Guest Post: On, and Beyond, Deficits

By DoctoRx, who writes at EconBlog Review:Introduction

A few days ago, Naked Capitalism kicked off a series of posts on government deficits with a first-of-two posts by me. My Debate on Deficits, was followed by posts by Marshall Auerback, Rob Parenteau and Dr. Edward Harrison. My initial post was itself a response to Dr. Harrison’s comprehensive essay from a few weeks earlier on broad economic matters; in it, he recommended that the government increase its borrowing in response to his belief that: “The real problem is the debt – specifically an overly indebted private sector”. He pointed prominently to the financial sector balances model to explain his call for more government debt.


In Dr. Harrison’s essay, the concept of a financial sector balances model was described, per his quote from Mr. Auerback, was that: “the domestic private sector cannot increase savings unless and until foreign or government sectors increase deficits.” (From here on, for simplicity we will exclude foreign flows.)

Being a fan of William of Ockham’s logical razor, I suggested in response that an alternative path was for the private sector to settle its debts within itself. My specific point was in fact simply that there were alternatives that were not covered by the model. Specifically, this model deals with financial dealings between the private and public sector. Ergo, by definition it excluded financial dealings within the private sector.

As there was no attempt to refute that point of mine by any of the three responders, I’m moving on. The model he used was a flow of funds between; mine was debt simplification without any inter-sector flows (earning one’s way out of debt of course being superior to default or principal reduction).


In trying to understand the apparent illogic of the idea that the government needs to go more in debt for the private sector to go more in surplus, I had an aha! moment. This came when I realized that for obscure reasons, Federal Reserve notes are technically debt obligations of the Treasury. However, their only practical use is transactional. As I have no expertise in this matter, comments are solicited on how this fact may or may not affect the financial sector balances model.

A commenter to one of the above posts pointed out that Canada’s paper money is transactional only and not a governmental debt obligation. In most people’s minds, greater wealth in the private sector can be reflected in more money in circulation to reflect that wealth and productivity. If, however, economists must count that cash as Federal debt, that could explain some of the points of disagreement. Once again, expert commentary would be appreciated.


Yours truly is a medical doctor, with a specialty in internal medicine, a subspecialty in cardiovascular diseases, and an overriding interest in disease prevention. I also have extensive experience in the pharmaceutical and financial fields, have filed over 60 U. S. patent applications, and have had 6 books published. I began posting on the Net late last year largely from outrage that the incoming Obama administration was signaling continuity with the Big Finance bailout policies of the Bush team.

Because treating real people has the potential to kill them in more ways than you can imagine, the doctor is admonished thusly: primum non nocere. First, do no harm. In other words, God, fate or nature (take your pick) has given the person a health problem. The physician’s first responsibility is to not make it worse and to not create a new problem. I believe that government needs to be as thoughtful on behalf of its citizens as physicians are supposed to be on behalf of their patients. I also believe that finance has lost its moorings regarding professional standards of prudence, and that it is its responsibility to make its failings up to society by rationalizing the debts it created with borrowers who borrowed not wisely but too well. I and other investors have suffered enough collateral damage from the fallout of the global financial crisis. More debt to be incurred by the people? No way. Let the stock- and bond-holders of the financial companies take all the hits first, till they hit zero if it comes to that (which I doubt will happen on the bond side).

The ramifications of the financial insanity of the past decade and more (it is almost 13 years since Chairman Greenspan’s “irrational exuberance” statement) will not be solved by government pushing a “Send” button to create more “money”. Creation of real wealth- the tangible and human kinds- has little to do with the quantity of money. After all, money has a velocity, and that velocity can very markedly.

In a sense, there is no “economy”. There are only human needs and desires that are satisfied by mutual consent via commercial means when self-help and private, non-commercial means do not suffice. The elevation of GDP as the measure of the nation’s well being is bizarre. When a country has achieved as much material wealth as America and has, in the current Great Recession-ary state, disposable personal income of about $30,000 per capita, then other factors beyond accumulation of material goods are indeed important. Yet the powers that be continue to support in a very large way industries that make the quintessential debt-financed products- homes and autos. All for finance.

IIB, Prescriptions for a healthy American economy

a. The Merchants of Debt and the Merchants of (mostly empty) Calories have had a parallel rise. Debt and junk food are both addictive but are easily marketed to addicts or prospects. Just as America would be better off breaking the addiction the Merchants of Debt have caused, so would it be better off eating less. Less debt would mean smaller houses that could actually be paid for, and fewer cars that harm the atmosphere and deplete natural resources. Less food production would mean less obesity, and less processing of food would mean less of the modern toxins of salt and refined sugar in our diets. This would then mean vastly less cardiovascular disease, fewer medical expenditures, and a smaller economy. And more walking in general, and more bike-riding to work where practical, would also mean a “smaller” economy. But we’d all be better off. Quelle paradox!

We must not equate a higher GDP with improvement in anything important. What is made, how it is made, for whom it is made, how it is paid for, what the effect on the environment is, and the like are some of the factors that matter.

b. Back to finance.

