Open Question: What is the Optimal Level of U.S. Public Debt?
by Bruce Webb
Back in 2000 Alan Greenspan warned Congress about the potential disappearance of the long bond in the face of continuing surpluses. He probably knew at the time that he was just feeding the appetites of tax-cutters, and not say advocating for using those surpluses for something like Universal Single Payer, but he wasn’t crazy, because to some extent the world is dependent on the existence of SOME amount of U.S. Treasuries just to keep the gears of the world economy going. For the time being the U.S. dollar is the biggest component of most other countries foreign exchange reserves and is also used to buy and sell many commodities, particularly crude oil.
So the question is How Low Can We Go? Where is the sweet spot in terms of the ratio of U.S. Debt Held by the Public and world GDP?
Now we know the answer in relation to Social Security, at least the statutory answer. The Trustees are mandated to target a Trust Fund ratio of 100 or one year of future cost at any given time. And since the annual cost of Social Security goes up every year due to changes in population and inflation the result is that even a perfectly balanced system will contribute that much more to total Public Debt (Intragovernmental Holdings combined with Debt Held by the Public) each year. For example you can say all we ‘really’ owe to Social Security is the amount of principal above a TF ratio of 100 plus the costs of servicing the remaining reserve, or $1.8 tn out of $2.5 trillion plus interest on the total.
And it would seem that the same applies to the world economy. How much of that $8.5 trillion are we actually on the hook for? Certainly we owe interest on the whole amount, but realistically how much on net will EVER get redeemed even under ideal economic conditions?
This is not a rhetorical question to which I will spring some nifty answer under the fold, this post doesn’t have a ‘read more’. Anyone care to kick this one around?
This is a very good question!
In terms of the dollar’s role as a reserve currency, the key thing to remember is that, both in practice and in principle, central banks target reserves at some proportion of current account transactions. Typical benchmarks are 3-4 months of imports or 12 months of interest payments on foreign debt.
So as long as the dollar remains the world’s reserve currency, and given that dolalr resevres are invariably held in the form of Treasuries, then US government debt held abroad should grow in line with world trade or with cross-border lending. Both have experienced long-term growth considerably faster than US GDP (prior to the Great Recession nominal dollar trade volumes were growing at an annual rate of 10-12 percent), so that implies that the dollar’s role as a reserve currenncy requires a similar growth rate of US debt held abroad. If USS debt is say 50% of GDP, that implies a required fedeeral deficit of 5% of GDP.
What happens if that requirement isn’t met? Well, obviously not all federal debt is held abroad, so if the annual increase in federal debt is not sufficient to meet the reserve needs of foreign central banks, they can always buy Treasuries from Americans. This however will tend to push up the price, and therefore reduce the yield, of federal debt. Since other asset-owners, unlike central banks purchasing Treasuries for reserve purposes, are not indifferent to to yield, this rise in the price of federal debt creates strong pressure to find or create new, Treasury-like assets. This was clearly part of the impetus toward mortgage securitization; in that sense, it was insufficent rather than excessive federal borrowing that helped provoke the financial crisis.
So as far as the international role of the dollar is concerned, prior to 2009 federal borrowing was below its optimal level, not above.
The role of the Treasuries in the US financial system is more complex but I would argue the case is similar: for fiscal deficits at least up to 5% of GDP or so, federal borrowing “crowds in” private borrowing, not just in terms of public good investments and whatnot, but in purely financial tterms. When a bank purchases Treasuries, that increases rather than diminishes its willingness to make a loan to the priivate sector.
I’ve discussed these issues a bit on my blog.
The compound growth of capital is a feature of the system and US treasuries are a critical component to stability.
Milton Friedman said it’s zero because anything you pay in interest could have actually bought something. I’ll disclose that Milt was the first economist that ever made sense to me, but I was a young, dumb nineteen year old at the time and since then I’ve become much more worldly and sophisticated.
Greenspan becoming a deficit dove a few days after Bush’s inauguration has to inspire huge guffaws among anyone paying the least amount of attention to government affairs.
But for the last decade or so, I have had this feeling that there seems to be too much money in the world and not enough good places to invest it. Kind of like Bernanke’s “Saving’s Glut” except Ben’s explanation for it was grossly inadequate.
