JEFF GUNDLACH SAYS THE USA WILL DEFAULT
At last week’s Morningstar Investor Conference in Chicago Jeff Gundlach, bond guru and founder of DoubleLine Capital said the USA is confronted with a terrible deflationary battle that will ultimately end in default (see the full presentation here). I was shocked to read this from Gundlach who is truly a master of the debt markets. He appears to connect all of the dots with near perfection only to come to what I believe is a maniacal conclusion (that we will default).
At the presentation Gundlach focused primarily on the government debt level without focusing heavily on the difference between private sector and public sector debt levels (which is absolutely crucial in my opinion). He said:
“The problem for the near term is that the load of all of this debt is deflationary. We need to work through these deflationary outcomes. Debt growth creates a headwind where we need more and more and more debt.”
Of course, deficits are as American as apple pie. As you can see below, the USA has essentially always run deficits. Throughout many of our most prosperous periods we have run large deficits and been deep in the red. Government has spent more than its brought in for almost the entirety of the existence of the USA yet we have never had trouble paying for our children’s futures or “financing” anything. This confounds the inflationistas and those arguing that we will default. How can a nation never be in surplus and still be, arguably, the greatest economic engine ever known to man?
The answer is a matter of accounting. Private sector net savings is public sector deficit. TO THE PENNY. This is simply an accounting identity. The government cannot be in surplus at the same time the private sector is in surplus.
The Gundlach commentary got decidedly more negative from there. He essentially blames government spending for our current woes:
“Government workers are being paid with taxes on borrowed money. If you are going to create government jobs, you are just borrowing more money. Those aren’t real jobs.”
This is a blanket falsehood. First of all, the USA doesn’t “borrow” money. We are no different than an alchemist who funds his spending internally. As the monopoly supplier of currency in a floating exchange rate system we are our own banker. Not China, not Japan. Just like the alchemist, we simply press a button and wahlah! Money appears. The bogey for the alchemist is not “funding” himself. The bogey for the alchemist is ensuring that there continues to be demand for his currency – that he does not inflate away its value. But as Gundlach earlier pronounced there is no risk of inflation….Only deflation as the private sector continues to destroy money via debt reduction.
The other flaw in his thinking is with regards to jobs. I don’t know where this idea comes from that government spends no money on productive labor. Most of us know our local police officers, fire fighters, perhaps someone in the military? Government employees are VERY real. These are not fake jobs at all. These are productive jobs that put real dollars into Main Street’s pockets. We can argue over the effectiveness of a large portion of these jobs or whether they are all necessary, but saying they are fake is simply erroneous. Would you rather we put those dollars into the pocket’s of bankers because that is what Ben has done for the last 18 months. How is that working out for us? I am the last person on earth to advocate a fully run government economy (I wouldn’t refer to the site as Pragmatic CAPITALISM if that were the case), but this idea that government is always and everywhere a bad thing is simply false. They are blanket falsehoods based on nothing more than political beliefs that cloud rational thought.
Where Gundlach nails the argument is in his deflation/stimulus argument. He clearly recognizes that the environment we are in has been and remains a deflationary threat. As I have argued for several quarters, Gundlach says that the removal of government aid will reveal a private sector that is still deeply in debt and unable to “run with the baton” (as I have previously described):
“Take the stimulus away, and you’re going to have a double-dip recession or a significant contraction or slowdown of economic growth.”
The flaw in Gundlach’s larger argument is the same one that David Einhorn and Alan Greenspan have recently made. It is this inability to differentiate between private sector debt and public sector debt (of which there is really none – a sovereign nation which has monopoly supply of currency in a non-convertible floating exchange rate system never really has any “debt”) which leads them to believe that the US government is no different than a household. This of course is what is leading us all to believe we are the next Greece. It’s sheer lunacy. And it is why we are implementing austerity measures almost universally. Because of this, Gundlach says tax increases are on the way:
“You have a tax increase coming and a radical policy shock that will affect investments in the economy.”
Ultimately, however, Gundlach says the USA will be forced to default as we truly are the next Greece:
“some type of polite default, at a minimum, will happen.”
And I would like to politely say, that Mr. Gundlach is wrong. The United States will not default unless we choose to default due to some mental lapse by the US Congress. On the other hand, we could effectively default by creating hyperinflation, but that is in direct contradiction to the rest of Mr. Gundlach’s argument. The US consumer might be on the verge of default, but there is no solvency risk in the United States at the government level, unlike the single currency nations in Europe.
Unfortunately, no one cares to listen to these vitally important facts (and simple accounting identities) so bring on the tax hikes. Bring on the austerity. Bring on the pain. We’ve become a world of masochists. Let’s see how well we handle it. My guess is not so well. Fortunately for Mr. Gundlach his bond portfolios will likely benefit enormously.
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More on this topic (What's this?)The Deflation Bogeyman, Part 2 (Expected Returns, 8/20/10)Jeremy Grantham: Deflation Wins (Expected Returns, 7/20/10)Jail for Unpaid Debt a Reality in Six States (Strategic Default Pushback Watch) (naked capitalism, 6/14/10)Deflation Requires New Strategy for Investors (The Globe and Mail) (The Contrary Investing Report, 7/19/10)
On the other hand, we could effectively default by creating hyperinflation, but that is in direct contradiction to the rest of Mr. Gundlach’s argument. TPC
Why is hyperinflation seen as necessary to deal with debt? Why would the following actions not work to eliminate debt without hyperinflation?
1. Limit the banks’ ability to leverage.
2. Distribute a sufficient amount of new legal tender fiat equally to every adult.
And let’s not call it “stimulus” but “debt relief” instead.
Private sector net savings is public sector deficit. TO THE PENNY.
OK, then private sector savings must be huge, correct? so where are they? in Wall St?
And if you want to re-balance this, what other solution than to tax the private sector to transfer back some of the savings to the government? Is there any other solution?
There is a corprate savings glut. You know all that chatter about how much cash corporates have on their balance sheets? There you go. Where it isn’t is in the hands of consumers so while corporates delever the huge deficit is somewhat misleading.
I had the same criticism. This comment from TPC also seems to ignore the international angle. Surely foreign savings also come into the equation, i.e. the private sector savings are held by non-US nationals, so this doesn’t help the US.
Public sector deficit = domestic sector savings + foreign sector savings (in our currency)
“Private sector net savings is public sector deficit. TO THE PENNY. This is simply an accounting identity.”
TPC is just wrong on this. He should go back to school and learn his identities. He forgets trade. If we didn’t have a trade deficit, then his “identity” would be true. Unfortunately though, we have a massive structural trade deficit. The result is that savings disappear overseas at an alarming rate.
He, like many, continue to ignore an issue that is at the heart of our problems.
(S-I) = (G-T) + (X-M)
A dollar is a dollar – no matter where it is spent or saved. While the value of the commodities/services purchase-able by that dollar may differ – it is, nonetheless, still a dollar. You have mis-interpreted the equation and seem to be applying it to dollars spent/held in the US.
In any case, you do present a conundrum or two.
1) If the US cannot generate goods/services of value to non-US consumers and/or reign in consumption of foreign goods/services, dollars will flow to foreigners (traders) and our standard of living will decrease while that of the traders will increase. This has been happening more and more every day, right before our eyes. The end-game – if we stay on this path – seems to be that our standard of living will continue to decrease until we are at equilibrium with countries like China, and it become less expensive (once again) to produce goods/services domestically. The traders would spend their dollars for US goods, the US economy would boom, and the whole process would repeat itself.
2) If we print to oblivion (as TPC has said we cannot do), eventually our dollars become worthless – to everyone – and you won’t be able to purchase a loaf of bread, regardless of whether it was made in Detroit, or China, or Mexico.
3) Even if we don’t print to oblivion, the constant outflows of cash could put the US in a precarious situation, where – the traders lose confidence in the future value of the dollars they hold, flood the US with said dollars creating overnight hyperinflation – and all sorts of other problems that probably involve guns and bombs.
