The World Can’t Get Enough American Debt
Between the TARP and the stimulus, we’ve added an enormous amount to the national debt recently. So it’s no surprise that I’ve heard from a lot of people who are worried about the situation. How are we going to finance all this debt? Aren’t we risking a dollar crisis? A huge run-up in interest rates?
These are all reasonable questions, but as Peter Goodman writes in The New York Times, the answer is no and the world can’t get enough of our Treasury bonds. Instead, the debt crisis is hitting elsewhere, especially Eastern Europe: “as Americans eschew foreign deals and keep their dollars at home, and as foreign central banks — especially China — buy Treasury bills, the United States is absorbing money that used to be scattered around the globe. And that is making money tighter elsewhere in the world.”
In a sense, we seem to have cycles from a dot-com bubble to a U.S. real estate bubble to a brief commodities bubble and now to a U.S. Treasuries bubble. Which all seems a little perverse. But it also bolsters the case for additional stimulus or a massively expensive bank nationalization scheme. We’re well-below full employment, and under the circumstances the way you know you’re doing too much stimulating is that the borrowing is pushing interest rates up. At the moment, that’s not happening.
70 Responses to “The World Can’t Get Enough American Debt”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
March 8th, 2009 at 8:20 pm
geez, not you too!
March 8th, 2009 at 8:22 pm
The question is: what happens when the treasury bubble bursts? Won’t that mean the yield on treasury notes goes sky high? Wouldn’t that cause people to invest more in treasury notes?
I think Matt should do a little more nuanced examination of the ramification of a treasury bubble.
March 8th, 2009 at 8:25 pm
As Stiglitz has observed, a Good Bank / Bad Bank bail-out can be reasonable straightforward and far simpler than many of the doomed-to-fail proposals floating out there … as long as the government is establishing the Good Bank.
Go through the books, find insolvent banks, and go ahead and put them in government receivership. Pull out the depository obligations we wish to protect, and the sound assets of the bank … that is, the assets of clear and stable market value.
The bank that went into receivership is now the Bad Bank.
If the obligations taken over by the good bank are less than the sound assets, then pay the Bad Bank for the surplus, if the obligations that must be taken over by the good bank are greater than the sound assets, the government receives a Senior claim on the Bad Bank and makes good the balance with the Good Bank.
The Bad Bank then has its shareholders wiped out, its bondholders become shareholders, Senior Preferred claims if any (from any stage of government bail out) remain as Senior Preferred claims, and the new shareholders see if they can do anything with the trash that the bank built up.
Then the government creates a unit trust to own the “good bank”, inviting a solvent bank to enter in as a managing partner, and when it is a reasonable time to privatize the bank, the units are converted to shares and the government sells its shares at auction.
We get unencumbered banks with solid balance sheets, in a position to lend to small and medium sized business if the economy is recovering and it is prudent to do so.
Ditto with AIG … put the ownership corporation and its CDS issuing subsidiary on one side, that’s AIG, pull out the regular insurance divisions so they are no longer lumbered by the proven bad strategy of the ownership corporation, and then spin off the regular insurance divisions as their own companies under new management.
March 8th, 2009 at 8:29 pm
I don’t see how this NYT article linked answers any of those disturbing questions. Currently 5 trillion dollars of debt is borrowed each year by the treasury. If, for whatever reason, interest rates rise the US is either going to have to borrow more or spend less.
Someone who believe in the EMH wouldn’t be too worried since the yield on long term debt is still quite low but you claim this is a bubble. If anything you should then be extremely worried that this cheap US debt will blow-up in America’s face once foreigners stop their lending.
March 8th, 2009 at 8:37 pm
The strength in the dollar is related to the strength in the Treasury market but not the same thing.
Since a story is needed to explain why markets move, in the case of the dollar probably the simplest story is that the dollar is strong because so much of the worlds debt is denominated in dollars that there is a demand for dollars in order to pay off all that debt, with dollars.
The Treasury market has been extremely strong in the face of the huge supply of the last year. Since last March I would guess that the Treasury has borrowed at least $1.25 trillion. Over the next 12 months it will have to borrow $2 trillion minimum.
The strong demand for Treasuries is based in part on the flight to quality. As the prices of assets fall, especially stocks and other bonds the sellers who are liquidating these assets are putting the money into Treasuries.
It must be understood that these huge money flows have nothing to do with normal peoples little $10K IRA. When institution and money managers are dealing with amounts in the tens of millions of dollars they cannot just ‘put the money in the bank. It has to be put into some sort of highly liquid financial asset. The most liquid and safest asset in the world still is US Treasury paper.
The flood of money into Treasuries was perfectly coincidental with the first big drop in stocks last year with the Bear debacle. Which was the driver of the first bailouts which necessitated the new huge Treasury needs. Very circular and quite logical. Making an absolute argument about the casual flow of this relationship is a mistake. I strongly believe that the flight into Treasuries has been causal in the decimation and freeze ups in other debt markets and the fall in stocks. That doesn’t make it true.
For the last year the markets have never once shown the ability to rally stocks and bonds together. I believe this will continue. If Treasury bonds rally, meaning interest rates on them drop, then I believe stocks will continue to fall. If stocks rise then I would expect Treasuries to fall. If they both can hold or if Treasuries can at least not crater in the face of the huge supply and stocks halt their fall then that means that something has changed. It would mean the the deflation has stopped, or at least stabilized. It would mean liquidity is returning to the markets.
