Bond Markets Say US Debt Doesn't Matter

[Anarchist420]

I don't buy the pro-deficit spending stimulus argument and the argument that supply side economics creates jobs is almost as flawed... I don't agree with the latter because all that matters is how much revenue is allowed to remain the market.

In the short term, the deficit spending puts more food on the table for those who are unemployed, but it doesn't create long term employment and it's totally unproductive. Bush's spending and inflation is largely why we're still in this shit, but Obama has done nothing to repair it and everything to fuck things up more.
I agree with his payroll tax cut as that would keep significantly more revenue in the market (more would be gained from that than would be lost from raising the top marginal rate), but everything else he's proposed has been proven not to work since the days of Alexander Hamilton.

Regulations need to be repealed, public spending needs to be slashed, and inflation needs to cease for there to be long term prosperity.

 

[nehalem256]

I don't buy the pro-deficit spending stimulus argument and the argument that supply side economics creates jobs is almost as flawed... I don't agree with the latter because all that matters is how much revenue is allowed to remain the market.

The biggest flaw is that assuming it always true. Everything I have read about the economy now shows that businesses have plenty of money to invest and create jobs (see record low interest rates), but dont because there is no demand for their products.

 

[LunarRay]

If debt truly doesn't matter, why $3 trillion and not $30 trillion or $300 trillion? If our success consists of our having a printing press - something of whose uniqueness I was apparently sadly unaware - shouldn't we crank that sucker up and be really prosperous?

Two reasons.
The first being the stimulus itself needs to be in the form of incentives to spur investment in the infrastructure, tooling up for the bits needed in the buy American notion, Loan underwriting and the like. The nature of that is basically not all money being spent is out of pocket, like underwriting or guaranteeing loans to small businesses and the incentives are tax credits and or grants for some aspects of it which offset the revenue gains.
The second being Tax cuts across the board so all sectors get the warm and fuzzies... that is the important part... as I've said a bazillion times, you've to get the minds of the people geared toward positive thinking and away from Fear...

As this unfolds it is an increase in debt which carries a few issues. The obvious one is why plan to incur more debt than the need projects. If it turns out 2t is enough fine and if 4t is needed fine... but why project 30t? The notion is to get all sectors engaged. We don't need to create more Monetary issues based on Fiscal policy either.
How do we increase debt without willing lenders? We don't want to produce a yield increase to the base debt we have since that only serves to increase the debt service so it only makes sense to manage that aspect. IF we simply have to 'print' money the upside is better than doing nothing. Increasing money supply beyond the growth produces inflation.

The job creation bit implies all aspects of the economy are moving in the right direction. We can't really expect to compete globally with comparative disadvantages among most of our export goods. The strength of the dollar v euro for instance is not favorable so it makes sense to allow the dollar to weaken but not to a 30t effect. We also have to consider our tariff agreements when we say Buy American made Cars, for instance, do all the bits come from American Companies or overseas. We want to encourage US companies to produce that. And that is problematic but doable. The question is: How can we reduce imports of certain goods without violating treaties and also not exacerbate the world economic crisis?... Slowly? Encourage foreign ownership of American companies who hire Americans? It all takes incentive and that means money. But not 30t.

We have quite a bit of leeway but not one that is immune to influence... And the Fed have pretty much used up their influence to stimulate. They are in the manage stage using the FOMC but that goes only so far.

The real question is: IF we do 'X' what is the pay back period? We need to get debt down over the long run and that takes revenue... Full employment is a term with fictitious meaning.... You can have full employment providing a budget deficit of 1t and full employment producing a surplus of 1t.... IT is all about what kind of jobs is full employment providing and how does that meet the budget's needs.

 

[Jhhnn]

The problem with your argument is that reductio ad absurdum is generally a logical argument - not a fallacy. You might want to take your own advice.

You're right- it was just a strawman. Thanks.

 

[CycloWizard]

You're right- it was just a strawman. Thanks.

No, it was very much a valid reductio ad absurdem argument.

 

[Jhhnn]

If deficits dont matter and neither does debt, why dont we stop making people and corps pay income tax and simply borrow for the rest of eternity? Can you imagine all the success we would have if none of us had to pay taxes?

