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solarbirdThere are several items going around during this debt crisis which I hear often, and upon which I would like to comment.
First, and I paraphrase: "there is no Social Security crisis, the trust fund is good until 20[25|40|etc]." The trust fund is a lie. There are not mountains of money store anywhere, not even electronically.
Yes, on the books, Social Security has billions stashed away to handle the shortfalls which have already begun (earlier than expected) in tax payments for the programme. But none of that money is actually there, because it was borrowed by the Treasury and spent in the general fund. Social Security's excess income has all been spent. All of it.
If I borrow $30,000 from my friend Geri, and then spend it - along with all my other money - on hookers and blow, does Geri still have $30,000? No. Is it likely Geri's going to get the 30,000? Not unless I get a job. Geri has possession of a debt obligation from me saying I owe her $30,000, but that does not make the money actually appear. The US Federal Government can get that money - but it's going to have to raise revenue or cut some other spending to do it.
That's exactly the state of the Social Security Trust Fund. It's empty. Like everything else, it's been part of the looting process I've been talking about for the last several years.
Second, and again I paraphrase, "The banks are sitting on trillions of dollars in taxpayer loans and they won't lend them out!" Mostly, it is asserted, because they're being greedy mean in one form or another. This is true - they are greedy, and the system is corrupt - but not in the way generally discussed.
They do have trillions in dollars, siphoned to them through AIG and various swap vehicles, courtesy of the Fed, and that vampire squid on the face of humanity, Goldman Sachs. This is to mask the valuelessness of those banks, and the zero- to near-zero-value of those CDOs and MBSes and all those other instruments of the last bubble. If they start handing out and loaning out that money at scale, they have to admit they're broke. You remember that boat anchor I keep talking about (see Part IV)? This is that boat anchor. This is the back hole sucking up liquidity and life from the economy.
Third, and another paraphrase, "Debt is good! We don't have a debt problem. We can spend our way out of this - the only problem with the stimulus is that it wasn't big enough!" I want to say first that if you are in the right environment, all these things are true. This would've been certainly true in the 70s and 80s, and maybe the 90s.
But circumstances do not remain static. This has been the failure of the Keyesnians here: Keyesnian spending works when you build credit/pay of debt in better times, which hasn't entirely been happening. At least as importantly, it also requires that the amount you're going to deficit-spend be at least adequate to cover the debt overhang you're trying to patch, and it hasn't been close to that. (Krugman is exactly right here.) But in this case, the stimulus can't fill in that overhang, because it can't be without destroying the currency. The debt overhang, in part thanks to all the looting, is far too large; what you'd actually trigger is a devaluation of the US dollar in rather more abrupt terms, and that triggers the interest rate "death spiral" I discussed in Part IV.
(See also Charles Hughes Smith at Zero Hedge talking about this refusal to acknowledge changes in underlying economic forces, most notably, the institution of "too big to fail," and the resultant behavioural changes.)
It also requires that your borrowing costs be covered by the resultant economic output. That's not happening in no small part because of the debt overhang. Even if you spend it directly on more productive stuff (infrastructure, research science, etc), money is still fungible, and anything excess goes to the financial system and the overhang. The financialisation of the economy has introduced tremendous inefficiencies atop everything else.
When this happens, it means that more debt means lower economic production, not higher. It boosts the GDP briefly because of the immediate expenditures - go back and read Part II and look at how GDP is calculated - but it actually reduces net economic output.
This is a credit death spiral and it is intensely deflationary.
So please, remember, spend-your-way-out is situationally dependant. The growth rates advocates say are required to "grow out of" the debt required to kick over this debt overhang have never been achieved in modern history, at least not over the amount of time required. (10 years of 8% real growth? That's one figure I read from one Keyesnian advocate, and I'm sorry, but no. Because no.)
