Bill Gross: America’s debt is not its biggest problem(washingtonpost.com)
washingtonpost.com
Bill Gross: America’s debt is not its biggest problem
http://www.washingtonpost.com/opinions/americas-debt-is-not-its-biggest-problem/2011/08/10/gIQAgYvE7I_story.html
4 comments
'Deficits dont matter' is a huge strawman. No where in the article does it imply this, it suggests that the government can mobilise resources and increase demand. In other words, it can organise people to produce more instead of sitting around, and use the surplus of that production to pay off who they owe. Having people sit around is bad, and adding to those people is worse. The government can get them to do something and that adds to the economy.
Also, you used the example of Greece or Italy. I assume you put Spain in the same category, so its interesting to note that Spain was running a surplus in the years leading up to the crisis.
Budget deficits are not the be all-end all of government finance. Deficits matter, but relative to other metrics.
Also, you used the example of Greece or Italy. I assume you put Spain in the same category, so its interesting to note that Spain was running a surplus in the years leading up to the crisis.
Budget deficits are not the be all-end all of government finance. Deficits matter, but relative to other metrics.
Your questions are neatly answered by Modern Monetary Theory, see e.g. the overview here: http://pragcap.com/resources/understanding-modern-monetary-s...
If deficits don't matter, then why isn't the government borrowing money and just paying for everything that its citizens desire? Why tax at all? Why not send >us< money?
The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation.
So taxation is necessary to take spending power away from private citizens and enterprises, to open up supply capacities that the government can then buy with its own spending, to fulfill whatever mandates are given to it, hopefully via a democratic process.
This is the obvious part. The more interesting question is: How much taxation is needed?
The answer to that is more subtle, but the key observation is that when private citizens and enterprises voluntarily refrain from using all their spending power, e.g. by paying down debt, saving, or simply hoarding cash (all of these things are happening these days), then obviously the amount of money removed from the private sector via taxation should be less than the amount of money that the government gives to the private sector via spending.
In fact, MMT economists argue that in the current situation, the budget deficit actually needs to become larger if the unemployment problem is to be resolved.
Finally, MMT tells you that the cases of the Italian and Greek governments are fundamentally different from the case of the US federal government.
It is clear that the US federal government will always be capable of paying back its debt, because it is the currency issuer of the US$, and its debts are only denominated in US$ (so the fact that almost a third of the debts are held by foreign owners is irrelevant). The only possibility is that the government might become unwilling to pay back its debt, but since congress is full of rich people who own a lot of government bonds, that scenario is quite unlikely.
This is very different from Italy and Greece, both of which do not have their own currency. Their governments are currency users like you and me, and they can become incapable of paying back their debt.
If deficits don't matter, then why isn't the government borrowing money and just paying for everything that its citizens desire? Why tax at all? Why not send >us< money?
The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation.
So taxation is necessary to take spending power away from private citizens and enterprises, to open up supply capacities that the government can then buy with its own spending, to fulfill whatever mandates are given to it, hopefully via a democratic process.
This is the obvious part. The more interesting question is: How much taxation is needed?
The answer to that is more subtle, but the key observation is that when private citizens and enterprises voluntarily refrain from using all their spending power, e.g. by paying down debt, saving, or simply hoarding cash (all of these things are happening these days), then obviously the amount of money removed from the private sector via taxation should be less than the amount of money that the government gives to the private sector via spending.
In fact, MMT economists argue that in the current situation, the budget deficit actually needs to become larger if the unemployment problem is to be resolved.
Finally, MMT tells you that the cases of the Italian and Greek governments are fundamentally different from the case of the US federal government.
It is clear that the US federal government will always be capable of paying back its debt, because it is the currency issuer of the US$, and its debts are only denominated in US$ (so the fact that almost a third of the debts are held by foreign owners is irrelevant). The only possibility is that the government might become unwilling to pay back its debt, but since congress is full of rich people who own a lot of government bonds, that scenario is quite unlikely.
This is very different from Italy and Greece, both of which do not have their own currency. Their governments are currency users like you and me, and they can become incapable of paying back their debt.
"The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation."
In other words, deficits [can] matter. Where do you think we are right now?
In other words, deficits [can] matter. Where do you think we are right now?
Where do you think we are right now?
You mean with respect to the size of the deficit? I think additional spending targeted at direct job creation would be a good thing. Even more so if the jobs created go towards improving the future economic capacity of the country, e.g. by improving schools, making the country more self-sufficient in terms of energy, think solar plants in southern states combined with updates to the electrical grids and storage capabilities, things like that.
Actually, many MMT economists also argue in favor of a Job Guarantee, i.e. a government program that ensures full employment simply by providing such WPA-like jobs at a minimum wage. The theory is that such a program can never be inflationary. At least the kind of inflation that is caused by bidding for higher prices cannot happen since the wages in a Job Guarantee are fixed by legislation.
You mean with respect to the size of the deficit? I think additional spending targeted at direct job creation would be a good thing. Even more so if the jobs created go towards improving the future economic capacity of the country, e.g. by improving schools, making the country more self-sufficient in terms of energy, think solar plants in southern states combined with updates to the electrical grids and storage capabilities, things like that.