No, it was very much a valid reductio ad absurdem argument.

It is a strawman because nobody offered that income tax should cease, other than Genx87. He argues against his own creation.

In normal times, investors borrow against their bonds at low rates, made possible by the fact that they're the world's safest investment. The actual creation of more money in circulation is a result of that borrowing under fractional reserve principles. It can be no other way.

As the article explains, these aren't normal times, and investors seek safety, so they just buy bonds. Demand is so high that the govt could obviously borrow more at basically the same low rates. There is no money creation, because there is no fractional reserve principle at work. Money is simply freed up by govt spending.

The truth is that the whole notion of the govt borrowing money is an anachronism, held over from the gold standard, amounting to a fee paid to wealth for dilution of the value of their money. The govt could just print & spend, so long as taxes are levied to create demand for that money. All the fiat dollars in existence were either spent into existence or created by fractional reserve banking, anyway.

 

[CycloWizard]

It is a strawman because nobody offered that income tax should cease, other than Genx87. He argues against his own creation.

I think you don't quite understand the term you've been trying to use as a weapon in this thread. Reductio ad absurdem means to apply your premise in an extreme case, thereby demonstrating the absurdity of your premise. If the debt level of our government does not matter (the premise of the OP), then why would we need income tax (or any other tax, for that matter)? We could simply borrow all of the money we want to spend. He reduced the premise to absurdity (reductio ad absurdem), thereby proving the opposite by contradiction: government debt levels DO matter.

In normal times, investors borrow against their bonds at low rates, made possible by the fact that they're the world's safest investment. The actual creation of more money in circulation is a result of that borrowing under fractional reserve principles. It can be no other way.

As the article explains, these aren't normal times, and investors seek safety, so they just buy bonds. Demand is so high that the govt could obviously borrow more at basically the same low rates. There is no money creation, because there is no fractional reserve principle at work. Money is simply freed up by govt spending.

The truth is that the whole notion of the govt borrowing money is an anachronism, held over from the gold standard, amounting to a fee paid to wealth for dilution of the value of their money. The govt could just print & spend, so long as taxes are levied to create demand for that money. All the fiat dollars in existence were either spent into existence or created by fractional reserve banking, anyway.

Government borrows money because money is property and its citizens have a right to property. Government printing money is stealing my property by devaluing it. If I work 40 hours a week for $X and the government can simply print an infinite supply of money, then I am effectively working for nothing. Scarcity of dollars (supply) and vendors' willingness to accept them in exchange for goods and services (demand) is the only reason they are worth anything. So, your calling government borrowing an anachronism is the same thing as calling property rights an anachronism. Since property rights are one of the three types of rights government exists to protect, it is impossible for property rights to be an anachronism while government exists. Therefore, whereas you began your claim by stating that this must be true, your argument is demonstrably false.

 

[Nebor]

It is a strawman because nobody offered that income tax should cease, other than Genx87. He argues against his own creation.

In normal times, investors borrow against their bonds at low rates, made possible by the fact that they're the world's safest investment. The actual creation of more money in circulation is a result of that borrowing under fractional reserve principles. It can be no other way.

As the article explains, these aren't normal times, and investors seek safety, so they just buy bonds. Demand is so high that the govt could obviously borrow more at basically the same low rates. There is no money creation, because there is no fractional reserve principle at work. Money is simply freed up by govt spending.

The truth is that the whole notion of the govt borrowing money is an anachronism, held over from the gold standard, amounting to a fee paid to wealth for dilution of the value of their money. The govt could just print & spend, so long as taxes are levied to create demand for that money. All the fiat dollars in existence were either spent into existence or created by fractional reserve banking, anyway.

This is the best post I've ever seen you make. Kudos. :thumbsup:

 

[Rebel44]

This is how market works:
now - dont worry about that - 1.5% interest
later - we dont trust you anymore - 5% interest

 

[nehalem256]

This is how market works:
now - dont worry about that - 1.5% interest
later - we dont trust you anymore - 5% interest

Actually I thinks more like

now - LA LA LA LA LA - 1.5% interest
later - oh crap - 10% interest

Remember the same people who thought Mortgage back securities were a great idea are the ones buying treasuries. What could possibly go wrong?