Fourth, "We give BILLIONS in FOREIGN AID!! Why the hell are we doing that when there are [X] NEEDS HERE" and also, "WHY are we talking about DEBT when the WORLD owes us SO MUCH MONEY from FOREIGN AID!" The capslock is typically part of the complaint. (I see this on Facebook a lot, along with "bet you won't dare to repost this!!" addendum. Well, you're right, I won't, because it's stupid and wrong.)
The United States has not been a net creditor nation since Ronald Reagan, running massive trade deficits for decades. It has mostly also run massive current accounts deficits since Mr. Reagan as well. The United States is not a net creditor. It is a massive debtor nation.
Does the US spend "billions" in foreign aid? Technically, yes. But the implication is that it's a substantial part of the budget. It's not. In 2008, which is the latest you get in the 2011 census report, there was US$33.6 billion in non-military foreign aid, of which US5.1B went to Iraq and Afghanistan. It's about 0.6% of the US Federal budget. Add in military foreign aid (which I argue is generally not aid) and you get up to around 1%. Take back out Iraq and Afghanistan - where most economic aid is pretty military in nature - and you're looking at about half a percent of the total US budget.
You're not balancing the budget on that.
Fifth, and yet another paraphrase, "Half of Americans pay no taxes!" implying that they're all, I don't know, bums of one sort or another, or that tax burdens on "the wealthy" are too low. Okay, first, that's just wrong. 46% of taxable units do not pay income tax, which is a very different statement. Everybody's paying sales tax, for example.
Of those "taxable units" (mostly households) which don't pay income tax, half of those are because they don't make enough income to qualify; no income means no income tax. Gosh, really? What's that say about tax rates? Not much. It says a lot more about incomes, not much of which is good.
That leaves 23% who are making some money. Most of those households are earning between $20,000 and $30,000/year. 23% breaks down to 10% who are elderly and income-sheltered, 7% who have enough deductions and tax credits that they wipe out their income tax, and 6% who are getting tax credits for children and/or are working poor. (sources)
Good luck balancing the budget by taxing people with no money. That doesn't work either.
That's all for now. Good luck.
1: I am ignoring actual costs of loan processing and such here; I'm oversimplifying to communicate an important idea. Please bear with me, those of you who know better.
First, and I paraphrase: "there is no Social Security crisis, the trust fund is good until 20[25|40|etc]." The trust fund is a lie. There are not mountains of money store anywhere, not even electronically.
Yes, on the books, Social Security has billions stashed away to handle the shortfalls which have already begun (earlier than expected) in tax payments for the programme. But none of that money is actually there, because it was borrowed by the Treasury and spent in the general fund. Social Security's excess income has all been spent. All of it.
If I borrow $30,000 from my friend Geri, and then spend it - along with all my other money - on hookers and blow, does Geri still have $30,000? No. Is it likely Geri's going to get the 30,000? Not unless I get a job. Geri has possession of a debt obligation from me saying I owe her $30,000, but that does not make the money actually appear. The US Federal Government can get that money - but it's going to have to raise revenue or cut some other spending to do it.
That's exactly the state of the Social Security Trust Fund. It's empty. Like everything else, it's been part of the looting process I've been talking about for the last several years.
Second, and again I paraphrase, "The banks are sitting on trillions of dollars in taxpayer loans and they won't lend them out!" Mostly, it is asserted, because they're being greedy mean in one form or another. This is true - they are greedy, and the system is corrupt - but not in the way generally discussed.
They do have trillions in dollars, siphoned to them through AIG and various swap vehicles, courtesy of the Fed, and that vampire squid on the face of humanity, Goldman Sachs. This is to mask the valuelessness of those banks, and the zero- to near-zero-value of those CDOs and MBSes and all those other instruments of the last bubble. If they start handing out and loaning out that money at scale, they have to admit they're broke. You remember that boat anchor I keep talking about (see Part IV)? This is that boat anchor. This is the back hole sucking up liquidity and life from the economy.
Third, and another paraphrase, "Debt is good! We don't have a debt problem. We can spend our way out of this - the only problem with the stimulus is that it wasn't big enough!" I want to say first that if you are in the right environment, all these things are true. This would've been certainly true in the 70s and 80s, and maybe the 90s.
