Sunday, February 07, 2010

Partisan Economics

This is not a political post.

I think partisan politics is one of the worst traits of our country.   Now, however, as we continue to see the line between political policy and economic policy blurred, we're encountering the absurdity of partisan economics.  For me, there is an essential truth we must acknowledge before even beginning this conversation:  debt is not partisan.  Debt doesn't care if you're liberal or conservative, democrat or republican.  Debt is mathematics.

I don't agree with everything Karl Denninger writes, nor with his ceaselessly hyperbolic delivery, yet he has been adamant (and correct, in my opinion) about one thing for the last 2 years in his blogging - debt is exponential, and you can't borrow your way out of a debt problem.  The concept that you cannot borrow your way out of a debt problem is an important one (one that I've touched on many times before, and I would have thought, a simple one), but it's even more important in today's fiscal/economic landcscape - we'll get to that in a minute.  Denninger takes issue with two widely read authors this week. First, Nobel Laureate Paul Krugman's NY Times piece titled "Fiscal Scare Tactics."    Krugman writes:

"Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth."

as well as some choice words for Krugman.

I take issue with Krugman's "partisanization" of economics - if I could coin a new word.    Krugman writes:

"True, there is a longer-term budget problem. Even a full economic recovery wouldn’t balance the budget, and it probably wouldn’t even reduce the deficit to a permanently sustainable level. So once the economic crisis is past, the U.S. government will have to increase its revenue and control its costs. And in the long run there’s no way to make the budget math work unless something is done about health care costs.
But there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.
Why, then, all the hysteria? The answer is politics."

No, No, No, No, NO Dr. Krugman - the answer is MATHEMATICS.   By politicizing the issue, Krugman is the one who is shirking the truth.  I would think that a Nobel Prize winner in economics would understand the concept of max-debt, yet Krugman cavalierly compares the current situation to one twenty years ago, under the first President Bush.   Let's go to some more charts!

That's government debt as a percent of GDP.  Again, you don't have to be a Nobel Laureate to see how debt has become a larger portion of our financial world in the last twenty years (the chart shows that the current ratio is DOUBLE what it was under the first President Bush).  Krugman wasn't referring to the Debt/GDP ratio - he was talking about the interest/GDP ratio - but you can't look at the latter without taking into account how much the former has grown - you have to pay back principal too!  I don't know when we will reach "max debt" but I do know what we're closer to that point than we've ever been before, and to simply write off concerns as partisan politicians trying to stonewall Obama's agenda is naive, not accurate (although Conservative critics may indeed be trying to stonewall the Administration),  and partisan in its response.

Robert Reich wrote the other piece which I found mind boggling.    I"ll give you Denninger's take first.  Reich inquires:

"Alright class, here's your assignment: Look at President Obama's budget proposal, spending freeze, jobs bill, stimulus, tax hikes on upper-income individuals, and proposed deficit commission. Also take a look at the fees he wants to impose on the biggest banks, and his proposed regulations of Wall Street. Look at his stalled trade agenda. Now, explain the big picture."

"Ok, I'll take a shot:
$500 billion in newly-embedded STRUCTURAL deficits in concert with rapidly-falling tax revenues = ultimate insolvency of the US Treasury.
Oh wait, you didn't like that answer.  Here's what Reich said:
If you're about to write "more taxes and more spending," you're either not thinking hard enough or you're a Republican running for office this November.
To see the big picture you need to keep your eye on three big things. The first is the extent of government spending needed to offset the continued reluctance of consumers and businesses to spend."

And then Denninger gets to the first of his two essential points:

"It's not reluctance.  It's inability.  That's usually what happens when your general mantra is "I can't be out of money - I still have checks left!" and then try the same trick with your credit card only to have it come back "REALLY DECLINED.""

Reich continues:

"You don't have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging the public sector has to borrow and spend in order to keep the economy moving forward."

Which Denninger sharply and accurately refutes in a few simple sentences which are the key to the entire economy for me:

"I don't have to have an IQ larger than my shoe size to understand that when the private sector has reached it's leverage limit it is not possible to "spur" it to take on more leverage - that is, to borrow and spend that which isn't earned in the present tense. 
All government borrowing and spending does in that case is make the ultimate deleveraging (across the entire economy) WORSE."

Again, I don't think you have to have a PhD in economics to understand that we're in a relatively unfamiliar spot in our economic landscape.  We're out of (or running out of) borrowing power.  Ned Davis Research publishes a chart of consumer debt to GDP:

Yes - I believe consumers have reached their debt limit - but the problem, as the chart I posted further above shows, is that the Government is also closer to reaching ITS debt limit than ever before.  No one knows if or when China will stop financing our economy, but to bet our entire stack on the fact that China has no choice but to continue to buy our debt - since they face a prisoner's dilemma otherwise because they already own massive amounts of it - is the equivalent of fiscal Russian roulette.

A final chart I'll reference is total credit market debt to GDP - it's a combination of the federal and household charts above, along with all other corporate debt (courtesy of Barry Ritholtz).

