Cullen Roche interview

[Tom Brown]

moda0306, regarding the unfunded liabilities, I really can't give you an informed opinion on that. What are your thoughts? (although, whenever I hear "doomed" I get a little skeptical)

[Tom Brown]

... ah, I see, that's in response to Libertarian666:

Libertarian666, no, if they're insolvent that's a completely different story. The US is not insolvent, nor is Japan nor the UK. If the gov bonds were worthless in any of those countries, they'd be insolvent.

The US most certainly is insolvent, as its unfunded liabilities amount to tens of trillions of dollars and are increasing at an astronomical rate. There is no possibility of these liabilities ever being paid off without immense inflation.

I'm skeptical of that claim (of insolvency) but I have absolutely no information on the subject myself. Maybe I can interest somebody like Cullen or Sadowski in offering an opinion. Maybe we can see some actual numbers.

[Libertarian666]

... ah, I see, that's in response to Libertarian666:

Libertarian666, no, if they're insolvent that's a completely different story. The US is not insolvent, nor is Japan nor the UK. If the gov bonds were worthless in any of those countries, they'd be insolvent.

The US most certainly is insolvent, as its unfunded liabilities amount to tens of trillions of dollars and are increasing at an astronomical rate. There is no possibility of these liabilities ever being paid off without immense inflation.

I'm skeptical of that claim (of insolvency) but I have absolutely no information on the subject myself. Maybe I can interest somebody like Cullen or Sadowski in offering an opinion. Maybe we can see some actual numbers.

Here is an article from some wild and crazy doomers at... the Wall Street Journal:

http://online.wsj.com/news/articles/SB1 ... 4039087636

But what do they know?

"A decade and a half ago, both of us served on President Clinton's Bipartisan Commission on Entitlement and Tax Reform, the forerunner to President Obama's recent National Commission on Fiscal Responsibility and Reform. "

Hmm...

[Kshartle]

Ok I was away today and we moved a few pages. I'll try to catch up.

Let me clear things up for you Tech. The 100+ trillion in unfunded liabilities is no problem because the government can just borrow the money and the FED can immediately print money and abosrb the bonds so no one else has to take the losses. It will do it all. Magic.

It's just like the government directly printing except now there is this asset (the bond) to offset the new money so there's no new net equity and no inflation.

That's about it right guys?

Wow Tech.....when will you ever learn? J/K

Here's hoping they just outright default. Maybe then people will know better than to lend money to a bunch of gangsters who have to steal to pay back the loan.

[Gumby]

Here is an article from some wild and crazy doomers at... the Wall Street Journal:

...

But what do they know?

Of course, that wasn't written by any reporter or editor at the WSJ. It was an "opinion" piece that was written by former politicians who have political agendas.

[Gumby]

The 100+ trillion in unfunded liabilities is no problem because the government can just borrow the money and the FED can immediately print money and abosrb the bonds so no one else has to take the losses. It will do it all. Magic.

It's just like the government directly printing except now there is this asset (the bond) to offset the new money so there's no new net equity and no inflation.

That's about it right guys?

Well, you forgot the part about people actually working and building goods/services over the next 50 years. You know... being productive in exchange for dollars? You make it sound like the government is just going to take a giant money dump on everyone tomorrow.

[Kshartle]

The 100+ trillion in unfunded liabilities is no problem because the government can just borrow the money and the FED can immediately print money and abosrb the bonds so no one else has to take the losses. It will do it all. Magic.

It's just like the government directly printing except now there is this asset (the bond) to offset the new money so there's no new net equity and no inflation.

That's about it right guys?

Well, you forgot the part about people actually working and building goods/services over the next 50 years. You know... being productive in exchange for dollars? You make it sound like the government is just going to take a giant money dump on everyone tomorrow.

The point is the money dump needs to be a lot bigger than the growth in goods and services can ever hope to be and regardless....the money dump prevents prices for those goods and services from falling which would actually be good.

