Saturday, August 21, 2010
How do you reduce the national debt and is it desirable?
Let's face it, the only way to lower the national debt is by reducing the non-governmental sector's net financial balance. Why this is desirable I have no idea. Sectoral balances must equate to zero as a matter of accounting. If the gov't runs a deficit of $1 trillion the non-government (domestic plus Rest of World) runs a $1 trillion surplus. It is much more desirable, in my opinion, for the sovereign currency issuer to run a deficit than the private sector. We tried the latter and it didn't work out so well.
Republicans propose tax cuts combined with spending cuts, however, that combination adds no new net financial assets. It merely redistributes income. (You're giving money to some and taking money away from others.) Moreover, taxes do not fund spending under a regime of floating FX/non-convertibility. Taxes merely function to regulate demand.
The idea of raising taxes to "fix" the deficit and/or provide funds for the government to spend ignores the operational realities of the current monetary system where spending is not constrained (only politically, perhaps). Gov't "debt" is an asset of the non-gov't. Reducing gov't debt reduces the non-government's wealth, by definition.
Let's get real about this!
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21 comments:
Mike Norman’s first sentence is debatable – “Let's face it, the only way to lower the national debt is by reducing the non-governmental sector's net financial balance.”
Actually the national debt COULD be substantially reduced while leaving the non-governmental sector’s net financial balance more or less untouched simply by printing money and buying back the debt - i.e. by quantitatively easing Treasuries. (This assumes one does not count money as national debt.)
Would this be inflationary? Well, we’ve had a huge amount of QE, while the effect has been disappointing. Mish calls it “quantitative nothingness”. (QE in the U.K. involved just national debt, while in the U.S. it involve primarily commercial bonds.)
One reason for the small effect is that owners of Treasuries regard the latter as SAVINGS. If that chunk of their wealth is converted to cash, they’ll still regard the chunk primarily as savings: they won’t run out and spend much of it, i.e. there’ll be little stimulatory or inflationary effect.
However, there WOULD be a FINITE stimulatory effect. If this proved inflationary, the remedy is to mix the above inflationary national debt reduction system with a deflationary one: raise taxes and use the money to buy back national debt. Hey presto: you have a national debt buy back system that is neutral – neither inflationary nor deflationary.
Mike,
I'm glad you have made this point about government spending and debt. Of course it only benefits us by controlling demand.
These ignorant deficit hawks will keep us with a low-simmering economy at best for years to come, if not a deflationary recession.
And either way, the decifit situation's not necessarily helped and it's probably hurt. Would these idiot deficit hawks rather buy the debt of a government with superior economic growth and a larger debt, or a sinking economy with no immediate prospects for recovery and still possibly rising debt, in terms of GDP?
This isn't a fair question, because these idiots want the latter.
Scottie,
Peter Schiff does not understand macroeconomics and any losses investors took in '07 due to the real estate projection you mention were vastly exceeded by those of Schiff's clients in '08 and early '09.
Schiff believed in decoupling, even though the US is responsible for around a quarter of aggregate demand. That's prima facie stupid and you must be very ignorant if you're defending that.
Musgrave,
We actually need inflation now.
Mike: I don’t like the phrase “we need inflation”. I’d put it differently – something like “with inflation at near record lows, the U.S. can perfectly well afford more stimulus”. That’s the REAL reason there is scope for buying back some national debt.
I’ve had second thoughts about the OTHER reasons I gave above for the buy back. In fact I think I was talking bo**ocks. Sorry.
The question isn't whether national debt reduction is desirable but rather who profits from it. Low interest rates, very low inflation, reduced consumption and slower growth rates would appeal to some...
@MikeSandifer
why do you anti-Schiff types always talk about these "losses from 08/09" without ever mentioning that all those losses have not only reversed but made massive gains since? this is a very dishonest approach, but understandable I suppose, as its all you have.
everything crashed, some stuff recovered, how's that real estate working out for you by comparison?
& it still hasnt bottomed yet, there's a long way down to go yet.
