Why not just monetize the debt?

[Allan from Fallbrook]

[quote=SD Realtor]
Brian I respectfully disagree with your rose colored outlook on globalization. The reality of globalization has clearly been contrary to your posting for more USA citizens over the past 30 years. That is globalization essentially levels the standard of living for the masses who are not rich or in a ruling class. In that respect our masses in the USA have quite a ways to come down. Until the working class ALL AROUND THE WORLD is essentially equal and labor costs are around the same, then capitalism will always dictate that you go to the lower cost center to build and obtain labor if the quality of the finished product is equivalent.

We have seen over the past 30 years, with increased globalization, the inequality of wealth in the USA has decreased proportionally. The middle class has shrunk, the lower class has grown, and the rich guys have all gotten richer. The quantity of rich people has not grown as fast as the quantity of poor people and probably has not grown as fast as the middle class has shrunk. We have seen many headlines about the increasing disparity of wealth in this country.

I don’t have clear evidence of that, and it is a speculative statement however I think it is pretty clear.

I am not saying capitalism is bad, however it is a consequence of it when you follow the string… for better or for worse.

The only “system” I know of where everyone wins, and everything gets better for everyone is a ponzi scheme.[/quote]

SDR: Another key element to the story that is either ignored or overlooked, is that, during the period from 1945 to around 1972, the US was really the primary global “manufacturer” when it came to autos, heavy industry, etc. Due to Europe and Asia being largely devastated in WWII, the US held a huge amount of the global manufacturing capability and that manufacturing capabilty shifted quickly from making war-fighting materiel to making consumer goods and the products to rebuild Europe and Asia. This fueled the rise of the middle class, especially those tied directly to the manufacturing effort in places like Detroit and Philly. When Europe and Asia “caught back up” in the period from the mid-1970s forward, you saw the impact on the US, especially in the manufacturing sectors. Jobs disappeared overseas, wages stagnated and entire sectors shrank exponentially.

We need to change our entire way of thinking and realize that we will not see a return of that “Golden Age” of manufacturing again (barring another worldwide war) and trying to sell the US populace on such a return is a blatant lie that both parties use when campaigning.

[sreeb]

[quote=DomoArigato][quote=sreeb]
Yes, it is true that poor government policy destroyed the Zimbabwe economy (just as poor government policy is destroying ours) and damage to the economy preceded hyperinflation. [/quote]

Anyone who compares the U.S. to Zimbabwe, Portugal, Italy, Ireland, Greece, and/or Spain is an idiot.[/quote]

I agree that our situation is not now similar to Zimbabwe although I would argue that it could become similar if we engage in large scale monetization.

As for Portugal, Italy, Ireland, Greece, and Spain, it isn’t clear that we are much better off and in some areas we are worse.

As of today, 40 cents of every dollar the federal government spends is borrowed. I believe that is worse than all of those countries (although much better than Japan). Italy is even running a primary surplus.

Even doubling our tax rate wouldn’t completely eliminate the deficit if it actually doubled revenue (which it wouldn’t).

We would have immediate severe problems today if we had to pay the interest rates those countries are currently paying. Interest rates that are similar to those we have historically paid.

Historically, we have paid an average of about 6% on federal debt. At 6% * $15T = $900B in interest alone. The average maturity of federal debt is ~4 years. If interest rates went above 6% we would be completely screwed.

In my view, we have the choice between cutting spending now, which will hurt the economy now and be very painful to all, and risking the destruction of the dollar in the not too distant future which would be catastrophic.

We have dug a big hole. Because of demographics, it will get worse. There are no easy answers. If there were, we would act on them.

[DomoArigato]

[quote=SD Realtor]

Perhaps you can show us successful historical references where your scheme actually was successful.

[/quote]

Uhhh … the U.S.? What do you think QE2 was? The Federal Reserve effectively printed money and used that money to buy U.S. debt. Yes, presumably the U.S. Government has to pay interest on that debt to the Federal Reserve, but the Fed returns all its profits to the Treasury, so that debt was effectively monetized. There was concern at the time that QE2 would cause inflation to spike, but the core inflation rate has remained below 3%.

The only difference between what I proposed in the first post and what the Fed already has done is that the Fed and the U.S. Government would officially announce that the Treasury bills that the Fed bought via QE2 would be retired and thus the deficit would officially go down by that much ($1.5 trillion?).

However, officially announcing that the QE2 debt is being retired is just semantics. So long as the Fed holds that debt, it is effectively retired.

I just find it interesting that I propose what amounts to a semantic difference in what was already done via QE2 and suddenly everybody and their brother goes hysterical and starts throwing out big words like ‘Zimbabwe’.

It just goes to show that the hysteria over the deficit is way overblown. The government should be focused on fixing unemployment and the large child poverty rate (20+%) instead of focusing on the deficit.

[SD Realtor]

What do you mean in the US?

