About half of the national debt is to the federal government, the federal reserve or state and local governments. In other words - the US government is primarily in debt to itself - in a currency that it can print! The government could wipe out half the debt overnight by just forgiving the loans it made to itself. And it could pay off the rest by printing money - which would lead to inflation, but how much really?
I'd be careful about running too far with that argument. Of the debt you've flagged as not "real", that would include ~$3T owed to the OASDI trust funds.
On the one hand: Yes, that represents a debt the US government owes to itself, and in a very real sense is not real. The SSA could announce they were tearing up the debt, and boom, the US national debt has now dropped by a hefty chunk!
On the other hand: That money is slated to pay social security beneficiaries. Tearing up the debt doesn't make the retirees go away, nor the obligations of the system. Assuming that the social security checks still go out, then cancelling that debt has done nothing.
The same is true of all of the rest of the debt too. "It's owed to a state government, it's not real!" True, but the state government is counting on getting that money. If they don't, they'll need to source it from somewhere else (via some mixture of taxation and cuts).
"Printing money" is a bit of a loaded term and has little applicability to how central banks actually work.
The Fed could basically convert the bonds into dollars in an account with the treasury - which is completely asset neutral. The bondholders before had extremely liquid bonds which are basically cash-equivalent. Now they have cash. Basically moving from one column in a spreadsheet to another, and suddenly the debt is gone. Yes, there's still a liability, but only in the same way that deposits in a bank are liabilities to them.
Would it create inflation? No, why would it? Inflation happens when money is spent (which happened back when the bond was issued, because it was probably issued in the same amount of Government deficit spending), and since the transaction is asset-neutral, it wouldn't necessarily change any of the bond-holder's spending patterns.
Of course, the thing at the end of the day is that people have bought those bonds because they want a safe interest-bearing instrument. The central bank or Government of a monetarily sovereign country doesn't really need to issue them to deficit spend, it's more that there's a lot of demand for them to exist...
This depends if people are forward looking or not. Bonds have terms, an account in the Treasury does not, which means it has no real meaning at all (It has no effect on anything so who cares if it ever gets paid back?). So, this is just obfuscation of money printing.
When a government starts money printing, their money doesn't look so good anymore.
If you go to Cambodia, the high street malls quote prices both in local currency and USD. As long as there is demand by external parties to transact between themselves using your fiat, you can print ad-infinitum.
You might be surprised how quickly people shift to another currency once yours becomes unstable. Why don’t they use their own currency again?... something something hyperinflation / instability / bad monetary policy. Printing money to pay debt ad infinitum is bad monetary policy.
Printing money to pay off debt will not affect the value of the dollar, making the payment less valuable than the debt? If so, wouldn't this affect future ability to sell bonds at a valuable price?
The argument I've heard is that T-bills are accepted as basically cash-equivalent by all the serious financial players, so whatever inflationary effect that has has already happened. Replacing them with actual dollars would simplify the system and create more of a level playing field.
So many of these arguments assume that financial players will keep doing things the way they always have once the monetary playbook since Breton Woods gets thrown out the window. Why would actors continue to behave the same way given a massive change to the market and policy?
What massive change are we talking about? Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity, and any serious player knows that. Monetizing the debt wouldn't be a radical change, it would be a tidying up of the existing system that makes it clearer and easier for small-time players and private individuals.
> Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity
What assumptions allow serious players to assume this? Do those assumptions still hold if the instruments are actually converted to cash, or would "serious players" start to treat it differently?
I'm not entirely sure as I admittedly don't 100% understand all of the fundamentals of treasuries, but if all of a sudden the idea that debt is not a thing to be paid back, but rather currency that seems to be a shift that might lead to some changes.
> What assumptions allow serious players to assume this?
I mean that's what currency holdings are (at least, it's the only model I know of that makes sense). People who held pesos and people who held local-law bonds were in much the same position in the Venezuelan crisis and reacted much the same way.
The weird part is the other side: the assumption that you can treat treasuries as a cash equivalent, which rests on the assumption that the federal government will keep consistently wanting debt and will keep targeting a stable rate of inflation, that there will always be a functional tri-party repo market, etc. Occasionally these assumptions are violated and some people lose money - see the "flash rally" for a fun recent example.
