Meyrick, you start from the standpoint that govt debt is a problem that needs solving. It isn't necessarily so. Federal govt debt might well be at 122% of GDP in 10years time, but how do you know that is 'too large' and therefore a problem? It might be 'too small', which will also be a problem that requires solving.
The Fed govt issues its currency, the USD, as a public good. Its debt IS its currency. It also sells bonds and bills as a public good. There's no fundamental reason why it has to exchange its issued currency for bonds, but it can do so, if the private sector prefers to hold its currency in fixed term savings accounts rather than am=n interest bearing checking account (a reserve account or a RRP at the Fed). Selling bonds is a service to the private sector. If the private sector doesn't want bonds......don't try to force them to buy them!
All the Fed govt should concentrate on is maintaining the value of the currency, by issuing just enough to meet demand (a little bit more if it wants to devalue the currency by 2% a year). If [everyone else in the World that isn't the Fed govt] wants to hold more USD, issue more. If it wants to hold those USD as a balance in a reserve account or RRP, issue reserves or expands the RRP facility. If it wants Bills, issue Bills, and if it wants 30yr Bonds, issue them. Do so 'in the public good'.
It is the value of the USD vs a basket of goods and services it is regularly employed to purchase that should be the main concern for the issuer of the USD, but as a proxy, its value against other major currencies is a useful yardstick. I'm not seeing many flashing warning lights in this respect. Has the Fed govt created too many of its USD or too few.......?
Rob, I detect, though it isn't overtly stated, a belief that there is an unlimited 'public good' in issuance of USD currency via whatever route. That is undoubtedly false. There is continued demand for US assets as foreign holdings show. But there is no unlimited demand for US assets so it is worth considering what that limit might be. Demand for US assets is also a problem for America and for other countries if it undermines economic self-reliance and emphasises reliance on enemies. In addition, fiscal expansion is associated with inflation, crowding out and diminishing of private sector. It also directly causes economic (and political) problems in the wider world which may jeopardise wider security interests of both the USA and its allies. Higher debt forces unpalatable choices on how the budget is allocated - more interest cost and less health/education/defence spending.
of course there isn't 'unlimited demand' for USD denominated financial assets emanating from [everyone in the World that isn't the Federal Govt], or for NET USD denominated financial assets (which can only be liabilities of the Federal govt, either physical currency, balances held at the central bank or balances held in govt offered savings accounts)
But there is demand
Who is to say that the demand is equivalent to 50% of GDP or 100% of GDP or 200% of GDP?
The value of the currency, as measured against things you care about, tells you whether the supply is just adequate to meet demand, too much or too little.
If fiscal expansion leads to inflation, then you've expanded too much. You've supplied too many USD relative to demand. But it can go the other way, the Federal govt can cause all sorts of problems, including deflation, recessions or depressions by not supplying enough of its own currency
Comparing interest costs to healthcare or defence spending is misleading. Healthcare and defence spending involves the consumption of real resources. Spending on interest (which is a policy choice) is a simple transfer payment, involving no purchasing of resources. It is equivalent to a negative tax (taxes debit private sector bank accounts, transfer payments credit them). If it's good policy to give people that already have money an effective tax cut, then pay more interest. If those receiving the interest increase spending on real resources, then you might have to cut defence or healthcare spending or increase consumption taxes elsewhere. If they don't spend it, you don't have to make that choice.
At heart this issue revolves around accepting the dysfunctional 'exorbitant privilege' associated with current dollar dominance, or accepting that the status quo corrupts investment decisions worldwide and distorts outcomes for both surplus and deficit countries. The fiscal deficit and its limits are simply a reflection of this wider malformed arrangement.
Meyrick, yes as your comment back implied to me. Greed and a capitalist system allowed to run amuck. Concur. Your description is much better stated in economics trained verbiage. Thank you.
"Concentrated short-term interest rate risk is dangerous. It is what caused the Global Financial Crisis in 2008." What? it was greed by everyone. A capitalist system let run amuck. Everyone was guilty of greed, rich and poor. Wall St to my readings was the main culprit. Short term rates blew up the money markets which signaled the end of the charades to Snow and his group of ...
Our system now runs on credit. Has since Ronnie Reagan started running huge deficits in the 80's. This system has been morphing into this system we have today. Our financial system is just financialization and is really just a shell game. But how long can these charades go on? When the end comes it will be abrupt, where did that come from as all shell games happen.
