Who Understands Debt?

January 3, 2012 · Posted in General Economics · 1 Comment

I’ll be commenting on the following statements, posted by a writer on the New York Times in a blog post titled Nobody Understands Debt:

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.

And that’s why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.

So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.

But the government HAS been running deficits!

This just as a sidenote:

Actually the US government is, has been, and is planning to continue to be running record deficits above $1 trillion:

The total public debt has more than tripled since 2000!

So technically, according to this guy it should all be good, right?

Any serious scientist proposes a null hypothesis.

What’s his null hypothesis?

How much longer should the government follow his policy recommendations before he’ll stop and wonder if
maybe they are aggravating and prolonging the economic crisis in the US?

How much did all this debt help rid the US of unemployment? Didn’t unemployment rather rise alongside the debt? In spite of corroborating data like that, I’m not even claiming that there necessarily is a direct correlation. But the author above obviously claims that there is a correlation in the other direction. If he thinks so, wouldn’t it make sense to have a curious and open discussion about such contradicting data, if he were serious in his pursuit of the truth?

Is it not at least reasonable food for thought to propose the that the public debt doesn’t seem to be a cure against unemployment, that maybe the problem needs to be tackled elsewhere?

Anyway …

What are the problems with the public debt?

The author conveniently picks all the wrong amateur arguments against the public debt to shoot down, and ignores the accurate ones.

The problem with the public debt as I see it, is that, even if “we” were completely indebted to “ourselves” (note the grade A sophistry in such imprecise analyses), the working population is over time more and more on the hook to rich investors and politically connected bankers who just lean back and let the IRS collect for them.

While there may be some small retirees receiving interest payments (which is also unfair because those young people who will be funding their retirement never had any say in the matter), there is a significantly larger percentage of foreign and domestic big time investors who get to collect from people who never had a say in the debt they now need to pay off.

Just look at the Federal Reserve as one example. What do you think happens with all the revenue they earn from interest payments?

People like this author here will likely tell you “It’s all good because it’s all paid back to the Treasury”.

Well, that’s just pure and lazy sophistry!

What’s paid back to the Treasury is the Fed’s PROFIT, which is a more or less negligible sum after all the Fed’s board members, employees, contractors, partners in holding companies held by the Fed, and shareholders have been paid off.

Guess who the Fed’s shareholders are? It’s the big national banks, receiving a handsome preferred dividend every year.

And yes, they can rollover debt for as long as interest rates are low. I may note that I have consistently and correctly predicted record low Treasury rates for years to come. (Just by the by: I don’t know that the author above has ever made such a prediction, except when rates were already way low which doesn’t make it a prediction since it’s already happened. In fact he actually predicted sky rocketing rates and complete fiscal doom back in 2003 with the public debt at a third of today’s level, but then … it’s not like I ever expect consistency and sound methodology from biased academics on either side of the political aisle.)

All these low rates will do is allow the debt to get even more bloated. And interest rates won’t remain low forever, as you can see in Greece and similar situations. Did people like the above author see any of those sovereign debt crises coming?

What about Japan? Their debt is the most crushing of all industrialized nations, and I’m predicting that their time of low rates will be drawing to an end any day now, with their debt and pension crisis having entered its final stage. Then what?

They have been running deficits for two decades, people like this author ought to love what they did. Now what? … All you’ll hear is chirping crickets.

And then for someone like that to go on public record and say “Nobody understands debt.” – It’s embarrassing!

It’s the same old tired Keynesian paradigm: Debts don’t matter … until they do. And then it’ll most likely be too late.

Of course people like the above author may say: “But it’s just the rich who’re supposed to get taxed to pay off the debts.”

Yeah right, the rich people who bribe all the politicians in charge will let that happen, that’s the way of the world in the hazy deluded minds of state tenured academics … get real people!

For a more detailed analysis, read my post What’s the Problem With Government Budget Deficits?, I’ll just post its conclusion here:

As I explained, the ultimate damage caused by public budget deficits occurs at that point in time when taxpayers are forced to restrict their consumption and unjustly bear the cost of malinvestments from the past.

