Yves here. Note I beg to differ with Das in his comments on government debt levels for countries that control their own currency. As we’ve noted, a country can always repay debts in its own currency, and the funding of federal deficits by borrowing is a political constraint and a holdover from the gold standard era. Moreover, there is a great deal of evidence that the solution implicit in that view, of cutting government spending in the aftermath of a demand-depressing, private balance sheet wrecking global financial crisis only makes matters worse. This is a case where you need to steer into the skid to get the car back on course. But this section is not core to Das’s discussion.
By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk
Powered flight requires air to flow smoothly over the wing at a certain speed. Erratic or slow air flow can cause a plane to stall. Most modern aircraft are fitted with a “stick shaker” – a mechanical device that rapidly and noisily vibrates the control yoke or “stick” of an aircraft to warn the pilot of an imminent stall.
The global economy too needs air flow -smooth, steady and strong growth. Unfortunately, the global economy’s stick shaker is vibrating violently.
The GFC Was Never Really Over…
The proximate cause of recent volatility is the down grading of the credit rating US (irrelevant) and the continuation of Europe’s debt problems (relevant). The deeper cause is the realisation that future growth will be low and the lack of policy options.
In 2008, panicked governments and central banks injected massive amounts of money into the economy, in the form of government spending, tax concessions, ultra low interest rates and “non-conventional” monetary strategies – code for printing money. The actions did stave off the Great Depression 2.0 temporarily, converting it into a deep recession –the US economy shrank by 8.9% in 2008.
As individuals and companies reduced debt as banks cut off the supply of credit, governments increased their borrowing propping up demand to keep the game going for a little longer. The actions bought time. But policy makers did not use the time to prepare the global economy for an orderly reduction of debt. There was little attempt to address structural problems, such as persistent trade imbalances between China and the US or within Europe or the role of the US dollar as the global reserve currency.
Governments gambled on a return to growth, solving all the problems. That bet has failed.
Greece was always going to be Patient Zero in the global sovereign crisis, highlighting deep-seated problems in public finances of developed nations. While the deep economic contraction was a factor, government financial problems were structural. Much of the build-up in government debt had taken place before the crisis as a result of spending financed by increased borrowing.
Like individuals and companies, governments did not always use borrowed money for productive purposes, fuelling consumption and making poor investments. Realising that many European governments had too much debt that couldn’t be repaid, investors pushed up the cost of borrowing and then cut of access to funding.
Instead of treating the situation as a solvency problem and reducing the debt to sustainable levels, stronger countries within the European Union banded together to lend the distressed countries the money they needed. Within a period of about 12 months, Greece, Ireland and Portugal needed bailouts totalling just under Euro 400 billion. Many European banks, exposed to these borrowers, also lost access to commercial funding becoming reliant on European Central Bank (“ECB”) loans. The need to guarantee the weaker countries inevitably increased the liabilities of the stronger countries, weakening them.
Greece, Ireland and Portugal will need debt restructuring. Spain and Italy are now firmly in the sights of markets. The bailout strategy cannot continue without affecting the creditworthiness of France and Germany. In the absence of continuing bailout, the European banking system, including the ECB itself, is vulnerable and will need capital from governments – economic catch 22!
The sovereign debt problem is global. The US, Japan and others also owe more than they can repay.
The recent rating downgrade of the US should not distract from the real issue – the quantum of US government debt and the ongoing ability to finance America. US government debt currently totals over $14 trillion.
Commentator David Rosenberg passionately described the problem: “In the past three years…we had the U.S. public debt explode by $5 trillion— the country is 244 years old and over one-third of the national debt has been created in just the past three years. Incredible. The U.S. government now spends $1.60 in goods and services for every dollar it is taking in with respect to revenues which is unheard of — this ratio never got much above $1.20, not even during the previous severe economic setbacks in the early 1980s and early 1990s.”
America has been able to run large budget and balance of payments deficits because it had no problems in finding investors in US treasury securities because of the special status of the US dollar are aglobal reserve currency. In recent years, the Federal Reserve itself also purchased around 70% of issues, under its quantitative easing programs. As foreign investors, especially China, become increasingly sceptical about the ability of the US to get its economy into order, the ability of America to finance itself is not assured.
