The Meme that Refuses to Die: Government Debt Must Be Paid Back
I’m stealing this headline directly from Sandwichman. He sez:
No it doesn’t. It almost never is. To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt. But don’t take it from me, look at the record.
Here’s a longer-term view of nominal debt, zoomed in on successive times slices so you can see the changes:
Do you notice our progenitors’ great-great-grandchildren (us) paying off our forebears’ debts? Yeah, neither did I. (It did happen once, and the result was economic catastrophe. Every depression in our nation’s history was preceded by a big decline in nominal Federal debt.)
Here’s the U.K.:
David Graeber, from Debt: The First 5,000 Years:
The reader will recall that the Bank of England was created when a consortium of forty London and Edinburgh merchants — mostly already creditors to the crown — offered King William III a £1.2 million loan to help finance his war against France.
To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist.
That loan was issued 317 years ago — in 1694.
Governments that issue their own money don’t have to pay off their debts. They actually can’t. In fact, they issue money — the money that’s necessary for a growing economy to operate — by deficit spending.
Private borrowers (and non-sovereign-currency states like Greece and Alabama) do have to pay off their debts (or default). That’s why the level of private debt, not sovereign debt, is the big management problem — a problem that neoclassical economics has not tackled, does not even have the theoretical apparatus to tackle.
Yes, of course: government debt and interest payments as a percentage of GDP are important issues. I’ll hand it back to Sandwichman:
The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it. The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates. If you want to show your solicitude for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.
Today’s creditors will hate you. But your grandchildren will love you.
Update (thanks to Buffpilot for finding holes): A more precise explanation of why a sovereign-currency issuer might “have” to pay back their debt: if they have committed to redeem their money for something else. For instance Argentina (dollar-denominated debt) and whole host of others who were on a gold standard, had promised to give gold in return for their money. If they can’t or won’t do so, that’s a default on their promise. The U.S. and the U.K. (among others) do not face that situation.
Cross-posted at Asymptosis
Steve,
So basically you agree with Reagan that the debt doesn’t matter? I’m fascinated that you would say that after the somewhat very left wing initial posts.
BTW, unless the UK gov defaulted at some time (or executed its lenders – a somewhat common occurrance at times back then), the original 1.2M pound loan was repayed long ago. Just the UK gov just rolled it over into the next load of debt. This is basically the same as my cashing in some savings bonds I got as a kid. That debt was repayed, but the gov just issued more bonds to cover my redemption with interest. SS is another obvious example with the trust fund. The money is paid back and simultaneously new debt is issued to someone else.
Countries have defaulted/devauled on debt, some multiple times in relatively recent history, and stifed their creditors. Even ones with their own money – look at Argentina as an example. I assume you are not saying it couldn’t happen in the US? Or is it different this time?
From Wikipedia – list of just Europeon defualts/devaulations for the past 700 years (probably not a total list but it gives the flavor). Search “Sovereign default’. Its actually quite a list…
Austria-Hungary (1796, 1802, 1805, 1811, 1816, 1868)
Austria (1938, 1940, 1945[16])Bulgaria (1990)Croatia (1993–1996)[16]Denmark (1813)[16] (see Danish state bankruptcy of 1813)England (1340, 1472, 1596)France (1558, 1624, 1648, 1661, 1701, 1715, 1770, 1788, 1812)Germany (1932, 1939, 1948[16]) Hesse (1814)Prussia (1683, 1807, 1813)Schleswig-Holstein (1850)Westphalia (1812)Greece (1826, 1843, 1860, 1893, 1932)Hungary (1932, 1941)The Netherlands (1814)Poland (1936, 1940, 1981)Portugal (1560, 1828, 1837, 1841, 1845, 1852, 1890)Romania (1933, 1982, 1986)Russia (1839, 1885, 1918, 1947,[16] 1957,[16] 1991, 1998)Spain (1557, 1575, 1596, 1607, 1627, 1647, 1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939[16])Sweden (1812)Turkey (1876, 1915, 1931, 1940, 1978, 1982)Ukraine (1998–2000)
buff
two questions
one, i don’t think steve said “deficits don’t matter.” he said “it’s not necessary to repay the debt”
these are logically distinguishable,if by no other means, by the size and rate of debt accumulation, or as steve says… a combination of growth, inflation, and low interest…
two, i am not sure… someone smarter than me needs to explain if i am wrong… but the difference between “not paying” and “rolling over” or “borrowing from someone else to pay the original loan” makes no difference to the borrower.
i have this argument all the time with folks who somehow think that “interest on interest” is somehow different from interest on principle… or chuck blahous who thinks the interest owed to SS is “the government subsidizing SS.”
frankly, i think blahous can’t be that stupid, so i think he is lying.
but the point i am trying to make to you, is that it is important not to jump to conclusions that are not really justified or even on-point.
Sorry about the formatting at the end. It looked right when I hit post.
And I do note that the UK actually did default on her debt, so yes they didn’t repay the loan – they just wrote it off and stiffed the creditors of thier money. So that loan made in 1694 is long gone either way…but its not in existance today nor did it last 317 years. Basically it lasted, even using your definitions, until 1749. Basically 53 years. (The War of Austrian Succession ended in 1748 – so it looks like the crown just hit the reset button to get out of the war debt).