Schiff not only understands macroeconomics, he clearly has a clearer grasp of the fundamentals than any of you, time will once again prove him utterly correct, but as always timing itself is difficult to predict.
@Musgrave:
Yes, this is called growth, but let me correct you on a few things. First, we don't "print money." Money is digital.
Second, nominal growth in money and/or the economy doesn't lower the debt, you need real growth. That means the production of the real assets that comprise wealth and a higher standard of living. If those investments were made--via more digital money--then, yes, the debt would shrink.
Schiff nailed the crash in the housing market very right, but Mike is right that he was ultimately very wrong in his calls for a sell off in the dollar and that the Asian markets would hold up while only the U.S. would sell off. Schiff may end up being right about inflation (he was very right about buying gold, although gold and mining stocks have lagged in many cases...but this also happened at the beginning of the 30's only to see huge gains in gold stocks while the market languished) Don't listen to the nitwits on this site who do nothing but bash Schiff, for ultimately he was dead on about the problems in the housing market. (and Norman was tragically wrong and would have cost you a fortune if you'd listened to him and you'd be sitting on a house that you still can't sell that is going to sell off even more in the next 2 years) But don't let Schiff pat himself on the back and call himself the master of the universe b/c he got many of the things that happened after the fallout wrong. Try to gather all available information (yes, even from this site) and make your own decisions.
Eric, the average reader of this site is highly informed on modern macro-economics whereas the average Schiff follower is not because Schiff himself is not. So how can you ask us to listen to a Schiff when he doesn't understand the basic principles of modern money. For example, Schiff can't define what the term print money actually means.
bubble,
I agree that the people on this site are aware of modern Keynsian theory. Schiff adheres to Austrian economics and their theory of the business cycle. He (like all Austrians) believes that commodity backed money whose supply is not manipulatible by centralized forces is far superior to modern central banking. (who fail consistently and miserably at their mandate or in the case of the Federal Reserve dual mandate of full employment and stable prices) I'm hardly a discple of Schiff, (I do, however, believe that the Austrians are a lot closer to the answer than the Keynsians...who have now been more or less in control for 80 years and brought us nothing but deficits, inflation and nearly endless war), but how you can follow this clown Mike Norman is honestly beyond me. You can tell me that you're educated in modern money the same way that Sarah Palin can tell me that she's educated in modern creationist theory. Truth be told, I don't care. If the theory is wrong, why should I care how well you're versed in it?
Eric,
While I think fiscal stimulus can create inflation that can get us out of subpar growth, it is inferior in my mind to monetary stimulus. This is because the latter not only increases money velocity in the first place, but does so while actually decreasing federal debt and seems to have a more straightforward and immediate transmission mechanism, given relatively simplicity and immediacy of results. Some economists are concerned about the effecitiveness of montary policy near the zero bound, but it's widely thought problems like this can be overcome with inflation or nGDP targeting, and/or QE.
However, if fiscal stimulus is all we have, we should use it and worry about the deficit and debt later. The costs will nearly certainly be lower than people like Schiff contend, as the debt percentage of GDP may increase only slightly, if not decrease with rising GDP.
Of course, we should also realize that deficit spending can fund real assets, such as infrastucture, that can help the economy grow later.
So, this fixation with Keynes is very mispaced, as most economists are in larger measure monetarists, except at the zero rate bound. Keynes was the latter.
To move on to your other points, I see no relationship between following Keynes and supporting wars. There simply is no link I can see of any kind and supply-siders and monetarists have certainly supported wars too. Was Barry Goldwater a Keynesian? Didn't Keynesians like Paul Krugman, Stiglitz, etc. oppose invading Iraq?
On debt, largest peacetime deficits were brought on by Reagan, at least before the current mess, and I don't see what Keynesianism had to do with the tech or housing booms. And Keynes believed in running surpluses during full-employment to pay off recessionary debt, so you frankly don't seem to know what you're talking about.
