The US Government is not “$16 trillion in the hole”

There was a very scary sounding report on CNBC over the weekend that said the US government is “$16 trillion in the hole”  The balance sheet the article used was overly simplistic and extremely misleading.  The asset side of the balance sheet showed just $2.7 trillion in assets.  Which is accurate, if you exclude almost all of the assets the federal government actually owns.

Because I am extremely lazy (though not as lazy as that article!), I am just going to point out a few of the US government’s assets that prove this point terribly misleading.  For starters, the IER estimates that total fossil fuel resources owned by the Federal government are valued at over $150 trillion alone.  These assets alone are FIFTY FIVE times the amount stated in the CNBC report.  But that only scratches the surface.  I haven’t even looked into the huge amount of federally owned land and buildings that would surely amount into the hundreds of billions if not trillions of dollars.  There’s also the gold resources.  And there’s the trillions of dollars in its own liabilities that it owns via the Fed and Social Security funds.  I have no idea what all of this would add up to, but it would probably be a net worth nearing $200 trillion or more.  Maybe someone out there who is less lazy than I am can put an exact figure on it?

And none of this even touches on the operational realities behind the United States monetary system and the fact that we’re not going bankrupt unless we choose to go bankrupt.  So don’t fret.  The United States is not in the hole.  Not even remotely close.  And we’re not going to be unable to pay the bills on debt denominated in a currency we can print, unless we choose not to pay those bills.

NB – I should add that the “unfunded liabilities” don’t change the story.  Even if you include the $30 trillion in unfunded liabilities the assets the US government owns still give it a massively positive net worth.


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Cullen Roche

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. One thing the US doesn’t have is 8000 tons in gold. It is already going to take 7 years to give Germany’s Bundesbank bank 300 tons back. And the Bundesbank auditors are not allowed to see their gold for “security reasons”.

    And even though it has been actually sold, it is only marked on the FED’s balance sheets as ‘rented’ or ‘leased’. But in the mean time shipped over to the East (China, Russian and India, ) never to be returned.

    8000 tons is worth approx $340 billion at current gold prices.

  2. Who will buy my gold if people start learning the truth from you Cullen?

  3. If we ever get in a jam, we can put a value on the moon of $50T and start printing!
    Or, get this, we can promise to pay seniors $20T and call it an ‘asset.’

  4. How do all these “assets” matter? The US does not have any debts that would be payable in these assets. It only promises to exchange bonds for cash and vice versa, and accept its own cash as payment of fines and taxes.

  5. Yes, you are being every bit as lazy as CNBC; the IER numbers are the result of specious analyses.
    The resource amounts referenced in the IER report are the 50% probability (P50) for undiscovered technically recoverable resources (UTRR). The federal government already leases through competitive auctions the most prospective onshore and submerged public lands. In return for leasing the rights to explore for and produce oil, gas and coal, the public receives bonus bids, rentals, royalty on production and corporate income tax receipts for about 60-70 percent of the “take” (“take” is after capital and operational costs). Oil, gas and coal payments are already the largest non-tax source of federal revenue receipts except when the FCC has an especially good spectrum auction year.
    The most prospective inaccessible areas are ANWR and the So. CA offshore and these lands are unlikely to be available for leasing anytime soon. Oil shale is not yet economic at today’s oil prices. The most optimistic production scenario for U.S. public lands yields only moderate federal revenues with fiscal terms and a regulatory burden already more onerous than most comparable international jurisdictions. See CBO’s report:

  6. If we are so wealthy, why can’t we pay a decent interest rate on savings so we can dig out of this never ending recession? Wages have not kept up with inflation for the last thirty years and now everyone has felt the ill affects of inflation as their lifestyles have deteriorated dramatically. It now takes two working parents and credit cards to make up the difference. This is because costs for everything has gone up 12 fold in the last thirty years while wages have only tripled. All of this monetary structure insanity has left no one with any common sense.

  7. The US government also sits on one massive annuity asset; the present value of the perpetuity of all the tax revenues it takes in every year. Since its liabilities are stretched out and payable over time, just like its tax revenues, a fair comparison would have to treat both cash flows on either a present value basis or expressed as a cash flow schedule extending indefinitely in to the future.

    Given how low US interest rates are presently, it means the discount rate being used to value those future tax revenues is small, and hence the present value of that tax revenue is larger.

    In 2012, the present value of revenues of $2.45 trillion annually discounted at 2.6% would be equal to $94 trillion. Of course you’d have to do the same with the present value of all its liabilities baked in to the budget. Or an easier way to do it would be to take the deficit and express it as a perpetuity and add it to the current debt. In any case, these simplistic analyses are marketing doom and gloom, not a true cash flow, instrinsic value type of analysis.

  8. How practical is it for any of these assets held by the government to actually be sold? Just because we have natural resources that we could use, is it really a good idea to use them at any point to ever pay down the debt, even if it’s not any time in the future?

  9. Precisely Suvy…totally agree. I often see this rationale; that the assets offset the liabilities and thus the liabilities don’t matter. The real question is the LIQUIDITY of those assets. Land is relatively liquid, no doubt…..especially if its near infrastructure etc. But when was the last time that anyone actually saw a sovereign sell any of the “assets”….even when the country was in dire straights?

    The US does indeed have lots of assets and many of those assets are liquid …..if they were in the hands of a private entity…but they aren’t. They are in the hands of a bureaucratic and inefficient gov’t that changes every four years.

    Greece also has very liquid assets. They have beautiful and rare islands that have fresh water on land and are close to “civilization”….a rare combination. At the heights of the crisis, Greece attempted to sell some of these islands to offset budget shortfalls. There were even large private US investors that made reasonable bids, with the business plan of developing high end resorts…….but the deals fell through because of bureaucracy.