The jury is still out. The question about the US will not be resolved for years. Check back with me in 20 years about the US.

Your time horizon is quite distorted. Answers to these questions take years/decades to resolve themselves so try again on your answer.

What is happening now is slowly auguring down and making the problem worse. You know why? Because we don’t have any other choices. We don’t reduce spending, we don’t raise taxes, and our debt service is growing not shrinking. At some point, our creditors will no longer tolerate the situation and the cost of our credit will run much higher. Soon to follow the cost of goods/services will do the same.

How can the govt focus on employment when it has so much debt service. What about unfunded entitlements on the horizon? Last I checked it was not the charter of the US govt to provide jobs. The govt cannot “fix” unemployment. The govt can create policy that may or may not induce companies to hire. they cannot put a gun to someones head and say hire people (at least not yet).

You can only kick the can down the road so much.

Try again on showing a success.

[sreeb]

[quote=DomoArigato][quote=walterwhite]
Is there any other endgame?[/quote]

Raising taxes and cutting the defense budget would easily solve the budget issue. But like you said, that’s unamerican.[/quote]

May I ask how much you would cut from the defense budget and how much you would be willing to raise taxes?

Ideally expressed in % or billions.

[DomoArigato]

[quote=sreeb]
I agree that our situation is not now similar to Zimbabwe although I would argue that it could become similar if we engage in large scale monetization.
[/quote]

Nope. In order for the U.S. situation to become similar to Zimbabwe manufacturing capacity would have to fall by 63%. I feel very confident that debt monetization alone would not cause manufacturing capacity to drop by 63%.

[quote=sreeb]
As for Portugal, Italy, Ireland, Greece, and Spain, it isn’t clear that we are much better off and in some areas we are worse.
[/quote]

The U.S. is better off than all these countries because our debt is denominated in dollars and we own a dollar printing press that will allow us to print money and pay off our debts. Each of the above countries has their debt denominated in a currency which they do not control.

[quote=sreeb]
Even doubling our tax rate wouldn’t completely eliminate the deficit if it actually doubled revenue (which it wouldn’t).
[/quote]

Wrong!

FY2010 U.S. Federal Tax Receipts = $2.1T
FY2010 U.S. Federal Spending = $3.5T

2.1 x 2 = 4.2

[quote=sreeb]
We would have immediate severe problems today if we had to pay the interest rates those countries are currently paying. Interest rates that are similar to those we have historically paid.

Historically, we have paid an average of about 6% on federal debt. At 6% * $15T = $900B in interest alone. The average maturity of federal debt is ~4 years. If interest rates went above 6% we would be completely screwed.
[/quote]

Ahhh, yes, the problem of the invisible bond vigilantes. The Federal Reserve has already shown that they can lower interest rates by buying Treasury bills. Problem solved.

[DomoArigato]

[quote=SD Realtor]At some point, our creditors will no longer tolerate the situation and the cost of our credit will run much higher. [/quote]

Yes, I suspect that Bernanke let’s the U.S. Government know just how intolerable the U.S. debt situation is every time the Treasury pays interest on that debt to the Fed (right before handing that interest payment right back to the Treasury).

OH SHIT! BEHIND THAT BUSH! INVISIBLE BOND VIGILANTES! RUN!

[SD Realtor]

Sounds like you have it all figured out. Maybe you should give the white house a call and offer them your input.

I am certain all the top economists have overlooked such a brilliant solution.

[Allan from Fallbrook]

[quote=SD Realtor]
Try again on showing a success.[/quote]

SDR: He can’t, because there isn’t one, if you follow his line of reasoning. And you can’t follow his line of reasoning, because its foundation rests on an implacable fallacy: It presumes that because things are a certain way now, that is the way that they will always be.

Its like trying to explain quantum physics to a lemur. Or economics to Paul Krugman.

“Never teach a pig to sing. It wastes your time and annoys the pig”.

[sreeb]

Hyperinflation is directly related to money creation. You can’t get one without the other. All other aspects of Zimbabwe relate only to the motivation of the government to create the money.

Do you believe that the EUROZONE can solve its collective problems by simply creating money and buying up the debt? It is certainly possible that we may get a ring side seat on the result in the next year or two. Why do you think it hasn’t occured to them?

[quote=DomoArigato][quote=sreeb]
I agree that our situation is not now similar to Zimbabwe although I would argue that it could become similar if we engage in large scale monetization.
[/quote]

Nope. In order for the U.S. situation to become similar to Zimbabwe manufacturing capacity would have to fall by 63%. I feel very confident that debt monetization alone would not cause manufacturing capacity to drop by 63%.

[quote=sreeb]
As for Portugal, Italy, Ireland, Greece, and Spain, it isn’t clear that we are much better off and in some areas we are worse.
[/quote]

The U.S. is better off than all these countries because our debt is denominated in dollars and we own a dollar printing press that will allow us to print money and pay off our debts. Each of the above countries has their debt denominated in a currency which they do not control.

