Why not just monetize the debt?

[Allan from Fallbrook]

[quote=DomoArigato]
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.[/quote]

Domo: And your logic, such as it is, is non-existent. Because SDR hasn’t offered an example, one doesn’t exist? You then use this “logic” to buttress your unsupported contention that your solution is the only reasonable one.

I don’t know if you’re penning these little epistles whilst laughing, but you should be.

And, relative to the European Central Bank, they can print money all the live long day. That’s not the problem. The utter and complete lack of value of the underlying assets is. Much like what we’re still continuing to confront here in the US. Balance sheets still suck, the assets tied to the loans are essentially valueless, hence the reason the banks won’t (can’t) lend. China is very near finding itself in the same situation.

There are some excellent books out there on the proper formulation of an argument and the proper use of logic. You should read them. And quit with the ad hominen, it simply makes you look stupid, not your target.

[briansd1]

It’s interesting the see the two arguments.

A/ In the US we have had more government and Fed interventions.

B/ In Europe, governments have been cutting back and the ECB has not intervened as aggressively as the Fed.

Anyone wants to make a $10,000 bet on which solution will be more successful in terms of growth and prosperity?

I’m thinking solution A will prove superior.

[DomoArigato]

[quote=briansd1]It’s interesting the see the two arguments.

A/ In the US we have had more government and Fed interventions.

B/ In Europe, governments have been cutting back and the ECB has not intervened as aggressively as the Fed.

Anyone wants to make a $10,000 bet on which solution will be more successful in terms of growth and prosperity?

I’m thinking solution A will prove superior.[/quote]

It’s certainly starting to look that way. You can see in this chart that EU unemployment is heading up while unemployment in the U.S. is starting to edge down:

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:Unemployment_rates_EU-27,_EA-17,_US_and_Japan,_seasonally_adjusted,_January_2000_-_October_2011.PNG&filetimestamp=20111130153203

Of course Japan (twice the debt-to-GDP ratio as the U.S.!) has the lowest unemployment rate at around 4%.

[Allan from Fallbrook]

[quote=briansd1]It’s interesting the see the two arguments.

A/ In the US we have had more government and Fed interventions.

B/ In Europe, governments have been cutting back and the ECB has not intervened as aggressively as the Fed.

Anyone wants to make a $10,000 bet on which solution will be more successful in terms of growth and prosperity?

I’m thinking solution A will prove superior.[/quote]

Brian: Another completely specious argument, in that it ignores some very pertinent facts. The US and Europe are vastly different in terms of geography, government (and this one is key in that the US has a truly federal government and not 17 squabbling individual governments working under a mandate while also trying to satisfy their constituencies) and demographics.

Your argument also avoids answering the focal question that Domo has also evaded up to this point: WHAT ABOUT THE ASSETS? If you were to take the balance sheet of the ECB and correctly value the assets, the ECB becomes effectively insolvent (I’m sure the Fed is in a similar predicament).

You can agitate all you want for Big Brother, but governments from the US to China are blundering badly and we all will pay the price later.

The answer isn’t in printing money, its in REFORM. Tax reform, entitlement reform and immigration reform. Of course, none of our political leadership wants to bell that particular cat, so we’re left with nonsensical and ultimately pointless arguments like this one.

[Allan from Fallbrook]

Brian: Remember your comment about the DoJ having “bigger fish to fry” relative to prosecuting for fraud on Wall Street? Well, apparently they had NO fish to fry, as this article from Jeff Connaughton (Chief of Staff to U.S. Senator Ted Kaufman, D-DE) points out: http://www.huffingtonpost.com/jeff-connaughton/obama-wall-street-laws_b_1157915.html?ref=email_share

This article would seem to completely repudiate your assertion that this administration is sincere about helping the “little guy”. It would appear that they’re sincere about continuing to receive Wall Street money and support for re-election, however.

[UCGal]

[quote=Allan from Fallbrook]
Your argument also avoids answering the focal question that Domo has also evaded up to this point: WHAT ABOUT THE ASSETS? If you were to take the balance sheet of the ECB and correctly value the assets, the ECB becomes effectively insolvent (I’m sure the Fed is in a similar predicament).

