Peter Schiff on Treasury collapse

[Kshartle]

Please educate me on why we need a government deficit to prevent the money supply from being extinguished? Where are all these dollars going to go?

Fear mongering? Ok, let's call him a do-do head and then move on.



He thinks that the government needs to have "revenue" to spend.
No he central thesis is that the government is spending way beyond it's revenue and that's the problem.

  He thinks that the US could be the next Greece. 
No I've heard him say many times that he thinks Greece is better off because they can't issue their own currency so they are forced to cut spending. The US Gov't has the printing press at it's disposal and that's an option he believes in much worse than drastic government spending cuts.


  The Fed actually can't conduct its operations with the private sector without government debt existing in the first place. 
Six in one and half a dozen in the other. The fed purchases bonds which increases their price and lowers the yields and permits the government to borrow more by lowering the borrowing costs. If you don't think he understands how it works then I have to question how much you've ever read or listened to him.

[MediumTex]

As for LTTs beating the US stock market over the last 30 years......this is a strong case for the treasury bubble argument, not a case for buying treasuries.

So what?  We live in an economy of serial bubbles.  The name of the game is to harvest gains, not make judgments about what's a bubble and what's not.

If one asset outperforms another asset, it doesn't really matter why.  What matters is whether you were able to capture any of those gains.

The 30 year yield was a little over 13% in Dec of '81 and so the returns on a LTT fund have averaged 13% since then.

That's not how it works.  The returns on a bond fund are going to be a combination of interest payments and capital gains from interest rate moves (assuming the moves are down).  What rates were in 1981 only influenced bond returns in 1981.  What rates were in 1982 influenced bond returns in 1982, etc.

They are at 3.4% now and so that will be the average for the 30 years of TLT or whatever.

The returns on 30 year bonds will always be determined by interest rate moves more than the yield itself.  For example, long term treasuries were yielding around 4.5% at the beginning of 2008 and ended the year at 2.7%  This 180 basis point drop in yields translated into a 35%+ gain in long term treasuries in 2008.  Long term treasuries did something similar in 2011 as well.  All of these huge gains occurred with yields that were below 4%.

I'm not saying the US stock market will beat that. It might just based on the inflation needed to keep the rates down. Schiff isn't arguing that US stocks are the place to be though. He's arguing for investment in non-US countries that meet the following criteria:

From the Europac site:
Country Selection
The team reviews and focuses on the countries it views to have the best
fundamentals. Selection criteria include
- an expected 1-2 year trade surplus
- high real interest rates
- low debt-GDP ratio
- favorable real GDP growth estimates
- stock market price-to-earnings valuations that are attractive
relative to expected earnings growth.

People who followed Schiff's advice have done much worse than a person who bought the PP.  I get the idea, it just hasn't worked out the way Schiff said it was supposed to, especially in 2008 when Schiff was getting so much press after his great housing calls.

As far as inflation in Japan.......the Japanese have printed trillions upon trillions to weaken the Yen and prop up the dollar for a long time now.

The yen has not weakened, though.  It has strengthened.  The dollar has weakened as the yen has strengthened.

Imagine how much the Yen could have appreciated in that time and low prices could have fallen for the Japanese without non-stop intervention from their banks.

The yen has strengthened and Japanese prices have fallen. 

The BOJ won't let interest rates rise and the economy re-structure, just like the fed. Don't confuse rising prices and inflation. The Japanese have had massive inflation inflicted upon them by the BOJ to their detriment.

How would rising interest rates help the Japanese economy?  I'm not following how Japan has had massive inflation when prices have been stable or drifting lower for over 20 years.  What you may be describing is a central bank effort to combat contracting private sector credit through the expansion of public debt, but that's not what I would call "inflation."  If private sector debt contracts and public sector debt expands, doesn't that leave the money supply more or less where it started?  That's not inflation.

The Japan-US comparisons fail in my opinion since the only thing in common is the high government debt.

The two countries have a similar demographic profile, have similar central bank policies, have similar problems with zombie banks, have similar problems with overvalued real estate.  There are many similarities.

[MediumTex]

Please educate me on why we need a government deficit to prevent the money supply from being extinguished? Where are all these dollars going to go?