So basically the debt gets cleared somehow. But its different this time, right?
Islam will change
“So basically you agree with Reagan that the debt doesn’t matter? I’m fascinated that you would say that after the somewhat very left wing initial posts.” Buffpilot
I’m perplexed at your suggestion that Roth’s position on public debt, which may hold some agreement with a Reagan position, is contrary to a “left wing” ideology. I don’t know Steve’s ideological perssuasion, but I I do lnow that it is the right wing of the government, be they Dems or Repubs, that is crying the loudest of the deficit. It may very well be a canard aimed at the reduction of government serivces to its citizens, but it is still right wing mantra.
coberly,
It makes a difference to the lender – the guy who made the loan got repaid. Just like the SS Trust fund is getting repaid with interest with loans it made to the general fund. The idea that there is still a 317 year old debt on the books is ludicrous. And as I pointed out at 4:55 it was wiped out long ago.
As for the rest – how else to you take – the debt never has to be repaid???? How about the debt must be serviced….
Islam will change
Jack,
Its been a staple at AB that the Dems are the party of fiscal restraint and the numerous times Reagan’s comment has been met with derision is uncouuntable. This doesn’t fit in the meme at all.
But yes, borrowing 40% of our operating budget, each year, can go on forever! This time it really is different.
Islam will change
Coberly:
“So basically you agree with Reagan that the debt doesn’t matter?”
Now let’s get this right:
*Cheney* said “Reagan proved that deficits don’t matter.”
And that was quite decidedly *not* an economic, but a political statement.
It was utterly accurate and utterly craven.
He was saying that voters don’t give a shit about deficits (though they like to pretend that they do because it makes them feel virtuous and holier than thou).
When they walk into the voting booth, their virtue magically disappears. All they care about is promises to cut their taxes.
Voila: the genius of the Reaganomics Political Strategy — the sole basis of Republican electoral successes over the last three decades, based on one thing, the world’s oldest political pander: “I’ll cut your taxes!”
“the original 1.2M pound loan was repayed long ago. … The money is paid back and simultaneously new debt is issued to someone else. “
Yes which comes to the same thing vis-a-vis the government’s total debt.
“Argentina as an example”
Argentina’s debt was denominated in dollars.
“devaulations”
Devaluation of the debt through growth, inflation, and low interest rates is exactly what I propose.
“How about the debt must be serviced…. “
As long as real growth (inflation plus nominal growth) exceeds interest rates, that eventually disappears.
I was thinking of writing this post myself. But you did it better than the way I was going to write it.
Buff:
First, my long response was to you not Dale. Sorry.
Next, in response to that long iist of defaults, I added an update:
Update (thanks to Buffpilot for finding holes): A more precise explanation of why a sovereign-currency issuer might “have” to pay back their debt: if they have committed to redeem their money for something else. For instance Argentina (dollar-denominated debt) and whole host of others who were on a gold standard, had promised to give gold in return for their money. If they can’t or won’t do so, that’s a default on their promise. The U.S. and the U.K. (among others) do not face that situation.
‘It was utterly accurate and utterly craven.’ Steve Roth
This is the kind of insight that needs more frequent enunciation and publication. I like Steve already.
i agree that it makes a difference to the lender. i assume steve was saying “doesn’t have to be repaid” from the point of view of the government which just borrows from someone else to repay the first lender.
and as steve says in his reply to you here, servicing the debt eventually “repays” it… from the point of view of the lender… with money that appears “as if by magic” from growth in the economy plus inflation.
buff
i don’t know the history, but i would say, sadly, the sovereign can always stiff the citizens. and foreign lenders too. but that’s a bit dangerous because then it gets hard to find lenders.
i think you know this, but it really supports steves point, though not quite the point he is trying to make which is valid even without the default.
buff
i think it was cheney, not Reagan… but then Reagan might have said it too, when i wasn’t listening.
in any case… the details still matter. 40% can’t go on forever… in my opinion, but it can happen for a while and not lead to any serious consequences.
thing about borrowing is it’s only money. as long as we retain the ability to make things that we need, the money is simply a nice story. do you seriously imagine that if mr rich persons don’t get paid back that it hurts either them or anyone else…?
ooh, i shouldn’t have said that. now you will call me a communist or worse. my only point is that the person who lent the money wasn’t using it. and much of the time if he doesn’t see it again he won’t be any worse off. i’d say this “logic” does not apply to pension funds… but we have seen those defaulted and no one cries real tears… except of course the old folks who were counting on them.
but they can always be taken care of out of … well, we have ways… as long as we continue to be able to produce goods and services.
and the fact that we are NOT keeping out ability to do that is a whole nuther problem.
Steve
very important you learn to tell the difference between “coberly” and “buffpilot.”
Steve,
So just let me get this correct. Basically you are saying that the debt doesn’t matter. Correct?
We can borrow/print to our hearts content.
You really beleive that?
Wow.
Islam will change
Steve,
Why do the US and UK not face this? Becuase they can just print 1,000,000 dollar/pound notes at their whim and hand them over? Basically the have promised to repay in their currency and can do so even if the currency is worthless. So in that respect you don’t have to worry about the debt becuase you can always ‘pay.’