I mean, the traditional model is that bonds are less liquid and less dependable. A government pays a bit more interest on them than they pay on cash deposits, but in return they get the flexibility to issue more or less when they want to. They're not inflationary to the same degree as cash, because everyone understands that bonds are not quite money, that a missed interest payment and a debt restructuring is not quite a currency crisis; people don't accept bonds in lieu of conventional payments. But US treasuries are well past that stage; if more are issued, that changes the de facto money supply, and the federal reserve watches that effect closely. If the US risked defaulting on treasury bonds, there would be massive panic. The government, i.e. the public, pays all the costs of issuing bonds instead of cash, but gets little in the way of benefit; they monitor their issuance so closely (to prevent things like the flash rally) that they might as well just issue cash instead.
Those loans aren't simply from the government to itself, they consist of committed money to particular entitlements or programs. "Forgiving" those loans is equivalent to cutting those programs.
Isn't forgiveness the opposite? If the Highway Fund built too many highways, and was in debt, BUT the debt is forgiven, it's a transfer to the Highway Fund.
Those organizations aren’t the same thing. It’s not in debt to itself. I’m not sure what this means. You could make up new money, perhaps, but it’s tough when you’re still running $1T in the red each year, knowing you need to do it again. This seems like a gross oversimplification of an extremely complex problem (whose complexity you mention) whose answer instead should maybe be “maybe $1T is too much money to be in debt - how about $200M and we plan to be neutral in 10 years (or something rational) so we use serious debt for real catastrophes instead of made-up ones?
Public debt should really be called something other than debt since it behaves very differently from private debt, especially for nations with sovereign currencies.
It’s more of a security that tracks future national GDP; as long as you believe the US government will continue to exist and have the ability to tax a functioning US economy, treasuries have value.
Trying to explore that a bit: Is there any expectation of what would happen if the US did start printing money to pay off state/local government debt? The immediate thought is of course the inflation. But given that this money sponsors state/local projects which would otherwise not be funded, potentially both providing new jobs and improving infrastructure/services, maybe there's a line where it's a win overall?
Never forget about the main US "export product" that in a large part finances this growing monster - financial securities. All the foreigners want the S&P500 (growth!) and Treasuries (positive yield!).
This is not about the national debt. That's been measured in the $trillions for many years. This is about the deficit, which is the short-term delta between tax revenues and government expenditures. (The debt is basically the time integral of the deficit). For the deficit to be over $1 trillion really is a big deal, and it's not good news.
It’s fun how people only seem to talk or care about the national debt when it’s an election year. Almost as if it’s all a ploy to convince voters big projects that help them can’t be paid for.
But sure enough the other 3 years of the cycle will be spent raising the defense budget and cutting taxes mostly for businesses and the 1%. Hmmm....
People only care about the national debt when a Democrat is in the White House. The GOP’s tone will completely change once Trump is gone. A natural disaster strikes? “Oh, we can’t afford to send any aid. Have you seen the debt? We need to cut spending from some social program.” Unless, that is, there’s a recession, then it’ll be “we need to provide some tax relief.”
I don't know why you're being downvoted. The natural disaster is something that happened. That's the exact reason aid was delayed to New York and New Jersey post Hurricane Sandy. There really is no equivalency. Democrats when they care about deficits in or out of power the walk the walk. Mostly caring about deficits doesn't fit their model. They're Keynesians whatever. But Republicans just straight up never care when they are in power. They run the deficit up like no one is ever going to have to pay the bill. Then they lose the election and discover a conscience. Its been thirty years of this at this point. It is what it is.
Baloney. Democrats bent over backwards to get a good CBO score for the Affordable Care Act. They desperately wanted it to be revenue neutral, and they undershot; it increased revenue due to lower-than-anticipated uptake in the Obamacare marketplaces.
It's not good when Trump does it for "Republican party" purposes (to boost stockholder returns).
It's not good when others do it for "Democratic party" purposes (to offer large quantities of free stuff).
It really is as simple as that. Keep the budget balanced (certainly outside of a recession!) and you'll be less likely to be caught with your pants down. Keep it unbalanced and you'll be at the mercy of the markets.
Who knows where is the 10 year headed, 5%, 10%, even more? The monetary system would probably be rewritten before even 5% ever happens, with serious disorder on the way. Assuming we're not at the beginnings of the end of this iteration of money.
We should be concrete, and reject false equivalencies.
