Anyone got a number? For ‘Real Debt Service of Public Debt as % of GDP’
And this is an honest question, one that I have been poking around in but maybe don’t have the chops to answer.
Lets take three measures of Public Debt:
One nominal. Public Debt as of the 16th was $17.899 trillion. And rising.
Two as percentage of GDP. And BTW the preferred measure of deficit fetishists prior to the blowup in R-R, but still active enough. Well depending on whether you take Total Public Debt or its major component Debt Held by the Public this ratio is either close to 100 or 70 depending (top of head, please insert real number.
Three when measured as debt service as share of GDP.
Now I would argue that this last measure is the right one for measuring ‘sustainability’ of debt. For one thing it is generally the measure used my most households and corporations because it directly effects cash flow, and for most people Cash is King. Take the following thought experiment:
I have borrowed a billion dollars at zero percent interest on an interest only loan with no term. Is that borrowed money actually to be considered ‘debt’ if it costs nothing to hold it and never has to be paid back? Well lets just say that it is an odd kind of debt. Now obviously no one is going to loan me a billion on those terms but increasingly people are effectively offering something close to that to Uncle Sam. That is the real rate on the 10 year is at or even below the zero bound, in effect people are paying the U.S. to hold their money for them. On the other hand there are still older issues of the 10 year and longer notes and bonds that are carrying higher yields and so there is actual debt service. But how much of that is real? And what is the percentage of federal revenues and/or GDP going to that? Because this is a harder number to come up with than you might think for a couple reasons.
One, most debt service on the Intragovernmental Holdings component of Total Public Debt is not financed in real terms, instead it is just credited to various Trust Funds and shows up as an increase in Debt. But mostly not as an expenditure.
Two, a good deal of debt service on the Debt Held by the Public component of Total Public Debt is being paid/credited to the Federal Reserve. Which in turn returns any ‘profits’ to the Treasury. To me it is an open question as to whether debt service actually paid to the Fed should count as ‘Real Debt Service’ at all. Which is why I posed all this as a question.
Has anyone actually taken the ‘Interest on the Public Debt’ figure and related it to the actual budget line items for ‘Debt Service’ and then adjusted THAT for such debt service actually paid to governmental and quasi-governmental institutions? I have been meaning to make an attempt at doing this myself but have run into problems of time and expertise. But the question still remains: in real terms how close is the U.S. Treasury to being in the same position as my theoretical borrower with a no term billion dollar zero interest rate interest only loan? Not all that close maybe but the answer is far far away from most people’s assumption of what it means to carry $17.9 trillion in debt.
http://www.cbo.gov/publication/21960
CBO: Federal Debt and Interest Costs
Okay a start. ‘Net interest’ does not include interest paid on the Trust Funds. Which by the way argues for using ‘Debt Held by the Public’ rather than ‘Total Public Debt’ for these purposes.
http://www.gpo.gov/fdsys/browse/collection.action?collectionCode=BUDGET&browsePath=Fiscal+Year+2015&isCollapsed=false&leafLevelBrowse=false&isDocumentResults=true&ycord=0
OMB: Budget of the United States. See particularly Summary Tables. (Too bad the Tables are in Landscape while the image is in Page/Portrait). It shows ‘net interest’ dropping from 4.1% of GDP down to 1.9% in a few years.
But this doesn’t (its seems to me) take into account Fed Holdings. Even though I suspect most people would be flabbergasted to know we were on a track for 2% of GDP needed to finance $18 trillion plus in debt. After all a lot less than the debt service on your mortgage (if you are going to use the specious case of comparing U.S. budgets to household budgets to start with).
You are aware that the USA is sovereign in its own currency? You are aware that we have a floating exchange rate so that the value of our currency is not tied to the value of any other currency? You are aware that the FED creates money at will with just a few figurative keystrokes on a computer? You are aware that when the Treasury issues “debt” that they are taking money out of circulation?
As far as deficits go, you are aware that all that matters is if there is enough spare capacity in the economy to allow the government to buy the extra services it can buy with the deficit without causing inflation?
So therefore, you must be aware that the premise of this article is totally ridiculous?
The portion of interest that goes to the Fed and then comes back on budget as income is an interesting (new) feature to the puzzle. The Fed payments have exploded as the Fed’s balance sheet has expanded.
About half of the Fed’s income comes from % from MBS issued by Fannie/Freddie and FHA. I don’t think this income should be subtracted from the calculation of ‘real’ debt service cost. The Fed’s income from holdings of US Treasury bonds might be considered as a reduction however.
The problem with the Fed income is that it’s not predictable. If Yellen raises rates next year (as she’s suggested she will) then that Fed income will decline rapidly. (it could also produce a loss)
Fannie and Freddie paid Treasury over $200B the past few years as dividend income. That should not be included when determining net debt cost.
