SURPLUSES, DEBT AND DEPRESSIONS…
The facts don’t lie (courtesy of Randy Wray):
“With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.
The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don’t know of any case of a national depression caused by a household budget surplus.”
The moral of the story? Thinking of the US Federal balance sheet like that of a household’s, corporation or state is not just bad economics – it’s flat out wrong. See here for more.
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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60 Comments
As it seems that Ireland Portugal Greece and Spain will soon or very soon or even on Friday restructure their debts which will affect UK and German banks and thus will there be a ripple effect evident on the US banks or will it not appear for many months ?
Yes, austerity is starting to bite in Europe. I would not be optimistic about the region as I’ve previously written.
The Clinton surplus was followed by the Bush recession and “increasing deficits” and if to days massive deficit is any indication of prosperity I hate to see what is coming.
If deficits don’t matter since they denominated in fiat currency, what is the point of taxing? If the point of taxing is to destroy currency and ward off inflation from money supply explosion, then why not just tax those earning over say 200k. The poor don’t have the money to affect inflation expectations but the rich sure do. One buys a a box of rice and eats it while the other buys four cargo holds full because he thinks he can sell it higher. Disclaimer, I add to commodity prices by leveraging up and buying the offers with every other rich person. I am sure that my actions hurt those that need to buy these things, but that is how I take advantage of the flawed American system. I love MMT as it enables me to take advantage of the system, by exploiting the fact that debt doesn’t matter, the more the better.
The Market Still Goes Higher, gentleman. I guess the question I would ask is WHEN will the market care about deficits. No one cares! If you get a good employment report we will go higher. If the market can go higher on horrendous news in Japan (earthquake & a nuclear meltdown), turmoil in the Middle East, soaring commodity prices, record profit margins that apparently will go into the clouds and never revert to the mean….what will deter the investor optimism. Just waiting to hear someone say “deficits don’t matter” until I get cautious. Maybe Bernanke has figured out how to create an environment where investors don’t lose. I watch the rise in awe.
The market loves the deficit now because it is adding to pvt sector incomes which is fueling the meager economic growth we are witnessing. When will the market care? Wait til austerity kicks in. QE could cause some bumps as well, but not for fundamental reasons….
I keep telling people around me that state and local governments need another bailout to balance their budgets and people want to rip my throat out. Not one single person agrees with me on this. I tell them if they are concerned about the economy now, lets talk in July after the state cuts take place. State cuts are equivolent to roughly 1% GDP. Add in $30B at the federal level, and where does that put us? It is very difficult to imagine the second half of this year being all htat strong. If the gov steps up, we should be ok, but I’m not sure its politically feasable for more stimulus.
A couple of Texas Sharp shooters put these facts together for you?
Anyone who refers to it as the “Clinton surplus” is engaging in bs in the first place.
This entire article is so stupid I don’t even know where to begin. So debt reduction is a bad thing eh? What a moron.
The budget was balanced under Reagan, pretty much neutral from a revenue/expense standpoint. Do you know what happened that greatly expanded the debt during that period — INTEREST PAYMENTS!!!!!!!
Too much debt is slavery. Anyone tells you something different, then you know they have no idea what they’re tlaking about.
Come on Prescient. That’s a pretty disingenuous comment. Reagan ran massive deficits at 5% of GDP throughout his entire Presidency. He was a spendaholic contrary to popular mythology…
Look at the great President Reagan – champion of fiscal conservatism! Guy jammed the govt sector balance up to 5% of GDP in his first two years!!!!! You want to know why the economy was so great? If you’d like, I can show you what happened to the pvt sector balance and subsequent economic growth? Coincidence? I think not….
AVERAGED 5% DEFICIT THROUGHOUT HIS PRESIDENCY!!!!!!!!!
Honesty, RR made a deal deal with the devil….You can have spending, if I can have the USSR….
I’m sorry?
Break it down. What was the CAUSE of the deficits?? INTEREST PAYMENTS.
Look at how they exploded, the moron Volcker started started raising rates in the late 70s, which kicked in right when Reagan took office.
Compare interest payments during the 60s to those of the 80s and you tell me when it happened and how that affected things.
Excerpt from above:
From 1817 to 1821 the national debt fell by 29 percent;
from 1823 to 1836 it was eliminated (Jackson’s efforts);
from 1852 to 1857 it fell by 59 percent,
from 1867 to 1873 by 27 percent,
from 1880 to 1893 by more than 50 percent,
and from 1920 to 1930 by about a third.