The signature Democratic legislative achievement in the last decade was the Affordable Care Act ("Obamacare"), which came with deeply unpopular pay-fors: "Cadillac" taxes hitting union health plans, the "net investment income" tax hitting high earners, and others.
The signature Republican legislative achievement in the last decade was the Tax Cuts and Jobs Act ("Trump tax cuts"). This was chiefly deficit-financed (no pay-fors), excepting a popular repeal of the individual mandate and an unpopular-but-deferred middle-class tax increase 10 year later.
Democrats paid for their stuff, Republicans didn't, and Republicans won the messaging battle. "Keep the budget balanced" is terrible advice from a political perspective. It only gives space for the next administration to spend more money.
I am not in the 1% and I had a substantially reduced tax bill from the tax cuts. The perception that they only benefit the 1% is propaganda. It’s also patently false.
My tax bill went up, as did many other people I know. I assume a large number of people in high tax states had a higher bill due to SALT changes amongst others.
> The perception that they only benefit the 1% is propaganda. It’s also patently false.
The primary benefit went to the ultra wealthy, not surprising given lobbying. You can write off the cost of a private jet, for example.
I mean I got 50 dollars back a paycheck too but some how the top 1% grew their wealth by something like 30%... that 50 bucks did not have the same effect on me somehow.
I worry about the debt, too, in some fairly abstract way, but I don't know what realistically gets cut. Social Security? Good luck, because old people vote. Medicare? Good luck, old people vote. Defense spending? Good luck, you better believe that defense contractors vote, in perfect synchronized-by-lobbyists lockstep.
The problem is that defunding Medicare / SocialSec on a large scale is effectively defaulting on government's debt obligations and has the same effects as defaulting on treasuries. Defense will probably go first, since it's technically discretionary spending, but it won't be anywhere near enough because SS and Medicare balloons fast and will put the squeeze on all other government spends.
Eventually something will give. No idea which part though.
2. Remove ceiling on payroll. Or call it a tax as well.
3. Slightly lower the floor for estate tax and close loopholes (like buying an insurance to inherit...) and slightly increase estate tax rates (I think 60% estate tax of the estate value over a limit of about $5M is fair).
4. Higher Medicare and social security tax rates to pay for Medicare for all.
I hate how people treat this as an unsolvable problem: the solution is obvious: increase taxes and cut expenses where we can. It isn’t that hard.
1. You're proposing a linear increase in taxes to solve the problem of exponential growth of entitlements. Eventually you'll run out of GDP.
2. Doctors don't come out of assembly lines. Professionally trained medical staff is the biggest component of the Medicare blowout, and there is no easy way to increase supply in the short term. Dumping a lot of dollars into the Medicare system just drives up costs for everybody while shifting the limited supply of medical care around. From the perspective of the tax-paying middle-class, they'll be paying more into the system AND get worse medical care. That's the real political non-starter.
How many people complained about FDR's 'New Deal' as a bad thing - who weren't in the top 1%? The New Deal setup systems and infrastructure and laws to basically allow for a strong free enterprise system while ALSO reigning in crony capitalism.
I.e. regulated capitalism.
Since Reagan we've just been dismantling everything FDR got right, just to find out, hey those things were there for a reason. We need to go back to the tax rate that he had which was about 70% for incomes over 10 mill, or even 50% at 10, 75% at 50...
Alternately we could move to VAT + Land/Property taxes, and maybe Yang's UBI to offset the VAT for the poor. I don't see a VAT working w/out fixing some poverty issues first though...but I'm more thinking medicare for all needs to be the first.
It's the biggest social program with the most media attention, and I'd say of anything out there it has the most likelihood to gain momentum. UBI, College, Paid Maternity/Paternity - are pipe dreams if we can't muster the political capital for M4A.
The wealth tax that some candidates are pushing for would also possibly be a good thing.
The biggest thing though, I think we need to somehow change/streamline/modify how everything in congress works. There's TONS of money that just gets wasted that could work better via automation, combining two departments, re-thinking if a department is even needed - esp. if it only exists to enrich some constituent.
When designing medicare for all, we need to take congress out of the equation, instead we need to bring in physician groups, and economists and say here's what we're aiming for, come up w/ some proposals to make it the strongest possible plan for all parties -- without consideration to what it'll do for the pharma/insurance lobbies.
