the eminent US govt. bankruptsy

[moda0306]

Well, paying people less for risk-free saving can be inflationary, but not in the same way simply dropping money from helecopters would be, and this definitely depends on economic conditions.

I think the next step after realizing that inflation is the constraint is to ask ourselves how to behave around that... even if Peter Schiff could realize the inflation/budgetary piece, he'd probably still insist that we're about to head into some horrible inflation... well he already does that... so I guess that's a settled case.

The next step with MMR observations is to realize WHY QE and pretty large deficits won't be inflationary for quite some time.  This goes to the nature of BALANCE SHEETS, and servicing the debt on those balance sheets as a percentage of income, being the driver of whether people spend,  far more than whether they have some more liquidity on that balance sheet than they did yesterday.  It has to do with the nature of investment and the demand from the productive capacity of that investment.  When demand is 80% of capacity, what is going to spur on more investment and wealth creation?  Answer: Demand.  Why is demand low?  Well that's maybe up for debate, but to me it's mostly to do with the macro-failures that can happen in a monetized economy.

[Gumby]

Cullen appears to be having the same conversation with his audience...

Throwing the Hyperinflationists a Bone….

I spend a lot of time talking about how the US government is not going insolvent.  And while it’s true that changing to a non-convertible fiat currency system eliminated the risk of “running out of money”? it didn’t eliminate the risk of currency collapse.  Anyone who understands how the US monetary system is structured knows that the government will never have trouble procuring funds to meet its spending needs.  But this doesn’t mean the government has no constraint at all.

Of course, the government is always constrained by the rate of inflation and the extent to which policy negatively impacts the economy through a real decline in living standards.  So understanding that we can’t “run out of money”? doesn’t mean we shouldn’t understand our true constraint.   So that means we need an intricate understanding of hyperinflation, what causes it and whether or not it’s a real threat.

As Deutsche Bank recently highlighted, the move to non-convertible currencies didn’t eliminate sovereign crises.  It just changed how they occur:

“Indeed at the more extreme end of the spectrum, since 1971 the number of recorded hyperinflations seen throughout the globe has dramatically increased. Figure 22 counts such incidents seen through history in selected buckets.

Although the hyperinflation list perhaps isn’t 100% inclusive, the trend is absolutely beyond dispute. The 1980s and 1990s saw the vast majority of the examples of these occurrences through history. Although all these have been outside of the developed world, this region has also seen many countries with high inflation over the period and with wide divergence between countries.”?

[align=center][/align]

So yes, in a way all we’ve done is change the TYPE of insolvency that occurs at the sovereign level.  We haven’t eliminated it.   But it’s important to note that hyperinflation is a very different phenomenon than insolvency or having a funding shortage.   And perhaps most importantly, it’s helpful to understand that hyperinflation is more than a monetary phenomenon.  Please read my section on hyperinflation for more on the true constraint and why it’s not currently a threat in the USA.
Source: http://pragcap.com/throwing-the-hyperin ... sts-a-bone

[notsheigetz]

I think I at least halfway get the notion that a sovereign nation that prints its own currency can't go bankrupt.

But I have to balance it in my own mind with Stein's Law that says "If something cannot go on forever, it will stop".

[Pointedstick]

I think I at least halfway get the notion that a sovereign nation that prints its own currency can't go bankrupt.

But I have to balance it in my own mind with Stein's Law that says "If something cannot go on forever, it will stop".

As people have been alluding to, not being able to go bankrupt doesn't protect sovereign nations from all manner of other economic problems. In particular, having a debt-backed fiat currency tends to accelerate and worsen the onset of financial panics and balance sheet recessions. I agree that this state of affairs can't go on forever, but as for what will come next, your guess is as good as mine.

[MediumTex]

But I have to balance it in my own mind with Stein's Law that says "If something cannot go on forever, it will stop".

The earth has been spinning for hundreds of millions of years, while humans have only been running the place for about 6,000 years.

Part of the silliness of humanity is the idea that anything human-related is going to go on forever.

The rocks laugh at us.  The hills scoff at our designs.