Actually, many MMT economists also argue in favor of a Job Guarantee, i.e. a government program that ensures full employment simply by providing such WPA-like jobs at a minimum wage. The theory is that such a program can never be inflationary. At least the kind of inflation that is caused by bidding for higher prices cannot happen since the wages in a Job Guarantee are fixed by legislation.
He's right. Balancing a budget once, while already neck deep in debt won't fix all the problems, but accelerating jobs and consumption, in such a way that creates more profits, would eventually help balance the budget and put the economy back on track.
The president and Congress must recognize that an AA-plus country, to remain AA-plus, must focus on growth, not debt reduction, in the short term.
+1
I tweeted this a month ago: Dear America: A lack of growth, NOT spending caused your debt problem. Please Fix ASAP KTHX.[1]
That's a little simplistic (the joys of 140 chars). Of course spending caused problems, but it wasn't spending alone - it was spending combined with a lack of growth (and indeed negative growth at times).
What is more (and isn't explicitly called out in this article) is that economic growth can go a huge way to fixing the debt problem.
Growth->lower unemployment->less spending on welfare
Growth->higher tax receipts->increased debt repayment
[1] http://twitter.com/#!/nlothian/status/94266497513426944
+1
I tweeted this a month ago: Dear America: A lack of growth, NOT spending caused your debt problem. Please Fix ASAP KTHX.[1]
That's a little simplistic (the joys of 140 chars). Of course spending caused problems, but it wasn't spending alone - it was spending combined with a lack of growth (and indeed negative growth at times).
What is more (and isn't explicitly called out in this article) is that economic growth can go a huge way to fixing the debt problem.
Growth->lower unemployment->less spending on welfare
Growth->higher tax receipts->increased debt repayment
[1] http://twitter.com/#!/nlothian/status/94266497513426944
To a certain extent debt is the problem. If the US and other Governments didn't have so much debt when the shit hit the fan in 2008 then they would have had more means to deal with the growth issues. US public debt is 100% debt to GDP, so there isn't a whole lot of room to move.
Empirically, the case of Japan contradicts your claim that there isn't a whole lot of room to move. To remind you, Japan has long at close to and above a 200% debt-to-GDP ratio without any financing difficulty in sight.
The underlying reason for that is plain and simple: both the Japanese and the US governments are currency issuers. By definition, they are able to spend as much money in their respective currencies as they like. In that sense, they always have an infinite amount of room to move.
The only question can therefore be: How much of this maneuvering room should be used?
The answer to that question does not lie in financial data alone, but must take into account the state of the economy at large and whether additional spending might hit an inflation barrier. In the current situation, spending directed towards job-creation is unlikely to hit such a barrier, while handing out more money to the rich could drive speculation on resource markets (the money will be "invested" somewhere, after all) that can cause price increases and thus inflation.
The underlying reason for that is plain and simple: both the Japanese and the US governments are currency issuers. By definition, they are able to spend as much money in their respective currencies as they like. In that sense, they always have an infinite amount of room to move.
The only question can therefore be: How much of this maneuvering room should be used?
The answer to that question does not lie in financial data alone, but must take into account the state of the economy at large and whether additional spending might hit an inflation barrier. In the current situation, spending directed towards job-creation is unlikely to hit such a barrier, while handing out more money to the rich could drive speculation on resource markets (the money will be "invested" somewhere, after all) that can cause price increases and thus inflation.
It's a fascinating situation. I don't claim to know the answer or how much debt is viable. I do agree that the US isn't in the same basket as other debt-laden countries. They are an exception -- but for how long... I don't know.
I think there is a ceiling -- and I'm not talking about the official debt ceiling -- of debt. Is it 100% debt to GDP? 200%? 300%? It's somewhere. There's a point at which it just isn't possible to repay the money.
I think there is a ceiling -- and I'm not talking about the official debt ceiling -- of debt. Is it 100% debt to GDP? 200%? 300%? It's somewhere. There's a point at which it just isn't possible to repay the money.
Sorry for repeating myself, but the US government will always be able to repay the money.
They are the ones who maintain the authoritative databases that contain the information about how many reserves the commercial banks have and who owns the debt. The only obligation associated with repaying the debt is to change an entry in the debt database, and do a corresponding change to an entry in the reserves database. Since the government maintains these databases, they will always be able to do that.
There are a number of problematic things that might happen in the future. For example, if all the owners of the debt suddenly decided to go on a spending spree, then they might cause some (heightened, but non-hyper) inflation if the economy simply isn't able to produce enough real goods and services to fulfill the increased demand. Then politics has a choice of either weathering the inflation or raising taxes to fight it, and there might be other tough choices of equity and social justice involved.
But the ability to repay the money simply cannot be an issue, and nobody can accurately predict whether any of those other problems will ever happen.
