CREDIT SUISSE: AMERICA IS NOT BROKE

* This post was written before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought.  For more info on the difference in views please see here.  For more on MR’s views please see here.

It’s nice to see some mainstream economists making logical arguments with regards to America’s financial position.  In a recent research piece Credit Suisse shows that America is far from being broke.  Of course, anyone who understands MMT and the actual workings of a modern fiat monetary system knows this is a preposterous notion to begin with, but CS is using a traditional framework and their evidence counters much of what we so often hear from fear mongerers and politicians:

“Some of our senior politicians and market pundits say it every day: “America is broke.”

We wonder if this is meant to be a joke. America is not even close to being broke. Household net worth is $57T. Public government debt – including the state and local sector – is about $12T. If we consolidate balance sheets to reflect the fact that the household sector is ultimately responsible for repaying this debt we arrive at a household net worth of $45T or 303% of GDP. This is at the high-end of the historical norm of 250- to 300% since the data began in 1952. The current level was surpassed only in the recent tech stock and housing bubbles.

No doubt policymakers have a lot of work to do in terms of agreeing on a politically palatable way to adjust current laws to reduce the unprecedented intergenerational transfer of wealth associated with old entitlement programs and a wave of new retirees. But, ultimately, the resources are there and as we are increasingly finding out, so too is the political will.”

Source: Credit Suisse

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Brilliant stuff. If a company were able to turn its ‘liabilities’ into that kind of ROE’ I would cash out my 401k, borrow from neighbors, and collateralize my children to buy it.

  2. One may assume what happens in a consumption driven economy when and if “household net worth” is transferred to cover government liabilities, this is even more insane argument in case of Japan.

    Net worth is reflated by ZIRP, estimating earnings by extrapolating credit/deficit expansion of last 30 years and discounting it by ZIRP (well, risk premia is high, which appears to be natural in case of ZIRP and “digital nature” of outcomes).

    However, to consume from “net worth” one should sell that “worth” …

  3. Even more crazy in this analysis is that the HH net worth is matched to public debt, but private sector debt, which has also a huge claim against this net worth, is not considered. And the last time I saw private sector debt is > 300% GDP, so the US may indeed be broke by the logic of this type of analysis…

    InvestorX

  4. Does anyone really argue this point–being broke. The debate is about the next 30 years and trying to ascertain what the total is or will be as regards unfunded liabilities and the tax levels that will be required.

    But no worries, nothing will be done. Carry on, as you were.

  5. Cullen,

    Technically speaking, America can’t go broke. But the amount of money its creating and it needs to create to meet its future obligations seem to be stupendously high. US debt clock shows the total liabilities to be 113 Trillion … 113 TRILLION!!! More than 1 Million per tax payer.

    I am not an economist, but one thing obvious to me is that US needs to spend the money to meet its obligations. That is it needs to either tax to meet the obligations, or according to MMT, they can create the money they need to spend if not now then in future. Lets say its an expenditure for next 50 years, still it comes close to 3 Trillion a year.

    Do you think this kind of expenditure is sustainable? I am not against spending but this kind of expenditure seem to be a sure shot recipe for disaster.

  6. I am in agreement with other posts here, as I don’t believe there are many serious arguments about the country being broke. Because some notion of the term “broke” is understood across the class structures, elected officials generally use it as a scare tactic to quickly and effectively describe their levels of “concern”. I don’t believe they actually believe it to be true, but they do like the reaction elicited from the use of the phrase. It is unfortunate that more time is not spent on discussing the inflationary impact of servicing the escalating levels of debt, rather than continuing to polarize the electorate into the “they who spend” and “we who do not” camps.

  7. Isn’t it funny how “fiscal conservatives” who complain about the so-called debt burden want the Fed to raise interest rates? It’s all politics in the end…class warfare disguised as economics.

  8. yup. household and corp debt/loans adds another ~$25bil.

    the “unfunded liabilities” are, of course, also not considered…

  9. I want to earn the Max on my passbook saving account…The current APR is .10%….

    According to the Central Bank all is well, but they continue to keep rates at zero…

    Why is that? Oh, Max, are you suggesting that liberals are not savers?

    When a conservative voice (or others) states that America is broke, it means that the government is

    spending irresponsibly, which is no different than the disjointed lexicon use by the Central Bank and many

    economists…

  10. Cullen,

    Another pointless distinction – no one ever argues that America is technically insolvent or broke (when you can print your own currency). But effectively, it is BROKE. That figure of liabilities that CS states does not include future entitlements. And that household net worth that CS also cites is the most BS number – inflated housing and inflated stocks!

    I think you (and the MMT’ers) should rise above this very narrow definition of insolvency and agree that there is too much debt in the system, period! And that too much debt is supported by inflated asset values too.

    Harping on this “narrow technical” definition of insolvency gets you nowhere except scoring some brownie points against stupid politicians and fear mongers.

    If inflating away our debts is the way to get out, that is also defaulting for all practical purposes. Printing more $ is no panacea to over leverage!

  11. If the govt spending irresponsibly is the problem, then why not concentrate on that? Why do we need to cut programs that have the support of majority of voters because supposedly “we’re out of money”? If the govt spending were debated on merits as opposed to solvency that would have been a dream come true.
    MMT says: we can always afford what we can produce – our only constraint is real resources.

  12. Doesn’t household net worth mean household worth after private sector claims against total household worth have been subtracted? What is the definition of household net worth? I also wonder what the actual market value of household net worth would be if we had to start liquidating it to pay our collective government debt. Would that be an all correlations go to one scenario? It reminds me of the housing/financial crisis: Houses bought during the boom were thought to be worth a whole lot more than they turned out to be.

  13. Are you conflating private and govt debt here? Because private sector is over-leveraged and most MMTer will not disagree with you here. But govt debt is a very different creature. Govt debt is the offset of non-govt cumulative NFAs.
    Regarding future entitlement. SS entitlement is about shifting of 1 to 2 % of GDP to the seniors – nothing to get worked up about. Medicare is worse, but the problem is emphatically NOT the program itself but our broken healthcare system. This needs to be taken on, but that’s a totally separate issue from govt. debt!

  14. I am not an economist, but it seems to me that gauging financial wealth by comparing net worth to debt is somewhat specious. We all know that net worth can collapse very quickly because the assets that comprise that net worth depend on the market. Houses anyone?

    But debt it debt. The nominal value of an existing debt does not change due to supply/demand forces of the market. And one way or another it has to be paid–either by the borrower, or the lender, or a combination of the two.

    I think the better way to measure financial wealth is by income vs. debt, because you need income to pay the debt. You don’t pay a debt with your net worth. Yes, you can monetize your assets to pay down your debt, but that reduces your net worth. There is not escape in the aggregate.

    With incomes stagnant or decreasing, are we all going to monetize our assets to pay the debt? If we all did, to whom would we sell them? So then what happens to net worth then?

  15. Our politicians yell about the deficit, but they won’t fund the IRS enough to collect 200 billions of uncollected taxes even though every dollar spent on collcting yields at least 10 dollars collected. And they won’t cut huge payments to oil and ag business, not to mention loopholes, so who are they kidding? Gullible voters I suppose.

  16. John, your income like most is stagnant, but the top 2% are making out like bandits. You must have seen the millions of dollars salaries at failing banks and wall street.

  17. You may be right, geraldP, but that’s another issue and not the point I was trying to make.

  18. And my question concerning that future which is related to the control engineering term “Lag Time” If the gov is spending that kinda money in the future will it not increase the money supply at that time and will we not have inflation at that time? Granted the money supply is not being increased now.

    The only mitigating factor against future inflation MIGHT be the boomer demographics. Wage pressure may go up because fewer people are working, but fewer people will be spending as the boomers retire with less. Right? This sounds like a shrinking economy unless we open the immigration floodgates. Maybe I’m looking to far ahead, but for me it helps with understanding MMT.

  19. lol. lets say we believe our governments phoney accounting, and not even count all the hidden debt. and lets ignore the growth trend in debt over the last 10 tears. the national debt alone is $14 trillion and growing by over a trillion a year. a 100% of gdp.

    btw, when they say “america is broke” they are referring to our government. not households.

    and how about considering some of the future liabilities in the equation.

  20. Mr. Roche,

    With respect, and if you will forgive the didactic tone, I urge you to reconsider your perspective by reading with care Reinhart and Rogoff’s “This Time is Different”.

    US gov’t spending has grown 6%/yr. for 20-30 years to the “private GDP” (total GDP less total gov’t spending, including personal transfers) growth of 5-5.5% over the period, whereas private GDP growth since ’00 has been less than 3% to gov’t spending of 6%. (The gov’t is doubling in size every 11-12 years to the private economy doubling every 17-18 years.)

    Worse, the 10-year average trend rate of real private per capita US GDP has begun to contract as of ’10 vs. 2.75% real per capita gov’t spending growth. At the differential nominal and real per capita growth rates, the US will reach the critical faster-than-exponential Jubilee threshold by no later than the late ’10s to early ’20s, at which point gov’t spending will have to double every 4-5 years vs. 11-12 years today just to prevent outright contraction of nominal GDP by 30% or more.

    Moreover, the US fiscal deficit at an astounding annualized 17-18% of private GDP and 80% of federal receipts is among the more obvious terminal trajectories from history for gov’ts heading toward fiscal default. Incremental gov’t borrowing and spending since the onset of the Greatest Depression (and end of real per capita GDP growth) will reach 45%+ of private GDP this fiscal year and is on track to reach 100% of today’s private GDP by ’15-’16. It took Japan 6-7 years to run cumulative deficits of 50% of private GDP and 12 years to reach 100%; we are at a pace to do it in half the time.