[/quote]

Forgetting the politics and back to the topic of inflation (or lack thereof)…

I read something a few weeks ago that made sense to me. With the fed doing the massive QE – which in theory should have an inflationary effect, why haven’t we seen massive inflation. The explanation I read was that the fed wasn’t *adding* to the currency, it was replacing the currency represented by the collapsed assets.

We know that banks have to have treasuries or other “dollar equivalents” at some percentage to meet capitalization requirements.

A lot of these dollar equivalents (or close to dollar equivalents) turned out to be toxic derivatives. (mortgage backed securities, bonds issued by AAA rated Lehman for example). So when the value of these assets collapsed, the banks sold them to the fed, and recapitalized. All that re infusion was not adding money to the system, is was restoring (and not 100% restoring) some of the money that was in the system before the financial collapse.

We still have a problem with the assets being worth crap… but it’s not in the private sector as much.

[Allan from Fallbrook]

[quote=UCGal][quote=Allan from Fallbrook]
Your argument also avoids answering the focal question that Domo has also evaded up to this point: WHAT ABOUT THE ASSETS? If you were to take the balance sheet of the ECB and correctly value the assets, the ECB becomes effectively insolvent (I’m sure the Fed is in a similar predicament).

[/quote]

Forgetting the politics and back to the topic of inflation (or lack thereof)…

I read something a few weeks ago that made sense to me. With the fed doing the massive QE – which in theory should have an inflationary effect, why haven’t we seen massive inflation. The explanation I read was that the fed wasn’t *adding* to the currency, it was replacing the currency represented by the collapsed assets.

We know that banks have to have treasuries or other “dollar equivalents” at some percentage to meet capitalization requirements.

A lot of these dollar equivalents (or close to dollar equivalents) turned out to be toxic derivatives. (mortgage backed securities, bonds issued by AAA rated Lehman for example). So when the value of these assets collapsed, the banks sold them to the fed, and recapitalized. All that re infusion was not adding money to the system, is was restoring (and not 100% restoring) some of the money that was in the system before the financial collapse.

We still have a problem with the assets being worth crap… but it’s not in the private sector as much.[/quote]

UCGal: Agreed. I think we (the US) are in a better position than Europe, and that is one of the reasons. However, we have only partially cleaned up the mess. There are still huge amounts of toxic assets out there and they continue to plague the balance sheets of the big players in the banking world, hence no real lending. The banks in question are well aware of the risk they’re carrying and they are doing everything humanly possible to shore up their position. Again, no real lending.

As far as inflation goes: Don’t believe what the gubment tells you is the “real” core inflation rate. This is similar to the gubment’s assertion of the “real” unemployment rate. Between the gubment and the Fed, they are pedaling as fast as they can, in the (potentially forlorn) hope of outrunning another crash. This is why the Eurozone and Chinese situations are so worrisome: TONS of toxic assets, bad loans and helpless political leadership make for a fatal combination.

[moneymaker]

I agree with DomoArigato about the Fed already buying up bonds(effectively monetizing the debt). However until they sell them we won’t see the effects of this. They are kicking the can down the road in effect. I’m not afraid of inflation as long as my company keeps me employed and gives me regular raises. I t effectively lowers my mortgage, it does however do more damage to the poorer people than to the rich. I think if the rich do not create jobs it will have to be done by the government and I hope they do it soon.

[DomoArigato]

[quote=UCGal]

I read something a few weeks ago that made sense to me. With the fed doing the massive QE – which in theory should have an inflationary effect, why haven’t we seen massive inflation. [/quote]

Paul Krugman has done an excellent job of explaining the economics of our current situation on his blog:

http://krugman.blogs.nytimes.com/

I have this Allan character on mute as I find him to be too trollish for my tastes, but insolvency is a ridiculous concept when applied to countries with currency denominated in fiat issued by that same country. How would that conversation even go anyway?

Collective Creditors of the U.S.: You’re insolvent!
The U.S. Government in collusion with the Fed: Just a sec.
[Tim Geithner presses button that starts the printing press and a $15.436 trillion dollar bill rolls off the press.]
Here you go!
While you’re here, may we interest you in our shiny new $1.6 trillion dollar debt offering?