I wonder how the Crown’s creditors felt when the UK devaulued its currency by 25% in (I beleive) 1932? I’m starting to beleive Greenspan was correct in his statement that SS checks would always go out but he couldn’t gareentee how much they would buy….
Sorry about the wrong quote, but its nice to see a Dem agree with Cheney on something….bi-partisanship at its finest.
Islam will change
Steve,
Actually if you believe the debt doesn’t matter, why should you care what the tax rate is? Why not cut it?
You can always ‘pay’ it back. Sounds like the Rs are onto something.
Islam will change
buff
even with high inflation greenspan would have been wrong. SS checks are wage indexed, so inflation is finessed. that is one of the beauties of SS.
buff
please pay attention. he didn’t say the debt doesn’t matter. cheney did. i said “the debt doesn’thave to be repaid…: given the right combination of growth, inflation, and interest rates.
it is absolutely no fun talking to people who don’t even hear when you have answered. disagreement is fine. pointless repetition is not.
buff
get a grip. you are repeating yourself.
and you haven’t heard what “they” said.
and at the risk of repeating myself… again.
the debt gets repaid to the lender. generally in time before inflation has done it more damage than the lender had some reason to anticipate when he made the loan.
what doesn’t get “repaid” is the total amount owed by the borrower… if the borrower is a sovereign nation that is immortal. the debt gets rolled over or reborrowed and as long as the interest payments remain more or less constant with respect the whole economy (and tax receipts) it does no harm… at least no more harm than the interest you agree to pay when you buy a house for example… knowing that you could have used the money elsewhere but decided that the value of the house was worth the price and the value of the loan was worth the “interest.”
i don’t know how far this can be pushed… but in general its a kind of brain damage or dishonesty that gets people to screaming about “the deficit”,,, they want you to think it’s as if your husband or wife was out there charging ten times as much as you could afford to pay for drink, sportscars, and fancy clothes…
and it isn’t like that at all. very much.
coberly,
I have paid close attention. This statement from the original post is very clear:
“Governments that issue their own money don’t have to pay off their debts”
You seem to be missing the point. And at 5:42 Steve once again agreeded with Cheney’s assessment that Cheney was “utterly correct.”
Come back when you can read.
Islam will change
coberly,
And one of the beauties of SS was that it was self-funding. Obama’s actions with the current SS with-holding throws some dirt on that idea. I’ll take Greenspan over you guys any day – even if I do think his leadership of the Fed was the root cause of most of the current downturn.
BTW – Let Steve defend his own statements. You are obviously having a bad day at reading comprehension.
Islam will change
buff
i am having a bad day at reading your mind.
as far as i know greenspan did not know that obama and friends were going to throw dirt on the idea that SS was self funding. therefore i assume he was either ignorant of the fact that SS payments are indexed to wages…or that the tax base grows with inflation .. or he was lying.
in your case i don’t assume that you know what you are talking about because you keep saying the same thing in spite of having been answered.
buff
unlike you i read all the words.
governments don’t have to pay OFF their debts. they can roll them over… as long as they don’t get too far ahead of their income which increases with growth and inflation. once you can understand that you will be able to read what Steve said.
he also said the Cheney was “correct” “deficits don’t matter.” and clarified that with “politically.”
yes, i understand it is hard for you to read whole sentences and paragraphs and keep track of all the twists and turns in meaning, when it’s so much simpler to just keep saying the same thing over and over no matter how hard someone tries to explain to you the subtle but critical differences.
Buff:
“Greenspan was correct in his statement that SS checks would always go out but he couldn’t gareentee how much they would buy….”
Yes. He was.
First, understand: fed govt deficit spending *is* money printing. It’s how money is created. It has been created in unprecedently vast quantities over the last three decades.
And that money-printing “binge” has been accompanied by the longest period of low and steady inflation in history — the so-called “great moderation.”
All culminating in 1. recent years’ historically high government deficits and 2. historically low inflation, with the market (TIPS-to-treasury spreads) projecting that low inflation to continue for years or decades.
What story do you tell to explain those facts?
“its nice to see a Dem agree with Cheney on something….bi-partisanship at its finest.”
Me, disagree with Dick Cheney on how to manipulate the public using lies, deceit, misrepresentation, blatant self-contradiction, and utterly shameless rhetorical flip-flopping?
I’d be a fool to do that.
But I don’t know that “bi-partisan” is exactly what’s happening. Maybe you missed the word “craven”?
Coberly:
“very important you learn to tell the difference between “coberly” and “buffpilot.” “
Roger that.
Buff:
“why should you care what the tax rate is? Why not cut it? You can always ‘pay’ it back.”
If you go with the strong form of MMT thinking, you’re right. Government doesn’t need to tax in order to spend. It can simply deposit new dollars into people’s/businesses’ bank accounts.
Taxation, in this thinking, just serves to destroy money, preventing inflation. It’s not necessary or even related to spending. (Choices of taxation methods/mixes, of course will inevitably constitute “social engineering” — all tax mixes do — so will be dependent on political agreements.)
Pretty intersting thinking, in my book. Though I can’t see how this type of “functional finance” to manage inflation and unemployment could really work in the discretionary hands of feckless lawmakers. Need to implement it through some kind of algorithmic, automatic stabilizers. (Perhaps with continued discretionary tweaking by the Fed or similar?)
buff:
“Let Steve defend his own statements.”