Japan’s government debt to Gross Domestic Product (“GDP”) is over 200%. Tax revenues are less than half its outgoings, the remainder must be borrowed. The world’s largest saving pool has allowed Japan to manage till now. An aging population and a related slowing in its saving pool will make it increasingly difficult for Japan to finance itself in the future.
China’s headline debt to GDP ratio of 17% (around $1 trillion) is misleading. If local governments, its state controlled banks, state owned enterprise, and other government supported debt are included, then debt levels increase to 60% ($3.5 trillion), compared to America’s 93% of GDP. Some commentators argue that China’s real level of debt is far higher in reality, well above 100%.
At best, governments will cut spending or raise taxes to stabilise government debt as public-sector solvency becomes the priority. Reduction in government spending will slow growth, making the task of regaining control of government finances more difficult. This may require deeper cuts in governments spending and ever higher taxes, miring the developed world in low growth for a protracted period.
At worst, some governments overwhelmed by their debts will default, causing a major disruption in financial markets, perhaps setting off a deep global recession.
Government actions affected the financial economy far more than the real economy. Low interest rates boosted financial asset prices, while underlying economic activity remained weak.
Having shrunk by over 12% in 2008 and 2009, American output has yet to reattain its 2007 peak. On a per-person basis, inflation-adjusted basis, output stands at virtually the same level as in the second quarter of 2005 – in effect America has stood still for six years. The same is true of many countries.
Given consumption is 60-70% of individual developed economies, unemployment, under employment and lack on income growth will reduce growth.
In the four years since the recession began, the US civilian working-age population has grown by about 3% but the economy has 5% fewer jobs — 6.8 million jobs. The real unemployment rate – people without work, people involuntarily working part time, people not looking for work because there is none to be found – is around 15-20% in the US. Long-term unemployment has left millions of people out of work with poor prospects of finding jobs.
Americans in work are generally working less and, adjusted for inflation, personal income is down, not counting payments from the government like unemployment benefits. American household income has declined since the recession began in December 2007, falling to $49,445 in 2010, a total 6.4% decline.
According to latest figures, the number of American families living in poverty rose 2.6 million to 46.2 million, the largest increase since Census began keeping records 52 years ago. Income falls were particularly large for the less well off.
In 2010, the bottom fifth of households that make $20,000 or less saw their incomes decline 3.8% after inflation. Poor people, minorities were hit hardest. According to the National Women’s Law Center, the poverty rate for women climbed to 14.5% in 2010 from 13.9% in 2009, the highest level in 17 years. The extreme poverty rate for women jumped to an all-time high of 6.3% in 2010 from 5.9% in 2009. The poverty levels have reached the highest levels in over 15 years.
The same is true in Europe where the average official unemployment is above 10%. In many countries like Greece, Ireland, Portugal and Spain, unemployment is around 20%, youth unemployment is around 40-50%, as the economies have shrunk by 10-20%. Understandably, consumer spending is weak.
Key sectors, which employ workers, such as housing are frozen. In the US, housing starts are running around 400,000 to 600,000 units annually well below the level of the 1960s, down a staggering 70%+ from the peak and 50%+ from more normal levels.
With home prices down 35% from the peak and predicted to fall further, the Americans do not have a wealth buffer in housing equity to fall back on. Low interest rates and indifferent returns from investments mean that the ability of retirees to consume is also low. The same is true of many developed economies.
After a sharp decline in economic activity in 2008, emerging nations – China, India, Brazil and Russia– recovered through massive domestic investment, aggressive expansion of domestic credit and, in some cases, strong commodity prices. They benefited from the stimulus packages of developed nations, which helped fuel exports. Money fleeing the developed world looking for higher returns and elusive growth provided cheap and easy capital. That cycle is coming to an end.
China provides an example of the problems. Over-investment in infrastructure produced short term growth but many of the projects are not economically viable and will drag down future growth. Many are funded by debt that is already creating bad debts within the banking system, requiring diversion of funds to bail out troubled institutions.
Tepid growth in the US and Europe, its two largest trading partners, will slow Chinese exports. China’s foreign exchange reserves, invested in US and European government bonds and denominated in dollars and Euros, are increasingly worthless, as they cannot be sold and, if held, will be paid back in sharply devalued currency with lower purchasing power.
Printing money as the US has done, devalues the dollar creates additional pressure on China. Strong capital flows overwhelm smaller markets creating destabilising asset price bubbles.
