Satyajit Das: The Main Game Looms – The Problem of US Debt (Updated)

Yves here. As much as I am a big fan of Das, this post is a classic example of arguing that the US, a sovereign issuer of currency, is in the same position as a household. The problem is first, unlike a household, a sovereign issuer of currency cannot go bankrupt (it can always issue more currency to pay off its IOUs). It can VOLUNTARILY default, as Russia did in 1998 (which shocked the international markets, the Russian government debt outstanding was a very small % of GDP and widely seen as sustainable). The real economic danger is inflation, not default. But with considerable deflationary pressures underway via private sector deleveraging, government deficit spending is actually desirable to accommodate the private desire to save more (as in the private sector is not generating sufficient use for incremental savings in the way of new investments). Second, a household can cut spending without affecting its income. This is not true of a modern government, whose spending is a meaningful portion of GDP. In an economy, everyone’s income is someone else’s spending. Cutting government spending has a contractionary effect greater than the amount of the deficit reduction (we’ve seen this proven again and again in Europe, as the imposition of austerity is making debt to GDP ratios worse).

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

In the first of three articles, the problems of US debt are outlined. The next two articles look at how America needs to control its public debt and how given political exigencies it may actually be dealt with.

Greece and the other debt burdened European countries are merely the first carriages in the derailment of the “Sovereign Debt” Express train service to nowhere. The big carriage has ‘USA’ painted in red on it.

To understand the US financial position, just remove 8 zeros and pretend it’s a household budget (The analogy was originally suggested at

Annual family income: $21,700

Money the family spent: $38,200

New debt on the credit card: $16,500

Outstanding balance on the credit card: $142,710

The US is trying to bring their budget under control. This year they implemented total budget cuts of $385. Assuming they don’t spend more than they raise in taxes, it will take them 370 years to pay back this debt. The bi-partisan US Super Committee is currently discussing proposals to cut spending by $12,000 over 10 years. At $1,200 in saving per year and assuming they balance the budget, it will then take them a mere 119 year to pay back the debt.

That should clarify the position.

At Debt’s Door

Ralph Waldo Emerson wrote: “The World owes more than the world can pay.” The US certainly owes more than it can repay.

US government debt currently totals over $14 trillion. The US Treasury estimates that this debt will rise to around $20 trillion by 2015, over 100% of America’s Gross Domestic Product (“GDP”). Even these dire forecasts rely on extremely robust assumption about US growth around 5-5.5% per annum. Lower growth will translate into higher debt levels.

The rapid increase in debt will require Treasury to borrow heavily each year to repay maturing debt and raise new money. Annual interest payments will eventually exceed all domestic discretionary spending and rival the defence budget.

There are other current and contingent commitments not explicitly included in the debt figures reported by the government. Since July 2008, the US government has supported Freddie Mac and Fannie Mae (known as government sponsored enterprises (GSEs)). This totals over $5 trillion in additional on or off-balance sheet obligations.

The debt statistics do not include a number of unfunded obligations – the current value of mandatory payments for programs such as Medicare ($23 trillion), Medicaid ($35 trillion) and Social Security ($8 trillion). Projections show that payouts for these programs will significantly exceed tax revenues over the next 75 years and require funding from other tax sources or borrowing.

In addition to Federal debt, US State governments and municipalities have debt of around $3 trillion.

Apolitical Debt Blues

US public finances deteriorated significantly over recent years. Pimco’s Bill Gross observed: “What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

In 2001, the Congressional Budget Office (“CBO”) forecast average annual surpluses of approximately $850 billion from 2009–2012. With the budget balanced and forecasts of ever-larger annual surpluses indefinitely, the CBO estimated that >Washington would have enough money by the end of the decade to pay off everything it owed. The surpluses never emerged.

Instead, the US government has run large budget deficits of approximately $1 trillion per annum in recent years. The major drivers of this turnaround include: tax revenue declines due to recessions (28%); tax cuts (21%); increased defence spending (15%); non-defence spending (12%) higher interest costs (11%); and the 2009 stimulus package (6%). German finance minister Wolfgang Schäuble told the Wall Street Journal on 8 November 2010 that: “The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base.”

The US budget deficits and debt problems are apolitical, with bipartisan contribution to the accumulated mess in public finances.

Prior to the election of Ronald Reagan, deficit spending largely from military conflicts such as Vietnan and economic downturns created a national debt of around $1 trillion. President Reagan held firm views on government and the welfare state: “Government is like a baby. An alimentary canal with a big appetite at one end and no responsibility at the other.” He quipped that: “Welfare’s purpose should be to eliminate, as far as possible, the need for its own existence.” But between 1981 and 1989, tax cuts and peacetime defence spending contributed to an increase in the debt of $1.9 trillion. The President was disappointed at the growing national debt, joking that: “[The deficit] is big enough to take care of itself.”

Under President George Bush Senior, the national debt increased a further $1.5 trillion, driven by the costs of the first Gulf War and fall in tax revenues from a recession.

Under President Bill Clinton, national debt increased $1.4 trillion. There were large budget surpluses in some years, but increased spending added to the debt. The surpluses were driven by increased tax revenues from corporate and personal tax revenue gains due largely to the Internet bubble. In addition, Treasury Secretary Robert Rubin’s “carry trade”, shortening the maturity of US debt to take advantage of lower short term rates, resulted in interest costs savings.

Between 2001 and 2009, President George Bush Junior added $6.1 trillion in debt, driven by the wars in Afghanistan and Iraq, tax cuts and revenue losses of the economic downturn that started in 2007.

President Barrack Obama added a further $2.4 trillion in debt. The major contribution came from stimulus spending to counter the effects of recession, tax revenue losses due to the downturn, extension of the Bush tax cuts and the continued cost of two military actions.

The US debt problems resemble Agatha Christie’s Murder on the Orient Express – everybody did it but no one is responsible.

Drowning by Debt

No borrower can incur debt on this scale without the complicity of its lenders.

The US government holds around 40% of the debt through the Federal Reserve ($1.6 trillion), Social Security Trust Fund ($2.7 trillion) and other government trust funds ($1.9 trillion). Individuals, corporations, banks, insurance companies, pension funds, mutual funds, state or local governments, hold $3.6 trillion. Foreigner investors hold the remainder including China ($1.2 trillion), Japan ($0.9 trillion) and “other”, principally oil exporting nations, Asian central banks or sovereign wealth funds ($2.4 trillion).

Until the global financial crisis, foreign lenders, especially central banks with large foreign exchange reserves, led by the Chinese, increased their purchases of US government debt as part of a giant global liquidity scheme.

These reserves arose from dollars received from exports and foreign investment that had to be exchanged into local currency. In order to avoid increases in the value of the currency that would affect the competitive position of their exporters, the exporting nations invested the reserves in dollar denominated investment, primarily US Treasury bonds and other high quality securities. By the middle 2000s, foreign buyers were purchasing around 50% of US government bonds.

During this period, emerging countries, such as China fuelled American growth, both supplying cheap goods and providing cheap funding to finance the purchase of these goods. It was a mutually convenient addiction – China financed customers creating demand for exports and America received the money to buy cheap Chinese goods. Asked whether America hanged itself with an Asian rope, a Chinese official told a reporter: “No. It drowned itself in Asian liquidity.”

Following the global financial crisis, foreign purchases have decreased to around 30% of new issuance. Around 70% of US government bonds (US$ 0.9 trillion) have been purchased by the Federal Reserve, as part of successive rounds of quantitative easing.

The large stock of US debt and seemingly uncontrollable US budget deficits now pose several problems. Is the level of debt sustainable? How is it going to be funded? How can the deficits and debt be brought under control? What happens if the US finds itself unable to finances its requirements? The answer to these questions will shape the global financial economic landscape for a long time to come.

© 2011 Satyajit Das All Rights reserved.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. dvr

    How appropriate that this article should appear just when the ‘Gross Debt to GDP Ratio’ on breaks the 100% mark!

  2. Modgen

    It is excellent that Keynes proved that borrowing money to pay people to dig holes in the ground would lead to prosperity. Otherwise, we might have reason for some concern.

    1. Mark P

      The comparison with household debt is reasonable to the extent that governments and households own assets that do not earn income that can be used to repay debts. Both households and governments therefore have to commit a future revenue stream earned from another source (salaries or taxes) to service their debts. Government debt represents an unreasonable commitment made on behalf of future generations to be taxed more than future governments will spend. Further, it could be argued, that all tax dollars should be used to deliver government services not service debts on non-income earning assets. On this basis, any level of public debt is irresponsible.