    Imagine that the US gov’t was truly desperate and decided to put Yellowstone up for sale…..who actually owns Yellowstone? The PEOPLE do…and they don’t all agree. Try to sell Yellowstone and the deal would be complicated with a slew of lawsuits and potential re-nationalization in the future…….any investor worth their salt is going to HEAVILY discount the fair value of yellowstone if the the deal can even be consummated. Now whats the asset worth?

  10. Don’t you sometimes wish you could just take a bat, storm the mainstream media newsrooms and beat some sense in those people?! ;-) It is not only that they forget about the asset side but how about the fact that the US government completely controls its income? If it wanted it could tax the country out of the $16 trillion tomorrow. Of course, it does not make any sense but neither does that panic about the federal debt.

    Plus, you never hear about US households being $14 trillion and businesses $13 trillion in the hole. Why does that not seem to matter although they actually need to “earn” that money back?

  11. “Plus, you never hear about US households being $14 trillion and businesses $13 trillion in the hole. Why does that not seem to matter although they actually need to “earn” that money back?”

    – It does matter, and ironically these are some of the primary reasons why the gov’t can’t “tax the country out of the $16 trillion tomorrow”……it would cause a massive deflationary death spiral.

  12. The inference of this post is that you can borrow or create money against the value of your assets — so, for example, let’s say Yellowstone Park is valued at $1T you can create $1T in deposits and use this to pay Social Security recipients for a decade.
    Interesting idea. Would it work? You’d be assuming that that extra money would create economic activity and not just dilute the current money supply.

  13. That’s actually not what I am inferring. The US govt is autonomous in the dollar and has the ability to create currency if it wants. That means there is no way it can “run out of money” to meet obligations denominated in the currency it can create. Comparing the govt to a household is always a mistake. Especially when it’s a large developed autonomous currency issuing economy like the USA.

  14. Should we do this?
    Is this your prescription for dealing with the unfunded liabilities?
    Are we OK to be concerned about the known and unknown consequences of QE-style action to directly fund spending?

  15. Well, the point is, there’s no such thing as “unfunded liabilities”. We can literally print up the funds if we wanted to or raise taxes or sell more bonds. Whatever. The question is not whether we can, but whether the inflationary effect of these benefits would be worth it. That’s the debate we should be having. This solvency debate and comparing a household to a govt is missing the point.

    In my view, with inflation at 1.8%, wages very low, inequality rising, etc, I don’t see that the US govt’s financial position is presently a threat to high inflation.

  16. How do you create jobs and increase wages by playing with the supply of currency? If that were even possible, there would be very little poverty in the world.

    The question is not about inflation but rather about WTF the point of all of this monetary talk is, since the problem isn’t a lack of currency in circulation to meet transactions. The problem is that prices are too high in the aggregate and people have compensated to being boiled slowly by access to easy credit, which spends just like cash. Now, they have no more capacity for debt and thus no way to increase spending, as they cannot even cover their basic necessities with their current wages.

    The problem is the pulled forward demand nature of this backwards jackass accounting that got us into this mess.

  17. Doesn’t that put you in a policy strait-jacket?
    Let’s say you decide to fund 50 percent of the deficit through borrowing and printing (current policy) — total debt levels rise and then you get an inflation cycle.
    Now what?
    You can’t cut spending in that type of environment.

  18. No worries, Pete, Cullen is not nearly as good a promoter as CNBC or even you, so chances are that relatively few people are going to be that much wiser. But Cullen keeps trying to educate the masses anyway- bless him.

  19. Excellent comment.

    At some point would it be fair to say that rational investors would take note of the trend and historical average rates and begin to more heavily discount future revenues or account for increased debt service?In other words, would rational investors balk only once revenue/debt service fell below a certain number….or would they proactively take the trend into account and begin adding risk premia…thus creating a vicious circle?

  20. This is fun.
    Exactly how much did they value the 101st airborne at? How about the US strategic nuclear forces? The IRS? FEMA? If these are not tangible assets with specific valuations I would suggest the authors need to go back and do some homework.

    Or they could just admit that trying to assign an imaginary value to a sovergn nation based on cherry picking sovergn denominate “liabilities” is idiotic.

  21. Also, does debt maturity matter? It’s one thing if the debt is laddered with long dated maturities and only small amounts come due. At a time, it’s another if the majority of debt has maturities of 5 years or less and everybody is assuming it can forever be rolled over. (Cullen, I understand the fed can peg the short term and technically perpetually roll the debt over, and I don’t disagree….just asking for arguments sake)

  22. The US Government is not “in the hole”. However, most of its citizens are increasingly deeper into their own personal holes.

  23. “You can’t cut spending in that type of environment.”

    When you have excess inflation which means people are spending more than the economic output rises? Sure you can cut spending and/or raise taxes to reduce the deficit then. That is the whole point of government deficit/surplus spending: To act countercyclical to the private sector. Increase deficits when the private sector spends too little; decrease deficits/run surplus when private sector spends in excess of economic output creating inflation.

    The important goal is to keep the output of goods and services on a steady growth path. Monetary/fiscal policy is just a tool to achieve that.

  24. That’s actually not true. If my estimates are right the 2013 Fed Survey on median household net worth will show a near record high.

  25. Sure, deflation would ensure. That’s the reason why it is nonsense such as worrying about the federal debt. You can also say that the $16 trillion in federal debt (actually more $12 trillion when you subtract intragovernmental holdings) are the savings of the private and foreign sector. Now, $16 trillion in savings does not sound so bad, does it?

