We Discuss the Manufactured US Debt Crisis at The Real News Network Posted on July 25, 2011 by Yves Smith Hope you enjoy this chat. I’m pretty sure I corrected saying “House” rather than “Senate” at the time but that appeared not to have made the edits. The peril of this medium is low/no tolerance for flubs. More at The Real News Post navigation ← Links 7/25/11 Canary in the Treasury Coal Mine: Chicago Merc Increases Collateral Haircuts for Treasuries and Foreign Sovereign Debt → Subscribe to Post Comments 85 comments F. Beard July 25, 2011 at 12:07 pm Nice interview and your points were succinctly said. It’s nice to watch a fine, honest mind work. Philip Pilkington July 25, 2011 at 12:24 pm Literally the best recorded interview done on this so far. Nice one, Yves. That’s just what this debate (farce?) needed. Valissa July 25, 2011 at 4:09 pm Agreed! Very nice interview Yves… it was smart but not too wonky for non-financial types to understand… flowed nicely and the points were clearly made. jo6pac July 25, 2011 at 9:39 pm Yep, thanks sad but it’s really poor theater goes on the beltway with Main Street being killed in the end. Shock Doctrine Thanks Ives Ray Duray July 25, 2011 at 12:29 pm Yves, That was a fantastic segment. As clear-headed as anything I’ve seen on the issue. For those interested in a follow-up to Yves’ erudition might find these two segments featuring Dr. Michael Hudson to be of some use: Democracy NOW!: “Pushing Crisis: GOP Cries Wolf on Debt Ceiling in Order to Impose Radical Pro-Rich Agenda” http://www.democracynow.org/2011/7/22/pushing_crisis_gop_cries_wolf_on KPFA’s Guns + Butter: “Guns, Finance and Butter – Finance Is the New Mode of Warfare” http://www.kpfa.org/archive/id/71485 Ray Duray July 25, 2011 at 12:55 pm Here’s a transcript of Dr. Hudson’s Guns + Butter interview: http://michael-hudson.com/2011/07/the-euthanasia-of-industry/ TC July 26, 2011 at 7:56 pm Mr. Hudson does a fine job of elaborating the corruption we’re suffering. Although in his Guns & Butter interview he referenced the New Dark Age and inferred something like this is becoming an increasing risk, I’m hopeful the information age will prove instrumental in preventing anything like this from occurring. Tertium Squid July 25, 2011 at 12:37 pm Yves, If an economy is trying to delever, why is trillions in debt spending superior to a debt jubilee? pebird July 25, 2011 at 12:52 pm Don’t see the debt jubilee on the House calendar, but I could be missing something. Sufferin' Succotash July 25, 2011 at 1:04 pm Our current crop of solons aren’t Solon. There will be no Shaking Off Of Burdens. On the contrary, burdens will get heavier on the people least able to carry them. Ancien, meet Règime. ambrit July 25, 2011 at 7:57 pm My Dear Succotash; What’s next, the Spartan Peasant Hunt, all done up with lasers and pyrotechnics on the Acropolis? (Which will in future be known as the Credit Lyonnaise Acropolis. Rates on request.) F. Beard July 25, 2011 at 12:58 pm why is trillions in debt spending superior to a debt jubilee? Tertium Squid It isn’t but what would be superior to both would be to use siegniorage to send every US adult citizen, including savers, monthly and equal bailout checks till all mortgage debt was paid off. wunsacon July 25, 2011 at 7:45 pm I’ve been favoring that solution since 2008. F. Beard July 25, 2011 at 8:08 pm I wasn’t aware but truth be told I neither seek recognition for my own ideas nor am I very scrupulous about keeping up with who may have come up with other ideas first either. But in any case, congratulations for coming up with that solution so early. steelhead23 July 25, 2011 at 1:10 pm It is simply beyond the pale that an issue as simple as raising the debt ceiling should become the locomotive to undo the New Deal. If we are to dismantle the New Deal, let us debate it on its merits, not tie it to a hydrogen bomb. This is a manufactured crisis, pure and simple. On the other hand, I am concerned about the scale of debt, both for the U.S. Gov’t and the public. I really would like to see expenditures reduced and revenues increased. I would like to see the dollar strengthened. Pardon my harping on this single subject, but the real issue, the bottom line behind both the financial crisis and the scale of debt, is wages. Americans need better paying jobs. Sure, higher wages would eat into profits – but the current basis of profit is debt, not production, and this is unsustainable. Where is the focus on returning high paying jobs to our shores? Who is championing the American middle class? Indeed, where are the true Democrats? Yves Smith Post authorJuly 25, 2011 at 2:47 pm Steelhead, The concern re US government debt is so wrongheaded I don’t know where to begin. Even the Reinhart/Rogoff analysis, which is REALLY bad (they go back 800 years, to economies that bear no resemblance to a modern economy, and mix gold standard economies, which is most of them, in with fiat issuers) shows you don’t have a negative growth impact until sovereign debt to GDP hits 90%. And even if they had the right data (which they DON”T, this is an apples and oranges sample), that does not prove causality! People who have gone through the examples point to numerous cases where it was pre-existing low growth (often + a financial crisis) that led to the debt to rise, NOT the debt levels leading to low growth. And where is US debt projected to get, even if you believe Reinhart/Rogoff? 