Ironically, when you look at the political stage, all you will hear in regards to “solutions” to deficits in the end, will for the most part be tax hikes. These are not solutions. They are the ultimate manifestation of the very problem at hand. They are, in fact, the precise opposite of a solution. Keep this in mind whenever you hear politicians talk about deficit solutions. Raising taxes to reduce deficits is absolutely and 100% an admission that one has completely failed to solve this deficit problem, and in fact laid the final brick that was missing in the very process of the public’s depredation via deficit spending.

A real solution would of course be to make investors suffer the consequences of their unproductive investments, default on the public debt, stop stealing money from people, and allow for voluntaryism to take the place of interventionism.

Tags: krugman, paul krugman, public debt, public debts

Chinese Government Determined to Let Housing Prices Fall

December 15, 2011 · Posted in General Economics · Comment

China’s massive real estate bust has only just begun to unravel.

In light of that, it’s interesting to see the Chinese leadership take the exact opposite view to the US government’s regarding housing prices:

China’s leaders affirmed they will stick next year with a campaign to bring down property prices even as a “very grim” global outlook threatens growth in the second-largest economy.

The nation will target “basically stable” consumer prices and “unswervingly” implement real-estate curbs, according to a statement after an annual economic planning meeting in Beijing. At the same time, officials will seek “steady and relatively fast growth,” Xinhua News Agency said.

Premier Wen Jiabao’s officials may limit the scale of monetary and fiscal easing to support growth as officials grapple with elevated house prices and local-government debt burdens after record lending in 2009 and 2010. So far, the government has cut banks’ reserve requirements, while leaving interest-rates unchanged at a three-year high.

I don’t think I’ve heard a single US politician in any position of power even hint at the idea that maybe it’s not only desirable but necessary for home prices to come down in order for any meaningful recovery to begin.

The respect for concept prices as a steering and balancing indicator for entrepreneurs and capitalists in an economic system is one of the most basic pillars for understanding the economics of voluntary action, that is free market capitalism.

It’s a bit misleading for the Chinese leadership to say they are going to “bring down” property prices. Property prices are going to come down no matter what they do, the question is just how fast.

It’s possible the the Chinese have learned from the recent attempts of the US and European governments to support or stimulate housing prices and the not so recent ones next door in Japan, and figured if prices are going to come down anyway why not take credit for falling prices and even make it look like it’s them making this happen deliberately?

Tags: china, china housing bust, china property bubble, housing, real estate china

The Fed’s Secret Loans, Europe’s Crisis, and the Boring Patterns of Statist Propaganda

November 29, 2011 · Posted in General Economics · Comment

In response to recently published information about the Fed’s emergency loans, Bloomberg’s Felix Salmon was promptly ready to perpetrate this piece of grade A scumbaggery:

Ladies and Gentlemen, this is what a lender of last resort looks like. What you’re looking at here are three lines. The black line is Morgan Stanley’s market capitalization, which tends to hover in the $40 billion range but which fell as low as $9.8 billion in November 2008. The orange line is the amount that Morgan Stanley owed to the Federal Reserve on any given day — an amount which peaked at $107 billion on September 29, 2008. And the red line is the ratio between the two: Morgan Stanley’s debt to the Federal Reserve, expressed as a percentage of its market value.That ratio, it turns out, peaked at some point in October, at somewhere north of 750%.

Many congratulations are due to Bloomberg, for extracting this information from the Fed after a long and arduous fight. It couldn’t have come at a timelier moment: if the ECB wants to avert a liquidity crisis, charts like this give a sobering indication of just how far it might have to go, and how quickly it might have to act.

The Euromess has everything to do with the fact that the ECB exists in the first place, and the fact that it enabled irresponsible bureaucrats to hide behind relatively responsible ones and borrow beyond their respective taxpayers’ means.

Almost 3 years ago I already said that if European government bureaucrats don’t quit the centralization of power which enables the above, things would only get worse and worse.