  26. First, if you follow this site, the answer is No – it is not a good idea to pay down debt with these (or probably any other) resources. Second, on the other hand, there is a difference between selling oil in the ground, which the government actually does, and selling, say, Yellowstone, which the government does not do.

  27. So if the cost of living is rising because too much money is chasing too few goods and services, we are going to reduce Social Security checks and government health care spending and raise taxes?
    Impossible. That’s why a policy of planned deficit spending puts you in a strait-jacket.

  28. That may be true in aggregate, but for the life of me I cannot see how that affects the majority of the population. The equity market may have helped too.

    What matters is the distribution, not the aggregate.

  29. Another question that comes to mind is … if the US is so rich, why are all these cities and pension funds going bust? Why does the US Government need to expand borrowing at such nosebleed pace as in the past few years? Why are the ‘unfunded’ obligations still unfunded?

  30. No, it is a simple policy choice where you cut the money and get the taxes from. I doubt that people on SS with negligible disposal income are the ones who will drive inflation. If their spending on daily necessities causes price increases then we have a supply-side problem. Whatever monetary or fiscal policy we will enact then will do little to alleviate that inflationary pressure. However, that inflation would happen with a federal debt of $16 billion or $16 trillion. The only difference would be that in the first case prices will be a lot smaller but incomes, too.

    Inflation for monetary reasons can be easily curbed by raising taxes. For example: Just raise capital gains to equal it with the income tax rate and you have already taken a big chunk of the deficit.

  31. Massive tax cuts + multiple wars + deepest recession in 80 years + automatic stabilizers = current state.

    Really this is very simple and would be pretty easy to mitigate if the government choose to give the current low inflation environment.

  32. “What matters is the distribution, not the aggregate.” !!!

    That deserves a bunch of exclamation marks.

  33. “In my view, with inflation at 1.8%, wages very low, inequality rising, etc, I don’t see that the US govt’s financial position is presently a threat to high inflation.”

    Cullen, the one thing you cannot be sure, though, is whether or not inflation may not explode all of a sudden and uncontrollably in the future. It is a feature of complex interconnected systems like the economy that they do not exhibit simple linear behavior. A bad habit can go on for a long time before its hidden effects manifest themselves suddenly.

    At this point we could either end up in a permanent muddle through a–la-Japan or in a highly inflationary environment … or in a revolution because people get tired of rising inequality. There is just no way to tell.

    The most unlikely scenario, however, remains the idea that we can have a “beautiful deleveraging”.

  34. Massive subsidies to the richest people in the country or what would you call a 15% tax rate on capital gains? The problem of our society is that we are not looking at who has the money to see what is going wrong. Instead we want to cut even more off the guys who do not have much to begin with. All those hyperinflation scares play into the hands of all the rich and wealthy that have large monetary assets. And the guys who have larger monetary liabilities than assets eat it hook, line, and sinker.

  35. No not in the macro sense. I’ve seen no definitive evidence that distribution matters. Macro is concerned with whole economies. The wealth and resources of nations. Personally I think the US would be a better and healthier society with more even wealth distribution. But the is no evidence that would change how things play out in a macro sense.

    Net is Cullen is correct the US is an extremely wealthy growing sovergn nation with no major external constraints to future growth.

  36. I wonder if people like me may be skewing those numbers… my house increased 100K in the last couple years but… I’m still only just under 20% equity. so…. I can’t use any of that value to borrow against to reduce any of my other bills so I stay living pay check to pay check…

    Doesn’t help my mortgage payment or my student loan payment or my car payment or any of the others.. grant though maybe most are doing better..

    Hey I’m 100K richer! but doesn’t do a damn thing for me….

  37. but a person with 100 X the income of someone else does not buy 100 x the amount of cars or houses as the other person..

  38. Well, a capitalist system doesn’t divy up the pie in a nice neat fair manner. I think some people seem to be confused about that. They want to demonize socialism, but complain about how capitalism favors the capitalist class.

  39. The reason why the pension funds are going bust is largely thanks to Wall Street burning the idea of 8% perpetual returns into everyone’s heads in an attempt at a pension fund money grab. And the pension fund administrators fell for these unrealistic expectations hook, line and sinker. It really has nothing to do with not being wealthy, but assuming we’d be unrealistically wealthy in the future….Someone got rich through all this. And it wasn’t the plan participants. It was the guys charging 2% fees for a promise they would never be able to deliver.

  40. The way to create wealth the past 20 or 30 years is to borrow against an existing asset, apply some leverage and create financial instruments that go up in value every year. Then, sell to the next guy doing a similar maneuver.
    Then you make sure the government and the banking structure treat debt as an asset that must be protected at all costs.

  41. But they can spend 100x the cost on housing or meals. Have you not ever watched lifestyles of the rich and famous? MTV Cribs? Ordered a nice bottle of wine in NYC?

    Listen it is an interesting theory. I am just saying that there is no peer reviewed data that definitively proves distribution of wealth has a material impact at the macro level. Maybe you will publish a paper the makes the connection tomorrow. I will not be shocked if a link is found. I just have not seen it and until I do I base my judgements on the facts we know not what we would like.

  42. This is true only if you subscribe to the academic Macro theory.

    Of course distribution matters. It is simple common sense. A rich person with $1Bn will not spend as much on many items as 1,000,000 people with $1,000 each.

    You can also show that the shape of the aggregate supply-demand can be very different from the aggregation of individual supply-demand curves.

  43. The rich still spend a smaller fraction of their net worth compared to the middle class

  44. Household net worth will remain high and increase at ever increasing rates as long as the Fed can keep these asset bubbles inflated… the absence of the Fed’s current policies I imagine “median household net worth” would look a bit different.

