We owe ourselves 356% of what we produce every year? We don't owe this money to some foreign planet with a death-star pointing at us. So at what point should we be concerned? What is the worst that can happen? We don't get our own money back from ourselves?
The "world" doesn't owe the "world" that amount, it's people in already tight situations owing that to people in pretty comfortable ones. The ones borrowing to get by are paying more money than what they borrowed to people who already had money to lend out.
What we'll see is yet another rise in inequality, yet another wave of the bigger businesses surviving over the smaller ones, and more debates within each government regarding how much intervention is wanted to try and save people from the consequences of those inequalities.
I can assure you that the comfortably rich are not getting richer by loaning money to the average person to buy houses and cars with 2.5% interest rates, while inflation is arguably significantly higher than that number.
The rich get richer in this scenario because low interest rates increase the buying power for everyone, which means they can buy more expensive houses or pay less for the mortgage on the house they already own, which in turn means they can buy more things from Amazon, which means Amazon does more business, which means the stock price goes up, and so on.
The populist narrative likes to simplify complex economic topics into rich versus poor narratives as if this was a zero-sum game, but it’s not. I’m not sure how your final points about inequality relate to increasing total global debt, but it’s obvious that this isn’t as simple as funneling money from the poor to the rich.
Your explanation doesn't explain anything away but to try and put some sort of weird blame on poorer people for borrowing, it's just as usual of a narrative as the populist thing to be infantilizing poorer people. There's however a pretty big difference between borrowing at your limit or sometimes beyond because you're trying to get through a pandemic or have a place to live, and borrowing at high risk because you're playing with huge sums and can in fact afford the loss. The latter as a group made more money during the pandemic from any possible source you could look at, the former as a group lost money and jobs. I won't insult you by throwing Oxfam reports at the situation, especially since you might be keen on calling it populist too and calling it a day.
Consider what happens with high interest rates: The people with money are incentivized to put it in the bank and sit on it, while the people without money are forced to pay exorbitant interest rates for the privilege of borrowing that money to start businesses, buy cars they need to get to work, and so on.
Low interest rates are a forcing function to force the wealthy to deploy capital somewhere other than letting it sit in a bank.
> The latter as a group made more money during the pandemic from any possible source you could look at
Stock prices are up because we literally stimulated the economy by giving the average person free money to spend and subsidizing their jobs. The headlines comparing net worth of wealthy people at the lowest point of the pandemic to the highest point are outrage porn. They didn’t make money by funneling it out of the poor and into their bank accounts.
Saying that the function isn't flat doesn't give us ANY useful information about the finer distribution of wealth, studies do. And those studies keep on pointing out a world where the inequality gaps are getting wider and deeper. This is exactly back to my first comment, and somehow that was populist to point that out to you.
I think they were saying that it's not zero-sum with respect to policy rather than time. Most ideas of wealth redistribution would have disastrous effects on the economy. There's a reason why even the most progressive countries primarily fund their social programs with income taxes and VATs rather than capital gains or wealth taxes.
https://www.oxfordmartin.ox.ac.uk/blog/reducing-wealth-inequ...
I don't see it. How does increasing capital gains taxes and decreasing dividend taxes cause disastrous effects on the economy? If anything the low capital gains taxes incentivize bubbles by making it easier to make money off of selling to a greater fool than to simply let the company earn money and pay the profit out as a dividend.
Tesla's market cap is going to overtake Apple. If the value of the stock was based on (future) dividends people would stop trying to hype up the stock because it went up and instead just invest based on actual and future business activity. I consider a $100 billion market cap for Tesla to be fair but optimistic. The current market cap is just illogical. Once batteries have turned into a commodity, Tesla will no longer be able to justify its valuation.
In order for this to exist, you need people to trust that their capital is well protected and handled in a fair manner. "Fair", when talking about the global economic perspective, is a cost/benefit analysis taking account of your tax burden.
Private investment is a way of putting your money at risk in exchange for a potential reward. Wealth redistribution at scale implies that you massively reduce or eliminate the rewards associated with your capital. This is a big problem as it drastically affects the incentives to put your money at risk (i.e. in a private company). This will absolutely tank the private economy, which, as mentioned, is the backbone of a modern country. No one will want to hold capital in your country or invest it in your country because it's going to be redistributed.
This is why even the most "socialist" countries from the uninformed American perspective actually have very low wealth and corporate taxes: they recognize that encouraging the private economy is fundamental to the stable function of a modern country. (Instead, they heavily tax income, which has much less economic side effects)
The idea of infinite supply side stimulus when the demand side is anemic simply makes no sense unless you love increasing wealth inequality. You need multiple tools in your toolbox.
> However at any fixed t, the total value is a constant
This doesn't make sense. This as opposed to the total value at any fixed time t being... not a constant? What does that even mean? If f(1) = 2, then is f "constant" at 1 or not? What would a not-a-constant value for f(1) be in that case? Infinity/Dirac delta?