Interest paid to Trust Funds is another area that is a bit muddled. For example, in 2014 SS will receive $100B in interest, but it will also have a cash deficit of $75B. So 3/4 of the interest goes out the door as an expense. What portion of this should be part of the “real” debt cost?
Net-net, coming up with a definitive definition of debt service cost is not as clear as one would think. In 2014 that “real” number is historically very low. But it’s reasonable to assume that the 2014 “real debt cost” will be the lowest for many years into the future. Today is the sweet spot, tomorrow less sweet.
I know that MMTers are single issue ideologues who are basically Reversi-Goldbugs.
So yes I am aware of all those arguments but do not accept their validity because they are disconnected from historical reality and so are themselves ridiculous.
Suggesting we have no common ground and that you can take this tired off topic argument to another thread. Because I don’t care about your obsession and am asking a question about federal budget accounting whose operatives are not using MMT assumptions. That is none of OMB, CBO, Treasury or the Fed seem to give a crap about MMT and my question is about how their language and concepts interact.
If you like you can take this issue up with the Feds Open Market Committee and the Directors of OMB and CBO and get back to me once you convince them.
Good luck! And write if you get work!
krasting the Feds income specifically from that portion of QE 1-3 that was devoted to buying existing longer term bonds is independent of what Yellen does with rates. Interest payments are not based on price though of course the yield depends on the discount or premium paid by the Fed at the point of purchase. But since the Fed is at least nominally holding all those notes and bonds to maturity they need not be concerned with price variations on existing notes and bonds created by rates on new issues.
That is just like the SSAs Trust Fund holdings the Feds holdings of regular Treasuries don’t operate like a buy and sell bond fund, they just are not sensitive to price going forward from the point of issuance/purchase.
and BK my question has nothing to do with overall Fed income and still less whether that should be considered some sort of offset to net interest. Clearly it isn’t scored as such by Treasury so the question is moot, Fannie and Freddie have nothing to do with this either way.
And Interest on the Trust Funds is not considered an ‘outlay’ and is not included in ‘net interest’.
Now I see where you are going with the 3/4 argument but that is just you imposing your own frame of reference. For example I could claim that not one penny of interest paid on the Trust Fund actually went out the door and instead that $75 billion came from the Treasury net redemptions of maturing notes and bonds. And if you looked at the SSA balance sheets on a monthly basis (and you to your credit actually DO) you would see that outflows of cash from the Trust Funds occur at a steady monthly rate even as interest payments come in only twice a year. So while it is conceptually useful to see the gap between cost and revenue as being filled by that portion of revenue coming from interest I could just as well claim that it is being financed in large part by the portion of SS income coming from tax on benefits. Which mostly come in quarterly. I mean why not? It is all the same balance sheet and there is no line drawn from any particular income category to that outflow. Heck it even plays better for the Right, taxpayers who saved for their own retirement paying out taxes to fund the improvident. But it is all just framing.
Or not entirely so. Can you develop a number that includes net transfers from SSA and excludes interest retained by the Fed? Because at least that would be AN answer to my question, even if one I can’t fully accept. Still interesting and informed by something. Which is more than I can say for most critics of SocSec.
Bruce,
What makes you think I need work?
Does whether or not I need work have anything to do with MMT. I am glad that you at least knew what I was talking about.
Webb – The Fed’s balance sheet consists (primarily) of assets from QE and liabilities (money in circulation and reserves). The printed money costs nothing, the reserves on deposit do have a cost. That cost is Interest on Excess Reserves (IOER). The IOER rate that the Fed pays is currently 0.25%. So if the Fed has assets that yield an average of 3% and a cost of .25% for the borrowed money to pay for the assets, then it has net income of 2.75%.
If/when Yellen raises rates she will do it by increasing the rate that the Fed pays on IOER. If the IOER goes to 1%, then the Fed’s income would be reduced.
In theory, it’s possible that the IOER could be increased to a level that is greater than the yield on the assets. If that happened, then the Fed would record (a paper) loss for that year.
This Economist article spells this out better than I. My point is that the Fed’s future results are uncertain, and they are dependent on what Yellen does with monetary policy.
From the Economist:
“In a recent paper five Fed economists calculated that if the Fed buys $1 trillion of bonds this year and starts tightening in 2014, then the Fed’s profit will turn to loss by 2017.”
The link:
http://www.economist.com/news/finance-and-economics/21570753-what-happens-when-fed-starts-losing-money-other-side-qe
Note: I see little chance that Yellen will raise rates in 2015. (low global inflation and sub par growth). Buts she has indicated that she will nudge rates in mid 2015. The idea that the Fed could actually lose money because the Fed is forced to raise short term interest rates to (say) 5% is extremely remote. But the Fed’s short term rate was 5% in 2007, so it’s possible.