[briansd1]

[quote=Allan from Fallbrook]Brian: Remember your comment about the DoJ having “bigger fish to fry” relative to prosecuting for fraud on Wall Street? Well, apparently they had NO fish to fry, as this article from Jeff Connaughton (Chief of Staff to U.S. Senator Ted Kaufman, D-DE) points out: http://www.huffingtonpost.com/jeff-connaughton/obama-wall-street-laws_b_1157915.html?ref=email_share

This article would seem to completely repudiate your assertion that this administration is sincere about helping the “little guy”. It would appear that they’re sincere about continuing to receive Wall Street money and support for re-election, however.[/quote]

And the alternative is? A Republican administration that will be even more in the pocket of Wall Street?

Some said about Occupy Wall Street: “they’re bitching but can’t provide workable solutions and a viable alternative.”

[briansd1]

[quote=UCGal]
I read something a few weeks ago that made sense to me. With the fed doing the massive QE – which in theory should have an inflationary effect, why haven’t we seen massive inflation. The explanation I read was that the fed wasn’t *adding* to the currency, it was replacing the currency represented by the collapsed assets.
[/quote]

Yes, back during the boom, people were essentially monetizing their own assets by pledging them as collateral to obtain loans and spending the money into the economy.

[dumbrenter]

[quote=walterwhite]Sounds unamerican.[/quote]
Which one is it that is unamerican? Working or Dying?
I’ll have to stop working till I figure this out. Hate to be unamerican.

[dumbrenter]

[quote=briansd1][quote=dumbrenter][quote=SD Realtor]Is there any other endgame?

Yes, it is basically a lower standard of living for those that cannot keep up as well as more time spent keeping up by those who are in the middle.

It is simply a slow process. In terms you like to use, you work then you die. Now you just work harder, have less, then you die.[/quote]

This is one thing that economists / analysts never tell even though I am sure they knew it all along. One of the effects of globalization will be that in longer term, there will have to be some sort of equalization of standard of living. This means that those living in one country whose people have a way higher standard of living compared to the rest will have to give up some.[/quote]

That’s not how it works.

Globalization will result in more parity, but we can get richer still, at a lower growth rate, while developing countries catch up to us, at a faster rate, That’s actually very good for the world.

I think the psychological discomfort is that we, Americans, are no longer wildly richer than that rest of the world.

One example. In the past, Americans were use to new immigrants being the tired, poor, huddled masses yearning to breathe free, the wretched refuse. Now many immigrants come to the best universties and drive luxury cars to class. They get H1B visas and buy houses in Carmel Valley and 4S Ranch. Some Americans think that’s “wrong.”

There’s globaliztion of knowledge and capital. That’s just how it it works.[/quote]

If you are an economist or an analyst, you just made my point.
If other countries have to match America’s lifestyle, their growth rates have to be in mid-teens to even have a realistic chance of catching up. How soon do you think that is going to happen? How is it even mathematically possible? And who is growing in mid-teens now?
The fact is that the Americans quality of life is going down for a few years, the parity is going to happen alright, but while other countries grow faster, we have to give up some.

[sreeb]

[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]

“This Time it is Different” lists 66 countries that “defaulted through inflation” between 1800-2008. 25 of these experienced inflation of greater than 40%/year for multiple years.

Defaulting through inflation is pretty much what you do when you can no longer borrow. “Can no longer borrow” roughly translates “interest rates are too high”.

There of course lots of factors in interest rates. At some point the size of the outstanding debt relative to the size of the economy or the governments income becomes a concern. Historically, it becomes a serious issue for lenders once it reaches ~90% of GNP.

[Allan from Fallbrook]

[quote=briansd1][quote=UCGal]
I read something a few weeks ago that made sense to me. With the fed doing the massive QE – which in theory should have an inflationary effect, why haven’t we seen massive inflation. The explanation I read was that the fed wasn’t *adding* to the currency, it was replacing the currency represented by the collapsed assets.
[/quote]

Yes, back during the boom, people were essentially monetizing their own assets by pledging them as collateral to obtain loans and spending the money into the economy.[/quote]

Brian: Which makes my point perfectly, thank you. Completely absent from this conversation is the topic of asset value, which the Fed, the ECB and the ruling cadre of the Communist Party of China would all like you to ignore, please and thank you.

[Author]

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