An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Thursday, October 14, 2010
Who exactly do we owe money to?
Who exactly do WE owe money to? We keep hearing this…that WE Americans are deeply in debt and that every person in America now owes $43,000 or whatever the figure is.
This is what the politicians and Deficit Terrorists (that’s what I call them) say, day in and day out.
But what does that mean? Have you ever thought about that??
Does that mean we, as citizens, each and every one of us, have borrowed $43 grand from the government??
If so, then it’s an asset for the government. That’s right, those loans are an asset; just like the loans on the books of a bank. And given that the product of the nation (our national income = $14.5 trillion) exceeds the amount we supposedly owe, we’re technically good for the money. So when you look at it that way, the government is rich, not broke: it has a very strong asset on its books.
But of course that's not what's going on. In fact, it's the opposite.
When people talk about America’s debt what they’re really talking about is the government’s debt. But that’s the same thing as I just explained above, only in reverse! The government’s "debt" is OUR asset. (Remember, for every debt there is a credit, for every liability there is an asset.)
We OWN these assets in the form of Treasuries, higher financial balances, etc. So in short, WE THE PEOPLE owe nothing...WE OWN!
And here’s the best part about it: when we get these assets they come without any corresponding liability. So, by definition, our wealth (assets – liabilities) increases!
Okay, what about the Chinese and other foreigners you may ask? Is that a liability of the government? Perhaps you can look at it that way, however, what the Chinese and other foreigners have is simply a claim on some quantity of dollars, which our government issues freely and without constraint.
The whole thing is really very simple.
They hysteria created by this is the same kind of hysteria that drove people to think ships would fall off the end of the earth back in 1491, but Christopher Columbus took care of that nonsense.
Cheers!
-Mike
It's not that we have each borrowed individually $43,000 from the government. The government can only "lend" to us what it formerly confiscated to begin with. It's more accurate to say that the federal government has borrowed $43,000 per U.S. citizen from buyers of treasuries. Is my credit car debt now an asset too? Is the balance owed on my car an asset as well? You have an almost preternatural gift for getting everything exactly backward.
ReplyDeleteThe entire Keysenian system is collapsing all around you, and you still don't see it. A debt isn't an asset Mike. If someone owes you money, perhaps that can be called an asset though it isn't real unless the debt is actually payed. In any event the U.s. government isn't the creditor but the debtor anyway. The great thing is that all holders of U.S. debt are going to be repayed....in a substantially debased currency. The U.S. citizen will pay for this through the hidden tax of inflation.
Sorry, doesn't work that way. 500 years of double entry accounting makes what I am saying true and inarguable. A receivable is an asset you idiot. Any businessman knows that. You can go to a bank and get money against receivables and with the money you can invest and acquire wealth. It's called double entry accounting and the world is based on this. It's what lifted humanity out of the dark ages and spread prosperity to the masses rather than solely to kings and despots.
ReplyDeleteI am aware of double entry accounting. I've read books on banking by Austrian and classical economists. I think their explanations are far more convincing than neo-liberal or Keynesian economics. They also have an incredibly good track record for long-term predictions. The works on banking of Murray Rothbard are very instructive.
ReplyDeleteIf someone owes you money then I have no qualms with identifying that as an asset. When you owe someone else money that isn't an asset but,rather, a liability.
I would argue that private property rights, rule of law, the scientific method, the discovery of free market money, and the knowledge of how markets work brought us out of a primitive stage.
I would also like to address a comment you made to Severus. You mentioned that the FED doesn't buy U.S. Treasuries directly which is true enough. They buy them from bond dealers in the open market. These bonds were originally purchased by speculators with the expectation that they could sell them to the FED later at a higher price. Many of these people would have never bought these bonds at the current rates offered if that expectation weren't present. This is keeping bond rates artificially low for now.
These speculators in the commodities market that you are impugning have simply priced in current and future dollar debasement. Have you ever considered that the macroeconomic theories that you learned in college were in error? Perhaps the word theory is incorrect here given that "theory" implies that it has withstood repeated attempts to refute it. Given the last four decades, I would argue that your theories have been soundly refuted by history's test.
Lastly, when did you stop buying gold? $400? $500?
This Dean Baker article from earlier this month illustrated, for me, in a simple way the basic accounting identities in this debate about national savings, debt, and trade. And added to that article, the WTO President gave a speech to the French Senate cautioning them about using bilateral trade measurements when crafting policy. The numbers can be deceptive and he shows how it could backfire. But I'm still left scratching my head as to why the United States is prohibited from owning a Renminbi outside China. These articles show the effect of the decades long flows of capital to be somewhat innocuous. So I'm thinking perhaps the hysteria would die down if the United States stored a couple trillion of the social security surplus savings in Chinese government bonds instead of US treasury securities -- the income on the bonds would add to national savings and have the Chinese government adding income to the United States Treasury. The Chinese have stored their retirement savings in US Treasuries so it would be a nice gesture. No doubt received warmly by US and Chinese politicians.
ReplyDelete"...what the Chinese and other foreigners have is simply a claim on some quantity of dollars, which our government issues freely and without constraint.
ReplyDeleteThe whole thing is really very simple."
Don't I, as a dollar-holder, simply have a claim which our government issues freely and without constraint thus eroding my buying power?