the eminent US govt. bankruptsy

[toramba]

..would love to hear a few opinions on how the PP might hold up when the U.S. government begins to default on the bulk of its committments and files for bankruptsy..thx!

[Pointedstick]

The government, as a currency issuer, will never default unless congress permits it. There is no fiscal reason why the US should ever need to default. This is why US Treasury bonds have been going gangbusters during a time when uninformed pundits and ignorant politicians have been hysterical about some impending default.

[Gumby]

PointedStick is correct. This is explained further here...

That's Right, the US Government is not Running out of Money...

...The USA is structured in such a way that the government is always able to procure funds from the private sector.  It can tax us at will.  And it can harness the private banking system to sell bonds.   Although the US Treasury is designed as a currency user it can always procure funds.

The only situation where the government is unable to procure funds is during a very high inflation or period of hyperinflation (tax receipts would decline and banks would likely reject their mandate to buy bonds at auction as they become survive first, government agents second).  But even in this scenario the government does not “run out of money”? because it can always tap its central bank to provide the funding.  Again, there’s no constraint like there is if you’re on a gold standard.  The government quite literally has a printing press at its disposal if it really needs it.

But this all highlights a crucial understanding.  Unlike Greece, the USA is specifically designed in a way that it cannot have a solvency constraint that results in it “running out of money”?.  In fact, this is lack of unity in the European monetary system is one of its primary flaws.   Granted, we could suffer a high inflation or possibly even a hyperinflation, but this is a totally different phenomenon than suffering from a solvency constraint like Greece.  Misunderstanding this crucial element of the monetary system is playing a substantial role in our economic malaise as one of the most powerful tools we’ve ever designed (our very government) is being misrepresented as having a constraint that is totally inapplicable.  And during a time of 1.7% inflation that’s causing a lot more hardship than is necessary….
Source: That's Right, the US Government is not Running out of Money...

[moda0306]

To think HB realized in 1980 or so what Peter Schiff and Bill Clinton, alike, fail to realize today. 

PS, I swear Gumby's job, besides turning us all to meatitarians, is to spread MMR from the mountain tops.

[MediumTex]

..would love to hear a few opinions on how the PP might hold up when the U.S. government begins to default on the bulk of its committments and files for bankruptsy..thx!

If I control the printing press for the money in which my debt is denominated, it is inconceivable that I would ever default.

I think that the Japanese are really showing us the way that the rest of the developed world is likely to be heading in future years.

When people think about "debt" they often think about personal/household debt, but government debt is very different from household debt.

It's amazing how much misinformation and misunderstanding there is out there regarding this topic.  I can't figure out if the politicians are really that ignorant, or if they are just saying what people want to hear.

A year ago we learned that when "default" appears imminent, interest rates in the U.S. will fall, not rise.  Apparently, a lot of people didn't learn much from that exercise.

Like so many things in life, "government debt" is mostly just a meaningless abstraction used to fill time on cable news channels.  I say watch something else or just turn off the TV.

[toramba]

..please point me to a better understanding of this idea of government debt and your view..thx

[Pointedstick]

It's amazing how much misinformation and misunderstanding there is out there regarding this topic.  I can't figure out if the politicians are really that ignorant, or if they are just saying what people want to hear.

That's a great point. I think Mitt Romney is saying what people want to hear. It's inconceivable to me that someone with so much understanding about the financial system would misunderstand this on so basic a level. It also fits with his personality of saying whatever he thinks people want to hear.

[Pointedstick]

..please point me to a better understanding of this idea of government debt and your view..thx

http://pragcap.com/understanding-modern-monetary-system

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=7

[MediumTex]

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=7

Ah, the memories...

If I am selling servings of "good luck" from a stand in front of my house with the option of a "small" portion for $7, a "medium" portion for $11 and a "large" portion for $15 and I announce one day to my customers that I am "out" of the medium size portions of good luck, it will certainly be true that I may lose some sales (assuming my medium portions had been good sellers), but it doesn't mean that my inventory of good luck was actually depleted.