    1. propertius

      Well, that depends. If your household prints its own money, has the largest military in the history of the world, and invades other households to steal their stuff, then the U.S. government is exactly like your household. ;-)

    2. Flying Kiwi

      Had you not jumped to erroneous conclusions and thereby stuffed a Biblical plank into both your eyes you would have realised that the Author was merely attempting to give some perspective to otherwise unimaginably large numbers with this comparison. At no point did he suggest that solutions to the problem relate in any way to those which might be appropriate to a household in a similar position.

      1. F. Beard

        US public finances deteriorated significantly over recent years. Pimco’s Bill Gross observed: “What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter.” Das

        More misunderstanding. The US Government does not store its money; it spends it into existence and taxes it out of existence.

        1. LucyLulu

          I’m not an expert on squirrels, but my guess is that if the squirrels are lean and malnourished, they may be eating those nuts instead of storing them. (and yes, this is meant as an analogy)

          1. optimader

            the squirrels barrow nuts from the chipmunks to mount a shock and awe campaign against the feild mice to set them free (and secure their seeds)..
            whats not to love about analogies?

        2. psychohistorian

          I just want to make clear that SS used to have all its nuts “safely” in storage. Those nuts got taken out and spent by Reagan when he, Greenspan and the complicit congress critters decided those nuts needed to be spent, did so and replaced them with a budgetary promissory note.

          Laugh the global inherited rich out of control of our society and into rooms at the Hague where we can prosecute them for our social degradation. Their puppets described above need to be dealt with but it is incumbent on us to deal with the head of the beast that rules us.

      2. F. Beard

        Is the level of debt sustainable? How is it going to be funded? How can the deficits and debt be brought under control? What happens if the US finds itself unable to finances its requirements? The answer to these questions will shape the global financial economic landscape for a long time to come. Das [bold added]

        More gold-standard thinking.

      3. Procopius

        I don’t see that the author offered any solutions at all, much less ones that were not like solutions for a typical family. If not simple scaremongering, what is his point?

        1. K Ackermann

          I didn’t see the article like that at all.

          It was an informational piece describing nicely how we accumulated the debt we have.

          What do you want him to do… will it away?

      4. H. Alexander Ivey

        The analogy is fine, as for as it goes, and it goes for about 2 inches. The author uses the family to give a sense of scale, but he does nothing to clarify his assumptions. The household in question is a family with only 1 wage earner, working part time in service jobs, supporting deadbeat brother-in-laws who refuse to pay any room or board while paying overseas relatives to stay overseas. By quietly not stating his “family” boundary, the author leads the unsuspecting reader into his thicket of false finance, frauduant business, and robber baron government policies.

    3. rjs


      its called a fallacy of composition. wray & others have written about it. and das doesnt even mention the one element of the deficit picture that really matters; the cost of servicing the debt as a percentage of GDP; right now it’s the lowest its been in years…

      das should stick to derivatives; he’s clearly out of his field here…

    4. Carla

      Even with the caveat in her introduction to this piece that erroneously compares household debt to the U.S. “national debt”, I’m really surprised that Yves would choose to feature it in Naked Capitalism at all and must ask: Yves, why did you do that?

      1. Darren Kenworthy

        I believe Lambert posted the piece. I suspect he posted it so that F. Beard could elegantly refute it.

  3. F. Beard

    The US government does not have a debt problem since it is monetarily sovereign. How many times must that be pointed out? We are not Greece! Still living with a gold-standard mentality?

    Still, the national debt is a disgrace since it is unnecessary and because it is a risk-free gift to some at the expense of others. It is also a big enabler of the government backed usury and counterfeiting cartel, the banking system, since it provides them with risk-free assets in exchange for excess reserves.

    The US national Debt should be paid off as it comes due and all future deficits funded with new fiat.

    1. K Ackermann

      But it’s not really not a problem.

      Monetizing is not a simple plan – it can run away, or drag on and on, and meanwhile the economy is turned on its head with main street once again bearing the brunt of the damage.

      And if it happens at the endgame, then it will probably be accompanied by war.

  4. reason

    Why does the government have to pay back all the debt? What would happen if it did (to the money supply – and to net private sector financial wealth)? People need to understand MMT.

    1. F. Beard

      Why does the government have to pay back all the debt? reason

      Good question. I should have said: “The US National Debt should be paid off as it comes due with new fiat and all future deficits funded with new fiat.“.

      You are correct. Paying off the National Debt with taxation would be a catastrophe besides being unjust.

      1. Andrew

        It would be interesting if the US did try to pay off all it’s debt. For starters it would have to tax back all the the cash the 1% have stuffed into their trousers. Good luck with that.

        This guy may be an expert in derivatives but he has no understanding of the monetary system. Stick to derivatives in future pal.

      2. bmeisen

        Why aren’t all monetarily sovereign states paradise on earth? If it can just print and spend why isn’t Somalia like Singapore?

        1. F. Beard

          Banks are a big reason. They leverage whatever governments print many times over.

          Another big reason is the lack of money alternatives for private debts. This allows governments to steal via the “stealth inflation tax.”

          1. James Cole

            Your answer makes no sense–are you saying Somalia just needs more banks and it will be like Singapore? I think the number of aircraft carrier groups the fiat issuer has matters more.

          2. bmeisen

            Then the US doesn’t have to worry about its debt because it has the biggest army and anyone who makes trouble gets clubbed.

            I tend to agree with the debt-is-killing-us group, which is apparently the Austrians.

          3. optimader

            hmmm arent aircraft carrier task groups merely an asset burn that cause more debt?

            Anyway, Admiral Hyman Rickover himself didn t think much of the American carrier-centered Navy, either. When asked in 1982 about how long the American carriers would survive in an actual war, he curtly replied that they would be finished in approximately 48 hours.

            These days, a matter of hours. Supremely designed and executed to battle the imperial japanese navy.

          4. James Cole

            Bmeisen, although I think you are being sarcastic, you are 100% correct. It is naive to think that our carrier presence in the Gulf doesn’t have a whole lot to do with the relatively low dollar price of oil and a big portion of the value of the dollar in general (because it is certainly not our financial balance sheet alone that justifies it). In this sense, the carriers are not an asset burn at all.

            Look on a map at the nations in whose affairs we aggressively intervene in that region–we are ring-fencing the Gulf. I’m not saying this is the way it ought to be, but it’s the way it is. For now.

          5. F. Beard

            Your answer makes no sense–are you saying Somalia just needs more banks and it will be like Singapore? James Cole

            No. I am saying the ability of banks to leverage government money is the reason government printing is amplified into price inflation.

          6. Carla

            “Your answer makes no sense–are you saying Somalia just needs more banks and it will be like Singapore? James Cole

            No. I am saying the ability of banks to leverage government money is the reason government printing is amplified into price inflation.”

            F. Beard — so is it true that the important thing is: who controls the quantity of money, and how? Therefore, should we want to have that control over the quantity of money be the responsibility of an entity that is accountable to the public?

          7. LeonovaBalletRusse

            F. Beard is the Master. Do you think Gross takes the position he does because he, like so many of the *informed* before 2008 went long in gold and therefore seem to think along the old *gold standard lines*? Do you think that pocket-stuffing *cash* made from leverage alone is impossible to recover (think Olympus Corp *companies* in the Caymans, think MF Global likewise)? No claw-back from international financial *terrorist* accounts & property?

        2. Jessica

          The difference is that Singapore has and will have the ability to tax the thriving Singaporean economy but the Somalian government can’t make anyone pay and the Somalians don’t have much of an economy anyway. That is the difference.
          If ETs with the force to make it stick showed up tomorrow and said the US government is no longer allowed to collect taxes, then the dollar would worthless.
          Another towering irony is that the one way it would be possible to create a real debt crisis in America (as opposed to one arising only from arbitrary rules) would be to trash the US economy. And that is exactly the direction austerity pushes us.

        3. geerussell

          “Why aren’t all monetarily sovereign states paradise on earth? If it can just print and spend why isn’t Somalia like Singapore?”

          Because underlying the operational realities of a modern fiat monetary system is the reality of a productive real economy.

          The monetary system is a tool used by government to command real resources for public purpose. MMT merely describes the operational realities of that tool. What the constraints are, which ones are voluntary and which ones are not, what the causes and effects are of various actions.

          What MMT is not is a cheat to get around the requirement for a country to have a real, productive economy in order to prosper.

          Somalia fails that requirement. Singapore does not.