    Finally, one of the unambiguous indicators of eventual or imminent fiscal insolvency is when net interest on the public debt to gov’t receipts reaches the 20-25% threshold, after which the interest burden can no longer be sustained with the trend rate of spending and level of public debt outstanding. The US gov’t’s net interest to receipts is today at 12-13% and growing at 10-12% since the onset of the Greatest Depression, which is a doubling time of just 6-7 years, all else equal.

    Thus, we have no more than 5-6 years before gov’t spending, receipts, and net interest/receipts severely constrain gov’t functioning, including restrain the overstretched US imperial military, and the private US economy; and this will occur with the peak rate of change of growth effects of peak Baby Boomers drawing down on elder transfer programs, as well as global peak oil production and peak oil exports effectively preventing growth of real per capita GDP worldwide.

    Therefore, it is conceivable that global energy constraints and disruptions to the production and supply chains of the imperial trade regime will exacerbate fiscal and private economic conditions worldwide even sooner than ’15-’16, coinciding, if not causing, another deep global economic contraction, financial market crash, and causing severe fiscal austerity or default sooner.

    P.S. The nearly $10 trillion in US gov’t debt held by the public at the term structure is close to $12 trillion in FV terms (126% of today’s private GDP) with compounding interest at the average term. The $14 trillion in total public debt outstanding in total FV terms is $23 trillion at the longer average term (240% of today’s private GDP). These figures are the effective public debt levels and associated net interest costs we face in the next 7-30 years, not counting any incremental debt and net interest cost added in the years ahead. The private economy simply cannot grow anywhere near the rate required to service the public and private debt in the years ahead. And gov’t spending cannot continue to grow at twice or more the rate of private GDP and deficits to private GDP of 18% to prevent overall GDP contraction. Something has to give . . .

  21. That is a bunch of numbers but even orthodox economics says that as long as interest on debt is less than growth rate of the economy, then Intertemporal Government Budget Constraint holds (not to mention that solvency due to inability to pay off debt does not hold for fiat regimes). And MMT recognizes that interest rate is a policy variable set by the Fed. Scott Fullwiler wrote a great paper of Fiscal Sustainability from MMT perspective, I advice you to read it:
    http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf

  22. “It’s not pointless at all. Explain how the high debt is hurting us all?”

    Cullen, with great respect, you can’t be serious?

    A debt is a claim on future wealth. If you can’t print your own money you must acquire more money (income) then you need to live in order to pay back the debt.

    If you are the government and you CAN print your own money, then technically there is no limit to how much debt you can take on. In the extreme, you may be able to create enough money to pay your debt if you don’t have enough income, but in order to do so you must steal the wealth of the people and your creditors via monetary inflation/devaluation.

    You know this better than I. Am I missing something here?

  23. I am arguing that this technical definition of America is not insolvent because it owed its debt in its own currency is largely pointless. Either we let the current stock of debt liquidate or pay back the debts in inflated $. Its a default either way (whether or not it is technically a default is a meaningless and useless point to debate except in very strict legal definitions).

    W/o creating “true value”, fiscal deficit spending is a useless exercise, it gets channeled away into huge inefficiencies and asset bubbles that cannot be supported in future.

    Bottom line, either you liquidate unwanted debt in the system or inflate it away (because it is too much to grow into now!) and either is “default” whether it is technically a default or not. Utter nonsense in mainstream media over this and surprisingly too much harping on “US cannot technically default on its debt on this site too” – that is stating the obvious, move on.

  24. James, you make a good point. Gauging government solvency using private sector balance sheets is disingenuous, unless you assume the gov can just confiscate your private wealth any time they wish. Oh wait, I forgot. They are.

  25. Aaah I see that since the FED controls the interest rate and keeps them low to stimulate growth the growth will outpace the interest on the debt and all will be fine. But if the whole world is in debt and under the false illusion that US treasuries are worthless who buys the US debt? Does it continue to be the FED? and if so how will that play out?

  26. You’re missing a lot. You’re missing the fact that government debt = non-govt accumulated net financial assets. That the debt is incured as part of government injection of net-financial assets into the economy, which in turn accommodates non-govt sector’s desire to save in your currency. That inflation occurs when injection of NFAs outstrips the productive capacity of your economy – as in the case the ability of the firms to increase their production in response to increased demand hits the wall and they raise the prices – in which case you shouldn’t be injecting NFAs to begin with.
    In short, neither govt debt nor its size per se are a problem. It can definitely be, depending on the circumstances. But who decided that today’s debt is too big? All the terrible things that were supposed to happen to us because of the size of our debt never came to pass. And debt hysteria started long, long time ago. See this, for example
    http://rodgermmitchell.wordpress.com/2009/11/24/federal-debt-a-ticking-time-bomb/

  27. Even a blind person can see that the US is broke.

    Its government’s debt is US$14.2 trillion or 96% of GDP. The government’s annual revenue is US$2.28 trillion, whereas its annual expenditure is an EXTRA US$1.4 trillion!!!

    The US fiscal gap is US$202 trillion and things are so bad that the Fed is now funding 70% of new loans to the US Treasury (by creating dollar bills out of thin air – not even, by simply creating dollars via credit entries on computer screens!)

    If the interest rates rise by 100bps, the government’s annual interest payment will increase by US$140 billion!!! If interest rates go back to 4 or 5%, annual interest payments will increase by US$560 – US$600 billion!!! Then, the US government will spend 25-30% of its annual revenue on interest payments on existing debt.

    Of course, the US will not default (the Fed can always create trillions of additional dollars), so technically it is not insolvent.

    However, the end game will be extreme inflation and a currency collapse.

    Keep your gold, silver and other hard assets. A great inflation is now underway.

  28. One more point. The US gov’t debt held by the public has grown at 10%/yr. (doubling time of 7 years) since the secular bull market and GDP trend growth peak in ’00 to nominal GDP growth of 3.8% and private GDP of 2.8% (doubling time of 24-25 years), with the public debt held by the public now at 100% of private GDP.

    Were the trend rates to persist hereafter, public debt held by the public (not counting non-marketable intra-governmental debt or gross public debt) will reach 100% of nominal GDP and 180-85% of private GDP before the end of the decade.

    However, since the onset of Peak Oil and the Greatest Depression, the US gov’t public debt held by the public has grown at an average rate of 22-23% (doubling time of 3 years) to nominal GDP of 1.3% and private GDP of -0.9%.

    Were the post-Peak Oil and -Greatest Depression trend rates to persist hereafter, the public debt will reach 165-350% of GDP and 290-810% of private GDP by ’15-’20.

    Obviously, this is mathematically impossible, and the post-’10 trend rate of real per capita private GDP will not permit growth of US gov’t borrowing and spending much longer. Draconian cuts will occur, like it or not, whether by choice or by the gov’t failing to remain solvent to continue spending. It is only a matter of when, not if.

    Consequently, the US stock market is GROSSLY overvalued based on the post-’07 trend rate of likely nominal and real private per capita GDP and the associated secular revenue and earnings growth and P/E trend hereafter. The only question is when the stock market discounts negative real per capita private GDP growth and S&P 500 revenue growth of no more than nominal GDP at the Greatest Depression secular trend rate.

  29. forget about going broke, ask yourself this:

    does the usa have the stature that it had ten years ago?

    is the standard of living higher now than it was ten years ago?

    is the usa prepared to handle a major shock to the economy?

    what are the markets telling you? you know mr. gold and mr. dollar?

  30. You know I remember Reaganomics and the liberal’s complaints about the deficits then and then everyone else saying that we would grow our way out and I guess we did and then the moral implication that we paid off our debt with dollars of less value and I really didn’t care so much because I saw the whole merry go round getting started by trade imbalances and thought that “revenge was sweet”, but nowadays the whole world seems to be in trouble and I have to worry about the trade sanctions that occured after the Great Depression and wonder if we might have to go to war before all this plays out. If MMT is correct then great pressure might be on Cullen to get the word out before the Middle East wars spread elsewhere.

  31. “If the govt spending irresponsibly is the problem, then why not concentrate on that? Why do we need to cut programs that have the support of majority of voters because supposedly “we’re out of money”?’

    Today, we have plenty of examples of ruthless and wasteful government spending, whether on the parochial or state level..

    The consequences are quite undeniable, unless of course, one is myopic…

    Peter, the majority of freeloaders watch daytime TV, while producers are out working.

    It is called the tyranny of the majority…The barometer is the Dollar as well as gold which are non-bias

    indicators..

    BTW, my vehicle is 16 years old and it still drives but looks like cr@p…Yes, it is not broken, nevertheless,

    it is a piece of rolling junk…

    Now read the provide link, of which I hold the government complex responsible for…

    http://www.calculatedriskblog.com/2011/04/more-than-lost-decade.html

  32. Inflation will occur when your economy cannot grow anymore to accommodate the increased demand – in which case you should decrease the deficit (and other types of inflation are not controllable by either fiscal or monetary policies).
    For spending which doesn’t have ROI – such as social security and other transfers and other public purpose programs – yes, the electorate that approves of the programs should be ready to be taxed, if needed, to remove the inflationary effect, IF ANY. But this can always be done ex post.

  33. Yes, that all sounds good in theory. And you’re right, the debt alarms have been ringing for decades. And for good reason. Take a look at debt levels at all levels and sectors of our society? Just because you can’t predict what the ultimate breaking point is, does not mean rising debt doesn’t matter.