Many of the dollars will simply disappear as private sector debt contracts if the government does not take some action to prevent a deflationary spiral from gaining traction.  It was a failure to understand this process in the 1930s that made the U.S. Depression so bad.

Fear mongering? Ok, let's call him a do-do head and then move on.

Schiff is an entertainer.  You know that, right?  His schtick is fear.

He thinks that the government needs to have "revenue" to spend.
No he central thesis is that the government is spending way beyond it's revenue and that's the problem.

The government does not have any "revenue."  Where would such "revenue" come from?  In a fiat system the government can issue as much money as it needs.  It doesn't rely on any third party for "revenue."  Tax collection is just another way to regulate the money supply.  That is its only function.  The government doesn't need your "money."  It has plenty.

  He thinks that the US could be the next Greece. 
No I've heard him say many times that he thinks Greece is better off because they can't issue their own currency so they are forced to cut spending. The US Gov't has the printing press at it's disposal and that's an option he believes in much worse than drastic government spending cuts.

Government austerity measures to maintain an artificial currency peg are a cruel and pointless exercise.  The answer in such a situation is to break the currency peg, and the sooner the better.  Greece doesn't need austerity, what they need is to get rid of the boat anchor around their ankle in the form of the euro.

  The Fed actually can't conduct its operations with the private sector without government debt existing in the first place. 
Six in one and half a dozen in the other. The fed purchases bonds which increases their price and lowers the yields and permits the government to borrow more by lowering the borrowing costs. If you don't think he understands how it works then I have to question how much you've ever read or listened to him.

If he understands it so well, then why have his interest rate calls been consistently wrong for the past several years?  He says rates are about to go up and then they go down.

[melveyr]

Some interesting Japan graphs...

Note: This cannot be unseen and might lead to a different perspective, and possible brain re-wiring.




Notice how expansions in the money supply do not always result in inflation. There is always supply and demand at play. Schiff is focusing on supply while ignoring demand (among other more fundamental failings).

[Kshartle]

Expansions in the money supply IS inflation. Inflation does not always result in rising prices. Schiff isn't ignoring that at all. Youtube "Schiff on Japanese Inflation" or something like that. I listened to him speak on the very subject a few months ago and explain all of this.

Inflation is when the money supply is blown up. As technology and productivity increases prices should natually FALL. Sometimes governments use inflation to spend and spend but the result is not higher prices so the people don't realize how the central bank is punishing them for holding their currency and being savers. The government steals their purchasing by not allowing prices to fall like they should in a free market.

[Gumby]

Please educate me on why we need a government deficit to prevent the money supply from being extinguished? Where are all these dollars going to go?

The entire money supply, except coins, is backed by debt. See, Wikidedia:

A debt-based monetary system is the system where paper money is supplied as a bill of credit to an economy primarily by the purchase of debt, such as government bonds. This form of money is called "debt-based" because as a condition of money creation, it is required to be paid back at some point in the future, usually with interest. A monetary system that introduces full-reserve banking into the system is still "debt-based" if the economy's base money remains a creation of government debt.

When coupled with fractional reserve banking, this system becomes a credit-based monetary system, where both paper money and bank credit are supplied as interest bearing debt. Some economic and political commentators believe that debt-based paper money and fractional reserve banking together cause several economic problems such as, high government spending for debt servicing, economic recessions and depressions, and the consequent loss of property by borrowers during the downturn.

In contrast, a debt-free monetary system is the system where paper money is supplied as a bill of exchange to an economy primarily by capital expenditure. Banks are prohibited from lending at interest, and are required to apply 100% reserve banking.
Source: http://en.wikipedia.org/wiki/Debt-based_monetary_system

In other words, all our money, except coins, is backed by debt debt. During the Civil War, Lincoln issued pure, debt-free, Greenbacks to finance the Civil War. They were very popular, and helped the government run a surplus. However, bankers wanted them retired so that they could maintain their grip on a debt-based and credit-based economy — which is something that dates back to 1694, when the Bank of England was formed. Our monetary system has been continuously debt-based since 1864, when bankers pushed the National Bank Act through Congress.