Commodities traded in dollars increase in price creating inflation. Domestic inflation forces higher interest rates, slowing down the economy. The high proportion of spending on food and energy in emerging countries means a higher proportion of income is needed for essentials, reducing disposable income and creates wage pressures. These factors all choke off growth.
While improving American competitiveness and reducing its outstanding debt, a policy of devaluation of the US dollar may trigger trade and currency wars. There are already accusations of protectionism, currency manipulation and unfair competition. Many emerging markets have already implemented capital controls. These will be strengthened and supplemented by other measures such as trade sanctions. Even the Swiss National Bank recently announced moves to stop the flow of money into Swiss Francs seeking a safe haven, crimping growth and Switzerland’s exporter’s ability to compete.
Currency intervention may trigger tit-for-tat retaliation, reminiscent of the trade wars of the 1930s and will retard global growth.
Exit Via The Japanese Door …
Current concerns, most readily observable in wild gyrations of equity prices, are driven by the identified concerns but also the lack of credible policy options.
The most likely outcome is a protracted period of low, slow growth, analogous to Japan’s Ushinawareta Jūnen – the lost decade or two. The best case is a slow decline in living standards and wealth as the excesses of the past are paid for. The risk of instability is very high; a more violent correction and a breakdown in markets like 2008 or worse are possible. Frequent bouts of panic and volatility as the global economy deleverages –reduces debt- are likely. Problems created gradually over more than the last three decades can only be corrected slowly and painfully.
The eerie sound of the stick shaker can sometime be heard on cockpit voice recordings of doomed flights just before they crash. The global economy’s control stick is shaking violently. It remains to be seen whether the economic pilots can regain control and land the flight safely or whether it ends in a crash.
‘ … a policy of devaluation of the US dollar may trigger trade and currency wars.’
‘May trigger currency wars?’ It WILL trigger more currency wars, which in fact have already begun. And it’s not just the U.S.
We are witnessing a global, massively n-player Prisoner’s Dilemma, where each of the players, by rationally making those choices that maximize their own chance of surviving and retaining their assets, inevitably acts to produce outcomes that are ultimately worse — in almost every case — for themselves and for everybody else than if they had cooperated and taken their losses at the beginning.
This inevitability of things is the most essential feature of the catastrophe.
In the case of Greece, whether or not it’s true that the Europeans and whomever else have learned nothing from Lehmann in 2008 is secondary. (Though it certainly seems that European policymakers and big institutions are sleepwalking towards the abyss.)
The central point is that everybody — the German pols and people, the Greeks, the French and German banks, Morgan Chase and the other U.S. TBTFs which hold 85 percent of each others’ counterparty risk, and every other player — is rationally attempting to take the best course of action for themselves in the circumstances.
And thereby down and down we go.
You expect THESE pilots to land THIS plane under CURRENT conditions. Just a magic printing party and all will be well. Just a bit more FAITH and prosperity is just around the corner……..BALDERDASH!!!
Bend over and prepare for a crash.
i dont think the planned end game is war or starvation but neglect via reduction in SS and medicare which will kill millions prematurely and then they will introduce your last event — disease- they will set up a virus – which has limited availability vaccine for the 1% plus protection and utilities workers
the balance of the population will be at risk
they want 160 million eliminated – they have no use
Perhaps the targeted 160 million need a new movement. Perhaps it could be called We Are The 160 Million.
“We are the 160 million. We won’t die quietly”.
Even if we are deemed useless to the OverClass, that does not mean we have to accept that we are useless to ourselves or to eachother. What can we do to enhance and prolong our own and eachothers’ survival and lifespan in the teeth of OverClass attempts to exterminate us through slow starvation and healthcare deprivation designed to degrade our immune systems to the point of compromising our resistance to whatever bacterial or viral plagues might emerge? Those of us who are pre-retirement and still have jobs might especially begin thinking about that and about how to take personal, neighborhood, regional, and inter-regional collective countermeasures against the “Die you useless 160 million” plans by the OverClass if such plans are to be silently rolled out and applied.
(Another saying just occured to me: “Living longer is the best revenge”.)