          1. LeonovaBalletRusse

            Sounds true, geerussell, but didn’t Bush&Co. *create their own reality*? *Apres moi le deluge* and all that?

        4. Min

          Why isn’t having your own printing press heaven? Basically because money is not wealth, no? But there are times, like now, when there is not enough money in circulation. Then having your own printing press really helps. :)

  5. reason

    That said, yes the US Federal Government needs long term to both raise revenue and reduce expenditure. But not now.

    1. scraping_by

      Oh, we could do it now. We’d just have to confine “revenue enhancements” to the top 1%.

      We could also simply disappear the debt. Choose your least favorite foreign country and pick a fight. One way would be to amend the Central Reserve Act to make the Fed a part of the government rather than a private bank. Done in an afternoon, if there was the will. All the Treasuries it held would boomerang back to the Treasury and disappear.

      The majority of the money printed to save the wealth of banks has ended up sloshing around in speculative games unrelated to the real economy. Unrelated to the real world, really. It could be taken away the MOTUs and we’d have nothing but good.

  6. Earl Killian

    This post is complete nonsense. US accounts are not at all like a family budget, unless one hypothesizes that the family members are voluntarily working half-time, when they could easily be working full-time. The US can simply raise taxes to solve its fiscal imbalance, unlike the typical family. Thus there is no need for a US default. However, one party of the US political scene wants the US to default, and so is preventing the US from raising taxes. This is the problem, not some imaginary fiscal dilemma.

    There is admittedly a problem with healthcare expenses, i.e. Medicare. The same political party that prevents the collection of additional revenue opposes solutions to controlling healthcare expenses. Getting per capita healthcare spending to the level of European nations would solve the healthcare fiscal problem. The solution is known; it only takes political will to implement it. It is a shame that the US is ruled by ideologies that are the enemy of pragmatism, and so such solutions are currently “politically impossible”.

    Our ship of state is taking on water and listing to starboard. What is amazing is that some think the solution is to pile rocks on the port side of the ship to counteract the listing rather than to plug the leak.

    Also, the author of this post gives a misleading picture of where US debt comes from by giving it in nominal rather than real (inflation-adjusted) dollars. Reagan was the real beginning of our debt problems. Debt under Reagan/Bush1 in 2010 dollars grew by 5.8 trillion, under Clinton by 1.9 trillion, and under Bush2 by 6.7 trillion (more if you count the costs of dealing with the fiscal crisis to his under-regulation).

    1. carol

      “However, one party of the US political scene wants the US to default, and so is preventing the US from raising taxes. This is the problem…”

      NO, the problem is that the Democrats in power do not want to rise taxes on the very rich either.

      E.g.: It was a democratic senator (Nelson) who said that the people in his state do not want taxing millionaires, as they aspire to become millionaires themselves.

      E.g.: It was a democratic senator (Schumer) who said that having a very small increase in marginal tax rate above 250.000 income per year is not possible, as “people making 250.000 dollars per year are not rich at all”.

      It are democrats, jointly together with republicans, who have morphed the definition of a millionaire from someone who possesses 1 million (or more) into someone who ‘earns’ 1 million (or more) per annum.

      THE problem is that both parties are completely captured and bought by Wall Street.
      Effectively, the US has become a one-party ‘democracy’.

      1. scraping_by

        Having voted for the dolt five times, I can assure you Sen. Nelson isn’t really a Democrat. The only party he really belongs to the Confederacy of Dunces.

        Why do I vote for someone I know is both corrupt and stupid? Because the Nebraska Republicans always ran someone stupider and more corrupt. Because other states elect better people, and it was important to have one more mark in the “D” column. And maybe, sometimes, he’s not got money in his pocket so could stay out of the way.

        Now, of course, Omaha’s McCarthy Group run the state’s electronic voting machines. so elections are a quaint relic. Now it’s time to move beyond the legacy parties to something effective.

        1. carol

          “I can assure you Sen. Nelson isn’t really a Democrat. ”

          My point was and remains that it are the Democrats in power and the Republicans in power who show us the definition of ‘a democrat’ / ‘a republican’.

          The right ideas of all those who vote for these people (some holding their noses) hardly have any impact.

          Hence, if I want to know where the Democratic or Republican party stand for, I prefer to look at what the senators and house members say and do and vote for/against.

  7. Max424

    The Main Game Looms! US government debt is out-of-control! Oh noooooooo!!!

    Where did you get your Gambling degree, UC Kindergarten?

    We’ve been through all this on this blog, many, many times. Even in the idiotic system we’re in, where we give China, Japan, Russia, Mid-East dictatorships and various criminal banking institutions our money so that they lend it back to us at interest, we are still only paying 2% for that “fabricated privilege.”

    So we are fine. We can stupidly borrow in this idiotic system till cows come home.

    Now, if you read blog occasionally, Das, you also know this, a thing “transcendent;” we, as a sovereign country, don’t have to pay out 2%, or 3%, or God forbid, a nation breaking 7% to the psychotic gamblers, or anybody else, if we don’t want to, because we can always spend money into existence, instead of borrowing it into existence.

    But to do something smart like that would defeat the purpose of you, wouldn’t it? And that purpose is to gamble, gamble, gamble.

    The world is being led, and led asunder, by people whose highest calling is to let-er-rip on the craps table.

  8. spc

    @ To understand the US financial position, just remove 8 zeros and pretend it’s a household budget – no, it is not.

    Das does not understand macroeconomy ???

  9. sidelarge

    Ever since I started reading NC, which is actually not a long time ago, I suspected Mr. Das was a crypto-Austrian at least in terms of macroeconomics. This article kind of confirms it to me personally, but anyway, I would say that borrowing too much from foreigners has all kinds of political and geopolitical ramifications. That much is true.

    But other than that, well, like most of you guys, I don’t really know about his arguments so far. I don’t think you need to be an MMT-er to have serious questions over the key assumptions on which he seems to base his arguments.

    I particularly don’t understand the point of quoting someone like Wolfgang Schäuble, of all people, to support your arguments, other than deliberate provocation. Surely there are better choices, even if they say the exact same thing. I could quote Generalissimo Franco as I indeed agree with him on a few points on economic policies, but well, I just wouldn’t. The same can be said for the “household” analogy. I would avoid it like a plague even if I had an Austrian tendency or such, as I would be aware of the history of this particular old, abused analogy which continuously led to tears throughout history (even in pre-modern times).

    This lack of sensitivity makes me feel hmmm…

    1. K Ackermann

      I don’t believe in crypto-Austrians.

      There’s no way one could refrain from insulting every post that did not agree 100% with what was said, unless by directly quoting one of the Austrian gods, or using a railroad analogy.

      1. sidelarge

        Well, by “crypto-Austrian,” I meant someone who can reject the gold standard, abolishing the central bank altogether and so on while maintaining a disconcertingly Austrian-esque view on the economy, at least on the macro level, a sort of a intellectual-struggle-free streamlined Equilibrium model, if you will. I don’t think Mr. Das secretly worships von Mises.

        Maybe I should’ve said “Ricardo” instead of “Austrian” and been done with it, heh.

        1. sidelarge

          Anyway, I DO have a concern regarding the way the US has been handling its debt, rather than the (amount of) debt itself. In that sense, maybe I can find some common ground between me and Mr. Das.

          But why the infamous “household” analogy? I see it serving absolutely no purpose other than leading the whole argument sideways. That analogy does NOT make it simpler; it actually obfuscates important issues. When the MSM and politicians like to repeat this nonsense over and over, I simply don’t want to see it once again here on NC, but maybe that’s just me.

          And why Shaeuble? I happen to agree with him (horror, lol) on the danger of dismantling your industrial sector as rapidly and extensively as the UK and US did (the UK in particular), but that’s not even what this article is dealing with.

          You may think I’m just nitpicking, over minute details, but it’s important. It’s the matter of who exactly his target audience are. Does he want to just tell every random person how “indebted” the US government is? We get enough of that elsewhere, and heck, the MSM rather have the virtue of skipping those historical (and quite frankly, largely irrelevant) details to get right to the bottom = “HUGE DEBT ALERT!”

          Why does he provoke us like that with stuff like Schaeuble and “household,” assuming we are part of his intended audiences?

          Heck, this is a bit of PS, but as I was sort of writing this and pausing it and then writing it again and so on idly, I found a very similar article by him over at Eurointelligence, written very recently, where he even quotes Peter Schiff to emphasize how “broke” the US government is.

          Pointless is the only word that comes to mind.