In numerous years following the [Civil] War, the Federal government ran a heavy surplus. It could not [however] pay off its debt, retire its securities, because to do so meant there would be no bonds to back the national bank notes. To pay off the debt was to destroy the money supply. — John Kenneth Galbraith

He thinks that the government needs to have "revenue" to spend. No he central thesis is that the government is spending way beyond it's revenue and that's the problem.

If the government only spends what it takes in, that won't cause a surplus. You'll still have debt, and the only way to pay the interest payments on that debt is to have more debt. That's how the system was designed.

The government doesn't need revenue. In fact, it can't use revenue if it needs to ever increase the money supply for economical reasons. It's nonsensical. Where would the money come from? (You can't use private bank credit to back the base money). The government doesn't need revenue. Does a stadium need to collect points from the crowd when it issues points on its scoreboard? No, of course not. That's how debt-based fiat money works. When the government spends money into existence, it just changes numbers in your bank's reserve account at the Fed. When you pay your taxes or buy government securities, the Treasury just erases money from your bank's reserve account at the Fed. It's just part of a spreadsheet. The Treasury issues its "debt" securities whenever it spends, and the banking system is obligated to funnel our saved government spending into risk-free Treasuries as an exercise to set interest rates. The system is designed not to fail.

Peter Schiff does not understand the operational side of the monetary system. Here is a recording of Warren Mosler trying to explain this to Peter Schiff on Schiff's radio show...

http://fetch.noxsolutions.com/schiff/au ... 111711.mp3

As Mosler attempts to teach Schiff on how the monetary system works, he constantly interrupts Mosler and talks over him — never learning anything or hearing what he has to say. Hardly the qualities of someone who wants to have a real discussion or hear a different perspective.

 He thinks that the US could be the next Greece.  
No I've heard him say many times that he thinks Greece is better off because they can't issue their own currency so they are forced to cut spending. The US Gov't has the printing press at it's disposal and that's an option he believes in much worse than drastic government spending cuts.

Really? Better off?? The people in Greece do not seem very happy. In fact, they are literally rioting in the streets and highly unemployed.

 The Fed actually can't conduct its operations with the private sector without government debt existing in the first place.  
Six in one and half a dozen in the other. The fed purchases bonds which increases their price and lowers the yields and permits the government to borrow more by lowering the borrowing costs. If you don't think he understands how it works then I have to question how much you've ever read or listened to him.

Sorry, but Schiff often exclaims that the Fed is "monetizing the debt". He has no clue what he is talking about. He actually said it on that recording I've posted above. It's not true. He is misleading you and his listeners with that myth. The Fed doesn't have the power or authority to monetize the debt. Only the Treasury can monetize the debt. The Fed doesn't even have the power to conduct helicopter drops — the Fed can only conduct asset swaps. This is why it's a challenge for the Fed to create inflation. Only the Treasury can conduct a helicopter drop the increases net financial assets in the private sector.

Schiff is skilled at fear mongering and spreading myths. That's his expertise.

[Gumby]

Expansions in the money supply IS inflation.

...

Inflation is when the money supply is blown up.

Really? Because every economics textbook defines inflation as...

Definition of 'Inflation'
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling

Source: http://www.investopedia.com/terms/i/inf ... z1qhRbu3Th

...which is clearly not what Peter Schiff is telling you.

[jackely]

All kidding aside, if there's anything imagineable that would slaughter the PP, it's a huge hike in ST interest rates... gold would plummet, LTT's would plummet (if the market believed this to be a longer-term move), and stocks would plummet.  It would be 1981 on steroids... especially if you balance the budget to boot.

Wouldn't this be an instance in which the cash portion of the portfolio would hold down the fort? I remember my parents getting 18% on CD's back in 81.

[Gumby]

I'n not an economist either, nor did I stay at a Holiday Inn Express last night, but I did buy a house in 2006. I now wish I had paid more attention to people like Mr. Schiff at a time when most other experts were scoffing at the very idea of a housing bubble, kind of like some people in this forum are assuring me  there is no such thing as a Treasury collapse.

No one is saying that Treasuries can't fall 50% or 80% in value. Of course they can. But, this idea the government won't be able to pay its bills is ridiculous. Treasuries have zero credit risk. The debt could be $800 quadrillion and China could stop buying our Treasuries and the government would still be able to pay its bills and all of the interest payments.

