We’ll Be $1Trillion in the Red in 2020. No Big Deal
wsj.com
wsj.com
About half of the national debt is to the federal government, the federal reserve or state and local governments. In other words - the US government is primarily in debt to itself - in a currency that it can print! The government could wipe out half the debt overnight by just forgiving the loans it made to itself. And it could pay off the rest by printing money - which would lead to inflation, but how much really?
What assumptions allow serious players to assume this? Do those assumptions still hold if the instruments are actually converted to cash, or would "serious players" start to treat it differently?
I'm not entirely sure as I admittedly don't 100% understand all of the fundamentals of treasuries, but if all of a sudden the idea that debt is not a thing to be paid back, but rather currency that seems to be a shift that might lead to some changes.
I mean that's what currency holdings are (at least, it's the only model I know of that makes sense). People who held pesos and people who held local-law bonds were in much the same position in the Venezuelan crisis and reacted much the same way.
The weird part is the other side: the assumption that you can treat treasuries as a cash equivalent, which rests on the assumption that the federal government will keep consistently wanting debt and will keep targeting a stable rate of inflation, that there will always be a functional tri-party repo market, etc. Occasionally these assumptions are violated and some people lose money - see the "flash rally" for a fun recent example.
I mean, the traditional model is that bonds are less liquid and less dependable. A government pays a bit more interest on them than they pay on cash deposits, but in return they get the flexibility to issue more or less when they want to. They're not inflationary to the same degree as cash, because everyone understands that bonds are not quite money, that a missed interest payment and a debt restructuring is not quite a currency crisis; people don't accept bonds in lieu of conventional payments. But US treasuries are well past that stage; if more are issued, that changes the de facto money supply, and the federal reserve watches that effect closely. If the US risked defaulting on treasury bonds, there would be massive panic. The government, i.e. the public, pays all the costs of issuing bonds instead of cash, but gets little in the way of benefit; they monitor their issuance so closely (to prevent things like the flash rally) that they might as well just issue cash instead.
Lucky you.
The Fed could basically convert the bonds into dollars in an account with the treasury - which is completely asset neutral. The bondholders before had extremely liquid bonds which are basically cash-equivalent. Now they have cash. Basically moving from one column in a spreadsheet to another, and suddenly the debt is gone. Yes, there's still a liability, but only in the same way that deposits in a bank are liabilities to them.
Would it create inflation? No, why would it? Inflation happens when money is spent (which happened back when the bond was issued, because it was probably issued in the same amount of Government deficit spending), and since the transaction is asset-neutral, it wouldn't necessarily change any of the bond-holder's spending patterns.
Of course, the thing at the end of the day is that people have bought those bonds because they want a safe interest-bearing instrument. The central bank or Government of a monetarily sovereign country doesn't really need to issue them to deficit spend, it's more that there's a lot of demand for them to exist...
This depends if people are forward looking or not. Bonds have terms, an account in the Treasury does not, which means it has no real meaning at all (It has no effect on anything so who cares if it ever gets paid back?). So, this is just obfuscation of money printing.
When a government starts money printing, their money doesn't look so good anymore.
On the one hand: Yes, that represents a debt the US government owes to itself, and in a very real sense is not real. The SSA could announce they were tearing up the debt, and boom, the US national debt has now dropped by a hefty chunk!
On the other hand: That money is slated to pay social security beneficiaries. Tearing up the debt doesn't make the retirees go away, nor the obligations of the system. Assuming that the social security checks still go out, then cancelling that debt has done nothing.
The same is true of all of the rest of the debt too. "It's owed to a state government, it's not real!" True, but the state government is counting on getting that money. If they don't, they'll need to source it from somewhere else (via some mixture of taxation and cuts).
https://fred.stlouisfed.org/series/IIPUSNETIQ
The cumulative "exports" stand at around -$11T, 50% of GDP.
But sure enough the other 3 years of the cycle will be spent raising the defense budget and cutting taxes mostly for businesses and the 1%. Hmmm....
