Bill Gross: On the fiscal gap

[moda0306]

The entity we entrust to manage the defense & recording of private property, enforce contracts and manage wars/defense already has immense powers.  If we can't get any competence, altruism, or legitimacy out of government we simply shouldn't have any, if those are the first things we are going to entrust it with.

[Gumby]

Now that we've gotten that out of the way, it should be clear that while MMTers and Monetary Realists recognize that there is no solvency issue for Japan or the United States, they also realize that a country cannot print beyond its own productive capacity. Doing so would be highly inflationary, and that would not be good.

So, let's be clear. Nobody is advocating massive levels of debt beyond a country's productive capacity. But, with unemployment above 8% and 1 in 7 Americans on food stamps, there is little risk of printing beyond our productive capacity right now.

In negating Bill Gross's statement in the original post, it would seem to me that some are, in fact, dismissing the link between massive levels of debt and a potential crisis.

Nope. Nobody is suggesting to print money like crazy after full employment is reached. MMTers claim to be very mindful of inflation and would advocate stabilizing, slowing or reducing the deficit once full employment is reached.

From what you have said, it seems that much of the MMT argument depends on a delicate relationship between debt and production capacity, right? If so, this argument against the danger of escalating debt does not seem all that reassuring.

Why? Because debt is supposedly "bad"? Or because you think it would get out of hand? If the private sector was fully employed, and had too much money, the government can always tax it away. MMTers see taxation as a way to reduce the net financial assets in the private sector.

Finally, I still do not get the invariable relationship between lack of productive capacity and absence of inflation. Please explain. Even with unemployment of 8+%, if the government rains money upon the remaining 92%, can't this be inflationary? And if most of the large economies around the world are doing the same and we are all linked, can't this be inflationary?

Not if unemployed people are hired to increase supply. I'm not an MMTer, so I do see flaws in that logic (not all natural resources can have their supply increased). But, generally, factories, businesses, or whatever, would just hire unemployed workers to meet the demand from all the new money floating around. Once full employment is reached, it's more difficult to increase supply, and it wouldn't make sense to keep printing money beyond what the private sector could handle.

Again, I'm not an MMTer, but at the moment, it's difficult to see a risk of inflation in the immediate future when most people aren't swimming in cash. When the private sector gets money from the government, it's often used to pay down private debt and deleverlage. Perhaps inflation will become a problem someday, but my guess is that unemployment will come down before inflation ramps up.

[BearBones]

Thanks MT and Gumby. I may have asked this before but, if so, I will ask it again. Do those of you who think that you have a sound understanding of economics and monetary policy see any problem with ever rising interest on the debt? Is this just Monopoly money that can be increased infinitely? Or does it eventually become a fatal problem when the interest payment is a large % of the defect and it is growing exponentially?

[MediumTex]

Thanks MT and Gumby. I may have asked this before but, if so, I will ask it again. Do those of you who think that you have a sound understanding of economics and monetary policy see any problem with ever rising interest on the debt? Is this just Monopoly money that can be increased infinitely? Or does it eventually become a fatal problem when the interest payment is a large % of the defect and it is growing exponentially?

Well, in recent years interest rates have fallen so much that I would imagine that net interest payments on the current debt have declined, even though the principal has increased a lot.

If interest rates were to start to rise and the debt was also increasing that would probably be a problem at some point, but we are nowhere near that place right now.

[Gumby]

Thanks MT and Gumby. I may have asked this before but, if so, I will ask it again. Do those of you who think that you have a sound understanding of economics and monetary policy see any problem with ever rising interest on the debt? Is this just Monopoly money that can be increased infinitely? Or does it eventually become a fatal problem when the interest payment is a large % of the defect and it is growing exponentially?

Again, there is never an issue of solvency. The central bank can loan Primary Dealers an unlimited amount of money if need be. And that power to loan unlimited amounts of money gives the central bank the power to control interest rates.

See: http://pragcap.com/what-happens-if-and- ... rate-rises

Remember, the Fed says that rates will stay low through 2015, at least. They can set rates at whatever they want to. If inflation rises, and the Fed decides to raise interest rates, it won't make sense for the Treasury to keep spending. Therefore, it wouldn't make sense for the government to issue very much debt when interest rates are high.

[MachineGhost]

Thanks MT and Gumby. I may have asked this before but, if so, I will ask it again. Do those of you who think that you have a sound understanding of economics and monetary policy see any problem with ever rising interest on the debt? Is this just Monopoly money that can be increased infinitely? Or does it eventually become a fatal problem when the interest payment is a large % of the defect and it is growing exponentially?