Hey I’ll take all the help I can get! (Even more in helping me understand than in defending me.)
steve
since “money” is just a way (a pretty good way) to regulate distribution of resources, it is hard to see what you’d gain by replacing taxes with “inflation.” clever “idea” though it be.
Debt matters if it is going to waste like the F-35, C-17, KC 46A, European Phased Adaptive (emulation of the Maginot Line paid by the US taxpayer) etc…………
Annual deficits to GDP should decline by 3% just from cutting waste in the war profiteering sector.
ilsm is on the case
The creditor class (1%) does not seem to think the SSTF should ever get any cash in form of interest or retiring the special treasuries.
The victorious allies after WW I expect the US bankers to write off a lot of their war debts to US who lent them to sell them artillry and shells, which got the Lusitania sunk……………..
The allies saw Versailles reparations as profit.
Look what it got Paris in 1940.
buff,
Debt matters if it is going to waste like the F-35, C-17, KC 46A, European Phased Adaptive (Stars Wars emulation of the Maginot Line paid by the US taxpayer) etc…………
Annual deficits to GDP should decline by 3% just from cutting waste in the war profiteering sector.
ilsm is on the case
buff,
Thought exercise………………….
Why was Greenspan “concerned” with the Clinton surpluses?
I have some ideas but you can lead.
ilsm will not change
Hmmm, all this talk about government debt and the issuing of something called money to pay that debt got me to thinking though not to an answer to any question. So I pull out of my pocket Jack’s portable wealth, the green paper we all call money. It’s used to pay debt I say to myself. I know because I read it on the internet and other people and organizations will accept some of it and tell me that I don’t owe them as much money afterwards. I guess its true. Then I take a more careful look at my money while wondering why it has such an extraordinary characteristic of being able to satisfy debt. I look closely at the lovely engraving and the picture of some long dead historical figure. To my utter amazment and concern I see and read the few words written on the paper called money. The word money does not appear any place on the paper called money. So how do I know that it is what we call it? People treat it as what they call money. If I’m told, “Give me some money,” and I give over the pieces of paper that I call money, but don’t have that word writtent any where on the paper, it is still accepted and acknowledged that I have correctly complied with the demand for money. That is truly strange. I keep reading (there aren’t that many words, but I have to think a lot about the words that aren’t there) and come across the words Federal Reserve Note as well as The United States of America. In much smaller print, as though the printer of the “money” were hopeful they won’t be seen, I see the words, “This note is legal tender for all debts, public and private.” Ah ha!!! It isn’t money. It is something called “legal tender,” and it is for the purpose of paying debts of all types. Who says so, I think to myself? The Note is signed by both the Treasurer of the United States and the Secretary of the Treasury, but I keep in mind that it is inscribed, Federal Reserve Note, and the United States of America is the only entity described that I have any faith in. True that Andrew Jackson’s picture is displayed, but I doubt seriously he is the likely payee. So I’m really confused at this point because my money has nothing of value backing it up. Nothing other than all of our mutual agreement that it somethiing called “legal tender” and I can tender these Notes as payment of my debts. Hmm, but they are Notes, Federal Reserve Notes. Just so many I.O.U.s as I recall. This is really getting circular. I pay debt with other debt that is given over to me to satisfy someone’s debt to me. So when do I get some money and how do we reduce the debt?
Jack:
Alll money is credit. And the only way to store money is to lend it. Weird stuff, money…
Steve
That is precisely what my comment is intended to emphasize. Money is no more than an agreement between players in all economic games to accept each others’ promise to pay. Even when I give you cash you have nothing more than someone else’s agreement to honor the debt inscribed on that cash. Granted that what we call cash is Uncle Sam’s agreement to extend to you yet more credit. Is that cash any more really money than are the Trust Fund Treasury Notes? Not legally.
ilsm, you have the idea…not only do we not have to pay back our debt, but the financial system locks up if we do…
the problem is that “paying back our debt” cant be done yet, at least that’s what george w found out…it became clear that if clinton surpluses continued, the financial system would soon experience a dearth of safe assets & would freeze up; so his tax cuts were initiated in order to keep levels of AAA assets high enough for the markets to operate…
short term US government debt has become, at least in part, the worlds money supply; a million dollar Treasury bill is used as money by the international banking system or by a sovereign wealth fund in the same sense that you use a ten dollar bill in your wallet…thus, a contraction of the supply of the reserve currency (our treasury debt) would have a negative impact on the world economy in the same manner that a contraction in the domestic money supply would impact our nation’s economy… there’s a good new post on this is by david beckworth (excerpting)Why the Global Shortage of Safe Assets Matters – One of the key problems facing the world economy right now is a shortage of assets that investors would feel comfortable using as a store of value. There is both a structural and cyclical dimension to this shortage of safe asset problem, with the latter being particularly important now given the recent spate of negative economic shocks to the global economy. These shocks have elevated the demand for safe assets and, as David Andolfatto argues, is probably the key reason why we see such low yields on U.S. treasuries. Of course, these same shocks have also destroyed many of the once-safe assets (e.g. European sovereign bonds) adding further strain to this asset-shortage problem. This shrinking stock of safe assets can seen in the figure below created by Credit Suisse (ht FT Alphaville): This figure shows that if one does not count French bonds as safe assets (a reasonable assumption), then about half of the safe assets disappeared by 2011. That is a tremendous drop and, as I see it, matters for two reasons. The first reason is that many of these safe assets serve as transaction assets and thus either back or act as a medium of exchange. AAA-rated MBS or sovereigns have served as collateral for repurchase agreements, the equivalent of a deposit account for the shadow banking system. The second reason the assets shortage matters is that it creates a Triffin dilemma for the producers of safe assets, which says that a […]
the only way to store money is to lend it.