My blog’s motto is “In equity, veritas”. (The term “equity” relates both to ownership rather than debt; and to fairness rather than, for example, crony capitalism.) Thus, I sympathize with Dr. Harrison’s and Mr. Parenteau’s arguments that private debt is core to our current financial and economic problems.

Yet I disagree strenuously with that viewpoint.

I believe that this country has become “over-financialized”, and that debt is just part of the inappropriate recent primacy of finance over the production of useful, real goods and services. This primacy manifests itself in such ways as:

i. Wasteful merger and acquisition effort, given that the average deal does not meet its stated goals;
ii. The cult of the publicly-owned stock even though the companies are run for the benefit of insiders;
iii. The existence of interest rate swaps reportedly in the hundreds of trillions of dollars of notional value;
iv. The whole credit default swaps mess;
v. The overtrading of vital commodities such as oil, a barrel of which reportedly changes hands over 20 times before anything useful is done to it; and
vi. The entire concept that corporations and government can really promise important retirement benefits, given that the future is unknowable. All new pension obligations should be variable.
vii. Most importantly, strategists should consider that the quantity of new government debt was consciously decided upon to outweigh retiring private debt. Thus the debt-GDP ratio continues to rise, into cloud-cuckoo land. If you liked the last debt cycle, you will love the next one!

My medical-financial view is that global growth became manic this decade due to excessive use of stimulants provided by central banks and Big Finance. Now that the seemingly inevitable crash occurred, the patient has become partially resistant to the same stimulants. If the patient had been allowed to go through withdrawal, the addiction could be prevented from returning. In other words, too much frantic economic and financial activity occured that did not arise from real human needs. People, and therefore the economy, need to rest. That’s a rough medical analogy. Plus, Dr. Bernanke was the doctor in charge well before the crisis. He was guilty of malpractice due to failure to diagnose. Initially he failed to treat with a statin and high blood pressure medicine (continuing the patient’s former doctor’s negligence). Then when the patient had chest pains in 2008, he failed to perform an angiogram. Finally a messive myocardial infarction ensured. Only then, he brought in specialists and all the big guns when the patient was on a respirator, but the patient lived but has suffered permanent harm. In medicine, this us actionable malpractice.

On the other hand, parts of the world such as India that did not get whipped by artificial stimulants are, one notes, normal economically.

c. Depository banks probably should not be publicly traded. (Nassim Taleb believes they should be nationalized.) In any case, they should never have runs due to a falling stock price, but their loans and capital assets should be very plain vanilla. Clearly, depository banks fulfill such a critically important function that FDR’s war against bank holding companies should be revived. Separate them from investment banks. Then, divide investment banks into separate companies. One company would engage in principal trading. The other would service clients. The inherent conflicts inside a Goldman Sachs that engages in both these functions cannot be reliably overcome without that separation.

d. FDIC insurance should be reduced ASAP to limits that protect only the financially needy. There is no societal interest in guaranteeing the loans millionaires make to financial companies (i. e. savings deposits). Perhaps $10,000 per family is an appropriate total amongst all banks, not per bank. If anyone wants more government-provided coverage, that person or entity can simply buy a Treasury. Until a year ago, Australian banks had no deposit insurance– and no bank failures. I would also suggest that if ordinary citizens can rule on life and death matters in trials, they can work along with, or oversee, bank regulators. It’s our capital. We should know how it is being handled.

e. Depository institutions should not hold “Level 3” assets. Even Level 2 assets are dicey.

g. If lenders want to obtain insurance on a big loan, then let CDS’s be regulated as standard insurance products with reserves, etc. And make it as illegal for the insurer to resell them as it is for them to resell any insurance product. No holder of a CDS should ever be in a position to profit from the failure of the debt.

h. Most interest rate swaps are little more than line extensions as well, take advantage of the borrower, and serve no business need that is worth the cost of purchasing the swap and the ongoing attention it requires.

i. The “G30” that is so influential in financial and governmental circles has (had) Jacob Frenkel, an AIG VP, as its CEO. I pay no attention to anything it says. Everything it says is for the greater good of Big Finance.

j. Problems with Dr. Harrison’s and Mr. Auerback’s calls for more government debt include:

i. Just as we should be cautious about taking on debt as individuals and on the corporate level, government should if anything be our better angels and be even more cautious. Borrowing more and more from hard-working Chinese et. al for routine expenditures such as those on the elderly is, to put it mildly, a bad idea. Either raise taxes or cut expenditures. I’m not arguing for one path or the other, rather to just be honest about it. Government can print money but should be restrained in doing so.

ii. No matter how many people try to define Federal debt strictly as current obligations, here is Wikipedia on the subject: “The U.S. government is committed under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. . . The present value of these deficits or unfunded obligations is an estimated $41 trillion. This is the amount that would have to be set aside during 2008 such that the principal and interest would pay for the unfunded commitments through 2082.” What’s enshrined in the law is, indeed, the law. Where is the gold in the vault to meet these commitments?

Dr. Harrison, in his response to my post, wrote: “The governments unfunded liabilities for social security and healthcare are akin to General Motors’ unfunded pension liabilities. GM’s unfunded liabilities are germane to a credit crisis only to the degree they flow through the income statement and, thus, require credit financing in real time.”