 

[borisvodofsky]

It doesn't matter as long as the world is willing to carry it. NEXT STORY PLEASE

 

[Jhhnn]

I think you don't quite understand the term you've been trying to use as a weapon in this thread. Reductio ad absurdem means to apply your premise in an extreme case, thereby demonstrating the absurdity of your premise. If the debt level of our government does not matter (the premise of the OP), then why would we need income tax (or any other tax, for that matter)? We could simply borrow all of the money we want to spend. He reduced the premise to absurdity (reductio ad absurdem), thereby proving the opposite by contradiction: government debt levels DO matter.

Taxes create demand for a nation's money. You can't pay your taxes with chickens. Nobody made the if/then argument in the first place, other than you & Genx87.

Government borrows money because money is property and its citizens have a right to property. Government printing money is stealing my property by devaluing it. If I work 40 hours a week for $X and the government can simply print an infinite supply of money, then I am effectively working for nothing. Scarcity of dollars (supply) and vendors' willingness to accept them in exchange for goods and services (demand) is the only reason they are worth anything. So, your calling government borrowing an anachronism is the same thing as calling property rights an anachronism. Since property rights are one of the three types of rights government exists to protect, it is impossible for property rights to be an anachronism while government exists. Therefore, whereas you began your claim by stating that this must be true, your argument is demonstrably false.

No modern government guarantees the purchasing power of their fiat currency. An expanding currency base is necessary in a society with a growing population, otherwise deflation ensues & borrowing ceases. Banking collapses. An expanding currency base is also necessary in a society such as ours acting as the world reserve currency, particularly with a balance of payments deficit. It's also necessary when the top .1% squirrel away 8-10% of the money on an annual basis rather than spending it back into commerce.

How can govt "steal your money" when you still have it?

EDit- not "the top .1% squirrel away 8-10% of the money" but rather 8-10% of national income. They already have the lions's share of money.

 

[rchiu]

Please address the facts, counter, rebut, but be a logical adult. All quotations C&P'd from link.

http://www.businessinsider.com/what-the-collapse-in-interest-means-2012-5

"Well, the fact of the matter is that the size of the U.S. debt or deficit just doesn't matter that much. Actually, it's never mattered at all."

I wonder if it would have helped if the Stimulus was over $1 trillion and Obama's original Jobs Act was passed. The one where he wanted to lower the payroll tax rate to 3.1% and give billions to businesses to boost hiring.

"A few things matter.
One of them is inflation. When people think that inflation is high (meaning that the value of their dollars will erode rapidly) they will want a high return from the government."

This is obvious...no commentary needed.

"Another factor that matters is growth.
Growth is critical because if you think that the economy is going to grow in a robust fashion, then you won't want to lock up your cash with the government. You'll want to invest in real things or at least stocks that might boom along with the economy."

Rephrase: The debt might matter more in the future, but only if the economy is booming enough to where it probably offsets the affect anyway.

"There's another factor that's mattered a lot lately: FEAR!
If you think that everything is going to collapse (for example Europe's economy completely imploding in a crisis that makes Lehman's aftermath look like child's play) all you'll want to do is give your money to the one entity that has unlimited (thanks to the printing press) power to pay the money back."

In other words, many of the wealthiest entities in the world trust the United States with their money over any other person, country, mattress, or vault in the world. Because we have a printing press


Not trying to be Obama's cheerleader, I think he betrayed his base by being little Bush Jr. in many ways, but can we look at the facts?

If you are going to argue the stimulus either shouldn't have been passed or you disagree with my statements, then please explain your detailed, superior proposal that you would have passed instead.

If you attack Obama's economic plan, explain what you or an alternative POTUS would have passed that was superior to Obama's Jobs Bill.

Were the Republicans correct in blocking key measures in Obama's Jobs Bill? Yes: Explaination or No: Explanation.

