Re: Federal debt ceiling

[Maddy]

It sounds like everyone just agreed that the national debt doesn't matter, then.

You guys have lost me.

I'd just as soon the red bell pepper that they wanted $4.25 for yesterday (I put it back) didn't go up to $6.25 next year.

[Libertarian666]

It sounds like everyone just agreed that the national debt doesn't matter, then.

You guys have lost me.

I'd just as soon the red bell pepper that they wanted $4.25 for yesterday (I put it back) didn't go up to $6.25 next year.

What matters is money printing. But since the purpose of money printing is to allow the government to spend more money than they take in, government spending is the real problem.

[Maddy]

On the one hand, you think federal government debt is bad. But when presented with a scenario under which the debt is paid off [by creating the money out of thin air], you don't like that either.

That makes absolutely no sense. Debt has consequences. Debt bad because consequences bad.

You know, there ARE options besides increasing the debt and printing the money to make it go away. Just stop spending.

[Sir_Bondalot]

Help me understand some of the preliminary arguments here. My assumptions are no debt ceiling, and positive interest rates.

1. Assuming no debt ceiling, If the US Treasury issues so many bonds, lets say a trillion dollars, that the demand for such bonds starts falling in so-called private markets, the Federal Reserve will pick up the slack and buy whatever is needed so the government can keep operating.

2. So at this point we have the Fed with a trillion dollars in assets on its balance sheet, due a certain coupon payment. If my understanding is correct, in order to pay for the treasury purchases, banks are required to increase reserve balances at the Fed, either by lending money to each other to cover deficiencies (and thus subject to overnight rates), or some other method of which I am not certain.

3. The treasury now has an additional trillion dollars liability on its balance sheet, and a trillion in cash to spend on whatever government programs or projects it wishes.

4. At this point, the treasury must pay its coupon payments (or at least face value on a discounted treasury) on the trillion dollars in treasury bonds. However, it doesn't have the cash to do this now, so it must issue more bonds, which the Fed must buy because private markets are already exhausted.

5. By purchasing another trillion in treasuries, the reserve requirements would be increased yet again....

From here I don't understand what would happen. Maybe someone can help.

[Libertarian666]

Help me understand some of the preliminary arguments here. My assumptions are no debt ceiling, and positive interest rates.

1. Assuming no debt ceiling, If the US Treasury issues so many bonds, lets say a trillion dollars, that the demand for such bonds starts falling in so-called private markets, the Federal Reserve will pick up the slack and buy whatever is needed so the government can keep operating.

2. So at this point we have the Fed with a trillion dollars in assets on its balance sheet, due a certain coupon payment. If my understanding is correct, in order to pay for the treasury purchases, banks are required to increase reserve balances at the Fed, either by lending money to each other to cover deficiencies (and thus subject to overnight rates), or some other method of which I am not certain.

3. The treasury now has an additional trillion dollars liability on its balance sheet, and a trillion in cash to spend on whatever government programs or projects it wishes.

4. At this point, the treasury must pay its coupon payments (or at least face value on a discounted treasury) on the trillion dollars in treasury bonds. However, it doesn't have the cash to do this now, so it must issue more bonds, which the Fed must buy because private markets are already exhausted.

5. By purchasing another trillion in treasuries, the reserve requirements would be increased yet again....

From here I don't understand what would happen. Maybe someone can help.

It repeats until no one wants any more "US Dollars".

[Maddy]

Xan's initial post in this thread summarizes things as well:

The key difference between this and the "simple, old-fashioned way of seeing things" is that dollars are completely disconnected from gold, and from anything else. As Moda used to say, they're like points on a scoreboard. Watching a football game, you don't ever worry that the stadium is going to run out of points to give the team.

Basically that means that "paying it back" or "our children will have to pay it back" or "we've put all this on the credit card" isn't really an issue. It doesn't have to be paid back, ever.

Now, whether the government is using its power for good or for evil is a different discussion. And whether the economy will continue to be productive enough to support everyone to the standard we're used to is also a different discussion. The system might collapse, but it won't really be because a currency issuer owes currency denominated in the currency that it creates.

Well, when it comes to the question whether the national debt matters to you and me, I'll be darned if I can see the difference. Whether the risk of continued borrowing is insolvency or collapse of the system doesn't particularly matter; either one does not bode well for the ordinary citizen.

As an aside, we've all been assuming the best case scenario--i.e., that the "powers that be" would, in the event of a threatened collapse of the financial system, utilize all the tools they have to prevent it. Take a look at who's actually running this country and at least consider the possibility that they don't want this to all work out.