[craigr]

I think I at least halfway get the notion that a sovereign nation that prints its own currency can't go bankrupt.

Yes it can go bankrupt.

What I mean is that what people are thinking is they can't default in the technical sense of the word. But, yes the currency can be so worthless that it is the same as being bankrupt because you have no assets people want and are insolvent. Or that the conditions inside the country get so bad for the general population the government collapses and a new currency emerges. Or people bring about commerce that squeezes the government out of collecting any more resources and exacerbates their spending problems. Etc. Argentina for instance prints their own money but they absolutely have gone bankrupt. They may be doing it again as we speak. There are plenty of other examples as well.

I suppose my point is that just because the US can't "default" by printing money, it is not a get out of jail free card as people of these various money theories think either. There are repercussions for these decisions and they could show up at any time. It could be tomorrow or it could be in 100 years. But there are consequences to printing too much money, especially if that money is able to be absorbed and used in the economy quickly.

But I have to balance it in my own mind with Stein's Law that says "If something cannot go on forever, it will stop".

Yes and the thing is the markets can change very quickly to world events that you need to diversify even if you think things are rosy. So the Permanent Portfolio holds gold not because it is hoping something bad happens, but because bad things happen constantly in this world nobody expected!

[MediumTex]

Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable

That's a great explanation.  Thanks for posting.

[notsheigetz]

Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable

Interesting but I still think I'll keep 25% in gold.

[Pointedstick]

Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable

Interesting but I still think I'll keep 25% in gold.

I think we all would; that's why we're here talking about the PP and not over at Bogleheads!

[MediumTex]

Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable

Interesting but I still think I'll keep 25% in gold.

To me, there is nothing in MMT that suggests that gold is not a good asset to own.

MMT says that more money can always be created by the money issuer, but it doesn't say what that money will be worth.

[craigr]

MMT says that more money can always be created by the money issuer, but it doesn't say what that money will be worth.

Which is the main problem. Economics is a massive social psychology experiment at the core. If the people don't believe the money issuer there are big problems. I eagerly await how the money issuer Argentina is going to get out of their mess again. According to MMT, they should just be able to keep printing pesos and everyone will have a yacht soon enough. I'm thinking that's not going to happen…

[notsheigetz]

Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable

Interesting but I still think I'll keep 25% in gold.

To me, there is nothing in MMT that suggests that gold is not a good asset to own.

MMT says that more money can always be created by the money issuer, but it doesn't say what that money will be worth.

I think where the monopoly game analogy fails for me is in the very beginning where we all sit down and vote democratically to create a central bank for the mutual benefit of all. My thinking is probably tainted from having read "The Creature from Jekyll Island" which has a far different take on how the game began. And in the real world not everyone who passes go gets $200. Politicians always have their say.

[Pointedstick]

Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable

This article is also fascinating for the way it shows weaknesses in MMT thought patterns.

In the building code example, the CIG is creating new job categories by artificially limiting people's freedom. In that example, apparently nobody asked for a building code, the CIG just forced it on everyone. And while there are certainly financial benefits to the code writer, the builder, and the interpreter, everyone else who wants to build a house has been harmed because they now must spend money and time that they previously did not need to spend, all in order to get the same thing they could have gotten before (you don't need a building code to build a safe house, and in many cases codes actlally detract from safety, but that's another subject). Presumably creating building codes has also created jobs for spy drones to search the land for illegally-built homes, armed men to arrest the illegal homebuilders, wardens and guards to staff the prisons to incarcerate them, operators for bulldozers used to destroy the homes, and perhaps welfare programs for families who have found their breadwinners imprisoned and their homes destroyed simply for not following the building code. But are any of these CIG economy-expanding programs actually good for the individual members of society outside of simply offering CIG-created jobs to those who enforce the regulations? I've found that MMT usually prefers to avoid this topic.

Also notice how all the problems in this little economy have to be solved by the CIG rather than the private sector. For example, when the new people come by, nowhere is it suggested that the existing players could make deals with them to exchange some of their labor or expertise for property. Instead, it's assumed that the private sector already owning 100% of the land is a problem, and the only way newcomers (or presumably newly born inhabitants) to have any land for themselves is for the CIG to somehow magically create it (WTF?)