brilliant. ( i thought i was the only one who had noticed that.)
rjs:
Great comment. You’ve sent me down multiple rabbit holes, notably Beckworth (who I follow, but I hadn’t seen this post) and your assorted blogs.
This related to a developing notion of mine: the stock of “money” consists of the sum total of non-decaying, non-consumable things that can be traded for currency. (Or at least a useful way to think about money, maybe not a hard definition.) Can’t all be converted at once, by everybody, of course, but… Puzzling about the net vs gross issues in this view.
Steve,
I’m trying to get a grip on some of your statements. They do not seem consistent from my understanding about economics I’ve read and that I’ve gotten from Mike (& others – Bruce!) over the years here. (Mike and I disagree mostly with the interpretation of the data) Also you seem to be in conflict with a lot of what I’ve read on historical defaults. So to summarize your statements
1) Cheney was correct, Debt’s don’t matter for countries that can print their own money or a smaller subset, are the world’s reserve currency. (The fact that Cheney was a ruthless politician is not relevant to the economic statement) (Main post and 7:37)
2) Taxes are basically a way to control inflation. They can be set to anything you want or zero. (1:16)
3) Greenspan was correct that he could guarantee the SS checks not what they would buy. (1:04)
4) The SS trust fund is basically meaningless since it’s just an accounting method for political use since the money to cover SS checks comes from taxes (either payroll or from the general fund). (later post from today 12/21)
5) The US and UK cannot default (main post addendum) because they can just print to cover the debt as required.
Do I have it all correct so far?
So why do you care about the level of taxation? We can just print money to cover our debts including SS.
Right now inflation is almost negative, probably as low as it’s ever been in my lifetime. Why not cut taxes by 50% across the board and just print to cover the difference. Everyone is saying we need more inflation and since taxes are just a way to control inflation (“money destruction”) that would seem to be a workable solution to our economic woes….
Islam will change
Steve,
Seperately from above. You never answered my question. In 1932 the UK devauled its money by 25%. How do you think its creditors and citizens felt about seeing there net worth cut by a quarter at the whim of the government?
I’ll be honest, after further reading of your replies I see where the gold-bugs are coming from, even if I think they are nuts.
Islam will change
“How do you think its creditors and citizens felt about seeing there net worth cut by a quarter at the whim of the government?”
The value of the money is only relevant if the value of all goods and services is independent of that value. You don’t address the issue of the result on goods and services following the devaluation. If a house is worth !00,000 old Pounds and 75,000 new pounds what difference does the devaluation make to the holder of the money? The value of money is a conceptual relationship between property and services and our mutual understanding and agreement concerning payment for same.
Jack –
But the prices didn’t drop by 25%…..they lost 25% of the value of the money owed to them (or stored under a mattress).
Islam will change
steve, another meme that refuses to die & i find i have to push back against often is the comparison of government debt to household debt, as if they were offspring of the same beast…i’m sure that misunderstanding is behind a lot of the deficit hysteria among policy makers; hell, even obama has used that analogy…
what i’m thinking is that we need a different word than debt to identify the issuance of government bonds, in order to begin to change the dialog, because the word debt itself is already loaded with too many unfortunate connotations…i dont know what; but if you have a suggestion, i’ll incorporate it into my lexicon…
“….we need a different word than debt…”
Why not call it legal tender. That way we can say that the government is denominating its borrowing in cash money. The words money, cash or debt need not appear on the certificate. It could have the term U.S. Federal Reserve Note and a small description that it represents a value received from the purchaser of the note. Something like buying cash money instead of Treasury Bills. Another advantage to such bills is that they don’t usually accrue interest costs. I have a bunch of similar Reserve Notes that no one has paid any interest on since I got them. I’ve got to give my notes, my legal tender that is, to someone else in order to earn interest.
The author is right. Sovereign debt rarely gets paid off, it’s just rolled over.
There is one huge exception to this rule. Social Security (and the other gvmt pensions programs).
These funds MUST BE PAID BACK. At least they have to be paid back if SS is to remain solvent.
The US Debt to Public can’t be paid back. Not in 50 years. But SS must get paid, and that is the problem.
Running down the Trust Fund would have the same consequences at paying down the other Federal Debt.
Possibly someone should point this out to Coberly and all the other SS defenders.
Coberly:
“the only way to store money is to lend it.
brilliant. ( i thought i was the only one who had noticed that.)”
Hey that’s straight out of Randall Wray.
“what we call cash is Uncle Sam’s agreement to extend to you yet more credit”
I think of it differently, though I’m still pondering. Strong-form MMT:
When we hold cash we’re simply refraining from using it to pay down our tax liability to the government. So in a sense we’re “lending” it to them.
