Will the U.S. government ever have difficulty servicing its own debt?

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Will the U.S. government ever have difficulty servicing its own debt?

Post by Pointedstick » Fri Sep 06, 2013 2:47 pm

Will it have difficulty getting buyers for bonds? Will it have to print massive amounts of money and cause a lot of inflation? Will higher interest rates make further borrowing more difficult?

Discuss.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by MediumTex » Fri Sep 06, 2013 3:02 pm

No.

For the same reason that a unicorn rancher will NEVER run out of feed for his livestock.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by notsheigetz » Fri Sep 06, 2013 3:45 pm

Ties right in with a blog post I read this afternoon while killing time on my pointless job. It's written by some fellow named Craig Rowland...

http://www.crawlingroad.com/blog/2013/0 ... ivability/
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by AgAuMoney » Sat Sep 07, 2013 12:59 am

Pointedstick wrote: Will it have difficulty getting buyers for bonds? Will it have to print massive amounts of money and cause a lot of inflation? Will higher interest rates make further borrowing more difficult?
I believe those questions fairly accurately define the box in which the U.S. gov't is contained.  The size of the box is correlated with our productive capacity as a nation.  The more value we extract from natural resources or create, the more room in this box.  Should gov't get too big for the box, or the box too small for gov't, those questions will be the choices.

One thing is nearly certain.  Gov't will not starve or kill itself to remain constrained within the box.  If the people force gov't to starve itself, all can continue.  Once people will not do this, gov't will grow until the box bursts.  When that happens, it will be a very trying time.  How it will happen is the million dollar question...

Increasing rates will increase the appeal to bond buyers.  Until it becomes obvious that you'll never get the value back.  Then bonds would be unsaleable at any price.

"Printing money" is the alternative to the notional borrowing we have now.  It works, until people lose confidence in the value of money.  Confidence in the future value of money also plays into interest rate demands, in addition to confidence in the borrower. Rapidly escalating loss of confidence is behind every hyperinflation event more so than the actual money creation.

Higher rates are an indication of the squeezing of the box on gov't.  As long as they respond to those signals by going on a diet, letting the economy grow, etc. then rates will fall.  If they try to hide the rate signals then the economic growth is distorted and wealth will be destroyed.  (E.g. all the investment in dark fiber purchased by surviving companies at pennies on the dollar.)  If the destruction is not too deep, and proper market signals are allowed, the destruction forms the foundation for future growth.

If the destruction goes too deep, it can go beyond the bounds of economics and start destroying social and legal structure.  That is when gov't escapes the box and is the big concern.  And that concern is why some believe the time is now to find another place that isn't trying to keep such a huge beast in such a big box.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Pointedstick » Sat Sep 07, 2013 9:35 am

Exactly, AgAu. I agree completely.

Essentially, it works until the government wrecks society, then the entire monetary house of cards will collapse. But people lose confidence in a monetary system because of non-monetary events; the monetary house of cards probably isn't going to collapse just by doing its normal day-to-day thing.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Libertarian666 » Sun Sep 08, 2013 1:16 pm

Pointedstick wrote: Will it have difficulty getting buyers for bonds? Will it have to print massive amounts of money and cause a lot of inflation? Will higher interest rates make further borrowing more difficult?

Discuss.
These are three different questions with three different answers.

1. No, as long as the Fed buys nearly as much debt as the government issues, the government will never run out of buyer(s). If they stop buying, then yes, the government will have trouble selling bonds at anything near these rates.

2. The government does not print money. The Fed, which is not part of the government, does that. What the government does is print debt, which it then sells; at present, the end purchaser of its debt is the Fed.

3. Higher interest rates will not make borrowing more difficult as long as the Fed keeps taking nearly all the new debt on board.

So in essence the answer to all three questions is that the Fed's actions determine the structure of interest rates.

Can this last forever? No, because all the money that the government borrows from the Fed and then spends distorts the economy, causing capital consumption. This is true even if the overall price level does not go up dramatically. Eventually this capital consumption will cause a serious recession or depression, which may have already started.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Pointedstick » Sun Sep 08, 2013 1:28 pm

Thanks for those answers, Libertarian666, if I could summarize, would it be reasonable to say that your position is that absent the Fed, the government would have difficulty selling debt at present low interest rates?