But circumstances do not remain static. This has been the failure of the Keyesnians here: Keyesnian spending works when you build credit/pay of debt in better times, which hasn't entirely been happening. At least as importantly, it also requires that the amount you're going to deficit-spend be at least adequate to cover the debt overhang you're trying to patch, and it hasn't been close to that. (Krugman is exactly right here.) But in this case, the stimulus can't fill in that overhang, because it can't be without destroying the currency. The debt overhang, in part thanks to all the looting, is far too large; what you'd actually trigger is a devaluation of the US dollar in rather more abrupt terms, and that triggers the interest rate "death spiral" I discussed in Part IV.
(See also Charles Hughes Smith at Zero Hedge talking about this refusal to acknowledge changes in underlying economic forces, most notably, the institution of "too big to fail," and the resultant behavioural changes.)
It also requires that your borrowing costs be covered by the resultant economic output. That's not happening in no small part because of the debt overhang. Even if you spend it directly on more productive stuff (infrastructure, research science, etc), money is still fungible, and anything excess goes to the financial system and the overhang. The financialisation of the economy has introduced tremendous inefficiencies atop everything else.
As a long aside - that's why all this is blockquoted - debt having to pay for itself is true for any debt. If you take out a $10,000 loan to start a small business, and the total interest cost of the loan over its life is $2,000, you need to make $10,000 + $2,000 = $12,000 from the business over the life of the loan, just to break even yourself.The additional US debt that has been taken on thus far has produced much less little additional economic activity than new debt. Calculations I've seen indicate that the return on the new Federal borrowing is barely breakeven, if that (1:1). (Some estimates say it's worse, at 0.8. The best easily-accessible analogue to calculation, the M1 Money Multiplier, has crashed to 0.73ish, the lowest point since records are on file. That's bad, but I don't know how it correlates to the real figure since I haven't got access to the more recent complete figures I saw before. Stupid paywalls.) If interest rates rise, then we will also have to pay off that debt, which means we'll have to subtract that interest back out - and you'll go below 1.0.
Let's say you don't do that. Let's say you only make $10,000, and you pay the lender. The lender hasn't actually lost anything1 (other than opportunity cost, about which I can rant extensively), but hasn't made anything either. You haven't made anything. The economic return on debt is 1:1 - $10,000 out, from $10,000 put in. More debt wasn't really bad. It wasn't good for anyone, but it wasn't awful.
Let's say you do a little better, and make $12,000 instead. In that case, the lender gets their money back with a profit. You've lost some time, but assuming you had someone else covering your living expenses or had other income for that, you haven't lost anything either. The economic return on debt is 1.2:1. $12, 000 out, from $10,000 put in. That's definitely better. More debt wasn't great, but it wasn't too bad - more economic activity was generated than cost, just not very much more.
Let's say you do a lot better! If you make $50,000, you've profited by $38,000! ($50,000 - 12,000 = $38,000.) The lender makes a profit; you make a profit; everyone is happy! And the economic balance is $50,000 out on $10,000 put in; economic return on investment is 5:1! That's really great! Lots of economic activity was returned vs. cost!
But if you only make $5,000 - now there's a problem. $10,000 went in, and only half of it came back. You lost half the money. That's $5,000 out on $10,000 in, an economic return on debt of 1:2, or less than one. The additional debt resulted in a net reduction of economic activity.
When this happens, it means that more debt means lower economic production, not higher. It boosts the GDP briefly because of the immediate expenditures - go back and read Part II and look at how GDP is calculated - but it actually reduces net economic output.
This is a credit death spiral and it is intensely deflationary.
So please, remember, spend-your-way-out is situationally dependant. The growth rates advocates say are required to "grow out of" the debt required to kick over this debt overhang have never been achieved in modern history, at least not over the amount of time required. (10 years of 8% real growth? That's one figure I read from one Keyesnian advocate, and I'm sorry, but no. Because no.)