Is this where we guess what’s going to happen in the next 12 months ? Here’s my guess. The OccupyWallStreet crowd is willfully ignored, and things continue getting worse for the unfortunate 99%, until such time as the enablers, the gatekeeper police and military authorities figure out that to save the entire structure they have to do the unthinkable, they have to turn on their masters. Then we get lots of targeted killings, which may actually escalate into complete anarchy, or it may culminate with control being reestablished just in time for the shooting war to start. After that, well, there really is no place to hide in a war like that. You either die in the fighting, or by starvation and disease. Everybody have a nice day, especially you 1% whose greed caused all this, and you know who you are.
Das says that US debt can not and will not be repaid, at 93% of GDP, as is often heard in mainstream political discourse. However, at the end of WWII the public debt was 160% of GDP yet it was mostly paid down before it started climbing again. How can it be possible to pay down higher debts in one era and impossible in another? The limiting factor, as I see it, is lack of economic production (and excessive military spending), not the amount of current debt the government holds. The growth in production is affected by lack of demand which, in turn, is being affected by the levels of household debt which significantly exceed the level of public debt.
Also, the $5T increase in federal debt after the GFC has been matched by a close to similar reduction in state and local government debts in the U.S.
US had overwhelming economic power post-WWII, i.e., no competitors, for 25 years.
Does the US really control its currency?
As I see it, the US is in a eurozone-like construct with China, in which the US is Southern Europe and China is Germany.
If the Chinese government decided to sell their T-bills, interest rates would soar and the US would have a full-fledged currency and sovereign debt crisis, with its own banks betting on US bankruptcy.
Both the level of the US dollar and the sustainability of its sovereign debt are controlled in Beijing.
The key difference is the the US controls its own central bank so it could launch another round of QE to absorb any Chinese selling. The PIIGS don’t control the ECB.
your name explains a lot. If China so wants, it can create global inflation and then sell T-bills and buy US corporate assets instead.
The Fed would not be able to finance US sovereign debt via the printing press, since that would make a hyperinflation problem out of an imported inflation problem. So US interest rates would soar.
The US would not be able to finance its deficit nor cut it without sending the country into a depression and political upheaval.
Devaluation is not an option, since the US has no capital controls and, in this example, China would not sell dollars, only T-bills. Moreover, devaluation would be dangerous in an already inflating environment.
In this context, the US would be exactly in the same position as Southern Europe is today.
What could possibly go wrong here in the United States?
Everything is fine with a YoY 1% population increase with infinite resources.
This post is errant nonsense. The idea of growth as a solution has always been bogus. Growth of what? Does growth in drug traffic, prostitution, war, child pornography help? It does to economists. For thirty years we have lived the fiction that corporate growth equals prosperity. That is bunk. Government must begin cutting down the superrich to life size. There is plenty of money there, it is just held by 1/10% of the population. Corporate wealth may be accessed by franchise taxes based upon total assets. Corporate income taxes produce nothing but evasion. We need a tax holiday for the non rich. Let the rich pay for the government they have bought. All these problems can be solved, but not by the strategies which have created the problems. Das should stick to writing about trading fiascos. His devotion to free market mumbo jumbo disqualifies him as a serious commentator on the world economic situation.
Brilliant. Thank you, Yves!
Satyajit Das also appeared on Max Keiser last week. Here’s the link to the clip (if begins in the second half of the show):
As for me, at the moment I am hunkered down at the Ground Zero of the GFM (Global Financial Meltdown) — you guessed it, that would be Greece… Life is really tough down here these days. The frappes and the souvlakis are no longer of the quality I had gotten used to in past years, and everybody is stressed out and out to rip you off. So I guess it’s time for this old boy to kiss this third world nation good bye (yes, that’s Greece again), and move on to greener pastures… once I figure out where those greener pastures might be…
The proper response to the shaking stick is to push the stick forward to regain airspeed. Unfortunately there is also the voice in the cockpit saying “pull up!” That voice is the conservatives who believe we are too close to hitting the ground.
Policy makers feel the stick shaking but are paralyzed by indecision.
The best case is a slow decline in living standards and wealth as the excesses of the past are paid for. Satyajit Das
Wrong. The author confuses money with real capital. The real capital still exists (but is in danger of being destroyed). What is missing is simply “money” in the right hands.
But how could there be lack of money in the right hands? That’s easy. Our money system is based on theft of purchasing power and usury. Both are problematic.
as the excesses of the past are paid for. Satyajit Das
They are already paid for. It is impossible to borrow real goods and services from the future. All consumption is funded out of past and present production.
