This is Trump at his best. In the current climate, a President bypassing his party's Congressional leaders and going straight to the opposing party's leadership is unimaginable. Obama tried to do it once as I recall, but failed to get further than a weekend retreat with John Boehner. I hope he succeeds in hammering out a useful compromise - I think the Democrats wanted hurricane relief and something constructive to replace DACA, which Trump won't have much issue with. And maybe this will send a hint to Paul Ryan and Mitch McConnell that they're not indispensable.
I'm also impressed at his effort to get rid of the debt ceiling altogether. It removes one of the Tea Party's favorite blackmailing tools. He's right - why have something in place that has absolutely no benefit, and can only be used to do serious damage to the country's financial system?
Simonjester wrote:
this is just a personal opinion from a non expert - semi libertarian who over time has come to think MR is a reasonably sound understanding of an imaginary money economy... so take it for what its worth.... the government can and will print money endlessly (with some help from the banks) and it is not a problem except in how the government spends the money, if the money is used to promote endless war, corporate crony-ism, the expansion of government powers, the restriction of liberty, the blind acquisition of power by the corrupt and ambitious, and just plain old government boondoggles then the system starts to fail, if they money is created and spent wisely the expansion of debt can continue on much longer, and be a (relatively) stable reflection of the size of the true economy.
so if i was to put on my doom porn hat i would not base my "the end is nigh" predictions on the total size of the debt but on the ratio of how much is spent on the former compared to how much is spent on the latter... (we spend a lot of time skating very close to the line which only tends to reinforce my "cant predict the future" PP economic outlook)
edit to add (apologies for mix and matching thread topics i was reading both debt ceiling and doom porn at the same time)
WiseOne wrote:I'm also impressed at his effort to get rid of the debt ceiling altogether. It removes one of the Tea Party's favorite blackmailing tools. He's right - why have something in place that has absolutely no benefit, and can only be used to do serious damage to the country's financial system?
Nothing worse than blackmailing hurricane victims.
WiseOne wrote:This is Trump at his best. In the current climate, a President bypassing his party's Congressional leaders and going straight to the opposing party's leadership is unimaginable. Obama tried to do it once as I recall, but failed to get further than a weekend retreat with John Boehner. I hope he succeeds in hammering out a useful compromise - I think the Democrats wanted hurricane relief and something constructive to replace DACA, which Trump won't have much issue with. And maybe this will send a hint to Paul Ryan and Mitch McConnell that they're not indispensable.
I'm also impressed at his effort to get rid of the debt ceiling altogether. It removes one of the Tea Party's favorite blackmailing tools. He's right - why have something in place that has absolutely no benefit, and can only be used to do serious damage to the country's financial system?
Excuse me, but could you explain exactly how the debt ceiling can "be used to do serious damage to the country's financial system"? Do you want the government to print money endlessly? That is quite opposed to HB's (and all libertarians') position.
To add to Tenn's response....
The debt ceiling is not a tool. It's a ticking time bomb that serves no constructive purpose. Government deficit spending can only be addressed during, and only during, budget negotiations. All the debt ceiling can possibly accomplish is to temporarily decrease spending until the financial damage is so severe (Treasury defaults, crashed stock market etc) that even the most zealous Tea Party members will be forced to capitulate. Spending will then revert to baseline plus added costs incurred during the debt ceiling fiasco e.g. increased Treasury interest rates (this has already happened btw). It thus doesn't decrease spending in the long run - it can only increase it.
Maybe I'm just too unsophisticated to get it, but when limits on spending necessarily trigger financial catastrophe, isn't it obvious that the makings of catastrophe were already there?
Is there any compelling reason to protect the expectations of investors who have known, since at least 2007, that (to use the analogy of "musical chairs") there were more butts in the game than chairs? Or to backstop the unions which bargained for promises based on projections that no reasonable financial analysis could support? Isn't the devaluation of the dollar that results from continued deficit spending just a way of socializing losses that should, by all right, be born by the individuals and institutions to whom all the gains flowed when the gettin' was good?
Maddy wrote:Maybe I'm just too unsophisticated to get it, but when limits on spending necessarily trigger financial catastrophe, isn't it obvious that the makings of catastrophe were already there?
Is there any compelling reason to protect the expectations of investors who have known, since at least 2007, that (to use the analogy of "musical chairs") there were more butts in the game than chairs? Or to backstop the unions which bargained for promises based on projections that no reasonable financial analysis could support? Isn't the devaluation of the dollar that results from continued deficit spending just a way of socializing losses that should, by all right, be born by the individuals and institutions to whom all the gains flowed when the gettin' was good?
Yes, you are obviously unsophisticated. You might even think that gold is money, whereas everything else is credit, like the notoriously unsophisticated J. P. Morgan.
TennPaGa wrote:
I see it this way... You've got this very complicated system (the government, its spending, its budgeting process, its borrowing, etc.). In the absence of a constraint, there is no catastrophic reaction. However, if you add a constraint, there *is* a catastrophic reaction. To me, that says that the constraint is the issue, not the underlying system.