The magic number for bad levels of sovereign debt is 100% debt to GDP, but that is more or less pulled out of the air and nothing is cast in concrete. Whether you are a reserve currency or not of course matters. Some even think it is the duty of the US to grow the world’s money supply to foster worlwide economic growth. That comes home in the form of foreign purchases of treasuries.
How much debt you can handle always depends on a revenue stream, and in the case of governments, can taxes be increased without killing the economy.
I don’t think we are in danger of hitting 0 debt[sarcasm], but how long this magic all works has been the formost econ and finance question in my mind. But sorry to say no answer yet.
It’s worth noting in this context that, abstracting away the details, the banking system rescue consisted simply of replacing private liabilities with federal liabilities on financial institutions’ balance sheets. (Federal securities rose from about 1.5 to about 8 percent of bank assets over 2007-2009). This is pretty clear evidence that the level of federal debt was too low relative to the needs of the banking system.
“This is pretty clear evidence that the level of federal debt was too low relative to the needs of the banking system.”
That’s the smoothest way of saying “biggest bank bailout of all time” that I have seen yet.
Too abstract for my tastes, but you can probably copywrite it and sell it to Goldman-Sachs.
Well one thing we are buying is the provision of a safe harbor for countries that feel they need to take that flight to safety.
But keep it coming, this really isn’t my area of expertise.
Cedric, if it were up to me, we would abolish banks entirely. But Bruce’s question is clearly framed in terms of the financial system as it exists. Given that, a world with a large federal debt is going to be more financially stable than a world with a small federal debt.
It isiactually possible to answer these questions in an evidence-based way as opposed to answers “more or less pulled out of the air.”
Certainly, if the treasury can sell me t-bills with no middle-person, the federal reserve can buy a promisory note from me for any term at the same interest rate they lend to the big 20 who have the monoploy.
And that interest to the biggies is reserve interest rate.
I would take my loan form the fed and buy a vette!!
But I am getting old and old guys look really good gray hair and all in a velocity yellow vette.
A better use than the cash sitting on a wall st balance sheet.
Lend from the fed direct to citizen!!
Beat the spears into plough shares.
Raise taxes on the upper incomes to pay for the war machine, implement tariffs on oil, Hyundais, Honda’s and whatever is imported from Europe to charge the colonies for the US’ phony “protection”.
There is no optimum use of debt, debt needs to be accumulated in hard times and discharged in good.
The only debt that is bad is debt for the war machine, since that debt drives part of the economy to unproductive corporate welfare. War debt is okay if the economy needs to mobilize against a real threat, and private consumption suspended.
But the Bush debt for tax cuts during the war profits campaign of the past 9 years drove the hiring and buying of stuff the producers of which should have been making the things imported from the US’ creditors.
As soon as possible the war machine debt and the war machine must be liquidated.
There are no Huns at the gate. Butter is preferred to the war machine.
You cannot borrow to keep both flowing.
Bruce/JW,
I sent a post to rdan for AB a few months ago, which did not get published, which showed a relationship between Debt/GDP and economic growth.
I got the numbers from the CIA Fact Book:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2003rank.html
and did a regression. Basically, for the larger country economies I plotted, the higher the debt level, the slower the economic growth. I believe the relationship was: for every 40% increase in debt/GDP, economic growth was about 50% lower.
There is no longer a character limit on JS-Kit or if there is you can beat it by cutting your post into chunks. This is in effect an open thread so feel free.
What is the optimal level of US gov’t public debt?
One that gets unemployment below 5%.
Cedric Regula: “Milton Friedman said it’s zero because anything you pay in interest could have actually bought something.”
I like zero, or the minimum to provide a safe haven for investors. 🙂
But that would require a change in our money system, so that we have money that is not matched by debt.
JW Mason: “This is pretty clear evidence that the level of federal debt was too low relative to the needs of the banking system.”
Likewise, it is too low relative to the needs of consumers.
sammy: “I believe the relationship was: for every 40% increase in debt/GDP, economic growth was about 50% lower.”
