WHOA, THAT’S A LOT OF PRIVATE SECTOR SAVINGS (I MEAN, “DEBT”)!
There’s an image going around today of the national debt that is intended to scare the daylights out of you. It shows a stack of dollar bills in the form of the national debt and places it next to a soccer field, a football field and the Statue of Liberty (thanks to Joe Weisenthal at BI). At first glance, you’d be inclined to think, “whoa, that’s a lot of debt we owe! – we must be close to bankrupt, right?” Completely wrong.
The USA is an autonomous issuer of the US dollar. The country has endless supply of this currency meaning that no one else can produce it. Most importantly, the debt that is issued due to Congressional mandate, is denominated entirely in this currency. So, when you hear someone say that we might not be able to “pay back” our debts the proper response is “you, sir are full of it”. There is no such thing as not being able to cover the liabilities which are entirely denominated in a currency that we can create out of thin air.
Now, where this all gets more nuanced is with respect to the actual holdings themselves. People think that the debt is an inherent negative because they assume that it needs to be paid back at some point and that it generates some sort of solvency issue for the US Federal government. But that’s just a misconception. Warren Mosler sent me an email last night highlighting this point:
“Ever hear anyone say ‘I wish they’d pay off those Tsy bonds so I could get my money back and go buy something.’? Of course not. Tsy borrowing gives people who have already decided to save, a place to go. Dollars that came from deficit spending – dollars spent but not taxed. If they were spent and taxed, they’d be gone, not saved.
Tsy bonds provide a resting place for voluntary savings.They are bought voluntarily. They don’t ‘take’ anything away from anyone.
For example, imagine two people, each with $1 million. One pays a $1 million tax. The other doesn’t get taxed and decides to buy $1 million in tsy bonds. Pretty obvious who’s better off, and who’s still solvent and consuming. Someone tell the Democrats and the Republicans, thanks.”
Great explanation. Now, we can alter the image from the scary article above to visualize this point. US citizens own roughly TEN TRILLION DOLLARS worth of US government bonds. These are securities that the US government has issued due to Congressional mandate which US citizens park their savings in. I think of them as a form of persistent stimulus as they add to the net financial assets of the private sector via interest payments (by adding to the budget deficit). These savings include pension funds, the Social Security Trust fund, the US Civil Service Retirement Fund, the US Military Retirement Fund, 401K’s and a whole slew of other forms of private sector savings. The remaining 30% is foreign owned and due to the fact that the USA runs a current account deficit with foreigners whereby we send them pieces of paper with old dead white men on them, they send us real goods and services and they park this “cash” in the form of US government bonds because there’s not much else they can do with dollars (good luck buying Chevron next time China!).
To make a long story short, the way we think about the public debt needs to undergo a dramatic overhaul in this country. Of course, I don’t mean to imply that the spending represented by this public debt cannot become problematic. It most certainly could. Inefficient or mismanaged spending can result in a reduction in our overall standard of living in many ways and could even lead to hyperinflation, but anyone arguing hyperinflation in the current environment doesn’t have a very good grasp on the actual causes of hyperinflation. And this transformation in thinking is crucial if we are ever going to understand our monetary system and vote in leaders who can actually use this system to maximize its potential benefits. Clearly, given the absurdity of the debt ceiling charade in Washington, it shouldn’t surprise a single one of us to see that the domestic economy is in shambles….
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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151 Comments
Scott wrote:
“Part B and Part D (of Medicare) are both projected to remain adequately funded into the indefinite future because current law autonativally provides fuinancing each year to meet the next year’s expected costs.”
Actually, the fedral government has 2 thoughts on the funding of Parts B and D.
As you know, 75% of the funding comes from general revenues, withha direct, immediate budget impact. The other 25% is paid by the beneficiaries.
The Trust Fund Perspective considers not only the trust fund as an asset filled with gold ingots, like Social Security. It also considers a trust fund with little or no reserve to be fully funded, based on the governmeny’s implicit promises.
So, from the Trust Fund Perspective, Part D is fully funded.
From the Government-Wide Perspective, or the Budget Perspective, Part D is not funded at all, because the Budget Perspective depends on cash in and cash out, not accounting numbers, as in a calculator, or even numbers out of thin air.
The unfunded liabilties for Part D is in the trillions, while “your” perspective says it is fully funded!
The Government-Wide Perspective is considered more comprehensive and realistic than the Trust Fund Perspective, for it deals with real money, not Monopoly money.
Don Levit
Don Levit
Sorry, Don. Those aren’t Stephanie’s words. She’s quoting from the actual document. You’ll have to take up your disagreement with the Trustees.