Everyone better hope so. My crackpot self has been yelling the sky is falling on the Treasury not because I am certain it will but to wave a bloody shirt to point out that it could.
March 8th, 2009 at 8:48 pm
The relevant metric isn’t government debt by itself but total societal debt relative to GDP. That ratio is now 370%, a huge increase from the 140% average that prevailed for several decades after WW2 debt was paid down. In that context, adding more government debt should be worrisome, even if (for the moment) it seems painless & easy to do.
March 8th, 2009 at 8:58 pm
DTM,
Neither do I. But if I believed in the treasury bill bubble I would be concerned over the long term implications of a higher interest rate. Personally the low long term yields on government debt are a strong sign of confidence but there is a chance (albeit not a very good one) that interest rates rise by some unexpected and material amount. If this were to occur it would be a little more complicated than simply raise taxes a little. Raise taxes a lot, cut some spending, and watch GDP decline is more realistic.
And in reference to your inflation battle with Myles. If lenders ever thought America had the audacity to inflate their debt away interest rates on future debt issued would sky-rocket.
March 8th, 2009 at 9:32 pm
Which all seems a little perverse. But it also bolsters the case for additional stimulus or a massively expensive bank nationalization scheme.
Or a big tax cut? No, perish the thought.
The relevant metric isn’t government debt by itself but total societal debt relative to GDP.
Why? On what basis is this more “relevant” than government debt?
March 8th, 2009 at 9:38 pm
Room to raise taxes? You just returned from the moon? There will be blood if taxes are raised beyond Obama’s little hike at the very very top. There are several thousand Jr Tim McVies out there right now.
http://www.law.umkc.edu/faculty/projects/ftrials/mcveigh/t-shirt.jpg
March 8th, 2009 at 9:47 pm
Or a big tax cut? No, perish the thought.
Maybe that thought could be, oh, I don’t know, drowned in a bathtub?
March 8th, 2009 at 9:49 pm
why do you think there is such a chance–they will likely rise above their current low levels, sure, but to above normal levels, why would that happen?
This is really an ideological question (Austrians vs. Keynesians) but while I largely agree with you (i.e. the Keynesians) on debt I have a slightly more nuanced understanding.
First I believe once our globalized economic system returns to normal and becomes even more globalized the US interest rate will better reflect the global marginal return on capital (i.e. it will rise in the US). Secondly, I agree in part with the Austrians in that everyone has borrowed too much (thanks partially to the fed).
The reason I feel this rise could be unexpectedly high is because of this “flight to quality” you mentioned. Both long-term and short-term debt could be artificially low thanks to liquidity problems and the rise in default rates of other assets. In other words there is a chance EMH does not apply to treasury debt and we are in a bubble.
If this is true interest rates could rise substantially and so too would taxes. But based on what the messiah’s chair of the CEA says, raising taxes is a problem for everyone.
March 8th, 2009 at 10:12 pm
The strength of the dollar, at least from a Canadian perspective, is very bizarre. Canada’s fiscal house is in much better order than the balance of the G8 – our debt to GDP has fallen pretty dramatically over the last decade, to about 28% – or almost 1/3 of that of the US. And our banking system has been ranked tops, and is largely unaffected by the financial crisis. Yet our dollar climbed to parity (and above) with the greenback last year, only to fall steadily throughout the ongoing crisis – even as the stability of Canada’s finances has been one of the foremost points. We’re now down to 77 cents, even amid plaudits to Canada for good financial management and good banking.
Like I said, very strange.
March 8th, 2009 at 10:43 pm
The NYT’s data on Treasury instruments is nearly 3 months time late. Everyone was buying them in the Dec panic and this was reflected in 30 yr yields going as low as 2.5%. They have since rebounded to low but not basement levels. Similar for the short term, which have been off their bottom stops for nearly a month. Most forward projections show rates going up for the rest of the year – the consensus projection for the 30 yr (now 3.5%) is just under 5% by Dec.
All of which is to say the appetite is still there, but has been and continues to diminish.
March 8th, 2009 at 10:50 pm
What I don’t understand is why they would shoot higher than normal
Simple supply and demand. If there are more bonds out there than there are buyers, prices go down (and of course yields go up).
I would say most if not all market movements overshoot. Such is their nature. There is the ‘overdamped’ case where something will reach a new equilibrium asymptotically due to regulation or other ‘frictional’ forces – the physical example is a screen door closure device with excess dashpot force – but if I understand correctly I would say US treasuries are not such a market
March 8th, 2009 at 11:44 pm
Too many links put the previous attempt at this in moderation purgatory Here it is again without the links
DTM-
I would argue they overshot in the late seventies /early eighties
Even if I’m completely misreading cause and effect, here’s my central worry. All assumptions (e.g. in the recently released budget outline) assume a long term interest rate of around 5%. But it was only since the Great Moderation where such an assumption would even be in the ballpark. The long term trend line looks closer to 7-8; it was never below 6 until the last month of 1997
With the trillion dollar deficits we are talking about – and on other threads claiming these are too small – sure, a difference of 1 or 2 % may only be tens of billions of dollars a year, but 5% or more and were talking serious money. Esp with the magic of compound interest.