One more gem from Robert Reich:

"The federal budget deficit is a huge problem, to be sure. But if you want an A in this course you need to distinguish between deficits occurring this year and next when the economy is still trying to climb out of a hole, and deficits five to 10 years from now. If government doesn't spend enough in the short term to get jobs back, those out-year deficits will be even larger because tax revenues will be lower then, and government will be spending more on unemployment benefits."

Reich is actually claiming that if we don't spend more now to "get jobs back,"  then we'll have to spend more later on unemployment benefits.  He's ignoring the fact that the spending we're doing now is much more than the spending we'd be doing on unemployment benefits!  Otherwise, we'd just magically spend to create jobs instead of paying unemployment.  Of course, he's also using the classic Ponzi logic that a debt to be faced in the future is not as big a concern as a debt to be faced today.  I wholly agree with Denninger's comment on this that attempts to spend our way out of this crisis inevitably make the eventual reckoning (deleveraging) worse.

Which brings us back to politics.  One key realization I got from my sit down at the Treasury several months ago was that, although they didn't say this explicitly, the officials at the Treasury had realized how political economic policy was.  They were smart enough to understand that you can't make debt go away by borrowing more, yet they lacked the political will/ability to attempt any other option.    In my opinion, President Obama's biggest failure was his refusal to make the tough choices (which to me means recognizing bad debts, insolvent banks, etc, instead of trying to pretend they don't exist) early on in his presidency .  Obama's gift is his incredible eloquence, and the mandate he had (which would give him a very wide berth in any policy decisions) from the people who were starting to realize just how "up a creek without a paddle" our country's economic direction was heading.  I think he was one of the few presidents in recent memory who had the ability to recognize the bad debts, take the pain, talk the nation through it, and begin the road to recovery.  Instead, he did what almost any other President would have done - tried to avoid the inevitable - but we're quickly realizing that it's unavoidable.  Now, however, it may be too late to change course and make the really hard choices, as the pain involved will be worse, and some support for him has waned.

I can't help but think of the lyrics to the Grateful Dead's Touch of Grey:

"I know the rent is in arrears
The dog has not been fed in years
It's even worse than it appears
but it's all right.

The cow giving kerosene
Kid can't read at seventeen
The words he knows are all obscene
but it's all right"

I don't think we can talk our way out of this recession - I think the remedy calls for drastic, painful action that will result in a lot of losses for a lot of people and corporations.  However, such action would avoid the state we're in now: where our nation, our corporations, and our consumers are virtual debt-zombies, unable to borrow more, and unable to pay back the debts we currently have.  After taking the pain, the spending done by the government would have real "oomph" behind it - and could potentially fuel a legitimate recovery, but it won't be easy.

note: please think carefully before leaving off topic partisan political comments blaming Bush, Obama, Democrats,  Republicans, or Tickle Me Elmo for the current economic problems.   The point is how we FIX the problems, not placing blame for causing them.



oc bear said...

There are procedures for private and corporate debt reduction or elimination. Even for cities and states. I'm not a aware of a way out of sovereign debt for a G7 country. Argentina yes USA no.

Anonymous said...


I'd comment that partisanship is the only thing that saves us from the abyss of tyrannical government.

Massachusetts is the best example. The Liberals have had a strangle hold on this state for years. The Big Dig. The MassPike. The bloated UMass system. All examples of what happens when the two party system breaks down.

We need a "knife fight in a phone booth" in congress. It keeps the Solons from taking our very last penny.


p.s. Reich is a nutter. Thru-n-thru.

Anonymous said...

If you'd care to add a few more to the list of "debt doesn't matter I'll just play partisan games" pundits. You can include serial economist asshat Brad Delong, Scott Grannis the Calafia Beach Pundit, and Don "Cali Corporate Tool" Luskin. It's astonishing to me the things these type of people say. And they all claim to be on "different sides". They will take a political tack on anything before ever daring to admit we are debtoholics and need rehab. Thanks ,KD, I think you've hit the proverbial nailhead on this post.

Anonymous said...

My father and his buddies captured a volcano. A few of them climbed to the top and planted a flag. Some guy named Joe snapped a picture. People liked it.

Americans, after paying their taxes - the top rate was 94% - and sacrificing many of their sons, looked at that picture and raised 310 billion in todays dollars in 6 weeks to help pay for the war. During the entire war, the bond drives raised the equivalent of 3.2 trillion dollars.

Now Americans go apoplectic at thought of paying 39% instead of 35%.

We've become worthless bums.

Anonymous said...

Shouldn't we really be worried about government debt to government revenue instead?

Игры рынка said...

Kid, let me ask you a question.

We all know that personal savings are running higher and we can safely assume that corporate savings are high as well. Then we also know that foreign sector has been saving since ages.

When you and the private sector in aggregate wants to save (i.e. spend less income than earn as measured by GDP) where does it go to?