Or the other way around, eh? (Although the numbers will differ because of randomness.)
sammy
as your guys like to say correlation is not causation. i suspect the slower growth and high debt are both caused by “large economy.”
well, gee
i don’t think Bruce is really asking for the optimum level, but the minimum level. below some level of debt the economy runs out of grease. and that includes the world economy. though some day they will be able to do it on chinese grease instead of american grease.
i would humbly suggest you have too much debt when you aren’t getting any value for the interest you are paying. that seems to have been passed about thirty years ago.
you may also have too much debt when congress and other rich people have gotten into the habit of thinking they never have to pay it off (“deficits don’t matter”)
looking for the “sweet spot” is folly. it’s like the “optimum tax level.” buy what you need. don’t go stupid about it.
coberly: “i don’t think Bruce is really asking for the optimum level, but the minimum level. below some level of debt the economy runs out of grease.”
The minimum level? Zero. We don’t need debt to grease the wheels of the economy, we need money. We can have money without gov’t debt.
That’s how we used to do it, on a metallic standard. There are a lot of problems with a metallic standard, but we had money that we did not owe to anybody, on which we did not have to pay interest. Two main problems were that it made counter-cyclical policy difficult, and it did not always increase fast enough. With fiat currency we can avoid both problems. (We have to keep inflation in check, though.)
But why, with a fiat currency, should all our money (save a relatively little currency) be debt? Why?
Coberly wrote:
You may also have too much debt when Congress and other rich people have gotten into the habit of thinking they never have to pay it off.
I agree with you completely.
It seems like we are either unwilling or unable to pay off our debt.
My grandfather had a wise saying: “What you owe, you owe. What you own, you may not own.”
I don’t think the federal government (as well as the states) are owning up to their fiscal responsibilities.
Don Levit
Most economist might disagree but I think banks as a business is unstable. They borrow short to lend long which mean they will always go belly up whenever the business cycle changes and interest rates go up. This function should be better done by the Fed which already does it at the highest level. Banks add no value and there is no economy of scale and there are no need for any fancy products a private bank might offer. And for those you scream socialism well socialism started when we decide to have an elected government. Whatever function an elected government performs is socialism.
Yes, we have money, credit and now insurance on credit. And actually there is way more credit than “money”. And seemingly way, way more insurance on credit than credit.
My brain tends to shut down whenever I think about that too much.
“I don’t think the federal government (as well as the states) are owning up to their fiscal responsibilities.”
Government in a democracy does not exist independently of its citizens. The decisions made by government are not distinct from the actions of the people we elect to represent us in that government. If the government is failing to own up to its fiscal responsibilities it is because we have chosen poorly those elected officers of government. However, poor choices are relative concepts. Poor to one man is wise to another. Too few citizens have gained too much influence over those elected officials that make up our government. What is fiscal mismanagement, if that is what it is at all, can be beneficial to some small sector of our citizenry. Deficits are in part the result of government meeting its obligations to its citizens though even those obligations may have been poorly decided upon. The other part of fiscal deficiency is the failure of the government to require, to insist, that sufficient revenues be collected from its citizens to balance the cost of meeting those obligations. The answer isn’t that complex. Raise taxes on those that gain the most from our economy. Cut wasteful expenditures that result from some twisted sense of empire.
You’ve made an assertion here, and I’m not familiar with the underlying proof or arguments, so I’m not sure I understand correctly what you are saying .
“Given that, a world with a large federal debt is going to be more financially stable than a world with a small federal debt.”
There is a range of risk in investing, and all of it is financing some sort of economic endeavor. So far treasuries are considered the lowest risk investment in the spectrum.
So the most financially stable world is one where the banks borrow from the Fed at zero interest, take all depositor money at zero interest, and turn around and buy treasuries with it.
They would no longer serve the function of being the “intelligent” risk takers and we would live in a financially stable world full of zombie banks using our money for free and paying themselves huge bonuses. The USG would issue more and more bonds and banks can grow buying them.
That’s what we have at the moment. But that really wasn’t what we wanted!
Reinhart and Rogoff wrote a whole book on the subject. Haven’t read it, but they show correlations of slower growth when debt/GDP goes over 100%. I believe it.
Easy. It is zero. Why can’t there be a basically all currency economy?
System blocked this initially. I don’t know why.