Question? If the money had not run out would not the boom still be going? So what’s the problem? Is money a rare metal we have to dig out of the ground or is it virtually costless to produce?
“It is impossible to borrow real goods and services from the future. All consumption is funded out of past and present production”
Yes! Nations with positive balances of trade (i.e. Germany, China, and Japan) and net savings (i.e. Saudi Arabia and The UAE) have essentially given gifts to net debtor nations with negative balances of trade (i.e. USA, Greece and Portugal) The creditors will not be paid or paid in practically worthless currency.
“As we’ve noted, a country can always repay debts in its own currency, and the funding of federal deficits by borrowing is a political constraint and a holdover from the gold standard era”
Yes! And with debit cards they no longer have to distribute bushel baskets to carry the money in! Almost everyone will be impoverished because few people own tangible assets outright, but that is a small price for keeping the government functioning for a while longer.
“It is impossible to borrow real goods and services from the future”
Really? I would categorize oil as the most real source of the most vital service (concentrated energy) necessary for the continuation of industrial civilization. What do you consider pumping Texas dry in a mere half century if it isn’t borrowing from the future?
“If the money had not run out would not the boom still be going?” Tautological questions like this have no meaning, and only serve to obfuscate the way systems operate.
1- In a fractional reserve banking system money can only be created as debt and loaned into existence. No amount of “printing” increases the amount of money in circulation if its velocity is zero (i.e. no new loans are made).
2-If Helicopter Ben were true to his nickname and flew over the City dropping Federal Reserve Notes it would increase the amount of money in existence, but then we would have a Potlatch system rather than a fractional reserve banking system.
3- Loans are only issued in the expectation of earning a return in the form of interest.
4- If debt grows at a rate faster than the rate of growth in ability of borrowers to pay both the loan amount and its associated interest,it eventually reaches a point where it cannot be repaid and becomes valueless.
5- Because of the necessity to cover interest costs, a debt-based money system depends upon continued exponential growth of debt, growth in the exploitation of natural capital, and growth of consumption (demand).
6-Permanent exponential growth (of anything)is a mathematical impossibility in a finite world.
The US tried to sustain exponential growth of debt to mask stagnant real wages and massive redistribution of wealth, and it only took 30 years for Peak Debt to push the housing market over the cliff and render the banking system fundamentally insolvent.
“Money” will always run out because it is the product of debt, and debt is not cost free or infinite as you seem to believe. “Printing” money simply lowers the total debt burden of the borrower and thus the effective interest rate. If expected return on capital falls below zero because of inflation or fear of default, no new loans are initiated, and that money heads for the nearest financial casino in search of speculative yield.
Is it possible to structure a financial system that allows a sustainable economy to function? Perhaps, but there are no examples beyond hunter-gatherer societies that I am aware of.
Once you fully grasp the current extent, scale, and destructive quality of whole mass of existing human activities on resources/water/soils/oceans/forests/species; the acceleration of consumption by each individual and the prospect of another 1 billion arriving in less than a decade (nearly 3 billion by 2040) I don’t see how devising a sustainable economy is not the overarching priority – THE context withing which all else is determined.
There are a few souls working on this. But as with most learned disciplines these days, any thinking that logically culminates in conclusions requiring actually, honestly acknowledging what the real problems are, and that they rather badly demand real solutions, is almost immediately marginalized.
Herman Daly’s been working on it for some time:
I would categorize oil as the most real source of the most vital service (concentrated energy) necessary for the continuation of industrial civilization. What do you consider pumping Texas dry in a mere half century if it isn’t borrowing from the future? Crazy Horse
Oil is easily synthesised and we have an endless supply of raw material (CO2 and H2O) to do it with. And even if the process requires energy we have hundreds (if not thousands) of years of thorium and uranium for that purpose. And practical fusion maybe just around the corner but even if it isn’t we will surely have it in a hundred years or so.
“If the money had not run out would not the boom still be going?” Tautological questions like this have no meaning, and only serve to obfuscate the way systems operate. Crazy Horse
Fair enough but it is food for thought. The proximate cause of massive unemployment is mere accounting entries. Those accounting entries might easily be the ultimate cause as well since counterfeiting (fractional reserves) and usury are (or at least were) universally condemned.