I give you a hint. It is money (yes, that government issued cash) and government bonds. Nothing else counts as savings because everything else will have a corresponding private sector liability.

Good luck telling scary stories about debt. Government debt is your savings. Stop saving and your government will stop issuing debt

rjs said...

re solutions: i think Dave Merkel outlines the painful choices: Default, Inflation, Higher Taxes — Choose One - (quoting him)
So, what do we do about it?

1) Raise Taxes. I don’t like this idea, because the US Government has entered many areas where it should not be. I would rather see the discretionary government shrink considerably. Also, remember, Social Security and Medicare are not guaranteed. Congress could wipe out all benefits tomorrow, and face a political firestorm. But remember, in the Great Depression, that is just what they did. This is why I don’t insist that rates must head higher. It depends on society as a whole.

Raising taxes has the perverse result of slowing economic growth, which affects future taxes.

2) Inflate the currency. Ugh. Oppress the elderly, who cannot work to make up the difference? Create a new inflation mindset that has all of us focusing on the short-term. Inflationary economies by their nature become more and more short term.

3) Default on obligations. There are several forms of this:

a) Total default: anyone with a Treasury Note is a sucker. Global depression ensues.

b) External default: we do not honor external obligations, but honor internal ones. Global depression ensues, but the US does relatively well.

c) Internal default: what, are you joking? Why do we pay off the losers who lent to us?

Kid Dynamite said...

my Cyrillic friend @ 4:26am: false. the quick contra-example is that the Fed has been buying Treasuries directly. they print money (Digital money) to do this. it's got nothing to do with savings.

EconomicDisconnect said...

great points. It is my opinion that Keynesian thinkers are like the ill behaved kid left alone near the cookie jar; after pumping up deficit spending to almost impossible levels, they look around and do not see any parents watching them and thus are convinced they can keep going. It works until it does not and it will happen overnight.



But What do I Know? said...

Kid, I think you're leaving out one likely possibility here--that the Federal Reserve will continue to monetize Treasuries/Fannie & Fed debt (is there a real difference now?). The deficit can stay structurally high as long as the Fed is willing to put money in the Treasury's account in exchange for debt of some kind--and if, this is the big if, people are willing to keep taking those dollars in exchange for their goods and services.

I know this sounds simplistic, but the problem with running a deficit is not the deficit, but what happens when you are forced to stop running a deficit. This is what makes it political--the real problems occur in the future, and you want to make damn sure that the other guy is on the hook for them. The Republicans (as the party out of power) insist on deficit reduction now because they know it will crash the economy--and if it happens now it will be Obama's fault in the public's mind. Obama (as the party in power) wants to kick the can further down the road.

I'm sure I'm not saying anything new here, but there is now a new twist--the deficit is unsustainable NOW without the Federal Reserve's active support. How long will they continue QE--I know it's supposed to expire but they'll be starting it up again soon enough--or, put another way, what will force them to stop it?

Kid Dynamite said...

bwdik - yes - it's a virtual certainty that we'd "print" more money instead of defaulting on Treasury debt - but that also creates a downward spiral. Do i think we'll go Zimbabwe with hyperinflation? not anytime soon - but one you start debasing your currency by printing money to pay off your debts, the purchasers of your debt (read: CHINA) pull back at an exponential rate also - and the little bathtub drain downward spiral becomes an economy sucking vortex of pain.

Игры рынка said...

Kid, wrong. FED and Treasury are parts of the GOVERNMENT. It is Treasury who legislates money that FED is using.

When FED buys treasuries they do not "print" but change the composition of net financial assets in the economy. This is what is savings cash and government bonds. FED does it every day within OMO to keep interest rates on _money? at target level. What would the FED do if there was no treasuries? Correct, it would create them or pay interest on reserves.

So try again with your scary debt claim.

Игры рынка said...


So do we just live with the deficit?

Answer: yes and be thankful you have it and wish that it was bigger. Jobs and businesses are dependent on the deficit. They always will be unless the American economy can conjure up a radical transformation and become a net exporter of significant size. Then the US government will have to explain to its people why they are net shipping valuable resources elsewhere just to accumulate bits of paper denominated in foreign currencies.

Kid Dynamite said...

i'm not trying to scare anyone. if you think US debt is a good risk/reward right now, please - keep funding our deficit spending. we need some greater fool to fund the scheme or it will collapse. It's mathematics.

as for the other falsehoods you are spewing, Cyrillic Friend - you've clearly read just enough of a bunch of different sources to be incredibly confused about the relationship between Fed/Treasury. You're right about one thing - they are both part of the government - which is BUYING ITS OWN DEBT. that is exactly the problem. it's called "monetization" - also known as printing money.

Look at the balance sheet of the Fed (And its relationship to historic levels). that should tell you all you need to know.