The question was about a world economy. Are they supposed to hold their reserves in physical dollar bills in a warehouse? When their national economy starts going south during some crisis are they really going to fly in plane loads full of greenbacks?
japan’s ratio is at 190% of GDP and yet the yen continues to appreciate against the dollar:
National debt hits 190% of GDP at ¥900 trillion – The outstanding balance of the central government’s debt reached a record high ¥904.08 trillion at the end of June amid massive bond issuances and declining tax revenue, Finance Ministry data showed Tuesday. It is the first time the debt balance, including government bonds and financing bills, has topped ¥900 trillion. Per capita debt came to around ¥7.10 million based on Japan’s estimated population of about 127.42 million as of July 1. The debt is equivalent to almost 1.9 times the nominal gross domestic product in fiscal 2009, which totaled ¥476 trillion
Japan’s Debt Is So High, It Doesn’t Even Fit On The Charts – Let this be a reminder that the ongoing popularity of the yen and JGB (Japanese Government Bonds) should throw a big fat wrench into any notion that any simplistic ideas about the size of a country’s debt, and the strength of their national financial instruments. A brief paper on global sovereign debt crises by Silvio Contessi at the St. Louis Fed (.pdf) includes this lovely chart. As you can see, they had to especially elongate the chart, just so they could fit Japan on there.
The Nazi Bears are back. Censoring critiques that they have no rebuttal.
I am very conservative on this issue. I think the sustainable debt load of the US is about 3% of GDP. (annual debt service=3% of GDP). This % should be higher during periods of weakness and it should be lower during periods of strength.
We are currently at 9%, and if we do not sunset the tax cuts that number will go to 12%. That is not sustainable.
By the way, you say that SS does not have to redeem its holdings. That is wrong. All of the $2.5T will be liquidated. The only question is when does that start and when does that end. The fund says it starts in 2015 and ends in 2037. I say it will be 2012 and end in 2025. We shall see. Either way all those SS holdings have to come onto the Debt Held by the Public sooner or later.
They have cash reserves in US Treasury securities backing most of this debt. The balance is held by the govenment in savings accounts. This is very different than the US. We have not one nickle of foreign reserves to back up the debt held by foreigners. A mistake to compare the Japanese debt load to the US.
From what I gather Reinhart and Rogoff did not differentiate between debt in the country’s own fiat currency and other debt. That important distinction has also been ignored in comparisons between Greece and the U. S. 🙁
Don Levit: “It seems like we are either unwilling or unable to pay off our debt.
“My grandfather had a wise saying: “What you owe, you owe. What you owe, you may not own.”
“I don’t think the federal government (as well as the states) are owning up to their fiscal responsibilities.”
I changed what I think is a typo in your grandmother’s wise saying.
Andrew Jackson paid off the national debt in 1835. We had a severe depression in 1837 – 1836. These two facts are related. The Great Depression followed several years of gov’t surpluses aimed at paying off the debt from WWI. Rodger Mitchell has a good discussion on his blog, http://rodgermmitchell.wordpress.com/ . The temporal sequence is a reduction of gov’t debt, speculative increase in private bank debt, speculative crash, depression or recession. (This is not to say that gov’t surpluses cause recessions, but they can be a factor.) Paying down gov’t debt takes money out of the economy (Jackson was criticized for that), the economy leans more on bank debt, which is more fragile than gov’t debt. That is particularly true now, when we have a fiat currency.
The fiscal responsibility of the federal gov’t now is to provide money for jobs and to reduce household indebtedness.
As for the states, almost all of them have balanced budget laws or constitutional provisions. They are owning up to their fiscal responsibilities. They need help.
Sorry, that was your grandfather’s saying. (But I expect that your grandmother agreed. :))
And the dates of the depression are 1837 – 1843.
Bruce, do you think that the US Dollar is the world’s reserve currency because we pay interest on our bonds?
As for plane loads of greenbacks, they can borrow from the Treasury (if there is no more Fed). It’s all electronic, these days. 🙂
Japanese gov’t debt is in yen. It is not backed by US Treasuries, denominated in US dollars.
Min:
That was not a typo in my grandfather’s saying.
“What you owe, you owe.
What you own, you may not own.”
What he meant was that debts are primary to assets.
He believed in people honoring their debts.
The debt is real, it is stable, it needs to be paid off.
Assets increase or decrease in value.
Assets may need to be liquidated to pay off debts.
That’s why you may not own assets.
Don Levit
The trouble with ratios vs GDP is that there are two variables, and GDP is typically ignored. E. g., “The debt/GDP ratio is too high. We have to reduce the debt.” Why not this? “The debt/GDP ratio is too high. We have to increase the GDP.” Both are equally sensible. The sticky problem is that the two variables are not independent. Efforts to reduce the debt can reduce the GDP, for instance. We are seeing this kind of thing in Europe now, unfortunately.
