Why U.S. Public Debt Matters [audio]
morganstanley.com
morganstanley.com
* More than a fifth of the treasury bond debt owed by the federal government is owed to... none other than the Federal Reserve, which is part of the federal government. Every year, more than a fifth of the debt payments made by the US Treasury go to the US Federal Reserve, which dutifully sends them all back to the US Treasury every year.
* If you own any US treasury bonds (whether directly, in a 401(k), in some other kind of retirement or pension plan, or in an index fund), that's your share of the US national debt: It's the amount the federal government owes you.
* Every dollar spent by the government at home is a dollar earned by the private sector (who else?). Every dollar the government spends at home goes to private companies (healthcare providers, aerospace/weapons makers, government contractors, etc.) or to private citizens (government employees, military officers and their families, individuals receiving tax refunds, etc.).
First time I saw that I was genuinely dumbfounded. I honestly can't find an explanation of it other than 'stability of the system', but even that appears to be something of a stretch since to a person like me just appearance of that kind of meddling creates hesitation.
I think US is really milking the whole 'the only game in town' in terms of stability. The issue is.. that will not always be the case. At some point, reality will set in.
And I am saying all this as ( minor compared to the rest of stuff ), US bond holder.
Just as an example, what would you suppose would be a better mechanism to expand/contract the money supply? Just handing out money to random individuals? Randomly taking it away?
I do not want to derail this thread, but one could argue that post-2008 FED response almost exactly just that[1]. Granted, I guess I myself am stretching word random here as it is highly likely that criteria for selection for cash infusion were almost certainly not random at all.
<<It isn’t nefarious and is something that is done by central banks all over the world.
It may not be inherently, or even intentionally, nefarious, but it does undermine investor's view a little bit. It is not the same, but it is a little like me trying to pump shares of my own company to give it an appearance of strength. And just because everyone does it, does not make right.
<< The fed purchases treasuries in order to fulfill several different goals, all under the broader umbrella of monetary policy.
I would have been willing to accept this rationale pre-Powell tenure. His clearly political response to badgering from, at the time, Trump WH ( and then Biden WH ), made it clear to me that monetary policy is dangerously aligned with political issues ( where by design it was supposed to be apolitical or at least independent of political pressures ).
[1]https://www.federalreserve.gov/newsevents/speech/kohn2010051...
What exactly would you like to see the Fed do?
Also, keep in mind that the fed is quasi private. It is the central bank. While it is governed by a publicly appointed board, its primary responsibility is undergirding the banking system (and fulfilling its “dual mandates” by congress). It’s creating was bought on in response to numerous banking panics in the 19th century.
You are not going to like my answer ( and it is the same as my answer for Treasury, HUD and multiple other agencies ). I would like FED to do less. I do not want it constantly engaged in trying ( and failing ) to follow signals it cannot or will not comprehend.
Frankly, if we are going to have politicians run monetary policy, we might as well move it back to congress where it belongs.
<<It’s creating was bought on in response to numerous banking panics in the 19th century.
I know the rationale, but isn't that FDIC's job now to basically say to people 'your money is fine; don't panic'? Oh, you say, 'yes, but that does not preclude general market panic.' And this is where I have a problem.
To a reasonable person, 2008 shockwaves for any other type of business, would have created a massive pain for everyone involved. Somehow, there were only few casualties from that event. Instead of actual wave of bankruptcies that would have made people think twice before putting entire system at a precipice of oblivion, we had government effectively reward bad behavior. I personally would argue that a system, where incentives reward dangerous behavior is a bad system.
And the most amusing piece is that we are still paying for it ( not in money either, but the bad system that encourages that dangerous behavior remains in place, which means we will eventually deal with another like market panic sooner rather than later ) edit: all while the original reason for the instability was never really addressed.
>> << The fed purchases treasuries in order to fulfill several different goals, all under the broader umbrella of monetary policy. I would have been willing to accept this rationale pre-Powell tenure. His clearly political response to badgering from, at the time, Trump WH ( and then Biden WH ), made it clear to me that monetary policy is dangerously aligned with political issues ( where by design it was supposed to be apolitical or at least independent of political pressures ).
