What does US debt really mean?

Malor, I found your posts both informative and insightful. It felt at times like I was reading an instruction manual, perhaps for Civilization, but an informative one.

Malor wrote:

Hoover Dam is an incredibly valuable resource, and it continues to pay off vast multiples of the money invested to create it.

Also, my first thought when I read that was "Of course it's valuable, it provides Hydro Power to every city on every continent!"

Seth wrote:

I marvel at the fact that somehow, both Malor's and goman's points of view resonate with me. I read them and find myself nodding in agreement, despite the fact that they are essentially saying two opposite and irreconcileable things.

I just think my paradigm for me is more clear. I don't have much in conflict with Malor except he is dismissing the power of governments and is also dismissing accounting principles when he thinks Government Debt is a problem.

The opposite of Government Debt is Private Savings. He always harps that people need to save more yet does not want the government to "get in debt". Or when he mentions that you cannot "fix debt with more debt."

Who controls interest rates in the USA?
Who controls them in UK?
Who controls them in Euro using countries?

The USA is paying about the same in interest now than they did 10 years ago, yet the debt increased 2.5 fold.

http://en.wikipedia.org/wiki/History...

Right, and that makes sense to me, but when juxtaposed against failed states who failed because of hyperinflation (Zimbabwe springs to mind), what sets American money printing apart from them? What is missing in the American equation that stubbornly keeps inflation in check despite huge sums of money called forth into being and interest rates set extremely low?

Seth wrote:

Right, and that makes sense to me, but when juxtaposed against failed states who failed because of hyperinflation (Zimbabwe springs to mind), what sets American money printing apart from them? What is missing in the American equation that stubbornly keeps inflation in check despite huge sums of money called forth into being and interest rates set extremely low?

It's like I said before. American political stability is now what backs the currency. Not Gold, not industrial wealth and capacity. It's political might. And if that ever starts to fall apart hold on tight.

Seth wrote:

Right, and that makes sense to me, but when juxtaposed against failed states who failed because of hyperinflation (Zimbabwe springs to mind), what sets American money printing apart from them? What is missing in the American equation that stubbornly keeps inflation in check despite huge sums of money called forth into being and interest rates set extremely low?

Huge sums of money for Zimbabwe and the US are two completely different sums. The US GDP (the market value of all final goods and services from a nation in a given year) is 14 Trillion. The entire EU is 16 Trillion. As far as a "country" goes, the 2nd largest to the US is Japan, at 5 Trillion (China is 3rd at 4.9 Trillion). The GDP of Zimbabwe is 4 billion.

Even with all the economic turmoil, the US GDP is still approx 3x larger than any other country in the world. Japan (#2) + China (#3) + Germany (#4) still doesn't equal the US GDP. The countries of the world have a long way to go to match the economic power of the US.

Spot on Shoal07. What is true economically for the US is not necessarily true for everyone else. Also Americans need not worry unduly about their debt for now. Worry when other currencies can take on the dollar. Of course you could just hope that that day never comes...

Right, and that makes sense to me, but when juxtaposed against failed states who failed because of hyperinflation (Zimbabwe springs to mind), what sets American money printing apart from them? What is missing in the American equation that stubbornly keeps inflation in check despite huge sums of money called forth into being and interest rates set extremely low?

We did not repudiate all our international debt and seize the major economic sources to give them to the Presidents' supporters. And remember, hyperinflation is structurally different from ordinary inflation. There is no "business as usual" to an inflation rate of 231 million percent in less than a year.

Comparing the US to Zimbabwe is like arguing that because matches can occasionally catch a sofa on fire, use of matches will inevitably lead to a global conflagration. There's got to be a lot of other stuff involved for that to happen. Zimbabwe's economic engine didn't fail so much as it was driven off the road at high speed.

I'm still working on my next replies, but I will make the comment that our process is, overall, the same as theirs -- trying to extract more wealth out of the economy than the economy can actually provide. And our ultimate endgame will be exactly the same. It will take longer, because we're much wealthier to start with, but no economy anywhere is immune to the corrosion of inflation.