See:

Who Will Buy The Bonds
Who Bought All Those Bonds
Breaking News: "Bankrupt" Nation's Bond Auction 3x Oversubscribed
The NY Fed Explains How the Government Spends First and Issues Bonds Later

If you read those articles, you will begin to see that Treasury auctions are specifically designed not to fail. They are always 2 or 3 times oversubscribed. The government spends base money into existence, and that very same base money is used to pay taxes and purchase Treasury bonds. The Primary Dealers are obligated to help them do this and set interest rates in the process. If the Primary Dealers were ever in a position where they could not find the reserves to fulfill their obligations, the Treasury would simply delay the auction or the Fed would loan short-term liquidity to the Primary Dealers.

This is not to say that having an $800 quadrillion deficit is a good idea. It's certainly not a good idea right now. But, there is no solvency issue for the United Stated. Schiff may understand the housing bubble, but he has no idea how Treasury auctions work. He often misconstrues the facts — to sell more books.

[moda0306]

jackh,

As much holding down the fort as can be done by the least volatile asset in the group in a deflationary recession with artificially astronomical interest rates.  The rest of the portfolio would be losing in droves... 10% per year wouldn't float the PP in my estimation.

kshartle,

If the government is simultaneously pulling base money out of the private sector (definition of a surplus), AND significantly tightening lending (10% ST rates), You're right, we might see insanely low p/e ratios and large dividends.... AFTER the S&P goes to 300.  Where's all this money and velocity supposed to come from when the government is pulling base money out and significantly tightening the credit environment?

I think maybe you've been in an Austrian echochamber for a bit too long and have to expose yourself to some other economic thinking.  No offense or anything, but you seem to have the same predisposed opinions about things that I had coming into economics with limited exposure to economic perspecitives... though from a different political angle.

If expansion of the money supply is the definition of inflation (it isn't, in any useful sense, whatsoever... but I'll humor you if you'll humor me on this next part), and treasury bonds are a form of government-issued fiat money (they are), then QE is not printing money.  The fed, when it trades $$'s for bonds, is accomplishing zero inflation.  However, the mining of gold IS inflation, under your definition.  So using your definition of inflation, mining gold was more inflationary than anything the fed has done that Peter Schiff has freaked out about.

All in all, though, I can promise you there's a world of macroeconomics out there that you should expose yourself to that will help put things in perspective, even if you keep your original base opinions on the role of government.  I'd recommend the following blog: http://monetaryrealism.com/recommended-readings/.

[MediumTex]

One thing that Peter Schiff does that Gumby touched on above is he has a tendency to try to "win" arguments by simply talking over other people, interrupting them, and not allowing them to complete their arguments.

Other than being annoying, any time I see this tendency in a person it tells me that they aren't listening to what the other person is saying.  If you won't let a person finish his thought, how could you be really listening to what he is saying?

What's especially bad about this tendency not to listen to other points of view, however, is that it can condition your followers to approach other points of view in the same way.

I don't want to be too hard on Schiff, though, so let me say something nice as well.  His beatdown of Art Laffer on Kudlow's show a few years ago was awesome.  Laffer is such a smug ideologue it was great to see his arrogance exposed.  IMHO, the "Laffer Curve" is one of the dumber and more useless economic ideas out there.  I have no doubt that there is some ideal tax rate that will result in the maximum amount of tax collections, but there is no reason to suggest that tax collections would follow a "curve" based upon different rates.  If you could ever collect the data to graph such a thing (even though you can't) I am pretty sure that it would look more like a heart rate monitor than a "curve".

[moda0306]

Gumby,

Great point on Peter's ability to identify a credit bubble.  All basic micro indicators were screaming at us that there was an unsustainable housing bubble... even with the reduced interest rates and tax-deductibility, there was no justification for the prices being paid.  Somebody looking at a price/rent or debt-to-income ratio chart could see that unless rents & incomes were to rise substantially, the prices were simply too high.

So step 1: someone could obviously see there was a problem.  But I still give Schiff a slight, asterisk-laden tip of the cap for having the balls to scream it from the mountain tops.

