Why not just monetize the debt?

[Allan from Fallbrook]

[quote=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.”[/quote]

Brian: So your expectation is no expectation? The argument being that Obama’s DoJ has done nothing, but a GOP administration would do LESS than nothing? I’ve heard of reductionist arguments before, but that’s a new one!

Domo: Too “trollish”? Nah, you just got no heart, along with no facts. You know that in a standup fight, you’d get your ass waxed. I’ve dealt with you summarily before and due to your complete and utter lack of marshaling facts and logic. I’d think the “troll” sobriquet would belong to the one resorting to ad hominem. Go find your big boy pants and come at me then.

[briansd1]

[quote=Allan from Fallbrook]
Brian: So your expectation is no expectation? The argument being that Obama’s DoJ has done nothing, but a GOP administration would do LESS than nothing? I’ve heard of reductionist arguments before, but that’s a new one![/quote]

The Obama Administration has not done enough in prosecuting financial crimes that led the to financial crisis. I do believe that a Republican Administration would do nothing.

The Obama Administration has chosen the pragmatic approach of focusing on growth and getting the economy moving again.

Looking back and punishing past crimes is not the primary focus and will not create jobs and growth.

[briansd1]

[quote=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.[/quote]

Well, Allan, you do make a good point.

However, central banks have unlimited wherewithal. When they hold assets long enough to maturity, they will not lose money. They will make money, at least in nominal terms.

And if that helps stabilize the economy, generate growth and provide goods and services for people to enjoy life, then why not?

I really don’t see the point of going into recession and deprivation like some economic purists argue that we should.

[UCGal]

[quote=briansd1]

Looking back and punishing past crimes is not the primary focus and will not create jobs and growth.[/quote]
This is where you and I disagree.
Prosecuting bad acts and bad actors sends a message that these actions are not acceptable and will not be tolerated. Sweeping them under the rug provides no disincentive for future criminal acts.

[Allan from Fallbrook]

[quote=UCGal][quote=briansd1]

Looking back and punishing past crimes is not the primary focus and will not create jobs and growth.[/quote]
This is where you and I disagree.
Prosecuting bad acts and bad actors sends a message that these actions are not acceptable and will not be tolerated. Sweeping them under the rug provides no disincentive for future criminal acts.[/quote]

UCGal: Beautiful! Excellent post and excellent point. When one considers that finance and banking rely on trust and confidence more than any other factors combined, you hit the nail on the head regarding the need for both aggressive prosecution and better enforcement of regulations and guidelines (not just selective enforcement and one or two show trials).

By saying that Obama is better than a slightly worse GOP alternative simply underscores the fact that his administration should have led by example, in terms of regulation, prosecution and legislation.

If you read Kevin Williamson’s excellent piece, “Repo Men” ( http://www.nationalreview.com/articles/286704/repo-men-kevin-d-williamson?pg=3), you get a better understanding of why it didn’t. To say that Obama is in the pocket of Wall Street is not an idle nor a partisan accusation. The facts are there and the complete and total absence of action proves them.

[Allan from Fallbrook]

[quote=briansd1][quote=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.[/quote]

Well, Allan, you do make a good point.

However, central banks have unlimited wherewithal. When they hold assets long enough to maturity, they will not lose money. They will make money, at least in nominal terms.

And if that helps stabilize the economy, generate growth and provide goods and services for people to enjoy life, then why not?

I really don’t see the point of going into recession and deprivation like some economic purists argue that we should.[/quote]

Brian: Except that central banks do not have unlimited wherewithal and therein lies the rub. Most of the fear surrounding a double- or triple-dip recession (or worse) is that the Fed has expended its energies fighting the first one and now lacks the tools and depth to fend off another. The ECB is in similar straits. The utterly absurd notion that we can simply print our way out of this is one of the most idiotic notions floated. At some point, the bills come due.

Look at China. You’d think, since they are an autocratic system run by a select group of technocrats, that they’d be able to make their own rules and without any fear of repercussion. However, you note that the wheels are coming off the RE wagon there quickly and the Chinese Communist Party and central bank have been virtually helpless while this happens.

I’m not advocating for recession and deprivation, far from it. But I’m also not advocating for mendaciously stupid solutions to the problem, either.

Anyone with a passing understanding of finance and economics gets this. You cannot throw money at worthless assets ad infinitum and magically “grow” a recovery. Unless you’re Paul Krugman, of course. Since he’s like the Chuck Norris of economics, he can do anything.