If I'm summarizing correctly, then it sounds like you're saying non-Fed buyers would be in extremely short supply. However, my question is this: for the non-Fed entities that are typically purchasers of U.S. government bonds (domestic banks, private pension funds, individuals, foreign governments, foreign central banks), what better alternative exists? In other words, if we assume that these buyers like fixed income and want to purchase bonds from someone, and you are correct that they would eschew U.S. government bonds, whose bonds would they buy instead?
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Libertarian666 » Sun Sep 08, 2013 1:48 pm

Pointedstick wrote: Thanks for those answers, Libertarian666, if I could summarize, would it be reasonable to say that your position is that absent the Fed, the government would have difficulty selling debt at present low interest rates?
Yes.
Pointedstick wrote: If I'm summarizing correctly, then it sounds like you're saying non-Fed buyers would be in extremely short supply. However, my question is this: for the non-Fed entities that are typically purchasers of U.S. government bonds (domestic banks, private pension funds, individuals, foreign governments, foreign central banks), what better alternative exists? In other words, if we assume that these buyers like fixed income and want to purchase bonds from someone, and you are correct that they would eschew U.S. government bonds, whose bonds would they buy instead?
What are they buying now with their new cash flow? Obviously they are not buying newly issued government bonds, because the Fed is buying essentially all the new issuance. Are they just buying existing bonds from each other? Is that even mathematically possible?

And if they would buy at these interest rates without the Fed because they have no choice, why did the government ever pay more than it pays now? Why did it not just say "the interest rate on 30-year bonds is 3%" and force them down the purchasers' throats? Obviously there must be some reason they did not do that; my position is that they couldn't, because there wouldn't have been enough bids at those rates.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by moda0306 » Sun Sep 08, 2013 1:49 pm

The Fed chairman is nominated by the president and is mandated by government to balance full employment with price stability.

Just because they have cosy relationships with banks doesn't mean it's not part of government.

I mean look at our currency.... It's got pictures of presidents on it for heaven sakes.


Also, if the fed were keeping rates grossly unnaturally low, wouldn't we be seeing really high inflation, or at least rampant investment?  The demand for loanable funds is very low.  Shouldn't interest rates be low in that environment?
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Libertarian666 » Sun Sep 08, 2013 2:03 pm

moda0306 wrote: The Fed chairman is nominated by the president and is mandated by government to balance full employment with price stability.

Just because they have cosy relationships with banks doesn't mean it's not part of government.

I mean look at our currency.... It's got pictures of presidents on it for heaven sakes.
Now there's an irrefutable argument.  ;D
moda0306 wrote:
Also, if the fed were keeping rates grossly unnaturally low, wouldn't we be seeing really high inflation, or at least rampant investment?  The demand for loanable funds is very low.  Shouldn't interest rates be low in that environment?
There is indeed rampant investment, but not in businesses. Instead, the housing bubble is back, not only in the US but around the world. The Fed's cheap money has forced interest rates down everywhere, and real estate lending is one of the main outlets for that cheap money. This includes the ghost cities in China that have been discussed here already.

"Thehousingbubbleblog" has a lot of very scary information on this insanity. Take this post, for example:

http://thehousingbubbleblog.com/?p=7933
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by MediumTex » Sun Sep 08, 2013 2:08 pm

Pointedstick wrote: Thanks for those answers, Libertarian666, if I could summarize, would it be reasonable to say that your position is that absent the Fed, the government would have difficulty selling debt at present low interest rates?

If I'm summarizing correctly, then it sounds like you're saying non-Fed buyers would be in extremely short supply. However, my question is this: for the non-Fed entities that are typically purchasers of U.S. government bonds (domestic banks, private pension funds, individuals, foreign governments, foreign central banks), what better alternative exists? In other words, if we assume that these buyers like fixed income and want to purchase bonds from someone, and you are correct that they would eschew U.S. government bonds, whose bonds would they buy instead?
Maybe Japanese bonds.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Gumby » Sun Sep 08, 2013 2:44 pm

MediumTex wrote:
Pointedstick wrote: Thanks for those answers, Libertarian666, if I could summarize, would it be reasonable to say that your position is that absent the Fed, the government would have difficulty selling debt at present low interest rates?