But as you point out, his suggestions on how to hedge against it were completely off base.  Why?  Because he doesn't understand macro.  This is a point of pride in the Austrian community... they don't accept that things are different on a macro level than a micro level.  That's fine for personal philosophy, but when you're trying to make money on predictions, it might help to realize that there's a difference between one person getting in the left lane to go faster, and the entire freeway trying to get into the left lane to go faster.

MT... yes, his beat down of Laffer was amazing.  If I'd seen that then I probably would have sold my home then and become one of his avid followers...

[Gumby]

I'm still amazed that Schiff has the balls to say that Greece is better off than we are. Does this look like a population that is happy with their monetary system?...

[align=center][/align]

Uh, no. 20.7% unemployment in the face of austerity is what happens when you squeeze a debt-based sovereign currency user and replace their government with unelected technocrats. I can imagine Schiff trying to calm the crowd down... "Hey, c'mon everybody, austerity is a good thing!"

[Gumby]

The next time someone says something negative about Marxism and how the U.S. won the fight against communism, you might ask them which aspects of Marx's description of communism we defeated and what specifically about Marx's philosophy they disagree with.

Holy crap...

Karl Marx. Capital, Volume One
Chapter Thirty-One: Genesis of the Industrial Capitalist


The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalised the rosy dawn of the era of capitalist production. These idyllic proceedings are the chief momenta of primitive accumulation.

...

The system of public credit, i.e., of national debts, whose origin we discover in Genoa and Venice as early as the Middle Ages, took possession of Europe generally during the manufacturing period. The colonial system with its maritime trade and commercial wars served as a forcing-house for it. Thus it first took root in Holland. National debts, i.e., the alienation of the state – whether despotic, constitutional or republican – marked with its stamp the capitalistic era. The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt.[7] Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.

The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy.

7. William Cobbett remarks that in England all public institutions are designated "royal"; as compensation for this, however, there is the "national" debt.

Source: Karl Marx. Capital Volume One. Chapter Thirty-One: Genesis of the Industrial Capitalist

Can't believe I'm saying this, but Marx nailed it.

Debt-based money really is just a continuation of "primitive accumulation" — it's an invention of the early Medieval banking system, designed to make bankers richer and the people poorer. This is what Thomas Edison and Henry Ford were talking about in 1921 along with the Secret of Oz.

Honestly, this is why Schiff, and most Americans, are often so confused by the national debt. When you have a debt-based monetary system, such as ours, the debt is where our national wealth comes from.

[AdamA]

Also, Peter Schiff recommended foreign stocks and commodities as a way to deal with the crisis... Those positions got slaughtered.

He didn't understand how Treasuries would perform in a financial crisis then and he definitely doesn't understand them now.

Yeah, it's like he predicted it was going to rain and then went for a walk outside wearing sunglasses and a flowered bathing suit instead of an umbrella and raincoat.

[moda0306]

Also, Peter Schiff recommended foreign stocks and commodities as a way to deal with the crisis... Those positions got slaughtered.

He didn't understand how Treasuries would perform in a financial crisis then and he definitely doesn't understand them now.

Another surprise of the treasury market that seems to be completely forgotten is the debt ceiling fiasco, the subsequent S&P downgrade, and the performance of treasury bonds during that period.

I thought for sure that as the debt-ceiling date approached, stocks and treasuries would dive and gold would skyrocket... or at least that this would be the tendency as uncertainty spread.  I'm willing to bet Schiff would have agreed.  How wrong I was... all treasuries but the ones in immediate risk of being affected by the debt-ceiling date did well.  Further, and slightly more predictably, the S&P downgrade sent rates dropping and treasury values soaring.  The market did this... not the fed...

I'm patiently awaiting nominal rates to go negative.  I love the bond market.

[Gumby]

I thought for sure that as the debt-ceiling date approached, stocks and treasuries would dive and gold would skyrocket... or at least that this would be the tendency as uncertainty spread.  I'm willing to bet Schiff would have agreed.  How wrong I was... all treasuries but the ones in immediate risk of being affected by the debt-ceiling date did well.  Further, and slightly more predictably, the S&P downgrade sent rates dropping and treasury values soaring.  The market did this... not the fed...