[briansd1]

Paul Krugman is a very smart guy.

The lack of liquidity is what is constraining the economy. Factory and productive capacity are sitting idle; and that is very economically wasteful.

So if the lack of money is holding off the economic it makes sense for the central bank to inject liquidity into the system.

The Fed buys assets and provides cash to the sellers. The Fed can then hold those assets to maturity if necessary to recoup its investment. The Fed will not lose money because they can hold indefinitely and never have to worry about a fire sale to raise cash.

Some of my most vociferous right-wing friends are real estate bulls who previously bought at higher prices. I claim that they lost money already because their personal balance sheet should reflect current market value (same as banks). My friends, however, content that by holding long enough, they will make money because they will recoup their money and more. That’s essentially what the Fed is doing with the assets they bought from the banks.

IMHO, capitalism is superior to other economic systems because it embraces financial engineering to get economic activity going. More production today results in higher growth in the future.

We always have to look at the data and come up with new ways to grow, or at least to prevent existing capacity from sitting idle and going to waste.

There is no need to be constrained by economic orthodoxy just for the sake of purity. However we can get the economy going, we should do it. Why live with economy deprivation if we don’t have to?

[Allan from Fallbrook]

[quote=briansd1]Paul Krugman is a very smart guy.

The lack of liquidity is what is constraining the economy. Factory and productive capacity are sitting idle; and that is very economically wasteful.

So if the lack of money is holding off the economic it makes sense for the central bank to inject liquidity into the system.

The Fed buys assets and provides cash to the sellers. The Fed can then hold those assets to maturity if necessary to recoup its investment. The Fed will not lose money because they can hold indefinitely and never have to worry about a fire sale to raise cash.

Some of my most vociferous right-wing friends are real estate bulls who previously bought at higher prices. I claim that they lost money already because their personal balance sheet should reflect current market value (same as banks). My friends, however, content that by holding long enough, they will make money because they will recoup their money and more. That’s essentially what the Fed is doing with the assets they bought from the banks.

IMHO, capitalism is superior to other economic systems because it embraces financial engineering to get economic activity going. More production today results in higher growth in the future.

We always have to look at the data and come up with new ways to grow, or at least to prevent existing capacity from sitting idle and going to waste.

There is no need to be constrained by economic orthodoxy just for the sake of purity. However we can get the economy going, we should do it. Why live with economy deprivation if we don’t have to?[/quote]

Brian: You’re arguing a false equivalence (i.e. if one doesn’t choose your solution, one is really arguing for “orthodoxical purity” and NOT another solution). Krugman excels at this fraudulent type of reasoning as well and thus is unwilling/unable to see other solutions as being valid.

Again, I am NOT arguing for deprivation/depression, but rather am arguing for other solutions. I also have no problem with government “pump priming” a la Keynes, but, if we’re being honest, we’re well outside a Keynesian solution, especially regarding debt (wherein Keynes would argue that the excessive debt we’re now carrying would actually have a deleterious effect on said pump priming being effective).

Krugman has had his head handed to him numerous times by equally smart economists hewing closely to the Keynesian model (and, let’s face it, all of these “solutions” are being driven by models). Krugman has also unfortunately allowed his politics to prevent any serious discussion on the topic without retreating into rank partisanship.

You’re unfortunately falling into the same trap in that you’re allowing your partisan leanings to prevent you from seeing other solutions to the problem as well.

To use your “right-wing” RE friends as an example is also an odious comparison. Their RE holdings and their time horizon have nothing to do with the present situations here in the US, the Eurozone and China, in that the problems encountered there at present are far larger, far more complex and require solutions that are far larger and more complex. Again, the various central banks either don’t have enough ammo left to fight the problem, lack the acumen or ability or lack the political will.

[UCGal]

Brian – I agree that liquidity is part of the problem with the lack of manufacturing and production…. but only a part. The other problem is lack of demand. When the housing bubble burst folks no longer felt as wealthy… so spending slowed. Add higher in employment than before the collapse and you have another factor killing off demand for those manufactured goods. The job market is just barely starting to recover.

As far as toxic assets eventually recovering… not so much with the mortgage backed securities. Foreclosures force a recognition of the loss. If enough houses foreclose that MBS will never be above water. The AIG credit default swaps paid off dollar for dollar to Goldman… those will never be anything but a loss.