As an aside per this (http://www.irs.gov/pub/irs-soi/06in36tr.xls) there’s on the order of 1 trillon dollars of income taxed at the 33 or 35% (soon to be higher ) rates. And that was in a fairly good year. There simply not enough there to make up the shortfalls (esp at the modest increases proposed by simply allowing the bush tax cuts to expire and the minor tweaks to deductions)
March 8th, 2009 at 11:45 pm
Yet our dollar climbed to parity (and above) with the greenback last year, only to fall steadily throughout the ongoing crisis – even as the stability of Canada’s finances has been one of the foremost points.
Oil isn’t priced in loonies. The American dollar is so damn big that when we blew up we unwound oil instead of the currency strength. It’s perverse but that’s where we are.
March 9th, 2009 at 12:01 am
McKingford #17-
The canadian dollar (like the australian dollar) movements over the last two years have pretty much a result in the bubble in commodities and the subsequent burst.
March 9th, 2009 at 12:12 am
The Canadian and Austrailan dollar weren’t bubbles, that was rational. It’s irrationality and fear of the unknown that keep the US afloat and thank God for it (if you live here). That’s magical markets and the omnicience of the investor class.
March 9th, 2009 at 1:01 am
Since last March I would guess that the Treasury has borrowed at least $1.25 trillion. Over the next 12 months it will have to borrow $2 trillion minimum.
Another way to put that is that the treasury sold that many bonds at a ridiculous interest rate. 3 month bills almost went negative at the hight of the credit crunch. Equity funds and big capital were going to pay the treasury for a safe harbor.
I’m so goddamn sick of Austrian bullshit. It’s not how things work. Can it, already.
March 9th, 2009 at 1:08 am
In bizzaro Austrian economicland, does the treasury cease selling bonds in deficit circumstances? Has anyone suggested this as a macroeconomic policy idea? I’m asking in a serious manner.
March 9th, 2009 at 1:49 am
Money R stoopid.
March 9th, 2009 at 1:54 am
I have noticed that in our market, whenever the U.S. stock market tumbles and another major U.S. bank or corporation goes bust, and whenever the U.S. job market falters –
The value of the U.S. dollar goes up.
My guess is that there is an enormous amount of international vested interest in keeping the dollar strong, and in purchasing Treasury bonds. But so far as I understand it, the biggest buyer of Treasury bonds is China. What happens if China goes bust, as it well may given its current crisis of overproduction?
The U.S. budget deficit this year is supposed to be about 10%. That adding to an unprecedentedly large national debt. What happens when interest rates rise to a realistic level instead of being kept artificially low? You’d have to increase taxes by 10-20% to fund debt servicing on interest rates of 10-15%. I don’t believe that the U.S. ruling class would stand for that. They’d literally rather see the country go bust.
March 9th, 2009 at 2:03 am
As for taxes, so suppose in addition to the 33% and 35% tax brackets you also have to increase the 25% and 28% brackets. Is the economy going to grind to a halt? Hardly. And that still only substantially affects a minority of Americans.
Not saying the economy will grind to a halt. Someone’s re-election chances might. (There was a president in the late 80’s / early 90’s that broke a tax pledge, name escapes me at the moment)
I posted this on another thread: http://www.mymoneyblog.com/archives/2009/01/2009-marginal-rate-brackets-for-federal-income-tax.html
Fiddling around with the 28% bracket gets you to the at the border of the most upper quintile (upper decile if talking about couples) Fiddling around with the 25% bracket gets you square into the fourth quintile for couples, and as low as 34K AGI (actual income somewhat higher) if your of the sort that won’t or can’t get married. http://en.wikipedia.org/wiki/Household_income_in_the_United_States
Either way, a significant deviation from the oft repeated promise that only those at 250K and up will be affected.
(there is also a political trap in the budget plans as written wrt carbon tax/ cap&trade. Will the typical american understand that even if their electric bill and gasoline prices goes up they are getting back that money as some additional dollars in their paychecks and/or on April 15? The typical american thinks that getting overcharged for taxes during the year is the same thing as getting money back from the IRS after their 1040 series is filled out.)
March 9th, 2009 at 3:15 am
Nobody in the history of America ever got in trouble by taking on more debt than they could afford in the long run just because they could get a low teaser interest rate upfront. Hey, that strategy worked wonders in San Bernardino County, so why shouldn’t the U.S. Government act like a Costco clerk buying a McMansion with a zero down negatively amortizing mortgage? What could possibly go wrong?
March 9th, 2009 at 3:31 am
The world wants to invest its bucks not keep them under the mattress and in the current global downturn T bills are deemed among the safest bets. Safer than investing in China or Poland or GM.
And so the world is financing our deficits. Again.
But to suggest that this enabling in and of itself should encourage yet more deficit is crazy talk.
It is like the old joke “But judge my account musta been good ’cause I still had checks!”.
It is like the housing bubble… just because you could pull 100K out of your equity doesn’t mean it was a good idea.
Just because the bank would loan you 500K on a wing and a prayer doesn’t mean that was a good idea.
And just because the bar is full of liquor doesn’t mean I should get drunk.