Read this. http://www.nakedcapitalism.com/2010/06/parenteau-marching-to-austeria-and-other-neolib-fibs.html and then this http://www.interfluidity.com/v2/871.html
Sure, I am being a bit lazy in my description (for the sake of brevity), but I am not wrong at all….
In mention the current account deficit, don’t you need to also mention the capital account surplus? All that money “disappearing” overseas is flowing back as investments, reserve holdings, debt holdings, etc…..
I think you’ve made a similar mistake to many in regards of a mentioning the trade deficit when that’s only half of payment balance
Maybe some of that money is invested in the $600 TRILLION in derivatives on derivatives, backed by high-risk mortgages on property owned by the Russian mafia.
Also remember, much of that printing has gone to combat the overstated value of trillions of dollars of toxic assets. In other words, to fill the black hole created when the paper “value” of many financial instruments evaporated – we’re filling the paper money hole with “real” money now (well, “real” is a relative term).
i’m with TPC on this one for now, being somewhat of a convert.
vigilantes and wheelbarrows too far down the road to influence current or midrange policy.
from personal experience,when you are in a sinking boat you look for a sandbar….you don’t worry that its low tide until after you find one.
@EF13
Corporate cash levels are high, but so are corporate debt levels. If you look at corporate cash/debt, it shows that corporates aren’t actually flush with money.
Unfortunately, no one cares to listen to these vitally important facts (and simple accounting identities) so bring on the tax hikes. Bring on the austerity. Bring on the pain. We’ve become a world of masochists. Let’s see how well we handle it. My guess is not so well. Fortunately for Mr. Gundlach his bond portfolios will likely benefit enormously. TPC
Yep, I’m afraid the application of some heat may be necessary till some see the light. I imagine that will happen soon after some people lose their jobs to deflation. Then they will wonder how an economy can go from prosperity to depression virtually overnight with no physical damage to the economic base.
That’s what I don’t understand either. It almost seems like this whole crash was CREATED if you ask me.
Everything was great, although unsustainable, and then virtually overnight… BAM!!!! Damn. We’re broke.
Like I said, this crisis almost seems to have been created by people.
“Oh no! A democrat is going to win! Tank the economy quick, so that he can take the blame!”
I almost wish that McLame would have won, just so the party responsible for the crisis could be taking responsibility for it now.
I almost wish that McLame would have won, just so the party responsible for the crisis could be taking responsibility for it now. Johnny
Well, there was at least a glimmer of hope with Obama though I wrote in Ron Paul.
The party responsible???? You think this happened in the past 10 years? Sorry, that is patently incorrect.
Both political parties are responsible, as are most of the overindulgent citizens of this country. Period.
Both political parties are responsible, as are most of the overindulgent citizens of this country. Period. IB
I dispute that. US citizens were pretty dang moral till the Fed was established and it took quite a while to demoralize and corrupt them. Sorry IB, but the problem with having all the power is that one also has all the responsibility. Just like a banker though to put the blame on someone else. But I agree that both parties are equally to blame.
For someone who claims to be religious, you seem to be awfully judgmental of others – though I must say, this is quite a common characteristic among the religious extremists; they appear to completely miss the moral virtues underlying the religion as well as the core fundamentals for which their religion stands for. Just like a radical to blame his problems on everyone else “without seeing the plank in his own eye”.
But wait a minute, weren’t Adam and Eve the first to be given FREE WILL, and immediately thereafter violated the simple rule set forth by God to not indulge in the forbidden fruit lest they forfeit existence in Eden, burdening the rest of us with original sin? Seems to me for such a religious person, you seemed to have missed the first chapter of the Bible….along with many of the core principles of ALL religions and philosophy. Sorry buddy, I spent most of my life studying religion and theology with on of the most respected orders of the Christian faith and you are wrong from religious, financial, and historical standpoints.
“Let he who is without sin cast the first stone.”
Banker and everyone else,
Just so you know – any comment with a racial slur or religious term (jew, xian, etc) is getting kicked to the moderator before being posted. So for future reference you might want to just avoid any term that might even seem remotely off color. Not that you said anything wrong, but Xian got caught so I thought I’d give you a heads up as to why your comment didn’t post immediately.
I really can’t have the sort of comments here that were flying around yesterday. Nothing good comes of it.
Thanks everyone. Love the good debates and educational discussions.
TPC,
Heard loud and clear – feel free to delete my previous comment as I’ve already stated that I don’t find such discussions relevant to the topics at hand – just couldn’t resist the temptation to point out hypocrisy.
Similarly, personal attacks are equally irrelevant as are negative blanket generalizations with little factual basis but to each his own (bottle of kool aid)…
Just like a radical to blame his problems on everyone else “without seeing the plank in his own eye”. IB
I take full responsibility for my life and blame no one. However you called the people who do the real work in this country “overindulgent”. I’ll tell you who is overindulged: The government backed counterfeiting cartel who were not content to “borrow at 3, lend at 6 and be on the golf course by 3″ but had to wreck the economy one more time and then have the nerve to blame their victims.
i have to tell you IB you hit that nail on the head
The answer is a matter of accounting. Private sector net savings is public sector deficit. TO THE PENNY.
Excuse my ignorance but could someone expend on this subject
As per wikipedia :
Gross debt (2009) $12.4T
Debt held by public(I assume being the Private sector):$7.8T
Does that means Private sector savings:$20.2T
Please don’t laugh if I am asking a really stupid question but I’d really like some enlightenment
OK – TPC help me out. Let’s say there is an island society that has 100 people and each has $100 of earnings per year. Total island economy = $10,000.
Each family saves 10% of earnings and the government taxes each household 10%
Total private savings on the island is $1,000.
The government’s tax revenue is $1,000. The government spends $900 on goods and services, and keeps $100 in a rainy day fund (i.e., a surplus).
So where is the accounting identity in all this? What am I missing?
Sure as a sovereign nation we can print our own currency and pay off debts until the moment other countries do not trust the value of that currency going forward. Now why would they loose that trust? Maybe it is the not so hidden attempt to try and palm off our fiscal irresponsibility off on the rest of the world.
Now why would they loose that trust? Maybe it is the not so hidden attempt to try and palm off our fiscal irresponsibility off on the rest of the world. Pekuliar
Where would the palming off be? If a debtor bailout can be handled without inflation then where is the theft? Preventing deflation is not the same as inflation.
David – the money has to come from somewhere. You can’t earn dollars if there are no dollars to earn. The US government (or your island government) is the supplier of money. The $100 the government took off the table is no longer available for spending – the government doesn’t just hold onto your money “for a rainy day”. The result is that each family is – in reality – $1 poorer. Over time, your wages will go down (your employer can’t just print money) and there will be no money left – the government will have all of it. If the government deficit spends – they are putting more money on the table than they are taking off. More money should – depending on your economic theory stance – increase spending by consumers, investment by businesses, thus wages, furthering production and spending, and increasing the standard of living of all participants. Until there’s too much money (and not enough of something) and we get inflation.
Thanks Mike Maize, for unintentionally proving TPC’s point. The government, of course, does not “hold on to $100″ for a rainy day fund. Government’s rarely, if ever, run a surplus, nor should they. If the government on the island ran a $100 deficit, each citizen would not be $1 poorer, but $1 richer.
Understanding both the savings side and borrowing side is critical. Here is a simplified version of what happened leading up to the great recession.
The following provides a macroeconomic hypothesis of how wealth and income inequality might have contributed to causing the great recession.
Macroeconomic analysis starts with four cohorts, consumers (C), businesses (B), government (G), and trading partners (F). To understand the dynamic put forth here, consumers will be divided into two cohorts and businesses will be divided into two cohorts.
The two business cohorts are finance (Bf) and non-finance (Bn).
Assume a correlation for consumers between income and savings. Stated simply assume low income consumers to be net borrowers and high income consumers to be net savers. Assume some percentage of consumers such as the lowest 90% in income borrow on net an amount equal to the net savings of the highest income 10%. Whether 90% is the right number is not critical to the following discussion. The consumers cohorts are consumer borrowers (C90%) and consumer savers (C10%).