> The perception that they only benefit the 1% is propaganda. It’s also patently false.
The primary benefit went to the ultra wealthy, not surprising given lobbying. You can write off the cost of a private jet, for example.
https://www.economist.com/leaders/2019/03/07/private-jets-re...
https://www.businessinsider.com/private-jet-trump-tax-bill-d...
But what did you save? $500?
It's not good when others do it for "Democratic party" purposes (to offer large quantities of free stuff).
It really is as simple as that. Keep the budget balanced (certainly outside of a recession!) and you'll be less likely to be caught with your pants down. Keep it unbalanced and you'll be at the mercy of the markets.
Who knows where is the 10 year headed, 5%, 10%, even more? The monetary system would probably be rewritten before even 5% ever happens, with serious disorder on the way. Assuming we're not at the beginnings of the end of this iteration of money.
The signature Democratic legislative achievement in the last decade was the Affordable Care Act ("Obamacare"), which came with deeply unpopular pay-fors: "Cadillac" taxes hitting union health plans, the "net investment income" tax hitting high earners, and others.
The signature Republican legislative achievement in the last decade was the Tax Cuts and Jobs Act ("Trump tax cuts"). This was chiefly deficit-financed (no pay-fors), excepting a popular repeal of the individual mandate and an unpopular-but-deferred middle-class tax increase 10 year later.
Democrats paid for their stuff, Republicans didn't, and Republicans won the messaging battle. "Keep the budget balanced" is terrible advice from a political perspective. It only gives space for the next administration to spend more money.
https://www.cbo.gov/publication/55342
I worry about the debt, too, in some fairly abstract way, but I don't know what realistically gets cut. Social Security? Good luck, because old people vote. Medicare? Good luck, old people vote. Defense spending? Good luck, you better believe that defense contractors vote, in perfect synchronized-by-lobbyists lockstep.
Eventually something will give. No idea which part though.
1. increase income tax rates on everyone
2. Remove ceiling on payroll. Or call it a tax as well.
3. Slightly lower the floor for estate tax and close loopholes (like buying an insurance to inherit...) and slightly increase estate tax rates (I think 60% estate tax of the estate value over a limit of about $5M is fair).
4. Higher Medicare and social security tax rates to pay for Medicare for all.
I hate how people treat this as an unsolvable problem: the solution is obvious: increase taxes and cut expenses where we can. It isn’t that hard.
How many people complained about FDR's 'New Deal' as a bad thing - who weren't in the top 1%? The New Deal setup systems and infrastructure and laws to basically allow for a strong free enterprise system while ALSO reigning in crony capitalism.
I.e. regulated capitalism.
Since Reagan we've just been dismantling everything FDR got right, just to find out, hey those things were there for a reason. We need to go back to the tax rate that he had which was about 70% for incomes over 10 mill, or even 50% at 10, 75% at 50...
Alternately we could move to VAT + Land/Property taxes, and maybe Yang's UBI to offset the VAT for the poor. I don't see a VAT working w/out fixing some poverty issues first though...but I'm more thinking medicare for all needs to be the first.
It's the biggest social program with the most media attention, and I'd say of anything out there it has the most likelihood to gain momentum. UBI, College, Paid Maternity/Paternity - are pipe dreams if we can't muster the political capital for M4A.
The wealth tax that some candidates are pushing for would also possibly be a good thing.
The biggest thing though, I think we need to somehow change/streamline/modify how everything in congress works. There's TONS of money that just gets wasted that could work better via automation, combining two departments, re-thinking if a department is even needed - esp. if it only exists to enrich some constituent.
When designing medicare for all, we need to take congress out of the equation, instead we need to bring in physician groups, and economists and say here's what we're aiming for, come up w/ some proposals to make it the strongest possible plan for all parties -- without consideration to what it'll do for the pharma/insurance lobbies.
I mean, I trust scientists/mathematicians/accountants more to come up with sound economic theory/principles than a bunch of lawyers, and lay-people without experience doing that sort of thing. But for things like this and global warming, maybe Congress should sit back and let experts come up some solutions.