Of course, the last time we ran a budget surplus was during the Clinton years
—reply
In all of the cases, except for Clinton the fiscal surplus had measurable impact on the Debt, with a conclusion that the surpluses ran too long and triggered the depression.
The meager surplus in the Clinton era only scratched the National Debt – so I do not see where this would correlate to the Bush recession and in no way lead to the Financial Crisis 2008 – present.
It would be instructive to see the level of private sector debt during the same periods above as well as credit bubble conditions created by Money/Power elite (banksters) that set the stage for the crash, either depression or recession.
I am a firm believer in MMT and the need for public sector pumping (deficits). Not the “Deficits don’t matter” subterfuge that many decry, but deficits applied to productive use and/or value/asset creation (e.g. infrastructure) to meet a goal of full employment and full productive output.
Obsvr,
I think your comment is fair. It’s not entirely accurate to blame the Bush recession or the housing crisis entirely on the Clinton surplus, but it definitely contributed in my opinion. Just look at the pvt sector account go negative as govt spending gets sucked in:
And look at the subsequent pvt sector debt levels as they take on leverage to sustain a dying way of life:
Domestic pvt sector first goes negative in 1997 as govt spending slows and CA deficit remains….right when the debt boom begins. Coincidence? I think not.
Boom! I love watching people argue with Cullen. It’s like watching a ninja warrior take on little girls!
Ninja warrior? What are we all becoming comedians around here? I am more like a brown belt at best.
Good information, is there equivalent data available that looks back to the 1800′s ?
The private debt levels is certainly a supercharger on the boom/bubble formation, then when the asset bubble deflates, the recession (depression) ensues leaving the debt in its wake. When the debt is not restructured we are faced with this long jobless recovery, trying to grow GDP while carrying the weight of debt, need to delever and propensity of consumers to save. This is where the work of Steve Keen is relevant in illustrating the deleterious effects of debt levels and change in debt (credit impulse) on aggregated demand driving GDP. Too much of the GDP associated with private sector debt drives the boom/bubble, too much leverage ultimately leads to deflationary pressure and when levels reach $T’s as we are experiencing it is ugly and painful.
Question: If using public sector spend (deficits) when times are bad, high unemployment, private sector deleverageing is needed to stimulate (jolt) the economy back to health – then when the economy is healthy doesn’t it make sense to run the fiscal budget at balance and into surplus if the economy heats up enough to become inflationary.
Said differently, if fiscal policy is used to manage a neutral inflation/deflation environment, then the budget could run Deficit, Balanced, or Surplus to maintain the neutral position.
TPC,
this should be illuminating =)
http://politicalirony.com/wp-content/uploads/2011/03/dim-5-777×1024.gif
taken from
http://neweconomicperspectives.blogspot.com/2011/03/cartoon-by-ruben-bolling.html
(no advertising intended, just referring to where i got it)
That gave me a good laugh. Thanks okl. I used to love watching some Scooby doo in the morning before school!
glad you liked it, old boy!
remember those videos i posted a couple months back like these?
http://www.youtube.com/watch?v=OdxYyLQc6KE
are you planning on doing anything like that? it would be really great if you could do that; something simple and easy to understand- the MMT concepts at least.
sigh, i know what you might be thinking; aren’t these stuff i posted good enough?
i’d say yes, for those who are adept readers and familiar with economics/finance.. but for those who are not? for those who read about the debt situation and go “omg, that’s terribly similar to my <>’s situation! i’ve got to stop the govt going down this path!”?
i’m not gd enough at explaining MMT in simple terms; i’ve got more questions than answers… but i like Bill Mitchell’s
- “Business Card Economy”; http://bilbo.economicoutlook.net/blog/?p=1075
- “Barnaby, Better to Walk Before We Run”; http://bilbo.economicoutlook.net/blog/?p=7864
cos it’s really simple for the basic concepts of MMT! i don’t know about the others, but ever since i read that about 6mths ago, it really begins to sink in that inflation is the only thing against spending and more importantly- in the current monetary system, bonds are there for savers & not for the govt.
as for the other stuff you write about; bond auctions, the EU situation, differences from a gold standard, why MMT not Gold Standard, free lunch… etc, you could do it in separate videos, but remember to illustrate the concept first, then explain what’s the hoo-ha about.
sorry, i realize i’ve gone too far; it’s what got me fired from my last job.
anyway, glad i put a smile on your face with Scooby Doo!
