Cutting spending during a recession

[fskimospy]

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
1. Actually we owe 4,478,000,000,000 in foreign debt, which means ~30.25% of our debt is foreign held. That's up from 25% 5 years ago IIRC and not going down. Barring some retardedly good luck our current economic issues are going to last for decades, meaning that number will become more and more significant.

2. I'm talking about companies like Solyndra who are given money, spend it, and die. Yeah, that's great for the economy.

1.) Predicting our economic future decades out is a fool's errand. Not interested, and it really doesn't have much bearing on the short term stimulus that I was talking about.

2.) Anecdotal evidence is uninteresting as well.

 

[woolfe9999]

Whenever there's discussion of the deficit and you get into the inevitable cut spending vs raise taxes argument, people bring up the (IMO valid) point that cutting spending in the middle of a recession is a surefire way to tank the economy even further.

That said, why not agree to cut specific spending at a certain point in the future? For example, pass legislation that cuts spending / money allocation by x percent in 3 years, then another y percent in 5. Not bullshit accounting flim flam and baselining cuts, real cuts. That would signal to investors and the public that we are serious about attacking the deficit, but at the same time not undermine the current economy by taking out much needed money. The bonus for the current set of critters would be that they could claim they were fighting the deficit without actually incurring the wrath of those impacted by reductions.

Please keep the partisan hackery out, there are plenty of other treads where you can post the bobo the obummer, job creators, ownership society etc bullshit.

This is the correct approach, and actually it is what was agreed to in the debt ceiling crisis. The first phase cuts are phased in over time, back-loaded rather than front loaded. As are the automatic second phase cuts. The argument comes up that people don't expect the cuts to be implemented if it's done in this manner, but it's kind of a moot point. Cutting spending heavily right now is a bad idea. So we can either pass a law that says spending gets cut later, or we can do nothing right now which creates as you say a confidence issue.

- wolf

 

[werepossum]

This is the correct approach, and actually it is what was agreed to in the debt ceiling crisis. The first phase cuts are phased in over time, back-loaded rather than front loaded. As are the automatic second phase cuts. The argument comes up that people don't expect the cuts to be implemented if it's done in this manner, but it's kind of a moot point. Cutting spending heavily right now is a bad idea. So we can either pass a law that says spending gets cut later, or we can do nothing right now which creates as you say a confidence issue.

- wolf

I suspect that Doppel is correct (and has a pretty picture on his post to boot) that these later spending cuts will never happen, and I'm pretty sure the market knows this as well. But Double Trouble is exactly right about the problem of cutting spending in a recession. Sometimes you just don't have any good choices and have to figure out which is the least bad. But there are things we can and should do.

We need to be smarter about spending. Stop with the payroll tax cuts; far too much of that money goes straight to China, which manufactures the vast majority of our consumer items. Stop with the corporate and high earner tax cuts; high taxes can prevent hiring, but lower taxes won't necessarily cause hiring if more employees aren't needed. Stop with the tax increases; taking more money away from the private sector always damages the economy and costs jobs, and we can't afford to lose any private sector jobs right now. Define a five year plan on regulations and taxes, passed as law, so that business knows at least what burden government will place on it at least for the near future. We need stability.

Concentrate on spending that mostly stays in America (for things like construction) on things that will facilitate wealth creation, like infrastructure where it is seriously deficient, and on reducing the appetite of things that eat. Improving government buildings with better insulation, more efficient lighting & HVAC, or just with new buildings where renovation isn't cost effective reduces future expenditures and leaves more money for other things; it's like a tax increase without the economic damage. Sacrifice your favored groups and causes; don't make jobs union-only or mandate "prevailing working wages" that drive up costs without any increase in wealth production. This isn't the time for social engineering, even things that are good ideas in good economic times. Stop spending on projects just because there's a plan and spend only on projects that will make a material improvement in wealth creation. Stop spending money just to spend money; the government can always buy jobs, but at very high cost, and those jobs last only as long as the government money.

