This is a short video summarizing papers r<g? and (better) section 6.4 of Fiscal Theory of the Price Level. Do low interest costs on the debt mean the government never has to pay it back? If the government doesn't have to repay debts, why do any of us citizens have to repay debts? Let the government borrow, pay off our student, mortgage, and auto debt. Let it send us checks and we can all stop working, paying taxes, and just order things from Amazon. Hmm. Something is wrong here...
The main point. We have 5% of GDP primary deficits, and bigger coming. A r<g of 1% is a fun possibility for government with 1% of GDP deficits and 100% debt to GDP. But it still leaves us 4% in the hole, and then the next crisis, pandemic, war, or social security and medicare come along.
Kudos to the Hoover Policy-Ed team (This video on their website, with additional material) and especially Shana Farley and Tom Church, who managed to boil down a complex subject to an understandable video. The animations are impressive. Yes, the guy talking needs acting lessons (it's a lot better at 1.25 speed) and a haircut. Next time...
With sufficient borrowing, won't r rise?
ReplyDeleteThorough analysis, but I agree only to a point. First of all, the idea that the 'Markets' at some point would demand higher interests on US bonds fails to understand some important facts of the Money system. Specifically, agents hold US Bonds not solely with an 'investor' mindset. US Bonds are used as the World reserve currency and are the vital liquidity of the international money system (e.g. the Eurobonds markets). I would argue that most agents demand US Bonds for all reasons but investment. As such, they are little sensitive to the level of interest rates or the overall US debt. In short, as long as the US Dollar retains the credibility to be the World reserve currency, the US Debt can grow 'safely'.
ReplyDeleteA second point, we need to take a more critical look at the corporate sector and not blame the government for all problems. The pursuit of short term profit by public corporations has done far more damage to profitability than any government regulations. Besides, much US regulatory body remain extremely corporate friendly thanks to the legalization of corporate brib ..., ahem, lobbying (Citizens United). Let's look critically at the whole concept of Shareholders Value maximization, which has caused companies to take all kinds of shortcuts in order to chase Wall Street consensus. And in doing so CEOs have gutted once phenomenal companies. This situation cannot be changed simply with a different government fiscal policy or 'less regulation'.
The growth of the US debt is a symptom, not the cause, of decaying economic system where 'rent' seeking has taken over 'productivity' seeking. This is normal late cycle economic evolution and human nature. Let's put more history into the study of economics.
"The pursuit of short term profit by public corporations has done far more damage to profitability than any government regulations."
DeleteCoase's version would seem to have far more empirical support:
"The number of falsehoods put into circulation for the sake of money must be small compared to the number put forward 'to serve the public interest'"
So long as a concept such as “the public interest” (or the “social” or “national” or “international” interest) is regarded as a valid principle to guide legislation—lobbies and pressure groups will necessarily continue to exist. Since there is no such entity as “the public,” since the public is merely a number of individuals, the idea that “the public interest” supersedes private interests and rights, can have but one meaning: that the interests and rights of some individuals take precedence over the interests and rights of others.
DeleteIf so, then all men and all private groups have to fight to the death for the privilege of being regarded as “the public.” The government’s policy has to swing like an erratic pendulum from group to group, hitting some and favoring others, at the whim of any given moment—and so grotesque a profession as lobbying (selling “influence”) becomes a full-time job. If parasitism, favoritism, corruption, and greed for the unearned did not exist, a mixed economy would bring them into existence.
Since there is no rational justification for the sacrifice of some men to others, there is no objective criterion by which such a sacrifice can be guided in practice. All “public interest” legislation (and any distribution of money taken by force from some men for the unearned benefit of others) comes down ultimately to the grant of an undefined, undefinable, non-objective, arbitrary power to some government officials.
-Ayn Rand
The worst aspect of it is not that such a power can be used dishonestly, but that it cannot be used honestly. The wisest man in the world, with the purest integrity, cannot find a criterion for the just, equitable, rational application of an unjust, inequitable, irrational principle.