Kid Dynamite said...

there you go - you nailed it:

"Jobs and businesses are dependent on the deficit. They always will be unless the American economy can conjure up a radical transformation and become a net exporter of significant size."

that is the PROBLEM - not the solution... the solution is not to just pump the deficit ponzi scheme until it becomes too large to fund - which it will INEVITABLY - it's mathematically UNAVOIDABLE. It's not scare tactics, it's common sense.

Игры рынка said...

are you telling that US government is revenue constrained?

are you telling that Japan should have lived in hyperinflation during the last 20 years?

US government has deficits only because private sector (domestic as well as foreign) wants to save. And how does they save? The ONLY way for them to save, i.e. spend less then they earn, is to save in the financial assets which has no corresponding private liability.

Can you please reconcile it with ponzi? You want to save and you buy government issued financial asset (cash or bond). Noone is funding your deficits but YOU

The mathematics you refer to applies to you and me because we use money. US government is the issuer of money. It does not finance. It destroy money when it taxes and it issues money when it spends.

Kid Dynamite said...

ok - excellent questions.

1) the US Gov't is ABSOLUTELY revenue constrained. there is a limit to the amount of taxes they can collect, and there is also a limit to the amount of debt they can sell. when these limits come into effect, they do things like SELL DEBT TO THEMSELVES (see: Fed's balance sheet)

2) If you're going to cite Japan as an example of how to solve the economic problems, we really have nothing else to debate here - they are the TEXTBOOK case of what happens when you refuse to acknowledge bad debts and attempt to continue keynsian pumping schemes, but velocity of money goes to zero.

3) here's why it's ponzi: the government cannot pay back its debts out of revenue. fact - right? it can pay back its debts by 1) printing money (we will almost surely see that eventually, we're seeing it now with Fed asset purchases) and 2) selling MORE DEBT - aka, a PONZI SCHEME. it's not US who are funding our deficits - it's CHINA. what happens one day when they decide they wont anymore? end of ponzi scheme. Now, the government is betting all its eggs that won't happen...

Игры рынка said...

re monetization, government debt is broad money. It is almost as good as money in terms of financial system. FED will always buy it when market rates go above target and sell it when market rates go below target rate. Moreover, government debt is riskless and pays interest. It is a term deposit where YOU put your savings. When a bond matures Treasury will credit your bank account like it does with any other spending.

You can not monetize money because it obviously does not make sense.

James said...

The solution to the crisis is the exact opposite of what has been done over the last year.
Leverage is a very reliable indicator of risk and its rising to out of control levels.

Kid Dynamite said...

james - agree.

Cyrillic friend -
you wrote "Moreover, government debt is riskless"

come one - you can't possibly defend that one. it's not even up for debate that it's an outright false claim - many governments have defaulted on their debts, and are even at risk of doing so right now!!! (See: Greece, Portugal).

Still, it's at one of the HEARTS of the problem - the US policy makers think that our debt is riskless, and that the rest of the world thinks it's riskless - but that's not true! We think we can sell and endlessly growing pyramid of ponzi funding to china - what happens when that ends?

Игры рынка said...


how is government operationally constrained by revenue? Is it because they turn off the computer in Treasury which orders FED to transfer money? Or they change its password and then forget it? Did it ever occur to your that in order to tax, government has to spend first? Where will the money come from?

Government is the issuer of money. What does it have to sell or tax to make it revenue constrained? You and me are revenue constrained. Not the government.

Since you agree that FED and Treasury are the GOVERNMENT, what do they sell to each other? Does it make any difference for the private sector?

Government does not have to pay its debt. Its debt is annuity representing private sector savings. Without debt private sector would have to save in CASH. It is what you argue for? In the 21st century?

Игры рынка said...

Sovereign default is POLITICAL. And never economical.

Portugal etc live in gold standard with fixed fx rates and really constrained fiscal policies.

You miss a critical point about how fiat money works. Try again.

Игры рынка said...

Kid, you are verbose in CDS etc. Can central bank sell CDS on itself? What is it does that at 1bps and pocket riskless revenue? What will you say then about default?

What will you say if ECB does that tomorrow for Greece and Portugal, makes it its official policy now and forever? Do you think investors will face default risk?

Please think broader than your private household budget

Kid Dynamite said...

dude - come on. i understand that the US will always be able to avoid defaulting on its debts by printing money to pay back those debts. that's not a solution! it debases the currency and debases all the debt - which makes it impossible to sell MORE debt, and then you have a downward spiral, and your only way of funding becomes simply printing more money.

you seem to be arguing that sovereign nations can cure all their problems with hyperinflation. I strenuously disagree with that assertion. and that's why sovereign default is indeed economical - because nations realize that their other option, hyperinflation, is NOT A GOOD SOLUTION!

James said...

We should just have infinite debt and infinite money printing. Then no one will have to work or worry about anything. We can sit on the beach all day and drink frozen drinks. It wil be a utopia

Игры рынка said...

I never said hyperinflation. Moreover hyperinflation has always been due to complete disruption of supply which developed world is hardly going to face any time soon.

