
I can't be reading all that, man. god.
A simple concept in economcs. Capital is a resource,like any mineral or any other natural resources(asuming that we don't keep on printing). A capitalist economy is built on the basis of efficint capital allocation. A socialist economy is built on the basis of efficient distribution of capital. So goverment sector competes directly with the private sector for capital which is invested basically for no particular productive function.
How? Please explain. How is the government sector competing with the private sector for capital. I think you are speaking of things you dont understand.
I am Zeus
I'm not the original author, but I'll give it a shot. When the treasury sells a bond, it requires real capital in order to purchase said bond. That capital, however, has any number of alternative uses and must therefore compete with private debt or equity alternatives (among other things).
Say country A sells investor B a bond. The capital required for investor B to purchase country A's debt, like anything else, has alternative uses. Investor B could have purchased preferred shares of BoA, or GLD, or a twelve-pack of Pudding Pops. He could have deposited the funds in his bank (increasing the supply of loanable funds and reducing interest rates) or funded capital expansion by loaning directly to an entrepreneur. There is no shortage of investment options.
The opportunity cost of investor B's capital is everything else (be it an investment instrument, capital good, or consumption good) that must be foregone in order to purchase country A's debt. So to the extent that investor B consumes country A's debt, there are fewer capital inflows into BoA, GLD, or Unilever. The manifest cost for a more bloated public sector is a less robust private sector.
How about this debt to gdp ratio: A days wages for a loaf of bread.
I am no expert, but these empirical studies are very interesting to me! From Figure 1 of Reinhart and Rogoff's paper, the US public debt to GDP ratio in 2009 is only 84 percent, which means that it is unlikely we will exceed the 100 percent mark within the year. Granted, other measures may calculated this differently, but given we are talking about the findings in Reinhart and Rogoff's paper, it seems fair to use their numbers, right? On the other hand, we are likely to exceed 90 percent within the year.
The other part of Figure 1 that interested me is that it seems like the US public debt has only increased by 30-35% percent during the crisis, whereas "central government debt rises, on average, by about 86 percent within three years after the crisis". Doesn't this suggest that the US government has actually responded BETTER to this crisis than the average government? The high current public debt to GDP ratio of 84 percent seems like it can be blamed on the high level of debt that the government had coming into the crisis, rather than the crisis itself. For example, Ireland's public debt nearly doubled during the crisis, but its public debt to GDP ratio was still only 44 percent.
That is why Chairman Bernanke warned in his testimony to Congress about rising Medicare costs and other runaway mandatory spending programs. It seems to me the real public debt problem we have in this country is not one crisis, but that it is politically more difficult to cut spending and raise taxes than it is to add to the debt. Just look at the current health care debate-- as soon as Congress tries to cut someone's benefits (Medicare) or raise taxes on someone (the Cadillac plans), they start to squeal really, really loud. We need people to start looking beyond their own self interest toward the long term interest of the public purse.
This just came across the wire:
http://beforeitsnews.com/story/3048/401k/IRA_Screw_Job_Coming%3F
During my innocent years I would have dismissed the above as paranoid raving. But so much power has been arrogated to the federal government in just the last 10 years that it is hard to imagine a desperate measure that could not be justified by sufficiently desperate circumstances.
This was reported elsewhere too. Jesse's Cafe Americain
http://jessescrossroadscafe.blogspot.com/2010/01/us-government-is-eyeing...
and Denninger's Market Ticker:
http://market-ticker.denninger.net/archives/1830-401kIRA-Screw-Job-Comin...
Source articles are in Bloomberg and Business week; not at all paranoid ravings.
It was for this (and the other reason that taxes will go up) that I liquidated my IRA in 2008. Some people I knew told me NOT to do it because of the penalties and taxes. But, I now sleep better knowing that particular $100k+ is further from our .gov pals.
The Law of "Diminishing Returns".
Or, the point of "Negative Marginal Utility of Debt".
When you dig a deep enough hole and use 'magic powder' to make the dirt disappear - it comes time to climb out when the 'magic powder' is all used up - you find that you forgot the ladder. Oh great! Now what?