Is monetary policy no longer monetary policy simply because it is political?
This is really a rhetorical question on my end. The truth is that monetary policy is always political in nature.
I wouldn't worry too much about it, because games like this are almost always going to happen in politics. It's when the system gets rigid and these games stop being played that you have more issues.
No other country can match it. Switzerland has an economy that's far too small, China has capital controls in place, and middle eastern countries are too reliant on oil.
The two statements are at odds with one another. I am not disagreeing with your assessment of US capabilities, but those clearly only create the situation, where US is, in fact, the only game in town.
https://www.wsj.com/articles/higher-interest-rates-fuel-loss...
>The Federal Reserve Banks are not a part of the federal government [...]
https://www.wsj.com/articles/higher-interest-rates-fuel-loss...
https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
You are correct it is completely separated from the Treasury Department and the Department of Commerce.
So, those 7 people are government employees, but the remaining thousands that comprise the entirety of the Federal Reserve system are not.
Then there's the fact that the Treasury is the only place where it's possible to deposit something like a billion dollars. So the Treasury acts as a bank for companies with large cash reserves.
The country can never eliminate its debt. And the country wouldn't want to anyway.
It's snark, but I think it pretty well encapsulates the state of typical discourse; A consistent way to look at the numbers over the long-haul never really enters the public picture.
It will take either an end to global trade or a massive unilateral revision by the United States to fix it.
If the US deficit stopped increasing it would result in US consumers being forced to eat the deficit instead.
Edit:. This isn't my idea. I'm parroting a guy by the name "Michael pettis".
look him up and don't credit this to me. I'm just a fool who believes this guy who posts on the internet.
Most people invest it, loaning it to others. But how do you invest money? By someone else taking debt.
Most nations around the world are locked into trying to make more than they consume. So if you want to buy German debt you'll find you can't - every dollar you buy from them they'll immidiately go looking to buy someone else's debt in a game of musical chairs.
If there were no net debtor, eventually the production of 100 dollars and purchase of 25 would have to stop. You'll make more than you need and your economy will be halted by deflation, layoffs, and so on.
Enter America and the global economy. Now you can buy USD with those 75 dollars and keep on producing. Because your state is locking you into a trade surplus, the more free economy of the USA is by necessity locked into a deficit. Our companies who try to export immidiately fail to the foreign companies with cheaper labor and state subsidy. The companies trying to export go out of business. The ones using import benefit greatly, and the economy changes.
If we locked out this cycle with tariffs and import restrictions it forces China to face the music. Either their 100 productivity must result in 100 spend, or they will face economic and social issues bad enough to turn that 100 dollars of productive work into 25.
If China sells more stuff to the US than the US buys from China, then China ends up being a net holder of US dollars, which end up in some US denominated investment asset. This is the balance of payments. Since China is a net exporter to the US, it is also therefore a net investor in the US.
The question of what the investment ends up being in is affected to some extent by the availability of US debt, but it could equally well end up being in equity or real-estate or whatever.
The fact the balance is forced to be off as a result of Chinese policy and our failure to counter it in the name of free trade is the problem.
It forces the US national debt up because if it wasn't the national debt it would be in far more harmful places, so our politicians have no choice. Increase debt or lose your job next election.
If I trade X dollars for Y amount of goods, I by necessity must owe x dollars.
That "IOU" can be transformed in many different ways. But you can't erase it (without consequences that would end the flow of goods). If we have a trade deficit we have X dollars of IOU now in our economy that most go somewhere.
Where does it go?
Into debt, and eventually erased by either paying, inflating away, or printing money.
China has massive foreign reserves holdings, and it's been trying to hide that recently with some clever numerical juggling by having state banks hold it all (someone at the top said they have to reduce holdings after Russia got screwed).
I'm not 100 on how you can have internal debt and external surplus, sorry. You'll have to talk to someone smarter for that.