  10. Jessica

    “pretend it’s a household budget”
    Second paragraph, first assumption. This is what is off the tracks.
    The US national deficit only affects anything at all if and when it exceeds the amount of shortfall in demand (=excess production and productive capacity).
    There is some meaning in the article because this misperception is a commonly shared one. But little truth.
    “National budget = household budget”. The meme that will not die. Because it is so convenient for the powers that be. And because it resonates with our experience at the household level. Inaccurately. And takes the unexpressed sense that something excessive, out of control, has been going on and makes that the responsibility (and guilt) of the ordinary folks, again not the responsibility of those who have actually been in charged.
    If you know thermodynamics, a household budget is an open system. A national budget is close to a closed system. Different set of equations.
    The function is this deceit is to shift the burden of bailing out the financial sector away from those who caused the problem onto everyone else’s back. And to help power the process of reducing most of the populations of the historic first world down to second or third world levels.
    I am sorry. I have written nothing that will convince any one not already in the choir, not even make them really stop and think. But it is just so frustrating to see this kind of toxic misframing getting again so much air time. Even here in Naked Capitalism, where many of the readers know better.

  11. Brick

    Well I expect every MMT advocate to raise queries surrounding this post, but I think they will be missing the point of the post. Quite rightly it will pointed out that because the debt is in the US’s own currency there cannot be a debt crisis. In my view that does not mean the US cannot choose to have a debt crisis by not paying a debt or that there is a potential problem. I think most MMT’s understand that if you print to pay of your debts then there is a risk that your currency will be devalued and would much rather printed money was used for infrastructure projects. In this way you change the dynamic relationship between the size of debt and GDP, such that the resultant growth prevents the currency dropping due to printing. The problem here as I perceive it and perhaps this links back to the Steve Keen’s post the other day, that there are certain inefficiences in the government acting in this manner. Your resultant growth may not match expectations, as intermediaries take a bit of cut and your currency does not quite keep its value as you would expect. Some will argue that a drop in currency to make the US more competative is just what the doctor ordered. In a way that is true, but it does take time for the economy to adjust, and in that intermediate time you damage the economy by having higher import prices. The real problem though is that capital flows change, specifically into emerging markets, and you may see a drop off in exports as those regions go into a downturn. For me its all about capital flows, their inefficiencies and the fact that significant changes in these increases the inefficiencies (See Paul Krugman’s post today on Hyun Song Shin work and how capital flows matter in the banking system).
    The point of the post for me, is that whether rightly or wrongly (wrongly in my opinion), there will be those in the market that look at the US debt in terms of household debt. The market could be irrational and turn on US debt dynamics at some future point, especially since the US has a history of not following Keynesian mechanisms during the good times. At the minute this is a beauty contest that the US is winning, but there may be a day when it doesn’t, especially if it gets uglier every year. I am not setting out to knock MMT here, and think part of its aim is sustainable debt dynamics anyway. The question is not whether the solution is MMT,austerity, Fiscal stimulus, but that the US debt state without action could provoke and irrational response from the market. Satyajit das’s expertise is after all in capital flows, banking and derivatives, so if he believes it is a problem, is there not a chance that other market actors believe it as well?

    1. F. Beard

      but that the US debt state without action could provoke and irrational response from the market. Brick

      If you mean the bond market then so what? The US Government should never borrow in the first place. It has no need. The US Government should simply spend its money into circulation and tax it out of circulation as needed to control price inflation in the dollar. Let the bond vigilantes learn that they are powerless over the US.

      1. Brick

        Well the bond vigilantes are a mixture of actors. They are the banks using it as a hedge, hedge funds, pension funds, mutual funds, individual investors, fannie and freddie, insurance companies, big industrials, sovereign wealth funds and central banks.
        Teasury debt is the glue and transmission mechanism behind central bank policy and you probably never want it to disappear totally. There is an argument that the debt largely reflects trade inbalances and by correcting those you put the debt on a sustainable path.
        Now the argument that you print and spend and withdraw money on the basis of price inflation in the dollar is not without merits, but what happens if there is price inflation from an external sovereign (like china) while you have deflation internally, which do you target and what are the consequences. If you print money into circulation where does it end up (i.e. it might end up in China as inflation through mediation of the banks). In simple terms if the price of oil goes up would you advocate a tax increase on the back of price inflation. You see if you just use fiat currency in this way you lose the finesse in control over mortgage rates, insurance premiums, and credit availability as this forms part of treasury bond story. There will also be the temptation for government to forget about the taxing out of circulation bit. I am not against pro cyclical fiscal action, but it only really works if you don’t have structural deficits (thats the part I think MMT attempts to target). I think ultimately the US should eventually be more concerned about currency vigilantes (banks and global firms) due to changes in leverage and cross border flows (and no I am not suggesting hyperinflation).

        1. F. Beard

          In simple terms if the price of oil goes up would you advocate a tax increase on the back of price inflation. Brick

          That would ONLY be a problem for the government and its money since we should also have genuine private currencies. If the cost of oil went up in fiat but not in most private currencies then we could conclude that the US Government was overspending and/or under taxing. Meanwhile the private sector would sail along fine undamaged by government money mismanagement.

          You see if you just use fiat currency in this way you lose the finesse in control over mortgage rates, insurance premiums, and credit availability as this forms part of treasury bond story. Brick

          The US is steeped in government enabled usury and counterfeiting (so-called “credit creation”). It is the cause of financial and social instability. What we need is separation of the State and Banking so that Banking can shrink to its proper size which is negligible.

          Banking is based on usury, counterfeiting and government privilege. Why do we tolerate such a monster?

  12. rjs

    actually, there’s a worldwide shortage of safe assets; there isnt enough US Treasury debt to support the financial system…

  13. Robert Dudek

    Government debt is one side of the coin; the other side is private sector surpluses. Reducing the debt means reducing private sector surpluses, aka profits.

    1. LeonovaBalletRusse

      RD, kind of like the *surplus population* of yore? Is money *people*? No. Sounds like a plan good for the *real economy*.

  14. jason

    To all the readers who disagree with the writer, what do you propose to do? The example of the household budget is just illustrative so that lay people can in some sense comprehend what the situation in the US is. This piece was not written for an economics blog but was instead written for the wider public on a popular news website. As well the post only the first part of a three part article. Criticizing the first part without consideration of the whole is like criticizing a play after only seeing the first act.

    So again to those that attack Das, what is the solution that you propose? What would happen if foreign lenders all of a sudden dried up because they were only going to be paid back in worthless US dollars? What would happen if the government was forced to no longer issue more credit because of the reaction of the bond market? What would happen if the government keeps printing money without regard to the wider world? Who wins? Who loses? The U.S. is sovereign but does not exist in a vacuum.

    1. F. Beard

      The example of the household budget is just illustrative so that lay people can in some sense comprehend what the situation in the US is. jason

      What’s he doing misinforming the public? That’s the last thing we need.

      what is the solution that you propose? Jason

      1) Abolish all government privileges for the banks. These include:
      a) government borrowing.
      b) a lender of last resort.
      c) government deposit insurance.
      d) legal tender laws for private debts.
      e) the capital gains tax on potential private money alternatives.

      2) Have the Federal Government provide a risk-free money storage and check clearing service for its fiat that paid no interest and did no lending.

      3) Bailout the entire population equally (including savers) from all credit debt to the banks. This could be done without changing the size of the money supply (base money + credit) if:
      a) All further credit creation was forbidden during the bailout period and
      b) the bailout checks were metered to just replace existing credit as it is paid off.

      4) Remove all legal impediments to genuine private money supplies for private debts.

      1. F. Beard

        5) Payoff the US National Debt as it comes due with new fiat.
        6) Fund all future US Government deficit spending with new fiat.

        1. LeonovaBalletRusse

          Oh, this is *tough love* indeed for *financial crack addicts*. Time to do it and get it over with.

    2. JTFaraday

      “The example of the household budget is just illustrative so that lay people can in some sense comprehend what the situation in the US is. This piece was not written for an economics blog but was instead written for the wider public on a popular news website.”

      So, talking down to the public is acceptable journalistic practice?

    3. optimader

      Act One: lets assume the Moon is made of cheese, a simplification for the unwashed masses, and a reinforcment of the fallacious meme for various rightwing mouth-breathers to cut and paste into blogs….

      Act Two : Various economic schemes to harvest lunar cheese;

      Act Three; Lunar cheese: Recipes to revive the families health and verve.