What I'm saying is that when we keep on using the idea that this isn't "zero-sum" we implicitly carry the mindset that "money that I have isn't money that you don't have", that "it's not because I have this money that you don't" - but at that exact instant it's mechanically the case that me having this money is the actual barrier to you having it. The "zero sum" comment is a misleading way to talk about creation of value over time, because all it hints at is the idea that money somewhere isn't money taken from elsewhere simply because new value gets created as time goes. But it doesn't give any fact about money distribution at even a fixed time and even less so as a function of time. It's not a useful saying at all, because it only states "in the simple modelling of value(t), we have value(t+1) != value(t)", that's literally ALL it states but the heavy lifting is what it tries to imply.
Or a business. Give $1M today to the right business and it'll be worth more than if you give it to your local neighborhood MLM. While the change in value is realized over time, the net present value of the money varies depending on those future deltas.
Am I way off here? What I'm trying to say is that current value is derived from future value, so the sum of money at time t is dependent on how today's money is distributed and grows in the future.
What you're talking about is what the PROMISE of a dollar right now in some hands can be, in which case you're not solely putting value on the dollar bill in my hand but on the value created by my person in your belief - which is where people get to disagree and think whatever they want. And be right and win big, or be wrong and lose big, and anything in between.
It doesn't change the fact that whether the promise is mine or some other person's, when you give us a dollar it's a dollar to either of us. What we're making of it is the added value from human contribution at t+1 (and on and on).
How though? There are only limited amounts of land to own, water to drink, desirable places to live ect. How can everyone simultaneously get rich. It is obviously a zero sum game. Over last year my FAANG friends had their stocks increase by insane amounts which they sold and bought second homes, beach houses, ski condos. I am not a FAANG employee or owner or TSLA stock, we want to buy a house but we are priced out of most places. We have to move away from our family to the farthest suburbs to even be in the competition.
It's important to note that the third of these is not like the first two.
Yes, the Earth is a planet of finite size and there are only a finite amount of acres of land and molecules of H20 on the planet. Note that the actual land used by humans, and the actual H20 used by humans, are both much smaller than the total that is available. And the H20 gets recycled anyway. But yes, there are finite limits to both set by the Earth's finite size and the physical characteristics of humans.
"Desirable places to live", however, is subjective. Different people have different desires. And we have the ability to create different places to live that satisfy different people's desires. In other words, "desirable places to live" is not a finite, limited resource; we can create more.
Most human wealth is like the latter, not the former; we can create more of it. But you have to have a mindset that you can create wealth. That is a fundamentally different viewpoint than the viewpoint many people seem to have.
> Most human wealth is like the latter, not the former; we can create more of it. But you have to have a mindset that you can create wealth. That is a fundamentally different viewpoint than the viewpoint many people seem to have.
Agreed. Another thing many people miss is that money isn't wealth: its simply the measuring stick or common language/protocol we collectively use to measure the wealth or value people create through their work.
Simply creating money out of thin air, or out of non-collateralized debts results in systemic distortions in money's ability to accurately measure wealth and value. This leads to price signals that no longer communicate real needs, which in turn leads well-intentioned people to make malinvestments.
Can't upvote this enough. If only most people grasped this and saw through the smoke screens that politicians and financial institutions put up to disguise what is really going on.
The only thing I would add to this is that, in addition to the distortion effect you describe, creating money is a method of redistributing wealth from the poor to the rich, since the newly created money ends up going mostly to the rich.
I'm not sure it's as simple as that. Creating more money reduces the value of money that already exists. It helps those who are heavily indebted (including the government) by reducing the real cost of those debts and hurts anybody with a large amount of net worth saved in cash. Both rich and poor people gain a lift from this debt-reduction effect; rich because they use leverage to purchase income-producing assets, and the poor because it erodes the cost of any consumer debt they have. The savers are losers, regardless of net worth.
Yes, which is why all the people who don't get any of the newly created money lose wealth. They have the same amount of money as before, but it's worth less.
Where does the wealth they lose go? To the people who did get the newly created money. In other words, it's a wealth transfer from whoever doesn't get the newly created money, to whoever does. Usually the latter are banks and financial institutions, i.e., the rich.
> It helps those who are heavily indebted
As long as debts are denominated in dollars, yes, the real cost of the debt is reduced. But the people who don't get any newly created money also lose buying power, and the latter loss is not fully compensated for by the reduction in the real cost of their debt.
To see why, consider a simple example: I have $1000 in monthly income, $200 of which goes to pay off debt. The government creates some more money but I don't get any of it. The dollars I have to spend on debt each month stays the same, $200, but it now represents less real cost than before, so yes, the real cost of my debt has gone down. But the dollars I have left over for everything else also stays the same: it was $800 before and it's $800 after. But the $800 now buys me less than it did before, so in real terms I am still worse off.
> The savers are losers, regardless of net worth
Assuming they don't get any of the newly created money, yes.
That said lots of markets are close to zero-sum on a near-term basis. Real estate in very scarce locations is a good example for sure.
Regarding the real-estate example, the real estate may be zero-sum but net economic value still increases when a piece of land changes hands from someone who values the property less to someone who values the property more—which is the default expectation underlying any voluntary trade.
Total utility depends on people's ability to use/appreciate goods and services. Therefore, a transaction that allows for more use/appreciation creates value.
However, you can anticipate that other people will use/appreciate something, and set out to produce it. The expectation of future sale creates value for you; value is created before any buyer appears.
Feels to me like most value is probably created intentionally this way.