76% of GDP. That’s with NO deficit cutting measures implemented, it’s expected to stabilize at that level ~ 2015-2016. Debt will grow but not out of line with GDP growth. Moreover, Great Britain ran debt levels well in excess of the Reinhart/Rogoff scare levels through its entire period of industrialization. The US got to 200% debt to GDP in WWII. The US has run federal deficits over 80% of its history, and the times it didn’t (such as during Andrew Jackson’s presidency) we had bad recessions and financial panics. The problem is NOT debt, it is the failure of US businesses to invest. They have been net savers since 2003. It is very unnatural for the business sector as a whole not to invest during an expansion, that means they are effectively divesting. That in turn is the result of terrible incentives which have produced short-termism. When households are saving and businesses are saving too, you NEED government to run deficits, otherwise the economy contracts and wages fall. The best way to do that is through automatic stablizers, since there is a very legitimate concern that governments will not cut back spending once the economy starts growing and businesses invest enough again. Another good way is infrasctructure and industry supporting R&D. Everyone forgets we do have industrial policy in the US, the government spends a huge amount on military and drug related R&D. The Australians are very good at that, they have a really well respected government funded institute called the CSIRO that does fundamental and applied research in something like 10 priority industry clusters. The problem is since the Reagan era, we’ve bred government to be incompetent, so no one trusts it to do a decent job of investing when the private sector sits on its hands. But that is overdone too. There are a lot of good agencies in the communist state of New York, where we still pay taxes and don’t hate government as much as the rest of the country does. F. Beard July 25, 2011 at 3:08 pm The problem is NOT debt, … Yves Smith But why is US Government debt even necessary? It isn’t and it just gives deficit hawks ammunition. I would call the Republican’s bluff and say “OK, I agree. Increasing the debt is bad so from now on we will just use siegniorage to fund all deficits and to pay off existing debt as it comes due.” With no more US Treasuries to come onto the market, wouldn’t existing holders of them hang on to them for dear life unless US price inflation got out of hand? wunsacon July 25, 2011 at 7:43 pm You make sense, Beard. TC July 26, 2011 at 8:35 pm Sound sovereign debt is to domestic tranquility as a strong military is to international peace: both put a sovereign in a position where its reasonable concerns gain credibility and consideration because those with skin in the game have something to lose should these concerns otherwise be supposed trivial and unworthy of hearing. Jessica July 25, 2011 at 3:36 pm I have a theory that in an industrial economy, the capacity to produce outstrips effective demand. I don’t know why, but it just _does_. I know Say’s Law is a nice theoretical proof that production always creates an equivalent effective demand, but just looking empirically at the historical record, is there any industrial or industrializing economy that actually ran successfully on a balanced budget for any length of time? Either they had colonies to force to buy their goods (UK, France), international debt US in 19th century), consumer debt (most of the first world since the end of WW2), or some other country willing to buy their exports (Japan, Germany, China the past few decades). The only national industrial economies I can think of that ran on a balanced budget would be the Soviet Union until about the 1970s or so and Maoist-era China. And if that is what a no-debt economy looks like, I rest my case. F. Beard July 25, 2011 at 3:43 pm I have a theory that in an industrial economy, the capacity to produce outstrips effective demand. I don’t know why, but it just _does_ Jessica Basically it is because the population’s own stolen purchasing power is used to automate their jobs away thus leading to increased production but also a population that cannot effectively consume that production. It is ironic confirmation of “Thou shalt not steal”. Jessica July 25, 2011 at 5:04 pm I agree that taking what should be the purchasing power of ordinary people and using it for other purposes is bad, but it should not effect the total amount of effective demand, only the composition of that effective demand. In your example, that money would still show up as effective demand, for the machinery and engineering services used in automation. Even if the elite plunders us completely, that should still show up as effective demand for luxury goods and investment (at least in the old days) or all the legal and propaganda services required for getting away with murder. But empirically, a shortfall in effective demand (aka, overproduction or excess capacity) seems to be endemic. For immediate practical politics, this is not important. But I suspect that really understanding where the effective demand leaks out to would both help us understand how the economy really works (so that we can make it run more humanely) and help us explain it to people. Even though it is false, the notion that a national budget is just like a family budget, only scaled up, is inherently powerful. Not just because it is propagandized for the benefit of the elite, but because it makes sense to people. On the other hand, even if MMT is true, it just sounds like a free lunch or a perpetual motion machine. If we could point to exactly where the effective demand disappears, it would be easier to convince people that balancing that with some MMT-based program for ordinary people is a wise idea, not some Disney fantasy. F. Beard July 25, 2011 at 5:21 pm But empirically, a shortfall in effective demand (aka, overproduction or excess capacity) seems to be endemic. Jessica Without the government backed and enforced counterfeiting cartel to borrow from then how could business raise capital for productivity increases? Business could: 1) Borrow the worker’s savings at honest interest rates. OR 2) Share equity with the workers. In either case, the workers would be better able to consume the fruit of their labors. Leverage July 25, 2011 at 5:48 pm There is a piece lacking in your puzzle: inflation. Reduced effective demand or overproduction wouldn’t be a problem if prices were not rising constantly and asymmetrically compared to wages