  45. It is not so ideological and simplistic

    It is about ensuring a proper functioning of capitalism. Granted, no model tells you which is the optimal ratio of rich/poor to support capitalism, but it is implicit in the notion of free competitive markets that a certain amount of diversification and competition is needed to maintain equilibrium.

    Very little of this is discussed in the orthodox books, but it matters.

    You have it under your eyes. The fact that wages have been stagnant for decades had been masked by an explosion of credit, with the consequences we have all seen.

  46. This is the other problem with aggregation. It assumes that all sources of net worth are fungible. However, increase in net worth due to rising asset prices is different from increase in net worth due to increasing production of goods and services.

  47. Aha! Now you see the point. Adding the value of the US assets does not say much about how wealthy the country will be in the future, or how the value of those assets will be extracted.

    Many of the ‘unfunded’ liabilities have been caused by the un-realistic assumptions you refer to. So, if we are to believe that those liabilities do not matter because the country is rich, allegedly all these pension shortfalls are covered by enough collateral, based on your arguments.

  48. “This is true only if you subscribe to the academic Macro theory.”

    As opposed to academic gravity theory or climate theory or math theory? Either you are part of the earth based scientific method or you are not. If you have evidence that disproves the consensus publish it and collect your Nobel.

    Poor people spend more or food shelter clothing. Wealthy people spend more on capital goods and services. Either way the money goes somewhere in aggregate and that is all that matters in Macro.

  49. The problem is the economic theory is not a real science because it does not follow the rigorous process of reproducible experimentation and verification that characterizes the real sciences (in fact, it cannot). Economic theory is full of un-validated conjectures. The fact that the theory uses a lot of math if just window dressing to convince outsiders of the legitimacy of economics as a science.

    Regarding the poor vs rich, you still have the problem that the poor spend more relative to their net worth than rich people. When wealth is too concentrated in few hands, it circulates less and the country will get poor over time without the support of either asset prices inflation and/or credit expansion.

  50. Cullen impresses me greatly – he talks rubbish, yet makes it sound have believable !

    Here’s what is actually happening:
    – Western governments had 20yrs of prosperity and promised their electorates it would last forever. It doesn’t. Productivity gains via automation have resulted in job losses via automation. Globalisation has resulted in more people competing for fewer jobs.
    – Thus western living standards have and continue to fall (and government benefits can’t be sustained). So we load up on debt to keep the lie going…
    – Eventually the debt becomes unsustainable, so we engage in QE and ZIRP to form asset bubbles (fictitious wealth) and keep interest rates low, enabling some debt repayment.
    – Finally everyone realises QE is a one way bet and loads up on more debt, buys the SP500 and real estate with huge leverage, and then… pop… we have 2008 on steroids.
    – Then we blame people….

    Folks its gonna get ugly.

  51. because banks don’t operate that way any more. and that haven’t for more than a decade now. they dont pay on savings because their biggest income producer is fees. and having deposits also leads them to higher reserves.

  52. I believe states have given some consideration and taken some action not towards SELLING national parks like Yellowstone, but leasing parts of them for oil extraction. Not that this is a good thing.

    The larger point is that the Fed Govt creates money by issuing payments or account credits, by increasing a checking account balance in the private sector, which it has the LEGAL rights and power to do. Money is a LEGAL relationship, a contract, not a “thing”. Taxation “credits” the Treasury’s own account at the Fed, but Treasury has the power to credit its own account WITHOUT taxes. Except during Debt Ceiling standoffs, when Congress, which wrote a budget, forbid Treasury from acquiring financial assets to spend.

    In basic terms, the Fed and Treasury swap debt agreements which are also assets. Fed gets T-Bonds while Treasury gets Federal Reserve Notes. That’s a SWAP of similar instruments.

    Fed also pays Treasury 100% of its net profits annually, which is like a 100% “corporate income tax” paid directly to Treasury, not the IRS.

    In technical terms, Congress FORBIDS Fed & Treasury from interacting directly, FORBIDS Fed from competing at Treasury auctions. Treasury is REQUIRED by Congress to sell Bonds to PD banks which are selected by the Fed. Then those PD banks either sell T-Bonds to other banks for profit, or may turn around and sell T-Bonds directly to the Fed, depending on the situation and the Fed’s monetary policy at the moment.

    Treasury is also FORBIDDEN to run an overdraft at the Fed, but private PD banks that buy T-Securities, are allowed to run an overdraft, essentially borrowing funds from the Fed to buy T-Bonds to sell back to the Fed.

    It is “as if” (not really) Congress TRUSTS these global banks which are to a large extent dependent on the Fed for their survival, while Congress DOES NOT TRUST the U.S. Treasury and forbids it to get credit. Really, other than monetary policy functions, these free interest payments on savings for virtually zero risk for “lending” to USA funds that the USA doesn’t need because it creates the funds, is a form of WELFARE that is payable only to Rich People who are the savers by definition, and related institutions.

    This is by CHOICE, not a Law of Physics.

  53. Agree with the first part. Don’t quite agree with the 2nd part – western living standards are increasing, but eastern standards are increasing even more. Third part – I think you at least need to say when the debt will become unsustainable. After all, it happens to be currently shrinking, and it is not nearly as bad as it was post WWII. Fourth part – SP500 doesn’t seem that high and real estate is down from 2008. Sounds like I am hearing a bias and not an analysis.

  54. “Unfunded liabilities” assumes that the currency issuer ought to print and somehow “save up” financial assets in an account at the Fed for these distant future obligations.

    The fact that the US *is* a currency issuer means it cannot functionally save the financial assets it creates in its own currency. A bad analogy would be like a dog saving its fur by not shedding, or the sun saving hydrogen by using a dimmer switch.