The best definition I've seen for "hyperinflation" is when sellers start taking inflation into account in their pricing. That is, they know that the next round of goods will be more expensive, so they raise their prices in anticipation of replacement costs. Even hyperinflation doesn't bring about total destruction (iTulip claims that economies can at least somewhat function at inflation rates as high as 40% annually), although poor people begin to starve fairly quickly. It's when price controls are imposed that shortages start and the destruction starts getting serious. Eventually, you end up with total dysfunction.

It will take Zimbabwe decades to recover from their stupidity, and it may never happen at all. And we will eventually go down exactly the same path if we don't get our fiscal and monetary houses in order. I believe a Zimbabwe-style collapse is nearly inevitable, because ceasing the money printing and deficit spending always looks more painful than not doing so. It's not until the economy is a smoking crater that people are willing to admit that it would have been better, all the way along, to take a deflationary crash.

Short-term pain always seems to trump long-term pain in politics, but economics is all about the long term.

Robear wrote:
Right, and that makes sense to me, but when juxtaposed against failed states who failed because of hyperinflation (Zimbabwe springs to mind), what sets American money printing apart from them? What is missing in the American equation that stubbornly keeps inflation in check despite huge sums of money called forth into being and interest rates set extremely low?

We did not repudiate all our international debt and seize the major economic sources to give them to the Presidents' supporters. And remember, hyperinflation is structurally different from ordinary inflation. There is no "business as usual" to an inflation rate of 231 million percent in less than a year.

Comparing the US to Zimbabwe is like arguing that because matches can occasionally catch a sofa on fire, use of matches will inevitably lead to a global conflagration. There's got to be a lot of other stuff involved for that to happen. Zimbabwe's economic engine didn't fail so much as it was driven off the road at high speed.

The annual revenue of the company I work for is equal to the GDP of Zimbabwe (we have about 25k employees). Kinda puts it into perspective.

Have we seen this type of hyperinflation/monetary collapse in any modern, major country? I would think if it was going to happen anywhere, it would be happening to Greece or Ireland. The last I can think of is post WW1 Germany, but there were so many extenuating circumstances (the absurd Treaty of Versailles for one) that I don't know if it's even a comparable example.

Shoal07 wrote:

Have we seen this type of hyperinflation/monetary collapse in any modern, major country? I would think if it was going to happen anywhere, it would be happening to Greece or Ireland. The last I can think of is post WW1 Germany, but there were so many extenuating circumstances (the absurd Treaty of Versailles for one) that I don't know if it's even a comparable example.

1990's Russia comes to mind. Though it wasn't anywhere close to what Zimbabwe experienced, it was still devastating.

LouZiffer wrote:
Shoal07 wrote:

Have we seen this type of hyperinflation/monetary collapse in any modern, major country? I would think if it was going to happen anywhere, it would be happening to Greece or Ireland. The last I can think of is post WW1 Germany, but there were so many extenuating circumstances (the absurd Treaty of Versailles for one) that I don't know if it's even a comparable example.

1990's Russia comes to mind. Though it wasn't anywhere close to what Zimbabwe experienced, it was still devastating.

Russia probably had the biggest collapse/fall of any modern country, how bad was it really? They seem to exist fine today, and have been since the late 90s. Their fall may have been fast, but it doesn't seem to have been particularly hard or lasting. In fact, it's probably a better place to live today than it was in 1988.

Russia today:

Russia has the world's 12th largest economy by nominal GDP or the 7th largest by purchasing power parity, with the 5th largest nominal military budget. It is one of the five recognized nuclear weapons states and possesses the largest stockpile of weapons of mass destruction. Russia is a great power and a permanent member of the United Nations Security Council, a member of the G8, G20, the Council of Europe, the Asia-Pacific Economic Cooperation, the Shanghai Cooperation Organization, the Eurasian Economic Community, the Organisation for Security and Cooperation in Europe (OSCE), and is the leading member of the Commonwealth of Independent States.

It seems 1990-1995 were the worst years for Russia, with a 50% decline in GDP, and poverty close to 50%.

Taxes won't be going up over the next two years, and Obama has agreed to a deal cutting payroll taxes. So all this talk about "the problem of the deficit" from D.C. is just so much bullsh*t. The country is out of recession, and corporations are sitting on tons of cash. So when, if ever, will it be time to stop massive deficit spending?