If I'm summarizing correctly, then it sounds like you're saying non-Fed buyers would be in extremely short supply. However, my question is this: for the non-Fed entities that are typically purchasers of U.S. government bonds (domestic banks, private pension funds, individuals, foreign governments, foreign central banks), what better alternative exists? In other words, if we assume that these buyers like fixed income and want to purchase bonds from someone, and you are correct that they would eschew U.S. government bonds, whose bonds would they buy instead?
Maybe Japanese bonds.
Unfortunately, you can't buy Japanese Bonds with US Dollars. Treasury Bonds are the only government bonds you can buy with US Dollars.

So, say you want to buy Japanese Bonds, because you don't like US Government Bonds, so you trade your Dollars for Yen and buy JGBs (Japanese Government Bonds). Now someone else has your Dollars. And the person who now has your Dollars needs to figure out where to park his cash.

The owner of the dollars only has three options:

1) He can trade his Dollars for an asset (such as gold, stocks, corporate bonds, iPhones, garden gnomes), in which case someone else now has a choice to make of where to put their cash.

2) He can park his Dollars in a bank account, which will either be used to buy Government bonds or simply exist as reserves (for loans, credit, etc).

3) He can buy Treasury Bonds.

So, there really aren't many choices of where you can park bank cash (i.e. reserves). Unless you have paper money in your pocket, your bank dollars either live in a bank account or as Treasury Bonds purchased by the bank without your knowledge. If you have Dollars that live outside of the bank (CDs, Money Market Funds, Commercial Paper, CDS, MBS, etc.) they are just private credit assets and not really the kind of "Dollars" that can live in a bank (Mdraf doesn't even consider them to be "money"!)

Since bank reserves never leave your bank's Federal Reserve Account, the money that you use to purchase a private credit instrument — such as a Money Market Fund from Vanguard — just gets transferred into Vanguard's own bank's (HSBC's) reserve account held at the Fed, and they give you a form of private credit — known as a Money Market Fund.

So, again, the only option for "bank reserves" are either to remain as bank reserves, or be withdrawn as paper money, or handed over to the government in exchange for Treasury Bonds. That's it! Every other bank transaction is just an interbank transfer that remains at the Fed.

And of course, one of the problems with the Eurozone is that a Greek citizen can use his Euros to buy French or German government bonds. In the US, we are limited to only one choice of government bonds that we can buy with dollars.

So, within the US banking system the Fed is now paying some interest on Reserves and excess reserves (IOR), but other than that, banks have only a few other limited options (such as overnight Federal Funds loans) to earn interest on reserves beyond using them to buy Treasury Bonds. So, there is always a healthy demand for Treasury Bonds in the banking system, but of course, the Fed controls that demand.

(Please feel free to correct me if I'm wrong anywhere!)
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Gumby » Sun Sep 08, 2013 3:00 pm

BTW, Harry Browne explains how even China is limited to those same three options when they hold US dollars. You can listen to Harry Browne explain this exact phenomenon on his final radio show:

https://web.archive.org/web/20160324133 ... -11-13.mp3

(Skip to 21 min 40 sec to hear how dollars never leave American banks.)
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Pointedstick » Sun Sep 08, 2013 6:10 pm

Libertarian666 wrote: What are they buying now with their new cash flow? Obviously they are not buying newly issued government bonds, because the Fed is buying essentially all the new issuance. Are they just buying existing bonds from each other? Is that even mathematically possible?
That's a good question that I'll admit I don't know the answer to. Is it possible they're trying to buy them anyway on the secondary market? I'd love to hear if anyone has a definitive answer to this.

But whatever they're buying now, I guess the real question is:

"When/if the Fed stops its bond-buying, is that going to expose the fact that there's little demand from other players--causing rates to spike in order to attract them back--or is that just going to open the floodgates for those players to buy the newly-issued treasury bonds they wanted to buy all along--pushing rates even lower?"