Feel free to address part or all of the post, just don't say "Obama Marxist No Good Economy Kenya" without addressing the Jobs Bill & Stimulus.

Let's keep it simple. Debt does not matter if it creates desirable effects, maybe good return on investment, creates long term employment (not just short term boost)...etc.

But government's record to use debt to create desirable effects sucks. And it's not just US government, it's government around the world. Japan got into huge debt and their lost decades is still on going. Just throwing money at something is not enough. You have to fix the fundamental problem.

My take? This recession is a correction for the mortgage and other investment burst bubbles. Nothing to fix, just wait it out. (sure not a good advise for someone seeking another turn, I know) Forced money into a crap economy will result in bad return and just more debt to pay for the future generation.

 

[CycloWizard]

Taxes create demand for a nation's money. You can't pay your taxes with chickens. Nobody made the if/then argument in the first place, other than you & Genx87.

That's completely backwards. Property does not exist to satisfy the demands of government. Government exists to protect our right to property. The if/then form of argument is simply demonstrating the logical conclusion of the premise, whether you arrived at that conclusion or not.

No modern government guarantees the purchasing power of their fiat currency. An expanding currency base is necessary in a society with a growing population, otherwise deflation ensues & borrowing ceases. Banking collapses. An expanding currency base is also necessary in a society such as ours acting as the world reserve currency, particularly with a balance of payments deficit. It's also necessary when the top .1% squirrel away 8-10% of the money on an annual basis rather than spending it back into commerce.

How can govt "steal your money" when you still have it?

EDit- not "the top .1% squirrel away 8-10% of the money" but rather 8-10% of national income. They already have the lions's share of money.

Premise: Government's role is to protect its citizens' rights to life, liberty, and property.
Argument: The value of my property is decreased by government when it prints money because more money in circulation makes that in my pocket worth less. Since government holds the money it prints, it has taken the value of my property and given it to itself.

 

[Doppel]

The numbers make it look like it doesn't matter, but I don't see that in them. The way I'm looking at it is they do matter (even though THESE numbers don't show it), but they matter LESS than fear and potential recession cataclysms, which is why the interest rate has continued to go up even though debt has gone up, but it's in spite of the debt, not because it somehow doesn't care about it. The debt, of course, has climbed up as the economy has soured (over many years), so the bond market cares more about a sour economy than debt, certainly, but I don't see how it couldn't care about it.

 

[Jhhnn]

That's completely backwards. Property does not exist to satisfy the demands of government. Government exists to protect our right to property. The if/then form of argument is simply demonstrating the logical conclusion of the premise, whether you arrived at that conclusion or not.

Genx87 introduced the premise that the govt should quit levying taxes, borrow instead, reduced it to absurdity. *It's his own premise* & nobody else's. He argues against something nobody else offered, which is a strawman.

Premise: Government's role is to protect its citizens' rights to life, liberty, and property.
Argument: The value of my property is decreased by government when it prints money because more money in circulation makes that in my pocket worth less. Since government holds the money it prints, it has taken the value of my property and given it to itself.

If you lend to the govt, is there more money in existence? Why would there be?

Actually, there usually is, other than in the condition of a liquidity trap, which is today's economy. It's not the act of govt borrowing that creates money, at all, but rather other actions by the lender, the FRB, & member banks. The vast majority of "money" isn't created by govt, but by banking. Do they have greater right to do so than govt?

 

[Genx87]

Genx87 introduced the premise that the govt should quit levying taxes, borrow instead, reduced it to absurdity. *It's his own premise* & nobody else's. He argues against something nobody else offered, which is a strawman.



If you lend to the govt, is there more money in existence? Why would there be?

Actually, there usually is, other than in the condition of a liquidity trap, which is today's economy. It's not the act of govt borrowing that creates money, at all, but rather other actions by the lender, the FRB, & member banks. The vast majority of "money" isn't created by govt, but by banking. Do they have greater right to do so than govt?

The title of this thread is debts dont matter. If they dont matter my question is why not drop taxing all together and fund govt via debt? You get your panties in a bunch because my proposal is absurd just like the idea debts dont matter.