And Kolohe the carbon tax and income tax cuts do not cancel each other out.
If they did there would be no money for “investment in green energy” and “make work pay”.
As written cap and trade amounts to a rather steep tax increase on all consumers but aimed especially at the middle classes.
Another of those regressive taxes Matt has come to love.
March 9th, 2009 at 4:22 am
33: I’m not sure how many more times I can listen to this argument before I hurl. What you are missing here is the US government is fundamentally a different actor than your random individual. When people are trying to loan the US government money, that means they aren’t spending it. When a credit card company is trying to loan you money, it means that they would loan it to the next sucker just as easily. So if the government refuses to take those loans, those people will find somewhere extremely safe to park that money (actually, they will just drive down bond rates further and potentially trigger a deflationary cycle). And that kills the economy. The US government’s ability to pay is based on the strength of its economy. In one sense the government’s job is easy, since it can always borrow easily when things are bad. In another, it is very hard, because it can’t save money in case the economy tanks. It’s responsible for making sure that doesn’t happen. Right now it’s better to let individuals privately save money by investing it in treasuries while as a society collectively we borrow that money and spend or invest it.
March 9th, 2009 at 5:03 am
I agree with Steve Sailer — the issue is whether the government debt is being incurred via short term bills or 30 year bonds. If you run up $3 Trillion in 6 months securities , you can get fucked when you have to roll that $3 Trillion over in the near future.
Plus this US debt is NOT being invested into something that will benefit all Americans. It is being used to pay off the gambling debts of the Superrich –purchasing dreck that is the financial equivalent of a brown bag filled with cat shit.
And the huge US debt is a bloodsucking leech on the American taxpayer — who already before this was having to cough up $hundreds of billions a year in taxes to our coupon-clipping
rentier class.
The huge Treasury debt will crowd out private investment in the US economy –our oligarchs will have no need to risk capital and employ Americans if they can simply collect interest from the US government every month to pay their bar tab in the Caribbean. We are evolving from a Republic into a Confederacy slave system — with billionaires living a life of Southern slaveholder leisure, the US government serving as the whip-swinging overseer, and the vast majority of Americans slaving away in hopeless debt peonage. Their descendents doomed to be chattel.
March 9th, 2009 at 5:11 am
Note that in gold and platinum terms, the dollar has NOT appreciated 17 percent in the past few months (NY Times article)
Rather it has lost 10 percent of its value.
March 9th, 2009 at 5:42 am
1) If you look at the March 2009 Treasury Bulletin, You will see that Steve Sailor is RIGHT:
The US Government is incurring huge long term debt at
SHORT TERM low rate teaser loans!!
2) In 2004, the $3.2 Trillion in privately held Treasuries had an average maturity of 4 years, 11 months.
In Dec 2008, that debt had increased to $5.3 Trillion with an average maturity on only 3 years, 10 months.
That’s because $2.4 TRILLION of our federal debt will come due (mature) within 1 year and another
$1.6 Trillion matures within less than 5 years. That’s $4 Trillion in short term debt.
3) For the New York Times to suggest that America is borrowing the bank bailout money cheaply is,
in my opinion, a good example of how the Times engages in TWO-FACED DECEIT on behalf of Wall Street interests.
Note how Harvard-educated Matthew Yglesias swallowed the Time’s con hook, line and sinker.
Ref: Table FD-5 (Maturity Distribution and Average Length of Marketable Interest-Bearing
Public Debt Held by Private Investors) within the Federal Debt Section of the March 2009 Treasury
Bulletin, available at http://www.fms.treas.gov/bulletin/index.html
March 9th, 2009 at 5:50 am
In contrast, the amount of US Treasuries held by the public that has a maturity of 10-20 years is ONLY $354 Billion. And the Treasuries with a maturity of more than 20 years is only
$163 Billion.
March 9th, 2009 at 6:11 am
I do not know a lot about treasury and bonds, but I do have intelligence and commonsense. This is a good time to buy for anyone who has even a little money. Things will turn around again. My mother told me continually while growing up from Bible scripture that there would be a time that the high would be brought low and the low brought high. I think we are living in these times.
The Republicans like to state that Pres. Obama is spending too big, like GWB, only the spending that Pres. Obama is doing is on things that have been neglected for far too long and it is spending that will benefit Americans in the present and also in the future — bridges, roads, water and sewer systems, new electric grids and in weatherization, solar panels and wind turbins. This is constructive spending rather than destructive spending characterized by GWB and the Republicans. If you have a falling structure, it is stupid not to spend money on it to rehabilitiate it, not unless you do not want it anymore. And the argument that he is not moving quick enough is also distortion — it is easy to tear down a Mountain, but it takes time to build that mountain back up.
March 9th, 2009 at 6:26 am
34 Well I’ve already hurled.
I get it that the US Government is not an individual actor. Dohhh! Strikingly they can always just raise taxes and cancel their contracts with us whereas I can’t just demand a raise from my boss.
And failing that they can just turn on the presses or start a war. You know, our usual.
I also understand the theory of deficit spending during a depression; we are obviously doing just that. Jeez.
We are indebting ourselves to the tune of 10 Trillion$$$ and counting and we see very little return on our money despite Obama’s claim that it’s working. You might check out the NYTimes story on the already prevalent misuse of Stimulator funds.