Greenberg the saying “Good luck! And write if you get work!” Is an old old joke dating to the 1930s.
That you don’t”t recognize it as such puts you right in the mainstream of MMTer’s : young guys intoxicated by the simple logic of Sovereign Debt Issuers and ignorant of the actual history that shows it to be more than questionble.
Something no MMTers seem to recognize instead persistently trying to educate their elders as if it were WE who just Fell Off the Turnip Truck.
Another old saying that you are unlikely to recognize. Look you are free to peddle MMT on your own time and your own dime (another old phrase) but as far as traipsing in on my post and insisting that my whole premise is “ridiculous” because after all you know better , well so says you.
Stay on topic or go away. Or at least make a challenge that just doesn’t rely on the first principle of “Bruce you ignorant slut”
krasting reread that Economist article and isolate what it says about ‘Treasuries’ (which those five economists assume will be held to maturity) and possible losses on ‘bonds’ being sold at a lost, where ‘bonds’ seem in context to be referring to MBS holdings. Moreover there is an assumption that the current policy of paying interest on bank reserves, itself a relatively new phenomenon, will comtinue even though it results in a net loss.
But in any event the while article seems to turn on monetary policy and not on my question about the real burden onTREASURY of interest. How that impacts the Fed may be crucially important in the larger scheme but doesn’t help me to find the number I am asking for..
For decades the underlying narrative of Entitlements Crisis has been that the COMBINATION of payments on Social Insurance AND interest payments on Public Debt will have a crowding out effect on other spending and that a dependable proxy for that is Gross Public Debt “OMG Debt has ballooned from $10 trillion to $18 trillion!!!” While rarely examining in numeric terms the actual cost of financing that debt. Especially since QE has skewed the actual holdings of low yield short term debt (mostly held by non-Fed actors) vs higher yield and older long term debt (where up to 70% of those issues are held by the Fed).
What is the average coupon yield of Treasuries held by parties other than the Fed and the Trust Funds? That at least gets me to something like “Real Debt Service”
Obviously this isn’t the only question of interest or even the most important, it just is the one I am asking this weekend.
I believe cash to be King when the circumstances are usually more attractive that deals.
“That you don’t”t recognize it as such puts you right in the mainstream of MMTer’s : young guys intoxicated by the simple logic of Sovereign Debt Issuers and ignorant of the actual history that shows it to be more than questionble.”
Bruce, not to detract from some excellent questions about the way the government economist present debt. Which I have learned much in this short article and discussions.
In my limited study of sovereign debt it beats always private debt created money always.
Webb – Treasury has a report on the cost of outstanding public marketable debt as of 9/2014. The blended cost of the debt is 2.037%.
http://www.treasurydirect.gov/govt/rates/pd/avg/2014/2014_09.htm
I did not find (I looked) a recent report on what is the average yield on the Fed’s holdings of Treasury marketable debt. The current principal is $2.4T. The average yield is somewhere between 3 and 3.5%. (the most recent info is from 2013 Fed annual report – so old data). This # is the coupon yield – it does not adjust for the un-amortized premium the Fed paid to buy the bonds. So real return on the Fed’s Treasury holdings is around 3%. (the range is 2.5 – 3.25%)
In fiscal 2014 total debt service was $431B, of that $175b was paid to Intergovernmental accounts. So net expense on Debt to Public was $256B. (256/12,800 = 2.00% – very close to Treasury # of 2.037%)
If you use 2.75% as an estimate for the net return to the Fed on its Treasury holdings you get $66B, minus the cost of IOER (another estimate) it comes to ~$60B (this sounds a bit high, but let’s use it).
Subtract the $60B from the $256B and you get $196B as the adjusted public debt cost. Divide that by the $12.8T and it comes to a real cost of 1.53%.
My gut tells me this is a bit low. I would put a range of 1.5 – 1.6% as the number you were looking for.
Possibly a better way to look at this is to ask the question, “What is the marginal cost of Treasury to issue new debt?”
The average life of Treasury debt is 6+ years (let’s call it 7 years). Treasury issues two types of debt with a 7 year maturity – Straight coupon bonds and TIPS. The yield for 7 year bonds and TIPS as of Friday:
Coupon = 1.87%
TIPS (nominal yield) = 0%
(The TIPS cost is not zero, it will be whatever future inflation will be. The “market” expectation for inflation is ~1.5%)
From these pieces of info I would answer your question with:
Adjusted for the Fed, the real cost of the existing stock of public debt is between 1.5 – 1.7%.
The marginal cost of issuing new debt (a blend of TIPS and Coupons) is in the same range.
As I said previously, the cost today is about as low as it will get. In 2-3 years it will be higher.
