

Bill Gross: America’s debt is not its biggest problem - inshane
http://www.washingtonpost.com/opinions/americas-debt-is-not-its-biggest-problem/2011/08/10/gIQAgYvE7I_story.html

======
WalterSear
If deficits don't matter, then why isn't the government borrowing money and
just paying for everything that its citizens desire? Why tax at all? Why not
send >us< money?

Deficits matter. They just matter in ways more complicated than we are used
to, if you have the borrowing power of a first world nation behind you. Or
rather, they don't matter until they do. Ask Greece or Italy. Or check the
rate of return on Greek treasury bills.

Growth is not the answer. Building your society on the concept of perpetual,
unceasing, unpausing growth - that's the problem. The mentality of people
who's only solution to financial incompetence, graft, greed and waste is
'throw some more furniture on the fire' - that's the problem.

~~~
nhaehnle
Your questions are neatly answered by Modern Monetary Theory, see e.g. the
overview here: [http://pragcap.com/resources/understanding-modern-
monetary-s...](http://pragcap.com/resources/understanding-modern-monetary-
system)

 _If deficits don't matter, then why isn't the government borrowing money and
just paying for everything that its citizens desire? Why tax at all? Why not
send >us< money?_

The government is definitely capable of doing that, but think about the
consequences. If the government were to spend without any limits at all, it
would push aggregate demand to the point where the economy cannot grow quickly
enough to satisfy the demand. The result will be inflation.

So taxation is necessary to take spending power away from private citizens and
enterprises, to open up supply capacities that the government can then buy
with its own spending, to fulfill whatever mandates are given to it, hopefully
via a democratic process.

This is the obvious part. The more interesting question is: _How much_
taxation is needed?

The answer to that is more subtle, but the key observation is that when
private citizens and enterprises voluntarily refrain from using all their
spending power, e.g. by paying down debt, saving, or simply hoarding cash (all
of these things are happening these days), then obviously the amount of money
removed from the private sector via taxation should be less than the amount of
money that the government gives to the private sector via spending.

In fact, MMT economists argue that in the current situation, the budget
deficit actually needs to become larger if the unemployment problem is to be
resolved.

Finally, MMT tells you that the cases of the Italian and Greek governments are
fundamentally different from the case of the US federal government.

It is clear that the US federal government will always be _capable_ of paying
back its debt, because it is the currency issuer of the US$, and its debts are
only denominated in US$ (so the fact that almost a third of the debts are held
by foreign owners is irrelevant). The only possibility is that the government
might become _unwilling_ to pay back its debt, but since congress is full of
rich people who own a lot of government bonds, that scenario is quite
unlikely.

This is _very_ different from Italy and Greece, both of which do not have
their own currency. Their governments are currency users like you and me, and
they can become incapable of paying back their debt.

~~~
WalterSear
"The government is definitely capable of doing that, but think about the
consequences. If the government were to spend without any limits at all, it
would push aggregate demand to the point where the economy cannot grow quickly
enough to satisfy the demand. The result will be inflation."

In other words, deficits [can] matter. Where do you think we are right now?

~~~
nhaehnle
_Where do you think we are right now?_

You mean with respect to the size of the deficit? I think additional spending
targeted at direct job creation would be a good thing. Even more so if the
jobs created go towards improving the future economic capacity of the country,
e.g. by improving schools, making the country more self-sufficient in terms of
energy, think solar plants in southern states combined with updates to the
electrical grids and storage capabilities, things like that.

Actually, many MMT economists also argue in favor of a Job Guarantee, i.e. a
government program that ensures full employment simply by providing such WPA-
like jobs at a minimum wage. The theory is that such a program can never be
inflationary. At least the kind of inflation that is caused by bidding for
higher prices cannot happen since the wages in a Job Guarantee are fixed by
legislation.

------
kirillzubovsky
He's right. Balancing a budget once, while already neck deep in debt won't fix
all the problems, but accelerating jobs and consumption, in such a way that
creates more profits, would eventually help balance the budget and put the
economy back on track.

------
nl
_The president and Congress must recognize that an AA-plus country, to remain
AA-plus, must focus on growth, not debt reduction, in the short term._

+1

I tweeted this a month ago: _Dear America: A lack of growth, NOT spending
caused your debt problem. Please Fix ASAP KTHX._ [1]

That's a little simplistic (the joys of 140 chars). Of course spending caused
problems, but it wasn't spending _alone_ \- it was spending combined with a
lack of growth (and indeed negative growth at times).

What is more (and isn't explicitly called out in this article) is that
economic growth can go a huge way to fixing the debt problem.

Growth->lower unemployment->less spending on welfare

Growth->higher tax receipts->increased debt repayment

[1] <http://twitter.com/#!/nlothian/status/94266497513426944>