Bruce Krasting: “Either way all those SS holdings have to come onto the Debt Held by the Public sooner or later.”
That may well happen, but we cannot say that it must happen. Suppose that we eliminated the SS Trust Fund tomorrow. The Treasuries held by the fund would not have to go anywhere, would they? They would not have to be sold to the public, would they?
Min
I may be ove my head in this. But “debt” is just “spending money before you earn it” and is the basic idea of “investment.” I believe.. without understanding… that Hamilton created the US government debt exactly as a spur to investment and growth. I don’t see where it makes any difference whether you lend gold or promissory notes.
Japanese gov’t debt is in yen. It is not backed by US Treasuries, denominated in US dollars. The Japanese gov’t has no obligation to cash in yen for dollars.
Min
at the risk of agreeing too much with Don, I would say that even with their balanced budget laws the states are not doing a very good job of owning up to their fiscal responsibilities. But all I mean is that i see a lot of spendng that doesn’t look wise. There seems to be some contradiction between the need to use money responsibly and the need to use money to stimulate the economy, but I suspect it’s not so much of a contradiction as just a lazy habit of spending without thinking… vs the lazy habit of not-spending without thinking.
btw, your reply to don seems to me to contradict your reply to me. what am i not getting?
peter john
it’s okay to use words to provoke thought… and i think you do that here with “socialism = government”
but the bad guys use the same equation to mean “tear down this government.” which gives me
the excuse to say words do have meanings, and the meanings depend on use… but one man’s use may not be another man’s, so we do need to check our meanings at the door. socialism still means government ownership of the means of production, which is NOT the same thing as goverment regulation of business, or government sponsored insurance, or government programs against poverty.
krasting
well, they could be… you know… paid for with taxes. just the way taxes were cut when the SS money was borrowed, only the other way around.
thanks don
i thought that’s what granpa meant.
i must have gone to the same school. government debt is a little bit different, but i agree that our honorable friends across both sides of the aisle have gotten a little irresponsible about the way they manage debt.
bruce: youre saying japan is holding nearly $10 trillion of treasury securities?
Debt and growth revisitedCarmen M. Reinhart, Kenneth Rogoff, 11 August 2010
Debt and growth revisited— Carmen M. Reinhart, Kenneth Rogoff, 11 August 2010
“As for plane loads of greenbacks, they can borrow from the Treasury…”
They would have to move the electronic printing press to the Treasury, rename the Treasury “TReserve”, and Geithner and Bernanke would have to work closely together.
Wait a minute…..
Probably something to do with underwriting standards.
http://www.treas.gov/tic/mfh.txt
As of the end of May Japan was holding an estimated $786.7 billion in Treasuries. This would including not just the Central Bank but any other Japanese banks, corporations, and individuals.
Jay the Bears don’t censor critiques, we censor assholes, and the site-owner only makes that decision after a lot of discussion with the front pagers. The number of people banned from AB under current ownership can be numbered on one hand. It takes a special person to make that list. Congratulations.
I didn’t block your comments, I didn’t even bother reading them, you my former friend are caught in the screen. I am unblocking this comment just so that mine is not just hanging in mid-air as it were. Nothing in it would induce me to recommend Dan change his mind.
Krasting you need to think harder.
Social Security will get fixed one way or another. Either a combination of better than projected growth and incremental tax increases will be phased in to keep the Trust Fund Ratio above 100 or there will be offsetting benefit cuts that do the same thing. The 1977 fixes turned out to be inadequate resulting in a near meltdown in 1982 and the fix installed in 1983. But there is no reason to expect that things will get that close the next time. Under current projections the Trust Funds will fail the test for Short Term Actuarial Balance in 2023 or so which will give us plenty of planning time for a phased in solution starting in 2026, or ten years before the theoretical date of Trust Fund exhaustion.
Trust Fund exhaustion is a purely theoretical event as is the so-called unfunded liability that would follow. When the proper time comes we can and almost certainly will make the necessary adjustments to keep the funds solvent, it being in no one’s interest to have a sudden reset in benefits. And when those adjustments are made you can bet that they will keep the reserves of Special Treasuries relatively constant as a percentage of costs, meaning that they will be rolled over and not-redeemed.