But back to my point.
Are you arguing that there is no limit to the debt we should be incurring?
If not then what determines that limit?
You seem to suggest, as does Matt, that as long as the world will loan it we should borrow it and spend it and evidence little concern for the inevitable downside.
Hey we can always raise taxes!
In which case we are no better than the drunk in the bar because tomorrow’s hangover is going to wash away today’s brief and ineffectual relief of pain.
March 9th, 2009 at 7:03 am
And there is one other point that should concern all good bleeding heart progressives:
All that money flowing into T bills is money not available to other governments. Much of the world is having a tougher time than we are. Private investment in Africa is around 30% what it was just a few years ago. Asia is not doing much better. Eastern Europe is in the midst of a meltdown that makes ours look like a Gilded Age.
March 9th, 2009 at 7:25 am
If you look at two of the biggest banks that people are hot to nationalize, Bank of America and JP Morgan, both have forecast that they are going to be profitable, so if they are not requiring additional government funds, why are we talking about nationalization? Both helped the Federal authorities take rancid pieces of financial crap, Merrill and WaMu off the table last Fall. Both have said they want to repay TARP. So why this
lust for nationalization?
March 9th, 2009 at 7:38 am
I’m not criticizing the $800 Stimulus bill — that was needed to stimulate the economy and much of it appears to be an investment of one kind or another — or giving US citizens in bad situations a lifeline.
What I criticize is the other $9 Trillion — all the guarantees the Bernanke is giving out. All the loans that are being made secured by dreck. What kind of moron gives a $150 BILLION loan to a bankrupt enterprise (cough AIG cough).
The US Congress asks where all these $Trillions are going, who are receiving them and why. The response from the Fed and Treasury? “Go Fuck Yourself– we ain’t saying nothing.”
March 9th, 2009 at 7:55 am
40: I don’t mean to be unfair to you, but many people don’t understand why deficit spending in a depression is sound policy. There is an entire economic movement (Austrians) dedicated to this very proposition, so I didn’t necessarily know where you’re coming from. Two points: first, debt is cheap and we are not close to a historical high for the US government debt (or at a debt load where other countries have had problems). And the US will always have an easier time managing a high debt load as long as it is the world’s reserve currency. Second, enough with the stimulus misuse arguments! The majority of the money is dedicated to things like tax cuts and state assistance for existing programs so fundamentally they can’t be misused. And the examples of ‘misuse’ that I have seen turned out to be things like ‘volcano watching’, ie small amounts of money dedicated to, in fact, very worthwhile activities.
I am more concerned about the bank bailout money. It’s a lot harder to say what needs to happen there, but a < 1T stimulus was, in my opinion, a no brainer to start off the year.
March 9th, 2009 at 8:19 am
I know that America is in trouble but other countries are the same too. Europe’s economy going very bad too, but the houses are not $10.000 and $1, they are much more. Why every boddy rave only about America’s economy I can not understand.If our goverment did not give so many millions to all over the world country and if they started putting those millions and billions to America and not any were else , then we will see whoe’s more prodactive and rich, We were not have to worrie about anything because we will all have more money then any one else.After all is our hard earn money and we pay more taxes for them to give it away.(not fair)
We all worried about tomorrow , but thank God and my finding the best opportunity existing on the net , I do not have to worrie about next year my daughter going to college, because first of all I can afford the best schools that there in USA and second she is in too. An opportunity that made me complete worrie free from not having enought and do it full or part time. Making 6 and 7 figure income is not any more a dream for a lot of people , and I am going to 6 figure very soon. You want to know more go to:
https://c5worldwide.infusionsoft.com/go/60/aspaarva/
March 9th, 2009 at 8:25 am
45 Comments so far, and not a one that shows any sign of understanding basic reserve accounting.
U.S. government “debt” is not “debt” in the same way that, say, corporate bonds are. If a corporation, or a state government, wants to sell bonds, it must compete against others for the supply of dollars available. But all that does is move dollar balances from one account to another. But when the U.S. gov sells a bond, it drains those dollar balances from the system (the Fed does the same thing in the conduct of monetary policy.)
The upshot? The U.S. Treasury “selling a bond” is merely exchanging an interest bearing government liability for a non-interest bearing liability (cash or reserves). It is emphatically not a “loan” – it’s only purpose in our system to to maintain a non-zero interest rate. In fact, since the Fed has recently begun paying interest on reserve balances, bonds are completely redundant and should be no longer be sold. The Treasury should just allow balances to build up at the Fed, and the Fed should simply set the risk-free rate directly, instead of going through all the unnecessary hassles of t-bill auctions, open-market operations, and the like. Unfortunately, as displayed here, obsolete notions about how the monetary system works will prevent this from happening…
March 9th, 2009 at 8:55 am
Don Williams: You make a compelling argument. It is certainly better than the silliness Matt typed. If the interest on the t-notes shoots upward, what will that mean in the long run? Will our annual budgets be hampered servicing a larger percentage of debt? I seem to recall that was a problem in the early nineties under Bush I, that debt was a large piece of the budget pie, and that it disappeared under Clinton. Heck, I seem to recall at the time Limbaugh accusing the administration of refinancing the US debt with short term bonds because the interest rate was lower. I don’t know how true that was, though.