Question. Why is the Fed even necessary? Why does the Treasury need to “borrow” its currency and pay interest on it? Why doesn’t the Treasury just issue the currency as needed and bypass the whole “debt” issue all together? Let the capital markets set the interest rates.
Because It would be to simple.
When something is complicated there is almost always a very good reason and its rarely to our advantage.
It’s necessary to have some govt entity that can provide overdrafts to the pvt sector without recourse to its own profitability in order to support the payments system both on a daily basis in and times of crisis. That’s the essence of central banking, originally at least, and I would argue it still is (see Charles Goodhart’s book (?) on why banks need a central banker). In so doing, this entity sets an overnight (and/or intraday) rate that anchors the term and default structure of interest rates (assuming flexible exchange rates). But there’s no reason for such an entity to be “independent”; it could easily be another branch of the Tsy, for instance, and it is in some countries.
Scott,
thanks for the reading rec. I will take a look. Seems like the role you describe can be carried out, however, without the Government having to borrow currency as opposed to just issuing it. I guess I must be missing something!
Alex,
I’m just catching up on this thread and will at all times point to anything Mr. Fullwiler, Mr. Roche, and many others hear have to say above my own comments.
But, its seems to me that you are saying that the Tsy shouldn’t need to borrow from the Fed, is that correct? If so, remember that the Tsy and Fed are apart of the same larger entity. Its like the left hand borrowing from the right- same person, just different hands.
Cullen, Scott or some other MMTer,
I have two questions. Why do banks pay interest on deposits if they don’t need the funds to lend?
Also, I am still unclear on the fact that Treasury needs to have funds in their TT&L account before they can spend. Are you saying that reserves supplied by the Fed settle bond purchases?
Thanks!
First, understand what the business of banking is–they make profits mostly by charging more on loans than they pay on their liabilities. So, they want the cheapest liabilities they can get.
Unless the deposits created by the bank in the process of making a loan are used to purchase something from someone else that banks at the same bank (rare, and even then it doesn’t usually work, as that person will spend, too, or search for a place to earn interest if the balances aren’t needed right away), the bank will need to replace them on its balance sheet (otherwise you’d be cutting into capital when the deposits were debited).
Attracting deposits and time deposits that are much cheaper liabilities (usually) than borrowing in money markets or issuing capital is very competitive. Therefore, they offer interest to get as many as they can. Also, the regulators view these as a more stable liability than borrowings in money markets.
I see. So that fits into the capital constraint.
Do you know the answer to part 2 of my comment above? I still can’t wrap my head around it. The primary dealers use current reserves to buy bonds at auction?
Thanks.
Why can’t any MMTer give a straight answer to this question? It seems fairly straight forward.
I believe your answer is in here…
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198
“Also, I am still unclear on the fact that Treasury needs to have funds in their TT&L account before they can spend. Are you saying that reserves supplied by the Fed settle bond purchases? ”
The Fed is legally prohibited from giving the Tsy an overdraft. This means that the Tsy must have balances in its account before it can spend (or at least a positive balance by the end of the day–I can’t get the Tsy to come clean and tell me whether or not they receive intraday overdrafts; seems to me that it’s virtually impossible for them not to given the pure volume in/out and the complexity of keeping track of the number of agencies spending each day). This means that either it has balances in its account or it calls them in from the TTL accounts.
The Fed is the only place reserves are held, so I don’t know what “reserves from the Fed” means. To settle an auction, there is either enough reserve balances already circulating for that and for banks to hold the desired buffer by the end of the day, or the Fed adds the difference to make sure there is. Whatever reserve balances are circulating are doing so only because they were either (a) spent into existence, or (b) some other change to the Fed’s balance sheet. It doesn’t always have to be (a), that is.
Don’t confuse reserve balances with NFA. The only source of more NFA is more deficit.
Primary dealers, unless they are themselves banks, do not hold reserve accounts, so they don’t pay with reserve balances. Their deposits at their bank would be debited as they buy a tsy and their bank’s reserve account would be debited.
Hope that helps!
Scott, I’m doubtful about a part. I understand the entire mechanism, I’ve read your papers (really thanks a lot, if you come in Italy I offer you a beer). You say:
“The Fed is the only place reserves are held, so I don’t know what “reserves from the Fed” means. To settle an auction, there is either enough reserve balances already circulating for that and for banks to hold the desired buffer by the end of the day, or the Fed adds the difference to make sure there is. Whatever reserve balances are circulating are doing so only because they were either (a) spent into existence, or (b) some other change to the Fed’s balance sheet. It doesn’t always have to be (a), that is.”