[craigr]

And in the real world not everyone who passes go gets $200. Politicians always have their say.

Yes. These systems always assume everyone is a good actor, but history has shown repeatedly that it just isn't the case with paper money systems. The whole MMT craze to me seems very odd. We have a host of examples in the past where central bank issued credit ideas should have worked just fine with paper money, but they didn't. Why should anyone believe it will work with a new name slapped on it?

[Pointedstick]

I think where the monopoly game analogy fails for me is in the very beginning where we all sit down and vote democratically to create a central bank for the mutual benefit of all. My thinking is probably tainted from having read "The Creature from Jekyll Island" which has a far different take on how the game began. And in the real world not everyone who passes go gets $200. Politicians always have their say.

Yeah, in the real world, it's more like you have to give up $200 in taxes when you pass go. I agree that the big problem of MMT is that it requires you to see a government as an entity created with the consent of the people for their own mutual benefit. History has too many counter-examples for this to be an even remotely credible view. Even governments that were once enacted on a mutual, consensual basis can and usually do become tyrannical in the future. And of course MMT is weak on the subject of government being co-opted by special interests who wish to tilt the rules of society toward their private benefit. Building codes are actually a great example of this in that they were originally written by fire insurance companies wishing to lower their own costs. They reasoned that if they got the government to force everyone to put asbestos in their houses, they'd be much more fire resistant, thereby profiting the insurance companies more (of course they didn't lower their rates). In no possible universe can this be counted as an example of the people democratically consenting to a CIG economy-expanding jobs program.

And of course it turned out that asbestos caused severe lung problems but the solution was never going to be to get rid of the regulation, right? No, instead, asbestos went from being required to being banned! And on and on it went until we got to where we are today when every aspect of building is hyper-regulated right down to the number, length, and spacing of nails you must use when joining dimensional lumber.

[Storm]

Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable

What a great article - I particularly like this quote:

When my personal bank account is in “deficit”?, that is something I worry about. When a city or state government has a “deficit”?, that’s also something to worry about because we have not given our “local”? governments the power to issue the currency (they are users of the currency, just like the rest of the players.) When their coffers are empty, they have to make tough choices and cutback on their spending. But when we say our sovereign government has a growing “deficit”?, we are badly misleading ourselves if we use the word the way we do when we think of our own bank accounts. What Monopolis Monopoly is showing us is that our sovereign “deficit”? is in fact a balance sheet accounting of our own financial wealth. And why we would want to reduce that is a mysterious thing indeed!

[BearBones]

What a great article - I particularly like this quote:

When my personal bank account is in “deficit”?, that is something I worry about. When a city or state government has a “deficit”?, that’s also something to worry about because we have not given our “local”? governments the power to issue the currency (they are users of the currency, just like the rest of the players.) When their coffers are empty, they have to make tough choices and cutback on their spending. But when we say our sovereign government has a growing “deficit”?, we are badly misleading ourselves if we use the word the way we do when we think of our own bank accounts. What Monopolis Monopoly is showing us is that our sovereign “deficit”? is in fact a balance sheet accounting of our own financial wealth. And why we would want to reduce that is a mysterious thing indeed!

I must confess, that I have skipped over the MMT/MMR discussions and articles, so I am ignorant about a few things. Can you proponents succinctly explain a few things so that I can continue to be lazy?:
1. In this balance sheet concept, growing deficit/debt translates into growing "wealth" on the other side of the equation. If this is from careless overspending and undertaxation on the part of government, doesn't this debt and wealth creation still lead to inflation?
2. Similarly, what does MMT/MMR suggest happens when debt/GDP is high and climbing?
3. What happens when interest on the debt becomes an exponentially increasing proportion of the debt?
4. Since foreigners hold about 50% of our debt, what happens when they say, "I'm getting out and instead buying land, businesses and other strategic assets in foreign countries?"

Thanks for your patience.