I said money was weird stuff… 😉
Buff:
I hesitate to reply when I have to first correct misrepresentations of my statements, some of which I’ve already corrected. But I like that you took the time to summarize (albeit inaccurately):
“1) Cheney was correct, Debt’s don’t matterfor countries that can print their own money or a smaller subset, are the world’s reserve currency. (The fact that Cheney was a ruthless politician is not relevant to the economic statement) “
1. It was not an economic statement. (7:37) 2. I didn’t say it.
“2) Taxes are basically a way to control inflation. They can be set to anything you want or zero. (1:16)”
If A) is true then B) is false, because zero taxes would result in inflation.
“3) Greenspan was correct that he could guarantee the SS checks not what they would buy. (1:04)”
Correct.
“4) The SS trust fund is basically meaningless since it’s just an accounting method for political use since the money to cover SS checks comes from taxes (either payroll or from the general fund). (later post from today 12/21)”
“*arithmetically* meaningless”
“5) The US and UK cannot default (main post addendum) because they can just print to cover the debt as required.”
I never said they can’t default. I implied that they never would.
“Do I have it all correct so far?”
So: no.
“So why do you care about the level of taxation? We can just print money to cover our debts including SS.”
In one sense I don’t. Long-term we should be taxing significantly more, to cover the services that tea-partiers insist on receiving (this necessity because of 3, below).
The problem is (at least) three-fold: 1) we’ve under-taxed for three decades*, 2) tax *increases* (not levels) have negative short-term effects on economic activity, and 3) the operations of our monetary system are still premised on […]
Buff:
Didn’t reply because I’m not intimate with the particulars of this, wasn’t inclined to educate myself at the moment. Off the top of my head, sort of guessing: didn’t the U.K. devalue “in terms of gold”? Isn’t that what pretty much everyone did as part of getting out of the depression? I’ve read multiple articles with accompanying data and graphics suggesting that the countries that gold-devalued early got out of the depression early, while those who did so later, came out later.
Again, this is all from memory. I’ve never studied this issue carefully.
Have you? Please: educate me! Give me the details, and the big-picture context. Keen to know.
P.S. How did they “feel”? I have no idea what the import of that question is, in terms of economic thinking and understanding.
Bruce:
SS Trustees say that the 75-year shortfall in SS is .6% of projected GDP.
Given that the U.S. currently taxes about more than 10% less than the EU average (and that EU GDP/cap has grown at the same rate as the US for decades), an extra .6% of GDP to pay for SS is totally doable.
In fact — coincidence — if we Scrapped the Cap on SS contributions (so all earned income is subject), it would deliver … wait for it … .6% of GDP, making SS solvent *on a cash-flow basis* beyond the foreseeable future (trustees’ 75-year projections).
Now I’m kind of tepid about this solution, because it only makes a regressive and inefficient tax (only on earned income) somewhat less regressive, while *increasing* the proportion of total taxes coming from that regressive tax.
I’d much prefer increasing more efficient taxes — pigovians in particular, land taxes, and progressive taxes in general — and using that money to pay for people’s retirement.
But that would require acknowledging that SS is a transfer program. The trust-fund idea kind of handcuffs us progressives that way.
Excuse the typos please.
So, having killed the “SS is going to strangle us” meme, the real problem:
Rising health-care costs — *what providers charge.*
If they were rising at the same rate as inflation, we wouldn’t have a long-term budget problem.
Anybody who’s not suggesting realistic solutions that the problem — solutions that have a proven track-record of working *somewhere* in this world — is not making a useful contribution to the discussion.
Steve,
The summary was to try to get the political part out of the economic part as best as possible. Yes, they are intertwined, but I was trying to break it out. I’ll try again.
1) Do you believe Fed Gov. debt’s don’t matter? Everything you’ve posted gives me that conclusion, but I could be wildly misinterpreting what your saying.
2) Basically you’ve said that taxation can be set anywhere as long as you accept the resulting inflation. Taxation is a form of inflation control. So how can we be undertaxed when inflation is sitting at zero? This is where you lose me to be honest.
3) Got that right
4) I gather you see the SSTF as a political issue as oppossed to an economic issue since there would be no difference if the entire SS program was rolled into the general fund – taxes go in and checks go out. (I will stipulate that the SSTF is a political football)
5) If the US/UK can just print, how would they ever defualt on a debt denominated in US dollars or UK pounds (respectively)? Assuming we don’t suddenly go back to the gold standard or peg to the Yuan I’m not sure how we could defualt. We can always write our creditor’s a check (even if worthless – see Greenspans comment).
You say we need to raise taxes and that we under-taxed for three decades.(I tend to agree and add we over-spent also for three decades). With inflation at near-zero I have a hard time squaring that with you statements on debt and what taxation represents. How can you under-tax with inflation at zero?
I think a post titled, “What is money, debt, and taxation.” Might be helpful in understanding where you are coming from. It may be we are not looking at the basics in the same way.
I appreciate not going in circles – why I tried to cut through this. And thanks for ignoring my spelling mistakes too!
Islam will change
“we need a different word than debt to identify the issuance of government bonds”
Totally agree, and what Jack says.