and income of the majority of the population (labour). This would mean in fact that things would get cheaper and purchasing power would increase. This would mean less working (at least by obligation) and more leisure and better quality of life. But then there is the other coin of deflation: deflation is problematic in our monetary economy because money hoarding is natural in it. Propensity to save and speculate with the value of money. Then you would need an incentive to make money move (circulate), probably using negative rates while keeping the money supply constant (no new loans) or just increasing in relation to the economy output; ie. a demurrage tax. Within the current monetary frame, using MMT, this probably would mean constant deficits, very few loans (and zombi banks), zero interest-rates and high progressive taxes to reduce money hoarding with inflationary propensity due to speculation (plus strong asset price regulation). F. Beard July 25, 2011 at 6:15 pm Reduced effective demand or overproduction wouldn’t be a problem if prices were not rising constantly and asymmetrically compared to wages and income of the majority of the population (labour). leverage A big part of prices is for usury, the rent of money from the bankers. With no need to pay depositors honest interest rates, that usury accrues to the banks and not to the workers’ savings. This would mean in fact that things would get cheaper and purchasing power would increase. This would mean less working (at least by obligation) and more leisure and better quality of life. leverage Yes, we might expect that with genuine lending as opposed to so-called “credit creation”. But then there is the other coin of deflation: deflation is problematic in our monetary economy because money hoarding is natural in it. leverage The solution to money hoarding is to abolish any money monopoly for private debts. Any significant attempt to hoard one private currency would create a market for another one. As for those hoarding government currency, the government could flood the economy as needed with new currency to prevent deflation. DJ July 25, 2011 at 10:47 pm F. Beard says: July 25, 2011 at 3:43 pm I have a theory that in an industrial economy, the capacity to produce outstrips effective demand. I don’t know why, but it just _does_ Jessica Basically it is because the population’s own stolen purchasing power is used to automate their jobs away thus leading to increased production but also a population that cannot effectively consume that production. It is ironic confirmation of “Thou shalt not steal”. Ahhhh…sounds a lot like Karl Marx’s “surplus value” theory – that the workers aren’t paid enough to “buy back” the goods they produced. Marx was on the right track. The economy would actually be in perfect balance if the “capitalists” consumed “their share” but in practice they don’t. Warren Buffet is a multi-billionaire but drives around in an old pickup truck and lives in the same house he bought in the 1950s. He is continually reinvesting capital, but he is not consuming the income his capital produces. But wealth can be stored by “lending” it out…which helps to explain our collective debt to income ratio. It can only go on so long before the system breaks down. F. Beard July 26, 2011 at 1:27 am The economy would actually be in perfect balance if the “capitalists” consumed “their share” but in practice they don’t. DJ No, the capitalists (via the counterfeiting cartel, the banking system) have stolen their workers’ share of the ability to consume. One man can only consume so much decently; it would be absurd to expect Warren Buffet to consume according to his income. But good comment otherwise. Another Gordon July 26, 2011 at 7:51 am The problem is that Say’s Law, like so much in economics, appears reasonable, watertight even, but is actually dead wrong. As Steve Keen points out in “Debunking Economics” (new edition due soon), “The … [argument is]… that, on the average, agents in a market economy are neither theives (who want to take more than they give) nor philanthropists (who want to give more than they get). Therefore the economy stays in balance. In the real world there are in fact many thieves operating on an industrial scale. But more fundamentally, as Keen points out, Say’s Law assumes an economy where the only activity is trading commodities (including labor) whereas in reality the essence of capitalism is the combining of commodities to generate surplus value which can be further invested or hoarded. Say’s Law is not a valid description of capitalist production. The conculsion I draw is that when theiving or hoarding (above what is necessary to get each of us through retirement which is really not hoarding in any case) reach epidemic levels the results will be large scale un- and underemployment and gross inequality. And since the law is not nearly as blind as one would wish, wealth and income inequality soon adds to legal inequality exemplified by, for instance, fraudclosure and a toxic feedback is established. F. Beard July 26, 2011 at 11:09 am In the real world there are in fact many thieves operating on an industrial scale. Another Gordon Every banker and even every credit union member is by definition a thief of purchasing power since they extend credit in a government enforced monopoly money supply for private debts. river July 25, 2011 at 3:39 pm I agree with you about the public debt, but it seems that the private levels of debt is the root cause of the economies problem . . . talking about mortgages, student loans, credit cards. Or have I missed some nuance between reading your postings and maybe somebody like Steve Keen’s Cedric Regula July 25, 2011 at 4:21 pm Whenever I see anyone toss out the “The US got to 200% debt to GDP in WWII” factoid I remind myself that Eisenhower helped solve that with something like a 90% max tax rate. Today we have the “balance sheet recession” on the part of the consumer, so even raising tax rates a little