Then about 2 years ago I wrote:

The truth is very simple: The best that can be done for the people of Greece is to not provide one cent of assistance to its corrupt, bloated, and union-controlled government apparatus. A country’s bailout is like a corporate bailout, only many times worse! From this logically follows that the absolute worst Europe could do to the people of Greece would be to give their rulers any more means to continue their irresponsible policies.

The European Currency Union and the European Union itself are both such gigantic failures that it is already pre-ordained that the entire experiment will go down in flames sooner or later. Now is certainly not that time yet. What we are seeing are just a few more cracks emerging in the structure of the system. The European bureaucrats will come up with some sort of pseudo solution to paper over and patch the Greek problem for now.

Even if the Greek government were saved to the detriment of the people it tyrannizes, this won’t be the last time we’ll be having this discussion, and it sure as hell won’t get any better!

We’re having that discussion again now, and the time has run out for patchwork and pseudo solutions. The system is going down as predicted.

To say that the Euromess is caused by a lack of even more ECB intervention is to say that the heroin addict’s withdrawal pains are to be imputed upon a lack of an increase in his dosage.

I think that’s pretty lazy and irresponsible stuff to put out there and it genuinely hurts reading it.

Wouldn’t it make sense at some point to stop and think a little more carefully and precisely about the things we say in public discourse?

Bank of England governor King pointed out a few weeks ago: “This phrase ‘lender of last resort’ has been bandied around by people who, it seems to me, have no idea what lender of last resort actually means, to be perfectly honest. It is very clear from its origin that lender of last resort by a central bank is intended to be lending to individual banking institutions and to institutions that are clearly regarded as solvent. And it is done against good collateral, and at a penalty rate. That’s what lender of last resort means.”

And about the Fed having solved any problems in the US … are you going to say the same thing when the public debt burden, subsidized by QE1,2,3,4,5…, will have reached an amount where the government’s automatic spending cuts start to kick in and begin to impoverish more and more of the millions of people who have been made dependent upon government handouts?

Or better yet, are people going to be asking for the Fed and government to step in, grab more power, and regulate all these banks’ irresponsible speculation binges, because for some inexplicable, magical reason they don’t seem to have much of an incentive to conduct business prudently, to pay themselves reasonable salaries, or to lend responsibly, and not, say … invest in Greek bonds for example?

The pattern is simple and boring: Keynesian and other statist clowns out there will continue doing what they’re paid for. They will support one stupid ass government spending and expansion program after another, applaud one newly created government institution after another, be completely incapable of predicting the long term effects of those unsustainable policies, ignore or even ridicule those who are capable, and then when the inevitable crisis hits they will boldly “predict” that a tragic crisis is going to hit, should all those unsustainable programs not be sustained.

This is truly embarrassing to watch.

But at the same time it’s encouraging to see other people around the world wake up to the truth, and ditch the repetitive dronings and platitudes of entitled and state tenured ivory tower academics whose cumulative output will supply plenty of instructive and awe-inspiring entertainment for future generations.

Tags: ecb, europe, european central bank, federal reserve bank, keynesian, lender of last resort

Economics 101 – Part 1: The Scope of Economics

November 25, 2011 · Posted in General Economics · Comment

I recently started a recorded learning series where I read out and comment on some of the concepts that I work with here. This is the first part, titled “The Scope of Economics”:

Praxeology:

Economics:

Context (Economics, Human Action, Praxeology, Ethics, and History):

Tags: ethics, General Economics, History, Praxeology, the scope of economics

Commodities Bubble: US Warehouses Overloaded With Metals

November 17, 2011 · Posted in General Economics · Comment

Signs abound that the global commodities bubble, fueled by money and credit creation on the part of the world’s governments, is coming to a dramatic end.

NOLA.com writes Local warehouse space is bursting with stored metals:

Long-vacant New Orleans warehouses are bursting with metals such as copper, lead, aluminum and zinc as manufacturing slows down with the economy. The stockpiles that are accumulating are good news for owners of local warehouses, but the trend has touched off a rare scramble for specialized warehouses in certain parts of the metro area.