[Gumby]

The point is the money dump needs to be a lot bigger than the growth in goods and services can ever hope to be

Can you elaborate? That doesn't necessarily mean massive inflation in a short period of time that will demolish us. I would think if it did, we would see more evidence of it by now — it has been 237 years, after all.

It feels like you just want to complain about the government (again) — not learn about the effects of monetary policy. I mean, have you read any of the material Tom gave you? Do you have any questions from those links? He gave you material from a wide spectrum of economic thought.

and regardless....the money dump prevents prices for those goods and services from falling which would actually be good.

Some inflation isn't as bad as you make it sound. Sure, the price of an ice cream cone (and everything else) may have skyrocketed over the past century, but the standard of living has also risen dramatically in the process. We might characterize that as the proof of "massive" inflation, but I'll gladly take the inflation for that return in the standard of living.

[Tom Brown]

Unfunded liabilities:

I put the question to both Cullen and Sadowski, with a link to the WSJ article. Cullen responded w/o the benefit of the WSJ article (which I put there later) here:

http://pragcap.com/forums/topic/unfunde ... post-58016

So it's clear he wasn't sure what was meant by liabilities (nor was I), so the article should clear that up ($86T in SS, Medicare, and Fed employee retirement programs).

I hope I get at least one more from Cullen and one from Sadowski. BTW, is there a way to obtain a link directly to a particular comment here?

[Gumby]

BTW, is there a way to obtain a link directly to a particular comment here?

Yes.. the link itself is the post message title (in this case, "Re: Cullen Roche interview") directly to the right of the poster's name on that post.

[Tom Brown]

re: unfunded:

http://blogs.law.harvard.edu/philg/2012 ... ent-194118

I read pg. 244 of the report, and I'm still not sure what I'm looking at there.

One thing in the Cox & Archer piece that I thought was a little misleading was this:

"In theory, the Medicare and Social Security trust funds have at least some money to pay a portion of the bills that are coming due. In actuality, the cupboard is bare: 100% of the payroll taxes for these programs were spent in the same year they were collected."

They then go on to talk about "nonmarketable Tsy debt" in the trust funds. I believe it's the case that 100% of the payroll taxes are spent every year since any that's not paid in benefits is used to purchase those nonmarketable T-bonds, which makes sense: why leave it in a non-interest bearing Fed deposit account? In fact, intra-governmental debt holdings amount to about 1/3 of the total $17 Trillion current Tsy debt. That 1/3 doesn't include Fed held Tsy debt (Fed held was under 10% last I checked). The following pie chart is a bit out of date now (2011) but gives some idea of the breakdown:

http://www.optimist123.com/optimist/201 ... -2011.html

So, if the trust funds hold T-bonds, it's not really the case that the "cupboard is bare" as the authors state. A minor point maybe, but I thought that was a little odd. If they need to "trade" these bonds for marketable ones, supposedly the old bonds would be retired. I don't know how that works, but I'd be surprised if that wasn't the case.

[Tom Brown]

OK, Sadowski came through on this one

http://www.themoneyillusion.com/?p=2592 ... ent-313779

"Assuming the $86 trillion figure is correct, it is the present value of the additional resources that would be necessary to meet projected expenditures at current law levels for all those programs combined for the next 75 years.

According to the Medicare Trustees report the present value of GDP for the next 75 years is $944 trillion (page 228):

http://downloads.cms.gov/files/TR2013.pdf

In short, yes it’s big, but the present value of GDP for the next 75 years is much bigger. Also, a lot can happen in 75 years. A small shift downward in cost projections and a small shift upward in revenue could make that scary sounding figure vanish completely."

-- Mark A. Sadowski

[Tom Brown]

OK, this is from the TR2012-1.pdf:

"From the 75-year budget perspective, the present value of the additional resources that would be necessary to meet projected expenditures, at current-law levels for the three programs combined, is $38.6 trillion.112 To put this very large figure in perspective, it would represent 4.3 percent of the present value of projected GDP over the same period ($907 trillion)."

