Is the PP Safer Than Cash?

[Gumby]

And what was the price of gold and oil the day before Obama took office, a mere two and a half years ago? And what was the national debt on that day?

Sounds like the kind of brainwashing rhetoric I'd expect from Fox News. To boil a complicated manner, such as government spending, down to a simple anti-Obama sound bite is to ignore the facts of whose policies were put into place. In the real world, most government spending is decided years in advance.

And I know that you know this. So, why continue to only target Obama when every President (and every Congress) is to blame?

[clacy]

And what was the price of gold and oil the day before Obama took office, a mere two and a half years ago? And what was the national debt on that day?

Sounds like the kind of brainwashing rhetoric I'd expect from Fox News. To boil a complicated manner, such as government spending, down to a simple anti-Obama sound bite is to ignore the facts of whose policies were put into place. In the real world, most government spending is decided years in advance.

And I know that you know this. So, why continue to only target Obama when every President (and every Congress) is to blame?

With all due respect, Obama is the man in the White House.  There is a debt/spending crisis, and all he has done is propose more debt/spending.  He has accumulated and spent more prolific than any other President before him.

Certainly there is an enormous amount of blame to go around, on both sides.  But in the face of a gathering storm, Obama decided to show a complete lack of leadership on this issue, and in fact decided to just put the peddle to the metal.

[Gumby]

With all due respect, Obama is the man in the White House.  There is a debt/spending crisis, and all he has done is propose more debt/spending.  He has accumulated and spent more prolific than any other President before him.

Certainly there is an enormous amount of blame to go around, on both sides.  But in the face of a gathering storm, Obama decided to show a complete lack of leadership on this issue, and in fact decided to just put the peddle to the metal.

Technically, according to the CBO, his massive spending is mostly due to Bush-era policies. But, I see your point, and I think that's fair to say. But, Reub was clearly implying that our deficit spending was all Obama's fault — which is clearly not the case.

[MediumTex]

And what was the price of gold and oil the day before Obama took office, a mere two and a half years ago? And what was the national debt on that day?

Sounds like the kind of brainwashing rhetoric I'd expect from Fox News. To boil a complicated manner, such as government spending, down to a simple anti-Obama sound bite is to ignore the facts of whose policies were put into place. In the real world, most government spending is decided years in advance.

And I know that you know this. So, why continue to only target Obama when every President (and every Congress) is to blame?

With all due respect, Obama is the man in the White House.  There is a debt/spending crisis, and all he has done is propose more debt/spending.  He has accumulated and spent more prolific than any other President before him.

Certainly there is an enormous amount of blame to go around, on both sides.  But in the face of a gathering storm, Obama decided to show a complete lack of leadership on this issue, and in fact decided to just put the peddle to the metal.

It seems to me that our current fiscal problems are mainly the result of collapsing tax revenue as a result of the worst economic contraction since the 1930s.

Obama has certainly shown a lack of leadership on many issues, but I can't say he has been any worse than his predecessor.

I would say that healthcare reform is roughly equivalent to the second Iraq War on the stupid-o-meter.

[moda0306]

There is a debt/spending crisis

Says who?  What evidence is there of such a crisis?  High interest rates?  No.  Significantly unprecedented debt/gdp ratio amongst countries with sovereign fiat currencies?  No.

We have an unemployment crisis.

We have an education crisis.

We have a private sector debt & balance sheet crisis.

We have an education & healthcare cost crisis.

We may even have a distribution of wealth crisis.

All of those "crises" are based on actual evidence and things that are truly hurting our country and hopes for future prosperity.  They are truly hard to deny and the effects of their presence are real in everyone's lives.

I do not see such evidence of a deficit crisis... in that the deficit is actually causing problems for Americans.  In fact, I see loanable funds piling on top of each other with no borrowers in sight.  I also see unemployed construction workers sitting at home with no jobs in sight.

MT,

While  I agree with you on the wars we've chosen to fight, haven't most of our large "welfare state" programs been relatively "pay-as-you-go"-funded?  SS has been overfunded for decades, and while medicare definitely will see challenges, it's been properly funded to-date.  Unemployment, for the most part, is funded by premiums (less-so lately).  That leaves welfare, medicaid & "others" that I'm not quite sure how they are funded, but it seems they're not part of a pay-as-you-go system.

It seems to me that most of the can-kicking has been well outside our welfare state system, though I can definitely sympathize with the argument that the welfare state has resulted in more irresponsible behavior and children that people can't take care of that are creating more implied liabilities along the way.