Some observations about the 2000s leading up to the great recession. Government (G) net borrowing and trading partners (F) net savings in the US were about equal. The finance industry (Bf) accounted for more GDP and profit growth in the 2000s than non-finance (Bn). Consumer income and wealth inequality increased leading up to the great recession.
Here is a hypothesis of what took place.
* Trading partners (F) on net ran mercantile policies. The US trade deficit (and current account deficit) was financed by trading partners lending to us. In other words our trading partners on net had dollars they wanted to save instead of spend.
* Government (G) borrowing lowered taxes primarily in the consumer savers (C10%) cohort leaving this group with savings searching for investment.
* Much of our trading partners (F) exported products and services needed to be bought by consumer borrowers (C90%).
* For consumer borrowers (C90%) to buy these products and services, savings had to be made available to them.
* As we well know now, the borrowing of consumer borrowers (C90%) greatly exceeded their ability to pay from current and expected income.
* Savings was made available to consumer borrowers (C90%) through the finance industry (Bf) using expected increases in new and existing home values as collateral.
* Savings flowed from consumer savers (C10%) and trading partners (F). The finance industry (Bf) was a conduit until late in the game when it became a net saver. However the finance industry (Bf) is primarily owned by consumers savers (C10%). It can best be viewed as a surrogate for consumer savers (C10%). Non-finance businesses (Bn) were not major borrowers or savers.
* Savings flowed to consumer borrowers (C90%) and government (G).
* Interestingly trading partners (F) saving was primarily in the form of government (G) debt. Consumer savers (C10%) and finance industry (Bf) savings went primarily to consumer borrowers (C90%).
* When home values ceased to provide collateral for consumer borrower (C90%) debt, consumer savers (C10%) and the finance industry (Bf) suffered the losses. The losses for consumer savers (C10%) were increased by the fact that this cohort was the primary owner of finance industry (Bf) equity and bonds.
What was the role of government deficits in this dynamic. If government (G) had not run deficits, consumer savers (C10%) would have had less savings and trading partners (F) would have had to make up the savings difference (or sell less) taking on some of the consumer borrowers (C90%) credit risk. Trading partners (F) might have been less generous with credit terms. Even if the great recession still happened the risk would have been spread more broadly between beneficiaries of the boom, the consumer savers (C10%) and trading partners (F).
Those that see the great recession as arising because of to much debt miss the other side of the coin, the savings side. Borrowing has to equal savings. Consumer wealth inequality and trading partner mercantile policies contributed a savings side cause to the great recession.
Using this framework, how might deflation arise going forward.
If consumer borrowers (C90%) continue to de-leverage they become savers. The finance industry (Bf) is a conduit and can’t create borrowing demand. The non-finance business (Bn) will be neutral until high enough anticipated demand can be seen to absorb current capacity and require investment in increase capacity. Trading partners (F) are unlikely to be net importers instead of net exporters near term. Consumers savers (C10%) who were saving when asset values were highest probably won’t increase spending to a point of being net borrowers.
So we have four cohorts that may be net savers and only one cohort, government (G), left to be a net borrower. We have strong political and cultural pressure for the Government to reduce its borrowing. To understand the implications of reduced government borrowing without one or more of the other cohorts taking up the slack, consider how wealth is created and protected.
Wealth is directly or indirectly owned by people (consumers). Businesses and government are legal creations which are owned by people.
Consumer savers (C10%) are the primary owners of business wealth in the form of stocks and bonds. Other direct forms of consumer wealth include net house equity, durables and checking and savings accounts. Important indirect forms of wealth include rights to income and services such as pensions, social security, and medicare.
The most important form of wealth is the productive capacity of business and the growth in that productive capacity. As the quantity and value of products produced and services provided increase over time, earned and unearned income increases, earned income in the form of wages and unearned income in the form of dividends and interest. Growth in quantity and value arises from innovation and increases in productivity and employment.
Productivity arises from capital investment and improved management processes. Much capital is currently underutilized reducing capital investment demand. Most current productivity improvement is related to improving management processes.
For employment to increase, demand for products and services must increases beyond what productivity improvement can provide.
If four cohorts act as net savers, funding of innovation is not a problem of not enough savings, it is a problem of savers willing to provide the savings to innovators. A tax reduction probably will not motivate this willingness. Perhaps a directed tax credit would.
If there is not sufficient borrowing for the amount of savings available, wealth destroys savings to equilibrate to the level of borrowing. This equilibration creates deflation. Borrowing has to equal savings. If borrowing declines, the savings decline shows up in the form of wealth decline. Some businesses would be unable to pay interest obligations. Incomes and employment would be reduced. Government tax revenue would decline which might defeat any effort to reduce deficits. Some consumers would be unable to meet obligations such as mortgage payments. If business contracts, the value of business equity which is the present value of future dividends would decline. Wealth would decline until savings and borrowing are again equal.
Looking at the two consumer cohorts, consumer savers (C10%) who have most of the wealth would suffer the most wealth loss. Consumer borrowers (C90%) would suffer increased unemployment and reduced incomes.
Other direct forms of wealth such as net house equity and durables would decline more and faster in a deflationary environment that they would do otherwise.
Pensions are dependent on business health and would suffer reduced returns or losses. Social Security and Medicare are funded from trust funds but trust funds have been a net provider of revenue to government. With reduced government revenue in a deflationary environment, pressure to reduce Social Security and Medicare payments would be intense.
Excellent explanation. This is sticky article worthy.
Lesson…lack of investment of savings into R&D to assure future productivity leads to falling incomes for the 90% leading the 10% to create incentives for the 90% to take on more indebtedness leading to assure the returns for the 10% leading the 90% to ultimately collapse under a perverse Debt/Income ratio.
What seems to be missing is incorporating currency volition. At some point investors made a trade off between high current returns vs long term investment (gee, was that the baby boomers). Money managers demanded high returns in the short term, CEO’s cratered to their demands lured by obscene compensation. The 90% are reaping the harvest that the 10% have sown.
Please explain how, if sovereign nations who have their own currency they cannot default, why history shows that they do! This is an argument I have read several times and I just dont get it! And if pressing the button solves the problem why did Germany have difficulties in the 20′s?
Let me know
Si
To quote TPC: “Just like the alchemist, we simply press a button and wahlah! Money appears. The bogey for the alchemist is not “funding” himself. The bogey for the alchemist is ensuring that there continues to be demand for his currency – that he does not inflate away its value.”
You can print your currency’s value to (near) nothing. The goal of the Fed is (or should be) to walk the fine line between too little money changing hands (deflation) and too much money (inflation).
I think TPC says it’s not so much the amount of money, but the “velocity” of that money. Even though the US has expanded its spending by trillions – the “velocity” of that spending is low (maybe because we gave it all to the same financial hucksters that got us into this mess).
Germany was not sovereign. They were on the gold standard. Apples and oranges.
@ Si – they had convertable currencies. Think gold standard.
TPC
I have read your arguments against default basically stemming from the fact that we are the monopoly creator of our own currency. Technically you will always be right as the US only agrees to pay its creditors back in dollars NOT IN PURCHASING POWER.
However, as always, I restate the point that a) when (thats when not if) we are no longer the worlds currency, and b) we have eroded the confidence of the american people in the currency
Will you continue to state that we cannot default?
Technically you will continue to be right, however, your lack of purchasing power with your dollars will probably have something to say about that.
TPC has made his point – several times – that we cannot print “recklessly” (to use his word). As in the article above:
“The bogey for the alchemist is ensuring that there continues to be demand for his currency – that he does not inflate away its value.”
I don’t think your opinion is not at odds with TPC’s statements.
TPC has made his point – several times – that we cannot print “recklessly” (to use his word). As in the article above:
“The bogey for the alchemist is ensuring that there continues to be demand for his currency – that he does not inflate away its value.”
I don’t think your opinion is not at odds with TPC’s statements.
Your point is well taken, but it appears to be contradictory with the other sentiments.
It isn’t possible to believe that there is a limit to how much one can print while simultaneously also arguing that the US could never default. This statement acknowledges that money is a market-driven animal that isn’t simply a byproduct of government deficit spending, and it doesn’t really jive with chartalist theory (at least not as I understand it.)