Eliminate the corporate tax complete to make it easier for businesses to save money for expansion. In return, tax capital gains as wage income, both for basic fairness and to make up the loss in corporate tax revenue. Offer a tax holiday on repatriated foreign profits, but tied to new hiring and/or new capital ventures. We can't afford to just write off taxes, but we need that money; let's make a deal to all three parties' advantage. Start removing tax credits that have outlived their usefulness, like Energy Star appliance manufacturing credits. All manufacturers now have full lines of Energy Star appliances at little or no extra cost; the Energy Star rating needs to transition to a mandate, not a reward system.

Be smarter with public money; if we have to bail out a major company to avoid losing a lot of jobs we should, but there's a big difference between keeping a company afloat and allowing it to pay out its bonuses. If that takes a structured bankruptcy to break those contractual agreements, so be it. We're supposedly doing these bailouts to save jobs, not to keep these companies profitable, so we should be doing the minimum as well as getting legal agreements against layoffs.

Close some foreign bases and bring those troops home. We pay companies like Halliburton fortunes to supply foreign bases, and while the reasoning behind their location might once have been very valid, we can no longer afford them.

 

[Craig234]

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
1. Actually we owe 4,478,000,000,000 in foreign debt, which means ~30.25% of our debt is foreign held. That's up from 25% 5 years ago IIRC and not going down. Barring some retardedly good luck our current economic issues are going to last for decades, meaning that number will become more and more significant.

2. I'm talking about companies like Solyndra who are given money, spend it, and die. Yeah, that's great for the economy.

IIRC Solyndra was something like 0.5% of the green investment.

Yes, all business investments should be GUARANTEED. There should be a zero rate of any not doing great. Very practical demand you have.

If anything wrong was done on Solyndra, deal with that, but simply having an investment in a growing green industry not go well is not a condemnation of the policy to invest.

NOT investing would be the disaster.

 

[momeNt]

http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
1. Actually we owe 4,478,000,000,000 in foreign debt, which means ~30.25% of our debt is foreign held. That's up from 25% 5 years ago IIRC and not going down. Barring some retardedly good luck our current economic issues are going to last for decades, meaning that number will become more and more significant.

2. I'm talking about companies like Solyndra who are given money, spend it, and die. Yeah, that's great for the economy.

Foreign held debt is a term that simply persisted into the fiat currency era. Back in the gold standard days there literally was loans to foreign countries so that surplus production could be dumped onto those countries. Back in the 1920s the USA literally was financing foreign countries to buy their exports.

Today we have irredeemable currencies and in order for a country to give another surplus, an account is created with "printed" currencies. The central banks in order to hit their interest rate targets sell treasuries to take back the printed surplus to control the interest rate. When this is done with foreign countries, it becomes "foreign debt".

This does two important things - it hides the growth of the monetary base because the printed dollars are no longer being held as actual cash, they are being held as treasuries so the actual cash is taken out of the system and replaced with a far less liquid asset. What this means is that the purchasing power of the dollar stays higher because instead of printed money weakening the value it is replaced with debt.

It also leaves your manufacturing base at the mercy of the country with the surplus. When the deficit is settled you first print the currency and then sell the treasury. It then is the part of the country receiving the treasury to allow their currency to appreciate - because by selling the treasury the US isn't allowing theirs to depreciate. This can be seen by China who isn't playing by the rules but in order to do this they must battle inflation.

So the only way countries can "call in" their debt is to simply take in more than they receive from the USA and then the USA lowers the balance on that country's account. This can be accomplished by cutting back on their exports, or letting their currency appreciate in relation to the dollar which would keep more of the manufactured products in China and allow them to import more USA goods.

In conclusion, we gave the governments of this world a whole lot of power when we decided to move to irredeemable paper money.

Where will the last 40 years of monetary policy leave us in the next 10 years? I'd agree with eskimospy - very difficult to say and might as well be a fool's errand.