In the simplest case, suppose the government of an export-heavy country such as Germany, Japan or China simply stopped collecting taxes for a year. It would be self-evident that their government would run a large budgetary deficit no matter how large their export surplus for that year was.
You can't pull single statistics to tell the whole story and you're probably going to be wrong if you try it.
For example, a surplus can appear in the form of the average citizen holding US bonds. Large foreign reserves, stuff like that.
The US, for example, doesn't have to have it's deficit show in government debt. It could be held by citizens or the states or so on.
It just so happens that in this case, it does, because the government is taking on a burden the citizens would reject and averting (temporarily) an economic disaster.
China has a massive trade surplus. It has not had a trade deficit in years, and that must show in its pocketbook.
I really can. If your premise is that the US has to run a government deficit because China runs a government surplus then the fact that the Chinese government doesn't run a surplus really sinks the whole line of thought.
Again: government spending is not the same thing as the balance of trade. Japan runs a huge current account surplus, but has the highest ratio of government debt to GDP in the world.
It is a problem not because it's government debt, it's a problem because of the lost jobs. It's a problem because of our dependence on China for goods. It's a problem because it's inherently unsustainable debt no matter what form it takes.
The government does not have a right to my money. They spend all the money we give them, then demand more so they can spend more money.
The government spends too much money. They should take less of my money. Taking less of my money is not the problem, spending too much of the money they already took from me is.
How about solving that before cutting taxes?
It will now take less money from everyone richer than you. However, it is also going to now take more from you, and everyone poorer than you. No fear - this is the exact same as taking less from you, because you will get richer, just as soon as all the people richer than you get tired of having money.
Budget Deficit By Year (billions)
2002 - $158 (R)
2003 - $378 (R)
2004 - $413 (R)
2005 - $318 (R)
2006 - $248 (R)
2007 - $161 (R)
2008 - $459 (R)
2009 - $1,413 (R)
2010 - $1,294 (D)
2011 - $1,300 (D)
2012 - $1,077 (D)
2013 - $680 (D)
2014 - $485 (D)
2015 - $442 (D)
2016 - $585 (D)
2017 - $665 (D)
2018 - $779 (R)
2019 - $984 (R)
2020 - $3,132 (R)
2021 - $2,772 (R)
2022 - $1,375 (D)
Congress, not the president, controls the government's budget.
Source for this? Based on a cursory search the numbers don't seem to match up.
* The current national debt is $24.19T or $30.85T, depending on how you count[1]
* The CBO estimated the bush tax cuts to have added $1.5T to the debt between 2002-2011[2]
* The CBO estimated that if the bush cuts were fully extended at all income levels, it would add $3.0T to the debt over 2010 to 2019[2]. I skimmed the article and it looks like that obama only partially extended it, so $3.0T is more of an upper bound
* The CBO estimated that the trump tax cuts[3] would add $2.289T (or $1.891 trillion "after taking into account macroeconomic feedback effects") over 10 years. Again, this is also an upper bound because the tax cuts have only been effect for 5 years but the figure is for over 10 years.
If you add all the estimates you get an upper bound of around $6.8T, which is a good chunk of the the current debt but I wouldn't characterize the debt as being "largely" due to the tax cuts. Not to mention, the figures above are overestimates due to the reasons I previously mentioned.
[1] https://en.wikipedia.org/wiki/National_debt_of_the_United_St...
[2] https://en.wikipedia.org/wiki/Bush_tax_cuts
[3] https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act_of_2017
It’s hard to find any kind of careful analysis about the counterfactual question of cumulative differences in revenue and taxes if Carter-era tax policy had remained in place for the past 40 years. It requires making strong, almost certainly unjustified, assumptions about the rest of federal policy and the trajectory of the economy. But we’re talking about cumulative numbers on the order of 10 trillion dollars, to within say a factor of two.
You also have to decide what to lump in with the same set of policy changes (e.g. successive reductions in IRS enforcement capability, cumulatively leaving $trillions more on the table, changes to labor law and the minimum wage, ...). And there are certainly other large-scale sources of deficits.