    QE didn’t PRINT anything, not even in the whacky sense people think. Swapping some 3-month Treasury Bonds for 0-month Dollars — which is functionally crediting a bank’s reserve acct and debiting the bank’s securities acct — does functionally NOTHING to improve anyone’s economy except by creating some hype and movement on Wall St due to misinformation that leads silly investors to make bets based on the Fed’s “bold action”.

    All QE does is hold down interest rates to near-Zero, which actually means LESS payments going from the Govt to the Private Sector, more like a tax or spending cut than a flood of money.

    What do banks do with those FATTENED reserves from QE (counterbalanced by THINNER securities balances)? NOTHING MUCH. Bank loans don’t come from Reserves as a SOURCE, therefore increasing Reserve balances doesn’t “pressure” banks to issue more loans to American consumers and biz that are already “underwater” on homes and are otherwise facing an economy on continuous decline, due to Austerity politics.

    Why would banks increase lending to consumers who are LIKELY to lose their jobs before their cars are actually paid off and likely to face future foreclosure on a house, or a bankrupt business?

    QE would mean something in terms of inflation if banks suddenly decided to give everyone a $50000 or more credit card at 2% interest, or even give everyone a $10000 line of credit. Soon? Nope.

  55. The problem IS lack of currency in circulation to meet transactions — not the quantity of reserves needed to clear checks, but the quantity of currency needed to maintain sufficient aggregate demand for ordinary (non-monopoly, non-cartel) businesses to maintain profits, such that everyone has a job.

    Everyone could have a job NOW if they were willing to work for free. Regardless, people who work for free or low wages don’t earn enough to buy the output of companies, including restaurants, retail, tanning salons, nursing homes, whatever.

    The high level of imports in our modern economy means that our currency (electronic, not just paper bills) goes into foreign accts at the Fed, not remaining in circulation. The high level of savings — mostly by the super-rich in this era of wealth stratification — removes funds from circulation when funds are added to Securities accts at the Fed.

    This is called Demand Leakage. Warren Mosler has an article on this “800 pound gorilla” with more details.

  56. yes, the rich, by definition, save much of their sizeable unspent incomes.

    Wage earning poor, by definition, even Adam Smith and later Andrew Mellon wrote about this, must spend virtually all their income to survive.

    Yet it’s also true in a sense that “on the macro level” — meaning without breaking down to various demographics, without considering GINI coefficient, just looking at GDP as a whole — including the gains from financial Ponzi manipulation — it doesn’t matter if ONE person earns 100% of the GDP (GINI = 1) or if everyone has an equal income (GINI = 0).

    Of course that fact is meaningless if the purpose of an economy is for human beings to have wonderful lives, to the extent that income and wealth helps that.

  57. Mosler’s thinking on pension funds and how investment accounts are a demand leakage is factually wrong and based on a common misconception. He’s making a version of the “cash on the sidelines” argument that claims money gets trapped in secondary markets. He claims that retirement accounts and savings vehicles are demand leakages. They absolutely aren’t. Money moves through secondary markets, it doesn’t get trapped in them. When you buy stocks in your brokerage account someone is reducing their stock holdings to buy your cash and you’re reducing your cash to buy their stock. This money isn’t a demand leakage. In fact, the money was already “put to work” in the means of financing a firms operations on the primary market. In other words, these instruments help to fund private investment which is the backbone not only of private saving, but also the entire economy! So the idea that this is bad is so backwards I am actually surprised that a person with 40 years of market experience would make it. Mosler doesn’t often make mistakes, but this one is particularly glaring….

  58. Wealthy people, by definition, spend money on Treasury Bonds, which don’t generate any income or productivity. Wealthy people are wealthy because they not only have high income but savings, and savings = Treasury securities.

    Many super wealthy people — not just the One Percent — put their funds in Assets they hope will inflate or inflate by throwing huge sums of cash and/or credit as asset markets, futures markets, and so on, markets that have morphed from pools OF capitalism to literally “casinos”.

    I thought Casino Capitalism was a bit of justified hyperbole, until I heard corporate attorney and professor Lynn Stout describe how derivatives were “subsidized” by Govt Law, and how the derivatives market exploded, and how derivatives throughout history to ancient times were firewalled off from the main economy until the US Congress changed this in 1999, and how what a derivatives “position” really is is a BET or WAGER, non-productive use of capital.

    Poor people just by GOODS and SERVICES. One of the major flaws and blind spots of mainstream neo-classical textbook economics is that it looks at a basic economy of GOODS and SERVICES, while ignoring the existence of credit creation (including bubbles) and credit destruction (including collapse of bubbles), and believing that banks act as “intermediaries” between Rich vs Poor, between “patient” holders of money vs “impatient” borrowers, which is false. Banks don’t work like that. Banks create deposits out of loan agreements, which is called Balance Sheet Expansion.

  59. Assuming that the term “free market” is a fact and not just a buzzword for neoliberal politics and neoclassical economics.

  60. For “unfunded obligations” to be “funded”, the Govt would have to do what?

    Confiscate financial assets from the general public currency users, then add those credits to an account at the Fed and simply “save” that sum. That’s pretty much what Social Security is, an account balance number designated in certain legal terms as a special form of non-tradeable US security bonds.

    This “savings” by Govt accomplishes nothing for a sovereign issuer of non-fixed floating currency that creates financial assets when it spends by increasing the account balance of someone in the non-govt sector — rest of the world — and destroys financial assets when it taxes by decreasing the account balance of someone in the non-govt sector.

    For Eurozone, this is a different issue, because Eurozone voluntarily surrendered their monetary sovereignty to a “foreign” currency institution, the European Central Bank and the European Union, which sets all the rules, and which forces Eurozone states to be dependent victims on the Bond Market and/or Exports.