1- In a fractional reserve banking system money can only be created as debt and loaned into existence. No amount of “printing” increases the amount of money in circulation if its velocity is zero (i.e. no new loans are made). Crazy Horse
Normally true except in the case of deficit spending – “vertical money” is what the MMT folks call it.
2-If Helicopter Ben were true to his nickname and flew over the City dropping Federal Reserve Notes it would increase the amount of money in existence, but then we would have a Potlatch system rather than a fractional reserve banking system. Crazy Horse
Fractional reserve banking should be abolished or at least ALL government support for it removed such as a lender of last resort. But a ban on FRB would be massively deflationary so it should be combined with a bailout of the entire population at the same time metered to just replace existing “credit” as it was paid off.
BTW, thanks for the reference to the Potlatch system . Very interesting. And it is interesting that it was suppressed too.
3- Loans are only issued in the expectation of earning a return in the form of interest. Crazy Horse
Yes, our money system is usury based. And the interest for current loans does not even exist in aggregate. Thus future borrowing (or deficit spending by the government) is required just to prevent the mathematical necessity of some loan defaults .
4- If debt grows at a rate faster than the rate of growth in ability of borrowers to pay both the loan amount and its associated interest,it eventually reaches a point where it cannot be repaid and becomes valueless. Crazy Horse
True. And according to Karl Denninger and Michael Hudson that always occurs sooner or later.
5- Because of the necessity to cover interest costs, a debt-based money system depends upon continued exponential growth of debt, growth in the exploitation of natural capital, and growth of consumption (demand). Crazy Horse
Which is why I advocate common stock as a private money form. No usury is required. Wealth and power are “shared” rather than concentrated.
6-Permanent exponential growth (of anything)is a mathematical impossibility in a finite world. Crazy Horse
Not necessarily true. However, extreme wealth and power concentration, another symptom of usury, is probably unsustainable. Certainly injustice is not sustainable and fractional reserve lending is certainly unjust.
The US tried to sustain exponential growth of debt to mask stagnant real wages and massive redistribution of wealth, and it only took 30 years for Peak Debt to push the housing market over the cliff and render the banking system fundamentally insolvent. Crazy Horse
I don’t disagree. However real growth did occur and people did provide real goods and services to each other so long as the money circulated. So why do we tolerate a system where the flow of money can stop?
“Money” will always run out because it is the product of debt, and debt is not cost free or infinite as you seem to believe. Crazy Horse
Money should NEVER run out. It is the lifeblood of the economy. So usury-based money must be replaced with something else.
“Printing” money simply lowers the total debt burden of the borrower and thus the effective interest rate. If expected return on capital falls below zero because of inflation or fear of default, no new loans are initiated, and that money heads for the nearest financial casino in search of speculative yield. Crazy Horse
Very well said.
Is it possible to structure a financial system that allows a sustainable economy to function? Crazy Horse
Yes, I believe so.
Perhaps, but there are no examples beyond hunter-gatherer societies that I am aware of. Crazy Horse
Common stock as money:
1) Common stock as money requires no borrowing or lending. Assets and labor would simply be bought with new stock issue. Thus no PMs, usury, or fractional reserves are required. This is a huge benefit since PMs, usury (see Deuteronomy 23:19-20) and fractional reserves are all problematic.
2) All price inflation is born by the owners of the corporation since every receiver of the new common stock money is by definition a part owner of the corporation. This is an important moral consideration.
3) Without fractional reserves or even lending, then deflation is not a serious threat.
4) Since all money holders are part owners of the corporation then they could vote on how much new money is issued and for what purposes. Thus price inflation is under the control of only those affected by it.
5) The assets of a corporation are typically performing assets though PMs could easily be accommodated too.
6) Common stock as money shares wealth at the same times as it consolidates it for purposes of economies of scale. Labor problems should be non-existent since the workers would be paid in common stock and thus be part owners. The number of those with a stake in capitalism would increase. The need and desire for socialism should decrease.
Things are so bad that I decided I should consult the ghost of John Maynard Keynes for advice. I organised a seance, and fortunately the old boy agreed to share his sage musings with us. We all paid rapt attention. Happily he gave me permission to quote him, so here are his very words. “I wouldn’t start from here.”
Is there something special about U.S. Treasury debt that it can’t be redeemed, ie, paid it off, with good old legal tender greenbacks that don’t bear interest?