Maybe if you posed your musings in the form of a question?
Well I am all for thrift (for other people, I am not that good at it) but these appeals to grandpa kind of miss the thrust of my question.
In times of economic danger both countries and individuals need a safe harbor for their flight to safety. Prior to the 30s this was typically in gold and silver. But precious metals are subject to theft and in large quantities can’t be whisked away to safety when danger is impending. They also are subject to market distortions if there is a new discovery.
Well since the 60s the old function of gold was largely been displaced by a handful of currencies which are as a rule subject to some degree of inflation, leading both individuals and countries to demand some real rate of interest on those reserve holdings meaning they can either manage through some sort of Sovereign Wealth fund or by holding Treasuries or equivalents, it is not like the government of Qatar is going to open a passbook savings account at Wells-Fargo.
This constant demand for Treasuries serves to put downward pressure on rates and I suspect (though I don’t know for sure, readers?) that is also a big part of the reason why many commodities are priced in dollars. Would we really want to get totally out of debt if that meant that U.S. price levels were fundamentally set by decisions of the EU in Brussels, which in practice means German bankers? I am not a jingoist and so this prospect doesn’t frighten me much but I suspect I am in a decided minority here.
Speaking of old sayings there is one that is appropriate here: “If you owe the bank $10,000 the bank owns you, if you owe the bank $10 million, you own the bank” We owe the world outside the federal government itself $8.5 trillion, and if those countries, institutions, and individuals want to get their money back, they better hope that our economy doesn’t get truly sick, because that contagion spreads pretty quickly. And in large part it is our debt as much as our military that gives us that automatic place at the big folks table. How much of that power position are we realistically prepared to give up by paying down debt?
coberly: “ But “debt” is just “spending money before you earn it” and is the basic idea of “investment.”
Gov’t debt with a fiat currency is different from bank debt. Banks create money by lending. The money is balanced by the debt held (at least for the moment) by the bank. Money is also created when someone buys a gov’t bond at auction. However, the person who buys the bond (the lender) does not create the money, but uses money that already exists. Just how the money is created is obscured by the process, but it is the gov’t that creates the money. You can think of the gov’t’s creating money by spending, even though the details are complicated.
The gov’t can create money without all the rigamarole. Lincoln asked Congress to do so to finance the Civil War, and they authorized the printing of Greenbacks, which were fiat currency. The bond vigilantes of the day wanted too much interest, in Lincoln’s view. 😉 (The Greenbacks only partially financed the war, BTW.)
Anyway, the gov’t does not earn money. It is the source of money. It does not need to earn it. 🙂 Or to borrow it. 🙂
coberly: “I believe.. without understanding… that Hamilton created the US government debt exactly as a spur to investment and growth.”
Interesting. 🙂 Smart guy, Hamilton. I had heard that the promise to assume the states’ debts was an inducement to ratify the Constitution. 😉
coberly: “I don’t see where it makes any difference whether you lend gold or promissory notes.”
It makes a huge difference operationally. I have been reading the News from 1930 blog ( http://newsfrom1930.blogspot.com/ ). Shipments of gold were going back and forth across the ocean quite often, as gov’ts settled accounts with each other. Banks used to be required to keep gold in their vaults. (There are stories of gold bars being shipped from bank to bank by stage in the Wild West to keep ahead of the bank examiners. ;))
The requirement to back bank notes by gold or silver placed restraints on the banks. But the restraint on gov’ts was more problematic. (Aside from the shipping and guarding costs.) Suppose that you are on a gold standard and your population grows, but your supply of gold does not. Your people are poorer. Maybe gold is discovered in California, but you are Macedonia (Was Macedonia a country back then?). How do you get your hands on some of it? Or maybe your supply of gold keeps up with population, but your economy is growing even faster. Unless you get some more gold, you may see a speculative bubble. (OC, you may see one anyway.)
In 1873 the U. S. went off of a bimetallic standard and onto a gold standard. The result was an instant loss of money in the economy. (The price of silver dropped by 50%.) Jay Gould’s railroad went under, and England had problems, too. Enter the Long Depression. Over the next couple of decades a lot of people went bankrupt and a lot of farmers lost their farms to the banks. In 1896 William Jennings Bryan campaigned on a return to bimetalism, the focus of his Cross of Gold speech.