On real estate: I think there's not that much value created on average simply due to transacting. Sometimes people die and their estate is sold, or a space has features that are more valued by the buyer (e.g. proximity to water for a sailor, or 3-phase power for a machine shop), or some other asymmetry arises. However, most spaces don't suddenly provide more value to people just because someone else resides there. The majority of value in real estate is created by building/modifying, and the overall community (e.g. building a train stop increases value around it). Asymmetrically valued features are probably far from the biggest driver of value or price increase in aggregate. So, I agree value can be created by transacting real estate, but find the statement a bit misleading when thinking about why prices go up. The growth of availability of space is much slower than the growth of population and buying power.
I think if you stopped the transacting then the value of the property would deteriorate; the value that a given owner places on the property is variable and in the end must always go to zero when the owner dies. So transacting increases the value compared to not transacting but there are other factors in play with the opposite effect, resulting in little net change in value over time.
It's net negative when the buying party is misinformed and cannot afford the financing for the property he just bought. That's how we got the 2008 crash.
Those who are routinely wrong in their expectations tend not to accumulate wealth, and thus make up a smaller proportion of economic activity over time—unless there is some external force at work transferring wealth from those who make good economic decisions to those who do not, thus increasing the economic influence of bad decision-makers.
Untrue. The world has always had problems, even today, but it's ridiculous to think that everything was bad (before capitalism, isn't that what you meant?). That is propaganda you are repeating out without even noticing.
Go study history before making absolute claims like that.
Until sometime in the last few hundred years, the vast majority of human effort was spent on trying to make sure there was enough food, and famine was far more common than it is today.
The fact that life was so hard does not mean that people didn't find meaning in it or that it was bad by any means, but what's ridiculous to me is to suggest that there is a finite amount of wealth in the world when very obviously there is more today than there was yesterday and who knows how much more than there was a thousand years ago.
> How though? There are only limited amounts of land to own, water to drink, desirable places to live ect. How can everyone simultaneously get rich.
If you define "get rich" as "own land" or "own water" or "own property in desirable place X" then yes, you can see it as zero-sum.
But if you define "get rich" as "accumulate money", then the economy it is not zero-sum. And one of the ways it is not zero-sum is fractional reserve banking. This allows the banks (who arguably are the originators of most of the loans being discussed here) to literally "create money out of thin air". For a bank to underwrite a loan to someone for $20,000 for a car, they don't have to wait for grandma's saving account to accumulate $20,000 in order to have the funds to make that loan. They only need (example) $2,000 to be "savings" in grandma's savings account in order to be able to underwrite a $20,000 loan to the person wanting to buy the car. The $18,000 difference was simply created by fiat out of thin air.
Which is how, if one defines "get rich" as "accumulate money", the economy is not zero-sum. In order for person X to gain 10,000 more dollars, person Y does not have to give up any dollars (unlike with land/water/housing/etc.).
what is owning water? I don't want to own water. I want to live in place where there is no water shortages. What is your plan to survive without 'owning water' ?
You are not rich if you have ten billion Zimbabwean dollars.
I would agree if we had runaway population growth. However, we get to be wealthy simply because our population growth is going down. The amount of resources accessible to the average person is roughly staying the same or increasing. Urbanization and failure to build more housing is what is causing issues in the housing market. It's not about the availability of resources but rather their perceived value and low interest rates and job opportunities make the perceived value go up.
What's zero sum isn't the economy because productivity improvements happen all the time. What's zero sum is the access to fresh money. There is an inherent imbalance in the financial markets that favors large corporations. The money is arriving in their hands and thus the hands of their owners first, at the expense of those who get the money far later, the workers. This is why Biden wants a stimulus package. He's trying to make it fair for both sides.
High interest rates make sure that only the most productive businesses get access to capital. This is a very important inflation moderator in an overheating economy. Right now the economy is far from overheating which is why interest rates are low.
>Low interest rates are a forcing function to force the wealthy to deploy capital somewhere other than letting it sit in a bank.
They aren't. The theory behind low interest rates is that there are infinite investment opportunities and thus having access to cheaper loans will cause entrepreneurs to start more businesses and thus employ more people. Once unemployment is down any additional loan will cause any additional dollar to contribute to a decrease in purchasing power of the dollar because you have reached the maximum production capacity of the country. If you want to run your country at maximum production capacity demand has to just barely exceed supply. This is one reason why 2% inflation is a policy goal.
In practice nobody is spending the cheap money on sensible investments with a reasonable expectation of a return based on productive work. It's because small businesses have a hard time getting a loan in the first place. A small drop in interest rates isn't enough to compensate for the increased default rate of a startup. What happens is that big companies and rich individuals essentially have a monopoly on cheap credit and they use it for dumb stuff like buying stocks or Bitcoin.
It's not because we're allowing a lot of risks to be taken with regards to money that those risks don't have a value, i.e. a real cost.
The only 'real' money is cash and central bank reserves.
Banks create money, thats their role in the economy. Thats what banking license is for. You don't need banking licence to lend out money you already have.
www.bankofengland.co.uk › ...PDF Web results Money creation in the modern economy - Bank of England
What this inevitably means is that when it fucks up and doesn't juggle fast enough or people all change their expectations (like if everybody wants to suddenly pull money out of their accounts), then the money that doesn't exist has to end up existing one way or another - and governments foot the bill directly and/or indirectly.