What are record low inflation rates and what are you using to measure this? I hope the answer isn’t the same hopeless basket of goods Bernanke uses. Since MMT is so dependent on faith in someone else’s linen, this measurement better be exactly the same thing the guy on the street sees, since it is the average citizen that collectively determine the outcome of inflation. I agree that inflation is not a worry, you can just issue a new currency if you have to. Also, the debt in the system is so much larger than any new money entering the system that we are 10′s of trillions of government spending away from a hyper inflationary event. It is hard to get accurate figures on the underwater derivatives market, but I assure you that if debts were called, the whole world would have to hit the reset button.
What is the avg joe’s metric for inflation?
For most people I know it’s the gas pump
Hey Cullen, could you refute and revisit this article by Zero Hedge?
http://zerohedge.blogspot.com/2009/01/whither-hyperinflation.html
I saw him bragging about how PIMCO was using facts that Tyler has been talking about for years and he posted a link to his old site. To my surprise, there was a hyperinflation article on the old site from Jan 2009. He couldn’t have been more wrong. How wrong does someone have to be before their readers just tell them to go away and die?
I think everyone was scared in Jan 2009.
What do the other MMTers think about Billy Blogs comments here regarding Galbraith?
“For the record, Jamie Galbraith is only peripherally associated, in my opinion, with modern monetary theory. I do not consider him a core developer of the school of thought.”
This sounds pretty self serving to me. Mitchell acts like he created MMT. It’s like Paul Krugman taking credit for Keynesianism. Who the f*ck does this guy think he is? If it wasn’t for Galbraith, Mosler and sites like pragcap the world wouldn’t give a sh*t about MMT. It would just be some fringe economics theory being talked about in parts of Australia.
Bill’s actually correct. There’s always been an association with Jamie, but he distanced himself from us, sometimes in more or less nuanced ways, sometimes more explicitly, until the past 3-5 years. Also, while Jamie has created a (very) impressive body of work that integrates well into MMT (and we would be stupid not to do so), the core of MMT has been developed completely independently of him. Perhaps his tone was a bit offputting, but that’s Bill, and he happens to be correct.
Hi Scott. MMT is not new though. This is what I do not understand. The theory of state money has been around for a long time as Cullen mentioned.
I am not trying to take away from your work, but Bill acts as though he founded Keynesianism when in fact all he did is take an old idea and revive it. I am not sure why he acts so arrogant about it. His tone and writing style really detracts from the efforts of many others like yourself who do a great job of communicating MMT to the mainstream.
Actually, MMT, or Neo-Chartalism in academic circles, is quite new, generally founded by Bill, Randy, and Warren (mostly, though there are a handful of others, like myself that helped). The older literatures (Knapp, Innes, Keynes, Minsky, Lerner, etc.) you are referring to were not assembled together in the package that is the current MMT until the 1990s, though admittedly the majority of the parts were already in existence (which Randy in particular has documented extensively).
Certainly Jamie’s own research stands on its own, and he has done as much as almost anyone given his connections, status, and publications to further MMT at least in the public eye the past 3-5 years (even though I’ve never seen him publicly or privately refer to himself as an MMT’er).
This article, from last year, defies common sense…The author is claiming that by reducing national debt one is placing the nation at risk….
To think that the only element that would produce a depression is federal debt reduction, is a massive leap of faith and nothing but faith so help you God….
This is a liberal cleanse, no different than no government can go bankrupt if it has its own currency and debt…
Another article from a Educator…
http://130.94.230.21/debt_history.htm
http://haroldchorneypoliticaleconomist.blogspot.com/2010/09/randall-wray-and-monetary-theory.html
More about the author…
I just see a lot of coincidence in data trying to relate low debt to depressions/recessions. Except for the period after the Civil War, overall Federal debt was relatively lower in the 19the century as opposed to the 20th century. Furthermore, the two worst depressions in 1837 and 1893 were caused when the government cut off all liquidity (see Chris Whalen’s book “Inflated”).