[MediumTex]

MT,

While  I agree with you on the wars we've chosen to fight, haven't most of our large "welfare state" programs been relatively "pay-as-you-go"-funded?  SS has been overfunded for decades, and while medicare definitely will see challenges, it's been properly funded to-date.  Unemployment, for the most part, is funded by premiums (less-so lately).  That leaves welfare, medicaid & "others" that I'm not quite sure how they are funded, but it seems they're not part of a pay-as-you-go system.

If you choose to design a program on a pay-as-you-go basis, you have to be realistic about future tax revenue streams.  No one has been realistic about increasing life expectancy, broad demographic shifts in our society and increasing health care costs because doing so would provide benefits in the future, as opposed to the present.

It seems to me that most of the can-kicking has been well outside our welfare state system, though I can definitely sympathize with the argument that the welfare state has resulted in more irresponsible behavior and children that people can't take care of that are creating more implied liabilities along the way.

I don't have a problem with the government providing some level of social services.  What bothers me is when benefits are promised but no funding mechanism is put into place to make sure they can actually be paid for.

Remember a while back when I talked about the broad category of governments and broken promises?  This discussion is, to me, providing just a few excellent examples of what this promise breaking process looks like up close.

The politicians in our country have enjoyed several decades of tailwinds in the form of falling interest rates, payroll tax surpluses and favorable demographics.  Unfortunately, the politicans mistook these tailwinds for their own brilliance.  Historically, what one normally sees when tailwinds turn to headwinds is that the politicians (who were delusional to start with to a great degree) turn the "look how brilliant I am" narrative into a "look what these outside interests are trying to do to our country" narrative.

I don't think it is any accident that war frequently follows an economic crisis.  One of the brilliant things about Reagan's administration is that he basically took us to war in spending terms, but there wasn't the destruction that normally accompanies war.  For that move to succeed, however, there had to be a credible "outside interest" in the guise of the Soviet Union toward which our displeasure could be directed.  I don't see any outside interest today that could fill this role for purposes of rallying the country (though I'm sure the politicians will find one).  I think that George W. Bush masterfully used the terrorist threat as a credible "outside interest" to help him deal with the lousy economy he was working with early in his term, but I think this country is getting "fear fatigue" from the whole terrorist storyline and is looking for a new enemy.

If history is any guide, maybe in 20 years the terrorists will be one of our closest allies.  If Britain, Germany and Japan are any guide, I wouldn't rule it out.  Also, considering that a lot of the bad guys today were the good guys in the 1980s when they were fighting the Soviets in Afghanistan, the thought of them becoming good guys again doesn't seem so farfetched.

Look at Saudi Arabia.  They are basically running a terrorist farm league system throughout their country, and Obama is happy to bow before their king.  Does that make any sense? 

When you start to shake loose a lot of the dumb ideas that the TV wants you to believe, you begin to see what a truly strange (and unpredictable) world we live in.

[moda0306]

MT,

Once again, I agree with you in general, but when FICA started overpaying back in 1983 or so it was specifically designed to adjust for the fact that we were in fact approaching a demographic hiccup, and that the contributors today (2011) wouldn't be able to pay all the benefits of the boomers.

How do you fit this into your description of kicking the can down the road, or is this simply the exception to the rule?

Maybe medicare should have done the same thing, or should be overhauled in a way it is not.  It's obviously a bigger problem than SS, but I think it's driven as much by a broken healthcare system as demographics.

[MediumTex]

MT,

Once again, I agree with you in general, but when FICA started overpaying back in 1983 or so it was specifically designed to adjust for the fact that we were in fact approaching a demographic hiccup, and that the contributors today (2011) wouldn't be able to pay all the benefits of the boomers.

How do you fit this into your description of kicking the can down the road, or is this simply the exception to the rule?

Maybe medicare should have done the same thing, or should be overhauled in a way it is not.  It's obviously a bigger problem than SS, but I think it's driven as much by a broken healthcare system as demographics.

If the government has consistently taken the payroll tax "surplus" and spent it on other things, has there ever really been a "surplus"?

[moda0306]

If the government has consistently taken the payroll tax "surplus" and spent it on other things, has there ever really been a "surplus"?

That's certainly one way to look at it.

I gues one could either look at the SS trust fund and associated bonds as an asset to the SS trust fund and equivalent liability to the treasury, or you could look at both as being a wash to zero.