Why issue treasury bonds when you can just issue dollar bills? Just because the world wants perfectly safe interest-bearing securities doesn’t mean that the U.S. is obligated to provide them.
Steve,
Basically the UK government devauled it money. All its creditors took a 25% haircut. Yes the UK got off the hard gold standard at that time also, but people who were owed money lost the buying power that the debt represented. Before they could have bought 100 loaves of bread if repaid, now just 75.
Yes, that move probably helped them recover from the depression early than those who didn’t but it did not change the fact the they stiffed their creditors. As my list above shows, that is not without precedence historically or for the UK inpaticular.
The ‘feel’ question is important. If you owed me $100 and handed me $75 and said we are even I would not be happy even if I couldn’t do anything about it (since in this case the Crown was soveriegn and had the guns). But better $75 than the old days when the creditor would lose his head…
Islam will change
Buff:
Debt does matter. But it matters in complicated ways, ways that the silly “we’re-just-like-a-household” metaphor utterly obscures. *That’s* a meme that really needs to be killed.
Yes: all that under-taxation/deficit spending/money-printing, *if* you adopt strong-form MMT, seems like it should have caused inflation. Especially with private banks issuing mountains of new money as well. I’m not a complete MMT believer, though, and I’m *very* up in the air about what combinations of factors cause inflation. And I’m kind of amazed that I have yet to read a single account that provides a coherent and compelling explanation (to me) of the 1970s stagflation. (Supply shock, yeah, but…)
Yes, I want to write a lot more about the nature of money, debt, etc. I think we’re at a remarkable time where economists are actually explaining how money works in a realistic way, even, what it “is.” (With no thanks to the neoclassicals, who have mainly ignored and otherwise obfuscated the whole issue.)
But short answer: given the monetary and political system we have, we need to avoid spiraling debt. (Our current level and a decent amount more is perfectly manageable if growth, inflation, and interest rates are managed properly.) I think the solution is to raise taxes a bit, because the American people (notably including the tea partiers) don’t want to cut spending on anything besides foreign aid — which constitutes .5% of the budget.
That, plus get health-care inflation under control.
I never said that countries never inflate their way out of debt. They do. That’s pretty much the point of my post, and what I propose should be done.
Will creditors be pissed? You bet. Will everyone be better off? You bet.
I should qualify “everyone.” Not Pareto. But the collective “we.”
Steve,
Now I get it – the idea is to basically stiff our creditors to get out from under the debt. In this case by devaluation. Got it.
Remind me not to loan you money! 🙂
Islam will change
Steve,
I’ve never bought the FED debt is analogous to home-owner debt if for no other reason the home-owner can’t print money. Same with the foreign aid issue (in this case its chump change).
This is amuseing though:
“Our current level and a decent amount more is perfectly manageable if growth, inflation, and interest rates are managed properly”
You assume the they can be “managed properly” by either the current clowns running the show or any of the wannabe replacements. I don’t see that in evidence – why I want Obama out – better to take a chance on the unknown than the known incompetant.
YMMV
Islam will change
Steve
in case you haven’t noticed, I am proudly ignorant of the economics literature. it’s all i can do to deal with the popular misunderstandings of economics as encouraged by the “public economists”… who I think do get their “ideas” from academic economists who are not wrong about everything.
krasting
gee, and here i was about to say i agreed with you.
SSTF doesn’t “need” to be paid back. but in an honest country it would be.
You seem to think this is a disaster in the making. I don’t.
As to the rest of your and Steve and Buff’s dialogue, it would be funny if it wasn’t tragic. You get three people who don’t know what they are talking about and they can come up with all sorts of clever and wise sounding agreements… not to mention the disagreements.
Steve has a head full of theories that don’t work in the real world. Buff is… Buff. And Krasting appears to be suffering from Korsakoff syndrome. Sorry, I didn’t say I’d be nice.
in particular, Steve suffers from the liberal syndrome. he is convinced that all social evils need to be addressed by a “progressive tax.” SS really should be welfare. The fact that it’s not just messes up his beautiful ideas about a just society.
The fact that SS works only because it is NOT welfare, not a “tax” of any kind, certainly not regressive (have you looked at the payout schedule?), and has done more to keep Americans out of poverty than any “welfare” scheme ever devised, with none of the wasted expenses of “making sure only the deserving poor get a check” and none of the humiliation attendant upon visiting the government proctologist every quarter so he can examine you for hidden assets… all this is lost on your true liberal.
and of course its lost on your right wing idiot who knows nothing except what he hears on the tube from liars and ignoramuses.
and krasting… who can’t even follow a train of thought with a double yellow line to guide him.
Proud ignorance is perhaps the thing that I admire least in this world.
Pride in general, actually. Perhaps the original, most fundamental sin.
Eating of the tree did not impart the knowledge of good and evil. It imparted the *presumption* of such knowledge.
And it did, indeed, goeth before the Fall.
I, heir to that as are we all, am a terrible sinner.
But at least I admit that.
OTOH, as my annoyingly precocious U Chicago daughter points out to me:
“Dad, just cause you admit you’re a hypocrite doesn’t mean you’re any less of a hypocrite.”
Damn her.
But I’m not sure she’s right.