I can appreciate the US could never default in a legal sense, in that it could print away the obligation. But of course, if the US were to go to those extremes, the blowback would come swiftly when nobody shows up to bid at the next bond auction and when the foreign investment starts fleeing the United States. TPC would then argue that it doesn’t matter if those bond buyers don’t bother bidding, being that bond sales are merely part of the accounting entry, but that leads us back to the contradiction with MMT — does it matter, or doesn’t it?
Mind you, the goldbug belief that all printing is inherently inflationary is also wrong. Milton Friedman got it wrong when he claimed that inflation was purely a monetary phenomenon, and TPC is absolutely right in arguing that fiat money is superior to gold, as it makes it possible to manage the money supply.
But even Friedman knew that it was possible to use QE policies at certain points in the cycle, so it’s not contradictory for a monetarist like Bernanke to use QE while also remaining a monetarist. A monetarist may manage primarily around avoiding inflation, but that clearly isn’t a problem right now, even from a monetarist perspective.
It seems you disagree with TPC’s statement that we cannot default. I would agree with you and others that if we neared that threshold (that we had printed so much it would be equivalent to a default) – we would have problems (though most of them would much worse than a worthless dollar). I think TPC has explained in the past what he really means regarding this “can’t default” statement.
I also think TPC’s point here is that it’s not the risk of default (or worthless dollars) that is the issue right now. Sure, we may have had grossly misaligned spending and over-consumption, but now is not the time to be financially austere, clean up government spending, and try to balance the budget.
Where do you stand, Angry? Have we spent too much already? If not, what happens when we spend a few trillion more? If spending is not the answer, what do you think is? (I really am curious as I’m trying to figure that out myself.) If I am to believe Gundlach, the future is all but hopeless – so what do we do???
I think TPC has explained in the past what he really means regarding this “can’t default” statement.
He has, but my point is that there are contradictions in his argument. Either it is possible for a nation to print without causing problems (the accounting explains the reality), or else it isn’t (there are real limits to printing, and the accounting doesn’t fully explain the reality). You can’t have it both ways.
I also think TPC’s point here is that it’s not the risk of default (or worthless dollars) that is the issue right now.
I agree with him 100% on this, but not for the same reasons. The essence of my argument is that the US balance sheet has a lot more debt capacity than a lot of these deficit perma-hawks realize, and that the US government can deploy that debt to create growth in order to pay for it. In other words, a cost-benefit analysis generates a positive outcome that tells us to proceed with the spending.
Have we spent too much already? If not, what happens when we spend a few trillion more?
No, we haven’t spent enough, and we should probably spend more (although the real world logistics of stimulus create problems, as government tends to be slow, even under the best of circumstances.) Some nations have no choice but to resort to austerity programs, but the US has better options.
I would like to see more reductions in private debt, so that creditors aren’t competing with producers and investors for cash. I do wish that the government had acted decisively to force the lenders to work out and cram down debt, but the feds decided to take a softer approach. Again, I suspect that lenders will get their on their own, but they will do it more slowly to a lesser degree than would be optimal for the economy.
I do wish that the government had acted decisively to force the lenders to work out and cram down debt, but the feds decided to take a softer approach. Angry MBA
Why cram it down? Wouldn’t that impact banker’s equity? Instead, why not just give money to the debtors to pay down their mortgages to market price levels? Wouldn’t that also fix the banks in nominal terms? Of course, the savers would howl so give them an equal amount too.
Why cram it down?
Because the purpose of banks is to create liquidity that supports money velocity — that is why we give them the authority to convert assets into collateral (and by extension, money).
During times such as these, they are doing the opposite of this. They are not fulfilling their mission. When banks fail to do what we need them to do, then it is our job to do something about it.
Wouldn’t that impact banker’s equity?
The equity has already been lost, but the accounting fails to recognize it. During periods like this, lenders change from being velocity creators to velocity killers in their efforts to conceal this reality.
During a time of crisis, preservation of their equity should not be our priority, since it comes at our expense. If their investors and bondholders don’t pay, then the taxpayer pays the difference.
The irony is that it is conservatives who freak out about bank nationalization, as if it’s some pinko commie attack on capitalism, when their alternative of avoid cramdowns only raises the price tag to the taxpayer. You have to choose who gets burned, and I would prefer that the taxpayer get the best deal possible.
The irony is that it is conservatives who freak out about bank nationalization, as if it’s some pinko commie attack on capitalism, when their alternative of avoid cramdowns only raises the price tag to the taxpayer. Angry MBA
And what is their alternative? Bailouts of the banking system?
And what is their alternative?
Their “alternatives”, if one may call them that, are not workable. They believe that either the big mean borrowers should simply pay the debt, even though the money needed to repay the loans no longer exists (it was destroyed when asset values crashed), or else that the banks should be allowed to fail (even though the FDIC wouldn’t have the money to pay for it without printing it, and a failure to honor deposit insurance would predictably lead to bank runs and a massive depression like one we’ve never seen.)
Unlike the last real estate recession, this one has been politicized to death — we have pundits and politicians opining about stuff about which they know little or nothing. Had we mucked up the resolution of that last recession with politics, we would have never had an RTC (the bleating about government involvement would have been deafening) and we would have been stuck in a trench for a much longer period.
These are economic problems, first and foremost, and the obstructionist politics should be left out of it. But there are elections to be won, and a public ready to be led down the garden path with soundbites instead of viable, workable but hard choices.
Had we mucked up the resolution of that last recession with politics, we would have never had an RTC (the bleating about government involvement would have been deafening) and we would have been stuck in a trench for a much longer period. Angry MBA
Well, you can probably guess that I’ll say it was government involvement in the first place that caused the problem. But now is not the time to desire government non-interference, so we agree.
These are economic problems, first and foremost, and the obstructionist politics should be left out of it. But there are elections to be won, and a public ready to be led down the garden path…” Angry MBA
Garden Path? If only! Instead the public will have needless, destructive austerity pushed on them so they can atone for their “sins”.
with soundbites instead of viable, workable but hard choices. Angry MBA
Hard choices? No one yet has refuted that just giving every US adult a sufficient amount of new legal tender would solve our problems. Unthinkable? Apparently, but not hard, IMO. Your thoughts?
No one yet has refuted that just giving every US adult a sufficient amount of new legal tender would solve our problems.
It’s Econ 101 that such a policy of money printing would be inherently inflationary. The hyperinflation crowd would actually have a point if we were to pursue such policies.
The asset value that created the money that would have been used to repay the debt was destroyed in the crash. The answer to that particular problem is not to print more money, but to default on the debt.
We can’t default on sovereign debt, as the reputation of the US Treasury needs to be maintained. But we could, and should, default on private debt, in order to shed the macroecon problem.
We should print money in order to stimulate growth, not to pay debts. Debt repayments are a drag on the money multiplier, and we shouldn’t create inflation just so lenders can avoid dealing with reality at our expense.
I think you need to review the definition of default. Defaulting means not being able to be good on ones debt payments. The USA, like the alchemist, never doesn’t have dollars. We don’t have real debt. We can never be short of money. It is impossible. This is not even debatable. It is fact.
You’re just putting words in my mouth with very loose definitions of words that have very strict definitions….
This is not even debatable. It is fact.
If it wasn’t debatable, then you wouldn’t have the vast majority of economists rejecting MMT.
I think you need to review the definition of default. Defaulting means not being able to be good on ones debt payments. The USA, like the alchemist, never doesn’t have dollars.
I already made it clear that in a legal sense, the US cannot default. But if we ever got to a point that nobody wanted our debt (or at least not without demanding usurious rates of interest and impossible terms) that this would be just as bad as a default, as we would lose the ability to sell our debt to the market. (And yes, we do need to be able to do that — the accounting does not perfectly explain the reality.)
MBA,
It’s more than abundantly clear that you haven’t absorbed the basic premises behind MMT….Not sure how else I can help.