During the Great Depression advanced economies went off of the gold standard, and immediately saw a boost to their economies. (Brad DeLong has shown a graph of that a few times on his blog. It is quite striking. :)) One reason is that they were able to supply money freely to their economies. After WWII the world returned to a kind of quasi-gold standard, with fixed exchange rates and the US dollar pegged to gold. (The dollar was now the world’s reserve currency.) Under the strain of the Vietnam War, the U. S. went off of the gold standard fully in 1971, and the exchange rate structure adjusted by 1973, and the […]
coberly: “btw, your reply to don seems to me to contradict your reply to me. what am i not getting?”
Then I am unclear, or confused, or both. 😉 Where do you see the contradiction? Thanks. 🙂
Before there was a Fed, there was the Treasury. Bruce is responding to a hypothetical where there is no Fed. (I think.)
Thanks for the clarification, Don. 🙂
Interesting thought. 🙂
Sorry, comment was blocked by system. Oddly enough using Gould’s first name is an automatic trigger for comment blockage. For the same reason any extended discussion of V.P. Burr requires some circumlocution. I call them “The Commenters who Must Not Be Named”.
That’s right.
Given the private financial system as it exists, there is a tradeoff between stability, and the share of bank financing that is “necessary” in the sense of funding private nonfinancial investment. Given our current institutions (I need to stress that condition), a system that lends only to the private sector is hopelessly unstable. But a system that doesn’t lend to the private sector at all is, as you say, purely parasitic. So there must be some optimal intermediate level of federal debt in bank portfolios. part of Bruce’s question is, where is that level?
Ansering that question is very tricky. but one thing we can say is that whatever the optimal level of federal debt in the financial system, it is going to change roughly in proportion to the overall volume of financial assets. Since these grow over time mroe rapidly than GDP, this is going to imply that the federal governemnt is going to have to run some positive primary deficit in order to provide the financial system with the necessary quantity of Treasuries. Otherwise, unless you want to permanently replace the big banks with public institutions (in which case, I’m with you!), we’re going to see a steady series of reprises of the 2007-08 financial crisis if the feds fail to provide the banking system with sufficient risk-free assets.
Right. External debt is a problem in a way that domestic debt is not.
%ay,
Assuming your reading this. I agree with Bruce. Rdan has not banned many people in years of operation. Even I have survived! And I disagree with this bunch more than most. BUt I try to be nice and keep the sarcasm to a tolerable limit. Play nice and they let you stay. Act like someone from DKos and your out!
Simple!
Islam will change
coberly,
Look at your answer to krasting – its exactly the point old Don Levit has been makign as you two talked past each other…
Bruce – I like that last paragraph. Never thought of the Fed debt that way. Sort of like the old MAD idea but for finance. If we go down, so does everyone else….
Islam will change
[Update: Paul Krugman responds, “Reinhart And Rogoff Are Confusing Me“
Japan govt’s debt tops $10.49 trillion for first time – Japan’s debt hit a record high of $10.54 trillion at the end of June amid massive government bond issuance and declining tax revenues, a data by the Finance Ministry has shown.
Japan govt’s debt tops $10.49 trillion for first time – Japan’s debt hit a record high of $10.54 trillion at the end of June amid massive government bond issuance and declining tax revenues, a data by the Finance Ministry has shown.It is the first time that the debt balance, including government bonds and financing bills, has exceeded $10.49 tril.Per-capita debt came to around $80,000 based on Japan’s estimated population of about 127.42 million as of July 1. The debt is equivalent to almost 1.9 times the nominal gross domestic product in fiscal 2009, which totaled $5.55 trillion.
….Per-capita debt came to around $80,000 based on Japan’s estimated population of about 127.42 million as of July 1. The debt is equivalent to almost 1.9 times the nominal gross domestic product in fiscal 2009, which totaled $5.55 trillion.
i wasnt directly comparing japan and the US; i was merely pointing out that there is no magic ratio of debt to GDP…other considerations obviously are cost of servicing and whether a lot of it in foreign hands…james hamilton asked the question, who will buy that expected $8B in additional debt, and rebecca answered: The answer is the domestic private sector
which i disagreed with at the time; however this week i see she’s already right: U.S. Investors Regain Majority Holding of Treasuries – For the first time since the start of the financial crisis in August 2007, U.S. investors own more Treasuries than foreign holders. Mutual funds, households and banks have boosted the domestic share of the $8.18 trillion in tradable U.S. debt to 50.2 percent as of May, according to the most recent Treasury Department data.