Personally, I think it's closer to the latter, due to the fact that most alternative debt issued by corporations, municipalities, and other governments and central banks generally have much worse risk/reward profiles. For example, Germany is issuing bonds denominated in a shaky currency it doesn't control that yield less than U.S. treasuries! Madness. If I was an extremely conservative investor who only liked fixed income, I think I'd be tearing my hair out, but would probably hold my nose and buy Uncle Sam's bonds for the majority of my portfolio.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Libertarian666 » Sun Sep 08, 2013 6:36 pm

Pointedstick wrote:
Libertarian666 wrote: What are they buying now with their new cash flow? Obviously they are not buying newly issued government bonds, because the Fed is buying essentially all the new issuance. Are they just buying existing bonds from each other? Is that even mathematically possible?
That's a good question that I'll admit I don't know the answer to. Is it possible they're trying to buy them anyway on the secondary market? I'd love to hear if anyone has a definitive answer to this.

But whatever they're buying now, I guess the real question is:

"When/if the Fed stops its bond-buying, is that going to expose the fact that there's little demand from other players--causing rates to spike in order to attract them back--or is that just going to open the floodgates for those players to buy the newly-issued treasury bonds they wanted to buy all along--pushing rates even lower?"

Personally, I think it's closer to the latter, due to the fact that most alternative debt issued by corporations, municipalities, and other governments and central banks generally have much worse risk/reward profiles. For example, Germany is issuing bonds denominated in a shaky currency it doesn't control that yield less than U.S. treasuries! Madness. If I was an extremely conservative investor who only liked fixed income, I think I'd be tearing my hair out, but would probably hold my nose and buy Uncle Sam's bonds for the majority of my portfolio.
Right, I'm sure that "everyone" is just itching to buy bonds that pay almost no interest and are being issued in gigantic quantities!

But wait... if that's true, why aren't they fighting over the bonds that are already issued and driving their prices up even more? After all, the Fed doesn't hold ALL the government bonds in the market!

Or if we're being serious here, economics tells us that there is no way that the disappearance of a gigantic purchaser in any asset market is going to make the price of the assets in that market go UP.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Gumby » Sun Sep 08, 2013 6:58 pm

Libertarian666 wrote:
moda0306 wrote: The Fed chairman is nominated by the president and is mandated by government to balance full employment with price stability.

Just because they have cosy relationships with banks doesn't mean it's not part of government.

I mean look at our currency.... It's got pictures of presidents on it for heaven sakes.
Now there's an irrefutable argument.  ;D
There are two ways to look at it. For instance, it can be argued that the Fed is really a slave to the banking oligopoly.
Cullen Roche wrote:...The Fed is really just a big special bank with some unique powers given to it by the government.  But it implements those powers by working with and for the private banking system.  In other words, if the private banking system doesn’t work then the Fed doesn’t work.  And if the Fed doesn’t work then it can’t achieve public purpose.  So the Fed really has to serve the banks before it can ever serve the government.  It has to ensure a working and healthy banking system before it can really implement policy effectively.  That’s how the whole Fed system is designed...

...When Larry Summers becomes Fed Chief he’ll quickly realize who his true master is.  And it’s not the President or the US Congress regardless of what they say.  The Fed’s true master is the banking oligopoly and he will become a slave to it just like all the Fed Chiefs that came before him.  And as long as that banking oligopoly is a private for profit industry the Fed will have to act in the independent best interests of the banking oligopoly before it can serve its other masters – the President, the US Congress & the US Taxpayer.


Source: http://pragcap.com/will-larry-summers-r ... dependence
If we take that point of view, it's not too much of a stretch to see why the Primary Dealers want to be the middleman every time the Fed buys a bond. I mean, why doesn't the government just cut out the middleman and give the Fed the ability to purchase Treasury Bonds directly from the Treasury, like Japan does?

In 1947, Federal Reserve Chairman Marriner Eccles testified before Congress on the issue of direct purchases of Government securities by Federal Reserve Banks. The Federal Reserve had been allowed to purchase securities directly from the Treasury from its inception in 1914 until the Banking Act of 1935, when...
Marriner Eccles — Federal Reserve Chairman (1947) wrote:A provision was inserted in that act requiring all purchases of government securities by Federal Reserve banks to be made in the open market, which means purchased chiefly from dealers in Government bonds. Those who inserted this proviso were motivated by the mistaken theory that it would help to prevent deficit financing...