It’s more than abundantly clear that you haven’t absorbed the basic premises behind MMT
No, I get it, but I disagree with it. The majority of others who are in a position to understand it also disagree with it, so I am far from being alone.
You are entitled to believe in it, of course, but you go overboard in your belief that is a fact, and not just a theory that you happen to find convincing. You can make your case for it, but it is a heterodox, minority belief, not an unimpeachable truth.
I’ll file you under the flat earth economist crowd then. The same economists who have been consistently wrong about almost everything.
“Most of us know our local police officers, fire fighters, perhaps someone in the military? Government employees are VERY real. These are not fake jobs at all. These are productive jobs that put real dollars into Main Street’s pockets.”
TPC, I’ll take issue with this – they used to be productive. From anecdotal numbers I’ve heard, 2/3 of the police time is spent on the drug war – there is no productivity gain and nearly a 100% loss. (Plus the second order losses of people who become unemployable due to drug/criminal records) Throw in illegal immigration and all the other pet projects and police officers can generally be categorized as not productive, if not a net hindrance on society.
Top that off with the public unions capturing the pay and pensions and all the public employees you mention are definitely getting overpaid for their economic contributions.
The military … well, 700+ bases, dozens of combat zones due to the war on drugs, war on terror, and supporting “democracy” missions – they’re a substantial drag on the American economy as well.
And the actual government red-tape employees? Productive?! =)
You’re welcome to move to places where drug wars are replaced with – well, wars. And the police are truly not productive – or they just work for the “bad guy”.
America is certainly not a well-oiled machine, and we shouldn’t turn a blind eye to corruption, but it seems you’re living a pretty damn cushy life to be complaining about the people – however overpaid they may be – that make it possible.
The real problem in the US is the greed evident in your opening line. Last I checked these people were buying houses, and cars, and TV’s – returning a majority of the dollars they earn back to the economy.
I’ll “take issue” with your greed and general lack of respect – somehow police officers, fire fighters, and soldiers are supposed to be lining YOUR pockets (as if putting their lives on the line for you wasn’t enough)..???
Please enjoy your stay at the Hyatt Kandahar. Be sure to wear your dog tags so we can at least recognize part of you.
Personally, I’ve never been helped by a police officer.
“Police, somebody stole my girlfriend’s car.”
“Did you see who took it?”
“Ummmm… no.”
“Well, if it’s parked at the donut shop, we’ll get it back to you. Otherwise, don’t even expect it back.”
So then, they found the car in her neighborhood, parked in front of the thief’s house. They did absolutely NOTHING to the thief (who was an illegal immigrant as well) but at least she got her car back… with the stereo stripped out of it.
Every time I go to a local cigar shop here, there are always several police officers sitting around smoking cigars. Couple that with the ones sitting on the side of the road radaring people, and you could probably cut a few police officers.
As far as soldiers go, I don’t see how kicking in the doors of innocent people in Iraq and walking around looking for roadside bombs all day is productive at all. I don’t see how building Iraqi children schools is productive for the U.S. economy at all. I don’t see how providing security for people to vote in other countries is productive for our economy at all.
Yet, we spend trillions of dollars on this every year.
As far as the war on drugs goes:
The United States has 5% of the world’s population, and 25% of the world’s prison population. 1/9 African American males are incarcerated due to drug offenses.
Despite all this, the purity of drugs is up, the price of drugs is down, and the United States has the highest rates of drug use in the world, even moreso than countries (like Portugal) where they are completely legal.
Yet another total waste of money.
At least teachers and firefighters do something to help American society. Police and soldiers, not so much.
Sure soldiers did something 70 years ago to make us free, but not since, despite all the money spent and deaths.
Mike, there is no need to fall into the mind traps set by our political class – it is not a black and white situation where it is either total anarchy or the police state that we have. No need to take it personally, either. Police, firefighters, and military are for the most part good people who serve the laws that they are told to serve. My problem is with the laws.
“You’re welcome to move to places where drug wars are replaced with – well, wars. And the police are truly not productive – or they just work for the “bad guy”. America is certainly not a well-oiled machine, and we shouldn’t turn a blind eye to corruption, but it seems you’re living a pretty damn cushy life to be complaining about the people – however overpaid they may be – that make it possible.”
Drug prohibition *causes* crime. Legalize drugs, no more money to the drug cartels. Even if all the drug cartels go into another line of business, which they won’t, all the buyers are now law-abiding citizens that the police do not have to pursue. Users are now working in society instead of sitting in jails.
Police officers serve productive functions when they protect private property or contracts, including items like fraud or corruption. Our current police does little of the sort and spends most of their time on political projects legislating morality or non-economic purposes. You can say that the morality is important, but you have to remember that there is both a direct cost and an opportunity cost to hiring police to enforce morality.
“The real problem in the US is the greed evident in your opening line. Last I checked these people were buying houses, and cars, and TV’s – returning a majority of the dollars they earn back to the economy.”
If the police spent 100% of their time digging ditches and filling them up, then used their pay to buy houses, cars, and TVs, would you say they are productive members of society?
Okay – I get your beef now. Sorry to take it personally.
Thoughts/questions:
1) Seems like all of us would draw a line in the sand somewhere as it relates to moral/immoral and whether or not something should be legal/illegal. Drugs, gambling, prostitution, child prostitution, gay marriage, plural marriage, strip joint at the end of the block, neighbor playing loud music, neighbor playing loud music while wearing a Speedo.
2) Lots of Americans disagree with the “conflicts” in the Middle East – but nobody wants to reduce their oil addiction. We are there protecting our own “interests” – and Bill Chaney’s portfolio.
3) Government does play an important role. Though you feel like we live in a police state, I have been in places that are truly police states and places in complete anarchy. In every moment – I longed to be back in the U.S.A. I’d be happy to pay police officers to dig/fill holes all day long if it I didn’t have to live in those types of places.
I realize none of those points mean much. So, let’s focus on the issue at hand – if the government is wasting lots of money on government employees, it seems like the worst thing to do right would be to add them to the unemployment pool and also release all of the now-exonerated drug convicts. How do you realistically implement the solution you propose?
“Okay – I get your beef now. Sorry to take it personally.”
No problem! As long as cool, logical heads prevail, I believe there is room for optimism for our country.
A lot of your questions are opinion, so take my responses as such…
“1) Seems like all of us would draw a line in the sand somewhere as it relates to moral/immoral and whether or not something should be legal/illegal. Drugs, gambling, prostitution, child prostitution, gay marriage, plural marriage, strip joint at the end of the block, neighbor playing loud music, neighbor playing loud music while wearing a Speedo.”
Figuratively speaking, and strictly from an economic perspective, I fall on the side of government establishing the largest economic pie. Enforcement of private property and contracts, or in other words, voluntary exchange. Involuntary exchange is crime, of course, since it violates private property and/or contracts. This is where law enforcement generates tremendous societal value by making it possible.
Morally speaking, most of your list “bothers me”; however, I’d only legislate aspects that impact kids. I firmly believe that the more economically prosperous a society, the more moral it will be.
“2) Lots of Americans disagree with the “conflicts” in the Middle East – but nobody wants to reduce their oil addiction. We are there protecting our own “interests” – and Bill Chaney’s portfolio.”
Agreed. The change will come economically and not through some sort of central planning. I saw it with my own eyes when gas was $5 a gallon here in Atlanta. People were biking, riding scooters, car pooling more, and riding the lackluster public transportation. What I hope in the meantime is that people realize we are helping special interests more than we are helping ourselves by “protecting our own interests”.
“3) Government does play an important role. Though you feel like we live in a police state, I have been in places that are truly police states and places in complete anarchy. In every moment – I longed to be back in the U.S.A. I’d be happy to pay police officers to dig/fill holes all day long if it I didn’t have to live in those types of places.”