Fourth, "We give BILLIONS in FOREIGN AID!! Why the hell are we doing that when there are [X] NEEDS HERE" and also, "WHY are we talking about DEBT when the WORLD owes us SO MUCH MONEY from FOREIGN AID!" The capslock is typically part of the complaint. (I see this on Facebook a lot, along with "bet you won't dare to repost this!!" addendum. Well, you're right, I won't, because it's stupid and wrong.)
The United States has not been a net creditor nation since Ronald Reagan, running massive trade deficits for decades. It has mostly also run massive current accounts deficits since Mr. Reagan as well. The United States is not a net creditor. It is a massive debtor nation.
Does the US spend "billions" in foreign aid? Technically, yes. But the implication is that it's a substantial part of the budget. It's not. In 2008, which is the latest you get in the 2011 census report, there was US$33.6 billion in non-military foreign aid, of which US5.1B went to Iraq and Afghanistan. It's about 0.6% of the US Federal budget. Add in military foreign aid (which I argue is generally not aid) and you get up to around 1%. Take back out Iraq and Afghanistan - where most economic aid is pretty military in nature - and you're looking at about half a percent of the total US budget.
You're not balancing the budget on that.
Fifth, and yet another paraphrase, "Half of Americans pay no taxes!" implying that they're all, I don't know, bums of one sort or another, or that tax burdens on "the wealthy" are too low. Okay, first, that's just wrong. 46% of taxable units do not pay income tax, which is a very different statement. Everybody's paying sales tax, for example.
Of those "taxable units" (mostly households) which don't pay income tax, half of those are because they don't make enough income to qualify; no income means no income tax. Gosh, really? What's that say about tax rates? Not much. It says a lot more about incomes, not much of which is good.
That leaves 23% who are making some money. Most of those households are earning between $20,000 and $30,000/year. 23% breaks down to 10% who are elderly and income-sheltered, 7% who have enough deductions and tax credits that they wipe out their income tax, and 6% who are getting tax credits for children and/or are working poor. (sources)
Good luck balancing the budget by taxing people with no money. That doesn't work either.
That's all for now. Good luck.
1: I am ignoring actual costs of loan processing and such here; I'm oversimplifying to communicate an important idea. Please bear with me, those of you who know better.
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no subject
Date: 2011-07-29 02:23 pm (UTC)The problem that everyone needs to face is that we have to pay off the debt and it is going to be US. All of us. The rich, the poor, the middle class. It doesn't matter at all who gets their taxes increased the most. It will end up hurting everyone. I hate to say it, since it makes me a horrible conservative, but I think the Bush tax cuts have got to go. BUT the money that is gained needs to be earmarked ONLY TO PAY DOWN THE DEFICIT.
Also, something that Obama pointed out when he was running that I REALLY LIKED was just how much waste and corruption go on in the government. Remember he said he could pay for national health care by eliminating a fraction of the waste? I was very happy to hear someone say that and, even though I was not backing him, I was thinking he'd still balance the budget like Clinton did. Did he have a plan for making it work or was it just a general idea? Even if it was just a general one, it's still good! Audit the departments. Also, torpedo DHS and TSA. They are the worst thing that have happened to our country in a long time. So corrupt...
I could really go on here forever. I realized the other day I, philosophically, lean right. But the the right has not been following their own philosphy for years and we stick our fingers in our ears when you point it out. This is not saying that the left doesn't do the same thing. It's like we have these ideals and we refuse to admit that our leaders really do not share them. They all act the same way but put on a dog and pony show saying that they don't. I have no idea who to vote for anymore. I have no idea who to write to. My representatives are part of this system. Asking them to not be corrupt is an exercise in futility.
Sigh. I'm tired. I'm paying off my own debt, though. Should be debt free except for my car in less than 11 months. Is that enough time or am I fucked?
no subject
Date: 2011-07-29 05:27 pm (UTC)THANK YOU. This is what I've been trying to drive home for many years now. And yes, that's also true for the left. If and when enough figure this out, the US may be able to break out of its tribalistic approach to politics and start to solve some things.