March 9th, 2009 at 9:06 am
What’s your point, Jimbo?
A Treasury security IS a liability that the US Government has to pay off. If a short term bill expires, the Treasury either has to sell another one (to raise the money to pay off the first one –i.e., roll over the debt ) or it has to raise the cash. If it sells a new one, the interest rate may be much higher than the one being retired.
If the government decides to pay off a maturing, It can raise cash in one of several ways, but none of them are painless. It can print the money — but if it does that beyond what is supported by the productive capacity of the country, then ALL dollars start becoming worth less and less. As more debt matures, the Treasury finds it has to pay a higher interest rate as punishment for the inflation it has created.
It can collect taxes instead — but someone has to do enough work to earn the taxes. Every year, a huge part of the money US citizens earn via labor has to be collected and used just to pay off the interest for incurred debt — the interest on our $11.3 Trillion is around $400 billion alone. Every year.
So what’s your point?
March 9th, 2009 at 9:13 am
What’s your point, Jimbo?
A Treasury security IS a liability that the US Government has to pay off. If a short term bill expires, the Treasury either has to sell another one (to raise the money to pay off the first one –i.e., roll over the debt ) or it has to raise the cash. If it sells a new one, the interest rate may be much higher than the one being retired.
If the government decides to pay off a maturing, It can raise cash in one of several ways, but none of them are painless. It can print the money — but if it does that beyond what is supported by the productive capacity of the country, then ALL dollars start becoming worth less and less. As more debt matures, the Treasury finds it has to pay a higher interest rate as punishment for the inflation it has created.
It can collect taxes instead — but someone has to do enough work to earn the taxes. Every year, a huge part of the money US citizens earn via labor has to be collected and used just to pay off the interest for incurred debt — the interest on our $11.3 Trillion is around $400 billion alone. Every year.
So what’s your point?
P.S. – Sorry, forgot to tell you great post!
March 9th, 2009 at 9:15 am
Hmm. Well, you’re right that the amount of bubbliness doesn’t *have* to be conserved; but the only way to reduce it is for net debt to be paid down (currently happening), which has a deflationary impact. There *is* a large amount of purchasing power (cash-like instruments) floating around, and when it leaves real estate or whatever other bubble du jour it has to go somewhere. Sometimes that might be back whence it came (paying down debt) but more often it would be into another venue (US Treasuries, commodities, or some other bubble…).
March 9th, 2009 at 9:25 am
I did not post item 50 above at 9:13 am –an imposter did.
March 9th, 2009 at 9:39 am
The flight to Treasuries is the bubble collapsing (or, more precisely, those with intact assets fleeing the collapsing bubble), not another bubble. Those fleeing may “overshoot” and overstay in Treasuries, but that’s not really a “bubble.”
March 9th, 2009 at 9:53 am
Sounds like a semantic argument. We can agree that if the returns go up in future, the value of Treasuries bought today will go down significantly. For example, if inflation goes to 5% and the rate on 30-year Treasuries goes to 7%, today’s buyers take a rather large bath. Whether we want to describe the current action as a ‘bubble’ depends perhaps on whether we regard these things as likely enough to have the sheen of inevitability, or as an unfortunate and somewhat unlikely circumstance.
March 9th, 2009 at 9:55 am
“A Treasury security IS a liability that the US Government has to pay off.”
So is a dolar bill. If you present a dollar bill to your local Fed bank, they have to pay you off – with a shiny new bill. Bank reserves are another form of liability (entries in one part of the combined Government/Fed spreadsheet) and Bills and Bonds are another (entires in another part) When the Bill or bonds matures, the government debits one account and credits another. In no case does money need to be “raised” – it’s all just entries on the Gov’s own spreadsheet.
“it does that beyond what is supported by the productive capacity of the country, then ALL dollars start becoming worth less and less.”
Now you’re getting it. The real risk – for any amount of government spending, whether finacnes by “printing money” or “sterilized” by bond sales – is inflation. If the government tries to spend more than the economy can handle (for instance, increasing the deficit when the economy is at full employment) it competes with the priovate sector for resources, and since it can win any bidding war, it devalues the currency. For this reason, the government taxes – NOT to “raise money”, (again, all that happens when you pay your taxes is that the government debits an account at the Fed – and if you py with cash, they throw it in the shredder) but to “make room” for government spending. Think of a subway collecting tokens at the turnstile: does it do it because it needs the tokens, or in order to ensure a demand for them at it’s token booths?
All of which, as I said, has nothing to do with bond sales, which merely change the mix of outstanding government obligations between interest bearing and non-interest bearing, in order to support a risk-free interest rate. Which leads me to:
“As more debt matures, the Treasury finds it has to pay a higher interest rate as punishment for the inflation it has created.”
Only if the Fed decides to raise the rate. The interest the government pays on it’s own debt is a policy variable. In the absence of offsetting bond sales to drain reserves, the interest rate will settle at the interest rate on cash – 0%.
This all has to do with the difference between being a currency issuer and a currency user. The two cases are fundamentally different, and the policy imperatives are in many cases completely opposite. And yet people, even eminent economists, insist on treating them as if they are the same.