Thorough analysis, but I agree only to a point. First of all, the idea that the 'Markets' at some point would demand higher interests on US bonds fails to understand some important facts of the Money system. Specifically, agents hold US Bonds not solely with an 'investor' mindset. US Bonds are used as the World reserve currency and are the vital liquidity of the international money system (e.g. the Eurobonds markets). I would argue that most agents demand US Bonds for all reasons but investment. As such, they are little sensitive to the level of interest rates or the overall US debt. In short, as long as the US Dollar retains the credibility to be the World reserve currency, the US Debt can grow 'safely'.
ReplyDeleteA second point, we need to take a more critical look at the corporate sector and not blame the government for all problems. The pursuit of short term profit by public corporations has done far more damage to profitability than any government regulations. Besides, much US regulatory body remain extremely corporate friendly thanks to the legalization of corporate brib ..., ahem, lobbying (Citizens United). Let's look critically at the whole concept of Shareholders Value maximization, which has caused companies to take all kinds of shortcuts in order to chase Wall Street consensus. And in doing so CEOs have gutted once phenomenal companies. This situation cannot be changed simply with a different government fiscal policy or 'less regulation'.
The growth of the US debt is a symptom, not the cause, of decaying economic system where 'rent' seeking has taken over 'productivity' seeking. This is normal late cycle economic evolution and human nature. Let's put more history into the study of economics.
AM,
Delete"In short, as long as the US Dollar retains the credibility to be the World reserve currency, the US Debt can grow safely."
Not exactly. For a given average interest rate i% on the federal debt, a given quantity of bonds B(t), a given level of tax receipts TR% (as a percentage of nominal GDP), and a given nominal GDP value NGDP(t), the following must be true to avoid the Ponzi condition:
TR% * NGDP(t) > i% * B(t)
"The growth of the US debt is a symptom, not the cause, of decaying economic system where rent seeking has taken over productivity seeking."
I think there is more to it than that. There is also the welfare / warfare aspect of government programs which drag down economic productivity.
Finally, government bonds themselves are a form of rent seeking in that taxpayers as a whole make the interest payments.
See my blog on equity sold by the US Treasury as an alternative approach to government financing.
Great video that doesn't get bogged down in the largely irrelevant r - g arguments when primary deficits are as large as they are. Would have been more accurate (appropriate?) to note this "and past" administrations, especially the last one, were spending money as if it didn't have to be repaid. For reference, the fiscal deficit in 2010 was 8.6 percent of GDP (2009 has the effect of 2 administrations); in 2016 it was 3.1 percent, rising to 4.6 percent in 2019 despite several years of 2-3 percent growth and no crisis. In 2020, the deficit exploded to 14.4 and is estimated at 13.3 in 2021 (2021 again has the effect of 2 administrations). The political economy angle of the recent fiscal deficits is often ignored...
ReplyDeleteNow I wonder what John might think of the balanced budget amendment that Switzerland and we have in Germany. I think it is working rather well for us and putting it into the constitution was an excellent idea from a public-choice-perspective. (Leaving aside all the problems we created for us with the Eurozone, of course)
ReplyDeleteThat's a good point. Quite a few US states have that.
DeleteIt would be a good idea for many countries.
Alas even The Economist now thinks it's too constraining.
"The main point. We have 5% of GDP primary deficits, and bigger coming. A r<g of 1% is a fun possibility for government with 0.5% of GDP deficits and 100% debt to GDP. But it still leaves us 4% in the hole, and then the next crisis, pandemic, war, or social security and medicare come along. " -- J. C.
ReplyDeleteAre the figures of "5% of GDP primary deficits" in the first sentence (above) and "0.5% of GDP deficits" referrng to the same set of facts?
Apparently, there is no conflict in the figures presented in the two sentences within the quotation marks.
Deleter>g ONLY when you're selective about your investments. For the government, as the investor-of-last-resort, there is adverse selectivity on its investments. So for the government, r<g.
ReplyDeleteI completely disagree with John on one point - fixing the problems IS very hard. We are miles away from an efficient tax regime. We are miles away from benefit reform. These are deeply intractable issues that frankly most politicans and voters don't understand and have been misled by bleeding heart arguments.
