Gyroscopic Investing

When banks lend they just print up the money for it, what happens when the loan defaults.

ie they make a mortgage loan for 200k and count that as an asset, the bank's net worth increases by 200k

if the loan defaults, does the bank lose anything? Do they have to put 10% down on these loans

boglerdude wrote:When banks lend they just print up the money for it, what happens when the loan defaults.

ie they make a mortgage loan for 200k and count that as an asset, the bank's net worth increases by 200k

if the loan defaults, does the bank lose anything? Do they have to put 10% down on these loans

Most mortgage loans are sold to one of the government-sponsored agencies like FNMA, and in that case I doubt that the bank suffers a loss (although they should).

If they keep the loan, then they have to take the loss.

One other point: the bank's net worth doesn't increase by 200k when they make a 200k loan. Yes, the 200K asset goes on their books, but they have to pay out 200k to the seller.

TennPaGa wrote:

boglerdude wrote:When banks lend they just print up the money for it, what happens when the loan defaults.

ie they make a mortgage loan for 200k and count that as an asset, the bank's net worth increases by 200k

They also have a liability - the 200k they deposited in the borrowers account.

if the loan defaults, does the bank lose anything?

Of course. The value of the asset is greatly reduced, and they still have the liability. The bank doesn't get a free lunch.

But of course if the bank is "too big to fail", the taxpayer will end up with the bill.

Does the growth in total debt really matter in the modern economy?

See in today's Wall Street Journal an article by Melvyn King, "Warning Signs About the Global Economy: The former governor of the Bank of England says total debt is troublesome."

As former governor of the Bank of England from 2003-2013, King had a ringside seat watching the financial crisis of 2008-2009, its runup and its aftermath.

jhogue wrote:Does the growth in total debt really matter in the modern economy?

See in today's Wall Street Journal an article by Melvyn King, "Warning Signs About the Global Economy: The former governor of the Bank of England says total debt is troublesome."

As former governor of the Bank of England from 2003-2013, King had a ringside seat watching the financial crisis of 2008-2009, its runup and its aftermath.

No, with "modern" monetary technology we can spend ourselves rich!
Math is hard...

So the answer to the question "Does the debt matter?" is. . . [drumroll]. . .

To the government itself: No
To the multinational corporate monopolies that run this country and to their whores in Congress: No
To you and me: Hell yes

Maddy wrote:To you and me: Hell yes

How, exactly? Suppose the Mint did create twenty 1-trillion-dollar coins and gave them to the Treasury. The national debt would suddenly be zero. Nothing in real life would change.

If things are the same, regardless of whether the national debt is twenty trillion dollars or zero, then it seems like it in fact doesn't matter.

Xan wrote:

Maddy wrote:To you and me: Hell yes

How, exactly? Suppose the Mint did create twenty 1-trillion-dollar coins and gave them to the Treasury. The national debt would suddenly be zero. Nothing in real life would change.

If things are the same, regardless of whether the national debt is twenty trillion dollars or zero, then it seems like it in fact doesn't matter.

Well, it's the next step that matters. The Treasury takes its 1 trillion new dollars and spends them on goods and services that I'd also like to buy, or that the people from whom I buy things also would like to buy. The cost of everything goes up.

Maddy wrote:

Xan wrote:

Maddy wrote:To you and me: Hell yes

How, exactly? Suppose the Mint did create twenty 1-trillion-dollar coins and gave them to the Treasury. The national debt would suddenly be zero. Nothing in real life would change.

If things are the same, regardless of whether the national debt is twenty trillion dollars or zero, then it seems like it in fact doesn't matter.

Well, it's the next step that matters. The Treasury takes its 1 trillion new dollars and spends them on goods and services that I'd also like to buy, or that the people from whom I buy things also would like to buy. The cost of everything goes up.

How does that differ from the current situation, where they spend whatever they want and add it to the debt?

Libertarian666 wrote:

Maddy wrote:

Xan wrote:
How, exactly? Suppose the Mint did create twenty 1-trillion-dollar coins and gave them to the Treasury. The national debt would suddenly be zero. Nothing in real life would change.

If things are the same, regardless of whether the national debt is twenty trillion dollars or zero, then it seems like it in fact doesn't matter.

Well, it's the next step that matters. The Treasury takes its 1 trillion new dollars and spends them on goods and services that I'd also like to buy, or that the people from whom I buy things also would like to buy. The cost of everything goes up.

How does that differ from the current situation, where they spend whatever they want and add it to the debt?

I can't see any difference at all.

It sounds like everyone just agreed that the national debt doesn't matter, then.

Xan wrote:It sounds like everyone just agreed that the national debt doesn't matter, then.

You guys have lost me.

I'd just as soon the red bell pepper that they wanted $4.25 for yesterday (I put it back) didn't go up to $6.25 next year.

Maddy wrote:

Xan wrote:It sounds like everyone just agreed that the national debt doesn't matter, then.

You guys have lost me.

I'd just as soon the red bell pepper that they wanted $4.25 for yesterday (I put it back) didn't go up to $6.25 next year.

What matters is money printing. But since the purpose of money printing is to allow the government to spend more money than they take in, government spending is the real problem.