I have understand that, when there aren’t enough reserves, the FED before the auction, adds reserves. So, funds that Treasury borrows are reserves that are created by the agent FED. If there are enough reserves, we can say that Treasury borrows funds that are already circulating, so, apparently Treasury borrows what it hasn’t created (the FED). But if banks lost reserves, successively they have to buy reserves in market, or have a loan by the FED. so at the aggregate level, now or successively FED has to add reserves in the market. So, also in this second case, we can say that Treasury borrows what it has created (now or successively).
It’s a bit confused, but if you understand what I mean, can you say if I miss something?
Thanks.
“The Fed is legally prohibited from giving the Tsy an overdraft. ”
i wasn’t aware of this. neither is carney: http://www.cnbc.com/id/43899646
please provide legal cite; thanking you in advance
I would frankly love it if you’re right, Chris. I haven’t been able to get the Tsy to give me a straight answer or provide me with the documentation of day-to-day operating procedures for the Tsy’s account the Fed. Their response is always rather cryptic.
I was going with this . . . but I’m not a legal expert, so if you think 13(3) over-rides it, then feel free to say so. I’d be interested in your view.
US Code Title 12, Ch. 3, section 355
“Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principle and interest may be bought and sold without regard to maturities but only in the open market.”
scott
ben had no problem buying maiden lane from bear stearns citing 13(3) as authority, and there is no other authority for the fed to bail out an investment bank under the act. so 13(3) is viewed rather liberally by ben and his counsel. the section you cite of course prevented direct QE, as opposed to buying treasuries from dealers, but this related to “obligations” that are issued by treasury or instrumentalities. the fed would say that an overdraft is not an obligation issued by treasury, but rather an extension of credit (or really money) by the fed itself…quite unusual, but permitted under exigent circumstances.
cracker?
“the fed would say that an overdraft is not an obligation issued by treasury, but rather an extension of credit (or really money) by the fed itself…quite unusual, but permitted under exigent circumstances.”
That’s exactly the part I’ve been wondering about. Appreciate hearing your view. Say cheese?
I wonder if Treasury has overdraft priviledges at their TTL accounts?
Daylight and maybe even overnight?
section 13(3) gives the fed extraordinary authority under exigent and unusual circumstances. this was the “bear stearns” provision. while amended by dodd-frank, the fed can still give the treasury overdraft availability under this provision in order to prevent default, imho.
That’s interesting Chris. Is there any way you could confirm this?
If Fed can allow overdrafts under that provision then that only strengthens the MMT case that this is all a bunch of nonsense.
actually, no there has been no precedent for this (unless you consider bear stearns precedent which, i suppose it is).
the exigent circumstances provision gives ben ample statutory authority under circumstances such as possible treasury default. whether ben actually uses it is up to him (and timmie, potus etc). it sure looks to me like potus got the high five from ben before he said he would veto boehner’s bill.
Thanks Scott. That helps a lot. So, is it accurate to say that it’s a chicken and egg argument from this point? Some of the reserves are already in circulation and those which aren’t are provided by the Fed?
Can some one send me $100,000 I will purchase a new boat and send you an 1% interest bearing note certificate. You will have the saving and I will have the boat. Note that it will never be paid back but it will be rolled over.
Since 2008 Treasury have generally not being purchased for income but for liquidity purposes and as a safe haven when fear comes back.
Net of inflation and taxes there is no return anyway.
Great way to stay poor.
You can have the 100k as long as you buy the boat from me.
Ha Ha Ha…… Great thanks and no point in sending money to me and back to you.
If the boat is valuable I will save you the wire transfer cost, simply send the boat and keep your money and I will send you your new savings the 1% perpetual note.
Scott:
Good point – they are Stephanie’s words, but they are in your post. I assume you put them there to further your points.
Let me provide a more objective source than either you, I or Stephanie: The Treasury Department.
From a paper entitled “2010 Financial Report of the united States Government Social Security and Medicare:”
“Medicare Part A income and expenditures as a percent of taxable payroll trust fund interest and assets provide enough resources to pay full benefits until 2029 with General Revenues used to finance interest and loan repayments to make up the difference between cash income and expenditures during that period.
From the Trust Fund Perspective, the SMI program is fully funded, from a Government-Wide Basis , the substantial gap that exists between premium and state transfer revenue and program expenditures in the SMI program ($31.5 trillion and $21 trillion) represents future General Revenue obligations of the Federal Budget.
http://www.fms.treas.gov/finrep/supp_info/fr_supplement_info_ss.html.
Don Levit
What really happens to the euro austerity surplus created when the authorties fail to provide enough paper to save in ?