What you call debasing the currency is defined by markets and floating fx rates. Despite running budget deficits ever since Bush 2nd took the office, DXY is still at the same level it was 10 years ago. How have all those deficits debased your currency to date?

Kid Dynamite said...

ok good - this seems like a logical point to end this back and forth, since I need to get on with my day here.

the currency (USD) has NOT yet been totally debased (although its purchasing power is being constantly eroded - again, that's not debatable, it's a fact, and is a direct consequence of ever expanding debt and money supply).

If you're going to make comparisons to how just because things were fine in the past then things must be fine in the future, i urge you to go back and read the post again - and look at the pretty pictures.

IF we continue doing what we're doing, either default or debasement/hyperinflation is inevitable. Math.

Игры рынка said...

Kid, I am not scared by those pictures. What you fail to understand is the purpose government issued money and bonds serve. If private sector wants to save (please read it as spend less then it earns) then GDP falls and then automatic fiscal stabilizers kick in to provide sources of savings for private sector (and support demand or equivalently mitigate private savings).

What those "scary" pictures tell me is only how much savings private sector has. Private sector in Japan has more even more of those. The only problem they have is that they still want to save and not the size of those savings.

What the government should do is not to cut its deficit but to provide incentives for private sector to spend. The lack of spending is the real reason of budget deficits. You can not make private sector save by C4C or house subsidy because it drives private sector further into debt. But you can make private sector to save less for example if you provide social safety nets like medical insurance. Or guaranteed employment. Or whatever else which might make private sector feel safer.

You have to argue against this claim and not refer to scary but rather funny however ultimately senseless pictures.

wcw said...

Not only am I not scared by those pictures, by posting this you just caused your non-poker thinking to fall deeply in my estimation. Rather than add to an already overlong comments thread, though, I'll just add one note:

1946 is on the phone for you. Shall I tell it to hold?

Transor Z said...

government debt is riskless and pays interest.

Market Games,

Thus the declining credit ratings, I guess...

And the Money Multiplier...

And dude, NOBODY is holding up Japan as an exemplar. Maybe you're just smarter than the rest of us.

[Hopefully I got the URL link coding right.]

Игры рынка said...

Transor Z,

Those ratings are rubbish and it is up to the government to forbid this non-sense. (not mentioning Moody's and Japan 10 years ago. Go and check yourself). Sovereign currency issuing government in floating exchange rates has ZERO default probability. Any "default" is possible only due to political will. How on earth can a rating agency assess a political will for this? Even assuming it can hope to be able to do it, the political will to default in the US will be ABSOLUTE ZERO. So good luck buying those CDSs.

Anybody who makes a reference to money multiplier (and FED is the main criminal in this regard) has no idea how banks work. And banks work in a very simple way as a matter of accounting: LOANS -> DEPOSITS, i.e. loans create deposits, as accounting identity (open a bank balance sheet and try to think what happens there with each new loan). If at the end of the day a bank does not have enough reserves it goes out and borrows those. And there you have the FED to manage interest rates and exchange bonds for money and back should the rates diverge from the target.

Finally, if your theory can not explain Japan then you should reconsider its foundation. A theory which fails minimum in one case out of two hundred is not worth the paper it is written on

Anonymous said...


The Denninger/Reich analysis is fundamentally flawed.

Denninger is treating sovereign monetary operations as equivalent to individual savings/debt. Reich is not.

No matter how much you wish it to be so, individual economic activity (debt in this discussion)is not analogous to sovereign monetary concept of debt.

The cyrillic commenter is trying to show you the way here. While economists will argue the fine points of the reasoning, the scope at which the cyrillic commenter is presenting macro economics is generally right.

Maybe a rhetorical question would help? Which party has more power, the country holding USD denominated debt or the owner of the USD printing press?

Please do not assist the deficit fear mongering.

Kid Dynamite said...

WCW - ah - so you're a Keynsian too? question - you said your estimation of my non-poker thinking has fallen - what about your estimation of my poker thinking? and what do you base your estimation on my poker thinking on? just curious... (since I haven't posted detailed poker thinking in years - and back when i used to, my poker thinking was embarrassing compared to my poker thinking now)

Anonymous said...

you are a nit!

Kid Dynamite said...

exactly. i AM a nit

But What do I Know? said...

Mr.Cyrillic doesn't seem to be able to move past the idea that the federal government can run whatever deficits it wants--sure it can, but you run the risk that people won't want those electronic entries you call dollars in exchange for real stuff. . .

Surely a global currency is such a great invention that we should try to keep it, and how will the game continue if one player can create whatever money he wants whenever he wants with no consequences. Who would play Monopoly under those circumstances?

Игры рынка said...

I never said "unlimited money". I only said that when private sector wants to save it is the task of the government to fulfil this desire otherwise the economy is going down.

It is very simple.

So please stop playing on primordial feelings of fear

Kid Dynamite said...