As for your personal debt? No idea. I personally strongly support paying down variable rate debt, but also sock money away as best you can, for all the obvious reasons. If you can live on half your income, you're generally okay no matter how bad things get, barring, you know, max mad, asteroid impact, all that crap.
However, I am nonetheless tempted to quote, for everybody, the classic Leela/Bender exchange:
no subject
Date: 2011-07-29 09:37 pm (UTC)no subject
Date: 2011-07-29 04:14 pm (UTC)You make a good point about the pile of valueless instruments held by banks but that isn't the main problem. The main problem is lack of demand. And your critique of policies to raise demand is unconvincing. I might return to that later when I am typing on a real keyboard.
You are half right on taxes but your implication that revenue and taxes on the wealthy can't solve the problem is wrong. We would have a surplus with Ike- era taxes, and just repealing the Bush cuts would put us on a long- term sustainable debt- to-GDP ratio.
no subject
Date: 2011-07-29 05:05 pm (UTC)Taxes at the Eisenhower levels - sure! Why not. And if production and capital were as difficult to move as they were then, and had production of material wealth not been moved so substantially to China, and were the American left's response to every crisis not to move further to the right, that would probably solve a great number of problems.
As for stimulus - money is fungible. In the current system, the Financial sector will find ways to suck off stimulus - c.f. the article in Business Insider today on the way Goldman Sachs has bought about a quarter of the currently available aluminium supply and is warehousing it to drive commodity prices up. They make money on the trades (because they know they're doing this and others didn't, so they know where prices are going) and on the resale of the aluminium (they're slowly reselling it at higher prices, having forced the cost up). And this isn't the first time they've done this, either.
Until the corruption in the financial sector and its regulators is cleared - and the accompanying debt overhang discounted - this must be included in any calculations, or you're simply not facing reality.
no subject
Date: 2011-07-29 06:26 pm (UTC)But once you take that as a given, there's still a lot you can do. So GS is gaming the aluminum market. That sucks, but if you can still create demand and jobs and higher incomes at the same time that's going on it's not going to kill you.
no subject
Date: 2011-07-29 06:15 pm (UTC)First, a concrete explanation of how you can tell this is about demand and not the willingness of the banks to lend because of all their bad assets. The reason businesses are not getting loans right now is not because the banks won't give them money because they're hoarding it out of fear or greed. It's because the businesses don't see demand for their products. No customers, excess products on shelves, and you're not going to borrow money so that you can make more product. And you're not going to hire. And lo and behold, that's exactly what businesses aren't doing. Lending standards have gotten stricter, but if a good business wants a loan it can get one. Some of this is about uncertainty, but it's uncertainty about demand. Things aren't going to get better unless people start buying stuff, and austerity won't get people buying. Also, I'll point out that to the extent bad assets make banks hesitant to lend, they're more likely to want to lend to a business that stands to make a profit, as that creates more good assets to offset the bad. If the problem wasn't demand, then you'd expect banks to be rushing to get their money lent to businesses that can serve that demand. They aren't, and that's further evidence that this is all about demand.
Classical Keynesianism does call for higher taxes and lower spending in times of higher growth, but the failure to achieve that does not invalidate the spending side during a recession or depression. You still get the benefits of additional demand from spending, which outweigh the debt costs, even if the debt is not paid off. There's a risk with too much debt if it prevents the government from spending during the next downturn because of interest costs, or because of a more general crowding out effect.
You seem to be suggesting we're at that point. But we're not. Despite a massive infusion of money we have no inflation to speak off and the dollar is still relatively strong. The currency is fine. Long-term interest rates are low. Self-inflicted debt ceiling wounds aside, this is a great time to borrow money.