FY2010 U.S. Federal Tax Receipts = $2.1T
FY2010 U.S. Federal Spending = $3.5T

Income tax (corporate and individual) was only $1.1T. Did you also intend to double Social Insurance taxes $0.9T?

[quote=sreeb]
Even doubling our tax rate wouldn’t completely eliminate the deficit if it actually doubled revenue (which it wouldn’t).
[/quote]

Wrong!

FY2010 U.S. Federal Tax Receipts = $2.1T
FY2010 U.S. Federal Spending = $3.5T

2.1 x 2 = 4.2

[quote=sreeb]
We would have immediate severe problems today if we had to pay the interest rates those countries are currently paying. Interest rates that are similar to those we have historically paid.

Historically, we have paid an average of about 6% on federal debt. At 6% * $15T = $900B in interest alone. The average maturity of federal debt is ~4 years. If interest rates went above 6% we would be completely screwed.
[/quote]

Ahhh, yes, the problem of the invisible bond vigilantes. The Federal Reserve has already shown that they can lower interest rates by buying Treasury bills. Problem solved.[/quote]

Just because they can do this in the short term at a time when our currency appears relatively safe does mean they can do this forever, particularly as our financial condition continues to deteriorate.

[DomoArigato]

[quote=SD Realtor]What do you mean in the US?

The jury is still out. The question about the US will not be resolved for years. Check back with me in 20 years about the US.
[/quote]

Can you show me a country that had its debt denominated in its own currency where a high debt-to-GDP ratio led to large increases in interest rates? Maybe interest rates are dependent on something other than just the size of the public debt?

[SD Realtor]

Of course interest rates are determined by many things, not just the size of the debt. However by all of the factors that are used to determine those rates, we don’t really measure up very well.

You seem to have an attitude that we are untouchable, that the USA is this economic force with no soft underbelly. That there are simplistic solutions like hitting a reset button and printing money or buying our own debt and retiring it will work out. What you fail to see is that there is not an easy solution, and you can convince yourself that there is. Good man.

Doesn’t seem like many people are buying into your logic.

Once upon a time the US dollar was not the reserve currency of the world. Our relative dominance as an economic force has been a blink of an eye temporally. It can be screwed up pretty damn quickly.

[DomoArigato]

[quote=sreeb]Hyperinflation is directly related to money creation. You can’t get one without the other. All other aspects of Zimbabwe relate only to the motivation of the government to create the money.
[/quote]

Half the country was destroyed. You can’t analogize Zimbabwe’s situation to the U.S. situation. Japan is a much better country to look to and their debt-to-GDP ratio is twice that of the U.S.

[quote=sreeb]
Do you believe that the EUROZONE can solve its collective problems by simply creating money and buying up the debt?
[/quote]

It would be a much easier way out. The ECB could buy debt of the countries in trouble. This would drive down interest rates and devalue the Euro which would further help the economies of the countries at risk.

[quote=sreeb]
It is certainly possible that we may get a ring side seat on the result in the next year or two. Why do you think it hasn’t occured to them?
[/quote]

Because the entire world is infatuated with deficits. Paul Krugman has been saying that the ECB should buy the debt of the countries in trouble. It makes a lot of sense to do so which is probably why the ECB isn’t doing it.

[markmax33]

[quote=DomoArigato][quote=SD Realtor]What do you mean in the US?

The jury is still out. The question about the US will not be resolved for years. Check back with me in 20 years about the US.
[/quote]

Can you show me a country that had its debt denominated in its own currency where a high debt-to-GDP ratio led to large increases in interest rates? Maybe interest rates are dependent on something other than just the size of the public debt?[/quote]

Interest rates are dependent solely on how much Ben Bernanke wants to print and loan out. If they feel as if jobs aren’t important and inflation is important interest would shoot up overnight as inflation is nearly as bad as it was in the late 1970s already. They just changed the unit of measure to trick you.

[DomoArigato]

[quote=SD Realtor]Of course interest rates are determined by many things, not just the size of the debt. However by all of the factors that are used to determine those rates, we don’t really measure up very well.

You seem to have an attitude that we are untouchable, that the USA is this economic force with no soft underbelly. That there are simplistic solutions like hitting a reset button and printing money or buying our own debt and retiring it will work out. What you fail to see is that there is not an easy solution, and you can convince yourself that there is. Good man.

Doesn’t seem like many people are buying into your logic.

Once upon a time the US dollar was not the reserve currency of the world. Our relative dominance as an economic force has been a blink of an eye temporally. It can be screwed up pretty damn quickly.[/quote]

So you can’t show me an example of a country that was similarly situated as the U.S. and that ended up destroyed due to large deficits (Japan is a very good counterexample), but you are certain that large deficits in the U.S. will lead to disaster. Your logic is bulletproof.

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