    4. Susan the other

      Maybe the USA should take the reverse of Germany’s medicine. We have been promoting our own trade agreements by buying a bunch of low value stuff from other countries but it has not served to raise the value of their currencies. Why not? Did we think off-shoring manufacturing would solve this for us? I think it did the opposite.

      We should withdraw from any trade agreement that does not adequately subsidize the currency of our respective trading partner. If their currencies go up then ours will go down where it belongs. This prospect terrifies China because they believe it will impoverish millions of Chinese overnight. But there must be a solution here.

      Didn’t Das just say that US “growth” has stagnated since Reagan. And now we clearly have created a liquidity swamp with our trade policy, a giant credit bubble with our banking deregulation, structural unemployment, and ZIRP to survive. So if we knew debt and false liquidity weren’t producing growth in 1980 why did we allow it to reach these proportions? “The (projected) surpluses never showed up.”

      Or faster still, just issue a new currency like F. Beard suggests. We’ve messed around with our trading partners too long as it is.

  15. kms

    The author does realize that all it would take for the deficit to pretty much go away is for congress to do nothing, right? Bye-bye tax cuts, doc fix- hello to the better than nothing ACA. Others have already beat me to the point that the US is not a household… Sorry dude, I realize you’re a guest, but we don’t like dealing with lies for children. We’re big boys and girls who totes get that sovereign nations with their own currency can inflate away their debt (though we probably won’t have to) and the underlying root of the problem can be fixed by closing the output gap, and adding a tax increase and a modern, first world nation healthcare system. This is the sort of stuff you’d tell a little kid who you “didn’t expect to get all those scary numbers!”. I am not afraid of a little math, but I am afraid of a national dialog dominated by this kind of codswallop.

  16. MacCruiskeen

    “At $1,200 in saving per year and assuming they balance the budget, it will then take them a mere 119 year to pay back the debt.”

    This is another difference between households and governments. Governments can be expected to be in business over such long periods of time. The US government has carried a debt balance every year since 1839. So we’re on 172 years of debt already. 119 years to pay off what took 172 years to build up is probably actually reasonable. And if such a plan were enacted, any GDP growth at all over that time would cause the debt to shrink relative to it.

  17. LucyLulu

    One more question, please, for the more well-informed.

    I read that global research/LEAP article a couple days ago. They predict no deal from the SuperCommittee leading to downgrades from the rating agencies, leading to hell in a handbasket for the US economy (which they portray as the REAL problem, not Greece or Europe). How accurate have they historically been or what kind of reputation do they have? (They don’t seem to have much love for the US, or UK, for that matter.)

    They do have some really good articles though on a link found at the LEAP site, to quarterly “MAP publications”.

    The first article from the Nov release was about advice for the G20. In summary, 3 points: 1) ditch the dollar as reserve currency 2)nationalize the banks 3)audit all US, UK, and Swiss banks The other article I enjoyed was “The Day After (2012 Presidential Election). They seem to always have a couple I really enjoy, and its free.

    1. Jessica

      Well your posts are there, so you must have found some way to appease the great god Lambert. He doesn’t seem like the type to want any virgins thrown in the volcano, so what did you use as the propitiatory sacrifice? A few pumpkins perhaps

  18. Foppe


    Apolitical debt blues
    Prior to the election of Ronald Reagan, deficit spending largely from military conflicts such as Vietnan and economic downturns created a national debt of around $1 trillion. President Reagan held firm views on government and the welfare state: “Government is like a baby. An alimentary canal with a big appetite at one end and no responsibility at the other.” He quipped that: “Welfare’s purpose should be to eliminate, as far as possible, the need for its own existence.” But between 1981 and 1989, tax cuts and peacetime defence spending contributed to an increase in the debt of $1.9 trillion. The President was disappointed at the growing national debt, joking that: “[The deficit] is big enough to take care of itself.”

    There is nothing apolitical about this, and it puzzles me that Das either does not recognize this, or that he wants to pretend otherwise. As he himself mentions, Reagan pushed through (enormous) tax cuts, while simultaneously “deficit-financing” a few nonsensical “wars” — incidentally ensuring that enormous amounts of public money would be given to the private sector (star wars, etc.). But rather than to recognize these as political moves, Das prefers uncritically repeating Reagan, who wanted to make sure that people would not recognize that it was precisely because of those political choices that there was such a huge increase in deficit, and national debt levels. Similar things can be said about the subsequent increases.
    In other words, intentional choices were made to run up the debt levels, and to lower taxes on the rich. There is nothing “apolitical” about this; rather, it is premeditated, and partly bipartisan attempt to undermine the legitimacy of the federal government, and to create a platform for welfare state cuts.

    1. psychohistorian

      If we are going to bash Reagan then let us not forget what he did with the SS fund that was holding T-=bills; they took them, spent them and made funding of SS a line item in the budget.

  19. Rodger Malcolm Mitchell

    Two important equations in economics:

    Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports

    Federal Deficits – Net Imports = Net Private Savings

    Based on these equations, here is a simple question:

    How do federal tax increases and/or spending cuts (aka deficit reduction) reduce unemployment or grow the economy? If you can’t answer, then there clearly is something wrong with the whole super committee concept.

    Those who do not understand Monetary Sovereignty ( do not understand economics.

    Rodger Malcolm Mitchell

    1. MyLessThanPrimeBeef

      It would be interesting to see a controlled experiement where a sovereign government prints as much money as it wants.

      1. Stephen

        it’s quite possible that we might get this with japan at some point…at least, according to Kyle Bass.


        1. sidelarge

          Rather, that’s what he hopes for, as he can’t get out of the deep short-Japanese-government-bond position, which must have been burning his house for months.

          He has to beg the government to embark on it, the sooner the better, AND hope for hyperinflation in Japan. I wouldn’t want to be in his position, personally.

  20. ka1

    The difference between outright default and money printing is not nearly so stark as Yves claims. Both actions would sharply reduce US lending credibility, and both would reduce the purchasing power of the principal returned to creditors. In real terms there is little or no difference between the two approaches from the creditor’s perspective.

    What I really can’t understand is why so many on here seem to think inflating debt away is some kind of panacea. It isn’t. The choice between outright default and money printing is really a choice about what kind of pain the government inflicts participants in the US economy. Printing money would create instantaneous inflation, which would have massively unequal effects on actors throughout the US economy. At least in the outright default scenario the primary impact is on bondholders, who intentionally took on risk. Surely that’s better!

    1. F. Beard

      What I really can’t understand is why so many on here seem to think inflating debt away is some kind of panacea. ka1

      Because the banking system has cheated savers too.

      And a bailout need not involve increasing the size of the money supply but merely changing the composition of it from 97% credit, 3% base money to 100% base money. We would do that by banning any further credit creation and metering the bailout checks to just replace existing credit as it is paid off.

      1. ka1

        I see, so you have gotten less than the advertised interest rate, or lost principal that you put in a savings account? Interesting. Look, I’m no fan of our criminal banking system but as far as I know the banking system itself has not screwed savers. And even if you were right about that, it is no response to my point.

        It does not matter in the least if the monetary base remains nominally constant. (Monetary base is just a theoretical construct anyway). Replacing debt with money would obviously reduce the marginal utility of money, which is inflation by definition.

        1. F. Beard

          Look, I’m no fan of our criminal banking system but as far as I know the banking system itself has not screwed savers. ka1

          Ever hear of negative real interest rates? How do you think those happen? Ans: Because savers are partially bypassed by the banking system.

          It does not matter in the least if the monetary base remains nominally constant. ka1

          I said nothing about keeping the monetary base constant; I said the total money supply would be kept constant (but only during the bailout period).

  21. Valissa

    WOW, it’s rather amazing watching people read all sorts of things into this post that don’t seem to be there. Also lots of MMT believer angst about a mathematical simplification of the US budget which it appears was only done so that the numbers would be manageable in one’s brain. What if Das had added a qualifiying sentence about that, would people still be tearing down this post in the same way. I think not.

    My observation is that there is a huge amount of denial about the seriousness of the US debt, esp. on the so-called left. Lots of apologists saying it’s not so bad, especially if we interpret the data according to Econ Theory X (be it MMT or Keynesian or something else) and implement the appropriate theoretically determined actions.

    My perspective tends to be empirical, and I have developed a big distrust of theoretical approaches as I’ve gotten older. Empirically speaking the US debt is huge and there is no easy fix to it. That’s a fact. This post seems to be talking about that, and not imaginary economic solutions.