What makes more sense is when public debt increases, economic growth slows because more credit is transferred from the private sector which generates jobs to the public sector which by and large is an inefficient operation. This can clearly be seen from 1980 to the present. In the 80′s we had average growth of 6 to 8% GDP. As public debt levels have progressively increased over the last 30 years there has been about a 2% decrease in growth each decade until we are now in the 2% growth range. The increase in private debt can mainly be attributed to the Federal Reserve keeping inflation adjusted interest rates historically way too low from 1986 on. The private sector then used the easy credit to maintain a high living standard rather than investing it in improving productivity.
BTW everyone, you wanna see some theories get put to the test, try paying 17% interest on our debt CURRENTLY, and then you will have seen the end of the solvency of the United States, I don’t give a damn what the alchemist is doing.
Mr. Obama, congress, all the clowns are taking us down a path of complete fiscal insanity.
The problem is that most economists are blind and only deal with the demand side of the equation rather than the supply side.
Sherman, the same clown that came up with the antitrust law which bears his name and his bastard brother who burned half the country, is the one who bankrupted the country in the late 19th century, which gave birth to the Fed. and let to JP Morgan bailing out the country.
Let me say one more thing, I actually believe in MMT and Cullen’s thoughts on it.
But you can’t apply theories in a vaccuum and this clown writing this piece is so wrong as to be dangerous. Suggesting correlation where there is none is about the worst thing that can be done. In other words, a half truth is more dangerous than a lie.
The only thing economists are good for is putting people on the other side of the winning trade.
The Europeans were significantly concerned about a US default in the 1980s, which eventually caused the 1987 crash in large part. What do you think they are thinking now? What do you think any rational person is thinking now?
Thinking is made by the Fed and all the Central banks. They destroyed the the economies and we depend on them to fix it. Prepare for more of the same.
“try paying 17% interest on our debt” In a fiat currency system as you must know rates are not based on risk but on correcting the abusive printing that the same idiots raising rate previously created.
I’m not convinced regarding the correlation with surpluses and depressions. We have had significant changes in monitary systems over 230 years. It seems an oversimplification. The time between the Clinton surpluses and the Bush recession seems too long to be make a direct causation. I would be interest in further investigation.
I am supried you have not posted anything on Japan’s plans to pay for reconstruction by canceling planed corporate tax reduction and general tax increases. Many analysts put a buy recommendation on Japaneese stocks but I think they assumed the reconstruction would be paid for through a QE program which would be an easy call for asset inflation. I wonder what would happen in Japan goes in to a recession in Q2 and taxes are raised at the same time.
I’d like someone schooled in MMT to explain the following artifact to me:
On page 423 of the just released 2010 Economic Report of the President we observe that between the years 1998 and 2001 the Feds ran a budget surplus in the total amount of $559.3 billion (roughly half a Trillion) and yet, the total US Federal Debt still INCREASED a total of $400.7 Billion (not quite half a Trillion). I understand that in MMT deficits and debt are not related, but don’t they at least still have to be loosely correlated? I still don’t get how we ran a large suplus and our so-called “debt” continued to rise. Any explanations out there?
Thanks,
Joe
Without looking at the data myself, I would say it probably has to do with which measure of the debt you are looking at. Total debt held by the pvt sector did go down. But trust funds (debt govt owes itself, which really isn’t debt, in my view or in the core mainstream model) kept going up. Sorry that I don’t have time to check for sure, but my guess is it has to do with which measure you are looking at.
Nice call Scott. During the same period, Federal Debt held by the public (as shown on the same page) decreased by 452.7 Billion.
Thanks.
Social Security surplus. Special purpose Treasuries. About to be cashed in by new austerians to pay for financial system bailout. Glad to see my FICA withholding used so wisely.
This is the only sentence you need to read that shows this entire “analysis” is not worth the short time it took to read.
All these “depressions” were based on a monetary system that was directly linked to gold. These times have no direct correlation to now, where we have a post-1971 floating currency-exchange system.
Dude, you have no idea what you’re talking about. We still had to transact in us dollars before the gold window closed. A private sector deficit still led to a public sector surplus. The gold standard doesn’t even matter for all of this.
The only difference was the government couldn’t spend as much because of the linkage to gold. If anything, it only strengthens the impact of this data since it shows how stupid it is to have a spending constraint at the government level.
With all due respect, you have no idea what you’re talking about. I would suggest a primer for you would be studying international capital flows and currency valuations for the past 200 years.
prescient, why so aggressive these days?
I think i pissed him off with my bearish commodity articles….oops.
pvk, I didn’t start anything, but I sure will end it. And no TPC, your bearish commodities articles aren’t doing it, hahaha, but the lack of analysis in those articles is beginning to get annoying. They never look at the demand side.