Funkenpants wrote:

Taxes won't be going up over the next two years, and Obama has agreed to a deal cutting payroll taxes. So all this talk about "the problem of the deficit" from D.C. is just so much bullsh*t. The country is out of recession, and corporations are sitting on tons of cash. So when, if ever, will it be time to stop massive deficit spending?

When unemployment gets back to 2% or less.

Good luck with that. You can borrow money only so long as people will lend to you at rates of interest that you can afford to pay. The only reason we're able to borrow cheaply now is because the rest of the world is so messed up. The instability will be resolved long before the unemployment rate drops to 2%.

Funkenpants wrote:

Good luck with that. You can borrow money only so long as people will lend to you at rates of interest that you can afford to pay. The only reason we're able to borrow cheaply now is because the rest of the world is so messed up. The instability will be resolved long before the unemployment rate drops to 2%.

how does that reconcile with what was written upthread? If the US is the most powerful economic factor in the world and so much international lending is done in our currency, what powerful nation on the planet would bet against us and intentionally sabotage their own development?

Because ultimately national economies are subject to forces of private trade that go beyond sovereign design, and because the debt markets are your good buddy right up to the point they decide they aren't. They U.S. has the advantage of being a reserve currency, which lowers borrowing costs, but it doesn't guarantee free borrowing in perpetuity.

Funkenpants wrote:

Good luck with that. You can borrow money only so long as people will lend to you at rates of interest that you can afford to pay. The only reason we're able to borrow cheaply now is because the rest of the world is so messed up. The instability will be resolved long before the unemployment rate drops to 2%.

The Fed controls interest rates.

No, lenders ultimately control interest rates. The fed sets certain rates by proxy and is in a position to move the markets, but it's a single powerful actor in a global debt market.

It's not like the unemployment rate is the actual rate of unemployment in this country. It's the percentage of people who are looking for a job but currently don't have any job at all and haven't been looking very long. Why such artificial limitations? Because at one point a politician wanted to get the unemployment rate down and found it was too hard to do it by creating jobs. I'm sure if they really want 2% they can come up with some more artificial restrictions. Maybe limit it to people who haven't had a job for at least a month and don't include anyone who has been employed for a total of five years or more (as they must have enough saved that they don't really need a job right now, right?). Maybe no one from a household that already has a worker in it since anything they pulled in would obviously just be supplementary income. Or hey, let's eliminate everyone who has a relative with a home within driving distance, because we shouldn't bend over backwards to worry about a guy who could always just go live with his mother, right?

Then come up with a good excuse for why only 1% of the population is unemployed but half have lost their homes. Maybe something about taxes being too high.

Funkenpants wrote:

No, lenders ultimately control interest rates. The fed sets certain rates by proxy and is in a position to move the markets, but it's a single powerful actor in a global debt market.

No the Fed controls interest rates for the US Dollar. Lenders controls how much is lent at that rate.

goman wrote:

No the Fed controls interest rates for the US Dollar. Lenders controls how much is lent at that rate.

Of course. But since the Fed doesn't control the size of the budget, it can't adjust the budget to fit the level of how much lenders are willing to lend at its rates. If the government requires more funding than lenders are willing to lend at the Fed's rate, then the interest rate rises to attract additional lending.

LobsterMobster wrote:

Then come up with a good excuse for why only 1% of the population is unemployed but half have lost their homes.

It must be the fault of those greedy Wall Street bankers.

Shoal07 wrote:

Russia probably had the biggest collapse/fall of any modern country, how bad was it really? They seem to exist fine today, and have been since the late 90s. Their fall may have been fast, but it doesn't seem to have been particularly hard or lasting. In fact, it's probably a better place to live today than it was in 1988.

It seems 1990-1995 were the worst years for Russia, with a 50% decline in GDP, and poverty close to 50%.

Russia is probably better off now as a whole but the destruction of lifetime savings contributed to a huge rift between classes, and an inability to weather current economic problems (such as the inflation resulting in part from the recent drought/fires). As it stands, I think Russia's situation in the 1990's serves as an example of how hyperinflation can start, and how to stop it and begin recovery (Step 1: Fire your finance minister!).

Yes, I've read your analysis of the situation many times.