Government is important, but I think we crossed the tipping point of a free society to a police state somewhere in the past two decades. I recognize it can get, much, much worse, so I by no means am taking what I have for granted. Even so, I believe the authors here are asking the right questions of whether we have ceded too many of our liberties:
http://www.house.gov/paul/congrec/congrec2002/cr062702.htm
http://www.zerohedge.com/article/guest-post-us-fascist-police-state
“I realize none of those points mean much. So, let’s focus on the issue at hand – if the government is wasting lots of money on government employees, it seems like the worst thing to do right would be to add them to the unemployment pool and also release all of the now-exonerated drug convicts. How do you realistically implement the solution you propose?”
I personally think the prior points are extremely important, hence why I answered them. Americans need to have rational discourse with one another rather than through politicians or the media. Understanding where everyone “comes from” is critical in my eyes to be able to move forward from the political and economic mess we have.
These problems didn’t happen overnight and required a LOT of incrementally bad policy to make what we have possible. In my opinion, undoing the problems and the policy will take just as long. Realistically, I think incremental solutions from the individual States will pave the way. For example, if Michigan dropped all their personal and corporate income taxes to spur economic activity. (And kept only a minimal sales tax) Or if California legalized Marijuana and demonstrated that it could generate tax and not result in a society that is perpetually high. Success will beget success.
I’ll “take issue” with your greed and general lack of respect – somehow police officers, fire fighters, and soldiers are supposed to be lining YOUR pockets (as if putting their lives on the line for you wasn’t enough)..???
You’re creating a straw man with this. In economic terms, he’s arguing that the drug war doesn’t add to the money multiplier.
If law enforcement and the courts act in ways that improve a community or keep it from declining, then that’s worth paying for. If it doesn’t, then the cost exceeds the benefit and the program should be scrutinized and perhaps dismantled.
The drug war strikes me as being horribly wasteful. We spend a lot on it, yet not only do we get nothing for it, but we actually make things worse by allowing a negative element of society to profit from it. As is the case with everything else, law enforcement resources are scarce, and they could be deployed more effectively if we had appropriate, realistic priorities.
You may recall that Prohibition was a horrendous failure. The only real winners from it was organized crime, which was able to invest the profits generated from the alcohol trade into expanding their operations and buying weapons to protect those operations. So not only was Prohibition ineffective, but it actually made things worse.
This is way off topic, so I won’t belabor it, but it is totally reasonable to apply a cost-benefit analysis to these programs, and to pick and choose which ones we want and which ones are counterproductive. That isn’t disrespectful to the cops, that’s showing respect for the taxpayer.
The problem is that we’re a nation of hypocrites to the point that we’re doomed. We all bemoan red-tape, until an oil rig blows in the GoM and suddenly there wasn’t enough red tape. Republicans bemoan the deficit and never EVER discuss cutting defense spending. Democrats talk one game on taxes, play another game on taxes, and never talk seriously about reducing the size of government, or taking on entitlements. Citizens want smaller government, but keep your hands off their social security/medicare/medicaid.
I could go on, but I won’t (you have better things to do, and so do I!). Until every one of us takes a hard look in the mirror and recognizes our own complicity in this situation we are screwed.
My bet is that self-realization happens when the entire thing has fallen apart.
Until every one of us takes a hard look in the mirror and recognizes our own complicity in this situation we are screwed. Jon
What good would that do since the ones who caused this mess, the bankers, would probably not see a reflection?
When the bogey for the alchemist prints a currency that as no valuation what is the difference between that and a default
TPC has made his point – several times.
Of course, If and as longa as “The bogey for the alchemist is ensuring that there continues to be demand for his currency – that he does not inflate away its value.”
If history is any guide that is a very risky “IF”.
When the bogey for the alchemist prints a currency that as no valuation what is the difference between that and a default.
…Then we’ve gone to far, haven’t we? We’ve inflated the currency to zero value. You’ve stated the obvious conclusion and in the end, you are just mincing words. Deflation – in the near-term – is a forgone conclusion. Let’s do our best to be sure we don’t run off the cliff before worrying excessively if there are any rocks at the bottom.
In the meantime, feel free to send me all of the “worthless” dollars that are burdening you.
He appears to connect all of the dots with near perfection only to come to what I believe is a maniacal conclusion (that we will default).
Slide 23 of Gundlach’s presentation indicates to me that he expects countries that control their own money supply, such as the US and the UK, to print their way out of it, and other nations that can’t (he seems to be hinting about the Eurozone) to default. So that sounds as if he’s predicting an inflation scenario for the US, not default.
As I have stated, I don’t agree with MMT, but what these analysts are missing is that the most likely resolution to this will be more defaults on private debt.
Banks have been in the process of rebuilding their reserves, balance sheets and equity prices, while sweeping a lot of defaults under the rug. The next logical step would be for them to start (quietly) recognizing those defaults and writing them down, as they can take that bullet now without becoming insolvent. That could be accomplished without either inflation or sovereign default; if the US government was a bit more clever, it would be pushing this process along to get it done sooner than later.
Alexander Hamilton figured out a long time ago that the key to getting a good sovereign credit rating was to create terms that would make it near-impossible to default on government debt, and then to combine a conspicuous, perfect record of repayment with an economic base that would provide the means to service that debt. I’d say that he did pretty well with that; the falling treasury rate today indicates that he was onto something.
Angry, were there actual, rudimentary credit ratings back in the day? Or was it more of a perceived de facto standard judged by investor behavior?
were there actual, rudimentary credit ratings back in the day?
I’m pretty sure that there weren’t. However, Hamilton did manage to get the interest rate on new US debt issuances reduced by one-third. In addition, the debt from the Revolutionary War had been trading in the secondary market at junk prices, but Hamilton’s plan to move the state debt to the federal level raised those market prices to something similar to what we would consider to be of approximately A-level quality. It was an impressive turnaround effort, by any measure.
Apparently Gundlach thinks that more jobs will be created if instead of paying for police officers and teachers, his tax money goes to buying golden dildos. How this will benefit anyone but holders of GLD and Chinese sex toy makers is beyond me.
It is always very interesting how many oppinions and comments are made regarding this topic.
We all obviously feel very strongly about this issue.
“Private sector net savings is public sector deficit. TO THE PENNY. This is simply an accounting identity.”
Sometimes the level of ignorance displayed is depressing. This is simply NOT an identity. The real identity includes trade. That is why our government dissaving does not equate to private sector saving. Our savings just go overseas instead (and then reappear at the Fed as foreign owned capital).
Is there any need to repeat your comment when I already responded to you?
Net household financial income = current account surplus + govt deficit + net nonfinancial assets.
You think trade deficits are untenable, a negative. We are simply using our savings to buy real goods and services from abroad. We send them pieces of paper. They send us their production.
“Apparently Gundlach thinks that more jobs will be created if instead of paying or police officers and teachers, his tax money goes to buying golden dildos. How this will benefit anyone but holders of GLD and Chinese sex toy makers is beyond me.”
Jon, I sense that what Gundlach means is that:
We all know what we will purchase from Farmers but when 420,000 census workers are paid to make sure we exist what exactly is it the you will purchase from there production?
Remember that money is only a claim on things other wise why not do like F. Beard is suggesting and send some to every one money.
Remember that money is only a claim on things other wise why not do like F. Beard is suggesting and send some to every one money. first
Actually, I only seek to replace credit money with real legal tender and at the same time limit bank leverage to prevent inflation.
I apologize in advance: this is a non-contributory posting.
I saw this article in MoneyNews this morning and the first thing that I thought?
TPC is going to jump on this like a fly on peanutbutter!
(hahahahahahahahahaha…)
F. Beard.
Thanks for the precision.
I think that investment bank leverage are probably still out of whack.
I’m still reading the Ellen Brown book, Web Of Debt. It’s pretty enlightening. I loath that I ever once considered gold as money. Anything beyond gold’s mere commodity value is an illusion fostered for the sake of bankers. We should embrace liberty and the rule of law and permanently de-fang the parasite class.
@TPC
I think this was your finest post!
The comments were also extremely valuable – especially those that were dealing w/ Bill Mitchell’s stock/flow consistent macro models (which I am 50% of the way through right now). They brought a sharp clarity to some of my confusions…
Thank-you very much!