"I only said that when private sector wants to save it is the task of the government to fulfil this desire otherwise the economy is going down."

a better way of saying that is: "if the private sector decides to stop spending, be it out of frugality or because THEY HAVE NO OTHER OPTION because they can no longer spend, the economy will contract. IF the government decides to fill this gap, what they are doing is confiscating the value of these "Savings" by devaluing them."

this is why people who have money do not like debasement of the currency (printing money, never ending debt, etc etc - it's all the same thing) - because it makes their money worthless. on the other hand, people with no money, in a world of perfect economic theory, shouldn't care - they see cost inflation, and HOPEFULLY wage inflation to compensate them for the cost inflation... unless, of course, economic models don't perfectly model the real world (SARCASM alert!)

Transor Z said...

Market Games is doing just that: playing semantic games. The sovereign's infinite ability to increase monetary base is a final exam question in Econ 101 and then should be promptly forgotten as irrelevant in the real world of treasury issues, trade imbalances, and reserve currency. The fact that fiat floats doesn't make relative value irrelevant! Just ask the ECB and Chinese central bank. Lastly, debt-to-GDP, an important component of "rubbish" ratings, semantically is more usefully seen as a measure of a currency's likelihood to hold relative value than "default."

Игры рынка said...

well, if you are of philosophical mind then you can think of past, now and future of the same time. However we are today where we are and normally people think what they should do today to make their life better tomorrow. This is especially true for millions of unemployed Americans with many of those who were probably frugal enough along the way but now still have to suffer. They also keep on asking why but their context is a bit different.

But above all your claim of devaluing is still based on your concept of gold standard which died 40 years ago. You need to wake up and see that Japan still lives in deflation despite the fact that Moodys downgraded them 4 (!) times not so long time ago. This is what happens when the government decides to go against the will of private sector. Right in front of your eyes and you have to be blind to deny it.

But it is up to you. I have only a limited amount of time in my life. If people refuse to understand reality I stop telling about it to them.

Good luck with your deficits cuts!

Игры рынка said...

Transor Z, this is what you get if you read ONLY Mankiw. Unfortunately he is the one who is using semantics. I am using accounting identities.

Good luck with you 101. Gold standard was over 40 years ago

Kieran McCarthy said...

I very much appreciate the tone and substance of this piece. I'm miffed at how brilliant folks such as Krugman and Galbraith can be so dismissive of anyone who expresses concern about unending growth in the federal budget deficit. I have no affinity for the tea party crowd, and I respect Keynes's work, but I feel as if we've reached a point where the short-term utility of stimulus may be outweighed by its long-term drag on growth.

rjs said...

i thought we wanted to imagine a solution to where we are...could we not, through some combination of tax increases and spending cuts (ie, start with iraq & afghanistan)get the ongoing deficits under reasonable control? then, achieving that, set a target inflation rate that would slowly monetize the debt? for instance, a 10% inflation rate would cut your GDP to debt ratio to 1/4 of present ratio within 14 years...thats just an example, not something im advocating; wiser men than i would have to decide the tolerable target...

Ritholtz said...

Debt can be turned into a partisan issue by hardcore idealogues.

You have to snicker at all of the new found deficit hawks. Whenever I hear an elected official discuss debt, I look at their track record: Do they support 1) Unfunded tax cuts 2) Prescription drug entitlements 3) Ear marking goodies for their home district 4) Expansive military spending 5) PAYGO, etc. ?

The ones who have a horrific track record on the above but suddenly discovered -- or forgot about -- deficits, oh, say January 20 of 2009 are deficit partisans . . .

Transor Z said...

Speaking of Mankiw, here's a cute cartoon from his blog that's very apropos for KD's topic.

everson said...


Your Cyrillic friend is pushing MMT (Modern Monetary Theory as espoused by Bill Mitchell on his blog here: )

The main point that he is trying to make but is not able to do so without being combative is that since we (US) are no longer on a gold standard the good ole government can issue money in the form of bank credits. Don't even need a printing press with all of this newfangled computer technology. MMT states that the limit to this is essentially the output gap. They believe that it is not inflationary up until you reach full employment and output/capacity. At that point it would start to be a problem. In practice I would imagine it to be a little bit sooner than that due to inefficiencies in measurement and the like.

I have quite a few concerns with the theory myself, but what do I know as I am not an economist. I have just read up on MMT, Keynesian-ism, and Austrian economics for the past few years.

MMT is nice theory, but I am not convinced it would work in practice. Not aware of much empirical evidence for or against it. (Please point me to some if you know of any!)

Ingolf said...

"Those ratings are rubbish and it is up to the government to forbid this non-sense. (not mentioning Moody's and Japan 10 years ago. Go and check yourself). Sovereign currency issuing government in floating exchange rates has ZERO default probability."

"Forbid this nonsense"? Nice one.

Sure, formal default for a sovereign currency issuing government in a floating exchange rate environment is effectively voluntary. However, nominal and real values are not interchangeable. Most economic actors (including rating agencies, for all their many sins) seem to take at least some account of this stubborn fact.