Moreover, I would think that *any* system would fall apart if you added a certain constraints. That doesn't necessarily signify that the system itself was bad.
I guess the question is whether there comes a point when a government runs out of tricks and its amassing of debt at an exponential rate leads to catastrophe regardless of what it does. If so, maybe it's better to take the medicine now in order to avoid an even worse catastrophe down the road. If modern economics has discovered a way of making exponential functions behave differently, I'd like to hear about it.
TennPaGa wrote:
I see it this way... You've got this very complicated system (the government, its spending, its budgeting process, its borrowing, etc.). In the absence of a constraint, there is no catastrophic reaction. However, if you add a constraint, there *is* a catastrophic reaction. To me, that says that the constraint is the issue, not the underlying system.
Moreover, I would think that *any* system would fall apart if you added a certain constraints. That doesn't necessarily signify that the system itself was bad.
I guess the question is whether there comes a point when a government runs out of tricks and its amassing of debt at an exponential rate leads to catastrophe regardless of what it does. If so, maybe it's better to take the medicine now in order to avoid an even worse catastrophe down the road. If modern economics has discovered a way of making exponential functions behave differently, I'd like to hear about it.
Yes, of course that is true. But no one ever got re-elected by promising to take the medicine now.
Tenn, I gather you're implying that you now (six years later) think differently about the question whether exponentially-increasing government debt is sustainable? What, in particular, changed your view?
Again, I'm speaking as someone who is about as economically illiterate as they come. I simply don't understand the theory of modern economics and always revert to the simple, old-fashioned way of seeing things. To me, an infinite number of butts hovering over a limited number of chairs spells trouble for the less nimble.
But I'm generally a skeptic when it comes to ideas and arguments that are so complex and abstract that they cannot be understood--much less critically examined--by anyone but an elite few. Or to theories that claim to be able to make eight slices of the pie feed eighteen. I keep looking for a simple, straightforward explanation as to how a system premised on multiple claims on the very same assets might all play out in a benign way, and I'm still looking.
I think most of us who were around the forum at the time Tenn describes went through this transition.
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.
Xan wrote: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.
In the end, purchasing a 30 year government bond implies that you believe that your cohort and your cohort's children (and grandchildren) are going to be paying enough in taxes to pay you back with interest. Government debt is only your asset if that happens. The alternative is that what you "don't have to worry about."
Maybe, counter intuitively, investing in Treasury bonds is more of a bet on humanity than stocks are.
Maddy wrote:Tenn, I gather you're implying that you now (six years later) think differently about the question whether exponentially-increasing government debt is sustainable? What, in particular, changed your view?
Again, I'm speaking as someone who is about as economically illiterate as they come. I simply don't understand the theory of modern economics and always revert to the simple, old-fashioned way of seeing things. To me, an infinite number of butts hovering over a limited number of chairs spells trouble for the less nimble.
But I'm generally a skeptic when it comes to ideas and arguments that are so complex and abstract that they cannot be understood--much less critically examined--by anyone but an elite few. Or to theories that claim to be able to make eight slices of the pie feed eighteen. I keep looking for a simple, straightforward explanation as to how a system premised on multiple claims on the very same assets might all play out in a benign way, and I'm still looking.
Money isn't that hard to understand. Unbacked paper is not money; it is debt.
You are correct and they are incorrect. The only question is when and exactly how it blows up. Will they stop before they destroy the currency or ride it off the cliff? I'd like to believe the former but can't think of many times anyone was willing to accept the pain of even slowing down the money printing. 1980 was the last time it happened here, and I doubt that anyone in power would do that now.
Yes, I'm in the same camp as Tenn. New government debt simply increases the supply of Treasury bonds, are bought, traded, etc. A household or individual can't issue bonds the same way, so debt has a completely different meaning to a household vs government.
There must be a limit to this process, but I don't think we're anywhere close to it yet. I imagine it would be when bond issuance starts to outstrip the number of available buyers. This would start to drive up interest rates. If this doesn't attract enough buyers, the rates would rise still more. At some point this becomes a runaway, unsustainable process. Maybe this would give us another version of the 1970s. Which we didn't manage to get out of by reducing deficit spending, as far as I know.
The whole process does still make me nervous, but we're kinda stuck with it now.
TennPaGa wrote:So, I would say, yes, the Fed is always there to buy.
And the Fed *creates* the cash to pay for them? That strikes me as an entirely fictional market, and I'm not sure why it should inspire confidence on the part of any ordinary investor who is required to assume that the Fed will be there to buy their bonds when it's time to sell.
TennPaGa wrote:So, I would say, yes, the Fed is always there to buy.
And the Fed *creates* the cash to pay for them? That strikes me as an entirely fictional market, and I'm not sure why it should inspire confidence on the part of any ordinary investor who is required to assume that the Fed will be there to buy their bonds when it's time to sell.
Honestly, Amway makes more sense to me.