  61. Sovereign Govts have NO CONSTRAINT or inability to fund wars or fund social programs or fund corporate subsidies, without limit, without constraint, except self-imposed constraints.

    The PRACTICAL limitations arise if Govt spent so much that every willing laborer had a job or if some other major resource was completely used to max capacity, and then the govt still continued to increase spending beyond full capacity, then by definition, demand-pull inflation would ensue, as the public sector was competing with the private sector for SCARCE resources.

    The problem with capitalism since the rise of the industrial age in the early 1900s has been OVER-SUPPLY not scarcity, and lack of sufficient Demand. Big Capitalists understood this in that era — the Republican run Progressive Era starting with McKinley — when Big Business lobbied their close friends for more Govt Subsidies, more regulations, more protections for capital, and increased “foreign aid” for industry to export surplus goods instead of competing for domestic sales with “cut-rate” or “cut-throat” discounting.

    The USA does not tax to spend, nor does “borrowing” provide funds for govt operations and spending.

    Taxes for Revenue are Obsolete!
    NY Fed Chairman B. Ruml, January 1946

    So why are they STILL COLLECTING TAXES, and collecting taxes at a level that purposely causes unemployment and poverty, when they don’t even need OUR money, WE need the Govt’s currency?

    QE is SUPPOSED to re-create a private sector asset bubble. How? The story is that banks sitting on excess reserves will lend to households and businesses. But banks don’t lend reserves in the first place, so a Zillion Dollar reserve balance cannot “push” lending.

    Furthermore, QE involved DEBITING banks’ securities (savings) accts and CREDITING banks’ reserve (checking) accts. All this occurs INSIDE the Fed. Note, the securities held by banks which the Fed bought were previously purchased with cash reserves. How does a mere ASSET SWAP that happens inside the Fed on the Fed’s books accomplish ANYTHING in the economy?

    It can’t and it doesn’t, except perhaps by “expectations” of investors like JJ who seem to think QE is some black magic formula.

    JJ can’t even differentiate between PRIVATE DEBT LEVELS of banks lending to consumers and business, vs GOVT DEBT which is Govt providing the main vehicle for rich people to store their wealth in safe federal savings accounts, to earn interest and with a constitutional guarantee the savers will not lose their assets.

  62. I don’t see how anyone can say USA living standards have been increasing, when people who STILL happen to have jobs report living paycheck-to-paycheck, unable to save enough to cover shocks and emergencies, now unable to have credit cards for emergencies, many more people some I know personally who work and are unable to afford to drive a car, after much public transportation has long been destroyed by car and oil interests (GM & Standard Oil), where there’s a record population of homeless people who are formerly middle class wage earners, where $10/hour is considered a “good job” for average people, and $15 per hour is both a great income and not enough for a family to live on, where families need at least TWO incomes if not three or more jobs to sustain themselves, and even more work on the East Coast and West Coast where housing is ridiculously inflated to triple, quadruple or more of the Midwest and “flyover” areas.

    Europe is facing Great Depression levels of unemployment. Old couples in Spain are committing suicide because they can’t afford to live.

    Britain, while not facing any constraints on domestic investment and spending, since it has not surrendered its monetary sovereignty like the EU has, is doing self-imposed Austerity anyhow, cutting spending while raising taxes.

    China, in the meantime, has 5-10 year plans to move in the opposite direction, to increase living standards for a majority of their citizens, to create a Middle Class.

    The only thing standing in the way of the West doing this is our own screwy thinking and ideology, which Cullen is TRYING to help people understand correctly, how our monetary system operates.

  63. Gary,

    You have to be careful describing the monetary system the way MMT does. The govt is indeed an operational user of bank money as it is presently designed. In theory (Modern Monetary Theory) it could print up notes and fund its spending. But that’s not what it actually does at present. The govt issues bonds and taxes bank deposits in order to fund its account at the Fed so it can then spend those bank deposits back into the economy. The monetary system is bank deposit centric. It is not reserve centric.

    Be careful using the MMT framework. It’s not right and will mislead you on many important facts about the way the system works.

  64. I am sorry, however, I would advise my patient to take a respite or two, as it appears that the debt crisis controversy has finally taken a toll on his nerves…

  65. You need to read Cullen’s critique of MMT. He buried their ideas long ago. Anyone using MMT is just pushing a political agenda and intentionally misleading you on the way the monetary system actually works.

  66. Maybe somebody can help me out here. When I go to Wikipedia under total assets US,
    I get “gross account total” of $156.86T assets.

    Then there is this graph, net financial position of US households and non-profits, which is $55T.

    I’m thinking that the $55T number double counts household and corporate assets. For instance, it double counts household ownership of GE stock and the assets on the GE balance sheet. Likewise it lists financial sector assets of $65.97B and includes that in total assets, but that is larger than net worth. I’ve got to think that also includes double counting. I’ve looked all over the net and in my copies of Mankiw and Delong textbooks, no answers to this basic question.

  67. “I often see this rationale; that the assets offset the liabilities and thus the liabilities don’t matter. The real question is the LIQUIDITY of those assets”

    I disagree that thats the real question. There is never a liquidity problem for the feds. They will never need to “Sell Yellowstone so they have money to spend.”

    The people who wish to put the govt on a “treat them like household or business” metric cant have it both ways. No one would ever claim Apple or GM is in the hole without looking at the totality of their operations. They would never just look at their bond issues or their loans form banks and say they are 500 billion in the hole as a way to influence their stock price. I take that back, some might try but the people at CNBC would quickly, and rightly in this case, point out that using only their debt levels to assess their worth is very stupid.