But . . . GM had to pay a higher price than Toyota when purchasing credit in part because every lender to GM raised the price of said credit in part because of said unfunded liabilities. GM might not have gone bankrupt had it not been for those unfunded obligations. As I read it, Dr. Harrison is supporting my point.

The same Wikipedia entry has a nice summary of the government’s obligations regarding Fannie and Freddie and the other bailout costs. I would expect that the surging low quality FHA debt should then be added to that amount.

The truth is that the net Federal obligations are extremely high, and all-in debt obligations relative to GDP are at all-time record levels for this country. The Ockham’s razor solution involves simplification of our obligations to one another and to foreigners at as many levels as possible. This solution is therefore opposite to one involving creation of more government debt obligations. If my favored solution entails 1% economic growth instead of 2% is irrelevant. Things are now getting like the emperor who had another set of “clothes” made that were just as see-through as the first set. Let’s get this mess cleaned up and move on. Government’s been “stimulating” this recession using debt financing since Q2 2008, when it was only a mild recession.

k. In contrast to all the environmentally unfriendly economic activities that count as good things in the sanctified GDP print, and all the corporate-friendly, person-unfriendly efforts that go on in this economy, there are insufficient efforts on truly useful activities. These include the fields of medical technology, public health, pro-environment activity and research, education at all levels, specific literacy efforts, vocational retraining, urban renewal, food production close to where people live, etc. If America made more of an effort to press its advantage in biotech and medical devices (etc.), and made a “First to the Moon” type race on alternative energy (more intensive than what has been enacted to date), it could regain world leadership in economic sectors of the future and develop an export economy with good jobs at home. In turn, this economy could lead the world toward a healthier and cleaner tomorrow while leading to an intrinsically strong dollar.


In the waning months of the Clinton Presidency, I lunched with a friend and his friend (call the friend of a friend “DC”). The two of them were discussing a business venture they controlled that tied into some governmental telecoms license arrangement. DC, as it happens, was the 3rd generation scion of a very tied-in Washington family. His daughter sat next to Chelsea at Sidwell Friends at the time. With sadness in his voice and demeanor, he mentioned that he and his family had never seen Washington so “for sale” as then, with the true bipartisan spirit having taken hold in that respect. Worse than the Watergate era? Yes, for sure.

Does anyone think things are cleaner lately?

A government that is “for sale” will want to expand its power. That is ultimately why in real time I oppose that phenomenon.

In gargantuan America, smaller and simpler is, for me, today and tomorrow, beautiful.

Copyright (C) Long Lake LLC 2009

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  1. ndk

    I agree with a lot of your policy prescriptions, but to me, the specific suggestions almost detract from a more important broad point you’re making by bogging it down in details.

    You’re pointing out that there are a lot of important metrics to consider when building an economy that serves the nation and its people the best. GDP is one that has become fetishized to the point where the others have lost sway and meaning, but we need to remember that a clumsy aggregate measure of total production masks a lot of very important details.

    The government invariably changes the private economy wherever it interfaces with it — even in a liquidity trap in which there should be hypothetically no “crowding out” possible. If the government issues a lot of money in the form of stimulus projects, the private sector will retool itself to answer that call as best it can. If the government raises taxes specifically on high-income earners, we’ll see an allocation of resources towards meeting the needs of the masses rather than the few, and more inflation in goods and services and less in assets. The “shape” of GDP and the economy is very mutable.

    The impacts on academia have been strong. Many research agendas are shaped almost exclusively by federal policy, leading to a narrow focus on some themes. My own zombifying organization spent months of its time trying to concoct more ways to suck up grant dollars, and didn’t accomplish much else during that period. Other major initiatives at R1 universities have been shelved in pursuit of stimulus.

    I happen to believe that the private sector will do its best innovation, design, and production when there is limited federal guidance. Others believe that there are very pressing issues where the federal government can channel our genius and solve big problems with expediency.

    I like to think both positions are defensible. As such, the overarching message I take from your post is that we should be very cognizant of the effects on the shape of the economy that result from our policy decisions, and as such, deliberate in policy making.

    Fire hoses of money directed at the financial sector and oligarchs, as well as capricious stimulus dollars that are being forced out the door faster than program officers can wisely allocate them, have had a predictable impact on the economy. So have subsidies for housing, and allowing high income earners to slip through any of a hundred taxation loopholes. If we continue in attempts to inflate asset bubbles to save the real economy, I think your fears of financialization will be realized.

    Pain tells me it’s time to get help and change my ways. Get the financial analgesics out of our system so we can begin rehab. It’s way too soon for palliative care.

  2. vlade

    GDP is nice, because it’s easy to measure (who cares it’s wrong). People want easy and transparent, even if it cannot be done – as a doctor I’m pretty sure you know that.

    As an aside, can you substantiate IIB h)?