    From a personal perspective I’d say you hit the wall when you can no longer service your debts.

    From a governmental fiat currency perspective, I’d day you hit the wall once the gov starts devaluing my currency to, not just foster economic growth, but simply to service the debt.

    Are we there yet?

  34. El Viejo, there are several possibilities. First, MMTers say you don’t have to issue debt at all. Your dollars are always desirable as long as you’re able to enforce taxation, so, you can just spend without issuing debt. Now, this is impossible under current law, so, either the Fed buys Tsys, or, what is more likely, the private sector will still buy it – see this discussion about how even with current laws there is still going to be arbitrage for the private sector to buy the Tsys.
    Johm, Warren Mosler has a paper called “A General Analytical Framework for the Analysis of Currencies and Other Commodities” where he discusses money as a public monopoly.

  35. Right. But let’s keep things in perspective. Our problem is not high inflation. The defense would like to enter into evidence exhibit A.

  36. I don’t understand this. How is hh net worth 57T when public debt is only 12T? That means hh must be holding 45T in corporate or foreign debt, yes?

  37. One more thing, Peter: ” All the terrible things that were supposed to happen to us because of the size of our debt never came to pass.”

    Are you kidding? The most important sector in the economy, housing has been in depression for about four years or so. And things are not getting better. 44 some odd million Americans on food stamps. Declining wages. Graduates with no jobs and huge debts. People out of work for years. Labour participation at historic lows (and not because families are richer). Crumbling infrastructure. Increased poverty. Nice trailer homes everywhere. I can go on. What would it take to prove to you that terrible things are happening? An asteroid collision?

  38. Haris,

    There is no such thing as “paying back the debt”. We’ve been accumulating debt since the day our nation began. Just look at the history of debt ceiling votes. There have been 40 of them or so and they were always higher. That’s because, as a nation, our debt has always grown as our needs have grown. We don’t pay it back because we owe it to ourselves. You’re still conflating the household vs govt issue.

    This comment is very good:

    W/o creating “true value”, fiscal deficit spending is a useless exercise, it gets channeled away into huge inefficiencies and asset bubbles that cannot be supported in future.

    Right. Govt spending must be targeted on productive output so as to maintain the value of the dollar. A country that just spends to spend will create inflation. It’s a form of corruption and mismanagement. That could result in hyperinflation, but it will never result in a default or an inability to pay our debts.

    Do you see hyperinflation in our future?

  39. Housing is not in depression because of govt spending. Housing is in depression because we have no lending standards in this country. There used to be a time in America when you had to post collateral to obtain a loan. Those days are long gone now that every public company with a banking arm needs to maximize profits. So, we tear down the standards and look what you get – a broken lending market.

    You want to avoid another housing crisis in this country? Implement a 20% down law. There. Done. You’re welcome. But it will never happen because it would hurt bank profits.

  40. Cullen,

    First of all, you can believe the official CPI numbers, or you can use your own judgement and look around. Let’s not pretend the gov does not fudge the numbers (not by lying necessarily) just by carefully manipulating the inputs. The way they measure employment has changed. The way they measure CPI has changed. Why? No doubt to hide the truth. Sam Clemens said there are lies, damn lies and statistics.

    Second, I said in some previous comment once, that nominal prices alone do not tell the story. What really matters is affordability. During a deflation prices can go go down but products can still become less affordable if money is getting scarcer at a faster rate. See the ’30s for reference.

  41. I totally agree, but the result was too much debt, which could not longer be serviced, let alone grow.

    The reasons for government limits to debt may not be the same as the reasons for private citizens. But there are limits. Let’s just hope it doe not take a currency collapse to prove it.

  42. I look around. I see interest rates near their all-time lows. I see housing prices cratering. Mortgages are 45% of the personal paycheck. Are you just excluding that lump sum in favor of gasoline and food (25% of hh costs?). Housing affordability is through the roof! And the CPI doesn’t even properly account for the decline in housing prices. It INFLATES them by using equivalent rents.

    I don’t know why people simply ignore their largest cost when considering inflation. I know you see the gas sign every day, but come on.

  43. Of course there are limits. I’ve never said otherwise. But the govt can’t go insolvent like a hh. They could cause hyperinflation, but that’s a totally different animal. Pvt sector debts are too large. No doubt. That is the cornerstone of 85% of my work here….

  44. You’re kidding, right? How about stock holdings, property, real estate, savings accounts, demand deposit, small business stakes, and so forth. There’s a lot of wealth in this country.

  45. Right. This is the wealthiest nation on earth.

    Guys and gals, don’t be fooled by the talking heads in pinstripe suits. They want you to believe that it is the govt that is stealing your wealth by spending money. The reality is that this country is in this mess because those same guys in suits have helped to breakdown every legal barrier stopping the financial institutions from making money. This would have been a garden style variety recession had it not been for the banks. Instead, main st suffers and wall st gets the bailout. You deserved the bailout. Not them. And now they’re trying to convince us all that it’s not them that is the problem, but our govt. And now they’re proposing fewer regulations and more ways to make the banks rich. Open your eyes. You’re batting for the wrong team….

  46. “There is no such thing as “paying back the debt”

    Actually, that’s not true. Andrew Jackson did it in 1835. (Of course, some argue this lead to a depression.)

  47. well mayb i’m off by a factor of 10. but even $600,000 seems high.

    i must be hangin with wrong crowd.

  48. And you do excellent work, and I personally thank you for it.

    My point, as a private citizen, is that private sector debts and wealth are all that really matter. Governments who destroy their currency can always just issue a new currency, like Germany did, and (almost) pretend nothing ever happened. But it’s the people who have to pay the piper. When we lose, we lose for good. That’s ultimately why gov debts matter. Because WE have to pay them somehow, either via a devalued currency or higher taxes, or both.

  49. Yeah, good points, but once again. I am not arguing inflation per se. I am arguing affordability. Housing prices are so low because the average guy can’t afford one, in real terms. The reality set in once the debt machine broke.

    And I would argue that energy and food are the primary costs for any family and economy. Without cheap energy there is no economy as we have today. And without food there are no people to populate the economy. A bit extreme, I know but you get the point.

    We are just (still) lucky enough that most people may yet be able to absorb the higher costs in food and fuel, but believe it or not, many of us are reaching even that limit.

  50. Cullen:

    Why do you suppose there is so little discussion of defense spending here, and in the MS media, when discussing deficits and national debt.

    Why is it only about entitlements, (Medicare, and Social Security)?

    We would be equally secure with half the defense spending we do now, though admittedly it would cause some pretty severe employment disruptions (shipbuilding, airplanes, soldiers).

    Here is a pretty good Time mag article

    http://www.time.com/time/politics/article/0,8599,1967353,00.html

    I’d love to see your analysis of this matter.

  51. Absolutely, my brother and I had this same dicussion a year ago. Potential money pooling at the banks (in an attempt to increase debt) and the people refusing or not being able to borrow. They would have done better by increasing the whole FICA paycheck rebate. Psychologically, people are more inclined to spend to the level of their regular income. A big rebate just goes into the bank.

    Think of the “new” money creation by debt and the increase in the money supply. We really would have inflation.

  52. Cullen,

    Wanted to get your take on something.

    I worked at a large investment bank during the crisis. We survived, in large part due to TARP & the Fed backstop. I am, thankfully, and of my own volition, no longer working there, but during the crisis I certainly was pro-“bailout”, if out of self-interest alone. I realize now that shuttering a lot of the worst banks and putting them into receivership would have been the best solution. But at the time, you couldn’t have convinced me that backstopping the banks wasn’t absolutely necessary to avoid a full-blown meltdown. This leads me to two thoughts/questions for you:

    1) Do you think putting a number of the large banks (Citi, BofA, Morgan, maybe Goldman) into receivership put us into a deeper hole than we got into?
    2) Is the financialization of the economy an inevitable result of the gross wealth disparity? A kind of corporatized equalization mechanism that chips away at that upper 2%’s hoard, basis points at a time? Or is that misguided and simplistic. I don’t think I believe it, but I wonder if financialization has been the result of more forces than government dereg.

    Thanks in advance.

  53. Great. Now all America has to do is hold a gigantic garage sale and sell off 20% or so of the private assets, note the word ‘private’, turn the proceeds over to the Government and we’re home free!

    Only a moron would seriously try to make this argument.

  54. *edit: Do you think putting the banks into receivership WOULD have put us into a deeper hole than we got into?

  55. So, John , you agree that the problem is private debt, right? Next you need to realize that private debt is high because people leverage, and one reason people leverage is because they don’t have enough money to sustain normal standards of living, paying for education etc. So this is not about govt debt at all, except we are currently grossly overtaxed.
    And inflation concerns were answered many times, so, please, don’t repeat those.

  56. Actually, Cullen, I blame both the banks and the gov’t. For a hundred years or so, after the banks captured gov’t, they have colluded to steal the wealth of the people. Each has benefited from this alliance.

    I’m sorry, I don’t see gov’t, in this current phase, as being there to foster the growth of private sector wealth. Governments throughout history have always done everything they could to take private sector wealth to feed themselves. I’m not saying government is all bad. We need government. But we need government, by and for the people. To give them a pass and blame it all on the banks only identifies half of the culprits.

  57. WE have to pay them somehow, either via a devalued currency or higher taxes, or both.

    Growing economy pays for itself. You now have about 20% un- and under-employed, lots of spare capacity – so, lots of room for growth. Don’t worry about getting fat when you’re starving.