seems to be a terrible problem. (except on rich taxpayers of course, and I think high 5 to 6 figures is rich enough) Unlike 2000, corporations are generally in good shape, so we could go after corporate taxes, but that seems so difficult to do as well. (????) Now it stands to reason if you are an industrializing economy, there would be much private and public investment and growth as a consequence. Today the developing world is industrializing. We had the information age and then the financial age. At this point we are wondering what the encore is? So I am not quite as sanguine about the idea that we can run the debt up real high, and expect to get it under control again. Jessica July 25, 2011 at 5:06 pm The 90% tax rate was instituted as part of the general mobilization during WW2, not as a debt reduction measure afterwards. Cedric Regula July 25, 2011 at 6:10 pm I think they lowered it down to 80% and it stayed pretty much there till Kennedy. Then the Kennedy rate, don’t quote me – 60% ? held up to Reagan times, I think. Plus everyone got inflated into higher tax brackets in the 70s. That was fun. I saw a chart of it once and am just going from memory. Yves Smith Post authorJuly 25, 2011 at 10:59 pm The debt to GDP ratio fell smartly in the later 1940s because they had several years running of 6-7% growth. It was the growth, not the taxes. Federal taxes as a % of GDP were lower in the Truman era than any time since then. Cedric Regula July 26, 2011 at 3:25 am Yes, well, someone needed to re-build europe, and all our competitors were blown up…. steelhead23 July 25, 2011 at 7:31 pm Yves, Thank you for your reply. Perhaps I spend too much time reading blogs that scream the “end of days” if the U.S. Gov. doesn’t reduce its deficit. And I have a visceral disdain for debt as debt service could become a burden. Further, the decline in the dollar index suggest that the U.S. current account deficit is not in our long-term interest. It offends my egalitarianist leanings to see so many Americans succumbing to debt peonage as the rentiers spend their wealth influencing policy in a decidedly anti-democratic manner. That is, credit leverages power, which is being used against the public interest. Your response speaks only to economic issues. Isn’t there reason to be concerned about the power afforded creditors? If not, please explain why the U.S. has looked away as the banksters foreclose on millions with fraudulent paper? Is this in the public interest? The growth of credit, both public and private, at rates far greater than wages or productivity is undermining our democracy and a focus purely on the economics of the issue misses this important power effect. Francois T July 25, 2011 at 8:29 pm It cannot be surprising that this country is in such dire shape when it is next to impossible to have a serious critique of Rogoff and Reinhart opus. Yours is one of the first I read about it. Of course, I’m no credit market jock or financial wizard, so i do not follow this stuff as a pro. However, I follow the news, trends and ideas very closely and again, this is the first time I read a substantive critique of Rogoff. Thank you for that. Siggy July 26, 2011 at 11:52 am I believe that savings are the fuel of investment. If, firms are merely saving, where and how are they saving? If the intermediary is accumulating savings, why isn’t the intermediary investing those savings? If the firm sees no need for further investment; what does that say about the structure of the economy? If there is, in fact, a deficit of investment, what are the banks, investment banks, private equity and hedge funds doing with all of the savings they are and have accumulated? Sock Puppet July 25, 2011 at 3:37 pm Govt. should run a deficit – take out a home equity loan if you will – for some serious projects to remove some headwinds for industry, states, and the population at large. A single payer health care system, investment in state higher education via grants not loans, investment in renewable energy and conservation, improving the efficiency and resilience of our energy and transportation infrastructure are just some examples off the top of my head. None of these will add shareholder value in a single quarter, so don’t look to the private sector to tackle them. Either we get our government to step up to the plate as those in some other countries have, or we’ll be seeing out the rest of the century in a bunker. Paul Tioxon July 25, 2011 at 10:10 pm If debt is such a drag on the economy, why is the private debt, which is three times the public debt not being addressed. Private debt is about FORTY TRILLION DOLLARS which is three times the GDP. If the US Government is on an unsustainable path, what kind of path is the private sector on. http://en.wikipedia.org/wiki/Financial_position_of_the_United_States Yves Smith Post authorJuly 25, 2011 at 11:01 pm Agreed, the problem is private debt, particularly household debt, which is pretty much never productive (lots of studies show rising HH debt levels are bad for growth). So more debt restructuring and consumer prudence is a good thing. Business investment should add to productivity, but as we know, businesses can also engage in what the Austrians call malinvestment. Paul Tioxon July 25, 2011 at 11:12 pm Be careful when invoking Austrians, do call up what you can not put down. Tao Jonesing July 25, 2011 at 11:59 pm What Austrians call “malinvestment” is actually leveraged financial speculation. Labeling such speculation as a form of “investment” legitimizes it, and was clearly intended to do so. The Austrian “solution” to such leveraged financial speculation is to constrain liquidity so that the people who currently engage in speculation will have the sure thing of usury, i.e., we can save the rabble from the negative effects of the “natural” business cycle by just giving the speculators complete control over the economy to leech away all of the value everybody else creates. I’d take MMT over the Austrians