[Xan]

I'm not saying that a collapse would be a result of the debt. I'm saying precisely the opposite: there may be a collapse, but it won't be because of the debt. It'll be because of actual, structural problems with the real economy, and will occur regardless of whether there's debt or not.

[Maddy]

I'm not saying that a collapse would be a result of the debt. I'm saying precisely the opposite: there may be a collapse, but it won't be because of the debt. It'll be because of actual, structural problems with the real economy, and will occur regardless of whether there's debt or not.

Help me to understand. . . What structural problems, other than the national debt and the various machinations intended to forestall or avoid payment of the national debt, do you view as posing a risk of collapse?

[Xan]

Really? Is it your position that the ONLY thing that could cause a systemic collapse is "unsustainable" national debt? But you're not even able to articulate exactly how it's even a problem.

Off the top of my head, here are some things:
* War
* Famine
* Plague
* Demographic problems (see Japan or Scandanavia: not enough young people)
* Loss of our premiere place in the world economically or militarily

[Maddy]

Really? Is it your position that the ONLY thing that could cause a systemic collapse is "unsustainable" national debt? But you're not even able to articulate exactly how it's even a problem.

Off the top of my head, here are some things:
* War
* Famine
* Plague
* Demographic problems (see Japan or Scandanavia: not enough young people)
* Loss of our premiere place in the world economically or militarily

I'm not taking a position here; simply asking for clarification of what yours is. I've simply recognized (as I thought was a commonly-held precept no matter what school of economic thought you ascribe to) that by creating money out of thin air, the value of all remaining money is diluted. That's generally regarded as a problem for anybody who has saved or whose earning capacity can't keep pace with the rate of inflation. Of course, offshoring your inflation is one option, but again that's not without consequences to the ordinary citizen. It's the ordinary citizen who is left without a way of making a living when his job is outsourced, or who is stuck working with cheap Chinese nails. Is it the proposition that the dilution of the currency is a problem that being challenged here?

So I'm still not sure what you're saying. That the national debt doesn't matter to the ordinary citizen because the system will collapse due to other structural problems (war, famine, plague, etc.) before the confiscatory consequences of burgeoning debt (either having to pay it back or having to inflate it away) ever take place?

[Xan]

Really? Is it your position that the ONLY thing that could cause a systemic collapse is "unsustainable" national debt? But you're not even able to articulate exactly how it's even a problem.

Off the top of my head, here are some things:
* War
* Famine
* Plague
* Demographic problems (see Japan or Scandanavia: not enough young people)
* Loss of our premiere place in the world economically or militarily

I'm not taking a position here; simply asking for clarification of what yours is. I've simply recognized (as I thought everyone does) that by creating money out of thin air, the value of all remaining money is diluted. That's generally regarded as a problem for anybody who has saved or whose earning capacity can't keep pace with the rate of inflation. Is that proposition being challenged here?

So I'm still not sure what you're saying. That the national debt doesn't matter to the ordinary citizen because the system will collapse due to other structural problems (war, famine, plague, etc.) before the confiscatory consequences of burgeoning debt (either having to pay it back or having to inflate it away) ever take place?

I only mentioned "the system may collapse" in the context of "if it does collapse, it won't be because of debt". I'm drawing the distinction between my position and a hypothetical Pollyanna who says things will go on forever no matter what.

So no, I'm not saying the system will collapse before the consequences of debt come home to roost. I mean, I guess I sort of am, trivially. What I'm really saying is that I don't believe those consequences exist. The debt ITSELF is not itself a problem. The government overreach it represents may well be.

[jhogue]

In his opinion piece in the WSJ, King argues that the central problem of the global economy today is the growth of total debt—public, private, and corporate-- and on a truly GLOBAL scale. He gives the figures and it is apparent that the problem is much bigger than just Washington’s follies with an artificially constructed debt ceiling.

King thinks that the massive and historically unprecedented injection of liquidity that central bankers undertook to alleviate the 2008 financial crisis has inevitably resulted in a serious mis-pricing of financial assets, including excess export capacity in China and Germany and ballooning real estate investment in the USA and the UK [probably Australia and Canada too]. Even under the best of circumstances, re-pricing of those assets is bound to be painful and protracted. Under less than ideal circumstances, it could well lead to more crises.

Lastly, Professor King points out that record stock markets and presently tranquil indicators like the VIX should not make us complacent. He insists that the markets have a terrible record of anticipating crises—like, for example, the unanticipated bankruptcy of Lehman Brothers on 15 Sept. 2008.

So, pay no attention when Janet Yellen – or her designated successor—emerges from behind the curtain to tell you that she is “cautiously optimistic” about the direction of the economy, the risk of inflation, and the state of unemployment in the USA. Once again, Uncle Harry was right and all the experts collectively know nothing.