  58. Today, we have plenty of examples of ruthless and wasteful government spending, whether on the parochial or state level..

    REally? And I thought states were cutting spending like crazy, laying off workers, neglecting to fix infrastructure, cutting education budget (about the LAT thing one should cut EVER!) What is this ruthless and wasteful spending, please tell me?

    Peter, the majority of freeloaders watch daytime TV, while producers are out working.

    Ha! So, about 5% of the population just decided to become freeloaders exactly at the same time as the worst financial crisis in decades hit the country (what a coincidence!) and live of the oh, so generous UI? What are you smoking?

    The barometer is the Dollar as well as gold which are non-bias indicators..

    Really? Speculation and bubbles doesn’t exist? And what about the dollar, huh?

  59. Peter (I could respond in the thread)

    “So, John , you agree that the problem is private debt, right?’

    I have been commenting in several threads, so I think some of my points are getting conflated.

    I think the problem is both private and public debt. Too much private debt leads to the mess we have now. Too much public debt can lead to severely devalued currency or even a currency collapse.

    In both cases, the people pay the bill. I may be responsible with my finances, but I can still suffer a major hit to my wealth if the gov’t is not responsible with theirs.

  60. Peter: “Growing economy pays for itself. You now have about 20% un- and under-employed, lots of spare capacity – so, lots of room for growth. Don’t worry about getting fat when you’re starving.”

    Room for growth is not the same as growth.

  61. Had accounts with several banks including the featured topic herein. Closed them all, and happy I did. Some of the “fine” investment advice my wife had from Credit Suisse as from Morgan Stanley (notice their hefty payment default in Japan?) before we married is now all set aright. No losses anymore, just safeguarding what we have in diversified places. We are avoiding ALL financial advice except our own common sense. All the rest of the sounding noise is politics.

  62. So, Paul, you now agree that Fed is part of the govt, right? Good progress. Now you need to realize that the Fed controls the interest rates. I strongly suggest you read this paper by Scott Fullwiler, it is all laid out, with some algebra even:
    “Interest Rates and Fiscal Sustainability”
    http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf

  63. In both cases, the people pay the bill. I may be responsible with my finances, but I can still suffer a major hit to my wealth if the gov’t is not responsible with theirs.

    Absolutely. Nobody advocates irresponsible spending. But this is not the same as saying that we need to cut vital, important spending because some magic ratios of debt-to-GDP after which it all supposedly goes downhill. Like, you know, the small measly social safety net that we have, like updating our infrastructure, like education budgets (seriously, cutting education is the MOST MORONIC THING TO DO EVER. Education is about the only sure investment we can leave for the future generations.)

    Room for growth is not the same as growth.

    It is a potential, let’s realize it. John, have you read Warren Mosler’s “7
    Deadly Innocent Frauds”?
    http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
    It is well worth your time and will answer most of your concerns, I think.

  64. “REally? And I thought states were cutting spending like crazy, laying off workers, neglecting to fix infrastructure, cutting education budget (about the LAT thing one should cut EVER!) What is this ruthless and wasteful spending, please tell me?” (Quote – Peter)

    The ever increasing proportion of government, that would be my first clue of poor government “investments.” Hear in, Moaistsota, with a looming $6 billion red hole, our Duma wishes to build a pleasure palace for the Minnesota Vikings. And Peter, is you do not think their is WASTE (but in taste) in our education budget, them we went to different schools….

    “Ha! So, about 5% of the population just decided to become freeloaders exactly at the same time as the worst financial crisis in decades hit the country (what a coincidence!) and live of the oh, so generous UI? What are you smoking?” (quote – Peter)

    The dependency class has been nurtured for the last sixty years, Peter…California Gold, a better buzz than my First Sargent had in basic training…

    “Really? Speculation and bubbles doesn’t exist? And what about the dollar, huh?” (quote – Perter)

    The rise in PMs only happens, when the general public losses confidence in the overseers…

    As for the Dollar, Peter, it is one half, yes one half of its strength from the early 80’s…Sorry, but no bubble nor speculation, only the general direction of the weather vane…

  65. “This would have been a garden style variety recession had it not been for the banks. Instead, main st suffers and wall st gets the bailout. You deserved the bailout. Not them.”

    Cullen, most Americans will be persuaded by this, but the causes go far deeper and are much more historically far reaching.

    I would urge you to study Peak Oil, peak oil exports, and net energy (EROEI), as the overwhelming majority of Americans are not well informed or are misinformed about this critical topic that will directly affect the rest of their lives hereafter in unexpected ways. Few influentials are telling Americans the truth, for obvious reasons; instead, they will blame Al Qaeda, terrorists, haters of freedom, other politicians, banksters, the Fed, competing tribal desert sky gods, the Mayan Prophesy, aliens from the Rinds of Uranus, and who knows what else.

    The banking situation occurred because of the hyper-financialization coinciding with deindustrialization of the US economy that started coincident with the US reaching peak domestic crude oil production in 1970 and a secondary peak in 1985. Since then, US per capita oil production has fallen 3.1% per year or 53-62% compounded over 25-40 years.

    To make up for the loss of self-sustaining crude oil production that caused us to fail to maintain our productive mfg. base, we grew debt-money at compounding rate until we have today debt-money “assets” of 8-9 times the underlying productive capital stock necessary to sustain crude oil and goods production.

    Put another way, at the differential scale of debt-money “assets” to productive capital stock, and at the long-term trend rate of population and production, there will be no real per capita US GDP growth indefinitely hereafter until a sufficient amount of debt-money “assets” are consumed over time at the necessary per capita rate; and even then the level of material standard of consumption made possible by fossil fuels will be 2/3 to 3/4 lower sustainable at that point.

    At the long-term nominal GDP and M2 growth rate of 6% (made possible by US oil production of 4-5%/year from 1920 to 1970), the period of asset consumption, all else equal, will take 34-35 years.

    The other principal inference is that, just to sustain today’s per capita GDP indefinitely, per capita consumption of liquid fossil fuels at the US domestic crude oil depletion rate must be reduced by 45-50% TODAY and another 25-50% over the next 10-20 years, requiring the typical person to double, triple, and quadruple up for housing, auto transport, utilities, etc.

    Yes, we have debt-money assets in the tens of trillions of dollars; however, we will be forced to conserve and consume those assets for the next 10-20 years just to prevent inexorable per capita decline.

    That the ownership of these assets is so concentrated to the top 1-10% of US households by net wealth (the top 1-10% own 40-85% of all financial assets and receive 25-45% of US income), the bottom 80-90% of US households will be required disproportionately to reduce their per capita consumption to maintain a socially acceptable level of “household” consumption.

    No politician can tell us this and remain in office. No corporate leader can say this and keep his job. No mass-media influential can tell us without being labeled a nut, un-American, a “Liberal” media elitist, or worse. Thus, we are destined to be woefully uninformed and vulnerable to demagoguery, political propaganda (“economics”), and mass-media disinformation, making us unprepared to adapt and become more resilient.

  66. Peter,

    I agree with you, to a point.

    There is no magic ratio, but that should not give us license to keep accumulating debt until the day of reckoning arrives. We want to avoid that day. Read Reinhart (sp?) and Rogoff “This time is different” or the new book Endgame by Mauldin. There is no known point at which the bond market will lose confidence in a currency. But there is no warning before it happens either.

    As I said before, perhaps a good place to stop is before inflation is used as a means of financing debt rather than growth.

    I agree with you on education and infrastructure. To let them decline is bad. They are the foundation of future growth. That said, if you risk destroying your currency, you have to cut back on spending somewhere. This is going to be a huge battle going forward if America does not develop some new, massive economic growth engine based on wealth, not debt.

    I believe it can happen. but it will have be big. Really big.

  67. Yes, check the few times we’ve run surpluses or “paid back the debt”. They were all followed by depressions. The 1800’s were filled with politicians who were hell bent on fiscal prudence and “paying back the debt”. Then every time they drove the economy into the ground they had to spend money to get it out of the hole….review my sectoral balances work. It will help resolve this myth for you.

    http://pragcap.com/sectoral-balances-and-the-united-states

  68. I thought it was the government telling me that the banks were stealing our money?

    Those dirty bankers, with guns and tactical units buttressed by penal institutions…

    Yes, by God, they make the rules, steal our money, place the blame on us and send us to the gulags….

  69. Hi Cullen, Others,

    Why do we call the (vertical) currency issued by the fed/government “debt”? Is it because the currency is created through the purchase of interest bearing Treasuries? Since the fed returns much of the interest to Treasury, isn’t our currency really more like “tokens” (or perhaps like Lincoln’s “greenbacks”) where currency is just abstractions/symbols of available goods/services?

    Also, when discussing monetary policy and government spending, should we be focusing on the rate at which our currency is created/destroyed relative to the rate (or potential rate — e.g. the output gap) at which goods/services are created or used? Thanks for any insights.

  70. So I don’t see your argument. If you’re worried about high inflation then we have a legitimate debate regarding govt solvency. If you’re not calling for hyperinflation then you can’t say you’re worried about the high debt….

  71. Good question. We’re all so scared of another 9/11 that we somehow justify policing the world. I’m not against defense spending, but I have to wonder why it’s our job to defend the world. For instance, why are we in Libya at all? I don’t get it. It’s not our job to police the entire world. If we really want to cut spending we need to stop pretending to be the world’s police officers. America was a better place when we remained more isolated in military terms…

  72. Just to clarify: … should we be focusing on the rate at which our currency is created/destroyed relative to the rate (or potential rate — e.g. the output gap) at which goods/services are created or used, rather than on the absolute amount of currency in the economy?