In less "agitated" times, that "fake" money being created is a direct measure of the value that banks are agreeing to see in the people they loan the money out to (and in fact they see a higher value over the exact same horizon of time and at any given value of t, otherwise they wouldn't loan the money out unless regulations force them to).
In both cases, money that circulates at any moment in time is money that exists in the system (yes it's a tautology), with money that exists at t+1 being paid one way or another by the system. If everybody takes out their money right now and that's more than what the banks have, governments step in and the impact over the financial system is the value of money itself falling, with the cost being that everybody having relied on money now has less value out of it.
It's not because it's not using the term "dollar" that it isn't a cost, just like on the other end of the system where we bet on humans creating value the humans in question aren't magically producing fully-formed dollar bills. Both ends of the system aren't formulated in dollars in and of themselves, because dollars are only the medium to 'illustrate' or represent the value, not the value itself. Ceci n'est pas une pipe, etc.
There are only three kinds of money: central bank reserves, which you can't get access to, cash, and commercial money, what you are calling 'fake money'
So if everyone tried to take out the money in cash, yes, there is simply less cash than 'digital money', so its impossible.
But there is no 'real money' except cash that you as an ibdividual has ever had your hands on.
The system, as designed, cannot work without banks. So its unfair to call banks 'smoke and mirrors' - you would have to redesigns the whole economy to get rid of them
By the way, you're the one who called it fake money in your message, I responded to that.
The cash that I have had in my hands is as true as whatever field in a database at a bank, in that whichever we refer to either way the bank will agree to make use of it equally and if it doesn't or can't it won't discriminate either in its inability to use the value. In both cases, when shit hits the fan and the value that banks bet on needs to be present and isn't, the system as a whole pays the cost of that. Printing new bills to put in the banks vault does create the "money" as in bill but not as in value.
I don't even understand what you're trying to argue here, quite frankly. I have no problem with the social constructs of money and the fact that banks through loans are a vessel for humans to inject value into the system, so I don't see what conversation we're having here.
Not true. Governments around the world are just using money that doesn't exists, an example is the new economic rescue package. This kind of money, is great to made rich people richer.
Ultimately it just wasn't in bills but it was indeed paid in the government's loss of abilities (as well as the price to the population) and made money in other places where it was due. And that exactly what governments do when they deal with currency: any adjustment isn't creating energy out of nothingness, it's just that the layers of our system make it pretty hard to figure just where the debt is paid and it ultimately ends up being paid by those least able to see it coming & to avoid it. Not to hammer the point again, but those people tend to be again on the end of the spectrum that has "poorer" written on it.
They get to spend the money right now, before the inevitable asset inflation that occurs when 2T gets printed.
By the time you -- YOU, the regular person -- see the money that was pumped in 10 months ago, in the form of your salary, it is already too late. Your salary does not give you any actual increase in any concrete thing, because inflation has already occurred.
If, somehow, that money that was printed goes into actually useful things, like RnD, infrastructure, or education, then perhaps your salary could buy more things because the economy would be more productive. But it can't because it's not... instead, dog walking apps are worth a billion dollars.
The federal governments deficit last year was about 4 trillion so the FED basically directly and indirectly financed 3/4 of our own federal governments deficit spending most of which went towards the CARES act which mainly gave cash to citizens directly through stimulus checks and increased unemployment payouts and indirectly by paying employee wages to keep people employed. It also helped fund state budgets, hospitals and operation warp speed which has speed up the moderna vaccine. Overall, I think the those were some pretty damn good investments for a pandemic induced recession.
As you note, money printing is a big part the tide went up. But why did Amazon go up even more than the tide? I think it is more complex than just printed money. It is partly aligned incentives, incentivized workers, ruthless execution, focus, internal investment, and i'm sure you can think of some bad reasons also.
At some point we do need to acknowledge better execution, more aligned incentives, etc.
One particular thing to note, many of the non-FAANG companies treat their employees terribly, especially engineers. Comp is nothing compared to FAANG, and yet they expect cheery engineers and other "low level workers" who give it their all and bring success to the company. And perhaps the formula doesnt work, which is good, because all workers should share in the success of their efforts.
There are multiple populist narratives. At least equally popular is simplifying into the narrative where the non-zero sum aspects make up for any number of other problems (cf Regan's trickle down stories).
I guess it's hard to simplify complex things without losing important information.
Oh, so everyone is getting richer! Whew, Thanks, I was worried for a second.
Inflation in the US isn't, even arguably, significantly higher than 2.5% per annum, and anyplace it is, interest rates are substantially higher.
And don't “but asset price inflation”; that's not relevant, since that's just the rate at which people invested in assets can get richer, not a price deflator that helps gauge how rich someone with a given nominal $ amount of wealth is.
Do they do this? I was under the impression that they stashed it offshore and sat on it. I'd like to see what "the rich" are actually spending their money on and how it drives any economic levers.
Poor people are in debt. They have student loans, medical debt, housing debt, etc.; there are people who owe on houses that they've been long evicted from. Inflation reduces that debt, which is why the fed believes its only mission is to hold inflation down.