The other way is improve the quality of risk assets. Also banks manage risk by buying CDS, but we aren’t real sure if it’s phoney insurance or not. This may artifically depress interest rates but the risk is still there. Banks need return too on their assets and if rates were higher maybe we would all be more stable. But we are locked into a cheap credit economy and are now stuck with the big output gap that created worldwide and not enough credit worthy consumers and biz to consume from it. So basically, we blew it.
Nationalization sounds good at first blush, but then I remind myself how they did with F&F and FHA.
The real solution is a controlled downsizing of the financial sector, I think.
min
thanks.
i don’t have time to respond to all the points you raise, and in any case my responses would be more in the way of asking for clarification rather than arguing the point. i don’t think i was so interested in the “financial details” as in just keeping clear what debt is and why we can’t do without it as someone seemed to be suggesting. Using the power to create (print?) money doesn’t seem to me to be much different than “borrowing” it from folks who have accumulated more than they need to spend on current consumption. It you think about it, money in a “box” is not money. It is at best potential money. When it is put back into circulation it has exactly the same effect as if the government just printed more of it. The problem with government printing is that it has no natural “governor” and must be managed by people we hope know what they are doing.
buff
i am aware that i agree with Levit about part of what he is saying. But he goes on to either say more or to fail to say exactly what his point is. I hear, though you may not, strong echoes in what he writes of the big lie. I am aware we are talking past each other,but i feel like it is because i am talking over his head. Note I am not trying to be nasty here, just telling you how it looks from my end.
Describing the problem as debt management obscures the details. Political policies that require vast and wasteful investment of resources is the front side of the problem. Political policies that result in discriminitory tax policies is the backside of the problem. Taken together they amount to poor debt management, however, when thus stated and described the remedies offered have little to do with the broadsides of the issue. At one and the same time our political class is crying about debt and offering yet more tax cuts and continued profligate waste of resources. I’d suggest that the Deficit Committee is little more than an effort to obscure from public view the realities of the budget problems.
Rather than focusing on the two basic contributinig factors to the emormity of the deficit, the Commission’s focus has created a firestorm of contravercy by looking aside at tangential financial issues. With that contravercy in full force the realities have been lost.
Actually, the term MAD has been used often with regard to the US-China relationship. The Chinese have been listening too….they will eventually find a way to not be held hostage that way. It’s not really that hard once they get to the point that they don’t need to peg to the dollar. But they can’t give up merchantilism with the US yet, so we are safe for a while.
coberly: “The problem with government printing is that it has no natural “governor” and must be managed by people we hope know what they are doing.”
Some states have counter-cyclical mandates. The Federal gov’t has a partial counter-cyclical mandate, as it has obligations to spend in hard times (automatic stabilizers), and taxes naturally tend to rise in good times. Going forward, I think that we need to have more stabilization on the upside: a more steeply graduated income tax, for instance, or taxes that kick in under boom conditions, something like that. Now is the time to enact such tax changes. If we wait until times are good, they will be greatly resisted.
min,
let it ride. i am too tired to go back and check. i noticed that my rather abstract musing about the nature of money and debt were getting anwers from you arguing the advantages of government printing etc… all of which i agree with. i was making the equivalence from the other side of the argument… those who like gold and hate government debt don’t seem to see the disadvantages of gold, or the similarty (as i see it) between government “borrowing” from the future by printing money and (anyone) borrowing from the past,as it were, by rescuing money from under matresses and putting it back to work.
coberly: “those who like gold and hate government debt don’t seem to see the disadvantages of gold,”
I grew up with those ideas. When you focus on yourself and your family, money as a store of value is very important.
coberly: “or the similarty (as i see it) between government “borrowing” from the future by printing money and (anyone) borrowing from the past,as it were, by rescuing money from under matresses and putting it back to work.”
Interesting. I had not thought about it in just that way. 🙂 OC. putting money to work focuses on the value of money as a medium of exchange.
One of Nixon’s millionaire buddies had a nice saying: “Money is like manure. When you pile it up it stinks. When you spread it around it makes things grow.” 🙂