And from TR2013-1.pdf:

"From the 75-year budget perspective, the present value of the additional resources that would be necessary to meet projected expenditures, at current-law levels for the three programs combined, is $39.6 trillion.106 To put this very large figure in perspective, it would represent 4.2 percent of the present value of projected GDP over the same period ($944 trillion)."

[Tom Brown]

Gumby, after digging into TR2012-1.pdf and TR2013-1.pdf (following the links from the harvard blog commenter and Sadowski) I think it's a little more clear. Without the benefit of these docs to look at, I think your analysis was pretty good above.

Can anybody figure out how Cox & Archer came up with their $86.8T estimate? And why did they ignore the present value of GDP estimates over the same 75 year time frame?

[Gumby]

Gumby, after digging into TR2012-1.pdf and TR2013-1.pdf (following the links from the harvard blog commenter and Sadowski) I think it's a little more clear. Without the benefit of these docs to look at, I think your analysis was pretty good above.

Can anybody figure out how Cox & Archer came up with their $86.8T estimate? And why did they ignore the present value of GDP estimates over the same 75 year time frame?

Wow, Tom. You work fast and know how to get in touch with the right people. Very impressive. I don't think I could come up with how Cox & Archer came up with their estimate. The op/ed itself says that "the actual figures do not appear in black and white on any balance sheet". And I suspect they ignore GDP estimates to rile up conservatives (they are/were politicians, after all).

Quite often someone else writes an Op/Ed piece for the people whose name is actually on it, so I doubt the "authors" even looked it up.

[Tom Brown]

Thanks Gumby & TennGaPa, but Mark & Cullen really deserve the credit. In an attempt to try and figure out how Cox and Archer did their calculation (if indeed they did the work) I also looked at TR2011-1.pdf, but still no luck. So I don't know if those are supposed to be 75 year numbers, or "out to infinity" as this criticism of their article suggests:

http://www.fool.com/investing/general/2 ... mbers.aspx

It's just not clear to me how they did the math here. If you google the title of the wsj article, you'll find a lot of uncritical copies of it, and not much discussion of where they got their numbers.

[Tom Brown]

... the best thing about that "fool" piece is that they point out why those "liabilities" are not really like regular liabilities (e.g. local gov employee pensions). The law can be changed at any time on those programs, as has been done in the past. I wish though that he'd explained why he thinks those projections are out to infinity... I question if that's really the case.

It'd be nice if the wsj authors had included links and page numbers!

[Gumby]

It'd be nice if the wsj authors had included links and page numbers!

I hear you.. If only. But, I don't think they are interested in having people check their work. Seems like the intent was fear-mongering.

[Gumby]

Tom,

Are you familiar with Francis X. Cavanaugh? He was a career Treasury Dept. economist awhile back.

In his 1996 book, The Truth about the National Debt: Five Myths and One Reality he explains that one of the biggest myths perpetuated by politicians and pundits is convincing people that our grandchildren will inherit the "burden" of our national debt. Here's an interesting quote from the book:

But look now at the words of a leading spokesman of the party of Lincoln, New Gingrich: "For the children trapped in poverty, for the children whose futures are trapped by a government debt they're going to have to pay, we have an obligation tonight to talk about the legacy we're leaving our children and grandchildren." At least as far as the national debt is concerned, Mr. Ginrich's Contract with America appears to be nothing more than new voices spouting old myths.

By the reckoning of Washington, Jefferson, Eisenhower, Regan, Clinton — and perhaps all presidents except Lincoln — and many other notables such as Ross Perot, Peter Peterson, and Newt Gingrich, we apparently have never paid for World War II.

The Federal debt at the of the war was approximately $270 billion, which was about equal to total defense spending in the four fiscal years 1942-1945. World War II was financed largely by debt (deficit spending) rather than by taxes. The debt was commonly viewed by politicians as a staggering legacy of the war. So it should not be be surprising that after the war there was intense political debate about the future burden of the war debt, even though economists generally recognized that the cost of the war could not be shifted to the future.