    What really matters is net worth when evaluating a company. Same with
    a govt that is being examined like a company. And even allowing for some variability in prices on the asset side of the US govts balance sheet, it is still the highest net worth company on the planet!! By a long shot I would say

  68. Pete if you own Gold because you dont like paper money why would you want to ever exchange it for paper at any price ? ….hoard as much as you can i have been told a race of ETs is looking for Gold in our part of the Universe ..just think they will need to negotiate with you …

  69. I disagree here Odie. The US govt does not control its income. It can only set the rate of taxation not the incomes of the people. Now, if everyone WAS a govt employee (something no one wants I suggest) then this would be true but that is a quite unrealistic scenario.

    No one controls their income. This seems to me to e a fundamental assumption of many in the econ blogosphere….. that we DO control our incomes to a large degree. Which is completely false. All we control is our efforts, what someone pays us for our efforts is up to them. And we need other people to spend for us to have income

  70. Total – Treasury-Owned Gold 261,498,926.247 $11,041,059,958.16

    Department of the Treasury
    Financial Management Service
    September 30, 2013

    Summary Fine Troy Ounces Book Value

    Gold Bullion 258,641,878.074 $10,920,429,098.79
    Gold Coins, Blanks, Miscellaneous 2,857,048.173 120,630,859.37

    Total 261,498,926.247 11,041,059,958.16

    Mint-Held Gold – Deep Storage

    Denver, CO 43,853,707.279 1,851,599,995.81
    Fort Knox, KY 147,341,858.382 6,221,097,412.78
    West Point, NY 54,067,331.379 2,282,841,677.17
    Subtotal – Deep Storage Gold 245,262,897.040 10,355,539,085.76

    Mint-Held Treasury Gold – Working Stock
    All locations – Coins, blanks, miscellaneous 2,783,218.656 117,513,614.74
    Subtotal – Working Stock Gold 2,783,218.656 117,513,614.74

    Grand Total – Mint-Held Gold 248,046,115.696 10,473,052,700.50

    Federal Reserve Bank-Held Gold

    Gold Bullion:
    Federal Reserve Banks – NY Vault 13,376,987.715 564,805,850.63
    Federal Reserve Banks – display 1,993.319 84,162.40
    Subtotal – Gold Bullion 13,378,981.034 564,890,013.03

    Gold Coins:
    Federal Reserve Banks – NY Vault 73,452.066 3,101,307.82
    Federal Reserve Banks – display 377.451 15,936.81
    Subtotal – Gold Coins 73,829.517 3,117.244.63

    Total – Federal Reserve Bank-Held Gold 13,452,810.551 568,007,257.66

    Total – Treasury-Owned Gold 261,498,926.247 $11,041,059,958.16

  71. “What really matters is net worth when evaluating a company”

    – I agree…..that is my point. But to be clear net worth is NOT simply Assets -liabilities as they are shown on the balance sheet. Anyone who has worked on distress debt deals knows that you have to look at the LIQUIDITY of the “assets”….it is very difficult to accurate;y value intangible assets. I don’t follow AAPL, but Im willing to bet that they have significant “goodwill” on their balance sheet. Lets say for the purposes of this example, that AAPL was also heavily levered…..if you count AAPL’s intangible assets at full value as shown on the balance sheet….you would be making a terrible mistake.

    A good example in the current market are some newspaper/media stocks. Several are VERY heavily levered and show assets on their balance sheets…..but these assets are NOT readily liquid. What is a distribution network worth in a particular midwest market? What is the newspaper brand worth? What are the Journalist column brands worth? ….the point is that in Newspaper companies, the assets are not readily liquid and the potential market of buyers is very small. The same applies to AAPL, whose assets are likely IP & brand heavy. The same applies to Gov’t assets Like Yellowstone pointed out in the comment above.

  72. I think Anonymous is talking about the political factors.

    Also, I doubt that inflation is best curbed by fiscal measures. The best way to kill an inflation is to invert the yield curve.

  73. Not everything is explained with monetary theory. MMT is not the relevant framework to understand this stuff. This is overall macro theory.

  74. “A rich person with $1Bn will not spend as much on many items as 1,000,000 people with $1,000 each.”

    Correct. Instead, he’ll put that $1Bn into investments, and the money goes to some company he starts up, which buys new equipment and hires people.

    So, sure, he didn’t spend the money on consumption, but instead invested it – but that still means money being put to productive use (actuallly, more of a productive use than consumption, since investments increase our ability to produce things).

    It’s important to think through these things; to consider carefully what actually happens when different people have money. The common, simple tropes are often wrong.

  75. Are you saying there are no demand leakages through this channel or just not that much?

    What are the data sources we could examine that you are using?

  76. There is some truth to that. However, the US GDP is 70% driven by consumption, not by investments. Also, a lot of wealth is kept in assets like treasuries and not necessarily ‘invested’, unless you believe that the money is then used productively by the government. Note that owning publicly traded stocks, as the rich also do, is a form of saving, not of investing (Cullen’s words). So far, this process has favored increasing imbalances in the distribution of wealth in the favor of the rich. This is not a “socialist” point (my views could not be furthest), but a pragmatic one about the viability of a capitalistic system with increasingly monopolized assets. It defies the cornerstone premises of a free capitalistic society.

    It’s important to think through these things; to consider carefully what actually happens when different people have money. The common, simple tropes are often wrong.

  77. If you want to interpret my post as “the government can always earn x amount of dollar more” yes then your point is correct. However, what I wanted to say is that the government can always raise its tax rates and with it its tax revenue and there is essentially nothing the private sector can do about it. If the government wants to run a surplus they will run a surplus.