And the ones who actually got this right were the MMT guys...

YouTube: Mike Norman: 'US debt is a myth!'

Look at the date on that video. Apr 6, 2011 — it's when the debt-ceiling crisis really first started brewing. Even when he explains it in plain English, the host still doesn't understand him since it's all so backwards to mainstream gold-standard era thinking.

[moda0306]

Gumby,

Can't watch that now... did he actually predict that rates would tumble as the crisis approached?

My feeling was that if congress were to display that it was really willing to push us to default, then MMT would cease to be correct in a way because we'd actually have default risk on US treasuries.

[Gumby]

did he actually predict that rates would tumble as the crisis approached?

When asked by the host if a rating downgrade would lead to skyrocketing interest rates, he said:

There is no issue of solvency. There cannot be an issue of solvency. The United States is always going to be able to pay its debts. I think a lot of what's going on here is fear mongering. Look, if you look at Japan, for example, which had its credit rating downgraded several times by the rating agencies the ten year yield on the Japanese Government Bond — the equivalent of our Ten Year Treasury — is yielding 1.5%. So the interest rate will be unaffected.
Source: http://youtu.be/4HJ54RRB7OU

It wasnt really a prediction, but he, and other MMTers, believed that a rating downgrade would generally lead to lower rates over time. For instance a month after appearing in that video, he clarified his position on rates continuing to fall...

The yield on 3-month T-bill fell to a record low today of .02%.

Back in 1980 the national debt was $800 bln and T-bill rates were 17%.

Today the national debt is $14 trillion and the rate the gov’t pays on T-bills is virtually zero!

THERE IS NO CORRELATION BETWEEN INTEREST RATES AND GOV’T DEBT FOR A COUNTRY THAT ISSUES ITS OWN CURRENCY AND WHERE ITS DEBTS ARE DENOMINATED IN THAT CURRENCY!

Bond yields are likely to continue falling as well. Japan’s debt is three times as large as the U.S. and the yield on 10-year Japanese government bonds is 1.5%. That’s probably where our 10-year is going.

Source: http://mikenormaneconomics.blogspot.com ... -lows.html

MMTers definitely nailed that comparison to Japan. It was a general consensus that I remembered seeing at the time. I remember also having a hard time believing it until I saw it happen! That's when I realized that the MMTers were on to something.

My feeling was that if congress were to display that it was really willing to push us to default, then MMT would cease to be correct in a way because we'd actually have default risk on US treasuries.

The MMTers didn't see it that way. They believed that the Treasury would never allow itself to default, and the Fed would loan to the Primary Dealers to become its own Treasury buyer of last resort, if necessary, to keep rates where they wanted them.

http://mikenormaneconomics.blogspot.com ... limit.html

There were too many back door options to keep the money flowing even if the debt-ceiling wasn't raised. In reality, it was all just political theater — which is exactly what MediumTex told us a year ago when we were all freaking out about it!

[moda0306]

Interesting how things work when you actually understand thet machinations of the system and don't let politics drive your view of everything.

[Gumby]

Interesting how things work when you actually understand thet machinations of the system and don't let politics drive your view of everything.

Here's a good one from Warren Mosler, dated July 23, 2011:

Consequences of debt ceiling extension outcomes
Posted by WARREN MOSLER on July 23rd, 2011

If Congress does get a bill to extend the debt ceiling to the President, he will sign it.
The US economy will continue to muddle through, with an extended soft spot and modest growth.

If Congress doesn’t get a bill to the President,
And if the US Treasury goes cold turkey to a balanced budget,
spending only as revenues accrue,
I forecast the following consequences:

Interest rates on US Treasury securities will fall, and not rise.

The US unemployment rate will move geometrically towards 100% until US Treasury deficit spending resumes.

Source: http://moslereconomics.com/2011/07/23/c ... -outcomes/

The problem is that there were a few different possible outcomes: Raising the debt ceiling or not raising it, getting downgraded or not getting downgraded, etc. But, in general, MMTers didn't see how Treasury rates would rise when the government controls them so well.

So, on July 28th, 2011 Mosler wrote:

The danger is from the spending cuts, not the potential downgrade
Posted by WARREN MOSLER on 28th July 2011

The headlines are all about the risks of default or a too small deficit reduction package causing a downgrade of US debt.