My preferred measure: (i-n)D/NGDP
i nominal interest rate
n Nominal GDP growth rate
D/NGDP nominal debt/NGDP ratio
It’s that share of NGDP that would be needed to keep the debt/NGDP ratio constant over time.
It’s probably negative at the moment. But n is always a forecast.
< ignorant of the actual history that shows it to be more than questionable.
What part of the 4,000 or so year history are they ignorant of?
I noticed that you avoided all my questions, but went on the personal attack immediately. Sorry if i pushed your buttons.
When the FED needs to fight inflation, i.e. stop buying up T-Bills, the US does the reasonable like any other time in history, cut off the war profiteers, and raise taxes and fees. Which might not be allowed since the rich own congress………. and are anti New Deal.
US has to have huge debt, elst [as Greenspan noted] the rich would have no safe place to put the money they made and paid no taxes on selling to the pentagon. The US’ debt is running about $10T less than cumulated pentagon spending since 1948.
The rich lend the money and sell to the pentagon the weapons they make profits on. Iraq [soon Afghanistan] a good example, sell $25B to them then blow it all up when they lose it and “when the ISIS dust settles” and it looks like the Sunnis want in with Baghdad sell them some more………….
What a great country to be a billionaire in.
Steve Greenberg,
I find you questions leading (not framed for critical thinking much less logic). I would take them as rhetorical.
I have to follow, my last course in Money and Banking was >50 years ago…….
“You are aware that when the Treasury issues “debt” that they are taking money out of circulation?”
Selling T Bills is how US “debt” is issued/created, the cash comes into the treasury and goes into the cash accounts managed by the US Comptroller general, these account send cash to the departments’ comptroller general cash accounts to write checks to pay demands for paynments for things like (I have watched a lot of this in my time) false claims on F-22, B-2, Zumwalts, Star Wars, F-35’s and those are only the biggest losers.
The cash outside of HHS is wasted, but that waste does not mean it is out of circulation.
Or is M&B is different since the Milton Friedman scam.
Steven said:
“You are aware that the FED creates money at will with just a few figurative keystrokes on a computer? You are aware that when the Treasury issues “debt” that they are taking money out of circulation?”
But what is the effect of the Fed using money created from nothing to purchase Treasury Debt? That is the question asked in the OP.
More pointedly one might ask what is the effect of such shenanigans on confidence in the government, the economy, and the dollar? At certain times it would be much more straightforward for the Treasury to issue dollars (analogous to a firm issuing stock) to fund the government while at most other times borrow/issue Debt. While there is in theory an infinite “stock” of dollars, confidence in the value of the dollar is another story.
Re: Steven Greenberg-“… [Bruce Webb] went on the personal attack immediately…”
As a somewhat objective observer, it seems to me that the attack was on MMT in general and not personal, and was in response to your attack on the (“ridiculous”) original post. If you attack someone you lose the right to complain that they respond in kind, it seems to me.
I remarked “As far as deficits go, you are aware that all that matters is if there is enough spare capacity in the economy to allow the government to buy the extra services it can buy with the deficit without causing inflation?”
This was an attempt to briefly mention that MMT is fully aware of and includes in its theory the impact of confidence in the value of the dollar.
JimV, I have to concede that you are right that I attacked first. If I have no tact, I can’t expect tact in the response. If we can get over my tactless approach, it would still be good to be able to discuss the merits of the questions I raised.
The point is that measures of the “debt” level or levels of “interest payments” are at best very indirect measures of the appropriate levels of government “deficits”. We should be looking at more direct measures such as how the economy and the people in it are fairing.
> What is the effect of the Fed using money created from nothing to purchase Treasury Debt?
In my opinion, the effect is to put more money into the economy that the big investors cannot figure out what to do with in a productive way to help the economy. So they invent financial gambling games and pump up the value of stocks or they turn right around and give the money back to the government in the form of buying Treasury certificates. This why uising monetary policy this way is likened to pushing on a string. There is no telling where that string is going to go.
Greenberg you opened your initial comment with six of what you clearly considered rhetorical questions with obvious answers with the implication that I was ignorant of all of them and then claimed that meant that my post was “ridiculous”.
Yes the following pushed buttons: you called me a ridiculous ignoramus and then bitched because I called you names. Try rereading your original comment as as reasonable person would have received it:
“You are aware that the USA is sovereign in its own currency? You are aware that we have a floating exchange rate so that the value of our currency is not tied to the value of any other currency? You are aware that the FED creates money at will with just a few figurative keystrokes on a computer? You are aware that when the Treasury issues “debt” that they are taking money out of circulation?
As far as deficits go, you are aware that all that matters is if there is enough spare capacity in the economy to allow the government to buy the extra services it can buy with the deficit without causing inflation?