Nothing constructive would be accomplished by the proviso that the Reserve System must purchase Government securities exclusively in the open market. About all such a ban means is that in making such purchases a commission has to be paid to Government bond dealers.


Source: http://fraser.stlouisfed.org/docs/histo ... rchgov.pdf
A ha! So, the banks demanded that they become part of the game in 1935. When you look at the big picture, you begin to see that the banks are just trying to fatten their holdings when the government moves money around. The banks make money every time the government deficit spends. And when the banks aren't selling bonds to the government for a commission, they are reaping interest from those Treasury Bonds.

Basically the whole system seems to be designed to make bankers richer and richer over time. They get "free" money from the government, they charge us interest when they loan us that money as "credit", and we have few choices but to store all that money in their own risky private banks.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Gumby » Sun Sep 08, 2013 7:04 pm

Libertarian666 wrote:But wait... if that's true, why aren't they fighting over the bonds that are already issued and driving their prices up even more? After all, the Fed doesn't hold ALL the government bonds in the market!
Well, I believe that's what happens. The Fed creates scarcity in the T-Bond market and that's what technically drives up the price of a T-Bond as it crowds out other buyers. It's artificial no doubt. But, as I explained above, it's not like you have any other choices when it comes to dollars in a Federal reserve account. People buy T-Bonds because it's the only place to park reserves outside of the Fed's reserve accounts (reserves don't leave the Fed unless you convert them into physical FRNs).

So, if you don't buy a T-Bond, your bank will just do it for you — particularly if the Fed sets a policy that requires the bank to do so (as it already does with Primary Dealers).

Interestingly, the government spending money into reserve accounts (i.e. deficit spending) creates even more demand for T-Bonds. The money the government spends is the same money we all use to buy T-Bonds (head explosion).
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Gumby » Mon Sep 09, 2013 9:42 am

Another way of looking at the role of Treasury Bonds is to imagine what life would be like without them.

If we acknowledge that the US has net spent ~$16 Trillion in conjured money then we can try to imagine a situation where the banking system would own ~$13 Trillion in excess reserves (assuming M0 is ~$3 Trillion, the remainder would be excess reserves).

In that situation, where no government bonds existed, how would the banking system be able to provide us any return on our ~$13 Trillion? The banking system could either try to loan those reserves amongst each other (i.e. overnight Federal Funds), or trade those reserves for private assets that might promise to be worth more in the future, but in both of those situations any return would have to be paid in forms of private credit since no new reserves could be created without a Fed swap (which people don't seem to like) or Treasury spending. Although, those markets are already fairly saturated in a world that already uses ~$16 Trillion in Treasury Bonds for a return. Saturating them even more would just drive the interest rate down to zero, since banks would be dying to unload their excess reserves for any return they could get. And in fact, banks already have this problem, which is one of the reasons why the Fed is offering it's IOR policy (Interest On Reserves). IOR (Interest on Reserves) is the new FFR (Federal Funds Rate). So, the Fed is helping to manipulate the rates on reserves HIGHER by implementing IOR!

See also: http://www.newyorkfed.org/markets/ior_faq.html

So, if we were to shun the government's printed money and just rely on private credit to be the only source of return on our reserves, all that would do is drive up private credit and fuel credit bubbles. Private credit is inherently unstable, since private entities can run out of money, and any disruption of private credit causes a chain reaction of other private credit to crumble around it.

Alternatively, the government could just offer a savings account or CD that could supply people with a small amount of return (paid purely by money printing). But, the funny thing is we already have that. They're called Treasury Bonds :).  If they just changed the name from "Treasury Bonds" to "Treasury Savings Accounts" it would cause a lot less confusion.

People naturally want a nominal return on money in the banking system. Treasury bonds simply offer a way to make that happen, since they are the only government bonds that you can buy with dollars and any other dollar-denominated asset would provide a return that would just come from ratcheting up private credit.