People with savings, and who own debt are the people who suffer from inflation. Or would, if there were any. Instead we just have an explosion in price of what rich people already own, like real estate.
For the last 50 years, home prices have tracked or exceeded CPI. When home prices appreciate, you get leveraged equity on your home. You are unquestionably benefiting enormously from inflation.
Sure - if you took out personal loans to go to Cancun for the weekend, you're not doing any better. But >68% of all personal debt is mortgage debt. The majority of debt is backed by assets which are inflating. The majority of people in debt (and especially companies) are benefiting enormously.
Further - even if you did have an unsecured personal loan or an auto loan or even student debt - you can refinance to artificially cheaper rates - so you are still benefiting.
Poor people without debt still pay because their buying power continually diminishes. Their $100 saved today isn't worth as much the next year.
Poor people without assets still pay. They are forced to pay rent to those who have assets. The rent will be priced to cover the debt of the asset owner.
> People with savings, and who own debt are the people who suffer from inflation.
People with savings most typically invest it. The higher the inflation, the riskier the investments they will take to ensure their savings don't dwindle away.
citations ?The idea that poor people could hold a large percentage of debt is - in itself - paradoxical / ridiculous. In order to have debt, you need something to service the debt with. Otherwise, you're bankrupt.
The major caveat here is student debt - anyone can load up on student debt regardless of ability to service - and there's no way out of the debt. You can't file bankruptcy.
[1] https://www.fool.com/the-ascent/research/average-american-ho...
To me (not from us) this sounds like indentured servitude.
It's like a concept from the days when we used to burn people at the stake and executions happened on a public holiday so everyone could watch.
Only the distress companies (Oil, Travel, Restaurant, Airlines) need debt more than anyone else.
This is wrong. Most people in tight situations around the world don't even have access to banking or debt.
I imagine most of this is sovereign or corporate debt, and financialized debt, like obligations incurred by instruments such as shorts, or taken out to perform leveraged trading.
"The private sector’s debt has tripled since 1950. This makes it the driving force behind global debt. Another change since the global financial crisis has been the rise in private debt in emerging markets, led by China, overtaking advanced economies. At the other end of the spectrum, private debt has remained very low in low-income developing countries.
Global public debt, on the other hand, has experienced a reversal of sorts. After a steady decline up to the mid-1970s, public debt has gone up since, with advanced economies at the helm and, of late, followed by emerging and low-income developing countries."
-> Debt owned in the private sector isn't just about stock market but about all the small businesses which in the US are 99.9% of them (see https://www.chamberofcommerce.org/small-business-statistics/ )
-> Public debt is debt that we all deal with, and it might come as a surprise to you but a majority of people aren't actually rich
What I'm trying to say here is that you can play on the technicality of the amount of people under poverty thresholds not being in debt because they can't even access debt, but it's not really changing anything about the people who ARE in debt being in significant amounts people who might not have the shoulders to take it on but are trying to get by and doing so as a requirement to get by.
Nor am I suggesting that the lower class won't bear the brunt of this problem. They will eventually bear the brunt of the global debt issue in a different way - through prices that outpace pay increases.
That's not how people in poverty view or use debt. But we are talking about global debt holdings. When zoomed out to the global scale, the VAST majority of debt is owed by large scale entities and it is pretty incoherent to describe that as a transfer from the wealthy to the poor.
Yes, the idea is that you expect to invest the money into something productive. At low interest rates the bar for "productive" is really, really low. Most companies just play around with stock buy backs.
Why isn't the money printer funding wind turbines, bridge repairs, etc. Instead of inflating ezisting bubbles.
If you are in the Western hemisphere, the interest rates are low (or negative) and the outlook of inflation is bleak. So it's more like the other way around.
Inflation hits those who have a salary, as their purchasing power sinks. The rich earn their income from owning capital, not from contracts where they trade hours per dollars.
You are not a cantiollionaire, neither are other HN users.
The rules are different for you than for those closest to the money printer.
No, I can tell you lots of rich people lost a lot during the pandemic. Especially in the affected industries (events, airlines etc). Unless by rich you mean Jeff and Elon, this statement isn't generally true though it is true for some.
https://theconversation.com/fact-check-us-did-some-americans...
https://www.thestar.com/business/2020/08/15/as-the-pandemic-...
https://www.npr.org/2020/04/22/840678984/small-business-resc...
https://www.cbsnews.com/news/billionaires-pandemic-1-trillio...
Only about 1/3 of the debt is government debt right now (a little under $100 trillion globally).
If you look up where your federal tax dollars go, there is a significant line item for servicing debt. Those interest payments go to holders of the government debt, which range from US citizens to foreign countries. You can find charts and estimates of who holds that debt if you want to understand where it goes.
The popular narrative about governments printing free money isn’t really true in the simplified meme-style presentation that we hear online.
... and also the fed[1] which, currently, holds more than 10% of the US debt[2].
"The popular narrative about governments printing free money isn’t really true in the simplified meme-style presentation that we hear online."
Perhaps - but it is getting more true all the time. In the case of the ECB it is getting more true all the time in the absence of any oversight, transparency, adherence to constitutional law or democratic processes[3].
[1] https://www.nytimes.com/2020/12/16/business/economy/fed-dece...