The economic burden of World War II, in terms of debt or otherwise, was borne by the Americans who made the sacrifices at the time: no new cars from 1942 through 1945, a ration of a few gallons of gas a week for pleasure driving, and scarcities of housing and consumer goods across the board. Americans could not consume the tanks and guns they produced in the war effort. Instead, they increased their savings, which became a source of funds for the government's war debt. In addition to the stepped-up sales of Treasury marketable securities, the government conducted massive campaigns of patriotic appeals to small savers to help finance the war effort by buying U.S. savings bonds (then caled war bonds and defense bonds). The war was thus paid for at the time, and future generations benefited, not burdened, by the national security they achieved.

The greatest cost of World War II, of course, was borne by those who paid the ultimate price . . . and by the loved ones left behind.

[...]

We never paid off the war debt — $270 billion plus interest — and today's federal debt is roughly equal to it. At an annual interest rate of 6 percent (the Treasury's approximate average annual borrowing cost since 1946), $270 billion would grow in fifty years to be approximately $5 trillion, which happens to be only slightly less than the $5.2 trillion estimated federal debt at the end of fiscal year 1996. Thus, had we paid off the debt from World War II (including interest) we might have little or no federal debt today (albeit based on the very questionable assumption of "all other things being equal").

What does that mean? That the cost, or debt burden, of World War II has been shifted to this generation? Or that, if we go another fifty years without paying off the debt (with accrued interest continuing at 6 percent), we will shift the World War II debt burden — then $96 trillion — to our grandchildren in the year 2046, one hundred years after the end of the war? No. Whatever the size of the federal debt in 2046, the people alive at that time will not owe it to us or to the World War II generation. They will owe it to one another. They will inherit both the Treasury security assets and the public debt payment liabilities.

Had we borrowed from other countries to help finance World War II (which we did not), and had that borrowing resulted in a net foreign investment in the United States at the end of the war, then there would have been a shifting of costs to post-World War II Americans. Yet that would have been an international shift, not an intergenerational shift.

Source: The Truth About the National Debt: Five Myths and One Reality (1996)

I think he brings up a good point in that whatever the national debt is a few decades from now, it will be a private sector asset (not a burden).

Personally, I think the only thing our grandchildren will inherit is the ridiculous myth that their own grandchildren will be responsible for paying down the national debt.

[Tom Brown]

... on another topic for a moment, it looks like at least one conservative traditional monetarist (John Cochrane) thinks:

"In my opinion, QE has essentially no effect. ... But the good news is that we therefore can't worry too much about its reversal. It’s neither going to cause hyperinflation, nor need it cause much trouble when the Fed "tapers.""

https://www.richmondfed.org/publication ... erview.cfm

And so-called "New Monetarist" Stephen Williamson thinks that QE might actually be deflationary:

http://newmonetarism.blogspot.ca/2013/1 ... olicy.html

...of course he caught a lot of flack for that one from across the spectrum:

http://noahpinionblog.blogspot.com/2013 ... ation.html

[Tom Brown]

Gumby, thanks for the interesting quote from Francis X. Cavanaugh. I'd never heard of him or that book.

[moda0306]

This is awesome.  I just want Cullen to post on this blog now.


Or JKH and we can all feel rrreeeeeeaaaal stupid.

[Tom Brown]

Cullen & Schiff on the same show:

http://pragcap.com/me-peter-schiff-jim- ... -same-show

[Tom Brown]

An interesting question from Cullen's favorite MMist (David Beckworth):

Has The Natural Interest Rate Has Been Negative for the Past Five Years?

http://macromarketmusings.blogspot.com/ ... -been.html

[Tom Brown]

An interesting explanation of why a central bank (in this case the Bank of Canada (BOC)) is like a bank with a 100% capital requirement, but one in which insolvency is not possible unless the "loans" lose 100% of their value:

http://worthwhile.typepad.com/worthwhil ... atios.html