So, as you can see, all money (and therefore, any return on that money) only comes from two places. Either from government spending or from increasing private credit. That's it!
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Bean » Mon Sep 09, 2013 7:33 pm

MediumTex wrote: No.

For the same reason that a unicorn rancher will NEVER run out of feed for his livestock.
Wait, does this mean we are buying the financial equivalent of unicorns?
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by moda0306 » Mon Sep 09, 2013 8:00 pm

Bean wrote:
MediumTex wrote: No.

For the same reason that a unicorn rancher will NEVER run out of feed for his livestock.
Wait, does this mean we are buying the financial equivalent of unicorns?
Yes.

Unicorns that the government holds a gun to our head every year to have us pay to them.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Kshartle » Mon Sep 09, 2013 9:05 pm

Pointedstick wrote: 1. Will it have difficulty getting buyers for bonds?

2. Will it have to print massive amounts of money and cause a lot of inflation?

3. Will higher interest rates make further borrowing more difficult?

Discuss.
1. Absent some type of rejection of the dollar due to inflation I think the gov't will always technically be able to find buyers, even if it's credit worthiness is called into question. The question is what rate will the lenders demand and will the gov't accept such rates or use some other method to deal with it's deficits.

2. The only way they avoid trying to print their way out is to make a major cutback on the budget vs. the total economy/GDP or a major asset sale I think. The government has trillions in assets it could potentially sell to private buyers or foreigners. It probably will need a combination of these two to make good on all it's promises to the dependent classes. It also has to stop adding them (dependents). A bonus of the government slashing it's budget would be less distortion in the productive economy. Paying people to either not work or interfere with trade (regulation) just hurts the country economically so eliminating agencies and refusing to add more freeloaders would help us all out. More people could stop riding in the wagon and actually get out and pull. The question here is how bad will the disruption/recession be in the short run.

Those options which I think are best just seem like political suicide. While not impossible, I can't imagine any politicians actually doing the right thing vs. the politically expedient one. As the country gets poorer, pandering to the poor and promising to steal for them becomes the only way to get elected. I wouldn't count on the voters to ever understand any of this and for anyone other the one who promises the most free stuff to win. I mean, they elected Obama twice. The Republicans ran a socialist so clearly they think that's the way to go also. Romney could have run in place of Clinton just 2 decades ago and fit right in as a democrat (Opinion).

3. Again I think higher rates make legitimate borrowing more attractive to the creditors. The problem is finding a way to pay all the interest. They are already relying on the FED to loan them 40 billion a month interest-free, even at these low rates. At higher rates the need to print gets ever higher. Not to mention the FED printing another 45 billion to reduce the supply of credit out there in the form of MBS. Reduced supply makes prices go up. Higher prices for debt means lower interest rates and debt-service for borrowers like the government gets easier. We focus on long-term debt a lot but forget the government has to borrow over 5 trillion a year to service it's debt. The maturity on the it's liabilities is very short so higher rates are going to add hundreds of billions a year to the deficit should rates move up before any of this is solved.

All in all I think the US government is caught between a rock and a hard place. I don't think the political will exists to do the right thing. That leaves it up to the FED and the market to reign it in. And if the FED refuses and leaves it all up to the market.....well that's going to make the ensuing depression even worse.


Bonus - Just so we can avoid the same repetitive discussions, debt isn't money. You can't buy stuff with debt, you buy with money. You don't borrow debt you borrow money. You don't pay interest on money unless borrow it. When the government borrows money it creates an IOU. The government's liability is now the private sector's asset. No new money has been created. When the FED prints new money exists where it didn't before. Now the money supply has increased. Absent other factors this will cause prices to go up. It's a logical fallacy to say that since an explosion in base money hasn't led to an equal explosion in prices that explosions in base money aren't inflationary. It's like saying "I went speeding last night and didn't get a ticket so clearly speeding doesn't lead to speeding tickets." It doesn't ALWAYS lead to speeding tickets.