There are many Republican politicians today (ironically just like there were in the late 1930s) who have an almost pathological fixation on the "budget deficit" and "national debt" that is hard to explain in a world where the money in which these abstractions are denominated is itself an abstraction.

I'm not suggesting that the government doesn't need to reduce its footprint in society or that some streamlining of its functions wouldn't be good, I'm just saying that a political decision to destabilize markets by intentionally failing to place the equivalent of a few extra pallets of "medium sized portions of good luck" in the warehouse of good intentions is ultimately probably an exercise in political stupidity rather than political wisdom.

Stated differently, a government that controls its own currency and has not attempted to maintain a peg to other currencies can default on its debt, but it would require a combination of ignorance and stupidity that I like to think wouldn't be able to infect a majority of Congress at the same time.

[Pointedstick]

That thread is epic. After reading it, I basically had to re-evaluate everything I thought I knew about the U.S. economy and Austrian economics. Some nights, I re-read parts of it in the hope of absorbing through osmosis a few more drops of the wisdom and knowledge people were radiating in such vast quantities.

[moda0306]

I stumbled upon the main MMT/MMR paper by Cullen Roche after scouring Google for a solid description on "How does the government print money" or something like that, and I couldn’t find anything that really made sense or dove into the topic with decent-enough detail.  I was confused about the topic as we always talked about “printing money”? with kind of a loose understanding, both in terms of whether it should be inflationary or not, to whether interest rates were controllable, etc. 

Needless to say I was blown away when I finally found it.  Did they nail everything 100% correctly?  No, but they went 10x further into the topic than anyone before them to the general public, and Cullen’s main goal was to understand the mechanics of the system, and, even if he won’t admit it, apply it to some arguable economic realities (will printing money in a deleveraging, depressed economy to buy back bonds of equal value cause inflation?  Why not?  Is there an inherent flaw with a pegged currency or is that what is needed to keep gov’t in check?).

[Lone Wolf]

I believe it misses the point to base your hopes for the PP on what any one economic theory says.  Whether you like Neo-Classical, Keynesian, Austrian, MMR, or whatever, it simply doesn't matter.  The PP doesn't depend on them or their models of the world.  There was a time when many here thought MMT was the bee's knees.  When these folks switched to the greener pastures of MMR, the PP stayed the same... and most importantly, kept working.

You don't have to accept some particular narrative on what will or won't happen.  All you have to do is consider the possibilities that face you and whether the PP system protects you against them.

Given this, let's assume that nothing is off the table.  The US will do one of four things to address its high debt burden:

• Muddle through.  Debt service continues via normal means, although perhaps with a great deal of pain.
• Print too much money and create a lot of inflation.  This is bad but fortunately your large gold allocation protects you in this circumstance.
• Experience incredible economic growth.  Perhaps some incredible discovery or innovation creates so much wealth that servicing our $16 trillion debt becomes trivial.  (Don't hold your breath, but it's worth discussing.)
• Default on some or all debts.  Only possible if the first two options are too unappealing for politicians to face.  (Extremely unlikely in my view, but let's game it out.)  The US dollar plays an incredibly important global role and this sort of destabilizing default would have holders of dollars fleeing for stronger assets.  And the only asset which will never default is gold.  IMO the rise of gold would be enormous in this situation.

As far as I know, that exhausts our list of possibilities.  Happily, the PP works in any of those scenarios.

Like so many things in life, "government debt" is mostly just a meaningless abstraction used to fill time on cable news channels.

I wonder, though -- would government debt still be a meaningless abstraction in the face of double-digit short-term interest rates?  Or does government debt only seem like an abstraction when interest rates are zero?

[MediumTex]

I wonder, though -- would government debt still be a meaningless abstraction in the face of double-digit short-term interest rates?  Or does government debt only seem like an abstraction when interest rates are zero?

That's a hard question to answer, but I would say that in a post-gold standard world, the nation with the biggest combination of productive capacity and military strength shouldn't have to worry too much about its bond market.

In the face of high interest rates, I would say maybe the government wasn't spending enough money.  As stupid as that sounds, interest rates in the U.S. didn't really start falling until Reagan adopted a set of fiscal policies that guaranteed a rapid increase in government debt and deficits.  As Nixon, Ford and Carter stumbled through the 1970s, the government's reasonably strong balance sheet didn't seem to impress the bond market much.