[2] http://www.crfb.org/blogs/fed-buying-our-new-debt
[3] https://www.lrb.co.uk/the-paper/v43/n01/perry-anderson/ever-...
Note that this view does not include the existence of the money printing press, which currently runs at full throttle. In theory it would mean destruction of the debt via inflation (i.e. debt yield will be smaller than inflation), thus preventing the avalanche effect, but this approach is by no means a free lunch.
There's still the matter of principal. The US government, for instance, could absolve itself of almost all debt liability by going into high-inflation mode, erasing the burden of most T-bills. Again though, this is a one-shot thing. It could eliminate most of the current debt, but would do nothing about the deficits. As long as large deficits remain (and are politically intractable), it doesn't seem workable in any meaningful sense.
The working quantity of cash out there is also fairly small. The entire point of a bank is that it minimizes the cash in the system by balancing deposits against loans. That means that changing the cash supply will affect the price levels more violently than what would otherwise be expected. That just means that there's less cushion to absorb large amounts of new cash that government issues, again, kind of reducing the benefit of "free" money.
I think we don't see big inflation (relative to the amount of the injected money) for two reasons:
- Slow velocity of money due to the effects of the pandemic. It's a temporary effect and we already see raises of oil and steel prices.
- Money distribution. The Fed (and the US government in general) policy mostly benefits the rich. Thus we do see inflation of real estate and financial assets (including cryptocurrencies). It works well for now (well, let's forget about the moral aspect of such policy for now), but such capital is very mobile and it can migrate to other jurisdictions very fast on the very first signs of danger, thus aggravating the situation which has caused this migration even further.
A bigger factor from which the "magic" comes in my opinion is the reserve status of the dollar, highly disproportionate to the global share of the US economy. There are signs that this status gradually being lost, which in 10-20 years probably will lead to big tectonic shifts in the global economy. I think that in 20-30 years, the US economy will be far more "normal" than currently, i.e. it will not be able to exploit the reserve status anymore.
Yes, when you consider that we don't need actual CPI inflation in order to reduce the debt. Economic growth works just as well. In hard terms, we can inflate money so the debt is smaller. We could also all get richer so the debt is proportionally smaller.
Pro-growth policies like the strengthened safety net we in the US are experimenting with as pandemic response could have the impact of increasing overall growth to make debts more easily serviceable.
Taken to its logical extreme, why bother collecting taxes at all? Just pay for all government spending with this magic money machine.
Generally, no, it pays the interest on T-Bills (or any other marginal increase in spending) with additional borrowing.
> I don't understand why people give me resistance on this.
Because it's mostly false.
> The higher the debt is, the higher the interest payments are.
Ceteris paribus, yes, but that doesn't support your other claim.
> Taken to its logical extreme, why bother collecting taxes at all?
MMT adherents will tell you “for the monetary impacts of withdrawing the amount of funds, and the distribution of funds, collected by the taxes from circulation”.
I am looking into this because people I respect are saying things that surprise me. I abjectly disagree with your sentiments and the core points of the book, so far. I'm looking to see if this book will change my mind.
It's hard to even pin down what MMT is saying. What I'm saying is that our national debt is productivity borrowed from our future, from our children, used for today. This translates into real investment, because I fully expect that our debt crowds out physical investment, like renewable energy or nuclear power plants in favor of plants with lower capital but higher operating costs. It's entirely possible to borrow from our children in terms of physical allocation of assets. While the debt is just some numbers in computers, it changes the way we allocate real productive resources.
I fully agree that we can, and should, step on the inflation pedal more. If our deficit were fully paid for by printing money, then I would not have a problem with it. I would hardly even consider it a deficit. This is miles away from reality. Issuing T-bills is not the same as issuing cash, and this book I'm reading (and commentators like you) are reckless with the distinction.
I also agree with the book's claim that we should increase taxes. This appears to be the opposite of what the MMT headline argument is, which is that deficits don't matter.
You probably mean CPI, not inflation. Inflation is really only loosely correlated if at all with the price of goods that consumers actually buy. Things like hedonic quality adjustments leave CPI largely up to whims of the regulators.
It's obviously a complicated domain, but I think it is dishonest to say that it is transparency issue. It's not like BLS keeps adjustment methodologies secret.
An alternative approach to tracking CPI through scraping e-commerce. They get effectively the same result.
I've seen many comments dismiss the CPI as if it was somehow broken. The real problem is that the CPI is correct and that there is no inflation. Stock gains are either driven by a bubble or simply through unfair government policies or both at the same time.
What is the worst that can happen? A government defaults on its debts, and then cannot secure the loans needed for some other very important work. Large numbers of defaults will cause interest rates to rise, and everyone suffers as a result. The "contagion" effect is also possible: a bank sees too many defaults from its clients, and then finds itself unable to repay its own loans, triggering more defaults elsewhere.
If the obvious answer is, "Can't we just forgive the debt," the answer is, "Sure, but we need to be careful." Forgiving all debt would break the markets, because it would remove the negative consequences of investing in bad ideas. Sometimes a business has to be allowed to fail. So the better answer is that central banks would have to buy some of the bad debt, just enough to prevent a cascade of defaults and other worst-case scenarios, but leave creditors holding enough bad debt to feel some "pain" when the defaults happen (in some cases, allowing creditors to fail entirely -- as long as it is not too many too quickly).