any day of the week. At least under MMT there is the possibility of the kind of liberty the Austrians drone on and on about. Sufferin'Succotash July 25, 2011 at 1:19 pm Worth noting that your proposal bears more than a passing resemblance to the “pump-priming” notions dating back to the 1930s: Huey Long’s “Every Man A King” program, the Social Credit movement in Canada. There was also Francis Townsend’s plan to provide monthly pension payments to retirees. His movement attracted literally millions of followers in the mid-30s and generated part of the impetus for the enactment of Social Security. Which we are now apparently in the process of destroying. Oh well… ScottW July 25, 2011 at 2:25 pm Very good explanation of the farce of the debt ceiling “debate.” I think the average American has no idea that when the Government says it cannot afford future social security/medicare spending what the Government is really saying is the retirement/healthcare obligation must now be financed by the average American. It does not simply go away, or become more affordable to retire, or buy healthcare. In fact just the opposite–now it will be more expensive as the private markets get their grubby little mitts more entrenched into the retirement/healthcare racket. Sufferin' Succotash July 25, 2011 at 3:33 pm And, inasmuch as Yves cited the hostage scene in “Blazing Saddles” to illustrate a point, the following snippet seems a good example of what “investment” has meant to the financial industry in recent years. http://www.youtube.com/watch?v=SbWg-mozGsU F. Beard July 25, 2011 at 3:49 pm The irony is they could have just ridden around the toll-booth but the bankers have seen to it that we MUST use FRNs for private debt and thus pay them toll. RSDallas July 25, 2011 at 3:56 pm We would not have even been talking about the debt level if ALL the banks and Investment houses would have recognized the assets held on their balance sheets at the market value. This would have triggered immediate failures by hundreds of financial institutions and at the same time there would have been billions, if not trillions of new money swooping and purchasing those assets. This would have caused the rain and thunder to stop, the water would have receded and low and behold the sun would come back out signaling a new era of prosperity for the smart money. Instead we continue to protect the stupid money and allow our Fed to literally rob us blind. F. Beard July 25, 2011 at 4:04 pm A Depression is a needlessly cruel “solution” (if it can be called that) to a credit driven boom. Plus it ignores the innocent victims. Anonymous July 25, 2011 at 4:35 pm Very well done, Yves. I always pictured you younger, with darker hair. Yves Smith Post authorJuly 25, 2011 at 11:06 pm :-( Pointing out I look middle aged is not exactly a compliment! Rob July 26, 2011 at 12:45 am Beauty is in the eye of the beholder… Wicked smart is near objective and you own that; embrace your abundances! F. Beard July 26, 2011 at 1:57 am I used to think you were a guy! Your first name threw me. It’s hard to do (at least for me), people will think you are nuts and you should consult a doctor first but a long water only fast (20-40 days) is an excellent way to turn back the clock and get a new lease on life. I plan to do one myself one of these days. Yankee July 25, 2011 at 6:43 pm No one has mentioned the cost of carrying out six wars and no mention of how to pay for it. Valissa July 25, 2011 at 7:30 pm As the quantity of wars increases, the US needs more quantitative easing. It seems like a very straightforward proportional relationship to me. http://nl.toonpool.com/user/997/files/king_war_expensive_spend_money_m_255085.jpg Cedric Regula July 25, 2011 at 8:11 pm Kings did it better. They got brand new serfs to tax. Valissa July 25, 2011 at 8:17 pm Serfing in the olden days! http://www.cartoonstock.com/lowres/mtu0007l.jpg Cedric Regula July 25, 2011 at 8:27 pm Ya. You should see how they “hang ten”! D M Smith July 25, 2011 at 7:57 pm A modest proposal: repeal the favorable tax treatment of capital gains. Not only is this a tax subsidy (especially with near-zero inflation) that distorts financial markets and costs the treasury, it feeds the concentration of income that arguably impairs domestic demand and therefore economic growth, through the lower propensity to consume at the top. We are not a country that lacks investible capital, but we do seem to be hurting for good, productive domestic business investment opportunities, in proportion to our available capital. Personally, I know how nice that 15% rate is, since I’m in the process of selling a company. But the 15% rate is not what motivated me to invest my time, energy, and money to make it succeed. D M Smith July 25, 2011 at 8:00 pm Almost forgot – Excellent interview! I will certainly pass it along. primefool July 25, 2011 at 8:06 pm Excellent program and great comments here. Just a small comment on cancelling the Treasury bonds held by the Fed. It is effectively not a real obligation in any event – because the Fed periodically returns the interest paid on the Treasuries back to the Treasury! So the Treasuries held by the Fed are in fact already effectively “neutered”. anonymous July 25, 2011 at 8:09 pm Yves, It’s a pleasure to see you so cogent on camera. I’m usually awed you can do it in full post mode. Don’t know how you do it, and I don’t want you to give up the writing gig, but you need a good agent to get you on screen more often. You really do a nice job on camera. I think you’ve redefined soundbite. Nice work and thanks. primefool July 25, 2011 at 8:18 pm A lot of the confusion on money/debt etc today is because most people still think of money as effectively “gold coins”. Which shows the success of central banking propaganda over the past decades! The Treasury/Fed ( “Tread”) could of course effectively print and spend any amount of dollars. There is no need for taxes or all of the elaborate machinery running Treasury auctions. There are 2 real issues: 1. If they are so “open kimono” about the matter – it might shock the untutored masses sufficiently that the currency unit becomes suspect and shunned. 