No, the Fed will buy every bond issued if no one else wants it.
The fact that they do it with freshly printed "money" means that they can keep it up until no one wants that "money".
When the Treasury took control of all the nation’s gold during the Depression under the Gold Reserve Act of 1934, it also took control of the Federal Reserve’s gold.
But we have a Fifth Amendment in this country which says the government can’t seize private property without just compensation. And despite its name, the Federal Reserve is not technically a government institution.
So the Treasury gave the Federal Reserve a gold certificate as compensation under the Fifth Amendment (to this day, that gold certificate is still on the Fed’s balance sheet).
Now come forward to 1953.
The Eisenhower administration actually had the same debt ceiling problem we have today. And Congress didn’t raise the debt ceiling in time. Eisenhower and his Treasury secretary realized they couldn’t pay the bills.
What happened?
They turned to the weird gold trick to get the money. It turned out that the gold certificate the Treasury gave the Fed in 1934 did not account for all the gold the Treasury had. It did not account for all the gold in the Treasury’s possession.
The Treasury calculated the difference, sent the Fed a new certificate for the difference and said, “Fed, give me the money.” It did. So the government got the money it needed from the Treasury gold until Congress increased the debt ceiling.
That ability exists today. In fact, it is exists in much a much larger form, and here’s why…
Right now, the Fed’s gold certificate values gold at $42.22 an ounce. That’s not anywhere near the market price of gold, which is about $1,330 an ounce.
Now, the Treasury could issue the Fed a new gold certificate valuing the 8,000 tons of Treasury gold at $1,330 an ounce. They could take today’s market price of $1,330, subtract the official $42.22 price, and multiply the difference by 8,000 tons.
I’ve done the math, and that number comes fairly close to $400 billion.
In other words, tomorrow morning the Treasury could issue the Fed a gold certificate for the 8,000 tons in Fort Knox at $1,330 an ounce and tell the Fed, “Give us the difference over $42 an ounce.”
The Treasury would have close to $400 billion out of thin air with no debt. It would not add to the debt because the Treasury already has the gold. It’s just taking an asset and marking it to market.
If the debt ceiling isn’t raised, this gold certificate trick could finance the government for almost an entire year, because we have about a $400 billion deficit.
It’s not a fantasy. It was done twice. It was done in 1934 and it was done again in 1953 by the Eisenhower administration. It could be done again. It doesn’t require legislation.
In a not-too-dissimilar scheme, the Mint could create a new coin, put the words "one trillion dollars" on it, and give it to the Fed in exchange for a trillion dollar check.
I think that's a pretty good illustration of how "not really real" money is.
There's no doubt that there are many ways for the government to print its way out of its debt, but that can't change the fact that there is a finite limit to the hard assets upon which all this money represents a claim. The game works so long as everybody closes their eyes and pretends that there's enough to go around, but that's the rub--there's not. God forbid the moment when the crowd wakes up and realizes that the emperor has no clothes. I have no idea how such an event would play out, but I'm pretty sure it will happen over night, and I have a good idea of who will come out unscathed and who will get flushed. Perhaps the only sane investment these days is in Steinway grands, liquor, ammunition, and tampons.
Xan wrote:Money doesn't represent a claim on hard assets. At least, dollars don't. They used to be backed by gold, at least in theory, but now they're not.
Dollars are valuable because a) people believe them to be valuable, and b) because taxes must be paid in dollars.
Maybe not literally, but ultimately money represents--at least to the man on the street--a claim to something tangible that he wants or needs--which I guess would include both goods and services. Money is valuable because people believe it can be converted immediately to one of those two things.
Xan wrote:In a not-too-dissimilar scheme, the Mint could create a new coin, put the words "one trillion dollars" on it, and give it to the Fed in exchange for a trillion dollar check.
I think that's a pretty good illustration of how "not really real" money is.
It's an excellent illustration of how "not really real" fiat paper "money" is.
Maddy wrote:There's no doubt that there are many ways for the government to print its way out of its debt, but that can't change the fact that there is a finite limit to the hard assets upon which all this money represents a claim.
Yes, there is a finite limit to the real goods and services that money can be exchanged for. But this is true regardless of how much money exists in the economy, right?
Yes, of course.
Printing more "money" doesn't increase goods or services. It just increases the number of claims on the same goods or services.
WiseOne wrote:There must be a limit to this process, but I don't think we're anywhere close to it yet.
I'd like to think that we could see it coming, but considering how things are interconnected, especially through derivatives, it's hard to say what might set things off. The spark could come from the most unlikely place. Who'd have predicted what Lehman set in motion?
WiseOne wrote:There must be a limit to this process, but I don't think we're anywhere close to it yet.
I'd like to think that we could see it coming, but considering how things are interconnected, especially through derivatives, it's hard to say what might set things off. The spark could come from the most unlikely place. Who'd have predicted what Lehman set in motion?
Correct. When the unraveling starts, it will be far too late to take evasive action if you haven't prepared in advance.