It begins to rain - not hard at first, however as the water level rises to your chest it begins to pour. The question becomes - how long can you tread water? Of course it depends upon the depth of the hole you dug!
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crises should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
- Ludwig von Misses.
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crises should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Von Mises is right and we know that they have chosen the 2nd option: destruction of the currency.
We are in the eye of the hurricane!!
this topic relates well to the marginal productivity of debt which makes similar claims about the tipping point of debt....mpd has been negative for some time....thus we can be assured that there will be no recovery....impossible...
of course we should be careful to define recovery as a state where full employment and increased economic activity at profitable levels prevails.
the usa may manage profitable economic activity but not with full employment. and i believe that the economic activity will be at subdued levels...
Missing, as usual from Rogoff, is applicability. U.S. sovereign debt is responding to the boom in private debt, which led into the crisis and which is the determinant of Depressionary deflation going forward.
But it also underestimates the impact of the federal obligation, the Fed's purchases. The central bank has backstopped trillions of dodgy securities, transferring full faith and credit to the cowboy capitalists and ratifying some of the most corrupt business decisions in history.
a. please refrain from corrupting the word 'capitalist' by associating it with today's corporatist practices.
b. the boom in private debt is an effect, not a cause.
Reagan had 10.5% unemployment in 1982 but he had the luxury of his debt to GDP at 35% where it had been hoovering for many years
on the other hand,
Obama has 10% unemployment now with 99% debt to GDP where it had been hoovering at 65% for several years.
The rally didn't start for Reagan until unemployment reached 10.5% and then began trending down. Now with Obama we've already had a rally back to the highs for 2/3 or more of the DOW 30.
However,comparing debt to gdp is like going to the bank and saying you want a loan and you claim your entire company's income as your own rather than your paycheck. The government only has acess to revenue not the entire GDP.
The current rate of unemployment was last seen in the early '80s.
Year = 1982
Rev = 617.8
Debt = 1,142.0
Debt/Rev% = 184.9%
Year = 2009
Rev = 2,075.1
Debt = 11,909.8
Debt/Rev% 573.9%
Based on this income to debt ration, the US would not qualify for a conforming mortgage; ie 3x your gross income.
Yet, the US is rated triple A.
Great post. Kudos. You get it.
Take a look at Japan.
http://www.mof.go.jp/english/budget/e20091225b.pdf
There is little external debt, sure, but
Year = 2010 (at end of FY, estimated)
Rev = 47996 (see page 1)
Debt (central govt) = 663000 (see page 5)
Debt/rev% = 1381%
Debt (central+local govt) = 862000 (see page 5)
see also the "For Reference" panel on page 4 for a concrete
illustration of the public debt load.
Given the demographics, can anyone see any other way out
of this except default or massive expropriation?
Say, a combination of
a) "Saver Special": BOJ prints without remorse or sterilization,
b) "Mr. Hatoyama pulls a Ms. Fernandez": JG raids BOJ FX reserves,
c) a "Ms. Fernandez" relative to some other "JG-controlled" assets,
d) the mother of all tax hikes (cf. p.4),
... ?
And now it time to state the obvious, it's all being done on purpose.
Replace Bernanke with Chavez of Venezuela. He knows how to devalue.
http://www.reuters.com/article/idUSN096521320100109
And Chavez also knows how to avoid the CIA.....
And Chavez also knows how to avoid the CIA.....
Perhaps Buiter read this when he wrote this exceptional piece on US Keynesian fallacy:
http://blogs.ft.com/maverecon/2009/01/can-the-us-economy-afford-a-keynes...
+10 nicely said Nout
And now a foray to the Reality Layer:
A big shout out to all of Rogoff's buddies over at the Group of Thirty, whose policies and pronouncements greatly aided in leading America to this present situation.
Oops! Did I say something amiss?
Why is it the guilty parties are all now claiming to suddenly know what's wrong?
Rogoff and his buds should all be doing hard time.....
"It just happened."