So therefore, you must be aware that the premise of this article is totally ridiculous?”
Note you didn’t make ANY arguments for your positions, you didn’t even provide linkage, you just laid them out there as if no right thinking person could even possbly challenge them. That’s trolling.
On a nicer note.
Thanks Krasting, that is pretty much what I was looking for and right in line with my top of the head estimates. Let me read it over some and then maybe use it as the hook for a new post.
Bruce,
Now that I have admitted to my tactless statement of my case, and now that you have stated that you are aware of all the points I have made, do you have anything further to say?
Lets take this from Krasting as a starting point:
“Adjusted for the Fed, the real cost of the existing stock of public debt is between 1.5 – 1.7%.”
I would note that if I am reading BK right we should amend “public debt” to “debt held by the public” (as he clearly understands two different things entirely).
As a ball park the $12.8 trillion in Debt Held by the Public is right at 75% of the 2013 GDP figure of $17.1 trillion. And 75% of 1.6 = 1.2%. Or we can take BK’s adjusted figure of $196 billion and get 1.15%. Which since there is a slight temporal mismatch between the debt figure and 2013 GDP gives us a number that is very literally “good enough for government work”.
1.2% of GDP to finance all ex-Fed Debt Held by the Public. Does that justify the Peterson type “Fix the Debt” “Kick the Can” narrative of Intergenerational Warfare? Are Boomers REALLY passing on an unsustainable debt burden to future generations? Is Bruce really himself a dick for asking rhetorical questions to which he assumes there is only one correct answer?
The answers to these questions are “No”. “No”. “And Yes. Yes he is”.
And to just pile on with another rhetorical question. Deficit hawks often like to use the meme “If the Federal government were a State or Household —“. Exactly how many U.S. States and households are financing their entire capital stock at a rate less than 1.2% of current year income?
Greenberg perhaps you can clear up what I see as my primary source of confusion about MMT, at least the version that gets deployed in blog comments.
What I read is that Sovereign Issuers of Currency have no effective limits on creation of said currency to pay debts because they have the ability to force creditors, in this case mostly taxpayers, to pay debts in that currency. So if we want to pay for increased benefits for Social Security we can just issue checks. With the caveat that all that has to we done within some capacity metric:
“As far as deficits go, you are aware that all that matters is if there is enough spare capacity in the economy to allow the government to buy the extra services it can buy with the deficit without causing inflation?- ”
But how determines the slack here? And how would you know that such spending wouldn’t cause inflation before the fact? And wouldn’t the existence of such slack be independent of whether the Debt Issuer was Sovereign?
Because the argument as typically presented makes the move from Sovereign to (Effectively) Unlimited Credit when to me history shows the opposite relation that (Effectively) Unlimited Faith and Credit enables the Sovereignity. And further suggests that Full Faith and Credit rests to some large degree on the belief that the issuers of currency will maintain some constraints on supply. Something beyond “hey the checks have always cashed” and “we only take dollars for tax payment” and “we own the printing press so why not”.
To you these may seem childish oversimplifations of MMT. But this may be because most MMTers simply assume the truth of the underlying assumptions and don’t think they need to bother explaining them beyond what to outsiders seem like pure slogans.
Bruce,
You may be interested in the “MMT Primer”
http://neweconomicperspectives.org/modern-monetary-theory-primer.html
Yes, “pay for increased benefits for Social Security we can just issue checks. With the caveat that all that has to we done within some capacity metric:”
The slack is determined by normal economic measures, factory utilization, unemployment rate, availability of physical resources, etc.
Remember we are only talking about debt issuers that are sovereign in their own currency, do not have debt denominated in anything but their own currency, and have a floating exchange rate with other countries – all of which describes today’s USA.
I think that if you read the MMT Primer you will find that the proponents of MMT do not assume anything like what you think they assume.
You might enjoy MMT on a Postcard.
http://www.nakedcapitalism.com/wp-content/uploads/2016/05/mmt_postcard_final-e1401342019907.png
Public debt is debt held by the public sector, the government. Private debt is the debt held by private people (sometimes confusingly called the public).
See the article “Beware of Policies and Legislation Based on the Generational Accounting Scam”
http://neweconomicperspectives.org/2014/10/beware-policies-legislation-based-generational-accounting-scam.html
Webb – Yes, the cost of new debt is at historical levels. There is a convergence of forces. Seven years of ZIRP and $3T of QE in the USA. Similar steps In many other economies. What is the result? Sub par global growth and very low inflation (deflation). There are Trillion of liquidity floating around the globe. The supply of money exceed the demand, so the yield(s) go down. You think rates are cheap in the US? The latest yields on ten-year sovereign bonds:
USA=2.2%
Germany=0.86%
Japan=0.47%
France=1.3% (!!)