2. It will focus the politics on real issues – like “fairness” – which may result in adverse consequences to the power elite. ie. There is a class of people in society who have access to the printing press and a second class of people who have to sweat long and hard to get their hands on any of it. 3. If the Govt simply prints up all the money it wants and does what it wants – even if the currency maintains its relevance for a while – it brings up issues of a very fundamental nature – what kind of political /economic system are we dealing with here and do we really want to spend another 30 years proving that central planning fails miserably? F. Beard July 25, 2011 at 8:36 pm There is no need for taxes or all of the elaborate machinery running Treasury auctions. primefool There is no need for government debt, true, but at least some amount of taxation is needed to back the value of the government’s money. That taxation should always be less than government spending though. primefool July 25, 2011 at 8:50 pm Yes – taxes are really only needed to endow the Dollar with “legal tender” status. Otherwise folks might be tempted to barter or use local forms of IOUs – thereby cutting the govt out of the loop. But – taxes are not really needed to enable the govt to spend – because the govt can simply print money and spend it. And if they spend it on amazingly innovative, productive projects ( hahahaha) – then there would be absolutely no problem would there? F. Beard July 25, 2011 at 9:10 pm Otherwise folks might be tempted to barter or use local forms of IOUs – thereby cutting the govt out of the loop. primefool Private currencies should be allowed. There is no legitimate need for government money to be de facto legal tender for private debts. However, government fiat is the only ethical form of money for government debts. But – taxes are not really needed to enable the govt to spend – because the govt can simply print money and spend it. And if they spend it on amazingly innovative, productive projects ( hahahaha) – then there would be absolutely no problem would there? primefool In that case, the government would still need to charge fees for the use of those projects payable in the government’s money. rps July 25, 2011 at 8:44 pm Obama will be a one term president if he destroys medicare and social security. And maybe that was always the plan. Perhaps his shortsightedness of no big deal destroying the new deal is worth a one term presidency and that his money is in the speech and book de’tour. I think he never considered he will be the most heinous, reviled, hated american president who betrayed the commonwealth, forced to live abroad. In fact, he’ll be despised more than Lincoln was in the southern states. psychohistorian July 25, 2011 at 9:57 pm Obama will be dead by some tea party idiot if he allows SS to be changed. No amount of security could save him from such stupidity. I don’t understand Obama. If I am going to die for my values, why not go out with guns blazing so to speak instead of this craven rich ass kissing…..or is he really an evil person like the rest? citalopram July 25, 2011 at 10:04 pm I think he and others stand to make a hell of a lot of money. I honestly think at this point that they want the economy on its knees so they can profit off of it. Besides that, once government is out of the way, they can do whatever they hell they want. Everything will have been privatized and then you won’t have any constitutional rights anymore. It will be one big privatized slave state. You don’t like corporations selling you water for exorbitant prices? Too bad, talk to our private mercenaries over there. kemo sabe July 25, 2011 at 9:31 pm Good work Yves! I think saying Democratic House instead of Senate was really a freudian slip. Is a difference between the Dimocrats and the Repugs? john July 25, 2011 at 10:33 pm the 14th amendment denies debts owed from protecting against domestic insurrection or outright rebellions. not just debt period. but no one is asking where this debt comes from? who is it exactly that the US owes money too? If it’s foreign capitol, can we make domestic laws that negate foreign debts? If it’s domestic debt, what the hell does that even mean? I’ve been researching online for four hours now and I can’t find anything that explains what this situation actually is. Media only talks about the drama on capital hill and doesn’t seem qualified or willing to explain what this debt crisis means! HELP ME! PLEASE!! Valissa July 26, 2011 at 1:38 am Suggest reading “The Creature from Jekyll Island: A Second Look at the Federal Reserve” by G. Edward Griffin. You don’t even need to read the whole thing to understand what the bankers behind the Federal Reserve are up to, the first 85 pages or so is enough to get the basics. This debt drama and bailout game has been played many times before. Each time the US borrows more money, the banks behind the Federal Reserve and their owners make a tidy pile of money off of the interest. Follow the money! Another place to get started… behind the kabuki of the political drama are some serious money and power games. The Federal Reserve Cartel: The Eight Families http://www.globalresearch.ca/index.php?context=va&aid=25080 Rex July 25, 2011 at 11:08 pm A little while ago Prez Obummer spoke to us about the debt impasse. Paraphrasing, I think he said he was willing to do dumb stuff just to prove what a schmuck he was, but the crazy Repugs are so looney they won’t even let him. He closed by asking us to whine to our congress critters. Umm, I think the one’s I have are not part of the problem, but he sure is. So I went here: http://www.whitehouse.gov/contact , to direct my thoughts in the vicinity of where I think one of the biggest problems lie. I hope sharing my (probably useless) response