The reason I prefer the former, is because 1) we're trying to judge SS based on how responsible and successful the program has been, not the expansion of our military and  other programs that have run the huge deficits of our government, and 2) it more accurately describes the "contractual nature" of what is going on, vs just saying "the right hand can't owe the left hand money and call it an asset to the left hand" and call it a day.

Is it appropriate for the SS trust fund to invest in anything other than an extremely safe portfolio?  Maybe they should have done a PP, but a treasury bond only portfolio with a short duration bias is probably extremely appropriate for a hypothetical SS trust fund.  This "self-investing" is bound to create accusations that it's not a real trust fund, but then one could argue that the liabilities of the treasury to the SS fund aren't real liabilities (a non-asset to one is a non-liability to another)... in fact that's much of what I try to argue in our MMT discussions due to our ability to print money, but that's another discussion.

It seems to me the can-kicking has been done outside the SS administration, though, and that SS, if looked at as a program, has been pretty responsible.  If we're going to look at it all as one big whole, then, yes, in net we've been running deficits.  But then these funding vehicles (payroll & SE taxes) are just a myth anyway and aren't even relevant to talk about, since what we're looking at is overall funding.  So then we just have to look at the whole under-funded pot together.  This method of looking at our entitlement funding is in its very nature implying that any direct funding of these programs is a myth anyway and that it just falls into the overall budget, so discussions of SS solvency are no more relevant at this point than discussions of military solvency... they're both just pulling out of a big deficit pot, and any "fund" accounting is just a myth.

I guess I just see, that unlike the sea of excess saving being done by dollar holders that's driving down interest rates, the bonds held by the SS administration are going to be redeemed over the next decades.  The SS administration is no different than China in many ways, except it's more likely to cash in in the coming years.

I don't find it irresponsible to look at our nations finances as a whole, but one can't claim that the last 30 years of SS over-funding have been a myth, and then say that SS is bankrupt.  If the trust fund is a myth and deficits = bankruptcy, then everything's bankrupt, including SS, but then again, when's the last time a bankrupt institution could borrow money at 1.87% for 10 years?

[stone]

I think when you get to the scale of the US government, the concept of a "real" asset is bogus. In the end it all boils down to whether there are fit healthy people who will be willing to look after the elderly and infirm at the behest of the US government. Whether the US government  buys bonds from itself and then saves them or just  directly honours its obligations to the elderly just as it honours bond holders simply boils down to whether they judge the population finds reassurance from an electronic account statement. When push comes to shove what will determine whether the elderly get looked after in the future is whether the tax system at that time is capable of persuading people to care for the elderly at that time ( persuading indirectly by confering value to "printed out of thin air" government money).

[Gumby]

My understanding is that Congress mandates that all spending must be funded by Treasury bonds (a policy that was necessary when the government was constrained by how much gold was in Fort Knox). So, the government can't technically print the money it spends without offsetting the spending with Treasury bonds. That doesn't mean that the Treasury needs to call up China when it wants to go to war. It just means that the government prints the money and then issues corresponding bonds to offset that "printing."

Now, if the government were to take in more dollars from taxes than it spent (i.e. a surplus), wouldn't that just reduce the money supply in the private sector? That would seem like a bad thing — particularly if an economy was growing nicely or in a recession.

Every dollar in the world can be traced back to an original debt (whether it comes from a Treasury Bond or a bank loan). Dollars are debt-based money. So, I don't believe it's possible for their to be a government surplus and still grow the money supply in the private sector at the same time.

[moda0306]

Gumby,

Unless you account for bartaring and self-used & self-created wealth (inventing something in your basement that adds value) I believe you're right.

If there aren't enough dollars in our economy to allow the commerce we'd otherwise naturally want, people will resort to "alternatives" such as debt (private-sector created), bartaring, and simply doing things ourselves.  The nature of a recession means money is tight and unemployment is probably high, so these seem natural reactions in that environment.

But, mathmatically, if you remove both of those options (I think we can admit that neither is efficient enough to result in prosperity), then you need, by mathmatical necessity, more money in the economy to induce wealth creation and simultaneously create more profits.

Financial assets net to zero wealth, so those tend to allow people with time and skills to meet people with money to save and allow those skills to be put to work.  Held in the private sector, these assets/liabilities are helpful, but aren't real wealth so much as the lubrication that allows the wealth engine to turn faster and more consistently, as those with skills aren't left sitting on the couch while those with money are sitting on their mattress full of money.