Ultimately, there is a lot more abstraction in our world that we would perhaps like to admit.  The money is imaginary, the debt is imaginary, our "ownership" of stocks is mostly imaginary, our "ownership" of our homes is contingent upon timely payment of property taxes, HOA assessments and other recurring claims, we have discussions about the things that are important to us in abstract parlors such as this one and we ruminate on the chances of becoming a pure abstraction upon the expiration of our physical form.

I was watching a movie once and a guy said that the problem with many people is that they have "a preoccupation with abstraction."  That really resonated with me.

[Ad Orientem]

I wonder, though -- would government debt still be a meaningless abstraction in the face of double-digit short-term interest rates?  Or does government debt only seem like an abstraction when interest rates are zero?

In the face of high interest rates, I would say maybe the government wasn't spending enough money.  As stupid as that sounds, interest rates in the U.S. didn't really start falling until Reagan adopted a set of fiscal policies that guaranteed a rapid increase in government debt and deficits.  As Nixon, Ford and Carter stumbled through the 1970s, the government's reasonably strong balance sheet didn't seem to impress the bond market much.

I would be more inclined to credit Paul Volker's decision to jack up interest rates at the FED to around 15%. It was devastating to the economy in the near term. But it broke the great inflation of the 70's and early 80's.

[MediumTex]

I wonder, though -- would government debt still be a meaningless abstraction in the face of double-digit short-term interest rates?  Or does government debt only seem like an abstraction when interest rates are zero?

In the face of high interest rates, I would say maybe the government wasn't spending enough money.  As stupid as that sounds, interest rates in the U.S. didn't really start falling until Reagan adopted a set of fiscal policies that guaranteed a rapid increase in government debt and deficits.  As Nixon, Ford and Carter stumbled through the 1970s, the government's reasonably strong balance sheet didn't seem to impress the bond market much.

I would be more inclined to credit Paul Volker's decision to jack up interest rates at the FED to around 15%. It was devastating to the economy in the near term. But it broke the great inflation of the 70's and early 80's.

Was it Volcker or the collapse in the price of oil as a huge amount of new production came online in response to the 1970s price spikes?

I've always thought this would be great research for someone to do.  I suspect that Volcker gets more credit than he is really due.

[MachineGhost]

..would love to hear a few opinions on how the PP might hold up when the U.S. government begins to default on the bulk of its committments and files for bankruptsy..thx!

After the resulting capital flight, expect hyperinflation.

[MachineGhost]

I would be more inclined to credit Paul Volker's decision to jack up interest rates at the FED to around 15%. It was devastating to the economy in the near term. But it broke the great inflation of the 70's and early 80's.

He broke inflation expectations, the irrational fear mongering cycle of inflation begetting inflation.  So even inflation is abstract.

I'll give you my gold when you pry it from my cold, dead hands!

[clacy]

I would recommend Warren Mosler's book "The Seven Deadly Innocent Frauds of Economic Policy". 

This book is a very easy to understand, tutorial on why the US will not default any time in the foreseeable future.

[Pointedstick]

I would recommend Warren Mosler's book "The Seven Deadly Innocent Frauds of Economic Policy". 

This book is a very easy to understand, tutorial on why the US will not default any time in the foreseeable future.

Not having read the book, did Mosler predict the possibility that a contrarian congress might threaten to allow a default as a form of brinksmanship? I'm not altogether sure that the Republicans won't let it happen someday, to be honest.

[clacy]

He didn't talk about that scenario that I recall.  Suffice it to say, that in his opinion, both parties are pretty clueless about economic policy. 

The Democrats are hell bent on raising taxes.  The Republicans are hell bent on instituting austerity to reduce deficits (or so they say now).

Warren Mosler has really grown on me and has changed me thinking in regards to economic and monetary policy.

[moda0306]

Regarding raising interest rates, not to sound short, but we'd pay the interest for the same reason we can pay all our other bills.  Higher rates won't mean insolvency any more than paying SS benefits will.