- Some loans start to default. Either randomly, or because the easy availability of credit encourages riskier projects.
- Conservative lenders get spooked and exit. Credit becomes a bit scarcer.
- This repeats in a cycle. Each round wipes out more businesses. At first it's mostly the obviously risky ones, but increasingly it's normal business with unlucky timing.
- People start to see the writing on the wall, credit markets lock up, and panic sets in. Major corporations find themselves unable to make payroll. Ordinary financial stuff like currency exchanges stop working, while everyone scrambles to figure out which intermediary banks might be insolvent.
At the time, real estate investing felt like Bitcoin or GameStop today: Everywhere you turned, it felt like everyone else was getting hilariously rich by investing in it and anyone who wasn’t speculating in real estate was going to be left out. Dinner party and online forum conversation was all about how real estate prices could only go up and how we were going to be destroyed by inflation if we didn’t put all of our money into real estate, the real store of value.
The difference was that anyone could walk into a bank and get a huge mortgage without much scrutiny. As strange as it sounds, lenders would give you a mortgage based on “stated income” without verifying paystubs or even checking if you had a job.
I remember realizing the frenzy was out of control when an unemployed acquaintance suddenly moved into a large new house and was talking about building her real estate rental empire. If money was free and house prices only go up, the only way to lose was to not play, right?
As we all know, it turns out house prices can go down and debt really does have to be paid back.
Low interest rates alone won’t cause this cycle to repeat without similar Mia pricing of risk, but it certainly increases the probability of bubbles popping as quickly as they inflated.
FWIW, the finance world seems keenly aware of the bubble-like nature of our current situation this time around, contrary to what I saw during the 2008 era.
Housing prices have gone up almost $200,000 in some areas.
The derivatives were a multiplier.
In financial terms, such cascades are typically mopped up by central banks through dilution of the money supply and/or taxpayer financed bailouts.
Long story short: more debt means more risk of a financial crisis.
p.s. I think it is not helpful to use terms such as "our own", "ourselves" when trying to understand these issues.
You can think of a promise as an edge between nodes in a graph. A failure cascade occurs when removing a single edge causes many nodes to become unreachable.
Whether adding edges increases that change depends entirely on the topology of the graph. A long linear chain increases the risk. (But you have to implicitly create new nodes—new lenders—in order to maintain that topology while adding edges.)
But if you just add edges without increasing nodes, the result is that the graph becomes more connected and thus more resilient to edge loss. In other words, if you owe me $100 and don't pay, I'm out $100. But if five people owe me $20 and one doesn't pay, I still get $80 back.
[1] https://mises.org/wire/review-stephanie-keltons-deficit-myth
It's almost impossible to have a rational discussion about this subjects when most people (including the writer of the article, I'm afraid) don't understand the difference between private debt and the public debt of a country with its own currency.
If that happens is becomes much more difficult for people to buy a house, car, college tuition, construction loan. That could cause a recession which causes businesses to do layoffs and spend less because they are worried about future income.
Countries are not households, and the world as a whole is not a household either. Heuristics that work for individual households fail when applied to countries or the world.
Debt hysteria is promoted by lenders, who will go to extremes to try to ensure they are repaid. Even if their actions cause a general depression that impoverishes themselves as well as borrowers.
Actually, this is wrong. If you can borrow money and spend the money in a way that you will get more money in the future then you can take on an infinite amount of debt. This applies to households, small businesses, large businesses and governments.
Households get into trouble because debt can be used to overspend on consumer goods. Nigeria is in this situation. Oil exports made importing food very cheap. Now that oil is worth less they suffer from a trade deficit and the government has to borrow foreign currency so that companies can import food. Inflation is the expected result because you have exceeded the production capacity of your economy.
The ideal choice would be to invest the borrowed money into agriculture and eliminate the deficit.
Lenders conveniently forget the reason they can charge interest is because there's a risk they won't be paid back.
Yet when these private investments go back, they always go to the government to be subsidised with a bailout.
No, the reason they can charge interest is that they have the money now, and other people want it, and are willing.to pay interest to get it.
The reason they need to charge interest if they don't want to go broke is that there is a risk they won't be paid back.
Any liquidity issues could be addressed by the central bank, again at low interest if no risk.
And a central bank of a sovereign country can arbitrarily increase liquidity, pushing down the non-risk part of the interest rate.
But interest rates for borrowers, as I said, can be high, depending upon the risk profile.
You lend me $10. I then lend $10 to my friend who lends $10 to his mom. We just created $30 of debt.
But it’s gonna take just $10 to repay all $30.
Multiple layers of lending on a single dollar is building a house of cards. When everything works out you get a nice house. When one of the legs fails the whole house comes tumbling down. This is not a good way to build an economy.
You seem to know this 'mom' quite well :-)
Poor mom, who needs to lend $10 from her son :-)
One, not all that debt is termed to one year. And two, it’s an internal transmission mechanism.
If two people produce $50 a year, and one owes the other $100 in four years and the other owes the one $100 in five years, that’s a perfectly fine 200% debt to annual production ratio. For years 1, 2, 3 and 5, their positions will be equal. In year 4, there will be inequality. If one or the other defaults, that inequality would persist even though aggregate indebtedness went down.