March 9th, 2009 at 10:04 am
bbartlog — the risk that one might stay too long and suffer losses in the aftermath of a “flight to security” is a commonplace; it’s part of the trade. What’s new and trendy is plastering this with another term (which has other established uses), “bubble.” In addition, bubbliness comes about when buyers expect the price increases to continue. In contrast, no sensible person thinks Treasuries are going to continue to stay at current rates or go lower — a return to normalcy is the expectation although the timing is uncertain. further, since we’re in the zero rate range, Treasury prices can’t rise much unless things get REALLY weird.
Calling this a bubble is worse than silly, it’s also misleading and muddled.
March 9th, 2009 at 11:37 am
Re jimbo’s comment “For this reason, the government taxes – NOT to “raise money” … but to “make room” for government spending.”
—————
So why can’t 300 Million Americans go on vacation for 6 months while the Fed keeps the economy running. Would’t that “make room” for government spending?
Just print out $100,000 to cover my bar tab in Aruba and I’ll be glad to get out of your way. Oh –and can you toss that $11.3 Trillion federal debt into that ” shredder” you were talking about? And if all you do when I pay taxes is toss the money away, then how about you make that “debit” mark and I’ll keep the tax money to cut down on the paperwork.
Why does everybody work so hard for –you know — paychecks? Profits?
And if you can actually set interest rates to 0 while there are other investment alternatives overseas, don’t you run the risk of capital flight? Isn’t our low rates now more a matter of Europe being in the crapper than any monetary merit on our part? Well that plus being able to steal $3 Trillion out of the Social Security/Medicare Trust Fund?
March 9th, 2009 at 11:43 am
Jimbo wants to treat the Fed and the treasury as the same entity when they are not. Only a fraction of the debt issues by the Treasury is purchased by the Fed. Only a fraction of the treasury market is new issues. The secondary market is subject to market forces of supply and demand. The supply being determined by how much debt was issued in the past is still outstanding minus whatever smallish percentage the Fed has monetized. The demand is determined by investors expectations for dollar inflation, interest rates, volatility and prospects and availability of alternative investments for their dollars.
As for interest rates shooting up if foreign investors ever suspected the U.S. was going to inflate its way out of its debt, I give you the quote of Luo Ping of the China Banking Regulatory Commission http://shanghaiist.com/2009/02/12/quote_of_the_day_luo_ping_director-.php
They are stuck with us. They bought so much of our debt that they cannot dump it fast enough now to avoid triggering a collapse in value of the remainder. As we issue trillions more, they have no alternatives for investments and apparently feel they have to stand by, keep buying, and watch the real value of the treasury holdings diminish.
March 9th, 2009 at 12:09 pm
Doug –
They try to hell to pretend they aren’t the same entity (out of a misguided progressive era distaste for politics in favor of technocracy), but on an operational basis, they are. In order to run monetary policy, the Fed must continually consult with the Treasury, since every time the Treasury taxes, spends, or borrows, it is engaging in the same monetary operations that the Fed itself does. (Google “Treasury Tax and Loan accounts”) The Fed is merely the U.S. Treasury’s interface with the banking system.
It doesn’t matter how much of the debt is primary or secondary. Prices are set at the margin, and a monopoly supplier must, as a point of logic, either set the price or the quantity. Long term rates float around because the Fed chooses not to set them. Instead, they are set based on expectations of future fed changes in the short term rate. But there is nothing magic about the short term rate – the fed could set rates out anywhere on the yield curve if it wanted to (and it looks like that’s where they’re heading). \
If the Chinese wanted to dump it’s treasuries, it would certainly have an effect on the value of the dollar. But it would only increase interest rates if the Fed decided to raise them in order to persuade them not to. Once again, its a policy choice – it has nothing to do with the market.
March 9th, 2009 at 12:22 pm
Re benny lava’s question “If the interest on the t-notes shoots upward, what will that mean in the long run?”
—————–
1) It means we’re fucked like a dog.
Long term rates are almost always higher than short term rates , as an inflation fee. (The few occasions they are not — the inverted yield curve — is an anomaly that signals a recession within 9 months. Usually because its a signal that insiders are fleeing a sinking ship before word gets out. See ,e,g, my Dec 2006 post here: http://www.matthewyglesias.com/archives/2006/12/the_sweet_sweet_fed/ — i.e. at 10:33 am. )
2) Our long term Treasury rates are down around 4 percent, in my opinion, simply because the US government is NOT trying to sell any bonds. If they did, the oversupply would force rates up which would probably fuck the banks holding $180 Trillion in DERIVATIVES even worse than they are already fucked.
3)Again, look at the March Treasury Bulletin.
a) Just From 2007 to Dec 2008, Debt held by the public increased by $1.680 Trillion!
(from $3.63 Trillion to $5.31 Trillion).
But the amount of debt held at 10 years or greater maturity only increased by
$47 Billion!!
That’s LESS than 2.8 percent of the $1.68 Trillion being borrowed.
b) It was the debt with a maturity of 5 years or less that increased by $1.528 Trillion
— 91 Percent of the $1.68 Trillion being borrowed.
c) Steve Sailor was right — the US government has taken out a $5 Trillion ARM with a low rate teaser rate that can be reset to much higher rates every year.