They are the ones who maintain the authoritative databases that contain the information about how many reserves the commercial banks have and who owns the debt. The only obligation associated with repaying the debt is to change an entry in the debt database, and do a corresponding change to an entry in the reserves database. Since the government maintains these databases, they will always be able to do that.
There are a number of problematic things that might happen in the future. For example, if all the owners of the debt suddenly decided to go on a spending spree, then they might cause some (heightened, but non-hyper) inflation if the economy simply isn't able to produce enough real goods and services to fulfill the increased demand. Then politics has a choice of either weathering the inflation or raising taxes to fight it, and there might be other tough choices of equity and social justice involved.
But the ability to repay the money simply cannot be an issue, and nobody can accurately predict whether any of those other problems will ever happen.
It was a poor choice of words on my end.
I take your point that America will always be technically able to print money in order to pay back the debt.
But wouldn't printing that amount of money destroy the value of the US dollar? Causing all sorts of other issues?
I take your point that America will always be technically able to print money in order to pay back the debt.
But wouldn't printing that amount of money destroy the value of the US dollar? Causing all sorts of other issues?
I see now what you meant.
I think it depends entirely on how and why the debt is paid back. We probably agree that the act of paying back the principal of some bond cannot have an inflationary effect if the owner of that bond just uses the money to buy the next bond, so it's not the act of printing the money itself that causes inflation.
If they use the money to buy other things then this might cause inflation if it happens at a large scale, say the hypothetical spending spree that I wrote about in the parent post.
The thing is, since it is pretty much impossible to predict when and how such an event is going to happen, and the best remedy likely depends on that knowledge, it seems unwise to me to cause damage to the economy right now in a (probably ultimately futile) attempt to prevent such events from happening in the first place.
It seems even more unwise to cause such damage since such an event may never happen anyway. After all, it is actually very rare for a government to (net!) pay back part of its debt, and paying back all debt is almost unheard of. Except for the rare times of government surpluses, the US government has never actually net paid back its debt over quite a long history by now, and I see no reason why that should change in the future.
After all, there is significant evidence that government surpluses cause recessions: http://www.newdeal20.org/2010/02/10/the-federal-budget-is-no...
I think it depends entirely on how and why the debt is paid back. We probably agree that the act of paying back the principal of some bond cannot have an inflationary effect if the owner of that bond just uses the money to buy the next bond, so it's not the act of printing the money itself that causes inflation.
If they use the money to buy other things then this might cause inflation if it happens at a large scale, say the hypothetical spending spree that I wrote about in the parent post.
The thing is, since it is pretty much impossible to predict when and how such an event is going to happen, and the best remedy likely depends on that knowledge, it seems unwise to me to cause damage to the economy right now in a (probably ultimately futile) attempt to prevent such events from happening in the first place.
It seems even more unwise to cause such damage since such an event may never happen anyway. After all, it is actually very rare for a government to (net!) pay back part of its debt, and paying back all debt is almost unheard of. Except for the rare times of government surpluses, the US government has never actually net paid back its debt over quite a long history by now, and I see no reason why that should change in the future.
After all, there is significant evidence that government surpluses cause recessions: http://www.newdeal20.org/2010/02/10/the-federal-budget-is-no...
based on the downvotes, I guess my logic must be highly faulty..
No. You're exactly correct. Wrote a comment, directly related, on Google+ the other day in this thread: https://plus.google.com/107033731246200681024/posts/LHVVz5e3...
Here it is (can't figure out how to link directly to a comment):
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I sort of blame this on shoddy journalism. There is actually broad bi-partisan consensus from economists and business on what policy steps need to be taken.
There is an important ratio that is largely being ignored:
Debt-to-GDP
Planet Money probably does a better job of explaining sovereign debt to GDP ratios in this recent podcast: http://www.npr.org/blogs/money/2011/07/20/138518262/the-tues...
Here it is (can't figure out how to link directly to a comment):
--------------------------------------------------------------
I sort of blame this on shoddy journalism. There is actually broad bi-partisan consensus from economists and business on what policy steps need to be taken.
There is an important ratio that is largely being ignored:
Debt-to-GDP
~ This is a fundamental measurement for determining credit risk.
~ Economists agree this ratio will grow too high in the future.
~ Economists agree we must spark GDP growth in the present.
~ There are two ways to improve this ratio:
(i) Shrink the debt (cut spending &/or raise taxes)
(ii) Grow GDP (invest in economy &/or cut redtape for business)
Planet Money probably does a better job of explaining sovereign debt to GDP ratios in this recent podcast: http://www.npr.org/blogs/money/2011/07/20/138518262/the-tues...
I do not claim to know if this thesis is true or false, but I do know that it is a very convenient thing for inside-the-beltway types to believe.
Deficits matter. They just matter in ways more complicated than we are used to, if you have the borrowing power of a first world nation behind you. Or rather, they don't matter until they do. Ask Greece or Italy. Or check the rate of return on Greek treasury bills.
Growth is not the answer. Building your society on the concept of perpetual, unceasing, unpausing growth - that's the problem. The mentality of people who's only solution to financial incompetence, graft, greed and waste is 'throw some more furniture on the fire' - that's the problem.