The thing to realize is that interest rates on our debt can be one of two things, or a combination of both:

1) The fed sets rates.  Case closed, then, right?  We don't need to worry about 6%, 8%, 10%, 15% interest rates because they're not set by the market... the fed sets them.  Now if rates are held significantly lower than some "natural" rate (let's pretend for a second we can agree on what that is ), I think all the commies and capitalist pigs on this board alike can agree that inflation would ensue.  Why?  If rates are grossly negative in real terms, it makes sense to go into debt, not save (assuming we're not extremely over leveraged).

But this just reinforces the view that inflation, not solvency, is our economy's true constraint. 

2) The market sets rates, which would be best reinforced by looking at the loanable funds model.  There are a lot of people with money they want to lend, and few people borrowing.  Supply & Demand here, not some evil banking cartel, are keeping rates at ridiculous lows.  This means that the low rates we can borrow at actually mean the market wants to borrow it to the government at that rate.  So under this assumption, the market is actually trying to borrow the government money at negative real interest rates, and not all that much higher of a rate to the private sector.... but the latter isn't borrowing due to a lack of demand and bad balance sheets.  The gov't isn't "crowding out" anyone by doing so, then.  This means that the government is just another currency user and responding to the apparent wills of the private debt markets.  If we're not borrowing at natural negative real interest rates, then when do we?

I mean if we can't decide what drives rates as well as economic constraints, than ANY amount of debt could be "catastrophic."  Funny thing is, if inflation is the truest constraint, and it would appear so, then as inflation gets worse, it actually mitigates our debt/GDP ratio (as inflation alone will decrease debt/GDP ratios).

[craigr]

Regarding raising interest rates, not to sound short, but we'd pay the interest for the same reason we can pay all our other bills.  Higher rates won't mean insolvency any more than paying SS benefits will.

As you mention in one of your scenarios, the markets set the rates not the Fed. The Fed can influence rates but the market is going to ultimately decide what is charged to the borrower. If the markets think that the only safe rate to own US bonds is 10% then it doesn't matter what the Fed does because the bond yields are going to spike.

I think the distinction here is that technically the US (or any government that controls printing of their own money) will not "default" in the strict sense of the word of not paying you back. But they could default through inflation which would have the same net result. After all if you hold $1 Million in US bonds and they print out a $1 Million dollar bill to pay you back (along with everyone else) they did not default, but the money could be so worthless that the outcome is identical.

[moda0306]

Craig,

Very well could be... In fact that's the whole point.... The constraint isn't budgetary, but inflationary.

[Gumby]

Agreed. Inflation is the constraint. But, of course, let's not forget that the private sector isn't any richer when the government converts highly liquid risk free Treasuries to cold hard cash. So, it's difficult to see how the conversion from bonds to cash would be inflationary (it's sort of like how moving money from Savings to Checking...doesn't cause inflation). However, the deficit spending that caused the creation of the bonds in the first place (as well as the interest itself) would obviously be an inflationary force. (And taxation is a deflationary force).

Btw, for those who are interested, Warren Mosler's book can be found here:

http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

[stone]

I don't understand how it can be said that, in these days of QE, the fed doesn't simply set short term treasury rates to being as low as it wants. Is your point simply that high interest rates might be needed in order to strengthen USD/foreign currency exchange rates? I was trying to envisage the scenario where the fed could not get short term treasury rates below 10%. If QE did not exist as a policy option, then I guess high rates could come about if people/banks wanted to hold bank reserves paying zero interest in preferance over 30day treasuries paying 9.9% per year. I guess that could occur if people were absolutely frenetically exchanging the USD bank reserves for some foreign currency such that only bank reserves and not 30day treasuries provided the liquidity required for the forex trading out of USD. That would be a full on hyperinflation currency slide. I suppose if every single oil producing nation in the world and every single multinational corporation was to say tommorrow that they no longer accepted USD for payment, then that might cause such a scenario?
I think a much more likely road to ruin is simply an incremental stifling of the economy by financialization. Its curious to me how we are having our economy ruined in front of our eyes by financialization and yet we seem to care less about that and more about wacky hypothetical sky falling down scenarios.