Forty odd years of doing computer programming, systems analysis, operating systems installation plus management and Direction of Information systems has taught me one important lesson, One must be very sure that they have defined the real problem and not a symptom before they design and implement a fix.
Can we really define “THE PROBLEM”?
Yes. The problem is that we cannot grow our way out of this based on all our expectations of growth up to this point in time. If we properly define the problem as the impossibility of old-fashioned growth then we can take effective steps. Recycling and clean up could be looked at as reverse-growth. The greening of the planet could be looked at as at least neutral. These industries can employ lots of people and keep currencies circulating. One thing about our high level of debt that I find interesting is this: When Obama took office he promised budget sunshine. He said he would include all the formerly omitted items, such as military and pentagon and black budget stuff and his administration put all our obligations out there for all of us to see. They are pretty expensive. Are they worth our lack of employment? Are they worth healtlh care? Are they worth housing? Education? Maybe even food soon? And are they worth all the lives lost and the hatred?
“As we’ve noted, a country can always repay debts in its own currency, and the funding of federal deficits by borrowing is a political constraint and a holdover from the gold standard era. Moreover, there is a great deal of evidence that the solution implicit in that view, of cutting government spending in the aftermath of a demand-depressing, private balance sheet wrecking global financial crisis only makes matters worse.”
This is the point of view Yves and others have consistently advocated. The reservation I have is this. There is no free lunch here. It may be that cutting government spending in these circumstances will do great harm. Could well be.
But you will do great harm the other way, which is essentially to default by devaluation of the currency in which the debt is repaid. All that has happened is that you have repaid in nominal dollars. You have not repaid the dollars that the debt was taken out in.
Now if we look back historically, you can see many occasions when desperate rulers did this. It was simple, debasement of the currency, when the medium of exchange was gold or silver. It never worked. Or rather, it did work nominally. You were paying back the right nominal amounts of thalers or whatever, but the bankers and everyone else knew they had been defrauded.
The consequences were severe. They were different from those of balancing your budget and reducing your expenses, which would have been dire too. In the case of 17c Spain for instance, those seemed at the time to include losing the war in the Netherlands, unthinkable. But they were still quite horrendous. There is one striking contemporary account which describes in a letter home that Spain was declining so fast that it almost seemed to be happening before ones very eyes.
What I would like to see from people advocating the default-by-currency debasement argument is some quantitative and rigorous account of what the consequences are, and for who, of each alternative. Then we could really show why one was preferable.
So far we have not done that, and the use of metaphors like ‘steering into the skid’ are not rigorous thought, but a substitute for it, and an admission that it has not been done.
There is an excellent rigorous mind in there. Please, please use it!
I agree, currency devaluation is an easy way out on the surface only.
The really missing link is that there is no leader standing up (except maybe Paul) and explaining that we have to face a few years of hardship and that we have to be ready to share the difficulties during these next few years.
This, of course, will immediately lead to get the loot back from those thieves (mainly on wallstreet) and those bankers did not get yet the message that they better run with their loot before it is taken back from them. I am waiting for some justice here that will lead us back to the spirit of the rule of law and do not think matters will improve without the required measures to arrive at a feeling of a certain degree of justice for the majority of the population.
There is no free lunch here. LRT
The lunch has already been paid for. The problem is that the banks claim we owe them our own stolen purchasing power. As for foreign creditors, paying them would just require moving their deposits from interest-bearing accounts at the Fed to non-interest-bearing accounts at the Fed.
more references to 2008 being bad. The only bad thing that happened was the bail outs, which bankrupted some countries and brought on the austerity thing.
All this stuff about the sky falling in if banks aren’t bailed out is hot air. Lehman’s went under, a load of yuppies got sacked and no one died.
Here is something which promises to be very interesting even though I have only begun to read it. I found it on John Robb’s Global Guerillas blog. It is an article from the Institute for New Economic Thinking and it is a basic takedown of Establishment Economics as being deeply illusion-based and a basically worthless intellectual endeavor. Here is the link.
The Euroamerican is just about finishing his 500 year genocide of indigenous peoples and other ingrates, just have patience. We’ll all think alike soon. The earth was given to us to conquer and make our own. All we have to do is figure out the flaw in the system, unless of course we just happen to be the virus?
I always appreciates Satyajit Das’ insights in regards to the macro-financial mayhen of the day. Always fine writing.