2. Doctors don't come out of assembly lines. Professionally trained medical staff is the biggest component of the Medicare blowout, and there is no easy way to increase supply in the short term. Dumping a lot of dollars into the Medicare system just drives up costs for everybody while shifting the limited supply of medical care around. From the perspective of the tax-paying middle-class, they'll be paying more into the system AND get worse medical care. That's the real political non-starter.
We are in a 'weird new normal' of low-interest rates for a variety of reasons, partly artificially induced.
But if you put your finance hat on and contemplate for a moment what that means ... well it means debt and a lot of it and rationally so.
If super low-interest rates become normative, our thinking has to change quite fundamentally because it's rational to lever up quite dramatically. We may have to reconsider entirely how the national balance sheet works.
The only question is how deep we will "correct" and will it develop into something bigger than a simple correction. At these levels even a 20% correction will drop SnP >600points. Interestingly a 50% correction will drop us right on top of the 2000-2006 market tops which would still be considered bullish long term, if it holds.
Are you buying long term puts on the SnP? Is anybody?
The only way to actually do this would be for some pundits/funds to come out and say they have built a massive short position on the SnP, just like all those Tesla shorts that got on TV from time to time. Is there any?
There is no perfect answer. Different people worry about different secondary risks, and do different things in response.
IF we look at history and dozens of cases of runaway inflation or currency crises (germany, argentina, russia default, venezuela etc) where currencies devalued fast in a short period of time - having physical gold (even 5-10% of the total portfolio) would have alleviated the pain.
people lost life savings... and will lose again, as history often rhymes again and again.
I will sell most of my stock this week.
Interest rates are historically low. Wait until they go to 6 or 7%.
QE is not "printing money".
So you would think from Econ 101, but that empirically has not been the case. We're in uncharted waters at this point.
The bank owns you.
Owe the bank $1,000,000,000,000?
You own the bank.
And like every other finite resource that doesn't come with an accurate accounting system, it is being overexploited, and will come back and bite us all eventually.
No they can't, and they won't, unless you want the fed to crash the dollar and make it worthless. The money supply is a very tricky thing in that you want enough liquidity so that the market continues working, but too much money supply would make the dollar as worthless as seashells.
[0] https://www.cnbc.com/2017/11/24/the-fed-launched-qe-nine-yea...
Sure, but what is the number that constitutes "too much"? Right now the M3 money supply is 15.3 trillion dollars and the CPI inflation has been below 4 percent since 1991. In that period the money supply has grown by 12 trillion. If quintupling the money supply in the same period that GDP only doubled doesn't not only not tank the value of the dollar but doesn't even cause serious inflation, I'm curious what would?
That's a serious question, by the way - I have a background in economics. This is unprecedented.
Once you do that, you can get away with near infinite debt like the US Government.
The US isn’t even in the top 15 by percentage of government spending. Not even in the top 15 as a percentage of GDP.
Focusing on those two points does say.. something, but it doesn't rebut the point being made, and does serve to obfuscate it.
The United States has eleven of the largest carriers in the world and a bunch more that are smaller that are still bigger than what other countries consider a carrier.
That's an example of how disproportionate it is in terms of overall size. Not manpower, not GDP percentage, just size.
Where other countries have one or two of something the United States has at least ten. This goes for planes, tanks, cruisers, helicopters, missiles, pretty much whatever, they've got more.
This is correct except for tanks [0], where Russia has about 3 times more than US. This is not unexpected, given that no-one is going to invade US by land, and that Russia has been repeatedly invaded by land.
[0] https://www.nationmaster.com/country-info/stats/Military/Arm...?
We spend more than the next 7 countries combined.
https://www.visualcapitalist.com/u-s-military-personnel-depl...
The US debt to GDP is not especially high compared to other countries.
Once this kind of a situation arises, a lot of trust is gone from the system. Eventually the spill over spreads to the larger parts of your economy.
But seriously, buy gold.