  73. Yes, but it’s all be declining in real terms, except of course for houses which have declined in both nominal and real terms.

  74. Peter, “education” and “health care” spending has grown at a combined rate of 3-4 times the labor force for 20-30 years. The incremental growth of “education” spending is now being taken up by payouts for self-sustaining administration costs and pension payouts and benefits, and demographic effects will exacerbate this trend.

    The 10-year avg. rate of real per capita private GDP is now contracting for the first time in US history. Gov’t, “education” (public AND private), and “health care” spending is no longer sustainable, if we can avoid contraction of 30% in the years ahead.

    The human mind operates in a linear dimension, and growth of population, debt-money, and resource consumption is exponential. Nature, however, is log-linear or functions at a finite limit bound to population and resource consumption. We human apes have exceeded the carrying capacity of the finite planet, but our linear consciousness does not allow us to perceive in real time the cumulative debilitating effects of our unsustainable exponential growth within a finite space.

    Consequently, we do not realize that the limits to growth of population growth and consumption have been in effect in the US since the 1970s-80s, whereas growth is no longer possible as of the late 1990s and mid-2000s to date (since the bursting tech bubble, 9/11, and Peak Oil).

    For example, there has been no net new full-time private sector US employment since the mid- to late 1990s, and no growth since the early 1990s after “education” and “health care” employment.

    Similarly, US real industrial production per capita is back to the levels of the late mid- to 1980s.

    How many Americans know these facts categorically? In my personal experience, fewer than 1%. Does it matter? If one does not know, perhaps not. If one knows, it can explain a lot about where we are today and why. If one does not want to know, well, that speaks for itself and explains a lot about the American mass-social psychology of denial and mass delusion.

  75. Or, just tax away all of our assets. Then the govt will be “rich”. But what will happen to the real economy? Think hard about that one…

  76. John,

    “There is no magic ratio, but that should not give us license to keep accumulating debt until the day of reckoning arrives.
    [...]
    That said, if you risk destroying your currency, you have to cut back on spending somewhere.”

    This is all rhetoric. It is repeated as infinitum in the media. And it is all based on wrong understanding of the potential of our monetary regime. Destroying the currency? What does it mean? As Cullen and many others noted, all the attempts to proactively cut the debt in US history lead to recessions and depression and were self-defeating, since the deficits and debt went up right back again. Why? Because by removing money from the economy you let it shrink, your tax receipts go down (remember, the govt can control the tax rate but not the tax receipts) and the deficit magically reappears. When economy grows the opposite happens (which is not to say that any economic growth is good – there are still issues of sustainability and stability).
    You know what, why do I spent time when others said these things much better than I:
    http://www.levyinstitute.org/pubs/ppb_111.pdf

  77. Hey, Cullen. Honestly, I wasn’t trying to stick it in your eye, just correcting a factual error.

    That said, your graph only goes back to 1961. Things were different in 1835, as I’m sure you know. I don’t want to harp on this point, but this period (the 19th) century was also a period of great, real economic expansion for the US. There are many reasons for this that go beyond this discussion. There were also many challenges to be sure. Again, I wasn’t trying to open a whole can of worms, just add what little I can to the edification of the readers.

  78. More banking regulation. That’s my point regarding govt. We sacrificed lending standards for corporate profits. The results – debates like this due to 30 million unemployed Americans….

  79. Thanks for the reply. You pretty much summed up what I was thinking as well.

  80. Peter, I’ll let you have the last word on this one.

    Cullen, et al. Good points. Great discussion. I have to go. Till next time.

  81. The 1800’s were a nightmare. We experienced FIVE depressions. I don’t know why everyone wants to go back and live in the 1800’s. Sure, we were an emerging market and growth was higher, but that’s not the country we live in. The 1800′s had a banking crisis, depression or panic every 20 years. Where do people get this notion that the 1800′s were some period of great prosperity and stability? There were FIVE depressions in the 1800′s….1819, 1837, 1857, 1873, 1893….Do you really want to live thru that gain?

  82. “Housing affordability is through the roof!”

    You must not live in Los Angeles.

  83. Yeah, I live in San Diego which is even worse. We’re in our own little bubbles here in SoCal. It’s not fair to extrapolate out to the rest of the country….

  84. Yes, by historical affordability measures (something like median income over average mortgage payment) housing is affordable (even for LA that has a huge housing crash in the 90s.) The rates are very low, the prices depressed. But with balance sheet recessions people are reluctant about leveraging and credit availability is low too.

  85. thats a parabolic move! I thought every parabolic rise results in a bubble, so when and how will this bubble burst. As default, hyperinflation, deflation
    question: whats next, how we gonna reboot?

  86. Go to http://www.shadowstats.com and take a look at the real CPI (the way it used to be calculated in the old days). The CPI is rising by 10% per year! And you say there is no inflation?

    Come on, you are smarter than that.

  87. Dah!?

    Obviously, assets are better than debt/liabilities!

    What would u rather own? A fully paid house (asset) or a $1m loan (liability)?

  88. Oil is the main economic problem ; and Islam is the main political problem because Muslims own the world’s most important source of oil – MidEast . Oil politics rules the world – including the United Islamic States of Am.

  89. Peter D,

    The Fed is NOT a part of the government – it is a private bank. Go to the yellow/white pages, u’ll see it listed next to Federal Express. The Federal Reserve is as ‘federal’ as Federal Express!

    The Fed is in the business of lending money, so now that the private sector isn’t borrowing, it is very happy to lend to the US government (this is what the QE or money lending program is all about).

    The banks live off interest and the Federal Reserve does not care who borrows as long as someone borrows from it.

    Before you dismiss my facts, please go and read ‘Creature from Jekyll Island’ and ‘Secrets of the Federal Reserve’.

    Also, go and watch a documentary on the Federal Reserve by Eustance Mullins (you should be able to find it on youtube)

    The mind is like a parachute – they both work when they are open.

  90. Cullen,

    For the first time, I agree with you 100%.

    The REAL bastards are the bankstas. They loaned huge amounts of cash, indebted the US society (Americans were also guilty of being greedy) and then, when the banks went bust, they forced the government to save them at the expense of the taxpayer.

    The quicker Americans realise that the US government is simply a puppet and the real controllers are the elite banking families (Morgan, Warburg, Rockefeller, Rothschild, Lazard etc.), the quicker they will force the perpetrators out of power. As long as Americans are fooled into pointing fingers at the smokescreen (Republicans and Democrats), nothing will change.

    Obama was all about ‘change’ but if you see his economic advisers, they are the same corrupt morons who bankrupted America – some change!

    The Federal Reserve MUST be exposed for what it is and then abolished.

    May the banksta families long burn in hell.

  91. And I told you that this is a bunch of conspiracy theories. The Fed is a creature of the Congress. But you yourself said “Of course, the US will not default (the Fed can always create trillions of additional dollars), so technically it is not insolvent”, so, you seem to contradict yourself, because what you said holds only if the Fed always accommodates, in which case there is no sense in saying the Fed is not part of the govt.

  92. Without the oil problem maybe……. but the imperium is designed for now compliant nations such as Japan not for undefeated opponents on the Asian landmass.
    Naval nations need more stuff coming in then going out – the Chinese want what you have.
    Somethings got to give either way.

  93. “If we consolidate balance sheets ”

    Amen

    If you don’t want state deficit anymore let’s violently increase taxes…govt will be rich…private sector broke…someone has to be broke…while aiming at having faith kept in the currency

  94. Paul (and everyone else who misses this),

    While you were paying off your house (saving technically), someone else MUST have been borrowing…

    SPENDING = INCOME.

    Savings is a leakage to the economy. For every dollar saved another dollar must be injected by borrowing. That could be someone else in the private sector; it could be the foreign sector (exports); or it could be the government!

  95. “does the usa have the stature that it had ten years ago?”
    Compared to what? I mean, we’re still only 5% of the world population and yet we produce 25% of all the worlds total annual output.

    “is the standard of living higher now than it was ten years ago?”
    It depends on who you are. Top 1% are allot richer then they were 10 years ago.

    “is the usa prepared to handle a major shock to the economy?”
    Is the world?

  96. Totally agree with you Cullen. Sweden is doing great. From 1994 until 2010, Sweden’s average annual GDP Growth was 2.68 percent reaching an historical high of 6.90 percent in September of 2010.

    Sweden predicts a budget surplus and plans to tax cuts are economy beats Europe according to a Bloomberg article from Johan Carlstrom.

    “The largest Nordic economy will expand 4.6 percent this year, compared with the 4.8 percent predicted last month, the government said in its spring fiscal policy bill released today in Stockholm. The government raised its forecast for growth in 2012 and 2013 and predicted a widening surplus over the next four years as unemployment falls.”

    “The Swedish economy grew 5.5 percent in 2010, the most since 1970, as exports recovered from the global financial crisis.”

    Sweden is doing the right thing:
    “Reinfeldt’s four-party government alliance had already revealed it will invest more money in the country’s railway infrastructure and that it wants to ease benefit rules for long- term sick leave. It’s also considering next year cutting income taxes for foreign nationals with “expert knowledge,” dividend taxes for some small businesses and allowing bigger write-offs for investments in research and development.”

    Applying recipes for expansion:
    “The government has cut income taxes by 70 billion kronor ($11.1 billion), or about 2.1 percent of the economy, since coming to power in 2006. It has also reduced corporate and payroll taxes and abolished a levy on wealth.”