    Now, tell me: Do you know of any business or consumer who can stand up and say with confidence that they will increase their revenue or salary, respectively, by 10% for the next year? Not just as a wish but matter of fact? That is something only the government can do.

  78. Texas is turning purple and will soon be bright blue, which will spell the end of the Party of Self-Deportation.

  79. ‘We can *literally print up the funds if we wanted to* or raise taxes or sell more bonds. Whatever.’

    I think Cullen is finally getting down to policy prescriptions here.
    We have unfunded liabilities (and unfunded pensions) because we have made commitments for which we will not have the resources unless we grow at 5 pct annually.
    The solution?
    ‘We can literally print up the funds if we wanted to.’
    So let’s examine this.
    First, would that in fact be legal?
    Second, what would happen in the currency markets if this happened?
    And what would happen politically as interest groups began battling for this new money?

  80. Does QE hold down interest rates? That is the conventional view, which is wrong, based upon the data. Long interest rates have gone UP during QE periods and down in the two periods between QE. So to argue that QE holds down interest rates is the opposite of the facts. This is living in a world that rejects facts and logic.

    The asset swap concept also rejects reality and logic. It’s impossible to put this forth if you understand banking and MR.

    When a bank increases it’s balance sheet through lending it creates money out of thin air. This increases the money supply. It’s trivial to work out on a sheet of paper for a single bank and a system with no pre-existing money. If all debt is paid back, all money goes away.

    So this is clear. When total bank lending increases the supply of real money grows, when total bank lending decreases the supply of real money goes down.

    The Fed is a bank. When it creates new money it is just a bank. It is increasing the supply of money.

    It is not an asset swap! Before QE, the government got existing money from the bond buyer, who exchanged existing money for a NFA. This didn’t create money. It was an asset swap. In the normal course of finance, when the bond matures, the government does an asset swap with the bond holder, returning existing money to the bond holder to retire the bond. The government can’t create money like a bank, it has to get existing money to retire the bond (taxes, another bond sale, …)

    Under QE, the bond holder who sells to the Fed gets money that is created by a bank, it’s not existing money, it’s not an asset swap!

    If you understand banking and MR then it is impossible to logically consider QE an asset swap.

    What QE has done is partially offset the unprecedented fall off in bank lending. If you add QE to consumer and business debt it is still well below the historic trend. So the options for the economy are a balance of real growth and inflation, with the current situation exactly reflecting that, low growth and low inflation.

    The Fed will not be able to significantly lower it’s balance sheet until private lending increases to a rate approaching that of the past 60 years or more. Even then, the gap between the long term trend (which was remarkably steady over 60 years until the 2008 crisis) and the current level will almost certainly require the Fed to only slowly reduce it’s balance sheet.

  81. The best way of curbing inflation is to have people spend less money on goods and services (see CPI). How can you do that any better than just divert more of their income towards taxes to reduce federal debt (= surplus)?

  82. I don’t think it would be deflationary.I think it would be inflationary.What would happen is wealth would come out of the bond market and into the regular economy driving up stocks and real estate.Money abhors a vacuum.

  83. Remember what inflationary expectations do to money creation. Is it more profitable for a person to borrow in a time of high inflation or low inflation? Obviously it’s the case under high inflation. When inflation and inflationary expectations take off, more people will try to borrow and more banks will be willing to lend. In that situation, you must make money tight and invert the yield curve. An inverted yield curve makes everyone bid for liquidity as funding costs while banks are forced to contract the money supply.

    Also, the lags of fiscal policy are much larger. I also can’t think of a single time where an inflation was stopped by fiscal policy.

  84. Well the thing is with anything other than cash or a govt bond there is always the risk one takes when “having to sell”. Any asset class which has a lot of people trying to sell at once will not sell at the best price. The govt never is in a situation where it has to sell though. Only private parties meet that constraint…….. occassionally. So the govts asset side is more stable than ours.

  85. If you tax the middle class too much they lose their incentive to work, may go on welfare or work in the underground economy. If you tax business too much, they move their business and jobs overseas. Raising taxes has a breaking point.

  86. “I wanted to say is that the government can always raise its tax rates and with it its tax revenue”

    Not so fast. Raising rates too much can result in a net DECREASE in revenue. This is not abstract theory.

  87. You say MSNBC is lazy? Perhaps if you had done a little more homework, you’d find some problem with your asset valuations. 82% of the oil you mention is shale oil, which while is “technically extractable” is not “economically extractable”. To value that at full market price is rather fanciful.

    Much of the rest of it is in areas Democrats have ferociously declared off limits.

    Coal? It’s being run out of the market.

    You know, you can’t spend assets. You have to sell ‘em first. How much can you sell oil shale for, given you can’t unlock it’s value yet?

    I think it’s always interesting when a review launches an attack against a report, and is guilty of the same crime he accuses the reporter of. Yes, indeed, be nice.

  88. Jeff, The report from the IER, says “IER estimated the worth of the government’s oil and gas technically recoverable resources to the economy to be $128 trillion”. The coal alone is worth 22 trillion. And I am sure the federal lands, minerals and buildings are worth a hundred trillion as well. It’s unrealistic that you qualify your point by saying it’s not an asset just because the govt can’t sell it. That’s like saying our gold is not an asset because some crazy republican gold bugs don’t want to sell it. Or, we won’t sell our monuments because that would be idiotic. Of course. That doesn’t mean you just get to erase these items from the balance sheet because they put a wrinkle in your political story. That’s not how accounting works.

    Maybe you shouldn’t be so quick to attack just because you’re convinced our govt can run out of money it can print. Which is an absurd assumption, but that’s actually a different matter….