    To those of you who think we can simply print more money and not deal with fundamental structural problems… or just start measuring the economy in new ways (use a different econ theory)… or hey, let’s invest in infrastructure… what are the limits of fiat money and how do you know, in practical real life terms (not econ theory) when you’ve reached them?

    1. Foppe

      Valissa: It’s all well and good to take deficit/debt issues seriously, but as I’ve suggested (implicitly) in my own response, there is a curious double standard going on with regard to how problematic such debt levels are perceived to be. So I don’t really see a good reason why one should suddenly take seriously the worry whether or not the policies enacted will or will not be inflationary at some point down the road, and to what extent it is sustainable in that it will result in outcomes that are stable over a 30+ year period. Likely no policy enacted now will be, and problems will crop, but there are ways to solve those issues. Being empirically-minded is fine, but the major obstacle to resolution is not that there aren’t any solutions available that would work, but the problem is that nobody with institutional power will consider them. This is the primary issue to tackle.
      Furthermore, the only two/three ways out of an “unsustainable debt”-problem (if you exclude the theoretical possibility of the sudden creation of a huge US trade surplus) are (voluntary) default, some type of debt cancellation, or inflation. Austerity is basically a way to force lots of players into bankruptcy while pretending you’re letting it happen via “market mechanisms”. Its major “virtue” is that it allows politicians to claim that they cannot intervene, and that it allows them to pretend that nothing systemic is going on, since the defaults are happening at the individual rather than the macro level (with the added bonus that vulture funds can snap up whatever firms fail due to liquidity or minor solvency issues). It is an extremely crude way to “solve” the issues facing the US, and I don’t really think it is a distinct policy choice, except in that it has a secondary aim — welfare state destruction (since military/private contractor/government outsourcing spending enjoys bipartisan support).
      Anyway, I would still go for infrastructure — even if the US has to default, having new/recently maintained built infra will help, and the Fed govt can borrow for next to nothing anyway, since there is no other “safe” investment anywhere.

      1. MyLessThanPrimeBeef

        If we question if or how infrastructure spending, which might include building pipelines, might impact the environment, we might start to question the whole current economic model.

        1. Foppe

          Ah, I wasn’t really thinking about pipelines. More about bridges/rail, and secondarily about roads and the like. (Perhaps broadband coverage?)

    2. Jessica

      “What are the limits of fiat money and how do you know, in practical real life terms (not econ theory) when you’ve reached them?”
      These are such good questions. Questions really worth wrestling with.
      I think that the limit of _painless_ fiat money is set by the amount of excess capacity/shortfall in demand in the system. If you go beyond that, inflation becomes much more likely. Capacity utilization rates and bottlenecks (shortages of specific goods) would be good indicators of when the pain-free limit was reached. Right now, we have massive unemployment and under-utilized capacity, so we could distribute a fair amount of extra money with much benefit.
      It might be worth printing money beyond this point, but then it would require a balance of costs and benefits. And doing that would require a more democratic society than the one we have now (in which one person one vote is undermined and overwhelmed by one dollar one vote).
      If all the major nations suddenly changed policy and started printed money up to the overcapacity limit, we would run into temporary resource shortages before increased production could come online. And if we are facing any permanent resource shortages (for example, peak oil), we would move towards them faster. Personally, I think talking about peak oil for the global economy is like talking about Peak Breast Milk for a 10-year old. Meaning that the problem is not a lack of petroleum but that the economies of the world have failed to make the transition to a completely different energy regime, one that will use energy far more efficiently, still in increasing amounts, but with environmental impacts fully taken into account, and based far more on human brains and far less on dinosaurs.

      How much money you can safely print for infrastructure investment depends on your taxation system and the rest of your economy. If you are willing to tax even the wealthy, then wise infrastructure investment generates extra economic activity and extra taxes that pays for the investment. If your policy is to refuse to tax the wealthy, then infrastructure investments will not pay for themselves.
      There is another significant question implicit in yours: assuming we can detect the proper limits on fiat spending, how do we ensure that we actually respect those limits? I suspect that some resistance to MMT comes from a fear that if we do not respect the notion that the government needs to pay back its debts some day, then we would be unable to draw the line anywhere else. I think there is some truth to that fear and that the proper utilization of anything like MMT requires a very different politics from what we have now. After all, MMT in the hands of the 1% is basically what the bail-outs were. Except that the moment the 1% had gotten their money, suddenly things shifted from MMT back to standard monetary theory and the media suddenly rediscovered that deficits were more important than fair play for the 99%.
      Sorry, I have run far afield with this answer, but it was just so nice to be dealing with questions that we really ought to be wrestling with.

      1. MyLessThanPrimeBeef

        Very astute, Jessica.

        What have we been talking about here very day – Congress insider trading, the best government money can buy, etc?

        So, we are going to say the government can print as much money as it wants?

        The more money we the virtuous in the government print, the more money you in the private sector can save? Who doesn’t want to be in the public sector?

        And when we the virutous in the government print too much, we will tax you in the private sector? Again, who doesn’t want to be in the public sector? Which mother doesn’t want her kids to be in the public sector?

        Who wants to be in the private sector then?

    3. optimader

      left vs right….
      left:parasitic slipsteam that gets recycled back into the domestic economic blackbox, albeit inefficiently, nut money is turned over on food, domestic resorces and hopefully some level of education
      right: parasitic slipstream that gets externalized from the blackbox w/o equivalent recovery by producing unproductive assets that are eventually decomissioned and scrapped, worse yet get deployed w/ high O&M cash burn/resource consumption rates to be blown up/depleted while engendering external antagonisims and self reinforcment of the parasitic load.

      both parasitic, the former largly recycled internally, the latter externally consumed in a variation of the broken window fallacy.

      Want deficit reduction? Build submarines, invest in the “coast guard”: soveriegn protection and wrap up much of the rest of it that is deployed in foreign missions and plan on just paying world market prices for hydrocarbon like we have to anyway.

      take away that incredible imperial burden and we will all be puzzled how much of the social welfare net can be made redundant..

  22. Marley

    ~groan~ … Really? Very disappointing.

    The Gov’t is just running up the score, people. Money gets created and destroyed, and with sufficient demand in the economy, the deficit would stabilize over time. For those who resist giving into the truth about Gov’t spending (a., that it is dollar for dollar equal to private sector savings NFA, and b. that as the monopoly ISSUER of the money of account, the Gov’t is FUNDAMENTALLY different from households a.k.a. USERS of the currency), I came across a really wonderful graphic tool to show/explain/play-with the macro view public vs private sector.

    Hat tip to Rogue Economist who runs Rogue Economist Rants, and to poster HBL who developed the sector balances model.

    I keep posting the following in response to similar articles elsewhere on these “internets”:
    (I – S) + (G – T) + (X – M) = 0
    All day every day and “8 nights a week” (latter part lifted off the sign on Jazz bar in Cape Town, ZA)!

    1. MyLessThanPrimeBeef

      What if an MMT government puts every citizen on its payroll?

      There will never be any unemployment, I think.

      1. Marley

        No need to go that far MYTPB. Very much outside the realm of reality, but there’s nothing wrong with a GJP (Guaranteed Job Program) to bridge the gap in times such as these where the private sector is not growing due to the contractions brought on by the crisis and unemployment.

        1. MyLessThanPrimeBeef

          Although if you go that far, we all can enjoy

          1) job security
          2) no more boom-bust cylces.

      2. mansoor h. khan

        Don’t think in terms of accounting only.

        Think how the production process works and what drives the production process. Demand drives the production process. Currency when spent drives (creates) demand which gets the production process going as entrepreneurs satisfying demand (currency when spent is information signal from the consumer to the producer).

        Most people have such a hard time social credit and MMT is because they think too much in terms of accounting (debts!) or think terms of the scarcity paradigm. Even the “fixed” amount raw materials on earth are not fixed because it’s net effectiveness than can be multiplied by human creativity (engineering creativity) and management skill (proper and just distribution of the output) that matters.


  23. Eric

    ”But with considerable deflationary pressures underway via private sector deleveraging, government deficit spending is actually desirable”

    This is the Japan scenario, that is already going on for 20 years. And this raises some questions:
    Is Japan ever going to be able to pay back their 200% of GDP (and growing) public debt?
    What happens with Japan when bond rates rise?
    And with a trade deficit, contrary to Japan, can the USA expect to get even close to 200% of GDP debt without foreign bond buyers giving up?