ReplyDeleteI don't think the voters and politicans were any different in the 1950s. We just got lucky and grew. It does not appear we are so lucky this time.
Thought the video was great. I'm just curious what "craziness" will emerge from the Fiscal and Monetary side...
ReplyDeleteDr. Cochrane - you don't need acting lessons. Stay the way you are. Ha.
This video demonstrates the Grump’s fundamental misunderstanding of the flexibilities of a monetary sovereign. He needs to ponder 4 FACTS:
ReplyDelete1) The US government is unlike a:
a. state,
b. municipality,
c. business, or
d. household,
in that it can issue its own currency.
2) A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
a. issues,
b. borrows in, and
c. floats
its own currency, can NEVER run out of cash.
3) The sovereign, like the US, can:
a. issue currency to spend and buy anything the economy produces,
b. up to the productive capacity of the economy (adjusted for turnover/velocity),
c. without creating inflation.
In other words the US government can issue currency and hire any and all unemployed and underemployed folk. The constraint is the productive capacity of the economy, as measured by wage inflation. If prices do rise above an acceptable level, they can be controlled by i) selling government securities, ii) raising interest paid on deposits at the fed, iii) raising taxes across the board (on income, sales/vat, and asset values), or iv) a cut in spending.
Inflation is easily managed through several tools including
1) down payment and margin requirements on real estate and securities,
2) targeted supply chain actions, and
3) broad based tax increases/decreases.
For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation targets are hit-say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales/VAT Taxes
c) Asset Value (or Wealth) Taxes
That'll cool things off pronto. When inflation has cooled, the taxes automatically return to a base level.
Easy Peasy.
4) The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.
Private Debt, by the way, can be a problem and is largely responsible for many of our recessions.
What a Grump!
I've asked you this in the past. How do you think investment, savings, and consumption decisions will be affected by a regime entirely based on a historically variable like inflation?
DeleteDD,
Delete"Private Debt, by the way, can be a problem and is largely responsible for many of our recessions."
Indeed, something we agree on. And the real (inflation adjusted) cost of servicing private debt can be fully offset with equity sold by the US Treasury even under a deflationary scenario.
But the War Dog economists insist that government "must sell bonds" or "must raise the debt ceiling" or some other variant.
How can you possibly think that the Federal Debt and inflation can be a serious problem in the US. Think things through Dude.
ReplyDeleteHow can the government have too much debt? It has a fricken printing press and can print dollars. The notion that anyone would seriously think that the debt couldn’t be paid off is preposterous. (See current yield of 1.9% on 30 year bonds.)
Interest rates are whatever the Fed says they are. The Federal Govt does not need investors. It has the Fed.
Why would anybody freak out about inflation when the Federal Government can fully control the supply of money in circulation through fiscal and monetary policy? (Aaaahhhh!!!!! Zimbabweeeeee!!!! Weimer Republicccc!!!!!)
How would any taxes levied to control inflation be “crushing? If you take money out of circulation and prices fall proportionately, how is that “crushing”? Your income falls by 30% due to taxes and all prices fall by 30%. Aaahhhh!!!! Crushing!!!!!
Mentioning Greece and Italy gave away the Grump’s blind spot. Greece and Italy are not sovereigns. They do not issue, borrow in, and float their own currency. They are fundamentally different from a sovereign, like the US.
What a Grump!
And this is why I think this is a better video, as these points are addressed: https://youtu.be/EPjrFjAxwlw
DeleteMises, in _Human Action_, thinks that govt "money and credit" creation shifts investment from the market to politics, decreasing long-term productivity.
ReplyDeleteThe MMT claim that debt is not destructive is a distraction from their basic purpose, sacrifice. Their purpose is not a better economy or even the welfare state. Its a moral, not political situation for them. Their ideal politics is the crucified Jesus. We should all suffer. The allegedly good effect from big debt is irrelevant to the alleged moral responsibility to suffer. Avoiding inflation is irrelevant.