[MediumTex]

What a great article - I particularly like this quote:

When my personal bank account is in “deficit”?, that is something I worry about. When a city or state government has a “deficit”?, that’s also something to worry about because we have not given our “local”? governments the power to issue the currency (they are users of the currency, just like the rest of the players.) When their coffers are empty, they have to make tough choices and cutback on their spending. But when we say our sovereign government has a growing “deficit”?, we are badly misleading ourselves if we use the word the way we do when we think of our own bank accounts. What Monopolis Monopoly is showing us is that our sovereign “deficit”? is in fact a balance sheet accounting of our own financial wealth. And why we would want to reduce that is a mysterious thing indeed!

I must confess, that I have skipped over the MMT/MMR discussions and articles, so I am ignorant about a few things. Can you proponents succinctly explain a few things so that I can continue to be lazy?:
1. In this balance sheet concept, growing deficit/debt translates into growing "wealth" on the other side of the equation. If this is from careless overspending and undertaxation on the part of government, doesn't this debt and wealth creation still lead to inflation?

Only if the productive output of the underlying economy is growing more slowly than the money supply is increasing.

2. Similarly, what does MMT/MMR suggest happens when debt/GDP is high and climbing?

I don't know.

3. What happens when interest on the debt becomes an exponentially increasing proportion of the debt?

It depends on what is happening in the larger economy.

4. Since foreigners hold about 50% of our debt, what happens when they say, "I'm getting out and instead buying land, businesses and other strategic assets in foreign countries?"

I don't think that's how it works.  I think that when you are running a trade deficit, there is always a market for your debt because there is nowhere else for that money to go.

[Storm]

The most basic concept of MMT/MMR is that if government were successful in reducing the deficit to 0, it would mean reducing the money supply to 0 as well - we would all be broke!

Somewhere between 0 and a bazillion dollars is a number that allows enough money supply for the economy to flourish.  Get the number too high and you have hyperinflation... get it too low and you have recession/depression.

Right now, it seems like the money supply is much too low, considering the trillions of money supply destroyed by the housing crash that has yet to be replaced.

Now, ask yourselves why any politician that understands this would intentionally want to reduce the deficit, if deficit = money supply to the private sector?  Could it be that they just want to make everyone suffer so that we feel the need to change the political leadership?

[Pointedstick]

1. In this balance sheet concept, growing deficit/debt translates into growing "wealth" on the other side of the equation. If this is from careless overspending and undertaxation on the part of government, doesn't this debt and wealth creation still lead to inflation?

Growing the public deficit doesn't translate to more private wealth, it translates to more money given to the private sector. Subtle difference, but it's important here. Although you're not wrong; there are times when doing this leads to inflation. If the demand for money and economic growth are low, and the government is creating billions or trillions of dollars and giving it to people, that's gonna be inflationary. The government can "safely" create money without it being inflationary at a rate equal to GDP growth + the nebulous, difficult-to-measure demand for money.

2. Similarly, what does MMT/MMR suggest happens when debt/GDP is high and climbing?

That would suggest that each dollar the government gives the private sector is not as effective at growing GDP as it was in the past. Uh-oh. Something's wrong with the private sector, or the government is spending money on the wrong parts of it (e.g. military spending that results in less private benefit diffused throughout the economy compared to, say, a railroad or power plant).

3. What happens when interest on the debt becomes an exponentially increasing proportion of the debt?

Nothing special, since the interest itself is just more conjured up money credited to peoples' accounts. As with any other form of federal spending, the limitation is inflation. If interest payments make up a large fraction of federal spending, that limits the government's ability to further spend on a discretionary basis without that spending becoming inflationary.

4. Since foreigners hold about 50% of our debt, what happens when they say, "I'm getting out and instead buying land, businesses and other strategic assets in foreign countries?"

What happens is that the Primary Dealers are required by the Fed to take up the slack by buying up what foreigners are avoiding. They are bound to do this by their contract they signed when they became Primary Dealers. This is why U.S. Treasury Auctions never fail to find buyers. The real question is really, "what happens when no banks sign up to become primary dealers?"