It's also odd that you say this would have made more sense in the 70s and 80s. With high inflation in the 70s, Keynesian demand-centered policies were not effective. Interest rates were high well into the 80s. Maybe in the 1981 recession you could have made a case, but seeing as that recession was the direct result of a choice to kill inflation, turning around and priming the pump would have been counterproductive, and the recession was short (though sharp) in any case. While there is a case for having had a higher inflation target after that point, I can see why they erred on the side of low inflation for a while. They just took it too far for too long, and the fiscal decisions made in the 80s (mostly tax cuts and military spending) helped make the problems we have now worse. I would say the 70s killed the vulgar Keynesianism that suggested you could spend at all times, and suggested that aside from a preference for higher inflation in normal times to achieve full employment, the strong Keynesian approach was really most suited for rare periods of depression where the interest rate was at or near zero.
That's where we are today, and have been for three years.
(more in second post)
no subject
Date: 2011-07-29 06:17 pm (UTC)You say that this requires 10 years of 8% growth, which has never happened before (in the US) in "modern history." But that ignores the fact that the only comparable episode in American history is the Great Depression (conveniently omitted from "modern history"), in which Keynesian policies were weakly applied until the WWII buildup, and then applied in full through military spending. Before the military buildup there were 4 of 6 years with 9% or greater GDP growth. The exceptions were 1938, the year after FDR imposed an austerity budget, and 1939 (where he reversed direction and achieved over 6% growth). The next 5 years each had over 10% growth, with three of them exceeding 20%. Growth slowed as the war came to a conclusion in 1945 with only 1.5% growth, setting up for the postwar recession.
Still, in the one comparable period we have in this country, 9 of 11 years following the application of Keynesian policies resulted in growth rates over 9%, well above the 8% you're asking for. We don't even need the economic equivalent of another world war. We just need to replicate what FDR did in 1934-1937.
And if we fall a bit short, but at least get some growth, isn't that better than the alternative of the status quo, with previous annualized growth in the last quarter as the stimulus wound down of 0.4%? Or the austerity alternative of the "Grand Bargain" which would drop us into a recession at least with negative growth rates of one or two percent? Or the debt ceiling self-imposed Armageddon of an immediate 10% drop in GDP and Great Depression II?
no subject
Date: 2011-07-29 06:45 pm (UTC)Or print it. In some sense, Treasuries are still as good as cash (as long as you don't plan to use them before the maturity date). Of course, it's a problem that there's so much debt in circulation. But having Treasury Bonds in the Social Security Trust Fund isn't more of a problem for Social Security specifically than having cash, and having Treasury Bonds in the Social Security Trust Fund isn't more of a problem for the economy in general than having Treasury Bonds somewhere else.
If they start handing out and loaning out that money at scale, they have to admit they're broke.
How would loaning more money make it clear that the banks are broke? (Aside from crashing the value of the currency in general.)
Anyways, this is bad, bad, bad. If the GOP has changed to be really serious about "spending cuts, any spending cuts" (which is a shocking development, but maybe actually true this time) and can't pass such cuts with a Dem-controlled senate and presidency, letting the debt ceiling expire is the best thing they could do (and way, way better than any cuts they could get into an actual budget).
no subject
Date: 2011-08-01 09:36 pm (UTC)How would loaning more money make it clear that the banks are broke?
The various valueless instruments are supposed to be paying out profits. They aren't. The banks are reporting those profits anyway. Guess where that money's coming from?
no subject
Date: 2011-08-01 10:53 pm (UTC)My point is that by necessity, Treasuries and the Dollar stand or fall together, so I don't get why people think the Social Security Trust Fund would be better off holding USD (assuming the total debt stays the same).
The various valueless instruments are supposed to be paying out profits. They aren't. The banks are reporting those profits anyway. Guess where that money's coming from?
I'm still not following you back to your original point. If the banks are fraudulently reporting this money among their reserves while secretly giving it out as "profits", why does starting to loan money again change that situation? At that point, they'd be violating reserve requirements (if they aren't already) in addition to other crimes. But why would that make it clear that they're broke? (i.e. Why would they be caught?)