~~~
RuadhanMc
To a certain extent debt is the problem. If the US and other Governments
didn't have so much debt when the shit hit the fan in 2008 then they would
have had more means to deal with the growth issues. US public debt is 100%
debt to GDP, so there isn't a whole lot of room to move.

~~~
nhaehnle
Empirically, the case of Japan contradicts your claim that there isn't a whole
lot of room to move. To remind you, Japan has long at close to and above a
200% debt-to-GDP ratio without any financing difficulty in sight.

The underlying reason for that is plain and simple: both the Japanese and the
US governments are currency issuers. By definition, they are able to spend as
much money in their respective currencies as they like. In that sense, they
always have an infinite amount of room to move.

The only question can therefore be: How much of this maneuvering room _should_
be used?

The answer to that question does not lie in financial data alone, but must
take into account the state of the economy at large and whether additional
spending might hit an inflation barrier. In the current situation, spending
directed towards job-creation is unlikely to hit such a barrier, while handing
out more money to the rich could drive speculation on resource markets (the
money will be "invested" somewhere, after all) that can cause price increases
and thus inflation.

~~~
RuadhanMc
It's a fascinating situation. I don't claim to know the answer or how much
debt is viable. I do agree that the US isn't in the same basket as other debt-
laden countries. They are an exception -- but for how long... I don't know.

I think there is a ceiling -- and I'm not talking about the official debt
ceiling -- of debt. Is it 100% debt to GDP? 200%? 300%? It's somewhere.
There's a point at which it just isn't possible to repay the money.

~~~
nhaehnle
Sorry for repeating myself, but the US government will _always_ be able to
repay the money.

They are the ones who maintain the authoritative databases that contain the
information about how many reserves the commercial banks have and who owns the
debt. The only obligation associated with repaying the debt is to change an
entry in the debt database, and do a corresponding change to an entry in the
reserves database. Since the government maintains these databases, they will
always be able to do that.

There are a number of problematic things that might happen in the future. For
example, if all the owners of the debt suddenly decided to go on a spending
spree, then they might cause some (heightened, but non-hyper) inflation if the
economy simply isn't able to produce enough real goods and services to fulfill
the increased demand. Then politics has a choice of either weathering the
inflation or raising taxes to fight it, and there might be other tough choices
of equity and social justice involved.

But the ability to repay the money simply cannot be an issue, and nobody can
accurately predict whether any of those other problems will ever happen.

~~~
RuadhanMc
It was a poor choice of words on my end.

I take your point that America will always be technically able to print money
in order to pay back the debt.

But wouldn't printing that amount of money destroy the value of the US dollar?
Causing all sorts of other issues?

~~~
nhaehnle
I see now what you meant.

I think it depends entirely on how and why the debt is paid back. We probably
agree that the act of paying back the principal of some bond cannot have an
inflationary effect if the owner of that bond just uses the money to buy the
next bond, so it's not the act of printing the money itself that causes
inflation.

If they use the money to buy other things then this might cause inflation if
it happens at a large scale, say the hypothetical spending spree that I wrote
about in the parent post.

The thing is, since it is pretty much impossible to predict when and how such
an event is going to happen, and the best remedy likely depends on that
knowledge, it seems unwise to me to cause damage to the economy _right now_ in
a (probably ultimately futile) attempt to prevent such events from happening
in the first place.

It seems even more unwise to cause such damage since such an event may never
happen anyway. After all, it is actually very rare for a government to (net!)
pay back part of its debt, and paying back _all_ debt is almost unheard of.
Except for the rare times of government surpluses, the US government has
_never_ actually net paid back its debt over quite a long history by now, and
I see no reason why that should change in the future.

After all, there is significant evidence that government surpluses cause
recessions: [http://www.newdeal20.org/2010/02/10/the-federal-budget-is-
no...](http://www.newdeal20.org/2010/02/10/the-federal-budget-is-not-like-a-
household-budget-heres-why-8230/)

------
hollerith
I do not claim to know if this thesis is true or false, but I do know that it
is a very _convenient_ thing for inside-the-beltway types to believe.