  3. Brick

    Lots of points here, and I rather liked the comparison between GM’s debts and government debt, although for so many reasons it’s a stretch of the imagination. The limits on government debt are different and that limit can be flexible when global imbalances are in place. That one day those imbalances will subside and the limits on government debt change, for me means racking up debt will one day come back to bite the government, hence today’s discussions about Japan and whether they are now in a sticky situation with debt. The assumption that after fiscal stimulus the economy will pick up significantly so that debts can be repaid also does not quite ring true when you consider the deleveraging going on and potential changes in compound interest going forward. It seems a bit like a political gamble on questionable factors one which competitors like Australia have shied away from.
    I cannot fully support the doctor’s view point even though I have lots of sympathy with it. Making everyone eat their losses is bound to have collateral damage while allowing a little time to prepare for the losses can reduce the damage. Financial institutions have used that time extremely unwisely in my view which points to crony capitalism at its worst. There are lots of people with views similar to the doctors and I expect their influence will be heard eventually.
    Arguing that the government has been stimulating the economy since 2008 misses the point that actually it has been stimulating it all the way back to the creation of Fannie and Freddie. For me the important point about these stimulus strategies is that they are highly biased and full of moral hazard. Should forbearance on principle be only for those under water, don’t the prudent deserve the same consideration. Moral hazard is the formation ground for new political movements and we should not be surprised when those movements begin to shape policy in ways that might otherwise be counter intuitive. At the end of the day the government is always for sale.

  4. Don

    d. FDIC insurance should be reduced ASAP to limits that protect only the financially needy. There is no societal interest in guaranteeing the loans millionaires make to financial companies (i. e. savings deposits). Perhaps $10,000 per family is an appropriate total amongst all banks, not per bank.

    Britain had a similar system prior to Northern Rock (IIRC it protected the first 2100£ and then a percentage afterwards). They wound up having to insure all deposits when the run on Northern Rock started. I’m not sure that such a system does what deposit insurance is intended to do (prevent runs on banks).

    1. vlade

      It reminded me of the comment I wanted to make re aussie banks. True, they didn’t have insurance, but they didn’t need to due to the “Four Pillars” policy (effectively the four large banks have govt guaranteed oligopoly – which also implicitly means the govt will bail them out if they look like failing).

  5. JKH

    Re your questions on the sector financial balances model (by way of explanation, not necessarily ideological promotion):

    The model excludes dealings within the private sector, but it doesn’t exclude consideration of them as a policy input. The idea is to create net savings for the non government sector to at least partially offset the PACE of non government deleveraging. Otherwise, unbridled deleveraging risks deflation implosion. The degree of desired offset is obviously a judgement call.

    Federal Reserve notes are a liability of Treasury. But their use is more than transactional. They serve also as a store of value – the most liquid store of value. If you have notes in your wallet, they are a store of value prior to their use in transaction. Notes are the most liquid form of non government net saving as per the sector financial balances model. There’s nothing distinct about Canada as far as this is concerned.

    The sector financial balances model acknowledges the government/central bank as a currency issuer. While unfunded obligations can be estimated on a present value basis, the commitments if honoured in the future will be met by the government’s capacity as a currency issuer at the time. The non government sector is a currency user, not an issuer. A corresponding present value calculation is probably somewhat more constraining in that case.

  6. DoctoRx

    JKH: Thanks for the comments.

    Vlade and Don:
    1) My point was that the Aussie (and Canadian banks) didn’t fail. They did not go insolvent. If you aren’t attached to a bungee cord, you do not jump off a cliff. American financial institutions went out of control repeatedly due to that insurance = bungee cord. A determined banker can generally trick or co-opt a regulator. Again, if one is in the top Nth % of liquid wealth in America, you can always buy T-bills or Ginnie Maes which pay off twice a month.

    2) Re your question about substantiating my assertion that most interest rate swaps are unnecessary line extensions to bring revenue to the financiers:
    A) How on earth did America, and before it Britain, ever grow to dominate the world without them despite their absence?
    B) How could they possibly be needed in the quantities of notional value reported?
    C) How could any small benefits to someone somewhere outweigh the systemic risk created by the possibility of counterparty refusal/inability to pay?

    Per Nassim Taleb, we need a stabler, safer system, and more brains going into real engineering rather than financial engineering.

    1. winterspeak


      JKH is right. To take a balance sheet perspective:

      All non-Govt sector balance sheets exist in three parts: assets (on the left), non-equity liabilities (on the right), and equity liabilities (also on the right). Assets – non-equity liabilities = equity liabilities by accounting.

      Within the non-Govt sector, the quantity of assets and non-equity liabilities can rise and fall as parties extend credit to one another, and then pay or write down that credit. This is how financial dealings WITHIN the non-govt sector impact balance sheets.

      However, there is no way that the non-Govt sector can increase its equity as a whole. It is IMPOSSIBLE. Entities within the non-Govt sector can shuffle around the equity they have, some go up, some go down by the same amount, but the sector as a whole has no way it can increase its equity.

      It can decrease its equity (at a sector level) if it withdraws cash from the bank and sets it on fire.

      The only way the non-Govt sector can increase its equity is if the Govt sector pays equity into it by running a deficit. That’s why the Govt deficit should be renamed “paid-out equity” because it is the mirror image, and only source, of non-Govt sector “paid-in equity”.