[stone]

I think the elephant in the room, that the deficit doves ignore, is that a bloated ratio of financial wealth to economy size is something that distorts what the real economy does. It is especially true that as the ratio of financial wealth to economy size grows, wealth inequality grows too. It is all very well to glibly point out that having thousands of oligarchs each with $10B in treasuries does not cause a danger of default on treasuries nor a danger of CPI inflation. BUT it does massively screw up the economy and the political system. Having a grossly out of kilter ratio of wealth to GDP leads to commodity speculation and wild gyrations in commodity prices. It leads to corruption of politicians. Basically if you print off hundreds of billions of USD in treasury bonds, then one way or another the people holding those will use that wealth to extract a revenue stream from the real economy. Printed off phoney wealth does not come with a real means to pay its way so instead it parasitically gathers money from the real economy and distorts the real economy to breaking point in the process.
If a bunch of people have astronomical wealth, then it makes sense for the economy to be on stand by just in case an oligarch might choose to buy something at some point. So the real needs of the bulk of the population get neglected by the private sector. Government then steps in to attempt (ineptly) to meet those real needs and so on and so forth.

[BearBones]

The most basic concept of MMT/MMR is that if government were successful in reducing the deficit to 0, it would mean reducing the money supply to 0 as well - we would all be broke!

Reducing the deficit to 0 doesn't seem to be much of an issue any more. I think we blew that chance.

Right now, it seems like the money supply is much too low, considering the trillions of money supply destroyed by the housing crash that has yet to be replaced.

Is this always the reason for stagnation? If you give pigs corn, they gain weight. But only to a point, and then they stop eating...

So, I now have my SUVs, 3 car garage, lawn service, labradoodle, entertainment center with large screen LCD TV, 40 extra pounds around my waist, renovated kitchen which I never use, and an ipod+ipad+macbook pro for all of my toddlers. Throw some bad news my way along with some extra money, and I am just not going to spend much more.

2. Similarly, what does MMT/MMR suggest happens when debt/GDP is high and climbing?

That would suggest that each dollar the government gives the private sector is not as effective at growing GDP as it was in the past. Uh-oh. Something's wrong with the private sector, or the government is spending money on the wrong parts of it (e.g. military spending that results in less private benefit diffused throughout the economy compared to, say, a railroad or power plant).

How about the pig analogy? Plus, meanwhile the price of corn is going up because now everyone wants to feed their pigs corn (demand), and the price of corn is going up because of draught and the increasing cost of fertilizer/fuel (supply).

Just not intuitive to me that we can have debt growing exponentially way out of proportion to the growth of our GDP (which is limited because we are already fat, and the corn is increasingly limited) and that this would not have severe consequences.

3. What happens when interest on the debt becomes an exponentially increasing proportion of the debt?

Nothing special, since the interest itself is just more conjured up money credited to peoples' accounts. As with any other form of federal spending, the limitation is inflation. If interest payments make up a large fraction of federal spending, that limits the government's ability to further spend on a discretionary basis without that spending becoming inflationary.

Could we reach a point where the interest on the debt has grown to the extent that we are limited in what we can spend on defense, healthcare, and social security?

What happens is that the Primary Dealers are required by the Fed to take up the slack by buying up what foreigners are avoiding. They are bound to do this by their contract they signed when they became Primary Dealers. This is why U.S. Treasury Auctions never fail to find buyers. The real question is really, "what happens when no banks sign up to become primary dealers?"

Very helpful. So what happens when no banks sign up to become primary dealers?

[Pointedstick]

Is this always the reason for stagnation? If you give pigs corn, they gain weight. But only to a point, and then they stop eating...

So, I now have my SUVs, 3 car garage, lawn service, labradoodle, entertainment center with large screen LCD TV, 40 extra pounds around my waist, renovated kitchen which I never use, and an ipod+ipad+macbook pro for all of my toddlers. Throw some bad news my way along with some extra money, and I am just not going to spend much more.

This is a very good point. Right now we're in a balance sheet recession: all those granite countertops and baby iPhones are nice to have, but eventually the bill comes due if you bought them on credit. So people carrying around huge amounts of debt are going to use extra cash to pay it down rather than spending it back into the economy. That's certainly what I did with every extra penny over the last three years. Gumby has some excellent charts plotting public deficits and private debt; the correlation is startling. In the aggregate, the money the government is creating is going straight to private debt service. This is one of the big reasons why it hasn't been inflationary. It's getting extinguished the moment we pay it back to the banks or even the federal government itself if we're talking about student loans.