“The US Debt to Public can’t be paid back. Not in 50 years. But SS must get paid, and that is the problem.” BK
Come off it Bruce. You kn know very well that all government debt is paid with newly issued debt. So it makes no difference if the debt being retired is Trust Fund debt, private debt or sovereign debt (debt to another copuntry). If you hold T Bills you’re going to be paid when the note is due. An electronic transfer is goiong to be initiated into an account with your name on it. BTW, if Uncle Sam shows up at your door with cash money as payment for your Treasurys that have matured be aware that he’s given you Treasury Notes and they don’t say money or cash or “redeemable in gold (or silver)”. In other words when you’re paid in cash you’re receiving nothing more than a promise from the government to electronically credit your account for what ever amount is written on the “cash” Treasury Notes that you deposit into your bank.
So explain to me Bruce, why is Trust Fund debt a bigger problem than any other government debt. How is honoring the Treasurys held by China, Japan et al or Citibank any different from honoring the Treasurys held by the Trust Fund?
Steve,
“SS Trustees say that the 75-year shortfall in SS is .6% of projected GDP.”
But isn’t that figure at the 75th year….what about all the damaging deficts transfered into debt in the run up to that 75th year? The demographics and size of the economy dictate this. The Baby Scammers must be paid, but at the expense of the deficit until the demographics come back around once they have died off.
If the S.S. Trust Fund is already supplementing the general fund, then why is a payroll tax cut actually a tax cut? In the long term it is a tax increase, because more funds are being drained from the general fund to service S.S. and the Interest on the Trust Fund, and the interest that was added to the public debt. Don’ they call this circular scenerio a “Ponzi Scheme?”
Jack,
“why is Trust Fund debt a bigger problem than any other government debt.”
It is not a bigger problem, but I don’t think that is his point! The point is the “service” of the debt and the “value” of the money being used to do the servicing.
What good is it the have zero debt when it costs $1 Million to buy a loaf bread? I don’t believe that the issue from the right is just about the size of the debt….the issue is the overall size of the “burden” that is being passed down while increasing for every generation, and the fact that we know from the Demographics that at some point along this path the “burden” will be overwhelming.
If we could generate another Tech Bubble or Industrial Revolution then we wouldn’t even be having this conversation. Also, It might have helped if China didn’t play games with their currency or if War in the Middle East wasn’t leering at everybody for the last 30 years.
Coberly,
If an honest country would pay back S.S……
Isn’t that an Oxymoron…because I thought S.S. had a built-in surplus so that it would not have to be paid back? So in other words……we pay for a surplus, and then we pay again to “payback” the surplus?
Awesome idea….that’s almost like me paying myself to spend my own money. I haven’t quite figured out yet how to formally issue myself IOU’s for the times when I spent money I didn’t have……maybe my government can guide me on this topic?
Otter:
What demographics are you concerned with in regard to SS? Since when has it become a necessity for demographics to be prime when productivity is related. Its not unless you accepty that productivity gains are skewed to capital versus labor. In relation to the growth of the economy which you do not take into account, the drbt remains small. Change the paradigm concerning Labor which is the issue here and not SS TF.
If we do not generate an environment where more of the NonInstitutional Civilian Population is a part of the Civilian Labor Force, the TF will be a much smaller problem in comparison.
Re: all these arguments about account-book juggling, bottom line:
If over ensuing years and decades:
1. The GDP growth rate exceeds the real interest rate (IR minus inflation)
and
2. Health care costs (what providers charge) stop growing faster than inflation,
We don’t have a long-term budget problem.
#1 is totally doable.
#2 remains to be seen. Sticking with the pre-2009 insurance regime certainly wasn’t doing it.
Otter. No. Start taxing .6% more now and devote it to SS, and it’s good as far as the eye can see — revenues support outlays.
And yes, I think the trustees have glanced at the demographics once or twice.
I just wish the .6% would come from a more economically efficient tax.
How about nationalizing all individual private wealth above $1Billion? Just as legitimate as stealing everyone’s retirement funding. An analogous amount could be determined for corporate wealth and be related to the number of shares outstanding and the distribution of those shares. Why do all plans to resolve deficit issues always have to focus on the working class bearing the greatest burden? Go to the bulk of the wealth, ’cause, as Mr. Sutton once said, “that’s where the money is.”
My theory is that the deficit is a measure of capital use efficiency. As the rate of the rate of change in deficit formation increases, it signals that capital is increasingly not being, or has not been, used efficiently.
The government can employ unemployed workers to build houses, when the houses are sold, the workers were maintained, assets added to the country, the debt repaid, and future receipts in the form of taxes and labor productivity are expected. This has the effect of lowering the rate of deficit increase.
Repeat the same senario but bulldoze the houses. The debt is not paid but the workers gained skills and supported families and the community. This is still better than just handing money to someone to lay around the house, both would cause a deficit increase. Over the past decade, capital was inefficiently used. Maintaining a large stable of unemployed workers is inefficient. If they are not stabilized, assets depreciate. Creative destruction is the basis of deficits. Deficits measure lost value. Deficits are a measure of an economy’s efficency. To create a system with laws and regulations that rewards extractive inefficiency will continue to produce deficits. Likewise, comparative advantage with respect to a global workforce is nationally inefficient. What is the source of our inefficiency? The deferred savings plans of SS and M&M?