"Maybe a rhetorical question would help? Which party has more power, the country holding USD denominated debt or the owner of the USD printing press?"

Interesting question. Well, there's no doubt the owner of the printing press can commit hari-kari and in the process inflict very real damage on the country holding its debt. Is that power? Depends on your definition, I suppose.

Anonymous said...

Cyrillic says:

US government has deficits only because private sector (domestic as well as foreign) wants to save. And how does they save? The ONLY way for them to save, i.e. spend less then they earn, is to save in the financial assets which has no corresponding private liability.

The reality is, that this is absurd.

Domestic savings is in the order of hundreds of billions of US$ annually.

The annual deficit is at least an order of magnitude higher then this. Has been so for quite some time.

Government does not have to pay its debt. Its debt is annuity representing private sector savings. Without debt private sector would have to save in CASH.

If only that were true. If only that were even approximately true...


A further problem that Modern Monetary Theory has is quite simple: demography.

With a collapsing birth rate, you cannot dig your way out of the debt hole.

Japan has a serious problem on their hands. They simply will not be able to out-grow their debt with new workers.

Hopefully, here in the US, we'll realize our debt needs to be curtailed before our population begins to shrink.


RN said...

You tool. Krugman has said over and over and over again that SHORT TERM deficits shouldn't be the primary issue, but LONG TERM deficits is another matter.

Geez, this isn't real hard.

You Krugman haters are so far from his intellect that you have to make up stuff he didn't say and attack it.

God help us all.

Игры рынка said...

It looks like everybody here is so blinded by Economics 101 and Mankiw that noone can think in terms of simple accounting cash-flow.

December personal savings rate: 4.8%
Q3 current account deficit: 4.9%
Do not have bloomberg at hand by corporate savings should be running about 3-4%.

All in about 13% of GDP

And now comes the key question. Where do you put these savings?

You have two options:
Option one: zero interst earning cash.
Option two: interest earning government bonds.

Good luck reconciling this with Economics 101 and Mankiw. They have no clue about it. Or even Krugman. Demand creates supply and here you come to government debt.

Игры рынка said...

Here we go again. Undistributed Profits in Q3 were 488 bn or 3.4% GDP

I updated all numbers for Q3:
Personal savings: 4.5%
Foreign savings: 3.3%
Corporate savings: 3.4%
So 4.5 + 3.3 + 3.4 = 11.2%

Kid, this is the math you should refer to and not the senseless junk that Market Ticker (or any rating agency) perpetuates. And this math tells you that at least here Krugman is right - existing deficit is too low by a couple of percentage points.

However, if you entertain yourself more with a view of economy falling apart for the sake of "low" debt to gdp ratio and it is a political consensus then I am happy to live with that (and abroad). But you should understand what consequences such decisions bring along with possible alternatives. What does low mean for debt to GDP? Who set the standard? Did China tell you last time to bring all required docs for the "loan" because your DTI seemed higher than an arbitrary number? There is no low or high debt to gdp from economics 102 (or even 101 for this sake). There is only political will to feed this junk into throats of intellectually paralyzed humans.

rjs said...

here's Obama’s 2011 Budget Proposal: How It’s Spent, an interactive graphic from the nytimes...button on top hides "mandatory sending" which is more than half...looks like we got to start by raising the retirement & medicare eligible age and maybe have some kinda cap on medicare spending...& let the bush tax cuts expire, eliminate most tax deductions, maybe add a surtax or VAT on top to increase the revenue stream...due to overbuilding during the boom & foreclosures, we have 19 million vacant houses; why not auction off 19 milllion green cards to raise billions more, and thus increase the number of younger taxpayers to support aging boomer population in the outgoing years?

Игры рынка said...

wow. Would be interesting to show it to Mankiw and fans of economics 101

Indeed, as the FT reminds us, Japan’s problem is still an excess of savings:

Banks are awash with deposits that they need to place somewhere. For some time yet, the government will not find it hard to secure buyers for JGBs. Japan’s debt problem will be worked out in the family.

Dynamite-in-law, Esq. said...

"Krugman wasn't referring to the Debt/GDP ratio - he was talking about the interest/GDP ratio - but you can't look at the latter without taking into account how much the former has grown - you have to pay back principal too!"

Kid - I'm certainly no economist, but it seems to me that Krugman has a point.

As long as the interest payments are affordable, the government can just keep rolling over the debt indefinitely. The principal really doesn't need to be paid back.

Yes, if the debt level increases then you need to worry about whether the interest rate will become unsustainable, but at any given debt level isn't it ultimately the interest that's important and not the principal?

Kid Dynamite said...

d-i-l esq: what you just described is the definition of a ponzi scheme. continually rolling debt works until, well - until it doesn't! until the day China says they've had enough gorging at the buffet of US Treasuries

Dynamite-in-law, Esq. said...

In a Ponzi scheme you need ever larger inflows to keep the scheme alive. It is unsustainable because the amount of money you need grows geometrically.