[CA renter]

[quote=UCGal]Brian – I agree that liquidity is part of the problem with the lack of manufacturing and production…. but only a part. The other problem is lack of demand. When the housing bubble burst folks no longer felt as wealthy… so spending slowed. Add higher in employment than before the collapse and you have another factor killing off demand for those manufactured goods. The job market is just barely starting to recover.

As far as toxic assets eventually recovering… not so much with the mortgage backed securities. Foreclosures force a recognition of the loss. If enough houses foreclose that MBS will never be above water. The AIG credit default swaps paid off dollar for dollar to Goldman… those will never be anything but a loss.[/quote]

Agree very much with the demand issue. I’ll go a bit further and say that liquidity is not a problem at all. Look at all the money sloshing around trying to buy up the favored asset class of the day (commodities, currencies, stocks, bonds, real estate, etc. — all up significantly since 2008/2009).

IMHO, the number one problem is solvency, especially the solvency of those who represent the traditional “demand” in the economy. Everyone is up to their eyeballs in debt, and they cannot afford to pay off that debt AND continue sustaining the demand necessary to keep our economy moving. This is the because of our wealth disparity. If all the money is owned by the few at the top who only seek to increase their cash/asset holdings, then the money cannot flow through the economy at the base of the economic pyramid, which is what holds everything else up.

More “liquidity” in the form of debt/credit will not help because credit simply pulls consumption forward, it has an even larger negative effect on future demand because all of that money, plus interest, needs to come back out of economy in order to pay off the debt. This negative effect on future demand is where we are now. They money has already been spent, and it’s now time to pay it back. Liquidity/more debt will not help us to get out of this mess. We need more money (without any debt offset) to be pushed down to the bottom of the pyramid so that the economy can begin moving again. This is why I favor major tax and trade reform so that the destructive trends of the past ~30 years can be reversed.

[Allan from Fallbrook]

CAR: Excellent post. You’ve stated the position well, especially regarding asset values and liquidity. The latter is a major problem for the Krugmanites, who, when they attempt to assert a “Keynesian” approach, forget that Keynes would’ve moved in the opposite direction because of the massive debt and devalued/valueless assets.

Couldn’t agree more on reform, either, and I’d add entitlement reform and immigration reform to tax and trade reform. When we’re ready to have a serious, “adult” dialogue on these topics, well, then we’re ready to move ahead and fix them.

Sadly, I don’t see any politician, Dem or GOP, willing to step up and be honest with the American people on the enormousness of the problems confronting us. Kinda hard to get elected if you do. So the can gets kicked further down the road.

[KSMountain]

It is a reasonable thought experiment posed by the OP.

It may say something about the nature of economics that we haven’t been able to come up with an answer that satisfies everyone yet.

Let me take a stab (note: I am not an economist nor do I play one on tv):

If we monetized $15T overnight – As sreeb said, what do you think would happen to commodity prices? How much would folks demand for a barrel of oil? Or for a future barrel of oil? Do you really think it would remain unchanged? As someone with a tangible asset like that, wouldn’t you be just a little concerned about the fiat you were being offered in trade? Might that concern take prices up to $140 or $200/barrel immediately? I think it might. Might that ripple into everything else pretty quickly? Look at gold prices (or oil prices) – it’s not like things are static – they *are* influenced by events.

What would happen to our exchange rate vs other currencies?

Do you think international trade and debt would continue to be denominated in dollars after such an action?

Even if we “printed” $15T, we would STILL be spending more than we take in. We would still need to borrow even *more*. Currently 40% of our debt (as I understand it) is held by external parties. If you were one of those external parties, how would you feel about lending even *more* to someone who took such a precipitous unilateral action? Might you change your terms for any future loan? I think you well might.

Since we seem to be having some trouble agreeing on what would happen, how about if we took it to a (even more) ridiculous extreme? Why stop at $15T and leave us in a position where we still need to borrow? Why not just “print” $150T? Hooray, we’re all rolling in dough! Are we able to agree on the outcome of *that*? If we can, then it seems to me you can walk back to what the impact of a $15T intervention would be.

Still not clear? Why not print $330Q? We could distribute that money and every man, woman, and child in the US would instantly be a billionaire! Problem solved?

[briansd1]

[quote=CA renter]
Agree very much with the demand issue. I’ll go a bit further and say that liquidity is not a problem at all. Look at all the money sloshing around trying to buy up the favored asset class of the day (commodities, currencies, stocks, bonds, real estate, etc. — all up significantly since 2008/2009).