"The law of unintended consequences."
"But officer.....just because I robbed the house with a loaded weapon....how was I to know the gun would go off and kill the homeowner?"
I like the debt ticker on this site: http://www.truthin08.org/
Even if there wasn't a huge pre-existing debt overhang, the total size of our unfunded social obligations would still necessitate posting up some pretty impressive economic growth numbers, over a significant length of time, to have any hope of meeting even minimum payouts.
Whether achieved by massive energy use and/or combined with some incredible productivity breakthroughs, lacking either, we would again resort to unsustainable leverage & debt to fake it through once more. In other words, facing the insurmountable mountain of promised bills, we would just repeat the last decade all over again.
In point of fact, a case can be made that this is why the housing bubble WAS blown in the first place. Those in the know knew we, as an advanced industrial civilization, had an empty holster.
Now we're doubled (some say tripled) screwed because we DO have the debt hanging around our necks, the total payment obligations have only increased in size & scope, and we're on the back-end of the baby boom demographic slope (ie more claimants, less payees).
If the federal government cannot (a) provide a minimum safety net; and/or (b) act in a manner consistent with Constitutional provisions to protect (not take) the Peoples' private property (ie value of MONEY), what's it doin', other than consuming resources to support its own employment & power?
What do you think the answers will be as this question starts to gain more purchase in main-stream circles? Now do you see why it's difficult to come to any other conclusion other than the USA is not gonna make it out of this alive?
Even if there wasn't a huge pre-existing debt overhang, the total size of our unfunded social obligations would still necessitate posting up some pretty impressive economic growth numbers, over a significant length of time, to have any hope of meeting even minimum payouts.
In other words, facing the insurmountable mountain of promised bills, we would just repeat the last decade all over again.
Now we're doubled (some say tripled) screwed because we DO have the debt hanging around our necks, the total payment obligations have only increased in size & scope, and we're on the back-end of the baby boom demographic slope (ie more claimants, less payees).
Well said!
Along with a few other items (my particular hard on is the banking sector), this is the reason that I have become incredibly bearish on a long term basis. Breaks my heart cuz I have kids. I really, really hope that my viewpoint is wrong.
I see you understand the chessboard parable. Good.
The housing bubble was a necessary artifact of an economy which had long since run out of core economicalness. When real production doesn't generate sufficient returns, you resort to pyramiding leverage and synthetic economics.
The reality is that our debt/GDP is far worse because most of that GDP for the past 10 years was complete bullshit. It was nominal or transaction GDP.
If you originated a ton of mortgages, you have GDP. Then if you tranche them up with some leverage in a CDO, you have more GDP. Sell the paper, GDP. Retranche the tranches into a CDO^2 with more leverage, even more GDP. Originate a CDS and tranche the payments streams, more GDP. But this shit is all fake, it is not production. It's just credit origination and transactional volume, not real things getting made or built. It's a synthetic economy.
It is nice to see a quantitative academic work , and not social conjecture and posturing,
The short term effect of massive growing USG debt will allow us that see clearly, huge speculative opportunities , in short sales, and commodities.
Agreed.
Just think. Today you can buy 30 residential properties in Detroit for the price of a late model Toyota Tundra.
They ain't makin' no more land......doncha' know ?? :)
theyre makin more of why Detroit land is so cheap tho...
A big double LMAO for that one, trav !!
Would that 30 property portfolio cash flow?
Found this on Ben's IPOD the other day:
http://s0.ilike.com/play#J.R.+Writer:Make+It:138871907:m30939505
"Poverty is the parent of revolution and crime." -Aristotle
Memo to Goldman Sax: Please maintain the floor under equity levels for another few weeks. I've completed my backward bunker, but it will take another few weeks to get it fully stocked -- food, water, booze, toilet paper, bullets, etc. After I'm locked in, I don't care where equity prices go. Let the fun begin.
Come out and meet me at my beach house when the food runs out in 2019. We can probably find an empty bed in the house, and if not you can always stay on the boat.