4) So if the short term rates start rising higher — due to inflation, need to strength dollar to avert capital flight (money fleeing from USA), etc — then the US government will be screwed. Because it has not locked in lower rates for that $5 Trillion with long term bonds.
March 9th, 2009 at 12:25 pm
“So why can’t 300 Million Americans go on vacation for 6 months while the Fed keeps the economy running. Would’t that “make room” for government spending?”
I hope you’re being facetious, but if not: those 300 million americans are producing real goods and services. The government takes a percentage of taht output and directs away from private spending toward some public purpose (roads, stealth bombers, volcano monitoring…) In order to make room for it’s demand, it must reduce private demand, and so it taxes. But note that, just as the subway msut first issue the tokens and then collect them at the turnstile, the Governement must first spend the money into circulation before it can tax any of it back. Note also that any savings (money paid for production but not spent on consumption) accomplishes the same goal as taxation, and requires therefore that taxes must be less than spending in order to maintain demand. (i.e. – the government must run a deficit in oredr for there to be net private savings.)
March 9th, 2009 at 12:47 pm
Re DTM’s comment “we could raise taxes to deal with the consequences.”
—————-
US tax revenue for 2007 was around$2.7 Trillion, roughly half of the debt held by the public. So if the short term rates increased by 5 percentage points –i.e, from 0.25 to 5.25, then you would need to increase taxes by about 10 percent.
However, only part of the federal debt is held by the public. A large chunk –roughly $4 Trillion — is held by Trust Funds for Social Security, Medicare,etc. Those Treasuries are also a claim on tax dollars — as the baby boomer retire, the government will have to go from stealing $Trillions in surplus payroll taxes to paying off the IOUs written by Bush. On top of that, Social Security is underfunded by $8 Trillion (over next 40 years?) and Medicare is underfunded by roughly $31 Trillion.
Saying that you can pay off your Master Card debt by getting a cash advance from your VISA card ain’t very smart if you know that there are more huge debts coming due in the near term.
March 9th, 2009 at 1:55 pm
There certainly is overlap and crossing accounts between the Fed and the Treasury and both of them are subject to making political decisions, but there is not a perfect identity of the accounts. The Fed “could” purchase all the treasury debt issued, but it does not, and it is partly because they do not that private investors and foreign central banks are willing to hold dollars and give money to the treasury in exchange for only the promise of being paid more dollars back later.
You seem to think that the only thing that drives the demand for dollars is the compulsory requirement to pay U.S. taxes in dollars. But dollars are used for much more than that and are held and accumulated by entities that have no U.S. tax liability whatsoever.
Also, a monopoly supplier can affect the market price of his product in only one direction, down. By flooding the market with excess supply at a low price he can drive the price of existing inventory down to that price. A monopoly supplier cannot make the price of existing inventory go up by offering new supply at the higher price than the market will bear.
As an example, the Federal reserve is the monopoly marginal supplier for one dollar federal reserve notes. Anyone with four 1964 silver quarters (containing about 25 grams of silver worth about $10.00) has a choice between converting those 25 grams of silver for a brand new one dollar federal reserve not at your bank, or 10 slightly used federal reserve notes at a coin shop. No matter how much the fed insists and no matter how perfect their monopoly over new supply, they cannot get people to pay 25 grams of silver for a one dollar federal reserve note when the market says one dollar is worth 2.5 grams.
March 9th, 2009 at 3:43 pm
I vote for more bubbliness.
http://www.theonion.com/content/news/recession_plagued_nation_demands
And for going straight to the Swedish model:
http://en.wikipedia.org/wiki/Elin_Nordegren
Also, to gordon gekko
liquidity trap + deflation > huge deficits (oh the children! the children!)
I puke a little in my mouth every time I here faux concern about deficits and government debt.
March 9th, 2009 at 8:37 pm
Why wasn’t there screaming inflation when there were all those extra trillions in the economy before the real estate bubble and CDS/derivatives collapse? Riddle me that.
March 9th, 2009 at 9:57 pm
Why wasn’t there screaming inflation when there were all those extra trillions in the economy before the real estate bubble and CDS/derivatives collapse? Riddle me that.
There was. Or at least the embrionic version of it. For most of the last decade, people were complaining that the official inflation rate was less than the real inflation rate. Less controversially, the spike in core inflation from food and energy was beginning to spill over into overall inflation numbers right before the Summer ‘08 collapse. That’s why the Fed was so slow to cut rates (although they eventually did) to increase liquidity in the first stages of the banking crisis from summer ‘07 to summer ‘08.
March 9th, 2009 at 10:05 pm
Also, the inflation of the real estate / CDS bubbles was basically masked as economic growth – and consumption of a lot of foreign made goods, which kept down prices. But there were still price bubbles in secondary goods in places with bubbles in the primary areas. And further evidence that it was inflationary is basically seen by the fact the popping of the bubbles has been severely (by modern standards) deflationary.
March 10th, 2009 at 12:14 pm
Increasing the foreign debt means higher interest payments that cause the US to make money tighter for socioeconomic development. As stated by Med Yones, economic advisor to pay for the debt, the Government will have to raise taxes, which will reduce the competitive position of US in a global economy and chase investors away resulting in less economic activities and more job loss. We can see it as a vicious economic cycle. Further information can be found at
http://www.iim-edu.org/u.s.economyrisks/index.htm