IMHO, the number one problem is solvency, especially the solvency of those who represent the traditional “demand” in the economy. Everyone is up to their eyeballs in debt, and they cannot afford to pay off that debt AND continue sustaining the demand necessary to keep our economy moving. This is the because of our wealth disparity. If all the money is owned by the few at the top who only seek to increase their cash/asset holdings, then the money cannot flow through the economy at the base of the economic pyramid, which is what holds everything else up.

More “liquidity” in the form of debt/credit will not help because credit simply pulls consumption forward, it has an even larger negative effect on future demand because all of that money, plus interest, needs to come back out of economy in order to pay off the debt. This negative effect on future demand is where we are now. They money has already been spent, and it’s now time to pay it back. Liquidity/more debt will not help us to get out of this mess. We need more money (without any debt offset) to be pushed down to the bottom of the pyramid so that the economy can begin moving again. This is why I favor major tax and trade reform so that the destructive trends of the past ~30 years can be reversed.[/quote]

I also agree. You make a good point.

Demand is the biggest problem, not taxes or regulations. Companies would expand if they forecast higher demand.

That’s why we need more demand in the form of unemployment benefits, safety net payments, student grants, etc.., proportionately commensurate with the economic stagnation we are experiencing.

The governement could create jobs corps and directly hire people on a temporary basis to build infrastructure.

As Allan pointed out, we need to look at all solutions. But Congress is gridlocked so that leaves the Fed to act independently. Ideally we really need fiscal and monetary policies to work together.

I agree that we need reforms. As you put it, the flaw in our system is that money gets dumped at the top of the pyramid and doesn’t trickle down.

Still money and credit are the constraints in getting economic activities going. We need to find ways to unstuck the wheel of economic activity.

There is no reason to let the system collapse, endure deprivation and poverty, just to claim that economic recovery is faster from a much lower low. We are much better off to have slower growth from a much higher point while avoiding that poverty and hardship that would have been forced upon millions around the world.

I’m not enamored by all the interventions which could have been handled differently. But we are now at GDP higher than the peak of 2008. I don’t believe we would already be back to pre-recession level had we let the system collapse.
http://www.calculatedriskblog.com/2011/10/gdp-slightly-above-pre-recession-peak.html

About housing, immediately kicking people out of the houses they can’t afford would result in more affordable house for buyers and faster adjustment to the real estate market. But how is kicking millions of people out of their homes a good thing for society?

Also how is a deeper collapse in house prices good for homeowners whose solvency depends on the biggest asset they own?

CA renter, financial assets prices collapsing much deeper would create ever graver underfunding problems for pension funds. And you want taxpayers to make up the pension shortfalls just because of union contracts? That’s not shared sacrifice.

[DomoArigato]

Per the Wall Street Journal, The Fed owns $1.672 trillion in Treasury securities.

http://online.wsj.com/article/BT-CO-20111229-708182.html

The current US National Debt is around $15.17 trillion and appears to be climbing at a rate of a few tens of thousands of dollars per second. If the federal debt were a sprinter it would be Ben Johnson with a jet (debt?) pack.

http://www.usdebtclock.org/

So the Fed has at least temporarily monetized 11% of the debt. Core inflation has remained under 3% and the value of the US dollar is near where it was at the beginning of the year. Unemployment is starting to head down.

If you are concerned about the value of the US dollar, based on a 1967 value of one dollar = $1.00, the dollar fell in value from 19.4 cents to 15.5 cents from 2000 to 2008 (a 20% drop). From 2008 to 2010, the dollar fell in value from 15.5 cents to 15.3 cents (a 1% drop).

http://mykindred.com/cloud/TX/Documents/dollar/

In my opinion, the Federal Reserve and Federal Government stimulus measures have been helpful. I would like to see more stimulus specifically directed towards helping those in poverty.

[DomoArigato]

[quote=KSMountain]
Still not clear? Why not print $330Q? We could distribute that money and every man, woman, and child in the US would instantly be a billionaire! Problem solved?[/quote]

Since the Federal government doesn’t want to prosecute any of the fraud that occurred during the bubble years, this would actually be an easy way to equalize the wealth of those who didn’t commit fraud against those who grew insanely wealthy via fraudulent means as any existing individual wealth would instantly be made insignificant.

Here’s another thought experiment for you: If interest rates do go up, what does that do to the value of the $15+ trillion in federal debt outstanding?

Hint: It goes down.

[Author]

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