TennPaGa wrote: On the one hand, you think federal government debt is bad. But when presented with a scenario under which the debt is paid off [by creating the money out of thin air], you don't like that either.

That makes absolutely no sense. Debt has consequences. Debt bad because consequences bad.

You know, there ARE options besides increasing the debt and printing the money to make it go away. Just stop spending.

Help me understand some of the preliminary arguments here. My assumptions are no debt ceiling, and positive interest rates.

1. Assuming no debt ceiling, If the US Treasury issues so many bonds, lets say a trillion dollars, that the demand for such bonds starts falling in so-called private markets, the Federal Reserve will pick up the slack and buy whatever is needed so the government can keep operating.

2. So at this point we have the Fed with a trillion dollars in assets on its balance sheet, due a certain coupon payment. If my understanding is correct, in order to pay for the treasury purchases, banks are required to increase reserve balances at the Fed, either by lending money to each other to cover deficiencies (and thus subject to overnight rates), or some other method of which I am not certain.

3. The treasury now has an additional trillion dollars liability on its balance sheet, and a trillion in cash to spend on whatever government programs or projects it wishes.

4. At this point, the treasury must pay its coupon payments (or at least face value on a discounted treasury) on the trillion dollars in treasury bonds. However, it doesn't have the cash to do this now, so it must issue more bonds, which the Fed must buy because private markets are already exhausted.

5. By purchasing another trillion in treasuries, the reserve requirements would be increased yet again....

From here I don't understand what would happen. Maybe someone can help.

Sir_Bondalot wrote:Help me understand some of the preliminary arguments here. My assumptions are no debt ceiling, and positive interest rates.

1. Assuming no debt ceiling, If the US Treasury issues so many bonds, lets say a trillion dollars, that the demand for such bonds starts falling in so-called private markets, the Federal Reserve will pick up the slack and buy whatever is needed so the government can keep operating.

2. So at this point we have the Fed with a trillion dollars in assets on its balance sheet, due a certain coupon payment. If my understanding is correct, in order to pay for the treasury purchases, banks are required to increase reserve balances at the Fed, either by lending money to each other to cover deficiencies (and thus subject to overnight rates), or some other method of which I am not certain.

3. The treasury now has an additional trillion dollars liability on its balance sheet, and a trillion in cash to spend on whatever government programs or projects it wishes.

4. At this point, the treasury must pay its coupon payments (or at least face value on a discounted treasury) on the trillion dollars in treasury bonds. However, it doesn't have the cash to do this now, so it must issue more bonds, which the Fed must buy because private markets are already exhausted.

5. By purchasing another trillion in treasuries, the reserve requirements would be increased yet again....

From here I don't understand what would happen. Maybe someone can help.

It repeats until no one wants any more "US Dollars".

TennPaGa wrote: Xan's initial post in this thread summarizes things as well:

Xan wrote:The key difference between this and the "simple, old-fashioned way of seeing things" is that dollars are completely disconnected from gold, and from anything else. As Moda used to say, they're like points on a scoreboard. Watching a football game, you don't ever worry that the stadium is going to run out of points to give the team.

Basically that means that "paying it back" or "our children will have to pay it back" or "we've put all this on the credit card" isn't really an issue. It doesn't have to be paid back, ever.

Now, whether the government is using its power for good or for evil is a different discussion. And whether the economy will continue to be productive enough to support everyone to the standard we're used to is also a different discussion. The system might collapse, but it won't really be because a currency issuer owes currency denominated in the currency that it creates.

Well, when it comes to the question whether the national debt matters to you and me, I'll be darned if I can see the difference. Whether the risk of continued borrowing is insolvency or collapse of the system doesn't particularly matter; either one does not bode well for the ordinary citizen.

As an aside, we've all been assuming the best case scenario--i.e., that the "powers that be" would, in the event of a threatened collapse of the financial system, utilize all the tools they have to prevent it. Take a look at who's actually running this country and at least consider the possibility that they don't want this to all work out.

I'm not saying that a collapse would be a result of the debt. I'm saying precisely the opposite: there may be a collapse, but it won't be because of the debt. It'll be because of actual, structural problems with the real economy, and will occur regardless of whether there's debt or not.

Xan wrote:I'm not saying that a collapse would be a result of the debt. I'm saying precisely the opposite: there may be a collapse, but it won't be because of the debt. It'll be because of actual, structural problems with the real economy, and will occur regardless of whether there's debt or not.

Help me to understand. . . What structural problems, other than the national debt and the various machinations intended to forestall or avoid payment of the national debt, do you view as posing a risk of collapse?

Really? Is it your position that the ONLY thing that could cause a systemic collapse is "unsustainable" national debt? But you're not even able to articulate exactly how it's even a problem.

Off the top of my head, here are some things:
* War
* Famine
* Plague
* Demographic problems (see Japan or Scandanavia: not enough young people)
* Loss of our premiere place in the world economically or militarily

Xan wrote:Really? Is it your position that the ONLY thing that could cause a systemic collapse is "unsustainable" national debt? But you're not even able to articulate exactly how it's even a problem.