It's also a logical fallacy to say that since the Government can print, it's bonds are risk free. Obviously there is potential loss to inflation. There is also risk to interest and principle. Just because it can print doesn't mean it will. The fallacy is "Since A is capable of doing B which solves C, A will always do B if necessary to solve C. There are reasons for A to not do B even when pushed. Believing that B (printing) has no impact does not make it true.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Gumby » Mon Sep 09, 2013 9:28 pm

Kshartle wrote:debt isn't money. You can't buy stuff with debt, you buy with money.
Just trying to understand your definition of "money".

Would you consider the dollars in a bank savings account to be "money"?

Would you consider the dollars in a money market fund to be "money"?
Last edited by Gumby on Mon Sep 09, 2013 9:31 pm, edited 1 time in total.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Gumby » Mon Sep 09, 2013 9:50 pm

Kshartle wrote:It's a logical fallacy to say that since an explosion in base money hasn't led to an equal explosion in prices that explosions in base money aren't inflationary. It's like saying "I went speeding last night and didn't get a ticket so clearly speeding doesn't lead to speeding tickets." It doesn't ALWAYS lead to speeding tickets.
You seem to think that you can predict inflation by only looking at M0 (base money). But, nobody — and I mean nobody — does that. Because while M0 is most certainly our medium of exchange (what you mean by "money") it most certainly does not represent our purchasing power as individuals.

For example...
Wikipedia.org wrote:Another measure of money, M0, is also used; unlike the other measures, it does not represent actual purchasing power by firms and households in the economy. M0 is base money, or the amount of money actually issued by the central bank of a country.

Source: http://en.wikipedia.org/wiki/Money
In other words, M0 is too narrow to represent our purchasing power. Economists who believe in the Quantity Theory of Money use MZM or "broad liquidity" (i.e. broad money that is highly liquid) when trying to predict inflationary pressures from the money supply.

Of course, the Quantity Theory of Money was debunked in the 1930s and was shown to be useless for predicting inflation — particularly over the short term. The only people who still believe in the Quantity Theory of Money are Monetarists — and people stopped listening to them in the 1980s when even moderate inflation never materialized when they were warning about high inflation from money printing.

Monetarism is dead — and has been for decades.
Last edited by Gumby on Tue Sep 10, 2013 7:09 am, edited 1 time in total.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by moda0306 » Mon Sep 09, 2013 10:59 pm

Kshartle,

To your points:

"Just so we can avoid the same repetitive discussions, debt isn't money."

Actually, our money is debt. It's a liability of the federal reserve and an asset of the private sector.


"You can't buy stuff with debt, you buy with money."

You can't buy stuff with gold, either. Does that make it not money? 

If they made t-bills legal tender, would you change your position?


"You don't borrow debt you borrow money."

At the risk of sounding snarky (truly not trying to be), tell that to the guys who borrow treasury bonds from the TLT etf to short them.  We can borrow or lend almost anything.


"When the government borrows money it creates an IOU. The government's liability is now the private sector's asset."

This is the exact same thing that happens when the government "prints money," but they just swap them for other government liabilities.


Kshartle,

I'm curious, what mechanism is it that you think makes us value the dollar?  At the most simple level possible, why do we crave them?

Also, if an entity can print money (government), isn't the idea that this entity issuing bonds and collecting taxes in a traditional sense a bit ridiculous?
Last edited by moda0306 on Mon Sep 09, 2013 11:09 pm, edited 1 time in total.
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Re: Will the U.S. government ever have difficulty servicing its own debt?

Post by Kshartle » Tue Sep 10, 2013 8:17 am

Gumby wrote:
Kshartle wrote:debt isn't money. You can't buy stuff with debt, you buy with money.
Just trying to understand your definition of "money".

Would you consider the dollars in a bank savings account to be "money"?

Would you consider the dollars in a money market fund to be "money"?
We use the word money very loosely now that we are using using fiat money. fiat money has no intrinsic value so I don't truly consider it money. It can't store value if it really doesn't have value. It's only value is artificially created. Absent the manipulation of very few people (government), no one would want to trade for it. Instead it's a money substitute. It is functioning as money though and for our purposes it's easier if we call dollars money, though again if truly pressed on the concept I wouldn't define them as money.

For our discussion....sure....dollars are money and that would include the dollars in your savings account or money market to be part of the money supply.
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