      Harrison’s point is that the non-Govt sector wants to increase its equity and it cannot. Thus you see a fall in aggregate demand and high unemployment. The way to cure this is for the Govt to fund this non-Govt demand for paid-in equity. There is no other way this can happen. It could do this quite simply by taking out less of the equity as it does now through taxation.

      Since the Govt has not funded this demand for non-Govt equity, the non-Govt sector is funding itself the hard way, though unemployment, which tempers the realizable demand for equity and also drives deficits automatically. This is a terrible way to do it.

      Currency issuers are different from currency users, just as doctors are different from patients. They both have different roles to play. The currency issuer funds the equity base that the currency user then leverages (extends private credit) on top of.

      The key insight is that Government deficits fund private sector savings, to the penny. Another term for assets minus non-equity liabilities is net savings.

      1. JKH


        Noting that you are now comment enabled at, I tried to leave one, but was incapacitated by technology challenge. I.e. I am comment disabled.

        I would have said, regarding your intended comment enabling, that I realize we’ve just changed time measurement by one hour (at least in my zone), but I hadn’t noticed that the earth’s rotation direction had been reversed as well.

  7. ex VRWC

    In response to the series of debates here and on Mish’s site, I wrote the following:

    How Monetary Easing Destroys the Economy

    Basic Point – It does not matter what economists conclude about whether deficit spending by governments is OK. It does not matter whether economists think government tax revenues are for funding government or controlling demand. The real impact of rampant easing is that is directly traceable to the the destruction of the real economy (and the middle class) due to a feedback loop. Take a look.

    Mark Snyder aka ex-VRWC

  8. David

    The model in this article does not look deeply enough at debts within the private sector, and it ignores international debts. Thereby it abstracts away the real reasons that the dollar must be devalued.

    The problem with your stronger-dollar prescription is that if one takes the government out of the picture at this time, the private sector cannot pay its “internal” debts. Someone with a mortgage and no job cannot pay their debts on their own, and government programs are needed to overcome this in the short term, and devaluing the currency is needed in the longer term so as to make these debts manageable.

    You also ignore our dollar-denominated international obligations. These must be reduced in real terms as well, and everyone in the world knows it. That’s why every major country is trying to get rid of their dollars. Argentina was the latest to announce, a few days ago, that they would be moving to a basket of currencies. Despite their protests aimed at extracting as much value from the US as possible, everyone knows that the US debts are unpayable. Strengthening the dollar just removes our only way of ameliorating these debts, short of outright default.

    Calling the economy in 2008 a “mild recession” is a very limited view of things. It was clear to many at that time, and earlier, that something very big was going on. Does your argument hold up if one realizes that at the time, banks were already blowing up?

  9. fresno dan

    Wonderful, wonderful post. I especially like:
    “The Merchants of Debt and the Merchants of (mostly empty) Calories have had a parallel rise. Debt and junk food are both addictive but are easily marketed to addicts or prospects. Just as America would be better off breaking the addiction the Merchants of Debt have caused, so would it be better off eating less.”

    Just as endless debt may nominally increase GDP, ever present outlets that sell 64oz of soda nominally increase GDP, versus buying 8oz (or better yet, drinking water). But I wonder how many truly despondent people are out there because their parents failed to instill good eating habits (or they themselves failed to recognize that although you CAN consume as much as you like, it will not make you happy. Life is just not consumption, and moments of non-satiety are NORMAL.

  10. MacroStrategy Edge


    You are to be commended for thinking your way through all these things. Yes, money should not be confused with real wealth. Yes, GDP is not the true measure of well being. Yes, the degree of financial leverage and the dominance of the financial sector must be addressed. The question is how to make the transition most effectively while doing the least harm,as you put it, and I want to encourage you to think about this especially with your private debt solution.

    When private debt loads are very high, and the financial sector itself is very leveraged, economic activity can be heavily disrupted by debt defaults and delinquencies, which is why such private debt build ups should never be allowed or encouraged in the first place – a lesson you might thing we should have learned by now. It was a lesson Irving Fisher learned the hard way a lifetime ago, and tried to pass down.

    We got a taste of the unbridled liquidation strategy last fall. It took us to the edge of a global depression. We need to recognize that is the real consequence of letting a financial crisis just rip. Another path is to encourage conditions where households in particular, but the private sector in general as well, can achieve a net saving position that allows private debt to be paid down, which in fact has started to happen in recent quarters. That requires either a falling trade deficit or a rising fiscal deficit or better yet, both. Better if this had been done through a concerted effort to use policy to encourage less energy dependence, and thus helps the trade balance than cash for clunker’s schemes which defeats the purpose of reducing private debt and adds to the trade deficit.

    Regarding public finance, please do consider the following. Where does the money come from to pay for taxes and to buy government bonds? You cannot print it. Your employer cannot print it. If you trace money back to its source, you may find a very surprising answer.

  11. DoctoRx

    Winterspeak: Your point is well made. NO disagreement. But . . . private WEALTH can increase. I suspect that the accounting point that currency counts as a liability to the government is an important source of people talking past each other. Clearly, a society on the gold standard, where gold is not a liability of the government, can become wealthier as more homes and roads are built, farms are irrigated, etc. And the government can be neutral, positive or negative in its gold flows. (Instead of gold, use corn cobs; it matters not.) My point is to focus on societal well-being.

    ex-VRWC: I agree that, per your website, too much speculation has been encouraged by the PTB (a la my comment about a cult surrounding the stock market).