So the USA is the ‘high cost borrower’ in this club.
This all argues in favor of your point; “What debt burden?”… But….
The CBO has a forecast of % rates that has 3mth bills at 3.4% and Ten-year at 4.7% after 2018. (SSA has a somewhat similar view)
What would the result be if those %s were the reality today? a) There would be no Fed income, b) the raw cost of debt would be ~4%. So about twice what it is today. Call it $500B. That is near 3% of GDP. That’s not a trifle. And that’s happening in 36 months? Gulp…
Are CBO/SSA gonna be proved right with their % rate outlooks? Don’t know; don’t think so. But these are the deep thinkers we have to rely on to have a conversation about this stuff. Right?
Using the CBO #’s is supportive of the claim “There’s too much debt! We’ll cripple the kids!”
The CBO link, page 52 of the report:
https://www.cbo.gov/sites/default/files/45653-OutlookUpdate_2014_Aug.pdf
MMT question:
If interest rates were to be higher, then government spending would increase, as would the deficit. More money would be transferred from the public to the private sector. This would be a favorable outcome.
Is this a correct MMT analysis??
Greenberg taking your last first.
There is a specific vocabulary around U.S. Federal Debt as that term is used by the Tresury’s Bureau of Public Debt. In turn any discussion of total Federal Debt as shown on such things as the National Debt Clock and Treasury’s D but to the Penny web application has to use those terms as defined or else engender untold confusion.
To the Bureau of Public Debt ‘Public Debt’ includes all bills, note and bonds issued by the Dept of the Treasury plus TIPS. It does not include a whole variety of Federally backed obligations like Fannie and Freddie securities FDIC and Pension Guarantees, Flood and Crop Loans/Guarantees etc. no instead the closest proxy term for ‘Public Debt’ is “Treasuries”.
Public Debt as tracked by the Bureau of Public Debt’s ‘Debt to the Penny’ application totals around $17.9 trillion. Of that some $12.8 trillion is in a category called “Debt Held by the Public” with the remainder being in the category “Intragovernmental Holdings” mostly but not entirely held by various “Trust Funds”.
If you don’t understand this terminology then you will not have a chance of understanding the question posed in this post. In the face of that we have this from you:
“Public debt is debt held by the public sector, the government”
Now it may be that “held by” is ambiguous here, in that one reading has the government being the debtor and the other the creditor, though the most natural reading would be the ‘holder’ of the note or the creditor. For example Treasury maintains a website tracking “Major Foreign Holders of U.S. Debt” which can’t be read any other way. But in the case of Public Debt as defined by the Bureau of Public Debt ALL of it is owed by the Federal Government but only a portion is owed the Federal Government, to the degree that say the Social Security Trust Funds or Fed Holdings are considered part of the ‘Federal Government’..
Either way your deployment of ‘public debt’ using the definition you do might as well be in a foreign language. At a minimum it needs translation into the language being used by me and my long term adversary Krasting. That is while my differences with BK are legion at least we are using certain referents in the same way.
Can you whip out your MMT Rosetta Stone here?
krasting your calculation uses a future rate of interest to calculate cost of debt service on today’s debt as a percentage of today’s GDP. But interest rates are not that high today and if they will be in 36 months or whenever they will be applied to that amount of debt as a percentage of that year’s GDP. Making your 3% of GDP number meaningless. Now certainly the faster we get to those interest rates the closer the calculation of debt service as a percentage of GDP gets to 3%. On the other hand CBO and SSA give no,bears for future GDP and Debt and so it is not necessary to appeal to the “what if interest rates were 4% today”. Who cares about a counter factual. Instead just redo the calculation using projected 2017 interest rates, total public debt and GDP. And then maybe recalculate it by deferring that 4% interest rate until 2019.
Then we would have something to talk about.
Greenberg on your second point.
Now it might well be that I would be interested in the MMT Primer and I may follow up on your kind invitation. But that would not explain why I should take its pronouncements sight unseen as being any kind of authority. Yes I see that it was convincing to YOU. But if you cannot explain it to me then all I see is a citing of the Catechism of Wray.
That is I see no difference between you and those known as Vulgar Marxists or Vulgar Freudians who are captivated by the concepts and slogans but on challenge reply “Why you have to read the Book”.
No, no it is up to you to advance arguments that make me NEED to read the Book. And “Well Duh! Sovereign!” Is not such an argument.
Webb – This CBO report (page 15 of report) has Net Interest, as a % of GDP for 2014 of 1.3%. This report was from February, so it was a bit high in this estimate. I think 2014 will come in close to your 1.2% number.
But the same report shows that this will increase to 3.3% of GDP in the 2020’s. This confirms what I just said, it’s moving in the direction of 3%. That’s a big relative change.