Off the top of my head, here are some things:
* War
* Famine
* Plague
* Demographic problems (see Japan or Scandanavia: not enough young people)
* Loss of our premiere place in the world economically or militarily

I'm not taking a position here; simply asking for clarification of what yours is. I've simply recognized (as I thought was a commonly-held precept no matter what school of economic thought you ascribe to) that by creating money out of thin air, the value of all remaining money is diluted. That's generally regarded as a problem for anybody who has saved or whose earning capacity can't keep pace with the rate of inflation. Of course, offshoring your inflation is one option, but again that's not without consequences to the ordinary citizen. It's the ordinary citizen who is left without a way of making a living when his job is outsourced, or who is stuck working with cheap Chinese nails. Is it the proposition that the dilution of the currency is a problem that being challenged here?

So I'm still not sure what you're saying. That the national debt doesn't matter to the ordinary citizen because the system will collapse due to other structural problems (war, famine, plague, etc.) before the confiscatory consequences of burgeoning debt (either having to pay it back or having to inflate it away) ever take place?

Maddy wrote:

Xan wrote:Really? Is it your position that the ONLY thing that could cause a systemic collapse is "unsustainable" national debt? But you're not even able to articulate exactly how it's even a problem.

Off the top of my head, here are some things:
* War
* Famine
* Plague
* Demographic problems (see Japan or Scandanavia: not enough young people)
* Loss of our premiere place in the world economically or militarily

I'm not taking a position here; simply asking for clarification of what yours is. I've simply recognized (as I thought everyone does) that by creating money out of thin air, the value of all remaining money is diluted. That's generally regarded as a problem for anybody who has saved or whose earning capacity can't keep pace with the rate of inflation. Is that proposition being challenged here?

So I'm still not sure what you're saying. That the national debt doesn't matter to the ordinary citizen because the system will collapse due to other structural problems (war, famine, plague, etc.) before the confiscatory consequences of burgeoning debt (either having to pay it back or having to inflate it away) ever take place?

I only mentioned "the system may collapse" in the context of "if it does collapse, it won't be because of debt". I'm drawing the distinction between my position and a hypothetical Pollyanna who says things will go on forever no matter what.

So no, I'm not saying the system will collapse before the consequences of debt come home to roost. I mean, I guess I sort of am, trivially. What I'm really saying is that I don't believe those consequences exist. The debt ITSELF is not itself a problem. The government overreach it represents may well be.

In his opinion piece in the WSJ, King argues that the central problem of the global economy today is the growth of total debt—public, private, and corporate-- and on a truly GLOBAL scale. He gives the figures and it is apparent that the problem is much bigger than just Washington’s follies with an artificially constructed debt ceiling.

King thinks that the massive and historically unprecedented injection of liquidity that central bankers undertook to alleviate the 2008 financial crisis has inevitably resulted in a serious mis-pricing of financial assets, including excess export capacity in China and Germany and ballooning real estate investment in the USA and the UK [probably Australia and Canada too]. Even under the best of circumstances, re-pricing of those assets is bound to be painful and protracted. Under less than ideal circumstances, it could well lead to more crises.

Lastly, Professor King points out that record stock markets and presently tranquil indicators like the VIX should not make us complacent. He insists that the markets have a terrible record of anticipating crises—like, for example, the unanticipated bankruptcy of Lehman Brothers on 15 Sept. 2008.

So, pay no attention when Janet Yellen – or her designated successor—emerges from behind the curtain to tell you that she is “cautiously optimistic” about the direction of the economy, the risk of inflation, and the state of unemployment in the USA. Once again, Uncle Harry was right and all the experts collectively know nothing.

Aren’t you glad you have a Permanent Portfolio?

jhogue wrote:In his opinion piece in the WSJ, King argues that the central problem of the global economy today is the growth of total debt—public, private, and corporate-- and on a truly GLOBAL scale. He gives the figures and it is apparent that the problem is much bigger than just Washington’s follies with an artificially constructed debt ceiling.

King thinks that the massive and historically unprecedented injection of liquidity that central bankers undertook to alleviate the 2008 financial crisis has inevitably resulted in a serious mis-pricing of financial assets, including excess export capacity in China and Germany and ballooning real estate investment in the USA and the UK [probably Australia and Canada too]. Even under the best of circumstances, re-pricing of those assets is bound to be painful and protracted. Under less than ideal circumstances, it could well lead to more crises.

Lastly, Professor King points out that record stock markets and presently tranquil indicators like the VIX should not make us complacent. He insists that the markets have a terrible record of anticipating crises—like, for example, the unanticipated bankruptcy of Lehman Brothers on 15 Sept. 2008.

So, pay no attention when Janet Yellen – or her designated successor—emerges from behind the curtain to tell you that she is “cautiously optimistic” about the direction of the economy, the risk of inflation, and the state of unemployment in the USA. Once again, Uncle Harry was right and all the experts collectively know nothing.

Aren’t you glad you have a Permanent Portfolio?

This is a wonderful answer and I think ties everything together.

https://www.pragcap.com/donkey-economics/

More about MMT and federal spending.