It also suggests that the government could create the same result faster by simply extinguishing the debt with the stroke of a pen. Then people would feel confident enough to spend again. That would require congress to 1) understand the system and 2) actually do something for the public good rather than for their interest groups. So, not gunna happen. 

How about the pig analogy? Plus, meanwhile the price of corn is going up because now everyone wants to feed their pigs corn (demand), and the price of corn is going up because of draught and the increasing cost of fertilizer/fuel (supply).

Just not intuitive to me that we can have debt growing exponentially way out of proportion to the growth of our GDP (which is limited because we are already fat, and the corn is increasingly limited) and that this would not have severe consequences.

Keep in mind the balance sheet recession we're in. For nearly a decade, the savings rate hovered near zero and people charged everything. Now they're delevereging, largely using conjured-up federal government money (it sure isn't coming from the lucrative job everyone has ). Imagine we're a pig that has been starving to death for weeks (living on debt). The farmer gives us a huge amount of corn (injects liquidity with conjured-up funds) and we eat it, but we don't become fat (experience inflation), we use it to get closer to your normal weight (pay down debt). Eventually, once we've become healthy again, an always-full feeding trough will indeed make us fatter, but right now we're using it just to return to normal. I think we're straining the limits of this metaphor here

Could we reach a point where the interest on the debt has grown to the extent that we are limited in what we can spend on defense, healthcare, and social security?

One side-effect of this screwed-up monetary system we're in is that it tends to push down interest rates for extended periods of time. So even though the federal government has created trillions in new debt, the percentage of the budget devoted to debt service is lower today than it was a few years ago.

If interest payments amount to, say, a trillion dollars a year and spending becomes inflationary at, say a 1.5 trillion-per-year level, then the federal government only has 500 billion dollars worth of room before any additional fabricated dollars push up inflation. In all likelihood, the government will just spend it anyway, leading to some moderate inflation (probably >3%, < 6%). But you're right that the longer this goes on, the more of a problem debt service becomes, even at very low interest rates. I don't think anyone knows how this will turn out, except for maybe Japan. They've been about 10 years ahead of the curve.

Very helpful. So what happens when no banks sign up to become primary dealers?

That's a very good question. I don't  really know to be honest, but I think it's unlikely. Being a Primary Dealer is a fantastic deal for the banks. It basically amounts to being the first receivers of new government-created funds.

[MediumTex]

How about the pig analogy? Plus, meanwhile the price of corn is going up because now everyone wants to feed their pigs corn (demand), and the price of corn is going up because of draught and the increasing cost of fertilizer/fuel (supply).

Just not intuitive to me that we can have debt growing exponentially way out of proportion to the growth of our GDP (which is limited because we are already fat, and the corn is increasingly limited) and that this would not have severe consequences.

Keep in mind the balance sheet recession we're in. For nearly a decade, the savings rate hovered near zero and people charged everything. Now they're deleveraging, largely using conjured-up federal government money (it sure isn't coming from the lucrative job everyone has ). Imagine we're a pig that has been starving to death for weeks (living on debt). The farmer gives us a huge amount of corn (injects liquidity with conjured-up funds) and we eat it, but we don't become fat (experience inflation), we use it to get closer to your normal weight (pay down debt). Eventually, once we've become healthy again, an always-full feeding trough will indeed make us fatter, but right now we're using it just to return to normal. I think we're straining the limits of this metaphor here

A balance sheet recession accompanied by consumers deleveraging would be like feeding corn to a pig who has an intestinal parasite.  No matter how much he eats he can't seem to gain any weight. 

In our system, the intestinal parasite is our too big to fail financial institutions.

[moda0306]

Cullen Roche estimates that we'd basically have tO be in the midst of a hyperinflation for PD's to give up their role I the process.  His logic appears pretty damn sound... So, again, it would appear that inflation is still the true constraint.