    David: 1. In real time, in early 2008, the recession was indeed mild. But there would have been pain, for sure. (Had the PTB moved proactively, I believe the GFC would not have happened and neither would the V-depression. Chris Whalen even today believes that the troubled Big Finance co’s can be made whole by debtholders converting to equity.) 2. The private sector’s debts are mainly within the private sector. It can work them out within said sector via writeoffs and growth. 3. I made no prescription for current dollar strength being advisable now. My point is that sustainable long-term currency strength follows a strong economy, not Fed interest rate manipulations which represent policy choices made by an unelected elite.

    fresno dan: You got my main point! Thanks for your insightful comments.

    1. winterspeak

      DoctoRx: I assure you, my focus is on societal wellbeing as well.

      We are in a situation now where a purely nominal problem (the Government’s unwillingness to fund the private sector’s demand for net savings, at no cost to itself) is creating REAL harm (high unemployment, lost productive output, sector malinvestments, etc.) 10% unemployment and 20% underemployment is not doing much for private “wealth” production (and by “wealth” I assume you mean real output).

      The reason for this incorrect prescription is because people think that Govt debt is the same as private debt, when in fact it is quite different. It’s like phlogiston vs oxygen.

      We are not on a gold standard. The real economy is suffering because the Government is abdicating its role as a responsible currency issuer and refusing to type a number into a spreadsheet.

  12. B

    Yves I struggle to understand how a noble cavalier such as yourself can allow an add that promises “Make 6% per month in ETF’s” just below this wonderful musing???
    I’m sure you’re not here for the money, r u?

  13. Greg

    Great article. Can we go ahead and just vote you into Congress and put you on a finance committee?

    One question/comment though.
    It seems your statement that we would need $41 trillion dollars to meet the unfunded liabilities of SS/Care/Caid is beside the point. These are all pay as you go type arrangements are they not? It seems like you could easily also say that if all of Nationwides life insurance policy holders died tomorrow they would not have enough money to pay them off, which would be true, but beside the point of how insurance is funded and priced for the consumer.

  14. DoctoRx

    MacroStrategy: Interesting comments. Your ending leaves me in suspense! Re one of your points, I am NOT advocating “unbridled” debt liquidation. What happened last year was a disgraceful failure of business and government. Business was greedy and government was at best lazy and negligent. I am in favor of “bridled” reduction of debt. Government has an obligation to see that the process is orderly. My view is that adding more and more government debt serves only the short-term interest of the financial community, which gains more business from issuing and trading that debt.

    With the business cycle for the nonce on an upswing, this is the ideal time for our country to reduce its aggregate debt:equity (or, debt:GDP, as one prefers) ratio while simplifying the entire financial structure.

    Greg: Tx for the praise. NO THANKS re Congress. If the people have a financial Great Awakening, Congress will follow.

    Re your question about unfunded liabilities, remember that this is the present value of EXISTING liabilities promised BY LAW. That quantity RISES every month. It’s not exactly a Ponzi scheme, but it’s got some characteristics thereof. Either the laws need to be revoked = broken promises, or the can which is being kicked down the road will spew out an oil slick that will be difficult to dodge.

  15. MattJ

    Unfunded liabilities that can be changed by passing a law should not be equated with Treasuries. Neither should Fannie/Freddie debts, which are expressly not backed by the full faith and credit of the US government.

    Anyone counting on receiving either of those promises is gambling that they will get theirs before the money runs out.

  16. DoctoRx

    MattJ: I concur. Promises to pay retirement and related benefits are not exactly the same as Treasuries, but they are not that dissimilar either. Existing law is the law. So it’s fair to discuss where we are based on the current status. ANY law can be changed. My whole point was that all retirement promises are dangerous. If the employer or govt invests money in stocks, bonds, gold, real estate, or timber, that is safer from the govt’s/employer’s standpoint than a fixed benefit deal.

  17. selise

    If the employer or govt invests money in stocks, bonds, gold, real estate, or timber, that is safer from the govt’s/employer’s standpoint than a fixed benefit deal.

    DoctoRx, in the case of the gov, i completely disagree. the gov function should be to invest in the economy (infrastructure, education, r&d, etc) so that when the time comes to care for the next generation (ss, medicare), the economy has the productive capability and to support that commitment.

  18. DoctoRx

    Selise: I was only referring to pension-type promises, whether by governments or companies. The problem with these commitments is that they cost nothing to make, but there is no possible way of anyone knowing whether they can be kept.

    In line with what you said, my entire writeup related to the need for government to engage in useful activities with benefits to society at large, rather than sustaining the financial sector and old mfg industries such as auto assembly and marketing.

  19. selise

    ss and medicare are pension type promises. no one knows what the future holds, that’s part of the difference between uncertainty and risk. what we can do is invest in growing the productive capability of the economy (and in line with your comment, a resilient economy) because that gives the best chance of being able to provide for all our citizens, young and old.

    i do agree with what you wrote re investments, just not re gov savings (or in many cases “Government can print money but should be restrained in doing so” but that is a separate issue).