    1. briantheprogrammer

      Everything becomes easier to think about if you just replace the words “government debt”, with “private sector assets” which are the same thing. Every “debt” has an asset offsetting it somewhere. Every dollar of government “debt” is the recording of a dollar payment made to some individual or business.

      So consider your question:

      Is Japan ever going to be able to take back the the private sector assets which are currently at 200% of GDP (and growing)

      The answer is obvious; no modern legitimate government would seek to confiscate all of the private sectors assets. That proposition is insane. But it gets a free pass when the question is rephrased as “How do we pay off the government’s debt?”.

      1. MyLessThanPrimeBeef

        That’s what I say to my – my debt is your asset.

        The more I borrow, the more the bank can create money out of thin air, the bigger his assets.

    2. Jessica

      At least a big part of why all that money the Japanese government borrowed and spent did not work so well is that they poured most of it into the areas they had already over-invested in. In their case, infrastructure to support the export of manufactured goods. Right at the time when globalization was forcing even Japan and Germany to shift production to Eastern Europe or Southeast Asia, then China.
      So in many ways, they borrowed to prop up an economic structure and put off the needed changes.
      The transition from consumption-discouraging export-dependent economy to consumer-driven economy seems to be quite difficult. Not sure any of the East Asian countries has managed it yet. I wonder how much of that is deep cultural stuff and how much is that the 1%-led form of globalization drives all nations to try to restrict consumption (austerity) and increase exports.

  24. Willy

    “Cutting government spending has a contractionary effect greater than the amount of the deficit reduction (we’ve seen this proven again and again in Europe, as the imposition of austerity is making debt to GDP ratios worse).”

    You act as if Government spending provides some kind of a cure.Considering the multiplier effect is somewhere between .9 to .5/$1 what’s the point?

    Credit pulls both productivity and spending forward. You can only pull forward so much and then you enjoy a slacking. As we are witnessing there’s no way to paper over this fundamental this cause/effect reality.

    1. F. Beard

      Credit pulls both productivity and spending forward. Willy

      Only because the money supply, being lent into existence, must be repaid and with interest to boot. Otherwise, both productivity and spending would proceed merrily along.

      Money should NEVER be lent into existence since the money supply should never shrink. This implies, btw, that government surpluses are bad.

      1. MyLessThanPrimeBeef

        Just curious.

        Is any borrowing (private or public) at non-zero (non-negative of course) percent interest usury?

          1. F. Beard

            Debt does not require 3rd party borrowing or usury. A manufacturer’s coupon represents a debt. Fiat is a debt of sorts.

          2. mansoor h. khan

            F. Beard,

            Fiat is not debt. But it is a claim. An equity claim. Fiat management might require a government to tax and destroy currency if the productive capacity of the economy decreased.

            Basicly, productive capacity of the economy is what matters in the end (not gov surpluses or gov deficit spending) or national debt level or even unfunded social security or medicaid or medicare liabilities or even level of private debt.


    2. briantheprogrammer

      Government spending is a cure. It expands the net-financial assets of the private sector, giving people the ability to trade goods and services for those assets. In the current state of affairs producers do not produce because they don’t see anyone wanting to buy. Consumers do not consume because they want to hold on to their precious dollars. The ricardian arguments about pulling spending forward (because it all has to be taxed back later) are wrong.

      The supply of real wealth is constantly expanding as the economy grows and productivity increases. Periodically, it gets ahead of the supply of private-sector-assets (aka money) which can only be expanded by government spending. The consequence of this are downturns and rising unemployment, as producers attempt to maintain prices by cutting back production. Government spending is the only thing that can bring the nominal wealth back into line with real wealth, making it easier to earn an income, save, and consume.

      1. MyLessThanPrimeBeef

        In theory.

        In practice today, it’s very easy to co-opt government spending into benefiting the 1%.

        They kill in the name of love.

        They rob in the name of hope.

        The steal in the name of change.

        Remember, the more money they print, the more money you (as you the private sector) will have. What’s not to like?

  25. Lew Glendenning

    These are Keynesian arguments.

    No country has followed Keynesian policy for 50 years and done well.

    All the countries in the world are falling into the same economic pit at the same time, and yet everyone wants to continue the same stupid policies of inflation, borrow and spend that got us here.


    1. F. Beard

      Keynes had it partly right. The mistake he made was to assume that banking is necessary; it isn’t.

    2. briantheprogrammer

      The “pit” we are in is one of deflation and high-unemployment brought on by an irrational fear of government spending and inflation. Namely the idea that the government has to “pay back” what it has “borrowed”. It is more accurate to thing of government spending as paying the private sector back for what IT has borrowed, by increasing its leverage.

      1. F. Beard

        It is more accurate to thing of government spending as paying the private sector back for what IT has borrowed, by increasing its leverage. briantheprogrammer

        Some deficit spending is necessary just so the private sector can pay the interest on its debts in aggregate (without further borrowing).

  26. dirtbagger

    The solution to our current Federal defict does not look so difficult if we Examine how we arrived at the current state of affairs.

    About 1/3 of the current defict was caused by the Bush and ongoing Obama tax cuts. Another 1/3 of the deficit was due to increases in spending on items such as Part D Medicare, off budget spending for Iraq and Afganistan, etc. The final 1/3 of the deficit is caused by a reduction of tax revenues from our high unemployment and low business activity during the ongoing recession.

    I don’t see that it will take an impossible amount of political will from both sides to sunset the Bush tax cuts, reduce defense spending (Iraq & Afgan spending reductions are already in place)and end the unfunded Medicare Part D. Additonal funding or cuts will be required of Medicare and some minor tweeking of Social Security. Should the economy continue to strengthen over the next couple of years, the Federal Balance sheet could begin to show major improvement.

    The personal balance sheet is another matter. Without significant wage growth there is no mechansim for debt relief other than bankruptcy or debt forgiveness.

  27. Lew Glendenning

    The other thing is that almost all economic commentary and almost every one of the commenters in this forum assume that governments CAN control their economies for the better.

    Governments can screw up their economies, and do so frequently. If ‘refraining from screwing up the economy’ is the definition, OK, govs can control their economy.

    But there is no evidence that govs can improve their economies over 50-year periods of time, and a lot of serious, careful theoretical arguments about why that is impossible.

    Three off the top of my head :

    There are many papers showing a negative correlation between total gov burden (taxes and regulations) and growth of GDP. Empirically, they can’t improve their economies relative to doing little.

    Mathematical chaos + computational complexity + emergent properties of systems means that the initial state of a system is not a strong predictor of a later state. It is difficult to navigate through a state space if you can’t reliably predict the consequences of your actions.

    Control systems require sufficiently dense sensors, sufficiently powerful effectors, equations describing the systems’ movment from state to state, and a computational system capable of calculating the current state from the sensor inputs and the require actions of the effectors to move the system to a desired state. We don’t have any of these, as the economy is too huge, too complex.

    1. F. Beard

      I agree that government cannot possibly control an economy properly. However, due to the private money monopoly the government and the banks share, the government must spend more when the banks decrease lending.

      The solution is to abolish the private money monopoly and then excessive government spending will not be required during busts.

      I presume you do not believe in government enforced/backed monopolies?

    2. briantheprogrammer

      Government spending does not imply “Control of the economy”. In fact it is the opposite. When the government spends it releases resources (money) to the private sector for it to use and allocate as appropriate. All the government has to do is respond to the demand for a larger stock of net-financial-assets (in evidence with rising unemployment and falling tax receipts) by spending more than it taxes.

    3. Foppe

      If you take a look at who initiated the rot, you’ll see that it was a president who was elected on a platform of attacking the government. Anyway, from your argument that corrupt politicians starting with Reagan broke the government, it in no way follows that government is inherently illegitimate. It simply follows that liars like the Kochs, Reagan and Peterson should be kept far away from politics.

      There are many papers showing a negative correlation between total gov burden (taxes and regulations) and growth of GDP. Empirically, they can’t improve their economies relative to doing little.

      This is utter nonsense. Under Eisenhower, income was taxed at 90%, whereas growth levels were through the roof. Yet this was primarily a function of not having any competition world-wide. “Empirically”, then, any paper that talks about a relationship between taxation rates and GDP growth without analyzing the much more important context in which those things occurred is probably crap, and more likely ideological crap.

  28. MyLessThanPrimeBeef

    Do I have this accounting identity correct?

    Money the government prints = Money you (including the foreigners, let’s be magnanimous here) have.

      1. MyLessThanPrimeBeef

        I know being rich means different things to different people.

        Some think being able to spend time with one’s family is what it’s like to be rich.