Some of the Reagan tax cuts were offset by substantial increases in payroll taxes, shifting the tax burden from the wealthiest onto the working class, and depressing after-tax wages.
Then for some reason you're comparing 10x valuations with debt loads...which aren't comparable in the slightest. Do you know how many companies have outstanding debt at 5-10x their revenues? Go look at most major debtors and you will find they have debt loads under 1x revenues.
I'm not praising Japan as being somehow superior in that regard, but Japanese culture _does_ have traits that allows the Japanese to bear hardship with a measure of grace and calmness.
I can't imagine the US being in the situation that Japan is in without far more severe political consequences.
The sky already fell.
When an individual takes a loan to buy a house or something like this, their debt to income ratio is often 10, so 1.85 doesn't sound scary at all.
I understand there's a difference between income (of which a large portion can be spent freely by the individual) and GDP, but still, doesn't sounds crazy.
But, that’s also math that applies to net-indebted people. The US has tons of asset wealth and you’d have to treat its financial position accordingly. You can run a 1.85 debt to gdp rate forever if your net assets accumulate at GDP in value yearly, for instance (not saying asset growth = 1 GDP is a true figure, but the factor is huge and unaccounted for).
"Please use the original title, unless it is misleading or linkbait; don't editorialize."
Cherry-picking one detail out of a story and making that the title is the primary form of editorializing, so please don't do that. If you want to say what you think is important about an article, that's fine, but do it by adding a comment to the thread. Then your view will be on a level playing field with everyone else's: https://hn.algolia.com/?dateRange=all&page=0&prefix=false&so...
Between who? It will have to be a nuclear war, otherwise I am unsure who would be battling.
>>> Welcome to Thoughts on the Market. I'm Matthew Hornbach, Morgan Stanley's Global Head of Macro Strategy. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about how macro investors may want to view rising U.S. public debt. It's Tuesday, October 18th, at 10 a.m. in New York.
U.S. public debt made breaking news headlines this month by rising above $31 trillion for the first time. In a decade, it's projected to hit $45 trillion, according to the Congressional Budget Office or CBO. By the time new hires today are ready to retire, U.S. debt to GDP could be at 185%.
The CBO argues that high and rising debt could increase the likelihood of a fiscal crisis, because investors might lose confidence in the U.S. government's ability to service and repay its debt. They also believe that it could lead to higher inflation expectations, erode confidence in the U.S. dollar as a reserve currency, and constrain policymakers from using deficits in a countercyclical way.
The government debt load in Japan has stood as a notable counterpoint to concerns of this nature for decades. With gross debt a whopping 263% of GDP, and no fiscal crisis that has occurred or appears to be on the horizon, Japan's situation should mitigate some of the CBO's concerns.
Still, the amount of debt matters, especially to those invested in it. As both the level of debt and interest rates rise further, net interest income for U.S. households may contribute more to total income over time.
Nevertheless, the level of government debt vis a vis the size of the economy and its contribution to societal income, are not the most pressing issues. The problem with debt has always been predicting the price at which it gets bought and the value it provides investors. The current size of the debt at $31 trillion is just a distraction. This staggering number fundamentally diverts attention from what matters most here.
So what does matter the most here? First, the speed at which the debt accumulates. Second, the risk characteristics of the debt that investors will buy. Third, the price at which investors will buy it and the value it provides at that price. And fourth, the major drivers of the yields in the marketplace for it.
The amount of debt, the Federal Reserve's retreat from buying it, and foreign investors' waning appetite have left some analysts and investors wondering who will buy at all. The relevant question for macro investors, however, is not who will buy the securities, but at what price. The marginal buyer or seller moves prices, not the largest. Consider that at least 3.5% of outstanding U.S. Treasuries change hands every single day. That's an open invitation for many investors, including those who use leverage, to move prices.
So what determines the level of Treasury yields over time? In the end, the most important factor, at least over the past 30 years, has been the Fed's interest rate policy and forward guidance around it.
So, bottom line, macro investors should pay more attention to the Fed and the economic data that the Fed care most about than the overall amount of government debt investors will need to purchase or which investors will do the buying.