 

[werepossum]

Foreign held debt is a term that simply persisted into the fiat currency era. Back in the gold standard days there literally was loans to foreign countries so that surplus production could be dumped onto those countries. Back in the 1920s the USA literally was financing foreign countries to buy their exports.

Today we have irredeemable currencies and in order for a country to give another surplus, an account is created with "printed" currencies. The central banks in order to hit their interest rate targets sell treasuries to take back the printed surplus to control the interest rate. When this is done with foreign countries, it becomes "foreign debt".

This does two important things - it hides the growth of the monetary base because the printed dollars are no longer being held as actual cash, they are being held as treasuries so the actual cash is taken out of the system and replaced with a far less liquid asset. What this means is that the purchasing power of the dollar stays higher because instead of printed money weakening the value it is replaced with debt.

It also leaves your manufacturing base at the mercy of the country with the surplus. When the deficit is settled you first print the currency and then sell the treasury. It then is the part of the country receiving the treasury to allow their currency to appreciate - because by selling the treasury the US isn't allowing theirs to depreciate. This can be seen by China who isn't playing by the rules but in order to do this they must battle inflation.

So the only way countries can "call in" their debt is to simply take in more than they receive from the USA and then the USA lowers the balance on that country's account. This can be accomplished by cutting back on their exports, or letting their currency appreciate in relation to the dollar which would keep more of the manufactured products in China and allow them to import more USA goods.

In conclusion, we gave the governments of this world a whole lot of power when we decided to move to irredeemable paper money.

Where will the last 40 years of monetary policy leave us in the next 10 years? I'd agree with eskimospy - very difficult to say and might as well be a fool's errand.

This isn't quite true. All countries shave to do to redeem their share of the American debt is to present their treasuries for redemption and not roll them over. They still have dollars on account, but they can immediately change those dollars for other currencies or for tangibles like gold, at least until our currency collapses to the point that no one will have it.

 

[woolfe9999]

I suspect that Doppel is correct (and has a pretty picture on his post to boot) that these later spending cuts will never happen, and I'm pretty sure the market knows this as well.

Droppel has nothing concrete to back up his statement. It's just an assumption, nothing more. These kinds of assumptions, especially the pessimistic ones, have become articles of faith for a lot of people. I remember back in the early 90's people were saying that the US was going bankrupt because of its debt (google the book Bankruptcy 1995). It was based on the assumption that no one would do anything about it before there was a calamity. I highly doubt that cut spending will be re-implemented with this debt curve approaching a crisis level, but that too is just an intuitive assumption.

I won't respond to the rest of your lengthy post except to say kudos for having a good number of concrete ideas instead of just sticking to generalized platitudes informed by nothing but emotions.

- wolf

 

[momeNt]

This isn't quite true. All countries shave to do to redeem their share of the American debt is to present their treasuries for redemption and not roll them over. They still have dollars on account, but they can immediately change those dollars for other currencies or for tangibles like gold, at least until our currency collapses to the point that no one will have it.

They can only do that when the Fed conducts open market operations to buy back treasuries - so they have to do it with the consent of the Fed and then they can only redeem what the Fed is willing to buy.

It was kinda not quite on topic to begin with I just wanted to clarify how the terms are used today. Also it helps us to understand how politicians generally try to misuse the terms when they allege that "China is funding our spending" and similar statements.

Running deficits during recessions comes from the ideology that credit markets seize up and the total money supply in circulation drops. Central banks following this ideology then provide the liquidity to avoid the deflation that would ensue if the total amount of money were to drop. Milton Friedman has stated that the central bank acts as a helicopter dropping money out of the sky so the economy can avoid the falling prices that come with a deflationary recession. Ben Bernanke has also earned the nickname of "Helicopter Ben" in some circles as well because he espouses a similar view to Friedman on the great depression and central planning policies.

Deficits create money in a irredeemable fiat currency system. In order for the government to create one dollar it must go into debt by one dollar. So think of the deficit as basically signifying how much money they have created.