Same report has debt to public in 2014 at 12.7T and GDP at 17.3T. The 2017 #s are Debt to Public = 14.5 and GDP of 20.0. So GDP goes up by 2.7T while debt goes up by 1.8T. It costs 67 cents of new debt to buy $1 of GDP. The debt ratios have no place to go but south with that gearing. And there are no recessions at all in the CBO forecast. Gulp.
http://www.cbo.gov/sites/default/files/45010-Outlook2014_Feb_0.pdf
Krasting and finally.
I am very leery of accepting CBOs numbers unchallenged given that they rather gratuitously made two huge changes in recent years. One was the introduction of “Alternative Fiscal” in parallel of their traditional “Current Law” with the suggestion that “Alternative Fiscal” was a better choice for policy makers. Even though it built in certain policy assumptions. To that degree it was a thumb on the scale and one that was concidentlally(?)) introduced at the same time as “Current Law” scoring of Medicare under ACA shedding 10s of trillions of $$$s from its ‘Unfunded Liability’
The second was the abandonment of their previous policy of accepting SSAs demographic numbers but instead substituting their own new data set. One whose methodology boiled down to “Since the future is unknowable lets just substitute straight line improvements in mortality for any kind of informed projection”. Boom overnight the actuarial deficit facing Spcial Security jumped by almost two points. Leading you to solemnly say “Even CBO projects–”
Well okay. But I have yet to see a good explanation for the abandonment of SSA demographics (which gave us an apples to apples baseline foe comparison between CBO and OACT economic projections) for this tremendous discontinuity that made CBOs 2013. numbers simply incommensurables with previous year’s numbers. And once again in a way that coincidentally(?) gave ammunition for anti-Administration budget hawks who were getting pummeled by previous numbers.
You could call this the Catechism of Elmemdorf. “why you could just read the Primer!”. Well yes I can and often do. It doesn’t always make me a Believer.
Krasting hmmm “Big relative change”
Well so it is. Then again anything rebounding off the zero lower bound will show up large in relative terms.
How does that 3% of GDP debt service compare to absolute levels in the past, say during the 70s? Or compared to projections then or in any of the now thirty years that groups like Concord have been pushing the “crowding out” and “Intergenerational warfare” numbers? Does that really support your 6:26 “We’ll cripple the kids!”?
Or is it just special pleading in support of the Economic Right’s 75 year plus war on the New Deal and Social Insurance?
(And will that dick Bruce ever stop posing rhetorical questions after whining about them?)
(Answering only the parenthetical: “Probably not”)
The word “holder” in holder of debt must not have registered with me when I read your comment. I was thinking issuer of debt – public sector debt. My mistake.
bkrasting –
>If interest rates were to be higher, then government spending would
> increase, as would the deficit. More money would be transferred from
> the public to the private sector. This would be a favorable outcome.
> Is this a correct MMT analysis??
I am not the authority on MMT, but I will try to give you my understanding.
In the scenario you mentioned the deficit might go up unless rising interest rates were a sign of an improving economy and the amount of taxes collected went up faster than the cost of financing went up. The cost of paying the interest on existing treasury debt that has a fixed rate of interest would not change. The cost only changes on a refinancing assuming that all debt is rolled over. If some debt were just repaid by money created from thin air by the fed, then the cost of refinancing the debt might not go up at all.
Putting more money in the private sector is only good when the economy needs more money in the private sector. If there is already too much money in the private sector, then sucking some of it back by rising tax collections not matched by rising spending might be the better prescription.
All the money that the Fed has pumped into the economy that is not being used because it was given right back to the government with purchases of Treasury securities would seem to me to be too much money in the private sector if everybody suddenly decided to start using it instead of salting it away in Treasuries. The Fed or some entity had better have a good plan of sucking that excess back out of the Private sector or we are in for one hell of a mess.
Of course, if a lot of money disappears with the collapse of the bank invented derivatives, then there might not be too much money in the private sector.
If anybody thinks that they can predict what is going to happen by considering only a restricted set of possibilities which are far fewer than what could possibly happen, then they don’t have a good chance of being right.
Bruce,
I never said “Well Duh! Sovereign!”.
You asked “And wouldn’t the existence of such slack be independent of whether the Debt Issuer was Sovereign?” I was trying to say that my discussion is about today’s USA which is sovereign in its own debt. Therefore I am not talking about countries who are not sovereign in their own debt. Whether they have slack or not, is of no relevance to this discussion about MMT.
I am trying to respond with tact, but I can see how you might assume that I am still being tactless and assuming bad things about you. I have left that stage of my thinking behind.