 

[JTsyo]

I wonder if it would have helped if the Stimulus was over $1 trillion and Obama's original Jobs Act was passed. The one where he wanted to lower the payroll tax rate to 3.1% and give billions to businesses to boost hiring.

Wouldn't have helped. Corporations are sitting on huge funds and credit is cheap. But they are not going to expand if there isn't an increase in demand, in fact companies are trying to go lean these days due to the lack of demand.

 

[werepossum]

Well, I googled it, and stumbled upon this:

http://square.concordcoalition.org/profiles/blogs/government-debt-why-it-doesnt.

"So the fear of rampant inflation and the subsequent tanking of markets is wrong. The U.S. would have to spend something to the tune of 30 trillion dollars in a single fiscal year to become the next Zimbabwe."

Not sure who he is, but he is certainly more educated than myself on this issue.

Take Note: He said to end up like Zimbabwe, hedidn't say spending 10 trillion in one fiscal year would be A-OK. He was using hyperbole to make a point, and I believe, considering the hysteria from both sides about how the deficit is the end-all-be-all issue, counter points almost have to use an equal amount of fact-based hysteria (even if it is usually a major hindrance to logical debate).

Some layman's analysis after my first 45 minutes or so of actual in-depth reading on the topic (other than flash card style talking points):

The US can issue more debt at better rates than ever before because of the weakness and uncertainty of virtually all other investments. These interest rates on the 10 year T-Bill says that many investors are preparing for an economic Armageddon, IMHO.

Over the last few years investor's confidence in the United States balance sheet relative to the rest of the world, grew dramatically. S&P's downgrade proved that no credit rating agency has real power over the US. Investors have rebuked S&P's rating and essentially christened the US with GTX680 Quad-SLI Credit (sorry, couldn't resist). It could probably be argued the US has more relative confidence compared to the rest of the world since right after World War 2. That is pretty astounding: with all the criticism of how the US is handling pretty much everything right now, the world is saying, "save us, protect us and our money".

"According to this total, the 'World' is in external debt to the tune of just under 60 trillion US dollars. Or 95% of the entire world’s GDP. Go back and read that again. How can this be? Is there an alien entity lending US dollars that I know nothing about?

Source for the 60 trillion figure: [CIA Factbook]
http://sturdyblog.wordpress.com/2011/04/08/to-whom-do-we-owe-this-money-exactly/

Who Holds Our debt?
U.S. Federal Government: 52%
Foreign Governments: 25% (China, Japan et al)
State & Local Governments: 5.5%
Individual Investors: 5%
Public and private pension funds: 3.8%
Mutual Funds: 2.9%
US saving account bondholders, insurance companies, and banks: 5.7%

Source: http://www.msnbc.msn.com/id/1742487.../just-who-owns-us-national-debt/#.T8oKLNXmO3t

Article is from 2007, but based on the various Fed programs, I'd speculate the figures are probably slightly more skewed towards the government. I'll find a 2010 or 2011 link on my next break (taking breaks periodically from research paper); it will be interesting to see how the percentages have shifted.

The world is too interdependent (I'd argue co-dependent) on the US to ever let us default: not only would their bonds be worthless, but their entire country and the stock exchanges around the world would be worthless. How Foolish for people to bring up Greece. If Greece's bondholder's are preparing to take a 74% haircut, what would they give the US? 95%? I'd say 100% with even less back and forth debate if that's what the US needed. What are the individual investors and banks going to demand out of their own creditor? The US could comfortable pass another trillion dollar stimulus tomorrow, and the Dow would be up 500-1000 points overnight.