Aren’t you glad you have a Permanent Portfolio?

[Sir_Bondalot]

In his opinion piece in the WSJ, King argues that the central problem of the global economy today is the growth of total debt—public, private, and corporate-- and on a truly GLOBAL scale. He gives the figures and it is apparent that the problem is much bigger than just Washington’s follies with an artificially constructed debt ceiling.

King thinks that the massive and historically unprecedented injection of liquidity that central bankers undertook to alleviate the 2008 financial crisis has inevitably resulted in a serious mis-pricing of financial assets, including excess export capacity in China and Germany and ballooning real estate investment in the USA and the UK [probably Australia and Canada too]. Even under the best of circumstances, re-pricing of those assets is bound to be painful and protracted. Under less than ideal circumstances, it could well lead to more crises.

Lastly, Professor King points out that record stock markets and presently tranquil indicators like the VIX should not make us complacent. He insists that the markets have a terrible record of anticipating crises—like, for example, the unanticipated bankruptcy of Lehman Brothers on 15 Sept. 2008.

So, pay no attention when Janet Yellen – or her designated successor—emerges from behind the curtain to tell you that she is “cautiously optimistic” about the direction of the economy, the risk of inflation, and the state of unemployment in the USA. Once again, Uncle Harry was right and all the experts collectively know nothing.

Aren’t you glad you have a Permanent Portfolio?

This is a wonderful answer and I think ties everything together.

[Kriegsspiel]

https://www.pragcap.com/donkey-economics/

More about MMT and federal spending.

[Libertarian666]

I'm not taking a position here; simply asking for clarification of what yours is. I've simply recognized (as I thought everyone does) that by creating money out of thin air, the value of all remaining money is diluted. That's generally regarded as a problem for anybody who has saved or whose earning capacity can't keep pace with the rate of inflation. Is that proposition being challenged here?

So I'm still not sure what you're saying. That the national debt doesn't matter to the ordinary citizen because the system will collapse due to other structural problems (war, famine, plague, etc.) before the confiscatory consequences of burgeoning debt (either having to pay it back or having to inflate it away) ever take place?

I only mentioned "the system may collapse" in the context of "if it does collapse, it won't be because of debt". I'm drawing the distinction between my position and a hypothetical Pollyanna who says things will go on forever no matter what.

So no, I'm not saying the system will collapse before the consequences of debt come home to roost. I mean, I guess I sort of am, trivially. What I'm really saying is that I don't believe those consequences exist. The debt ITSELF is not itself a problem. The government overreach it represents may well be.

+1 if money gets created and the debt that accompany it are representative of an economic reality, services and goods that exist and for which points on the score board are needed to account for and to be a means of trading.. then the total number of points needed to represent it is irrelevant. war famine and plague and demographics would be a big rapid change to the relationship between the two.(points needed and economic reality)
the more subtle and insidious potential cause of collapses is government creating dollars to "fix" problems they themselves create by spending on programs that kill economic activity and the creation of services and goods, and then exacerbate by doubling down on those same programs with their "fixes"... and a good chunk of government spending does seem to do just that...

As the founders of the Austrian school of economics pointed out many years ago, so long as there is enough money to facilitate commerce, adding more money does not in itself improve overall well-being, even if it is real physical money that has other uses. In that case, uses for the physical substance will be aided (e.g., gold used in technology) but the addition of money as money has no benefit. In fact, the new money disturbs existing price relationships and therefore makes economic calculation less efficient. Fortunately, in the case of mined money such as gold, the new supply is almost never enough to cause serious problems with price relations, so this is not a large effect.

However, in the case where the new money is counterfeit (unbacked paper money), then there is no limit to how much can be created. In this case, the historical record shows that this power will inevitably be abused, resulting in serious and prolonged interference with price relationships and with economic activity. And this is true even if we assume that this enormous power will be used for good ends, which it almost never is.

[boglerdude]

"so long as there is enough money to facilitate commerce"

How is this amount determined

i am not the topic expert by any stretch, but i believe it is largely determined on the bank created debt side of the equation.
the confounding factor is government created debt/spending.. (students of MR please correct me if i have that wrong)

[Libertarian666]

"so long as there is enough money to facilitate commerce"

How is this amount determined

Is there anyone who can't do business because no money exists to allow a transaction?

Needless to say, the answer to this is "no" in any advanced country, including those that were on the gold standard.

Furthermore, if there is indeed not enough gold to facilitate commerce, then gold mining is VERY profitable due to the great demand to use it in business transactions.