The fed did what it had to do to keep the world from imploding after the GFC. If they hadn't done what they did we all would have been dead meat. The world would have followed us since we started running and policing the world after WWII. As usual the taxpayers was the back stop again..
If all the old school economics guys want to do austerity we will be dead meat. Only way to get out of this shell game is to grow our way out, the old fashioned way, work. Which probably won't happen until this thing blows up. Sovereign wealth fund maybe? invest taxpayers money into funds for the future technologies we need. Keep the money away from politicians and invest it in robotics, AI, biotech, genomes, quantum computing, cures for cancer etc. etc. etc. Use taxpayers money and split profits with successful companies in these fields. The bond market is broken now and a joke anyway. Plus why should just the elites get to invest in this when every time the system breaks from their greed we back stop it and have to pay up?
Plus our present economic system just eats souls up. When you run everything off GDP and P&L this just feeds greed which ends up bad. Read the old wise men. Read the bible. Read, this history and philosophy will tell us this.
Well, we don't panic and keep plugging. We have to figure this out just like our grand parents and those before them had to figure it out. Called life huh? Good luck to all...
There's some heavy lifting for hope here. Which I wouldn't denigrate at all. Innovation and growth is by far the most appealing and even the most likely means of solving fiscal imbalances.
On your point on short-term funding I feel on safe ground. It was not that pre-GFC bankers were greedier than earlier bankers. It was the expansion of short-term funding and the creation of unstable funding vehicles underpinned by short-term funding and inaccurate credit assessments. It was also a factor of BoP financing needs by surplus countries - take a look at Germany's exposures to US real estate CDOs.
Credit is a good thing. Expanding credit in a risk-adjusted fashion is wholly beneficial to society. One person's debt is another person's asset. It becomes problematic when trust in either debtor or creditor emerges (it can be both sides). The higher the debt pile the more unstable the trust balance in the structure. Many of the Lehman Bros bonds that caused the bankruptcy eventually paid par, but liquidity can only be assessed on balance of probabilities at a single point in time, hence the bankruptcy.
Meyrick, you start from the standpoint that govt debt is a problem that needs solving. It isn't necessarily so. Federal govt debt might well be at 122% of GDP in 10years time, but how do you know that is 'too large' and therefore a problem? It might be 'too small', which will also be a problem that requires solving.
The Fed govt issues its currency, the USD, as a public good. Its debt IS its currency. It also sells bonds and bills as a public good. There's no fundamental reason why it has to exchange its issued currency for bonds, but it can do so, if the private sector prefers to hold its currency in fixed term savings accounts rather than am=n interest bearing checking account (a reserve account or a RRP at the Fed). Selling bonds is a service to the private sector. If the private sector doesn't want bonds......don't try to force them to buy them!
All the Fed govt should concentrate on is maintaining the value of the currency, by issuing just enough to meet demand (a little bit more if it wants to devalue the currency by 2% a year). If [everyone else in the World that isn't the Fed govt] wants to hold more USD, issue more. If it wants to hold those USD as a balance in a reserve account or RRP, issue reserves or expands the RRP facility. If it wants Bills, issue Bills, and if it wants 30yr Bonds, issue them. Do so 'in the public good'.
It is the value of the USD vs a basket of goods and services it is regularly employed to purchase that should be the main concern for the issuer of the USD, but as a proxy, its value against other major currencies is a useful yardstick. I'm not seeing many flashing warning lights in this respect. Has the Fed govt created too many of its USD or too few.......?
Rob, I detect, though it isn't overtly stated, a belief that there is an unlimited 'public good' in issuance of USD currency via whatever route. That is undoubtedly false. There is continued demand for US assets as foreign holdings show. But there is no unlimited demand for US assets so it is worth considering what that limit might be. Demand for US assets is also a problem for America and for other countries if it undermines economic self-reliance and emphasises reliance on enemies. In addition, fiscal expansion is associated with inflation, crowding out and diminishing of private sector. It also directly causes economic (and political) problems in the wider world which may jeopardise wider security interests of both the USA and its allies. Higher debt forces unpalatable choices on how the budget is allocated - more interest cost and less health/education/defence spending.
of course there isn't 'unlimited demand' for USD denominated financial assets emanating from [everyone in the World that isn't the Federal Govt], or for NET USD denominated financial assets (which can only be liabilities of the Federal govt, either physical currency, balances held at the central bank or balances held in govt offered savings accounts)
But there is demand
Who is to say that the demand is equivalent to 50% of GDP or 100% of GDP or 200% of GDP?