If you roll over debt while making the interest payments, your money needs stay constant. It's sustainable as long as you can attract creditors at a steady rate. In other words, you don't need China to take on ever larger amounts of US debt, you just need China (or creditors in the aggregate) to maintain the same level of US debt.

I agree that this is a risk, but it's not a Ponzi-style inevitability.

Kid Dynamite said...

dil-esq: by any metric, our debt funding needs are increasing. scary charts aside.

as i illustrated in the post: Krugman is being deceptive when he says the interest rate / gdp ratio is the same as 20 years ago, because our amount of ponzi funding is now DOUBLE what it was 20 years ago - and rising. we need twice as many chinese/japanese rubes to suck it all up... and GROWING!

Игры рынка said...

Government does NOT fund anything. It credits and debits accounts of the private banking system. This process creates and destroys money.

Interest paid on bonds is another form of government stimulus of the economy. Full point.

When economy needs less stimulus (approaching capacity) then stimulus is withdrawn and deficits reduced. Full point and problem solved.

Kid Dynamite said...

market games - put down the textbook and stop with the semantics. your opinion is well established in this comment thread, and your repeated assertions are not adding anything.

when the government institutes cash for clunkers and gives people $3k toward the purchase of a new car - they are FUNDING that purchase. Demand increases until the subsidy disappears, at which point demand decreases.

when the government gives homebuyers a tax credit to buy homes, they are FUNDING that purchase - and when that subsidy ends, the demand falls.

when the government pays companies to hire people, they are funding that new employee - and when the subsidy for that employee ends, the economics no longer work.

please direct any future comments/claims to the real world - not semantics about money creation.

Игры рынка said...

It is not me it is you who is using semantics here.

You said:
"by any metric, our debt funding needs are increasing."

I said:
"Government does NOT fund anything"

You said:
when the government institutes cash for clunkers and gives people $3k toward the purchase of a new car - they are FUNDING that purchase

I quote:
"government ... gives"

Please put your text book away and start thinking.

Anyways, my last comment here. No worries. You should be better arguing for GS and CDS than monetary matters

Kid Dynamite said...

market games - i don't want you to stop commenting here, just to stop commenting on this thread. we have reached the point where we are adding nothing to the conversation

Игры рынка said...

I think if you spend 20 min of your time here

you will not regard it as wasted and it will help you answer some basic questions. And then ask better and proper ones

rjs said...

chris martenson has a new post on the deficit, just made public: The Emperor Has No Clothes

fresno dan said...

borrowing is income, debt is wealth. Most people, and most societies have recognized the above to fatuous.

Our cyrillic friend's idea of debt could be improved with a thought experiment. He goes to work, and expects to be paid 1K for the week. If his boss "defaulted" on the cyrillic's wages (debt), cyrillic's income is reduced. If cyrillic's boss printed an IOU, it wouldn't do cyrillic much good to actually buy things. Printing something and saying it is worth something are two different things. Indeed, taken cyrillic's arguement to its logical conclusion, why collect taxes at all - just have the treasury issue bonds and the Fed can buy all of them.

Money is a "value" substitute. It makes trading goods and time (labor) easier. And although it can be created out of thin air for a while, at some point it must equilibrate between its nominal value and its true worth. And like a single flake that starts an avalanche, a snow covered mountain looks peaceful until the overhang of snow collapses.

Anonymous said...

I agree that the Ponzi finance bubble must be deflated , but it takes time if you don't want a real depression.

The second chart is the important one : total credit mkt debt /GDP. I'd like to see a more granular look over the past 2 years as to how that figure has changed. We want to work down from the peak over time. As long as private sector deleveraging exceeds gov't releveraging , we're headed in the right direction : downward on the total debt/gdp curve.

Japan was headed down on the curve as well , until the GFC.

As a group , the advanced economies need to pursue the same strategy : delever to bring total credit mkt debt/gdp down steadily , but not abruptly. Gov't debt/gdp will have to rise for most of those countries , but if it's more than offset by declining private debt/ gdp , the result will be the least-worse outcome , out of many -- all bad -- possible oucomes. Turn off the gov't spigots too soon and a bigger crash will follow , inevitably.

The sudden focus on gov't debt/gdp misses the bigger picture.

Anonymous said...


I should have said : " The LAST chart is the most important one "

Anonymous said...

Kid, what do you mean @8:00 when you say "the fed has been buying treasuries directly"?

boatman said...

@ anonymous:

kid at 8:00 said the fed was buying treasuries......yes they are.
we are printing money and buying our OWN debt with is called monetization of debt.

if you look at treasury auction info this purchase is in the "misc. other buyers" catagory.HA...they have a way with words

china is backing down buying.

the MMT'ers like cyrillic believe there is no harm in this.

and that gold is going up WITH the dollar out of stupidity.

i say i never said people were smart, esp. when scared.

as u can't land a 747 on a driveway, u can't pull QE & monetization out at the right time cause you don't know when til its over, least its never been done. inflation is on the way.period.