The gold you have should buy you drinks for a few weeks while we straighten out your head and put you to work ACTUALLY CREATING SOMETHING OF VALUE FOR YOUR FELLOW MAN... research, invention, commerce, and plain ol' hard work.
Afterall, that's what makes the world go 'round my friend... not sticking your head in a bunker.
its all over...
Not 'til the fraudulent derivatives come home to roost.
Passing thoughts...
IMHO The Marginal Productivity of Debt will decrease only if a nation lowers its standards of quality. Otherwise, the interest paid to the banks will find its way back into the system leveraged into significant gains in productivity.
So, I would be careful with simply writing off debt increases (although I am personally strongly against governments increasing outstanding debt - it's not their job, it's the job of risk taking corporations).
The employment issue is also riding (even before this current crisis) on this lowering of standards as a result of globalisation. If you let other countries sell to your country but their citizens have no rights or environmental protections then you can issue all the debt in the world but:
- it won't create a single job and
- it won't create rising real incomes.
Case in point : Germany. Although IMHO Deutsche Bank managed to get infiltrated and run hard, the rest of the German "economic miracle" (very high wages, lots of vacation time, powerful unions, social programs - and still a powerful exporting nation!) is based on raising standards in every area and enforcing them. You can't import junk from "no standards" economies into Germany. It's against the law.
Case in point : Zero Hedge. ZH IMHO is constantly raising standards. Which may be why it is so successful? It's not the standard itself (very high). It is the feeling that standards are constantly being improved, refined, advanced, challenged.
Case in point of result from raising standards on Zero Hedge : Do you think that Green Sharts #188404 would bother to pass on a comment like that on a site with falling standards? I'm not an expert, but it seems to provide everything needed to calculate the end cost of the Fed reverse-repos to the Treasury. Which sounds like somebody is trying to say something which is something which somebody should notice.
Anyway : first things first. Debt restructuring, get the reverse-repos out of the way and start raising standards (of quality, of job security, of minimum wage, of national security, of immigration enforcement, of product safety, of environmental standards, of education, of health care, etc). Lots of private sector jobs in that! Debt is only dangerous if it is not invested in increasing the productivity of the creation of quality.
Now, back to improving the quality of my English (grin!)...
all the best from
Namke von Federlein
Don't know why the authors lump Canada and Australia together, but they show a debt to GDP ratio of almost 100%. Since Canada's federal debt to GDP is only 33% as of June, 2009, either Australia has an astronomical figure, or the authors' numbers are wrong.
Is Carmine Reinhardt married to that dumb-ass Vincent?
Poland had high debt and runaway inflation in 1990. They embarked on strict budgetary spending reform and by 2006 were seeing 6%+ growth per annum. In 2009 Poland was the only country with economic growth (1.7%) while the other 26 members of the EU contracted. Today Poland's debt to GDP is under 50%. For Poland it was a long decade plus haul out of the debt morass. The same will be for America. The thing about debt is it is inescapable. Suze Orman should run America's finances for the next year. It would take her a month to set Washington on the right path. She would teach Washington the basics of money which neither party understands.
There is a BIG difference between 100% debt/GDP ratio at 10% interest and 100% debt/GDP ratio at 1% interest.
If you look at "interest service costs as a %-gdp" the US would rank very very low. As would Japan... which simply means no weak-currency, crisis effects.
In the past year... average coupon interest on US govt borrowing declined about 30%. This has long lags in bonds/long-bond as it includes 30-yr bonds issued in the 80s at 7-8-9%.
Right now the average interest rate is...2.56%. See:
http://www.treasurydirect.gov/govt/rates/pd/avg/2009/2009_12.htm
If I had 100% of my income in debt at 2.56%... during my worst financial crisis... I would not be worried.
Yet the stealth bull market powers on, as stocks continue to climb the "wall of worry."
The Cyclical Trend Indicator is currently bullish...and is expected to remain there until Mid Feb. Expect a modest pullback around that time...just enough to add to winning positions.
Longer-term, the S&P 500 will be range-bound between 800 and 1550 for the next eight years.
I am Anonymous.