It’s like trying to debate crop yield without discussing the weather…
What I don’t like to see is goofballs twisting MMT into some monster that somehow allows one to pretend that deficits and debt do not matter.
Being an alchemist of dog turds does us no help at all. In 10 years, on this same path, I guarantee you (you heard that right, it’s a guarantee) that the US dollar will be a joke.
And if I ever have to hear from the “it’s never happened before” crowd again, I am going to go nuts. You see, it’s ALWAYS happened before.
And it’s happening again. go figure.
I could accept that the US Federal balance sheet is not like that of a household’s, but the argument here is somewhat tenious. If as you argue that depressions are preceeded by deficit reductions would that not sort of imply that the economies were booming before the crash and is that perhaps not indicative perhaps of credit bubbles preceeding depressions. I would perhaps accept the argument that deficits do not lead to depressions, but the argument needs to be expanded. To my thinking most IMF bailouts or currency restructurings are preceeded by periods of high deficits. Some will quite rightly point out that Japan has had a high deficit to GDP ratio for some time so the causality is incorrect. My take would be that the deficit to GDP limit is a function of the populations saving rate, along with perceptions about how easy it is to increase the taxation base if necessary. Perhaps I disagree on semantics and I have read through you no free lunch argument which I basically agree with, but I think you make little of the role of perceptions in the bond market and its link to inflation. From outside the US there is a perception that US politicians are unable to cut the deficit (whether they should is a different matter). Quite correctly you point out that the bond market will not fail and the US will never be forced into bankruptcy (voluntary or back door restructurings are possible), but bond yields do matter and holding them down might well fuel inflation elsewhere, only to return through imports. For me there is a tipping point with the deficit to GDP ratio which is different for each economy which can be brought forward by policy mistakes leading to a period of stagflation.Perhaps I am not really disagreeing I just didn’t like the implied causality between preceeding deficit reduction and depressions. Maybe we should ask why the deficit was not reducing leading up to 2008.
the “clinton surpluses?” lol.
you mean “the republicans want to shut down the government” surpluses?
there never were any surpluses, they were projected surpluses. deficit went up every year under clinton.
and oh ya, the economy was in a high tech boom. you think that might have increased government revenues?
“there never were any surpluses, they were projected surpluses. deficit went up every year under clinton.”
Wrong. In 1999, Revenues exceeded Outlays by $1.9 billion. In 2000, that same figure was $86.4 billion. When you factor in excess Social Security revenues, the figures are even more pronounced, giving us surpluses in 1998, 1999, 2000, and 2001:
http://www.cbo.gov/budget/data/historical.pdf
SS and other trust funds brings up another issue. Ever since the gov’t moved to a unified budget they established another dimension to the deceptive and gaming activities between the FED, US Treasury and congress. Although congress is clueless compared to the banksters and Money elite as they believe there is a Trust Fund and SS can go bankrupt (become insolvent).
If the Payroll Taxes (SS) are going to be used as general fund expenses and not be held and managed separately (lock box) then call the tax what it really is, a regressive income tax on workers with income up to the upper limit ($106,800), giving a pass to the wealthy on incomes greater than the upper limit and for those whose income comes from unearned (investment) sources.
It gets worse for the working class (tax payers) since the Trust Funds are swapped for US Bonds, therefore the interest paid on the bonds in the trust fund come from where ? The TAX PAYER, because of perpetual budget deficits.
And if that wasn’t bad enough, when a US Bond is redeemed to be used to cover benefit payments, where does the US Treasury get the money to redeem the bond ? Yep, the TAX PAYER, because of perpetual budget deficits.
Understanding this, in the MMT context, illustrates that SS (all the trust funds) can not be insolvent, because the US Treasury is actually making the payments to the beneficiaries. The Trust Fund is a facade, yet another vestige of days gone by. The FICA tax is a low, middle and upper middle class tax, simple as that.
This is the reason more people need to understand the MMT, the foundation of our monetary system, because EVERYTHING stands on that foundation, monetary and fiscal policy, tax policy, fiscal budgets, etc. The US Bond market ends up being more of a tool of deception, it certainly is not needed for the MMT system to function (as discussed tirelessly in TPC and other MMT blogs).