The value of the currency, as measured against things you care about, tells you whether the supply is just adequate to meet demand, too much or too little.
If fiscal expansion leads to inflation, then you've expanded too much. You've supplied too many USD relative to demand. But it can go the other way, the Federal govt can cause all sorts of problems, including deflation, recessions or depressions by not supplying enough of its own currency
Comparing interest costs to healthcare or defence spending is misleading. Healthcare and defence spending involves the consumption of real resources. Spending on interest (which is a policy choice) is a simple transfer payment, involving no purchasing of resources. It is equivalent to a negative tax (taxes debit private sector bank accounts, transfer payments credit them). If it's good policy to give people that already have money an effective tax cut, then pay more interest. If those receiving the interest increase spending on real resources, then you might have to cut defence or healthcare spending or increase consumption taxes elsewhere. If they don't spend it, you don't have to make that choice.
At heart this issue revolves around accepting the dysfunctional 'exorbitant privilege' associated with current dollar dominance, or accepting that the status quo corrupts investment decisions worldwide and distorts outcomes for both surplus and deficit countries. The fiscal deficit and its limits are simply a reflection of this wider malformed arrangement.
Meyrick, yes as your comment back implied to me. Greed and a capitalist system allowed to run amuck. Concur. Your description is much better stated in economics trained verbiage. Thank you.
"Concentrated short-term interest rate risk is dangerous. It is what caused the Global Financial Crisis in 2008." What? it was greed by everyone. A capitalist system let run amuck. Everyone was guilty of greed, rich and poor. Wall St to my readings was the main culprit. Short term rates blew up the money markets which signaled the end of the charades to Snow and his group of ...
Our system now runs on credit. Has since Ronnie Reagan started running huge deficits in the 80's. This system has been morphing into this system we have today. Our financial system is just financialization and is really just a shell game. But how long can these charades go on? When the end comes it will be abrupt, where did that come from as all shell games happen.
The fed did what it had to do to keep the world from imploding after the GFC. If they hadn't done what they did we all would have been dead meat. The world would have followed us since we started running and policing the world after WWII. As usual the taxpayers was the back stop again..
If all the old school economics guys want to do austerity we will be dead meat. Only way to get out of this shell game is to grow our way out, the old fashioned way, work. Which probably won't happen until this thing blows up. Sovereign wealth fund maybe? invest taxpayers money into funds for the future technologies we need. Keep the money away from politicians and invest it in robotics, AI, biotech, genomes, quantum computing, cures for cancer etc. etc. etc. Use taxpayers money and split profits with successful companies in these fields. The bond market is broken now and a joke anyway. Plus why should just the elites get to invest in this when every time the system breaks from their greed we back stop it and have to pay up?
Plus our present economic system just eats souls up. When you run everything off GDP and P&L this just feeds greed which ends up bad. Read the old wise men. Read the bible. Read, this history and philosophy will tell us this.
Well, we don't panic and keep plugging. We have to figure this out just like our grand parents and those before them had to figure it out. Called life huh? Good luck to all...
Thanks Jeff,
There's some heavy lifting for hope here. Which I wouldn't denigrate at all. Innovation and growth is by far the most appealing and even the most likely means of solving fiscal imbalances.
On your point on short-term funding I feel on safe ground. It was not that pre-GFC bankers were greedier than earlier bankers. It was the expansion of short-term funding and the creation of unstable funding vehicles underpinned by short-term funding and inaccurate credit assessments. It was also a factor of BoP financing needs by surplus countries - take a look at Germany's exposures to US real estate CDOs.
Credit is a good thing. Expanding credit in a risk-adjusted fashion is wholly beneficial to society. One person's debt is another person's asset. It becomes problematic when trust in either debtor or creditor emerges (it can be both sides). The higher the debt pile the more unstable the trust balance in the structure. Many of the Lehman Bros bonds that caused the bankruptcy eventually paid par, but liquidity can only be assessed on balance of probabilities at a single point in time, hence the bankruptcy.