This time, I got a bit hung up right out of the gate because there is a flaw in the foundational logic from the beginning. Contrary to what many/most people believe, including Das: the downgrading of the US was/is not irrelevant. Those to whom it is/was relevant are not permitted to speak of the relevance. That is not the same as irrelevant.
Be not fooled… more is occurring than meets the eye.
I had a dream last night that I was in a vault full of treasure. Whenever I touched a piece of treasure, it spontaneously multiplied. For some reason, I couldn’t stop touching all those pretty but useless baubles. Eventually the vault filled up and I was crushed. I realized when I awoke that I had dreamed out a scene frome the last “Harry Potter” book. I also realized that the dream was allegorical (surprise). I was the global elite, the useless treasure was debt and the spontaneous replication was interest.
“Note I beg to differ with Das in his comments on government debt levels for countries that control their own currency. … But this section is not core to Das’s discussion.”
Nonsense. “This section” is equivalent to having a section of a mathematical paper devoted to proving that 1+1=3. It demonstrates a fundamental disconnect from a basic understanding of the subject matter.
Overall, the parts of this that *aren’t* textbook “Austerianism 101” voodoo are just fap-material for Austerians, documenting the wreckage already in progress.
The real question this piece fails to answer is, “will the stick-shaker finally convince the austerians to stop putting the plane into a dive because they believe it’s the ‘moral’ thing to do”?
i love these idiots ,” as i’ve already noted a country can always repay its debts ” . i’ve heard this time and again over the years. i’m tired of it. it’s like saying high frequency trading is good because it provides ‘liquidity’. or that a catepillar is still a catepillar , after it’s transformed into a butterfuly.
what does this even mean , when a “country” cannot indefinitely print money without engendering social revolution or total alteration of the countries’ political and financial system , a major change, or collapse of government, or other transformation . when the weimar republic began printing money, you coudl have said , well, germany can always pay back any debts by printing money. no, countries and borders and the people that inhabit them change. they are usually grouped together in time as ‘countries’ when under a governed body , but not always, they are sometimes described as nations in the more enduring sense, as governments come and go, but cultures and ethnicities and common living experiences can still unite people.
. this is a semantic game these idiots are playing, when they repeat this axiom as the rule from which an explanation is then made. stop repeating it, it is a truism used on fox news to keep the masses ignorant and stupid.
— because instead of looking at the underlying behavior of a hyper debt explosions consequences—massive bankruptcy or massive money printing caused hyper-stagflationary collapse,
simply put A COUNTRY CANNOT PAY BACK ITS DEBTS BY PRINTING INFINITE AMOUNTS OF MONEY BECAUSE THAT IS A FORM OF DEFAULT. there is an implicit agreement that if a government takes on debt, that it repays the debt on terms which the country can sustain–terms where the gdp of the country –it’s REAL output–backs the the promissory notes upon which the fed relies to ‘pay back’ debts, when they print money out of nowhere. diluting that output indefinitely is default. if it wasn’t, why don’t we just give the chinese a full trillion dollars of their money back by printing it. oh wait, that’s why everyone knows the u.s. plans on repeating it’s 1970’s strategy====devalue the currency and screw your creditors.
New York Kid: Go read some Warren Mosler, and get back to us when you understand how macro-economics really works in a non-convertible floating exchange rate fiat based monetary system.
All US debt is in dollars it can be effectively be paid back by moving it from one side of the balance sheet to the other. The only thing owners of treasury notes can get is dollars which the the Fed can create out of thin air. They have a savings account at the Fed which pays interest or they can change that to a checking account (dollars).
Yes, this is my feeling – its a form of default, which may be right, may be the best option, but has costs, and requires analysis and specification of what exactly they are and why this way is better than other ways. Too often people seem to be saying here something along the lines of just print money and everything will be OK.
No, it will cost. Show me how much.
I had a comment on this thread that disappeared into the ether. I tried to repost it, but I get a duplicate comment detected message. Any ideas where it went?
Not sure if it’s valid to say a sovereign’s printing money to inflate away debt is a mere “political” problem when that political problem precisely consists of a long, contentious, heated, dispute as to the justice or lack thereof of an impermanence in the value of our money – about what is the appropriate duration of the value of the money we’re all using over some considerable period of time towards a very diverse number of purposes – the answer to which is not some snappy formula, but is still economics.