I think the very last sentence is key.  It doesn't matter from a theoretical framework if solvency is never an issue, it is the real world, Main Street consequences that will reveal the powder-keg because you cannot convince people of rationality when they are panicing.  It is all a confidence game.

When the growth of interest overwhelms the totality of all previously outstanding debt, I predict people will panic.  In the Eurozone which has solvency constraints, the inflection point seems to have been when the yearly growth in total debt exceeds the yearly growth in total GDP.  At this point, there's no real difference vs hyperinflation.  All the the capital would have fleed the country.

Fortunately, we can watch Japan walk the plank first.  So long as Japan is OK, so will the good ol' US of A.

[BearBones]

If interest rates were to start to rise and the debt was also increasing that would probably be a problem at some point, but we are nowhere near that place right now.

Why are we nowhere near? The debt is skyrocketing even with low interest rates (and, no, it is not all due to Obamacare). So, even with interest rates low, interest on the debt is increasing.



If interest rates rise, this will become much exaggerated. At some point, this becomes constraining in the very least.

[BearBones]

Again, there is never an issue of solvency. The central bank can loan Primary Dealers an unlimited amount of money if need be. And that power to loan unlimited amounts of money gives the central bank the power to control interest rates...

...If inflation rises, and the Fed decides to raise interest rates, it won't make sense for the Treasury to keep spending. Therefore, it wouldn't make sense for the government to issue very much debt when interest rates are high.

But, if you are wrong, and if it is indeed possible to have inflation and a stagnant economy, then we are really stuck, aren't we?

...Do those of you who think that you have a sound understanding of economics and monetary policy see any problem with ever rising interest on the debt? Is this just Monopoly money that can be increased infinitely? Or does it eventually become a fatal problem when the interest payment is a large % of the defect and it is growing exponentially?

I think the very last sentence is key.  It doesn't matter from a theoretical framework if solvency is never an issue, it is the real world, Main Street consequences that will reveal the powder-keg because you cannot convince people of rationality when they are panicing.  It is all a confidence game.

When the growth of interest overwhelms the totality of all previously outstanding debt, I predict people will panic.

This is in line with what Craig has stated previously. Sound theory or not, when dealing with fiat money, it is all a confidence game, isn't it?

...No money issuing entity can print money forever and buy their own debt. I don't care how it's being justified. Ultimately any kind of money is a confidence game of sorts. When the confidence ends, so does the game.

[MediumTex]

Again, there is never an issue of solvency. The central bank can loan Primary Dealers an unlimited amount of money if need be. And that power to loan unlimited amounts of money gives the central bank the power to control interest rates...

...If inflation rises, and the Fed decides to raise interest rates, it won't make sense for the Treasury to keep spending. Therefore, it wouldn't make sense for the government to issue very much debt when interest rates are high.

But, if you are wrong, and if it is indeed possible to have inflation and a stagnant economy, then we are really stuck, aren't we?

...Do those of you who think that you have a sound understanding of economics and monetary policy see any problem with ever rising interest on the debt? Is this just Monopoly money that can be increased infinitely? Or does it eventually become a fatal problem when the interest payment is a large % of the defect and it is growing exponentially?

I think the very last sentence is key.  It doesn't matter from a theoretical framework if solvency is never an issue, it is the real world, Main Street consequences that will reveal the powder-keg because you cannot convince people of rationality when they are panicing.  It is all a confidence game.

When the growth of interest overwhelms the totality of all previously outstanding debt, I predict people will panic.

This is in line with what Craig has stated previously. Sound theory or not, when dealing with fiat money, it is all a confidence game, isn't it?

...No money issuing entity can print money forever and buy their own debt. I don't care how it's being justified. Ultimately any kind of money is a confidence game of sorts. When the confidence ends, so does the game.

I guess the question is whether it's anything worth getting upset over.

I would hate for my peace of mind to be dependent on a group of delusional and idiotic politicans suddenly becoming enlightened.

Wouldn't it be better to make realistic assumptions about what politicans are actually capable of and arrange your own life appropriately?  The PP can be an important part of such a program.

At some point the government debt may become a serious problem...or maybe it won't.  After all, in a fiat world money and debt are just abstractions--ideas that move from human mind to human mind.  It's not like there is a pile of gold somewhere backing any of this stuff up.  If the numbers don't directly corresppond to something in the real world, what's the difference between a billion, a trillion and a quadrillion, other than the way the words are spelled and the number of zeroes on the ledger? 

They're just abstractions.  They frighten us because we choose to let them, in the same way that we choose to let a horror movie frighten us.

People have been wringing their hands about debt and deficits since 1981, but it has been during this period that the U.S. economy has performed better than any other time in our history.  Would it have been wise to ignore all of this prosperity in order to strike a multi-decade Chicken Little pose fixated on government debt and deficits?  To me, this would not have been a good way for a person to spend his limited time and energy.