Iluv
There are two problems I see with this, 1. the majority of the private sector savings are foreign, and not domestic, 2. we do not create our own money, our money is created by the Federal Reserve and loaned at interest to the government. As a result we are still dependent on a bond market and therefore subject to the bond markets interpretation of our solvency.
TPC, I just love your work and I think I now fully understand your thoughts here.
As an alchemist, the USA has the reserve currency, based on nothing and backed by nothing, that it can distribute as it sees fit, it really has no debt, just promises to supply color paper to foreign countries.
And when you say private sector or even government savings – the private sector of the WORLD right? Because that is the only it balances out.
However, these “pretty colored pieces of paper” are becoming less and less attractive, especially when sounder currencies, without the potential for the alchemist to go crazy, are available. In other words, you stated:
“You think trade deficits are untenable, a negative. We are simply using our savings to buy real goods and services from abroad. We send them pieces of paper. They send us their production.”
They are not just sending us their production. The Chinese are buying up hard assets and commodities all over the world. Strategic logic. They are converting paper into actual assets.
Hence why I am bullish on the commodities. The fools who run into Treasuries are thinking 3 months out.
I guess the way I think about it is this way — the alchemist can have a super amount of debt/promises to pay paper, if and only if he can convince the world that his paper is worth something, and if he could potentially suck that much value out of the economy.
In the near term, everyone knows this is a bluff though because there is no way we could significantly suck money from our country’s production as that would cripple the private sector at this stage.
Ok, I’m done. Big problem here is when everyone else finally says bullshit and demands something of value rather than color paper. But that is ten years off at least. But that day of reckoning is coming eventually, if these morons can’t get their act together.
As Adam Smith said, every government eventually defaults, either through pure default or money printing. Eventually, balance sheets matter, and the world isn’t playing with a frigging monopoly board.
Btw TPC, biggest chances for default I see are at the muni level, which are allowed to file BK and have a mechanism for doing so.
Why in the hell do these morons go into muni bonds getting 6% when chance of default is so high? And the city has no “assets” that get distributed to creditors, that I can see.
I guess cause it has the word “bonds” in it, people think it is safe. Just like “investment advisor” eh? Give me an audited balance sheet of a company with good cash flow and dough in the bank over the City of Vallejo any day of the frigging week.
As Faber said, I think equities will start to be viewed as safer than muni/state bonds one of these days.
Yes. States are different so there is certain default risk.
Great great comment Prescient. Remember when you used to be the only one who commented on my articles?
I don’t think China is diversifying out of dollars. I think they are buying commodities that their citizenry needs. They are buying what is essentially becoming infrastructure because they know domestic demand on the rise.
As for default – it’s a more complex topic than this, but a currency collapse generally coincides with a lack of economic output. Ie, the death of a currency is really the death of the economic output. Weimar and Zimbabwe are great examples of economies that collapsed and whose currencies collapsed NEXT. The printing of money and irrational response is generally a response to a lack of economic output. Weimar is the best example. That is what hyperinflation really is. The death of an economy.
Does anyone really believe the US economy is dying? Are US companies going to stop making the best products on the planet? Are us citizens going to stop being productive? I wake up every morning with a fire in my belly to make money and be productive. I dont ever see that changing. It is in our DNA as Americans to wake up and try to be the best. This is a far oversimplified view, but I think you get my point.
The good old days, TPC. I remember finding you on Zero Hedge through your comments.
Finally, your response puts it about as plainly as it can be put. We need to revitalize the economy, cut onerous regulations, cut the corporate tax rate by 10% and condition it on CapEx spending and new hiring and they get a bonus, payroll tax holidays for consumers, supported workouts with credit card companies to lower consumer debt, and finally big infrastructure projects — electrical grid, alternative energy (that is not a boondoggle!!), and other works/technology projects, that are all bid out to private contractors.
Get out of the way of the private sector and incentivize as much as possible. Repair public sector balance sheet once private sector is stabilized and going. But we are no means a dead economy!!! Government just needs to stop adding dead weight and put the money where it’s going to count the most.
Hyperinflation = a dead economy is about the best I’ve seen it put. I say we get some inflation, but the stimulus/money printing is going to be muted by the tremendous deflationary pressures out there – thus, it’s ok to go. I like commodities because I think their value increases as they are necessities for any kind of growth/subsistence, and will be focused on first.
Again, thanks for all the hard work!
We’re certainly on the same page. Govt should incentivize the private sector to be productive. To be capitalists!
And you’re welcome!
It’s Econ 101 that such a policy of money printing would be inherently inflationary. The hyperinflation crowd would actually have a point if we were to pursue such policies.
The asset value that created the money that would have been used to repay the debt was destroyed in the crash. Angry MBA
I see no real destruction only nominal destruction. The factories still stand, the crops have not failed, etc. As for hyperinflation, limiting the banks’ ability to leverage should preclude that. At the most, we could expect a one-time burst of inflation at the bankers’ expense but only in real terms. In nominal terms asset values should be restored.
What do you see as the end game as far as credit destruction is concerned? We currently have huge amounts of debt which has been destroyed in effect, but still being carried on the books by institutions as assets. Realization of the destruction of this debt would be highly deflationary.
Again I am amazed that no one buy a small cabal of secretive bloggers and MMT types understand money.
Almost every economist on earth does not understand
Nor do the great hedge fund masters
Nor does bond king Bill Gross nor Gundlach
So somehow 99.982383893% of people have been fooled! The other group clearly see the earth is not flat. Its like the 1400s all over again.
But thankfully TPC does understand. Now if only TPC could run the Treasury yahoo!
Do I understand the monetary system better than most of these people? Perhaps not, but for some reason I have been right about almost everything I’ve been saying since this crisis started….At some point you have to start wondering why some people are right and others are wrong….The policymakers have clearly been wrong.
TPC, I continuously hear you say that the US can not become the next Greece because we can print money. But what about Argentina, Brazil and a host of other countries that print their own money that have defaulted (or restructured) their debt held by foreigners? The US may not become like Greece but is Argentina really a better choice?
Interestingly, I went to grad school with some of the Argentine politicos being trained in the Chicago economic school of thought and the same theories got us into this mess.
They had a pegged currency. Apples and oranges.
“Are US companies going to stop making the best products on the planet?”
Are US consumers going to stop importing the cheapest and sometime the best products on the planet?
Is GE a manufacturing Company or a financial institution?
Was GM making money or was it GMAC?
The profits have been made from financing not producing and eventually it was paying time so they took rates even lower and continued the spiral of debts and economic mirage until it got to where we are now. “Japan time”.
GM was selling the most cars in the world every year of the company’s existence until 2008 when Toyota finally overtook them. They were crippled by bloated pension programs and unions unwilling to budge on them with threats of strikes. Toyota doesn’t provide nearly the same pension plans as GM did. Moreover, I think the fallacy of “higher quality” import cars has been exposed quite spectacularly as of late.
GE is the only company still on the DOW Jones Industrial Index since its inception (114 years) and was founded by an obscure man you may of heard of – Thomas Edison. It is today considered by some measures to be the second largest company in the world (and currently has a near permanent residence in the top 5 US companies). This is a company which has impacted the lives of the vast majority of civilization since its creation and continues to produce products which we absolutely depend on.
These are real companies that have stood the test of time and though they’ve gone a bit astray (or far astray in GM’s case) they shouldn’t be written off. The world’s hundreds of millions of vehicles created and used, millions of kilowatts generated, and billions of air miles flown tells me we shouldn’t consider them useless. If we can bailout zombie banks and deadbeat McMansion owners, we most certainly should keep afloat 2 industrial Titans who’ve had substantial success over the long run.
SteveS
TPC is correct in that contrary to other countries the US never borrow money in any other domination than its own currency. Every commodity is also pegged in USD so every one needs USD to trade in almost every commodities.
Argentina needed to keep a USD reserve and a sound fiscal policy to maintain its currency at par with the US but smart investors soon realized that the ratio was not maintain and they started dumping.
I agree with you they definitely have an exceptional history and they should never be written off.