    On top of that:
    Finance Minister Anders Borg wants Sweden to introduce more tougher rules on capital buffers for banks than other countries.

    Finally:
    The government is closely monitoring housing to avoid a bubble and already has introduced measures to contain rising household debt such as introducing a loan-to value cap of 85% for mortgage borrowing….

  97. We were warned…

    Dwight D. Eisenhower.
    Farewell Adress – 17th of January 1961

    “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

  98. Mr Skinner, the house unless I had a government loan which would allow for a default with consequences…

  99. Gerald, so they collect the 200 billion, it will only be spent and nothing will change…

  100. Another good point, Adam, but I thought that every dollar in circulate is spent nine times?

  101. Consolidation from excess borrowing and driving an economy into the ground is not the same. The first is a cure and it does temporarily slow down the economy the second is a disease and thats when you maintain growth artificially via more debts every time there is a slow down until the ratio reaches what we have now.

    Debt is good when it’s issued against expected growth.
    Debt is bad when it’s issued against expected dreams.
    Even if a currency is not convertible there is always a form of conversion and collateral. “Confidence” alone is a very dangerous and temporary collateral against fiat money especially in a age when communication travels fast.

    The only real collateral of fiat money is the underlying country’s capacity to produce and grow.The US in the 1800 was a new and the fastest growing country in the world and it needed to borrow and had the capacity to do so against future growth expectation.

    You can not compare the 1800 with what as been going on since the greenback became a fiat currency in 1971. If we can’t compare private debt with public debt the same should apply to those gold standard day and today.

  102. Scott – this is great. Thank you. Now will Reinhart & Rogoff refund me $20 on their book I should now return?

  103. That 57 trillion of asset, is mostly of course in an ill liquid form of real estate…

  104. All I have time to say is great stuff, Cullen. This post puts a hell of a lot in perspective (which is what we most need). One hears the fearmongers rail on and on about how large the government debt is and how much that averages per person. The $12T public debt load is about $38,300 per every man, woman and child in this country. By the same token, the average individual net worth per person is $182,000. I have a feeling though, that the actual NW is skewed very highly to a small segment of the population.

  105. “by historical affordability measures (something like median income over average mortgage payment) housing is affordable ”

    Can you post the historical data for Los Angeles?

  106. Let me see if I have this right, America cannot be broke, but it sure as hell can break it’s citizens.
    I think that sums it up.

  107. Hm, I am not sure there are data like this in the public domain. There might be, but I was referring to the paid data some companies have.

  108. I see a few extremely relvant considerations left out through many of these threads.

    First, the current and trending shape of the private financial asset distribution among US households. No secret here, distribution is skewing towards the wealthy at an accelerating pace. This likely reflects the obvious ineffective distribution mechanism of newly minted net financial assets through deficit spending. It seems sometimes that many on these boards use the macro balances evident from the workings of MMT to allay broad concerns voiced throught the politico-media machine, and pain felt by the masses. Maybe someone should take a second to integrate the real world wealth distribution effects of deficit spending and concomitant innefective public wealth transfer mechanisms into the macro picture MMT “outcomes” espoused in these conversations.

    And, B, trade imbalances. Hello! Need I say more? OK, the basics for anyone who cares. Congress prints it up with the best intentions, wink wink. It finds it’s way to Wal-Mart, then to Shanghai, and then back to Timmy. Then, 1234, start all over again. You put your left foot out… you get it. Can someone comment on how that stinky pie integrates into MMT. Last I checked, we don’t live in a closed society.

    Great discussions though.

  109. Edit “No secret here, distribution is skewing towards the wealthy at an accelerating pace”

    Sorry for the poor math. “skewing” implies a continuous distibution. Since the wealth distribution is essentially binary (top 5% own just about everything), I should have used a different term. Nonetheless, the point stands. Comments?

  110. Peter D,

    The Fed always comes to the ‘rescue’ and eases NOT to help Americans!

    The Fed always eases and prints for the following two reasons:

    a. Provide a cheap source of funding for the bankrupt US government
    b. To lend even more money so that it can collect even more interest

    By the way, the conspiracy theory is not that the Federal Reserve is private – this is a fact (go and check the location of its listing in your white/yellow pages). The conspiracy is what has been fed to Americans for decades – that the Fed is there to provide price stability and create maximum employment!

    If these are the Fed’s dual mandates, why has it failed so miserably???

    Do you really think that a 97% loss of purchasing power of the Federal Reserve Note since 1913 is a coincidence or is this what you call price stability?

    And, what about the 25 million Americans who are currently out of work (the U6 unemployment rate is almost 16%)? Is this what you call ‘full employment’???

    If you realise the true purpose of the Federal Reserve (indebt the society and maximise profits for its banking cartel), you will note that it has succeeded perfectly!!!

    Do you think Bernanke is stupid? Do you think Rockefeller, Rothschilds, Morgan, Warburg and Lazard families are stupid??? No, no, no….

    These are some of the richest families on the planet (although they never appear in Forbes), and they did not become rich by stupidity. These guys realised in the early 20th century that in order to stay powerful, they had to fool the public via deception. This is why they called their central bank the ‘Federal’ Reserve and this is why Bernanke’s policies ALWAYS favour the banks.

    Open your eyes and your mind; otherwise you will also be taken to the cleaners.

    Before you dismiss my facts as lunacy, go and read the following books –

    Creature from Jekyll Island

    Secrets of the Federal Reserve

    Good luck to you Mr. Peter D, I hope you accept the truth.

  111. I am economist, I am s simple hard working tax payer. I don’t understand why it is so difficult for our leaders in Washington to understand that you cannot spend what you don’t have. or you will go broke sooner or later, does it really take a genious to understand that? the other question I would like to ask is, why are we (USA)responsible to feed the rest of the world? Why are we giving money to every country that hates us and wants to kill us? Can someone explain that to me please?
    We are printing money like is worth nothing so we can send it all over the world….

  112. Sure, are you arguing that the American standard of living has declined since 1940? If so, the judge is likely to throw your case out….

  113. Is US broke, or not broke?
    Is QE inflationary, or not inflationary?
    Do we have inflation problem? or no inflation problem?
    Should we look for answers from markets, or listen to some economists with full political agenda pretending to be scientific?
    When these guys have been right?
    When they are right, couldn’t you reach same conclusion with same old common sense?
    Such as housing was a bubble? Gold will be a bubble? and if you can print you will never go broke?
    Don’t you think analyzing their analysis is serious waste of time?

  114. It is difficult to doubt data from Credit Swiss. But they seem doubtful.

    “Public government debt – including the state and local sector – is about $12T”

    We have more than 14 trillions Treasuries, close to 3 trillions muni. How does one come up with a 12T figure?

    In a recent Gundlach presentation, the figure is current total U. S. issued credit is about 300% GDP, which seems more consistent with a higher figure.

    How to confirm household NET worth is 57T when we have 3T of consumer debt and more than 13T of mortgage debt? Perhaps CS forgot about the mortgage debt?

  115. Maybe there is a fallacy in this public debt = offset of private debt reduction, thus a normal economic cycle phenomenon, in particular that its size is not important.

    Because if so, we can conduct this perpetually and have our standard of living go on. People do recognize that if government spending goes beyond that of productivity of the economy (as waste), then inflation ensues. But then they believe this is always the case.

    The argument that this is a fallacy is that government spending is INHERENTLY wasteful. It can balance the contraction of private spending only by wasteful spending. Being inherent, there is no way to change and improve that. Any thought otherwise is an illusion.

  116. Our policing of the world is not an altruistic or pointless act.

    Under a gold standard, the holder of the world’s reserve currency must also have the most gold.

    Under a fiat paper standard, the holder of the world’s reserve currency needs to make sure the world economy has steady access to energy. It’s an implicit arrangement.

    Those that still think Iraq was not about oil, and point to China’s investments in Iraq are missing the point.

    What did China do with those petrodollars from Iraq? China bought US government and agency debt. Money is not just a means of exchange, store of value, or unit of account. People need to remember that money has geopolitical significance, especially for an Empire. And so, the Empire uses money just as it uses military strength. Money, for an Empire is a tool of statecraft.

    In the end, even fiat needs a connection to something tangible. And that connection must not be severed, or discussed openly. Instead, tell the little people about democratization, or WMDs…

  117. Canada ran a surplus for 10 year starting in the mid-90’s. The world did not end up here.

  118. “It’s nice to see some mainstream economists making logical arguments with regards to America’s financial position.”

    Cullen, when mainstream economists make logical arguments, I tend to reflexively duck and cover. Paraphrasing John Cusak’s character in “2012”, “when the government says nobody should panic … [the air at ground zero is fine ... the reactors are under control ... the well is capped] … RUN LIKE HELL!”

    IMO, the greatest reassurance that America is not broke is that Republicans are, with characteristic sound and fury, pressing the bankruptcy panic button. That alone is near proof of solvency, not the ivory tower economists that got everything so bass-ackwards wrong in every bubble in history. It’s like trusting Alan Greenspan on adjustable rate mortgages or NAR, the National Association of Realtors, when they say it’s a good time to buy a house.

  119. The only thing that matters is mass perception. Your discussing all the wrong things. The Facts are important but perception is more important. It does not matter how rich or poor we are if our investors believe we can not pay our debts. What comes first the chicken or the egg? Seriously what comes first not pay our debts or the belief that the American bonds are worthless?