  20. i on the ball patriot

    DoctoRx, you suggest some great remedial measures in your article but in your conclusion, in which you point out that a 3rd generation Washington insider relates, “that he and his family had never seen Washington so “for sale”, you bring to mind why your remedial measures, in my opinion, will never see the light of day.

    The government is not “for sale”. The government has been sold. It has been sold to a wealthy ruling elite cabal of global gangsters and it is totally non responsive to the will of the people. Our ‘rule of law’ is a shambles and an inequitable scam. Job one is for ordinary citizens to regain control of their government. I believe that election boycotts, as a ‘vote’ of no confidence in government are the only peaceful means to effect that change.

    As one who would like to see that positive change in government — that would enable implementing many of your fine ideas — I read a great variety of information on our bogus foreign policy ‘terror’ wars that are in reality decoys for imperial exploitation and control. Two things always come to mind. One is that I could never trust anyone in command of such despicable policy (my ‘government’, and two, that the same exploitation and decimation I see being wrought by scamerica in foreign lands, is now becoming well entrenched here at home. Both of these thoughts reaffirm to me that a new government is needed.

    Here is a fine example of a recent read that makes me feel as I do;

    Depraved Indifference: Drone Wars, Whack Jobs and Imperial Terror Written by Chris Floyd
    Wednesday, 28 October 2009 00:03

    I have often admired Jane Mayer’s reportage. She has helped expose several elements of “the dark side” of America’s worldwide Terror War. Her latest article in the New Yorker outlines the CIA’s use of “Predator” drones to kill people by remote control in Pakistan. As the magazine notes, the Obama Administration is relying on these covert drone killers more and more, as it escalates America’s military attacks in Pakistan — ostensibly a sovereign nation allied to the United States.

    Mayer’s article relates a chilling story of suburban killers — many of them stateside, firing their missiles from comfortable cubicles before heading home for dinner with the family — operating in a secret program outside all traditional lines of legality and accountability. (Even the extremely low levels of legality and accountability that weakly adhere to the business of wholesale slaughter and destruction known as war.) For example, part of the program has been “outsourced” to private companies, who are killing people — including hundreds of innocent civilians — for profit, with American tax money.”

    More here;

    Do you really believe that the changes you suggest can be made given the present extent of corruption and deception in government?

    Deception is the strongest political force on the planet.

  21. DoctoRx

    Patriot: Anyone can draw whatever inferences they wish from my conclusion and my suggestion that the “for sale” comment was a long time and ago; and look where we are now.

    So far as a “new government”, I am not sure if you mean a new form of government or a true housecleaning. I am certainly not advocating violence and hope you are not. New policies and new people are needed IMO.

    FYI interesting you mention Predator and the like. The closest I get to politics on my blog is reporting on the progress (if you can call it that it what I call the Pak-ghanistan war(s)). As an old Viet Nam antiwar marcher, I smell a rerun.

    1. i on the ball patriot

      “So far as a “new government”, I am not sure if you mean a new form of government or a true housecleaning. I am certainly not advocating violence and hope you are not. New policies and new people are needed IMO.”

      I favor a housecleaning and rewrite of the constitution to make it (especially the electoral process) more responsive to the will of the people. I do not advocate violence and feel that election boycotts are the best path to that more responsive government goal.

      My question was posed so as to get your sense of present government responsiveness and viability. How will you go about getting new policies and people in place?

      As an aside — it is interesting to see how Abdullah Abdullah in Afghanistan has just now caused the scamerican elite to bunch their undies with his withdrawal from the election. He is also saying that he will not recognize the authority of the IEC that just ‘anointed’ Karzi. It will be difficult now to play the legitimate democracy game. It speaks to the power of dropping out as a ‘vote’ of no confidence in government. Shame on us all for our deceptions.

  22. Ellie James

    DoctoRx made clear the negative implication of the vast government debt, based on facts and analysis, as opposed to analysis based upon political beliefs or wishful thinking.

    1. i on the ball patriot

      Ellie said — “DoctoRx made clear the negative implication of the vast government debt, based on facts and analysis, as opposed to analysis based upon political beliefs or wishful thinking.”

      Ellie, all of life is politics. I believe that it is wishful thinking to believe that facts and analysis are not the result of past and present politics.

  23. pebird

    We are not borrowing from Chinese elderly. They can either spend the dollars they have earned or buy debt to keep their exchange rates pegged to the dollar. We sell the debt to keep our interest rates low, that’s right low.

    The debt issued to the Chinese is not used to “fund” anything.

    Raising taxes and cutting expenditures would result in an much worse economic mess than we have already experienced.

    Who cares what the present value of our unfunded obligations are? What is present value of our future GDP on an infinite horizon? These are legal obligations that can be modified – not war debt.

    If we have the output capacity to provide to our elderly when they retire, we will be fine.

    I am currently beyond bankrupt if I look at my personal unfunded liabilities to the forecast end of my life, and most of us are.

    Maybe we should require each newborn child to put up cash to cover their unfunded liabilities? This is what goes for “thinking” today when we try to equate government finance with personal finance.