You're saying we can and should play a very high stakes game of chicken, asserting that the world will never let us default, will take a very small amount of our actual debt. Yet I see no indication that either party has the discipline to actually match spending and taxing, let alone pay down the debt. Greece is about to either leave the EU or be kicked out, and the total amount is but a tiny fraction of US debt. Why then would the world allow the USA to default on a much, much bigger debt and continue to loan us money? For that matter, how could Europe afford to allow us to default without going into a severe depression? The USA is a great profit center - for instance, we account for 25% of worldwide automobile sales but 50% of worldwide automobile sales profit. That gives the rest of the world a great reason to allow us to default, but it gives them little ability to allow us to default. The EU's GDP is slightly above ours in aggregate and we must roll over about 20% of our GDP in debt each year. Should the EU take even a 50% on the dollar hit for that kind of money, it's the Great Depression all over again. Our other major creditors like Japan and Red China are either in equally bad shape, or could well see it in their best interests to allow the USA to crash and burn. Red China for instance counts on us for about 25% of its exports. Should China stop dead lending us money it's got a 25% hole in its exports, but it certainly has the capacity to absorb that in domestic consumption. Why would China continue subsidizing our lifestyle if it isn't getting paid back? Defaulting, or even inflating our currency to meet our obligations, is a one-trick pony for a nation the size of the USA.

More immediately, when the world economy finally does improve, will capital continue to flow into US bonds? Right now we're seen as the safest (or possibly the least safe) option for investing capital, as the world economy sucks except fro China and the other big borrower, Europe, has much more intrinsic overhead (i.e. social spending) and is in an even bigger mess than are we. But if the economy improves, that may no longer be the case. If the stock market is returning 10% and seems to be stable, we'll be looking at 5% or 6% or 7% to attract that money. Now imagine a 20% return. This is not a trivial concern since we already owe more than our GDP (much of which is merely wealth transfers rather than wealth production) and our debt is almost all short term debt. A five year period of really good growth would change almost all our debt from low interest to high interest.

 

[Anarchist420]

Excellent article by Dr. North.

 

[nehalem256]

Premise: Government's role is to protect its citizens' rights to life, liberty, and property.
Argument: The value of my property is decreased by government when it prints money because more money in circulation makes that in my pocket worth less. Since government holds the money it prints, it has taken the value of my property and given it to itself.

This would be true only assuming that the amount of goods remains constant.

Due to population growth, and hopefully an increase in real wealth, this is a faulty assumption.

 

[CycloWizard]

Genx87 introduced the premise that the govt should quit levying taxes, borrow instead, reduced it to absurdity. *It's his own premise* & nobody else's. He argues against something nobody else offered, which is a strawman.

Wrong. He posed it as a reductio ad absurdem conclusion to the premise of the OP. An argument is not a premise.

If you lend to the govt, is there more money in existence? Why would there be?

Actually, there usually is, other than in the condition of a liquidity trap, which is today's economy. It's not the act of govt borrowing that creates money, at all, but rather other actions by the lender, the FRB, & member banks. The vast majority of "money" isn't created by govt, but by banking. Do they have greater right to do so than govt?

I never said lending increases the money supply. Your last two posts were about printing money.

 

[CycloWizard]

This would be true only assuming that the amount of goods remains constant.

Due to population growth, and hopefully an increase in real wealth, this is a faulty assumption.

I can easily restate:

Premise: Government's role is to protect its citizens' rights to life, liberty, and property.
Argument: The value of my property is decreased by government when it prints money because more money in circulation makes that in my pocket worth less than it would be otherwise. Since government holds the money it prints, it has taken the value of my property and given it to itself.

 

[nehalem256]

I can easily restate:

Premise: Government's role is to protect its citizens' rights to life, liberty, and property.
Argument: The value of my property is decreased by government when it prints money because more money in circulation makes that in my pocket worth less than it would be otherwise. Since government holds the money it prints, it has taken the value of my property and given it to itself.

This is fundamentally untrue unless you are expecting to live in a deflationary environment in which you money become more valuable simply by being stored in your wallet.

Money is supposed to be a store of value to facilitate trade.

Interestingly most goods that you trade money for inherently become less valuable overtime.

 

[CycloWizard]

This is fundamentally untrue unless you are expecting to live in a deflationary environment in which you money become more valuable simply by being stored in your wallet.

Money is supposed to be a store of value to facilitate trade.

Interestingly most goods that you trade money for inherently become less valuable overtime.

That's the way it is - no one is arguing with that. I'm simply pointing out that it's completely opposite to the true role of government to expedite this process. Government printing money is the same as raising taxes on the wealthy except in terms of political expediency.