  120. So if everyone liquidates all of their assets, we can pay government debt? Wow! How about I keep my assets, government cuts spending, and uses taxes it already collects to service (and maybe even pay down) debt.

  121. Do the math. -3% CA deficit. Pvt sector deleveraging. A cut in spending or higher taxes means recession. You don’t cut off your arm to lose weight….

  122. “Standard of living” Hmm. Not so fast counselor, the trial might be more than you’d expect. I’ll point you to a passage in a facinating book written 2003 by Gregg Easterbrook, “The Progress Paradox”. Indeed many measures that one might point to as proxies for standard of living have been on a steady upward trajectory for decades (in the US). But consider this passage, and ask yourself, is this the best we can do?

    p.278

    “And it calls into question the modern soul. There will always be selfish people, and there will always be greed. Yet the realization that not just a few but many of those at the top of Western society were cackling as they counted their gold and the poor wept tells us we have come nowhere near as far as we thought.”

    While broad-based proxies tell us that we are better off today than 40 years ago, I have no doubt that I could put up a nice fight in court against any argument supporting the idea that the redistibutive mechanisms inherent to the theories (read ideologies) behind government deficit spending are a viable and important component of prosperity creation. My sense is that in the end, deficit spening and government redistribution beget insidious societal ills that fester and degrade the industrious nature of a population needed to sustain prosperity. In other words, these deficits are not only unsustainable, they generate unsustainability.

    IMHO

  123. Hans, that list is loaded with EMU nations. When you read an article that compares the two you should just stop. The info is guaranteed to be wrong.

  124. I am not sure if Credit Swiss is dishonest of simply stupid — they either forgot or intentionally omitted the US Private Debt and all unfunded liabilities:
    – total private and public debt is $50 trillion (according to Wikipedia), or $55 trillion (see here: http://fofoa.blogspot.com/). So, that’s 4x the US economy. Add another $140-180 trillion in unfunded (depending on which politician you ask) — that’s 10x more. So, I would like to see you guys show me math on how this is not a problem and the US is “not broke”? Credit Swiss and similarly “unbiased” banksters probably will be competing with each other in the next few months “talking up their books” trying to convnince the gullible public to buy more and more of that worthless paper “backed up by the word of the US government” (what is THAT worth nowadays?) while unloading it themselves… Good luck!

  125. Objection! Is it the deficit spending that has created the imbalance (we have been running deficits forever) or is it the growing power of the financial sector? I think I could build a pretty substantial case betting on the latter.

  126. I assume your home state, which also home of silicon valley, which should never have revenue problem at first, spend herself into oblivion because of rampant growth of financial sector.

  127. Yes, our revenue problem is largely due to the real estate decline so the financial sector directly contributed to CA’s fiscal mess. Obviously, there’s more moving pieces, but if the housing boom hadn’t occurred CA’s finances would be in a much better place….

  128. Thanks for the link Peter. I haven’t encountered that blog before. I may add it to my regular reading.

  129. That’s the trouble with “investment” banks (they think all wealth should belong to them), AND the government (which can also use it to bail them out)!

    The absurdity of this article relies on “household net worth” to offset the debt – and declare America is not broke!

    Of course, the only way the government can use this wealth to pay off the debt is to tax it or confiscate it. In which case, it would no longer be America.

    Fantasy, but a good way to maintain the “AAA” rating and keep that balance sheet looking strong.

  130. Nope. I don’t buy it. The change in wealth distribution in the country is not only due to the increases at the top, but to stagnation of wages and the effects of inflation on the middle on bottom. Both the wage stagnation and inflation are largely attributable to government policy and intervention. The deficits lead to inflation (I don’t have to tell you this, but) because the government is terrible at asset and capital allocation. They suck at investing. The deficits also reflect an overabundance of transfer payments, that indirectly lead to wage stagnation (via the inherent incentive killing mechanisms of such payments). In addition, regressive taxation (read payroll taxes, sales taxes, excise taxes, property taxes, etc.) helps to sutain the negative feedback loop of poverty (different issue though).

    Point being, implicit in deficits are malinvestment and incentive destruction. So, to make arguments that deficits are not inherently the cause of our problems may be accurate in the same way that saying guns don’t kill people, people kill people. But that argument is hollow to the victims, as they realize that it was both the gun and the person who pulled the trigger, and the bullet that flew that killed. All are essential parts of a system that created the effect.

    I contend that large deficits (in particular, when we are not in a MAJOR military engagment) are unsustainable, not when treated in a box without proper context, but when considered as part of complex and dynamic real-world system. Deficits do matter, make no mistake about it. Bankruptcy for a soveriegn entity may not be symantically correct, but its equivalent, whatever you want to call it, is certainly not only possible, but inevitable if we continue this course.

  131. Cullen,

    Is the eurozone working the same way the US does, that is the issuing of bonds is not a fiscal operation but a monetary one, and that it spends first then tax afterward?

    many thanks

  132. The federal budget deficit is 1.5T, & gross saving is 1.7T (the federal deficit is 86% of gross saving). It’s called crowding out. I.e., the debt to gdp ratio is a contrived figure. This country requires foreign participation & debt monetization.

  133. No, the EMU nations are fiscally constrained in the exact same way our states are. So, comparing the EMU nations to the Federal govt of the USA is a mistake that we see EVERY day by pundits and analysts…The USA is not the next Greece. It’s a ridiculous comparison.

  134. The federal government’s income statement and balance sheet look awful, and off balance sheet liabilities on the entitlement side are horrendous. The private sector in the US is also heavily overleveraged. MMT tells us that we still have a great deal of flexibility left before any inflationary crisis, and that is true, but as Calvin said “mass perception” is a key variable. Gold and silver are telling us that faith is eroding badly at the margins even though the system seems stable as evidenced by the bond market. Fiat currencies are faith based constructs. Behavioral factors, sentiment and mass psychology matter a geat deal when they matter. I wonder if there should be a socionomics variable that can be worked into the MMT equation.

  135. Yes, excellent point Mr Roche, however, I was trying to demonstrate that America is indeed not broke…

    The fact that there are many other government with much higher extremal debt than ours, particularly the Swiss, who are non-EMU…

  136. Paul

    All your scary numbers only prove one thing; That purchasing power of the dollar since 1913 and overall well being of the citizenry are not related.

    If you could somehow demonstrate that we are 97% worse off (which is virtually 100% worse off) then I would give your analysis some credibility. If we are 100% worse off from our 1913 brethren, why do we have cars with GPS and they didnt, why do we have HDTV and they didnt, why do we have treatments for brain cancer and they didnt, why do we have 40 hr work weeks and they didnt, why do we have the ability to have a weekend vacation 1000 miles away and they didnt?

    We are at least 100x better off than our 1913 brethren yet we have that lousy old devalued dollar. I guess it just goes to show you that the value of the dollar means little to overall welfare.

  137. Well said. First, the household net worth figure is a fantasy under current circumstances. Second, think about what would happen in the real world–outside the world of charts, indexes, and the like–if the government tried to use household wealth to pay off the debt. Think about how bad things would have to get before the government even considered such a thing. What would households stock holdings, real estate, etc. be worth by the time we got to the point where the government considered confiscating it to pay federal debt? Household net worth would have dropped significantly by the time the government even considered it and would crash when the government implemented such an action. All this is aside from the negative result of social unrest that is likely to occur. Other arguments may be valid to show that the federal government isn’t and can’t be broke, but this article is useless.

  138. “And it’s the ex post rate of inflation that matters, not the ex ante expectation” – MMT theorist.

    PIMCO already unloaded, now it’s China’s turn:

    BEIJING, April 23 (Xinhua) — China should reduce its excessive foreign exchange reserves and further diversify its holdings (3.04 trillion U.S. dollars by the end of March).

  139. Oh yes the US is broke in the sense that it can’t repay it’s debt. And since 1971 it never intended to repay its debts either. source: http://www.michael-hudson.com Yes, the US can try to print its way back to prosperity but the flipside of that is (high) inflation. (Not Hyper-inflation). And then interest rates will go through the roof (again, like in the late 1970s)

    But neither can other countries repay their current debts.

  140. CS makes – IMO – the mistake that it assumes that the US owes that debt to itself. And that’s baloney. Because then why is there debt in the first place if the US owes that debt to itself ?

    A second mistakes is to assume that the total US net worth is (about) $ 57 Trillion. That net worth is going/will be going down by about 90% like the situation in Japan and then the total net worth would be “”only”” about $ 6 trillion. We’re in a deflationary environment, remember ?

    That’s the blind spot of TPC and CS.

  141. Debt is a gold standard relic that serves only as a reserve drain. It funds nothing. When the USA stops spending it stops funding projects that the govt has previously deemed necessary. Now, we could likely do without much of our current spending, but there is no such thing as paying back the debt. You don’t just stop spending money on healthcare and defense because you want to “pay it back”. We have egregious healthcare and defense costs because our citizens have deemed them necessary….There’s no such thing as paying back the debt. We do it owe it ourselves because the “debts” represent programs that past generations have deemed necessary….If you want to reduce spending on certain programs then fine, but there is no such thing as paying it back….the concept simply doesn’t even apply. Unless that is, you want to stop sending medicare payments, stop policing the streets, stop defending the country, etc etc….

  142. No blind spot :-) You just haven’t grasped the concept that the USA is not a corporation or household….And it’s clear from many readers here that they haven’t either….

  143. I think Credit Suisse and S&P are talking about two very different things, and we need to be careful about “who” is broke.