I mean, I trust scientists/mathematicians/accountants more to come up with sound economic theory/principles than a bunch of lawyers, and lay-people without experience doing that sort of thing. But for things like this and global warming, maybe Congress should sit back and let experts come up some solutions.
Someone below mentioned interest rates which is a fundamental thing and cannot be overlooked.
We are in a 'weird new normal' of low-interest rates for a variety of reasons, partly artificially induced.
But if you put your finance hat on and contemplate for a moment what that means ... well it means debt and a lot of it and rationally so.
If super low-interest rates become normative, our thinking has to change quite fundamentally because it's rational to lever up quite dramatically. We may have to reconsider entirely how the national balance sheet works.
I would prefer to stay somewhat solvent so that we can use actual money to stave off the inevitable crisis in the 2-20 years. We know these are coming, we know we need reserves of capital to fight them. Going into debt now (except maybe in initial expenditure that will realize gains in efficiency in the out-years) is folly.
Yes except very little of the deficit is being used for investments that will increase future economic growth. Most of the money is just being spent on current year consumption.
well the music is going to stop playing sooner than later. 11 years since this bull market started...the clock is ticking. History tells us this wont go on forever.
The only question is how deep we will "correct" and will it develop into something bigger than a simple correction. At these levels even a 20% correction will drop SnP >600points. Interestingly a 50% correction will drop us right on top of the 2000-2006 market tops which would still be considered bullish long term, if it holds.
Here is a long term bull case for the stock market: currently the largest asset class is real estate. But as the world population stabilizes, real estate will lose much of its value as a lazy way to protect capital from inflation. There will be rebalancing of the global capital portfolio from real estate into the stock market. If real estate was securitized and turned into a liquid public electronic exchange, this transition would be even faster. Long term I am bullish on the stock market until it becomes a much larger percentage of the global wealth.
This sort of statement can't really be proven true or false, because you put no time limit on it. Of course, eventually the economy will shrink instead of grow and you can claim to have predicted the future. In the same vein, during a recession you could predict a return to growth, and it'll probably eventually happen. Neither are particularly meaningful unless you give a hard timeline, after which we could declare you right or wrong.
I'm suspicious of statements like this because there never seems to be any money placed where all the talk is. There were lots of people saying the same thing a couple of years back, too. They seem to still be around and haven't lost their shirts.
Are you buying long term puts on the SnP? Is anybody?
I believe the new virus will trigger a recession. The global supply chain is broken, most people just don’t realize it yet. China’s economy has crashed. A couple more weeks of quarantine and a lot of small businesses will fold. This will have a cascading effect. The debt situation in China is bad. Banks will collapse when lots of people and businesses default on loans, a lot of factories will never restart. Meanwhile factories outside China will shutdown because a lack of supplies. Some car factories already have.
a virus that kills < 1-2 % of the population (likely mostly elderly) isn’t going to hurt the economy long term. Remember preventive medicine is actually more costly than letting people die sooner, even for non viral killers like cancer and heart disease.
SH is the inverse fund for S&P 500 [1]. The fact that SH is non-zero should indicate someone has money backing that position. SPY has something like 20% short volume, although that is difficult to translate to long term short interest.
Much of it could be part of strategies. It's meaningless without knowing the overall positions.
The only way to actually do this would be for some pundits/funds to come out and say they have built a massive short position on the SnP, just like all those Tesla shorts that got on TV from time to time. Is there any?
yes. I am out of equities in my 401K. so i consider this a short position by being out of the market. i am not dumb enough to short the bull, its like stopping a freight train, might be deadly - my plan is to have cash ready to hopefully pick up some bargains when SHTF eventually. My time line is next 2-4 years. I am ok with losing some upside here, IMO downside risk is bigger than trying to squeeze last few bucks out of this thing.
You can look at the open interest of the option chain, check out the SPY Dec 21 LEAPS, there are hundreds to thousands of open put contracts at most of the strikes, which start at $25
sure, but how much of it are actual shorts and how much of it is just hedging against long positions? it is a meaningless metric unless it's lopsidedly in favor of puts, which it isn't.
You can see open interest for both calls and puts. What you can’t do (by looking at open interest alone) is determine whether they were sold to open or bought to open. The tape (transaction data) can help determine this.