I could explain MMT to you if I had the time and space to write the “MMT Primer” Does this blog have the space for me to paste it in here? Could I do that without violating the author’s copyright? So how do you propose that I answer all of your questions, when I am in fact not looking for a another full time job?
The problem of looking at the expense of servicing debt as an indication of long range sustainability is that it is of course highly dependent on interest rates. And a large percentage of the federal debt is financed over relatively short periods so it needs to be rolled over. So I don’t think that one can make conclusions about long term sustainability based on the short term interest the government is paying. Or we could all end up like those FBs with resetting ARMs on their houses that they couldn’t afford to pay.
Jim A, an excellent point that none-the-less misses the particular mark.
What I find interesting is that the Fed has gobbled up to 70% (their official lid) of most issues of longer term Treasuries, and indeed a big reason they branched out to MBSs in QE3 is that they had already reduced the long bond market as much as was safe given the role that bond has in international finance. To that degree we have already digested the hangover debt passed forward to us by past spending binges on defense and war. Of course we still owe the money but we are not particularly suffering from carrying it.
Now all of this is complicated by the rollover of the 10 year note in that large portions of THAT are just past excesses still on the books and just passed forward. But even that is being carried at zero real rates.
So from this perspective Boomers have truly done their part. We largely rescued Social Security from its state in spring 1983 where it was literally weeks from insolvency by paying more our entire work lives, and in the process moving out ‘insolvency’ (which isn’t exactly that anyway) to 2034 or a net 51 year improvement since 1983. And then more recently we have ‘refinanced’ all the overhanging debt at zero effective interest. Which means to me that we can tell the Austerians and the Austrians that insist that Boomers have to suffer further for their past sins to piss up a rope. Boomer workers stepped up to the plate in 1983 while Capital pocketed series after series of tax breaks. And certainly never delivered on THEIR problem of “Lifting All Boats” because of the “Rising Tide” provided by Supply Side.
Sure interest rates can and probably will go up, although maybe not as fast and far as the Krasting’s of this world would have it. But it becomes increasingly hard to pin any of those effects on the cost of financing past spending binges. Rhetoric that worked fine when 10 year bonds were carrying double digit coupon rates wears a little thin once run through the current numeric screen. After all 20 years ago the idea that the nation would be threatened by a move to 4% on the 10 year and 5% on a 30 year mortgage would be laughed at as totally ridiculous. Back then rates that low were considered the impossible dream. Now, at least temporarily, they are half of that with no one except Goldbugs predicting a return to anything like late 70s early 80s interest rates on anything. (Except of course consumer credit cards where people are still getting gouged at 25%+ as if the banks were paying that much for their money still.)
As things stand right now it is the ‘takers’ who have been paying the bills and the ‘makers’ who have been having the free ride.
Webb – Just a reminder. In 2008 the unfunded portion was $4.3T (28% of GDP). In 2014 it is $10.6T (62% of GDP). In six years GDP is up by $3T, the unfunded portion is up by $6T. Do these numbers not count at all?
PS – Guys like me love low interest rates. I’m a stock investor. ZIRP and QE have made me a bundle. Why do you think that income inequality has soared? Cheap rates make the rich richer.
Unfunded liability numbers don’t count at all.
For reasons I have presented in many, many posts dating back to my first series of Social Security posts on Angry Bear. Unfunded liability is NOT debt, it is nothing like debt, and it is a number only useful for certain technical aspects of economic analysis by experts and for use in generating totally scary and in context bogus numbers about “entitlements crisis”. For example the number for Medicare went down in a single year by $30 trillion dollars. Because of a policy change and not because Uncle Sam suddenly paid down the bill in advance with real moola. Moreover CBO took that opportunity to ring in “Alternative Fiscal” and so with the stroke of a pen, and in the face of a couple decades of consistent scoring methodology just restored a big chunk of that unfunded liability.
So no it is not important. Except for the effort required to beat back the folk who love to deploy it to scare the crap out of folk and reinforce the equally bogus messaging of “Intergenerational Warfare”.
People who are interested can search the AB archives under “unfunded liability”.
Plus measuring ‘unfunded liability’ over 75 years as a percentage of current year GDP is meaningless on the face of it. What percentage is unfunded liability over 75 years OVER the GDP for that 75 years? That is the question. And for SocSec it has been fairly steady at 0.6-0.7% of 75 year GDP for some years now even as the nominal numbers change.
Apple and oranges scare-mongering.
Krasting, inflation is not your problem.
You can short whenever you think [more] deflation is on the way.
Some, Krugman (?) observe that low interest rates [ZIRP] are like deflation if you think the sentiment is inflationary.
> I’m a stock investor. ZIRP and QE have made me a bundle.
Remember, it’s not how much you make on paper, it is how much you get to keep and spend to make your life better.
What ZIRP and QE giveth, they can also take away if you are not careful.