        Maybe one can think of some other spiritual defintions.

        For many, enough to get one elected to any office in the land, it’s to have a lot of money.

        So, if the government can print enough money, we’ll all be rich?

        1. briantheprogrammer

          There is some amount of money that the government should “print” in order to boost the demand for real goods and services. That would allow people to work more, consume more and save more and therefore be more rich.

          But if the government prints too much money and the demand outstrips the ability to produce the goods and services that are desired, then it causes prices to rise; inflation.

          So the answer to your question is yes, but only to a point. MMT says that the government has to manage the supply of financial assets so that prices of real assets remain stable over time. We are currently in a situation where the value of money (in terms of real assets) is rising so the solution is to increase the supply of stock of private-sector-assets. “Print Money” as you say.

  29. be'emet

    added plus to issuing new money for infrastucture: a productive economy would become the envy of the world; every nation would have to follow suit or drop out in misery.

    could public banks, a la Ellen Brown and now Michael Hudson, lend for infrastructure building – say a school or a bridge, then take possession and reclassify the value as a capital asset, while forgiving the loan? These projects then become community wealth, instead of impoverishing by bonded debt?

    The magic of public banks is that they could be instituted by feasible political process, without the impossible grief of pursuing national finance overhaul. And if used as described above, maybe could put the nation back on track lickity-spit?

    a despair: what’s the use of writing from Hawaii, after all the other players in the thread have picked up their bats and gloves and gone home?

    Why does the household/balanced budget model have such staying power? how does the propaganda bamboozle so many otherwise sensible people? like religion, gold=god?

    1. MyLessThanPrimeBeef

      The mystery of L.

      God + L = Gold.

      Who or what is L?

      Assuming L > 0, the Gold > God.

      That’s too scary to contemplate.

      1. Ian Ollmann

        I’m sure you see the obvious fallacy here, in that spelling is orthogonal to meaning. So why post this nonsense?

  30. Paul Tioxon

    A household budget is like the national budget is like saying one factory is like the entire economy. The differences in the scale of the unit of analysis, single household of 4 people vs an aggregate of 320 million people, are so completely different that you can not possibly make a comparison except by the enabling capacity of language to just say anything and confuse the words with verifiable propositions that are part of a meaning analysis.

    That is why there is a distinction between micro and macro economics. Of course, this reductionist fantasy is another example of the anti-intellectualism of right wing ideology and their contempt as well for Keynesian economic analysis.

    1. Curtis

      What part of Jubilee, don’t all these fine minds in the world of finance understand? Unlimited growth of money in a fixed world leads to to money that is surely worthless. All the flaying around and gnashing of teeth by our gangster bankers will not get around such an inevitable outcome. Will it be Faust things last?

    2. MyLessThanPrimeBeef

      I am not without sin.

      But I will say this, if you borrow from a bank, you’re an enabler of that bank.

      Here is an interesting observation of human nature. We hear, stop paying on your loan. We don’t hear, stop taking out more loans.

      A while back, you took out some money to buy a house while your renter neighbor didn’t. You now call for debt julibee. You have just redistributed wealth, relative to your neighbor. That’s an aggression against him. We are not talking about the criminal banksters here.

      I think it’s simpler to just say, don’t borrow. Stop taking out more loans.

      That, for sure, has less ‘conflict of interest’ potential than to just say, stop paying on your loans.

  31. Vespasian

    Yves says “But with considerable deflationary pressures underway via private sector deleveraging, government deficit spending is actually desirable to accommodate the private desire to save more” This mentality strikes me as “trickle-down from gov’t spending economics”, and I think it an even more scary concept than GOP tax-cut Trickle-Down philosophies (even though we’re currently in forms of both at the moment). It is the primary reason I cannot back MMT — it allows far too much political influence over who gets the cash & purchasing power. Such concentrated power could push existing political hostility into outright violence for control over this power; it could lead to our society’s destruction. Alas, I believe it is the path we’re on.

    1. briantheprogrammer

      So what is your alternative system in which money is created but no one has to decide who gets it?

    2. Jessica

      I do not agree with what Vespasian says but I think Vespasian is expressing a common fear that is worth noting. Because it does have some validity and it is one of the things that gets people to put up with rule by the 1%: fear that the alternative would be chaos and/or violence.
      This is why I think that the creation of credible alternatives is so crucial. And we have to do this amidst mainstream communication that is polluted at a far deeper level than most of us realize.

    3. Darren Kenworthy

      By giving the power to create money to banks, the government is already deciding who gets the cash, and who gets a lifetime of debt servitude. If it not obvious to you that banks have been given this power, reflect for a moment on the fact that they are allowed to lend money they don’t have, and collect interest on it besides. The “war” over who controls the creation of virtual money started several thousand years ago, and has been raging ever since. “We the people” are sovereign. Our government might be captured by unfaithful agents and bad actors, but the ideal that it is of, for and by the people is worth struggling for. The way money is created should reflect the fact that it is created on the people’s behalf.

      1. Ian Ollmann

        If money is experiencing high turnover, that is, it is both printed and taxed at high rates, then because taxation is typically more evenly spread out than is spending, a system of fiat spending will have the effect of enriching government contractors at the expense of everyone else. Those closest to the government will do best. I think this is a valid worry. We already have problems with $1000 toilet seats. One would not want the already notoriously broken government spending process to become more important. This is one service that banks do provide. They (used to) lend money into existence in a more distributed fashion. They also had a vested interest in lending money into existence to projects likely to be beneficial to e economy, whereas government programs are designed to suit some senators reelection campaign.

        1. Vespasian

          My concern exactly. I don’t want money-creation to exist within gov’t power. Nor, for that matter, within banking power — fractional reserve lending is outright (albeit currently legal) fraud. Absent a method for value-creation to occur in a monetary format, evenly spread amongst the citizenry, I believe in hard money: gold, silver, grain, oil, beads, wood, coal, what-have-you.

          A gov’t of the people, by the people, and for the people ought be using the current resources & value of the people (zero inflation & gov’t debt allowed) — not 1)exploiting the people by exercising monetary control (gov’t-sanctioned currency-printing banking & CBs) to devalue the currency-savings of the populace, 2)channeling the misappropriated wealth / value to those closest to the gov’t in profession or exchange, and 3)burdening the populace with a gov’t debt owed in ever-increasing % to those most-profiting from the first two trends.

          We are already very far down this dangerous road.

          1. Ian Ollmann

            Government “manipulation” of fiat currency is somewhat excusable. Government is at least elected and has some legitimacy. Similarly, I am opposed to balanced budget amendments, gold standards and other such things because they impinge on national sovereignty, the right of a nation to look after itself. That sort of freedom can be sorely needed at times. We haves nice example of it in California, where the state fiscal planning is so constrained by the voter initiative process (e.g. Prop 13) that state finances are a roller coaster (inevitably trending down) and the state is a fiscal wreck. The legislature is so constrained and tied up that I don’t think it is possible to have good government here. At some point all of the requirements of ballot box initiatives add up to more, and the budgeting process becomes a legally required work of fiction.

  32. mac

    I would note that we(The US) seem to have an abundance of folks who have most of the answers to the real or imagined debt problem. That being true as far as I can see, we should just harness all these wizards and poof the problem.


    YS: The real economic danger is inflation, not default.

    That depends upon the nature of the debt, methinks.

    France and Germany have about the same debt to GDP ratio – but why are the CRAs breathing down the neck of France and not Germany.? Yes, Germany is an export-country far more than France (or even the US, for that matter) and therefore more able to earn the money with which to pay its debt.

    But that’s not the real answer. Which is the nature of the debt. The Germans had the good wisdom to sell bonds to their own citizenry qs well as banks. So the holder of most of the debt is not the same as in France.

    CRAs believe the debt held by citizens of a nation is “non-defaultable” because any national government that refuses to pay debt-maintenance will not be in office for a long, long time. Whilst a government could willingly default on bank-debt – some people would even applaud!

    If it is the nature of the debt that matters, perhaps America should start selling Liberty Bonds once again?

  34. Karen

    PLEASE, everyone here who thinks having control of one’s own money supply is some kind of panacea, read “When Money Dies: The Nightmare of the Weimar Collapse,” by Adam Fergusson.

    When a government takes money-creation too far, everyone stops accepting that money. It becomes worthless.

    And until the government gives up on forcing people to accept its worthless money, the whole society descends into a financial Stone Age in which the economy goes underground and switches to barter.

    Haven’t you all heard the expression: “if it sounds too good to be true, it probably is”?

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