Funkenpants wrote:
goman wrote:

No the Fed controls interest rates for the US Dollar. Lenders controls how much is lent at that rate.

Of course. But since the Fed doesn't control the size of the budget, it can't adjust the budget to fit the level of how much lenders are willing to lend at its rates. If the government requires more funding than lenders are willing to lend at the Fed's rate, then the interest rate rises to attract additional lending.

The problem with your analysis is that for the so-called lender of the federal government is that it is simply just a savings account for those "lenders". The money is simply moving from a no-interest checking account to a interest bearing savings account. If money was not "lent" to the Federal government then it just stays in the checking account.

Treasury auctions have never failed.

Here is a primer of what I am talking about.

http://pragcap.com/n-y-fed-explains-...

Funkenpants wrote:

Yes, I've read your analysis of the situation many times.

As we have read Malors over and over (Zimbabwe anyone?). At least goman's opinion hasn't been stated constantly for the last 5 years. Comparatively, his stance/approach is at least "new".

EDIT

I'll assume you didn't actually read the linked article, but it draws an interesting conclusion which makes many arguments moot.

...once you realize that foreigners do not fund our spending you begin to realize that everything your textbook taught you about our monetary system is simply not true. A government with a monopoly supply of currency in a floating exchange rate system has no solvency risk unlike a nation such as Greece which exists in a single currency system with what is essentially a foreign central bank. The policy implications in such a system are astronomically different – particularly for a nation suffering a balance sheet recession.
Shoal07 wrote:

As we have read Malors over and over (Zimbabwe anyone?). At least goman's opinion hasn't been stated constantly for the last 5 years. Comparatively, his stance/approach is at least "new".

It's not new to me. These discussions have occurred before a bunch of times. I'm not banging on anyone in particular, but this is a small enough group that you know people's positions on some issues without them needing to explain them.

Also, when someone on a blog tells me that I can throw out my textbook, I don't consider it authoritative. Come to think of it, I'm not sure you can say anything in economics is authoritative. Just competing ideas and theories.

goman wrote:

Here is a primer of what I am talking about.

http://pragcap.com/n-y-fed-explains-...

I need you to explain something:

that article wrote:

Why does any of this matter you ask? Because once you realize that foreigners do not fund our spending you begin to realize that everything your textbook taught you about our monetary system is simply not true. A government with a monopoly supply of currency in a floating exchange rate system has no solvency risk unlike a nation such as Greece which exists in a single currency system with what is essentially a foreign central bank. The policy implications in such a system are astronomically different – particularly for a nation suffering a balance sheet recession.

Is the difference between American monetary policy and Greece's simply that Greece was borrowing in a currency over which they did not have monopoly control over? Did going to the Euro essentially bankrupt Greece?

Sorry if these are stupid questions. . .

Seth wrote:
goman wrote:

Here is a primer of what I am talking about.

http://pragcap.com/n-y-fed-explains-...

I need you to explain something:

that article wrote:

Why does any of this matter you ask? Because once you realize that foreigners do not fund our spending you begin to realize that everything your textbook taught you about our monetary system is simply not true. A government with a monopoly supply of currency in a floating exchange rate system has no solvency risk unlike a nation such as Greece which exists in a single currency system with what is essentially a foreign central bank. The policy implications in such a system are astronomically different – particularly for a nation suffering a balance sheet recession.

Is the difference between American monetary policy and Greece's simply that Greece was borrowing in a currency over which they did not have monopoly control over? Did going to the Euro essentially bankrupt Greece?

Sorry if these are stupid questions. . .

This is a complex topic which no one truly understands, so it's ok. I believe what it means is Greece's situation and the US's situation aren't comparable because the US debt is not a part of it's fiscal sovereignty... No one actually owns it but the US, even though bonds and treasuries are sold, we still control them, and their value/worth. I think... It's all smoke and mirrors, essentially, but it's a game played under our rules because we make the rules and run the game. It's like being the DM of a DnD game, if you also wrote all the books and controlled the dice rolls. Everyone else is a player because it's the only game.

Of course, I could be wrong, or babbling.

Is there any sign that the major political schools of thought on economics have adapted to the failure of the theory of rational actors? Or are we just going to settle right back into Friedman vs Keynes?