 

[Engineer]

I love the non binding spending cuts in 10 years....

Obama has tried everything that has been proven not to work and he has promised to double down. Tax and spend & spend some more.

When has Obama raised taxes? AFAIK, he has cut taxes (or extended several cuts) and has even proposed MORE cuts for most folks. 404 - tax raises (up until he actually does get them raised) not found.

 

[werepossum]

Droppel has nothing concrete to back up his statement. It's just an assumption, nothing more. These kinds of assumptions, especially the pessimistic ones, have become articles of faith for a lot of people. I remember back in the early 90's people were saying that the US was going bankrupt because of its debt (google the book Bankruptcy 1995). It was based on the assumption that no one would do anything about it before there was a calamity. I highly doubt that cut spending will be re-implemented with this debt curve approaching a crisis level, but that too is just an intuitive assumption.

I won't respond to the rest of your lengthy post except to say kudos for having a good number of concrete ideas instead of just sticking to generalized platitudes informed by nothing but emotions.

- wolf

But it's an assumption backed up by observation. At least since Reagan, promised spending cuts in the future have never materialized. The Pubbies did an excellent job in the '95 to '2000 Congresses of cutting spending (or more properly, usually the rate of growth of spending), even to the point of balancing the budget if one includes the borrowed Social Security revenues, but that was year to year cuts. Here we're talking about promised future cuts - I'll gladly pay you Tuesday for a hamburger today. Problem is, with Congress by Tuesday they'll want three hamburgers and have the revenue for two, and borrowing the money for that third hamburger is a lot more likely than cutting back to one hamburger to make good that pledge.

They can only do that when the Fed conducts open market operations to buy back treasuries - so they have to do it with the consent of the Fed and then they can only redeem what the Fed is willing to buy.

It was kinda not quite on topic to begin with I just wanted to clarify how the terms are used today. Also it helps us to understand how politicians generally try to misuse the terms when they allege that "China is funding our spending" and similar statements.

Running deficits during recessions comes from the ideology that credit markets seize up and the total money supply in circulation drops. Central banks following this ideology then provide the liquidity to avoid the deflation that would ensue if the total amount of money were to drop. Milton Friedman has stated that the central bank acts as a helicopter dropping money out of the sky so the economy can avoid the falling prices that come with a deflationary recession. Ben Bernanke has also earned the nickname of "Helicopter Ben" in some circles as well because he espouses a similar view to Friedman on the great depression and central planning policies.

Deficits create money in a irredeemable fiat currency system. In order for the government to create one dollar it must go into debt by one dollar. So think of the deficit as basically signifying how much money they have created.

Granted, but that's a one trick pony. The first time we refuse to buy back our debt on (or reasonably close to) schedule, our debt becomes unmarketable, since debt is marketable not only on promised return, but even more so on perceived safety.

 

[Matt1970]

we need to tax and spend in a way that reduces our peak
concentration of wealth.

LOL

 

[Double Trouble]

First off, thanks for participating in the thread without trolling (with some exceptions of course). Some interesting reading and good posts, something we don't get enough of around here.

Seems like the crux of the issue then is that there's no way to make sure agreed upon future cuts actually materialize. I guess there probably isn't a way (short of constitutional amendment) to tie the hands of future congresses to make sure the cuts we set out in a plan today actually happen 5-10 years from now.

 

[werepossum]

First off, thanks for participating in the thread without trolling (with some exceptions of course). Some interesting reading and good posts, something we don't get enough of around here.

Seems like the crux of the issue then is that there's no way to make sure agreed upon future cuts actually materialize. I guess there probably isn't a way (short of constitutional amendment) to tie the hands of future congresses to make sure the cuts we set out in a plan today actually happen 5-10 years from now.

A Constitutional Amendment requiring a balanced budget would be great. Unfortunately, with our current spending and debt, it would be disastrous to the economy.