This financial crisis, different from all others, it has illuminated the dark crannies where corruption runs amok, the ugly underbelly of the FED, corporatism and the tentacles of deception perpetrated by the oligarchy, plutocracy, kleptocracy or whatever label fits the particular miscreants. We are three years into this debacle and these issues are still front and center, so perhaps with more and more people becoming educated, there will be a demand for change. My vote is to embrace MMT, close down the US Bond market, End the FED and return to Constitutionally oriented gov’t as the first step along the path of restoring a sound country.
After booms comes the busts/recessions/depressions. All as normal as breathing. The problems come with trying to avoid this normal cycle. While correlation does not equal causation–cutting deficits lead to depressions–lets say it does in this case—so? As always the cover up is worse than the crime as we have seen over the last 25 years. Despite what MMT’ers say and all previous/current soothsayers that chirp in, debt and its service matters and more importantly as sure as there are politicians there will never be restraint on spending during the boom times. We are not trillions in debt by accident.
Everytime I see this argument, it sounds just like the drunk’s argument that he always gets a hangover everytime he STOPS drinking.
The correlation between deficit reduction and depressions is clear. The causation, not so much.
I am sorry but it is easy to hatch these theories in a state paid laboratory…
If what the author claims has lead to a multitude of depressions, then would it be possible to state that many
or all recessions are caused due to increase federal debt…
As the government complex (industry) grows it continues to sap (in more ways than one) the free enterprise syste, making it vulnerable to economic downturns…
In all fairness, it could be possible to produce a depression through the throttling of government spending,
but to suggest that government pay downs from 1921 to 1930 lead to the great depression is in my
opinion a _________ __________ (please entry your own grammar)….
http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States
The link I think too many of you doubters are missing is that whenever public debt is reduced, private debt is increased. People need a certain amount of spending/saving and if govt deficits arent supporting it then private deficits will. In every circumstance described, but most especially the great depression and the current depression, private debt levels reached over 5x the public debt levels. Its private debt that becomes unsustainable because it must be serviced out of income.
If you dont think private debt is worse than public debt, I’ll trade you my $100,000 mortgage for your $100,000 T Bill. Deal?
You are tight private debt is way more critical, because it has to be paid with real productive (or non-productive) output, where “public debt” is an accounting entry of money issued to the private sector, to keep it running and growing and extracted by tax on the private sector.
As for your offer, nice try. You are asking to trade a debt for an asset. If you happen to find folks to make such a trade, then I too have a mortgage to swap.
Now, if you are talking about holding someone’s mortgage where you are carrying the credit and interest rate risk and want to trade for an equal face value zero risk US Trys, then you have fingered QE 1. The FED opened the back door with QE 1 to flush bailout funds to the banks, trading (buying) the toxic crap for a US “money” instrument, be it FRN or US Trsy.
Obsvr-1
“As for your offer, nice try. You are asking to trade a debt for an asset. If you happen to find folks to make such a trade, then I too have a mortgage to swap.”
BINGO!
The public sector debt (T Bill) is actually a private sector asset! This is why Randall Wray corrects people who talk about how much each citizen OWES TO the national debt when in fact its more correct to say how much they OWN OF the national debt.
Huuuuuuuuuuuge difference! (Like 180 deg)
Greg:
Very interesting comment.
That seems to correspond to my thinking that although governments cannot go broke, it doesn’t mean that the citizens are prosperous.
I don’t have the statistics on household debt as a percentage of household income, but I think it has increased in the last 30 years from 40% to 130% of household income.
Obsvr-1:
Your comments about the trust fund is right on.
The trust fund makes it no easier to pay benefits than it does without the trust fund. The trust fund only makes it more convenient, for as long as there is a positive balance, no authorization is needed to draw down from the Treasury.
This is a far cry from Rosevelt’s intention of Social Security to be self-supporting, with no use of general revenues.
It is interesting that Cullen talks about the federal government’s balance sheet not being like a household’s.
How many of you are aware that the federal retirees’ pension fund is listed as a liability on the balance sheet?
It is even higher than intragovernmental debt, at around $5 trillion.
And, remember, the trust fund that funds the federal retirees is operated just like the Social Security trust fund.
It is not a pension plan, for it is not a store of wealth.
Tapping the federal retirees’ trust fund will mean increasing the debt held by the public, if there is a budget deficit.
Don Levit
Your 10 basis point tbill or your 5% govt guarantee mortgage bond You might want to rethink that one.