My point is that growth that is dependent on to much easy credit (Future income) as its limitation.
huh? real jobs…huh? give me a second, I have to shake that one off.
ok. So as our own bank we DO print fiat money that’s REAL to create non-productive (NO PRODUCT PRODUCED) jobs that are real…I get it now.
So all we have to do is hire more homeland security goons and TSA noise pickers and go for the 5 Trillion in QE not the 2.6 Trillion AND EVERYTHING WILL BE OK.
Whew – for a second there I thought we were in trouble. We can just build more reaper drones and kill more innocent women and children overseas and QE and manipulate the bond markets and call IRS jobs productive!
Good god. Problems solved.
That was easy.
Can bloggers GET any more STUPID!
Scott (it’s okay if I call you Scott right?),
How do you like these things for NON-PRODUCTIVE military/govt inventions:
1. The computer & the internet
2. Satellite technology
3. Rubber
4. The jet engine
5. Submersible technology
I could go on and on. The US military has invented or been the cause of an outrageously high number of ultra productive inventions (many of which you probably use and take for granted).
But don’t mind the facts. Just keep beating that anti-govt drum of yours. Just remember to pull the wool from over your eyes before you get in your car tomorrow morning.
Are you saying that the US can’t technically go broke but every one broke.?
Anesthesia was invented for surgical purposes to provide a painless method when a procedure is carried on. Though such types of herbal remedies were carried by Sushruta Samhita and others, the first successfully use of this gas was introduced by Crawford W. Long, an American physician, in an operation in 1842.
Konrad Zuse was the inventor of the first freely programmable computer.
The US military gives contracts to private firms. It’s obvious that some of those inventions can also be used for civilians but at what cost?
To benefit from any inventions we do not need to spend trillions of dollars to get a few rocks from the moon.
Pyramids are impressive but not for the guy that did spend is life building them instead of building his house. What we see are the pyramid but what we do not see is what could have happen.
Maybe the govt should just stop spending money, huh? Is that your solution? Try that out for a few years and we’ll see what happens.
I can’t even believe I am entertaining this discussion….
Some additional material on discussions on accounting identities:
http://mpettis.com/2010/04/the-rmb-and-the-magic-of-accounting-identities/
Also, re: TPC’s comment on Germany and the gold standard. After reading Lords of Finance and a few other books on the Great Depression and monetary history, I don’t think we can always say that things were different then because of the gold standard, simply because countries (including the US into the 70s) have always had a dirty gold standard: (a) the government says it is on the gold standard, but doesn’t honour or limits convertibility, (b) they go on/off the gold standard as convenient. Germany created hyperinflation because its “gold standard” was not credible and the markets called their bluff by devaluing the ReichMark. They also had severe industrial production restrictions because of the tensions with the Allies over reparations … basically the Germans said, “you’re trying to draw blood from a stone; invade us, put us in jail … if you want, but we’ll just stop working and ensure we don’t repay you a dime.”. Sort of like unions in much of the G7 during the 70-80s. The corollary to the above is you can have a depression even without a gold stantard.
Are you serious? “Holding my feet to the fire?” Alexander Fleming was in the military. He served in the army medical corp. He only founded the cure to penicillin as he was researching cures for infected wounds.
Do your research before you troll websites.
The rest of your comments just very vague anti-govt hogwash. This idea that the govt does nothing good for you is total bullshit. Go live on an island if America has treated you so poorly. My guess is this country has not treated you so poorly.
As for this crisis. I am not claiming that govt played no role in it, but this idea that govt is the cause and can play no part in the solution is sheer idiocy. You want to say govt employees are worthless, but what about all those private sector jobs that “produce nothing”? Should we just get rid of them also?
Maybe the govt should just stop spending money, huh? Is that your solution? Try that out for a few years and we’ll see what happens.
Show me in history one contry that had big government programs or wars and I will show you a country that failed.
The USA has the biggest military and the biggest govt programs and we have not failed. In fact, we have grown to be the most prosperous nation in the history of mankind. So prosperous, in fact, that we are all overweight, complacent and lazy (and still bitching about how tough life is).
Hey first,
We can’t shut down the government till we get it to create some new legal tender fiat (United States Notes)and bailout the debt slaves and compensate the savers for years of suppressed interest rates.
TPC,
Why do you even bother responding to obvious trolling? These people are sitting at home talking to you thru the greatest (and most productive) military invention ever. And yes, the internet was created during the cold war by the US military.
The notion that the US government makes nothing is not even worth discussing. No factual argument to the contrary can be made.
Move along.
Why do I respond? Because this might actually be the most important discussion we have here. People like to think the world is so black and white. Govt is bad. Private sector is good. The truth lies somewhere inbetween. I am not an apologist for the govt. And I am not an advocate of big govt, but I recognize that they can and do do good things for society. As you said, any argument to the contrary is simply not based on real fact.
Exactly, why do people even question this?
The genius of Reagan was his fundamental understanding of how to USE the government to really contribute, and when to crush the garbage spending.
Check out the Bayh-Dole Act, do you know how much that has added to GDP over the years, how many jobs, how much wealth. A tremendous amount.
The simple fact is that the government doesn’t have to show a profit, IT CAN JUST DO THINGS. Like the space program, etc. Look at all the technologies that have evolved from the government simply doing things. It’s amazing. And then the private sector can jump on it, patent it and make a crazy profit. And the government gets paid back tenfold based on the huge productivity of society.
It’s really pretty simple. And I don’t understand why people can question this. Does the govt. waste a ton and have a bunch of bs, absolutely and undoubtedly. But the military, NASA, university studies, etc., have contributed to the overall wealth of this country and technologically to a tremendous decree.
Great comment my friend.
“The USA has the biggest military and the biggest govt programs and we have not failed.”
Surprise that you say this, In relation to its economy it does not.
Govt spending to GDP is much larger in several other countries and they only do worst.
TPC you are a gentleman. I love you site despite my last comments.
I obviously do not like the Government very much but I am very appreciative of what I have learned on your site .
Thanks First.
It seems a component missing from the discussion is the investor’s perception of US credibility and long term value of its currency.
Obviously we’ll get deflation if demand and/or velocity slow. Obviously, hyper-inflation is the end.
People are waiting this period out…a psychological holding pattern occurs when everyone questions the fiscal & monetary system.
If liberals want to add zeroes to all categories, then we continue doing the same thing & expect a different result? If you practice hardcore austerity then maybe we all go on a diet? That’s too drastic as well.
Why can’t we be rational & let the world suspend disbelief for a one-time reset?
1) If we trim the budget and just slow down the fiscal bleeding. Change the momentum of the deficits.
2) Promise a long-term vote of confidence in our people, such as a tax-payer’s bill of rights.
3) Couple that with some money printing for all…adding zeroes here but not in the debt.
4) Encourage growth of GDP again by rewarding producers vs. slackers.
The accounting straightens out, you had a one-time re-set, that will be held against us for awhile, but it’s no dirtier than what the rest of the world has done with money over history.
Low interest rates & low pricing doesn’t get the bank out of the hole anymore than high taxes on widget makers.
You’ve got to get velocity again by jump starting widgets. We are not doing anything fundamental to encourage entry-level investment.
Where are the jobs? Why doesn’t anyone want to offer tax credits to train a new worker?
hey PC – you deleted our discussion about your lies concerning government “inventing” penicillin! You even removed it from your list of benefical governmental “products and inventions”. A BETTER ADMISSION OF YOUR DUPLICITY and DISINFORMATION I could not ask for.
I will not waste time on the rest of your list – I will however point out that the former solviet union had great scientests and great discoveries and the state was the sole source of food! So by your logic, since the state fed the russian population, the russian people should have been thankful (and should not remember that starvation of the useless pesants was an intergral part of the state’s plan to feed those who served the state well!).
Anyone reading this blog should know that this is a propaganda website and it is designed by your loving oligarchy to control dissent and to offer a kind view of our “productive” military industrial fascist economy.
LOL – you are all being cointelpro’d!!!
This site is a cia front.
This site is a cia front. Anonymous
Even if it were, I’d be happy to inform the CIA of the error of its ways.