Our future selves find that the cupboard is bare because our present selves squandered it all. Printing money now is a gamble that the real economy of goods and services will expand at that rate over the long term. It’s not by any means certain that it will.
It's quite possible this ends in a global depression that's worse than what we had in 2008, maybe even worse than what we had in the 1930s.
There are a lot of states that are not very solvent: states collapsing financially is also a possibility. Very bad for the people who live there, and sometimes their neighbors.
Taking the national debt example, that’s asking: can I reasonably and safely bet on four years of comparable value generation?
When you need to worry is if anything you’re extending debt that you can’t say that about.
Well, no. Yes, this is the sum of what everybody owes, which is also the sum of what everybody is owed.
But not everyone is equally on both sides of that equation.
Banks defaulting and no way to payout their customers in that branch because they lent it out.
When you have a bank account your money moves, your bank give you iou and they gamble / invest or lend out mortgages which go bad as much or more then good.
Ourselves is a strange thing to say, the whole world isn't exactly one country. When you have visa restriction preventing movements, and wars for resources. We are not one entity.
No country is going to forgive defaults on money borrowed from it.
More like some people don't get their money back from some other people. It can manifest in many ways: Higher taxes, Inflation, or Bonds defaults.
The debt is not all due next year, so why not? As long as it’s serviceable, the amount of outstanding debt is kind of meaningless.
Serviceable now or serviceable forever? its not the same thing, and its the kind of thinking that convinces someone who just got a small bump in pay to go out and lease a new $800/month car because they can affords the payments today, or buy an expensive house at the top of the market, because in their opinion house prices only go up, and their job will only ever pay more - neither of those things are always true, and when the conditions change, they can change fast and have a huge domino effect.
When a household can sell bonds to investors, then you can logically compare household debt vs corporate/government debt. I know I can’t issue bonds, nobody will buy them! Also, one persons debt is another person’s asset.
Yea, some consumers make bad purchasing decisions, that has nothing to do with the ability of corporations and governments to service bond interest payments.
A lot of countries and companies have a lot of debt, but at the same time they're also often owed. So, from those numbers alone it's impossible to know what the actual situation is.
Yeah, it's really counter-intuitive. That's because economics is not just based on maths. The only schools of economics with pure-mathematical analysis are neo-liberal schools with game-theory axioms (which are provably wrong).
Mathematics fail to prevent economic crashes of the capitalist system, as they have for more than a century: 1929 was going to be the last crash ever, or so they said.
To understand economics, we have to study social/political context. That's why economists that actually make sense are studying it as a social science, not a branch of mathematics (though mathematical principles apply).
> We don't get our own money back from ourselves?
Debt is a complex topic. But many NGOs and economists over the years have argued it's a system designed to keep the poor and the third world in check. That's evidence by the fact that rich nations/people owe [m,b]illions without any concern for their safety, while poor people will have their property seized for minor debts, and entire countries will be wreaked just to pay off a handful of greedy banks (Greece).
And that's assuming the debt is legitimate in the first place. See concept of odious debt in international accords/law, which applies to most country's debt, which has been contracted not to help the people but eg. to develop the military or give away money to private companies through dubious public-private partnerships.
The best way to think of it is 356% inflation that will hit us slowly.
I'm this case because the printed money is going to people with lower income it can be thought of as wealth transfer from richer people to poorer people. Poor people get printed cash, wealth people lose more due to inflation. Most of us as software engineers should be losing money if our wealth is stored as cash.
Money printing transfers wealth overall to the asset owning class, not the bottom ~40% of Americans who do not hold assets.
Research from the NY Fed and impact of money printing: https://www.newyorkfed.org/medialibrary/media/research/staff...
It's borrowed from the future. Literally, we owe the money to our future selves, like in human race.
To oversimplify it, we expect that the productivity (ie. the amounts of material possessions and services that are available to humanity as a whole) will grow in a geometric rate.
Those future money are an instrument on how this growth is to be directed, basically relying on the wisdom of the crowds to determine investment strategies. The opposite - direct planning of growth - was vastly tested (in communist countries) but it didn't go anywhere.
Even before this pandemic, by cutting taxes the US Government got larger deficits under Trump (after Bush’s $1.5T a year deficit, Obama era got it down to $500B only, and then Trump’s and Republican budgets ran it up again.) The public sector deficits add up to the debts.
The northern cities - forget about it, they can’t even print their own money, and they shus down their businesses - they are screwed.
Now, everything is relative, so US sovereign debt instruments compete against, say, China’s in the open marketplace. But, there are alternatives to US treasuries - like Bitcoin and cryptos and gold etc.
If banks start to keep those as reserves, then the public sector and central banks will have decreasing power unless they FORCE the banks to have higher reserve requirements of base money that they print.
Btw in the USA, the vast majority of dollars is issued by banks (to businesses whose cashflows back this money supply, so bailing out businesses is a priority for the economy).
People are taking all that fiat money being sent by the government created by banks and plowing it into assets, which the government doesn’t have laws to seize, dilute the value of, etc.
Now, whether this is actually the case remains to be seen...
This assumes that people think of the world as a single unit. Last 4 years should reveal our primitive minds.