It must go somewhere right ?
Its energy saved in the financial ether yes ? no ?
My hunch is that it is the primary driver for the rise in Gold price………..any thoughts Cullen ?
Also google : Irish central statistics office – quarterly institutional sector accounts 2011
WTF is happening with this energy surplus ?
It must be floating around the financial ether somewhere.
Unbelievable. Our $14 trillion debt is “not a problem” because it represents the savings of “us”. What’s more, “we” print the currency in which we service said debt, so we, by definition, can always pay the service cost (and return principal). Oh, ok.
Let me try a theoretical with the learned community.
Suppose in scenario 1. “we” racked up $14 trillion of debt doing the following:
Educating the populace in science, math, engineering, finance and marketing to a level heretofore unheard of in world history; basic and applied R&D in critical technologies; world-class infrastructure including roads, ports, airports, freight and passenger rail; advanced energy technologies leveraging indigenous natural resources.
Now suppose in scenario 2. “we” racked up $14 trillion of debt doing the following:
Food stamps, union pay-offs, pay-offs to seniors, paying people not to work, cash-for-clunkers, social science research, free healthcare for all, bridges to nowhere, foreign wars w/o end, pay-offs to corrupt foreign dictators, importing foreign energy sources, importing trinkets and trash, etc, etc, etc
So, would you rather be the creditor in scenario 1. or the creditor in scenario 2.? If you are the creditor in scenario 2., does it make you “feel better” that there is something called “MMT”, which observes that society can issue you currency, w/o constraint, to service the debt (your asset) no matter to what extent your savings were squandered on wasteful consumption of no lasting economic value? I didn’t think so…
OK. I’ll bite. Hmmmm…..let’s see. I think I’ll choose option 1.
Society has 3 choices. 1) Pay people not to work (welfare) 2) Pay the unemployed nothing (and society will pay through the nose with high crime, prisons, poor health, turn us into a 3rd world country) 3) Put them to work repairing our infrastructure, etc (where society actually benefits from the money it spends into existence).
Your turn to pick one.
you are making my point. what matters is the (future) economic value of the government spending. paying people not to work has minimal economic value. spending to keep the terminally sick and aged alive for an incremental 6 months has zero economic value. fighting the boogie man in caves in afghanistan has minimal economic value.
And just to be clear I have no problem with food stamps or free healthcare for all. That’s what civilized societies do, they provide safety nets for people who may have (through no fault of their own) had a bad run of luck. Obviously, you’ve never known anyone who has gotten sick and couldn’t afford to pay outrageous health care bills so some fat-ass drug company CEO can sit on another billion in the bank to make himself feel like a man.
Yes, we all know exactly where you’re going with this discussion. You want to show that the American standard of living has collapse due to big govt. Rather than repeating this, why don’t you present your evidence so we can discuss it. Thanks.
Evidence that US living standards are declining? LOL. That’s funny. Are you kidding me? How about the fact that median household incomes have done nothing for 20 years. How about the fact that we have structural unemployment of 7-8% (minimum) and a labor particpation rate in secular decline, never mind those that are “gainfully employed” in “government cheese activities” such as handing out drivers licenses or frisking grandma at the airport. How about the fact that 45 million people receive food stamps.
There are consequences to a government that expropriates an ever larger share of national wealth and income for the purposes of unproductive spending on consumption and foreign wars.
But you go ahead and keep focusing on the mechanical A/R A/P process and how you have such a superior understanding of said process. You are fiddling while Rome burns.
You still don’t provide any real evidence that government is responsible for this. I’d argue that LACK of government oversight of our financial institutions coupled with a baffling lack of understanding of our monetary system by those in charge of it are more responsible for our stagnant wages and persistent unemployment.
Cullen, RobertM probably is Robert Mundell !!
oh sorry RobertM, I’ve misinterpreted your message…
You forget that banker fascism led to the need for socialism in the US. The US had little need for socialism till the government backed usury and counterfeiting cartel, the banking system, wrecked the economy in the 1920′s and 30′s.
I find it amusing people like Cullen argue that because the US can issue as much currency as it wants, it can never be bankrupt. Hmmm, may be in a world where only technical definition of the word bankrupt matters.
It is clear the moment the US decides to just print more dollars to “pay off” its debt, buyers of teasuries are going to get wise to it pretty quickly and those dollars won’t be worth much. The US won’t be able to finance the purchase of necessary imports and it would be as good as bankruptcy – you could cry yourself hoarse that you are repaying your debts, people would just laugh and say if you want more financing, let’s see some of that shiny yellow thing that is true incorruptible collateral, not useless green pieces of paper
You need to read this before commenting again.
http://pragcap.com/resources/understanding-modern-monetary-system
With all due respect, you need to stop posting links to the architectural plans when the problem is not the plumbing, but rather that the house is on fire.