    Credit Suisse is right that America as a whole, its economy and society, are not broke. S&P and others are talking about the US federal government being broke, and that’s right, or soon will be. There’s no contradiction between the two. The government may be approaching insolvency and a liquidity crunch. America as a whole is far from that.

    That’s why I’m pessimistic about our politics in the next few years, but not about the American economy in general, in the long run. It will survive and prosper. Society will force major changes on the political class, and the nature and direction of US government will change in a major way.

  144. Cullen,

    Your comment: “Public government debt – including the state and local sector – is about $12T. If we consolidate balance sheets to reflect the fact that the household sector is ultimately responsible for repaying this debt we arrive at a household net worth of $45T or 303% of GDP” is not correct. The household sector (aka taxpayers) does not pay the debt or the deficit.

    Federal government spending is not constrained by taxes. The government services its debt (aka T-securities) simply by crediting the checking accounts of T-security holders, which it can do forever — no tax money involved. In fact, the government could eliminate all debt tomorrow, simply by exchanging one form of money (dollars) for another form of money (T-securities).

    You might wish to review Monetary Sovereignty

  145. At times it is clear that the focus in these threads digresses into arguments about symantics. Words like “bankruptcy” and “broke” and “insolvent” are clearly not applicable to a soveriegn nation with a hold on the world’s reserve currency. But somehow, the discussion often gets bogged down with these terms, and the real issues get sidelined. Sure, terms such as: inflation, malinvestment, transfer payments, income distribution, wealth distribution, standard of living, prosperity, productivity, ideology, deflation, deleveraging, and the like are symatically correct, but I like “Broke”. It sums it all up in one word.

    The private sector analog to default, when applied to the US monetary and fiscal stewards, is inflation. Insolvency, bankruptcy, etc., for the US amounts to rapid currency devaluation, inflation yada, yada.

    Are we “broke”? Hell yes. If the average current Medicare recipient has “paid in” about $150K (I get it, don’t hammer me on “paid-in” you know what I mean, it’s just easier to say it that way), and the same recipient will receive a private sector value of $450K in health care assistance, then we are broke. How inflationary is that? A huge proportion of those health care services will be funded with new fed money, since the transfer payment base is not sufficient. The new fed money will find its way into bank accounts, and the fractional resevere currency system will do it’s work to generate huge amounts of inflation. If congress thinks it can control this inflation by increasing taxes, they are f’ing idiots (actually they are anyways), or if the fed thinks it can do the same by raising short term rates, or selling their longer dated treasuries, they are dumber than dirt too.

    The reason all this “broke” talk is going around, is because the only conceivable way for the government to fulfill the promises of dead and/or nearly dead politicians, is to devalue the hell out of our currency. In my book, becuase I am a saver, and I don’t want to have to speculate to survive, that’s a “broke” government stealing the remnants of my prosperity.

  146. To: Cullen. Sorry for misunderstanding your position.

    To: MS. You said, “The reason all this “broke” talk is going around, is because the only conceivable way for the government to fulfill the promises of dead and/or nearly dead politicians, is to devalue the hell out of our currency.” And yet, despite massive deficits over the past few years, I don’t see the inflation you predict. Actually, since we went off the gold standard in 1971, there has been no relationship between deficit spending and inflation. What is related to inflation? Oil prices.

    Also, you said, ” Sure, terms such as: inflation, malinvestment, transfer payments, income distribution, wealth distribution, standard of living, prosperity, productivity, ideology, deflation, deleveraging, and the like are symatically correct, but I like “Broke”. It sums it all up in one word.” Using the wrong word is exactly what has caused the confusion we now suffer. In science, it’s important to use the correct word.

    Rodger Malcolm Mitchell

  147. “We have egregious healthcare and defense costs because our citizens have deemed them necessary”

    We (the citizens), don’t live in a democracy. We have an “elastic” currency “aided and abetted” by “elastic” legislators. We have perennial Walter Wriston caricatures pressuring the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs. We have a conspiratorial organization that goes by the name of the American Bankers Association – with its well funded lobbyists.

    “MMT is just a description of a modern fiat monetary system”

    And WE do not have a fiat currency system. A fiat system is where the volume of currency issued is dictated by the deficit-financing requirements of the issuing government. In contrast, the essence of our managed-currency system, is a system in which the volume of currency in circulation is impersonally determined by the total effective demands of the public or the amount which meets most closely the needs of trade. Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past (during this country’s history), the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation.

  148. Deficits throughout our history have been driven by many different factors. Deficits are not be inherently inflationary in the short-term, agreed. In some cases howevery, even in your plots, you will find periods of time in which there is a high correlation between inflation and deficits, if you account for the time lag necessary to create inflation. Segment your data in 5-10 year rolling blocks, and do your correlation study on future inflation (5-10 years out), and the R^2 values will get very high in some cases.

    The current deficits are of a nature that will almost certainly lead to massive inflation in 5-10 years. The current deficits are largely driven by an escalating proportion of outlays dedicated to transfer payments. My contention (and I am not alone), is that these transfer payments engender terribly inneficient capital allocation, which eventually leads to inflation.

    If deficits were invested wisely into productive assets, we could run huge deficits for a very long time, and experience ever increasing standards of living. In fact, in such a case, when capital is allocated prudently, the deficits would eventually shrink, becausse the returns from such effective capital allocation would generate huge tax efficiency, which would lead to a positive feedback mechanism involving growth the real economy, and increasing government revenue.

    The transfer payment model, for a country with the world’s reserve currency, is a disaster. The US is not Japan.

    In our situation, the long-term effects of ever-increasing transfer payments will be inflationary. Wealth will explode for the very rich becuase they are in a position of power and can simultaneously hedge and game the system effectively, the middle class carries the burden of the transfer payments and is destroyed through inflation as real wages stagnate, and the poorest get crushed both financially and sociologically by becoming wholly dependent on the state; their incentive structure is dismantled, and their opportunities are ruined as the infrastructure surrounding them crumbles.

    You won’t find this on a month to month chart correlating deficits to inflation. You’ll need to dig a bit deeper than that.

    Also, inflation should correlate with inflation. When prices go up, prices go up. Of course Oil prices correlate with inflation, they are inflation.

    If my tone is a bit sardonic, it’s not directed at you. I’m among the very, very frustrated class, who is watching our congress sytematically fetter away the hard work of Americans. I don’t believe that congress is carrying out the will of the people. I think they have become ever more effective at fear and deception, and that the vast majority of Americans, who spend most of their time working and trying to make ends meet for their families, can’t concievably be expected to micromanage their local congressmen. For our republic to work, we have to be able to trust the people we elect to behave prudently, and in our best interest. But they don’t. They do a darn good job of deceiving us though, and that is what all this ranting is about, at least for me.

    Most of the folks I know don’t know the first thing about monetary policy, fiscal policy, or deficit spending. They know that they have to pay taxes, and that the cost of their tires, groceries, gas, diapers, water, electricity, and beer is crushing them. They have no savings to speak of, and they are worrying about sending their kids to college.

    I pin this entire mess on our Wall-Street Government. They work to appease the masses by promising what is not theirs to promise, while stealing us blind, and paying their crony partners in crime with our sweat and worry, laughing all the way to the bank.

    Anyways, Good day friend.

  149. Yes, the US is not a household or a corporation. Yes, the US can print al the money it needs but when all the banks are going “”belly up”” then where’s the transmission mechanism to extend credit in(to) the economy ? And banks going belly up is therefore VERY deflationary. No matter how much money the FED injects into the economy. Even when Benny Bernanke starts dropping dollar notes out of helicopters then that won’t help. First (nearly) all credit has be destroyed. Then and only then “”printing money”” or “”increasing bankreserves”” would make a difference for EVEN the USA.

    The MMT is a load of BS. I believe more in the “”Money Circuit Theory”” developed by mr. Steve Keen. That theory makes much more sense.

  150. It would really be worth your time learning about MMT and a fiat currency because the FED does not control the money supply and is subordinate to the treasury regardless of the pomp and circumstance.

  151. Current deficits are a by product of the non-government sectors desire to save…

    Net Government Spending MUST EQUAL Net Savings of the Non-Government Sector (by accounting identity)

    Net Savings of the Private Sector PLUS Net Savings of the Foreign Sector (inverse of the trade deficit) = Net Savings of the Non-Government Sector.

    Inflation is caused by excess aggregate demand, and it may or may not be induced by the government.

    Ideally, if the government must spend it should spend to meet the basic needs of its nation (full employment) and invest in the FUTURE productivity of its society.

  152. Congress can spend money that has not been created yet. How can it be savings if it has not even been created.

    Congress deficit spends money into existence, and they add to net assets, if you want to call the new fed money an asset, it’s paper after all.

    from Cullen

    “When the government “spends,” the Treasury disburses the funds by crediting bank accounts. Settlement involves transferring reserves from the Treasury’s account at the Fed to the recipient’s bank. The resulting increase in the recipient’s deposit account has no corresponding liability in the banking system. This creation is called “vertical,” or exogenous to the banking system. Since there is no corresponding liability in the banking system, this results in an increase of non-government net financial assets.”

    Accounting identities notwithstanding, congress creates money, and eventually, since there is more of it, it’s worth less.

  153. You miss a very important point. Money is not “worth less” it is worthless! Money serves only the purpose of providing someone with the means of accessing goods and services in the economy. If you have a stack of money 10 foot high it has just as much value as a stack 10 miles high if you have no economy. The value is derived in what it can allow you to access in the real economy.

    As for being an asset, well that’s where it sits on you balance sheet – as an asset.