And inflation's been very low since Keynes published his General Theory in '36, so I have no idea what metrics you're using.
I don't think you know what Keynesiaism is. Have you even read Keynes?
Mike,
I've only read the "General Theory" but if you've got another book to suggest, of course I'll give it a look. And who cares if inflation has been low since 1936? Inflation has existed since the creation of the central bank, and it didn't exist prior (with the exception of times of war when the U.S. would go off a commodity standard and print things like Continentals during the Civil War). In a healthy and strong economy it is normal for prices to slowly drop as the economy becomes more robust and productive (check out www.westegg.com/inflation/ and type in a price from 1800 and see how much lower it is in 1913). As people begin to produce more, and the money stock remains largely constant (or likely increases very slowly with new discoveries of gold/silver), prices will lower. And who cares if Keynsian economists are in favor of war or not? Whether or not they like the wars, it is their policies of endless money creation and credit expansion which allows primary dealers to buy up treasuries which help the federal gov't run astronomical deficits which they use to fund wars. And since 1971 when we finally lost our last link to commodity money, we've been at nearly endless war. This is no different from how other empires (Romans, etc) eventually fell. They expand their military empire to a point where they can no longer fund the war and projects at home which eventually lead to huge deficits, monetary debasement, inflation, etc. We're headed down the same path. History may not repeat itself, but it does rhyme. What continually surprises me is that people try and explain why it is going to be different this time, or why I just don't understand or get what's really going on. Maybe you're right. Maybe this is some new paradigm and all we need to continue the party is continual expansion of the monetary base and increased credit expansion to fund more government ditch digging projects and more overseas bases and foreign aid to tyrannical dictators. But I don't think I'm wrong, I just think it'll be another couple of years before I'm (sadly) proven correct. For the record, I'd love to be wrong. I want desperately to be wrong. And you should read Hayek.
Eric,
On your first claim about inflation before the establishment of the Fed, yes it may have only been about .1% on averate, but that hides the high relative volatility that came with it, along with more frequent, longer, and more severe recessions and depressions, due in part to sticky prices and wages and the non-immediacy of returns to price equilibrium.
http://www.nber.org/cycles/cyclesmain.html
That also came with much more severe swings in unemployment. Here is a nice article on the gold standard:
http://www.econlib.org/library/Enc/GoldStandard.html
Specifically, you claim that there was more money stock stability, which was certainly not true in eh 1850s after the huge gold discoveries in the US and Australia.
Also, I see it claimed by some lovers of the Austrian school that the dollar has lost 97% of its value since the Fed establishment in 1913. I don't have immediate access to a poper calculator, but that seems to be around 3.5%. That is hardly devastating, especially given that most workers receive annual raises that keep their incomes ahead of inflation. Compare this to the vastly larger effects of taxes.
And with regard to Keynesian economics making it easier to finance wars, you still don't seem to understand that Keynes favored long run zero deficits and debt. Yet, you say you read him?
Of course, you also ignore the many, many calamitous wars that occurred sans fiat money, such as WW1 which began when we were still on the gold standard. Are you going to blame Keynes for that one too? How about the even earlier Spanish American War? And World War 2, when we were still on a gold standard, albeit watered down in '33? And how many wars did the British empire fight while on the gold standard?
Then, to think you see some correlation between the number of wars the US has fought and the abandoment of the godl standard in '71 ignores both the Korean and Vietnam wars, both of which began well before '71 and were by far more severe in terms of monetary costs and loss of life than any war thereafter by far. Of course, correlation does not necessarily imply causation anyway.
More generally, no gold standard or indeed, any non-fiat currency has ever survived. All have failed, due to associated volatility and what are often uncomfortable monetary constraints.
Or if you want to get even more fundamental than that, governments abandon non-fiat currencies whenever they want and always have. You are always free to save in gold, to get many of the benefits of a gold-based currency without any help from the government anyway.
The real issue with any monetary system is discipline. A fiat currency is a tool that can be used to misused, just as any other system which is eventually replaced by fiat currency.
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