Haters gonna hate, politicians gonna spend, and government's gonna grow.  Anyone who tells you different is either naive or lying.  I think that peace of mind comes from recognizing these things and finding a way of simply working around them. 

The PP accepts Wall Street as it is, and builds a personal investment program around this reality.  I would suggest that there is the potential for building a personal political program around similar assumptions about the political process.  To me, one of the basic goals in life should be to enjoy as much peace of mind as possible, and getting hung up on any aspect of the government's incompetence can quickly erode anyone's peace of mind.

[moda0306]

Bearbones,

If the fed owns that debt, the interest is credited back to the treasury.  So it's almost as if that debt can't really get out of hand, because there's no interest/debt/interest/debt.  So first off, if the fed so-chooses, it has a fail-safe mechanism to take that debt on, by "printing money" and buying those bonds.  This has the capacity to create inflation, if the economic conditions are right.  

Any disagreement on that point?

Secondly, I think we can all agree that since debt numbers are meaningless in a vacuum, we need to compare them to production (GDP).  Hence, the oft-measured Debt-to-GDP ratio.  GDP is measured nominally.  Therefore, if we were to have 8% inflation for a few years as a result of "money printing" to buy bonds, it would actively mitigate our debt-to-GDP ratio problem.

Now, of course, this could be problematic, especially if the fed/treasury continue to keep rates low and deficits high when our balance-sheets are repaired again.  But it again proves that our contraint is inflationary.  When we as individuals go into debt, we're not changing the world around us in the same way the government is.  Combine that with control over interest rates and you basically have a very different game.

Put another way, looking at the nature of debt to begin with, any public-sector debt is a financial asset of the private sector.  If you put more financial assets in the private sector (by running bigger deficits) without the private sector increasing assets relating to productive investment, it can very well lead to inflation, but moreso if our economy is in supply/demand equilibrium (aka, running at full capacity).   Our trade deficit complicates this, but it seems to me it represents foreign demand for our currency/debt as much as our demand for cheap toys.

[moda0306]

If we have inflation in a stagnant economy, then we simply have inflation in a stagnant economy. It will still increase our nominal GDP and therefore help our denominator in that equation.

Inflation lowers debt/GDP ratios just as much as higher real GDP does.

[Pointedstick]

All that shows is the uselessness of the debt/GDP figure. Inflation in a stagnant economy sucks, while hardy growth rocks. We all want growth a lot more than we want low debt/GDP figures.

[craigr]

The one criticism I read of MMT put it the best: Economics is not accounting.

It's not so simple as moving fields around in a balance sheet. There are human actors involved and their motives are all different and unpredictable.

[moda0306]

Craig,

I agree that economics can't be wrapped into simple accounting identities, but the way we talk about debt and spending, sometimes, is to forget that one person's liability is another person's asset, and one person's expense is another person's income.

I guess I'd say that economics is not accounting, and macroeconomics is not household economics or microeconomics.

I could move in with my parents and work 80 hours per week, but I certainly don't expect an entire economy to be able to function like that no more than everyone on the freeway can get into the left lane to go faster.  Some things work differently when you look at the constraints of the system as a whole and the individual pieces of the system.  Supply/demand, income/spending, investment/consumption all have to play within at least some basic level of equilibrium.  We can't all be entrepreneurs coming up with great ideas in our parents garages and never go out and spend money.  We need both sides of the coin.  There would never have been an Apple if not for both Steve Jobs and all the people willing to take a chance on spending some money in an uncertain economy on a tool such as a PC.

[BearBones]

I guess the question is whether it's anything worth getting upset over.

Agree. But when we read something like the original post by Gross, the tendency is to discount what he says rather than openly reading it while saying, "Wow, he could very well be right. But I am not so convinced of his clairvoyance that I am going to skew my investments toward that outcome."

No need to respond. I know you agree or you would not be moderating this forum.

[BearBones]

Bearbones,

If the fed owns that debt, the interest is credited back to the treasury.  So it's almost as if that debt can't really get out of hand, because there's no interest/debt/interest/debt.  So first off, if the fed so-chooses, it has a fail-safe mechanism to take that debt on, by "printing money" and buying those bonds.  This has the capacity to create inflation, if the economic conditions are right.  

Any disagreement on that point?

Yep. No disagreement. In fact, you have stated this in such a clear, basic way that even I am starting to get it. Doesn't remember that I will remember it, though. One of the nice things about the PP, is that it is amenable to dementia... I really don't have to understand or believe anything other than the fact that I am really not all that smart.