Some do. Some mean buying something like GLD. That leaves you the risk of the exchange going out of business, though. So some prefer to actually take physical possession of the gold. That leaves you vulnerable to being robbed, though. So some prefer to have it stored in somebody else's vault. That leaves you vulnerable to the vault company going out of business, though.
There is no perfect answer. Different people worry about different secondary risks, and do different things in response.
If you buy physical gold, how does one go about converting that back into liquid cash without getting fleeced? Where do you sell it? I don't get the impression that pawn shops or jewelers pay fair amounts... what am I missing?
Its a hedge against SHTF scenario - full out crisis.
IF we look at history and dozens of cases of runaway inflation or currency crises (germany, argentina, russia default, venezuela etc) where currencies devalued fast in a short period of time - having physical gold (even 5-10% of the total portfolio) would have alleviated the pain.
people lost life savings... and will lose again, as history often rhymes again and again.
You know the fed can print money to pay off that debt right? That's the difference between you being personally $1T in the hole every year and the government. That's also why nobody really cares. At this point it's easier to do that than to find $1T in annual cuts the folks in office can agree on. Not that it's a good thing, of course.
> You know the fed can print money to pay off that debt right?
No they can't, and they won't, unless you want the fed to crash the dollar and make it worthless. The money supply is a very tricky thing in that you want enough liquidity so that the market continues working, but too much money supply would make the dollar as worthless as seashells.
>but too much money supply would make the dollar as worthless as seashells.
Sure, but what is the number that constitutes "too much"? Right now the M3 money supply is 15.3 trillion dollars and the CPI inflation has been below 4 percent since 1991. In that period the money supply has grown by 12 trillion. If quintupling the money supply in the same period that GDP only doubled doesn't not only not tank the value of the dollar but doesn't even cause serious inflation, I'm curious what would?
That's a serious question, by the way - I have a background in economics. This is unprecedented.
The fed expanded its balance sheet from less than $1 trillion in 2008 to over $4 trillion in 2016, practically dumping $3 trillion into the economy for all intents and purposes. What was the effect of that on crashing the dollar/making it worthless[0]?
There was extraordinary demand for liquidity during and following the financial crisis. Because the Fed was expanding its balance sheet to meet market demand, it did not crash the value of the dollar.
You can print an unknown but finite amount of money before hyperinflation sets in. It's not actually free money, just another finite resource that can be drawn - the credibility of the US government's promise to pay.
And like every other finite resource that doesn't come with an accurate accounting system, it is being overexploited, and will come back and bite us all eventually.
Anytime somebody talks in absolute numbers they’re more often than not trying to be deceptive. Absolutely numbers don’t mean anything at all in relation to nation debt, the only way to meaningfully quantify it is as a % of GDP (or interest charged as a % of government revenue). The article would give you the impressions that government debt is spiralling out of control, but really the debt/GDP is pretty stable.
With all that money you also need to buy the stupidly largest army in the world so if anyone has a problem with your debt you can solve that problem militarily.
The US still spends more than any other country on Earth and indeed more than almost all of them combined. Any random country can spend more by GDP or by percent, but by dollar the US is the clear largest spender.
Focusing on those two points does say.. something, but it doesn't rebut the point being made, and does serve to obfuscate it.
Most countries have, at most, one or two aircraft carriers, maybe four little ones if they're really ambitious like France or Japan. These are the pinnacle of power projection and are extraordinarily expensive to build, own and operate.
The United States has eleven of the largest carriers in the world and a bunch more that are smaller that are still bigger than what other countries consider a carrier.
That's an example of how disproportionate it is in terms of overall size. Not manpower, not GDP percentage, just size.
Where other countries have one or two of something the United States has at least ten. This goes for planes, tanks, cruisers, helicopters, missiles, pretty much whatever, they've got more.
> other countries have one or two of something the United States has at least ten. This goes for planes, tanks, cruisers, helicopters, missiles, pretty much whatever
This is correct except for tanks [0], where Russia has about 3 times more than US.
This is not unexpected, given that no-one is going to invade US by land, and that Russia has been repeatedly invaded by land.
About half of the national debt is to the federal government, the federal reserve or state and local governments. In other words - the US government is primarily in debt to itself - in a currency that it can print! The government could wipe out half the debt overnight by just forgiving the loans it made to itself. And it could pay off the rest by printing money - which would lead to inflation, but how much really?