direction isn’t a bad thing for the Blog. Getreal1 July 26, 2011 at 12:33 am Yves, What entitlement cuts is Obama requesting? We keep hearing about the $4 trillion in cuts, but have no details, which means this is hogwash. When does the overspending stop? Do we have to keep running a deficit every year in order for the economy to grow? Folks like you must love inflation, do you know that inflation robs the poorest of their savings? But, heck it may help the kids out in their future bills. So does this mean screw the poor? For you Bush bashers, yes he overspent and deserves to be called on it, but that shouldn’t give a blank check to Obama to do the very same and then some. Rex July 26, 2011 at 12:47 am Get Real, indeed. Hogwash — overspending — running a deficit every year — Folks like you — inflation — robs the poorest — Bush bashers — blank check to Obama. Talking points, much? If you check out this very post, most of that blather is covered. For more details read back through the archives. Rob July 26, 2011 at 1:00 am You might be surprised to find that Obama spending was one-off temporary. Wars last long and tax cuts and entitlement changes are permanent (plus education, energy, and all this other corporate socialism). Obama has spent little of discretion, automatic stabilizers do what they do for a reason. This is still all sideshow. Rentiers have bought the US government. Finance got bailed out but there was no shared sacrifice, real people took it on the chin. Most of the US economy is an incentives joke; short-termism is rampant. Inflation is good for debtors and bad for lenders; that’s justice under the current system. Diogenes July 26, 2011 at 1:05 am Well, I don’t see a contact or “e-mail me” link, but I wanted to submit this for your daily links. Yes, I know it’s not finance, but its a cave discovered in Mexico with mineral crystals several stories high: http://www.telegraph.co.uk/travel/picturegalleries/8660364/Amazing-caves-of-giant-crystals-inside-the-Naica-Mine-in-Chihuahua-Mexico.html?image=1 Yves Smith Post authorJuly 26, 2011 at 1:22 am As you may know I like science related stuff too and this is a good item for Links, thanks for sending it. Zarepheth July 26, 2011 at 1:17 am Our whole monetary and economic system, along with how our society divides wealth and resources between public and private needs to change. So long as land, natural resources, and public privileges are monopolized by private parties, those private parties will have unearned, economic advantages over everyone else. For the past 100+ years they have been using their advantages to unduly influence our government, getting our laws set up to favor themselves. The power to create money, is a public privilege. Handing it over to private parties without requiring them to fully compensate the community for the value they have received, harms the community. Likewise with parcels of land, minerals rights, logging rights, and so on. If it was not created by human labor or it was created only through the community as a whole – it should be owned by the community and leased for full market value to private individuals and organizations. That way, the community as a whole will benefit from private use of these public resources. Such a change in ownership, or setting tax/fee rates to equal the full market rent on those assets, would provide government with more wealth than it could legimately spend serving the public. At that point, it would have a fiduciary duty to evenly distribute the excess wealth to every resident and citizen. Further, there would be no need for taxes on economic transactions involving real goods and service – no sales tax, no value added taxes, no wage taxes. Under such a system, everyone would keep for themselves the products of their own labor – after repaying society for the use of communal resources. And if anyone received unearned income from the community, everyone would receive the same amount of unearned income. Basically a “national dividend”. mannfm11 July 26, 2011 at 3:26 am I’m glad I stopped and watched what you said, because I read the comments and thought the discussion was different. In part I agree with you. Ron Paul brought up the Fed a month ago. I believe we could cancel half the debt in the Fed merely because that money is never going to be picked up. The Fed needs enough in treasuries to manage monetary policy and nothing more. As far as the 14th amendment, I think that idea is treading on dangerous ground. The statement in that amendment has absolutely nothing to do with the authorization of debt, but instead the debt at the time the amendment was passed. The authorization of debt is under the control of Congress, exclusively. The point that Congress has already authorized the spending though is a valid point. Congress would be committing a double bind of sorts if it gave orders to do something and failed to provide the means. They are denying the means. As far as the European problem. The banks and bond holders should have borne the losses in Ireland and some of the other countries. Greece should have defaulted. The errors were made by the financial industry in Europe. The US should have backstopped the LEH mess, but only to the extent that the end bankruptcy could have been processed and the losses doled out. Banking got too big for its britches. The problem with Italy is quite different than the other countries, as it appears they could probably contain their debt, if given a chance. The idea we are going to be able to pump debt out to the world though defies logic. If the USA was as they were in the 1930’s, I could see the game going on. But, the cause of the depression in the 1930’s was a continued ponzi financing of debtors until the game ran out of rope. When does the US run out of rope? We cannot continue to pump consumption and at the same time finance the outflows we finance. All this money is going to Wall Street and the multinationals and is being put on the government