Real wealth is generated by the private sector, but as we just discussed, any wealth not created for home-use or bartared with somebody else for their wealth is going to need some $$'s of profit associated with it, and without debt or gov't spending, where are those $$'s going to come from?

That's really the big equation, isn't it?  Without some form of payment, wealth won't get created (widgets won't get made and plays won't get written without payment), unless that payment comes in a nontraditional (and most-likely rare and inefficient) form... such as other wealth created or using the wealth you created on yourself and nobody else.  Also, without some extra currency issued in excess of what it takes to pay wealth-creators, "net savings" is impossible.

So it's interesting to me to see that these two things that deficit & inflation hawks worry about (real wealth creation (not just by government make-work) and savings rates) seem to be actually negatively effected by the policies they suggest... at least as far as I can observe.  Real wealth creation won't happen unless they get something in return, and unless we start bartaring again, it will have to come from currency.  By running federal surpluses, you are starving the private sector of what it has come to seek as a reward for its wealth creation, and thus the subsequent negative GDP growth and hoarding of cash, and not creating wealth that we have the capacity and creativity to create, but simply no form of payment, or at least not enough of it to stay at full capacity.

The last piece being that, of course, if the issuer of a currency starts to set troublesome rules for some public-sector but mostly private sector debt creation, servicing those debts with proper investment becomes an afterthought, as a moral crisis has been built into the system.  Thus, much of the private sector debt expansion goes to fuel "wealth creation" with much lower net worth and faster depreciation than what is initially expected.  THIS creates debt problems, because while the wealth-creation induced by credit expansion was supposed to service that debt, now its value is not only not servicing the debt, but falling far below the value of the debt, creating a "debt overhang."  The rules the gov't sets up and the contracts they enforce, and not so much their deficits, then, seem to be the source of the real problem, IMO.

[Lone Wolf]

So, I don't believe it's possible for their to be a government surplus and still grow the money supply in the private sector at the same time.

This isn't true, at least as "government surplus" is usually understood.

The Federal Reserve creates dollars via open market operations.  The Federal Reserve can buy any asset that it wishes, including things like gold, silver, or even stocks (something the Bank of Japan actually did!)

All of these things would lead to the creation of dollars.  Our current fiscal profligacy is not a necessary precondition for the creation of money.

We could in fact pay down the entire national debt if we wished.

I know you guys really buy into this MMT line of thinking, so it's important to remember the unusual definitions that they use.  When they talk about government "surpluses", they are including changes in the balance sheet of the Federal Reserve, which is what absolutely nobody else means by "government surplus".  Any conclusions you draw should keep that in mind.

[moda0306]

LW,

I agree that there's still things to be explored within MMT, but don't you find the idea compelling that if we're trading in dollars, and not bartaring, that the vast majority of wealth creation is going to have to be exchanged for dollars, and starving the economy of what people are looking to be paid to create wealth with is only going to result in less profits, less creation of wealth, and simply more hoarding of cash?

How are profits to rise AND balance sheets to repair themselves if we starve the economy of dollars?  Neither seems possible alone, much less together, while trying to run government surpluses.

Also, the idea that any net private sector savings (in dollars, not coconuts) HAS to be as a result of public sector debt (or dollar issuance, depending on how you view the back door money issuance of printing to buy bonds vs printing to spend and using bonds as a mechanism to control rates) seems to ring pretty true.

If the definitions of their terms seem to confuse the issue, this was one "article" I found particularly apt at describing the flow of money in an economy through the sectors, and more specifically describe their definitions of savings & investment.

http://www.levyforecast.com/assets/Profits.pdf

[moda0306]

LW,

Also, to what degree we "change the MMT game" by doing backdoor "print-spending" by buying bonds is still a bit of a debatable nuance, but it doesn't seem to fundamentally change the game so much as require it be played a different way.

Most MMT examples to help people visualize a sovereign fiat currency use bond-issuance as a formality that allows people to earn interest on their savings, while keeping most of the description in the mechanics of spending & taxing as simply creating and destroying money.  In these examples, this is how it always was, so a dollar had to be issued first before it could be taxed or lent to gov't.

Obviously 1) we haven't always had a sovereign fiat currency and didn't simply issue the first US dollars out of thin air, and 2) have a system where we print to buy bonds that were issued in the past instead of printing to directly fund the government.

Neither of these, to me, fundamentally knock MMT out of being very pertinent.  The combination of deficit spending along with monetizing debt seems to me to be the exact same thing, effectively, as simply "print-spending" in MMT examples.