With all due respect, it’s Cullen’s site, not yours.
That out of the way, Cullen, Mosler, Galbraith, Wray, Fullwiler have all proposed, in other forums, ways to “put out the fire”. To continue your analogy, ignorance of how fire operates (the monetary system) would have had you dousing the oil fires in Iraq (balance sheet recession) with water (austerity), only to see the ground underneath you catch flame (Depression).
The US dollar will always be worth something externally as long as the US has exports the world desires such as Nebraska wheat and the Nebraska farmers or someone they buy from has to pay taxes.
The US Government has no need for financing. It should cease borrowing forever and simply deficit spend using siegniorage.
So MMT is important for what reason? I have read the link above many times before and it is pretty easy to understand, I don’t think you will find many that disagree. The only question is, of what importance is it to anyone in reality?
Well, if you don’t understand it you make decisions like bailing out banks, propping up markets, balancing the Federal budget during a balance sheet recession, etc. If you don’t understand it you’re more inclined to do all of the opposite. It alters public policy remarkably….
The interest payments as a share of GDP are actually 10x SMALLER than in Joe Weisenthal’s graphs. They average 1.5% of GDP now.
i think the bigger question is, what are we getting for all this debt.
and as far as inflation is concerned, i don’t know about you, but my bills seem to go up every year, and by a lot more than the cpi indicates.
Long time listener, first time caller.
In response to increasing prices, there are myriad factors at play: increasing demand for raw commodities from nations undergoing improving industrialization; global population growth; increased purchasing power from residents in rapidly improving nations; increased costs of production; government subsidies; trade imbalances… there are lots of reasons costs are on the rise in the US other than “the FED turned on the printing presses”.
It seems to me you all are whistling thru the grave yard.
Tell me what YOU would do to fix the actual problems in this economy.
Tell me why you talk so much about savings when savings are money removed from the economy and the dollar spent IS the economy. Have you all been living in a faked economy where the money you make comes from others efforts and you never return any of it to productive economic life.
http://zfacts.com/p/461.html
Bud,
Have you read this? http://pragcap.com/resources/understanding-modern-monetary-system
so i see that when you dont agree you just remove my post. i guess your just interested in mutual mastur——-
I never remove posts unless you use bad language or call people names. So, I have no idea what you’re talking about. If you can’t figure out how the internet works then lord help you….you’ve already proven you have zero interest in understanding how the monetary system works….
all i know is my two posts from yesterday are gone and you stated you might have to remove them because i said there were no real spending cuts in the recent congressional action. as far as understnading the monetary syatem, i simply dont agree that the government can continue to print money with no consequences, which as near as i can tell seems to be your position.
Jake,
You really need to make more of an effort to be factual. Your posts are right here:
http://pragcap.com/news-flash-america-avoids-default-crisis-averted/comment-page-1#comment-67359
http://pragcap.com/news-flash-america-avoids-default-crisis-averted/comment-page-1#comment-67181
I am trying very hard to give you the benefit of the doubt and help you understand my position. If you’re not interested in understanding it then I don’t know why you bother commenting or accusing me of things like removing your posts (when in reality you just couldn’t find them).
I have never said the govt can print money without consequences. You clearly haven’t taken the time to read my treatise. I have been VERY clear that govt spending can lead to malinvestment and/or high inflation.
Please Jake. At least make a concerted effort to understand my positions before writing these sorts of comments.
i apologize, i made my comments on a different article.
your treatise, like you invented this nonsense. MMT has been around for a long time. all it is, is socialism in a different disguise. Let us smart people tell all you stupid people how government is the answer to all your problems. we got here by spending money we don’t have and you think answer is even more spending and not only that but spending by the most ineffecient allocator of resources known to man, the government. read milton friedman, inflation is always a result monetary expansion.
Socialism. Money we don’t have. Don’t apologize and call me names in the same sentence. You just make yourself look silly and insincere when you do that. You haven’t even scratched the surface on MMT. I am not going to play your name calling games and get involved in your childish schoolyard fights. Please continue to make comments here such as the ones above. That way, I can use you exactly as I use all the other fearmongerers in this world. As tools to show that what you’re doing is not based on any facts, but is instead based on scary rhetoric, name calling and nothing of substance.
You’re 100% helping my cause and I implore you to keep doing it. I sincerely need detractors like you so that everyone else reading can see which side of the argument they should side with…..