(…)

Kevin Kelly, owner of Port Cargo Service, a metals warehousing business, said it may take years to run down supplies. He says the city is running out of suitable warehouse space.

“We’re probably close to 98 percent occupancy, which is the best ever,” Kelly said. “I’m considering buying property and building warehouses if I can find good land to build it on.”

With industrial demand slowing down so rapidly, and with the Chinese real estate and government credit fueled malinvestment bubbles coming unglued, industrial and agricultural commodities are in for a well deserved carnage.

To be sure, gold is not an industrial commodity. :)

Tags: alumium, commodities, commodity bubble, commodity crash, copper, lead, metals, zinc

Politics – A Definition

November 14, 2011 · Posted in General Economics · Comment

Politics is the process of planning, organizing, and implementing the means necessary to initiate threats and acts of aggression on an ongoing basis.

Tags: definition, Politics

Debate: Hoover, Wars, Municipalities & The Great Depression

November 9, 2011 · Posted in General Economics · Comment

Here is a little back and forth on the matter of Hoover, Wars, and The Great Depression.

First my original clip:

Here a Youtuber’s response:

And my response to the response:

Tags: herbert hoover, hoover, ohio, the great depression, youngstown

Occupy Congress, Forget Wall Street

October 18, 2011 · Posted in General Economics · Comment

Very intelligent and prescient observations from John Mauldin:

Tags: john mauldin, occupy wall street

US Poverty Rate Rises to 15.1 Percent

September 14, 2011 · Posted in General Economics · Comment

The US Census has published its report Income, Poverty, and Health Insurance Coverage in the United States: 2010.

Here is the historical chart:

Interesting highlights from the report:

The official poverty rate in 2010 was 15.1 percent—up from 14.3 percent in 2009. This was the third consecutive annual increase in the poverty rate. Since 2007, the poverty rate has increased by 2.6 percentage points, from 12.5 percent
to 15.1 percent

In 2010, 46.2 million people were in poverty, up from 43.6 million in 2009—the fourth consecutive annual increase in the number of people in poverty.

The poverty rate in 2010 (15.1 percent) was the highest poverty rate since 1993 but was 7.3 percentage points lower than the poverty rate in 1959, the first year for which poverty estimates are available.

I also found it interesting that by age group the poverty rate is lowest (9%) for people 65 years and older, the only age range for whom the poverty rate has fallen almost consistently since 1959:

For more historical and economical context see US Poverty Rate – How the Great Society Programs Reversed its Decline

Tags: poverty, poverty rate, us poverty rate

Eurozone Breakup Inevitable?

September 10, 2011 · Posted in General Economics · Comment

Mish writes in Europe Out of Time; Differences Impossible to Untangle; Merkel’s Mind is Fried; Eurozone Breakup Inevitable; “Let the Euro Die”:

Is the Euro Worth Saving?

Regardless of what you or I may think, that question is where European voters come in. From that standpoint it does not look pretty.

German Chancellor Merkel, Spanish Prime Minister Zapatero, Italian Prime Minister Berlusconi, and Greek President George Papandreou will all be gone after the next set of elections.

French President Nicholas Sarkozy may bite the dust as well, and if he does it may be to a vehemently anti-Euro candidate.

All it takes is one government to say “to hell with this” and the whole mess unravels.

The current set of politicians all want to “save the Euro”. But what did the Euro buy Greece, Ireland, Spain, or Portugal except misery?

Even German and Finland voters wonder what it bought them.

Eurozone Breakup Inevitable

Merkel’s half-baked proposal raises more questions than answers. The market (and voters) will not possibly wait for details of her proposal to get hashed out. If this is the best Merkel can come up with, a Eurozone breakup is inevitable.

I think that a complete political breakdown of the European Union would be the best thing that could happen to Europeans. Ditch all European political institutions, but maintain the free mobility of persons, capital, and goods across countries, really the only positive aspect of the Eurozone project. Oh, and you want one unified currency that actually works? I know I’ve been saying this over and over again, but … how about a gold standard? Anyone?

Tags: euro breakup, europe, european union, eurozone