    The government does do a lot of stupid things and has its fair share of corruption, but some mechanisms are there to be used for the public good – you can’t create new net financial wealth without unencumbered money. The government (us, the public) is the source of that. Unless you want to give that right away to the banks.

    The debt of the US has been growing right along with our wealth for quite a while – if it was so bad, it would have killed us a long time ago. Now private debt, that is a different story.

  24. mannfm11

    Doc, you cover a broad area in this post, well thought out stuff. Unfortunately those of us that feel about this as you do and I am sure most of us on this board do, we are in a situation of extortion on a subject that very few have the capacity to understand. The function of debt and credit in our system and through out history is so paradoxical that if it was understood, it would be outlawed as it was in biblical times. But, the concept of equity in itself implies debt as a flow of income to the equity. This is because once the equity has drawn the income, there isn’t much left to do in a period of savings other than to lend the income back to the person who paid it to you. The bulk of valuation in the stock market is drawn, not from the money supply itself, but from the promise of continued debt creation. This is why stocks do so poorly in a debt deflation. It is also why we are going to see as bad a performance in stocks as in junk debt over the near term future.

    What we are looking at today is financial debt in the midst of corporate debt and consumer debt and on the other end, savings and pension holdings. In banking, we have a bank and a borrower and later a depositor. In the beginning, the borrower is the depositor, something that most people don’t understand, as a bank doesn’t loan money, but creates credit. Once the borrower has spent his loan proceeds, the depositor becomes someone else. He might be a customer of another bank, which in turn creates a liability between banks. If the borrower is a corporation or lets say a commercial real estate construction company, they may go to wall street or some broker and borrow funds on a longer term and pay off the loan at the bank. For simplicity sakes, we might imply that the depositor that received the funds from the loan when it was spent bought annuities at xYZ life who made ABC construction company a loan and the debt with the bank plus interest was paid.

    There are a few problems here. For one, banking never creates enough money to pay principal and interest, thus we have a compound debt problem. Banks create all the money created and what they ask back is generally more than they create. They can’t get back more, but they can ask back more all the same and foreclose in some cases if they don’t get paid. The other problem is that the depositor that bought the annuities now has savings that is ABC construction companies debt and in some fashion is the asset and liability of XYZ insurance company. So this idea of savings is really nothing more than the piling of of debts in society. They called it wealth creation, when in fact it was wealth creation only for those that were running the debt machine while borrower and saver got caught in the vise. Few understand that Japan saved so much money that they went broke.

    The answer behind using government debt to support the system ala Japan is that the government can continue to float the money supply while it is being diminished by private debt repayment. Everyone owes the government for what the government owes everyone in a sense. Of course the problem and few recognize this either is that those that hold the bonds aren’t the ones that asked to pay the money, but in a sense this is all the money there is. If we ran deficits while individuals paid off their debts, the only savings would be government debt in the end and the only people with the capacity to pay government debt would be ones that held it. But, a system of paying people in general money they could pay back to the government in savings while other debt was retired with money paid back to those that were owed debts might give us a way out, but it would be a long shot.

    The problem is we need a jubilee, but it would leave so many people wiped out. The only people that don’t want to maintain the status quo are those with nothing to lose. The people in power would have to give up all their power, as money is the root of all evil in this sense. This is literally a commoner/royalty or nobility creating event if allowed to go on, as bondage is the future of many generations of Americans and as far as that goes, freemen around the world. All due to the propagation of usuary under the guise of social insurance and the idea that recessions to prevent massive debt build up were not only not necessary but avoidable. It will be another 70 years if we are lucky before we have another real depression. Lets hope the world makes it to another one by then because otherwise we are headed to feudalism.

  25. DoctoRx

    Mannfm: You said a mouthful. There are numerous ways to look at the flow of money and credit, and the creation thereof. What is incontrovertible, though, is the creation of physical wealth such as bridges and horse-carts in the old days, discoveries that help people such as penicillin, radio, etc. No matter the mechanism or accounting, humans can undertake activities with poor or good payoffs. My goal was to move beyond anger at the primacy of Big Finance or gloom over the future to get people focused on the real world of objects and productive ideas, which never go out of style and have their own existence apart from accounting concepts such as the financial sector balances model etc.

  26. David Herr

    Government debt obligations: the reason the actual, legal amount owed is on a cash and not accrual basis, is that future Social Security and Medicare benefits are NOT constitutionally obligated payments. They can be reduced at whim by future Congresses, and will, because the amount currently accrued is unpayable. The government can cut current retirees’ SS benefits by a third, and there is no right to sue to have the benefits restored, as the Supreme Court ruled nearly 50 years ago in Nestor v. Fleming. Moreover, the 75 year window used to calculate accrued liabilities is the wrong way to look at the problem, because it includes the excess of benefits over taxes for people who have not even been born! Surely, the system will be changed to be less generous. While some support removing the tax cap (while implying that the benefits cap will remain, so that those higher taxes do not lead to higher benefits), the actual solution lies in shrinking the system: drop the cap to $40,000, and benefits commensurately, and then mandate private saving above that level. That would reduce the SS footprint on the budget over time.

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