card. It might go direct, but it is going there, as witnessed by reported profits, which are being used to liquidate capital reserves in companies through stock repurchases (this was known in corporate tax law of the 1970’s as partial liquidations or as dealing in ones own stock, both of which are either tax preferred or tax free depending on whether it is company or shareholder). The government has merely reprimed the financial pump to continue this process of drawing money out of the economy into non-productive assets. I am rather conservative. One thing I do agree with, an idea I garnered from Michael Hudson was that Social Security should be a pay as you go system. It should have been that way from the start and Congress would have been forced to raise the money they spent through other taxes. Social Security is an open ended program, meaning there really isn’t an individual pension, but instead a system of payments and receipts. The system merely needs the cash to pay as you go, not to financialize every retirement that comes about. No one really has an account with Social Security. It should also be a consumption tax instead of an income tax. Medicare is another animal. I believe that once a pool of money is put in place to grab, the people that can do the grabbing do it. One piece of this was the mortgage bubble in California. It produced a growing pool of government income, which was grabbed up by the public unions, who backed and elected their own bosses. What we now have in place are liabilities that can’t be funded. Even if the pools existed, the economy can’t produce the income that would go into these pools because the debt exponential which goes along with the pools of assets are now too big for the economy. Medicine in the US has gotten expensive because the pools of money were created and the prices increased to absorb as much of the pools as possible. Education loans also created large pools of funds, thus academia now absorbs an amount of money that the productive economy cannot service. This means we are at the point where finance breaks down and either through adjustment or bankruptcy the system has to be reorganized. The math doesn’t work. Getting back to the deficits and government finance. Japan has so far gotten away with a huge debt because it is internally funded and they still earn foreign income. To some extent, this is clearly due to the debt bubble in the US and the international acceptance of the dollar. Debt is the only thing that keeps the dollar in demand and if the US is going to continue to fund excess consumption with the indication that it will never do anything other than Ponzi finance, trade with the US will be abandoned and the whole world trade system will collapse. Contrary to the tales told over and over again, the collapse of world finance is what triggered the Great Depression, as ponzi debts on an international basis ran out of time. Smoot Hawley was merely blamed for a banker driven debt bubble that broke. I don’t consider Social Security as an entitlement. It was and is a national pension and shouldn’t any more not be paid than an annuity out of an insurance company that is still intact and earning income. I believe the magic of Social Security is the absence of the need for a pile of debt instruments to continue its life. Medicare, on the other hand, is at least partially entitlement. But, it is as much entitlement for the health care industry as the insured. There needs to be something done with the entire structure of payment in US medicine. Maybe a dual form of insurance, where the expensive stuff is done by schedule and the less expensive stuff is done without insurance, maybe vouchers to pay for those that qualify due to income. There isn’t any competition in health care. One only need look at the financial disaster getting dental work has become since they invented widespread dental insurance. I just paid as much for a root canal as one would pay for an engine overhaul. The same procedure could have been done in Guadalajara for 1/6th the price by an American style dentist. It is that first $1000 or half the cost paid by insurance that opened that pool for grabbing. All of this, of course, would decrease GDP. But, it would also reduce the cost of doing other business in the US. The cost of government in the US is what has made it non-competitive. GDP is merely a number and if it is a number being continually artificially inflated, it means nothing. Linus Huber July 26, 2011 at 3:52 am If debt would not be a problem, why are we not increasing the debt 10 fold? IMHO debt IS the present problem and all those in charge are trying to solve the problem of too much debt with more and more debt. Did you ever feel your computer going slower and slower. Too many programs running to much of the memory being in use, right? Well, what did you do? REBOOT I think it is time to reboot. Sorry for those aspects that will be lost due to this process but we will all be better of afterwards. thelonegunman July 26, 2011 at 11:53 am it’s incredible that a ‘Democratic’ president is going to do something rethuglicans have been unable to do for over 70 years i.e., gutting the social safety net… we needed FDR and we got Hoover… TC July 26, 2011 at 9:30 pm “Rethuglicans” … nice. TC July 26, 2011 at 9:25 pm For a man who is said to have used the internet to great advantage in gaining the presidency you would think his administration (and the Democratic party more generally) would put a little more thought into political strategy. It’s just not as easy as it once was to hoodwink the citizenry. This probably is why, too, chaotic crisis is the most suitable means for engaging a swindle. In the electronic age you’ve gotta be fast if you’re going to steal. Your courage to speak out is much appreciated. kerwin July 29, 2011 at 10:10 am I always wanted to go to a third world country, but thanks to Obama I don’t even need to move. :) Comments are closed. Tip Jar Please Donate or Subscribe!