And while markets react to those issues, they all miss the point.

The consequences of a downgrade to US govt debt are minor at best.
Note that when Japan was downgraded below Botswana,
with a debt/GDP ratio nearly triple that of the US,
interest rates remained the lowest in the world

The real risk comes from the spending cuts.

No debt ceiling extension is the worst case-
Government spending falls by some $150 billion/month as expenses can’t exceed revenues
Fed Chairman Bernanke mentioned that might reduce GDP by a full 6%
And that’s just the first order effect, as a falling economy means falling tax revenues,
Which means further reductions in Treasury spending in a pro cyclical nightmare.

And if they do extend the debt ceiling it will be with prescribed spending cuts.
This too adds drag to the economy.
The more the cuts are meaningful and immediate, the more the drag on the economy increases.

Because the markets don’t yet understand this,
the feedback they are giving is misleading policy makers,
and encouraging them to make deeper, more meaningful cuts.

Source: http://moslereconomics.com/2011/07/28/t ... downgrade/

I think one of the reasons many people were drawn to MMT last year is that it understood the operational realities of the Treasury bond market very well.

[MediumTex]

There were too many back door options to keep the money flowing even if the debt-ceiling wasn't raised. In reality, it was all just political theater — which is exactly what MediumTex told us a year ago when we were all freaking out about it!

Ah yes, I was just thinking back to the day I did it for doodle.

[flyingpylon]

I'm still in the very steep part of the learning curve on all of this stuff, so perhaps this is a dumb question but:

If the US continues to increase its debt and simply increases the money supply to cover it, that makes each dollar worth less, correct? So what creditor is happy about having a loan repaid at a lower value than they lent it (even though the enumerated amount in dollars may be the same)?

Surely there is some downside to an increasing national debt... there's no such thing as a free lunch, is there?

[Gumby]

If the US continues to increase its debt and simply increases the money supply to cover it, that makes each dollar worth less, correct?

You're referring to the Quantity Theory of Money. It was disproven in the 1930s. In reality, predicting inflation is not that simple. If it was, we would have had very high inflation years ago.

Here's how Harry Browne explained it on his investment radio show (recorded on 12/12/04):

Harry Browne: Inflation results from the supply of money increasing faster than the demand for money. Now, mostly what we hear though is that inflation results from the increase supply of money. In other words, an increase in the supply of money is "A" and inflation is "B". When you get "A" then "B" follows. But what happens is periods like the past few years when the money supply has been increasing at a fairly rapid rate, and yet, we do not see any appreciable price inflation whatsoever. So, what we're seeing here is that the money supply has increased, but the consequence has not ensued. And that's because of two things. One of which is timing, and the other is that other factors can be introduced. So, what we do mean to say, really, is that an increase in the supply of money makes the inflation rate greater than it would be without that increase in the supply of money. We also take into account the demand for money — the desire of individuals to hold money in their pocket, to hang on to money, rather than spending, saving, or investing it. And if that is increasing as fast as the supply of money, then there is no increase in the inflation rate. So, all other things being equal, the increase in the supply of money leads to an increase in the price inflation rate. But, there are other things that have to be considered and that case, mostly the demand for money. These other factors always play a part, but we can't always see them.

Source: https://web.archive.org/web/20160324133 ... -12-12.mp3 (skip to 13:20)

See also...

Some interesting Japan graphs...

Note: This cannot be unseen and might lead to a different perspective, and possible brain re-wiring.




Notice how expansions in the money supply do not always result in inflation. There is always supply and demand at play. Schiff is focusing on supply while ignoring demand (among other more fundamental failings).

[MediumTex]

If you're trying to figure out what's going on with inflation, I think you need to know what's going on in at least the following categories:

1. Is private sector credit expanding or contracting?

2. What is the velocity of money?  Are people spending or hanging onto money?

3. How does the growth in the money supply compare to the expansion of the overall economy?

4. What is the unemployment level?  Higher unemployment suggests there is little upward wage pressure and thus less additional discretionary income to fuel higher prices.

There are a lot of ther factors, but these seem especially important to me.