Total nonsense. Inflation fears are way overblown and are largely promulgated by people that have not considered the right hand side of the equation ---> the supply side. The truth is, if there are excess resources in the economy - unemployed folks - business people will go wakey wakey and hire the unemployed folk and PRODUCE MORE GOODS AND SERVICES - offsetting the added currency, so --> NO ADDED INFLATION.
DeleteJeff Sparshot, "Real Time Economics" (WSJ), reports, "The U.S. federal budget deficit is expected to widen to $195 billion in November from $145 billion one year earlier." If so, it represents a rate of increase of 34.48% per annum. The annual change in the BLS CPI is expected to reach 6.4% for the month of November from the year-earlier period.
ReplyDelete60% of firms surveyed now report that they have increased their selling prices. Rationales range from anticipated price increases, to increased labor costs, to increased non-labor input costs. Irrespective of the rationale, the underlying factors are likely the decision by the FOMC to de-emphasize "price stability" in favor of "full employment" of labor in monetary policy coupled with a drive by the administration to engage in Keynesian deficit spending stimulus. The brilliance of those policy directives is evidenced in the resurgence in rate of inflation in excess of the 2% target rate. It isn't the whole story, though.
What are 30 year bonds yielding? AAAAaaaahhhh!!!!! Weimer Republicccccccc!!!!!! Zimbabweeee!!!!!!! Aaaahhhhh!!!!! The inflation is transitory largely due to Covid breakdowns.
DeleteSure thing. That with all the academic fire power and data at the finger-tips of the boffins in the Federal Reserve System, they didn't see it coming. They were forecasting an entirely different outcome. It's not today's price that counts. It's tomorrow's, and the day after tomorrow, and the days to come. Did you foresee the melt-down in 2008? The advent of the novel coronavirus in 2019-20? No, you didn't, nor did I. And, that's the whole point--very few do anticipate the future, and the bond market and the FOMC are no exceptions to that rule. J. Powell looks a perfect rube these days for his backpeddling and rationalizations, and in that there is a lesson for you and all the resest of us. Untested assumptions will clean out out our bank accounts when we least expect it.
DeleteWhile it’s quite a bit longer, I felt that this video explained the same issue more clearly: https://www.youtube.com/watch?v=EPjrFjAxwlw&list=PL539AAB27E20C4DB5&index=51
ReplyDeleteJohn,
ReplyDeleteGovernment doesn’t have the resources or means to repay debts. The resident citizens of a community are responsible for repaying the public debts contracted by its government.
An individual or firm may not need to repay debts. Repay lenders, always. But repaying debts bears a different calculation. If the cost of doing X exceeds the benefit, why do X? If the cost of repaying public debt exceeds the benefit, why do it?
The cost of this action always exceeds the benefit.
>Government doesn’t have the resources or means to repay debts.
DeleteGovt doesnt have warehouses of goods, only countefeit money and credit.
>An individual or firm may not need to repay debts. Repay lenders, always.
But debts are caused by lenders lending to borrowers/debtors. You comment confuses me. Is there a very technical idea in the science of economics made here?
> If the cost of doing X exceeds the benefit, why do X?
Conventional morality is sacrifice. Profit, in conventional morality , is immoral. Of course ,as Ayn Rand has said, there is no rational defense of sacrifice. This invalidates much of economics. Brian Simpson (_Markets Dont Fail_) says externalities
is a rationalization of altruism, not a scientific concept. Rand identifies common good as mysticism.
How do banks repay lenders or depositors? Upon request of funds, do they call in loans or sell assets to garner funds to repay the lender, or do they simply borrow from another and repay the lender? The latter is always the case as rising bank liabilities over time demonstrate. Thus, repay the lender, but never the debt. Banks have not repaid any dollar borrowed in their entire existence.
DeleteSo, should the government repay lenders or repay debts? They are not the same.
John,
ReplyDeleteGovernment doesn’t have the resources or means to repay debts. The resident citizens of a community are responsible for repaying the public debts contracted by its government.
An individual or firm may not need to repay debts. Repay lenders, always. But repaying debts bears a different calculation. If the cost of doing X exceeds the benefit, why do X? If the cost of repaying public debt exceeds the benefit, why do it?
The cost of this action always exceeds the benefit.