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If the US paid off all its debt

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Ajay Alcos
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Post: #1
If the US paid off all its debt

I stumbled recently onto a fascinating document that was written near the end of the Clinton administration. Basically it details and hypothesizes what would happen to the global economy if the United States to paid off the entirety of its debts (which wasn't far fetched since the Clinton administration was running a budgetary surplus if I remember correctly). What do you make of it?

http://media.npr.org/assets/img/2011/10/...erDebt.pdf

07.06.2015 11:04
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Helsworth
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Post: #2
RE: If the US paid off all its debt

Fiscal positions are flows; debts are stocks (net fiscal positions accrued over time). The last time the US paid off all of its debt, the country went into recession. Someone's debt is someone else's savings. The gov debt = nongov sector savings; nongov sector = domestic private sector + foreign sector.
As far as I know, 'they' contemplated that the FED might buy private sector IOUs in order to expand the money supply and keep the economy going - which would be quite the socialist move Hehe
Anyway, they would have never been able to eliminate all the government debt. I dislike the expression "pay off the government debt" because it pertains to outdated logic and it doesn't make any sense. Government debt = nongov sector assets. "Let's pay off our savings", that doesn't make any sense.
Returning to the point of debt, all their musings about how to change monetary policy and what not for a post-government debt epoch shows just how delusional Clinton's staff were - for they were totally clueless about the automatic fiscal stabilizers.
They would have been faced with a recession, which they were, the moment in which the domestic private sector's credit would go dry - the foreign sector was in a net surplus against the US anyway - thus higher savings desires and lower spending desire and capacity would have changed the government's net fiscal position dramatically. In order to retain perma budget surpluses, the US federal gov would have required to take active pro-cyclical fiscal measure - aka higher taxes and lower spending. Something which would have been extremely hard politically and socially to do. We've seen how bad life is on the grass during private debt deleveraging periods and with too small deficits on top of that - let alone budget surpluses.
One more point that the authors of the paper were talking out of their ass is the very beginning of their paper:

Quote:
The financial services industry has grown tremendously in this country over the past eight years, and done a very good job of handling growth and the increased risks that accompany it. The industry accomplishes this task most fundamentally by separating risks by type, making them easier to evaluate and price.

LOL!


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07.06.2015 13:10
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Ajay Alcos
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Post: #3
RE: If the US paid off all its debt

Helsworth Wrote:
Fiscal positions are flows; debts are stocks (net fiscal positions accrued over time). The last time the US paid off all of its debt, the country went into recession. Someone's debt is someone else's savings. The gov debt = nongov sector savings; nongov sector = domestic private sector + foreign sector.
As far as I know, 'they' contemplated that the FED might buy private sector IOUs in order to expand the money supply and keep the economy going - which would be quite the socialist move Hehe
Anyway, they would have never been able to eliminate all the government debt. I dislike the expression "pay off the government debt" because it pertains to outdated logic and it doesn't make any sense. Government debt = nongov sector assets. "Let's pay off our savings", that doesn't make any sense.
Returning to the point of debt, all their musings about how to change monetary policy and what not for a post-government debt epoch shows just how delusional Clinton's staff were - for they were totally clueless about the automatic fiscal stabilizers.
They would have been faced with a recession, which they were, the moment in which the domestic private sector's credit would go dry - the foreign sector was in a net surplus against the US anyway - thus higher savings desires and lower spending desire and capacity would have changed the government's net fiscal position dramatically. In order to retain perma budget surpluses, the US federal gov would have required to take active pro-cyclical fiscal measure - aka higher taxes and lower spending. Something which would have been extremely hard politically and socially to do. We've seen how bad life is on the grass during private debt deleveraging periods and with too small deficits on top of that - let alone budget surpluses.
One more point that the authors of the paper were talking out of their ass is the very beginning of their paper:

Quote:
The financial services industry has grown tremendously in this country over the past eight years, and done a very good job of handling growth and the increased risks that accompany it. The industry accomplishes this task most fundamentally by separating risks by type, making them easier to evaluate and price.

LOL!


Well bear in mind it was written in 2000, plus nearly everyone at the time was making an 'ass' out of themselves (e.g. its a new millennium, woohoo!). However as I've suspected, what you've written bears a relation to what Dave Kestenbaum's wrote in his article; which is where I first came across the document. But really I would like to know how else would the world economy would react, given its affinity for US treasury bonds. Would other countries or monetary-unions (more precisely those with similarly spotless records of defaults) immediately take up the mantle and eschew out their public debt to the world markets? Could these other currencies actually be able to do so?

Also, what's your opinion of the 'debt-ceiling'? I personally find it far too arbitrary to be effective and in practice more of a politically-motivated directive as well as an socio-economic hindrance rather than an effective tool at budgetary control. Do you believe such legislatory actions should be made more flexible - in that they should only be suggestive rather than law?

07.06.2015 17:04
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Helsworth
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Post: #4
RE: If the US paid off all its debt

Sure, other countries could have chosen to be net exporters of their own currency in such a scenario. I highly doubt that US planners would have allowed for such a thing anyway. Government can still issue debt (interest bearing securities) even if it is running budget surpluses. Australia did this in the past when it ran surpluses, simply because there was demand from the finance sector for such a move. The government debt is the movement between the currency and bank reserves. So it ultimately becomes a shuffling of money - while the government is destroying net financial assets via budget surpluses, the rich still get access to government interest bearing securities. Still, this is no solution - the recession will kick in anyway, and the automatic stabilizers will turn the surplus into a deficit quickly and efficiently - provided of course blasted politicians don't intervene to sabotage the process with austerity measures.
As for debt ceilings, yes, they are totally arbitrary make no economic sense. For the government's fiscal position in the present and over time (the gov debt) are the result of the economy, not the cause of it. Government and Nongov sectors live in the same environment; and private sector spending patterns impact the fiscal numbers. So at the next crisis when the debt ceiling is reached, parliament will simply vote to increase the ceiling...


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07.06.2015 19:57
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Ajay Alcos
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Post: #5
RE: If the US paid off all its debt

Helsworth Wrote:
Sure, other countries could have chosen to be net exporters of their own currency in such a scenario. I highly doubt that US planners would have allowed for such a thing anyway. Government can still issue debt (interest bearing securities) even if it is running budget surpluses. Australia did this in the past when it ran surpluses, simply because there was demand from the finance sector for such a move. The government debt is the movement between the currency and bank reserves. So it ultimately becomes a shuffling of money - while the government is destroying net financial assets via budget surpluses, the rich still get access to government interest bearing securities. Still, this is no solution - the recession will kick in anyway, and the automatic stabilizers will turn the surplus into a deficit quickly and efficiently - provided of course blasted politicians don't intervene to sabotage the process with austerity measures.
As for debt ceilings, yes, they are totally arbitrary make no economic sense. For the government's fiscal position in the present and over time (the gov debt) are the result of the economy, not the cause of it. Government and Nongov sectors live in the same environment; and private sector spending patterns impact the fiscal numbers. So at the next crisis when the debt ceiling is reached, parliament will simply vote to increase the ceiling...


I totally agree with you. Then again, with all this obsession with austerity one would think that the governments which have implemented those policies might've learnt to change course by now. I mean, one only needs to further focus on stimulating growth to offset rises in debt. Having austerity in my eyes is akin to eating nothing other than bread just to keep the food bills down... Both are unhealthy, whether it be for one's wallet or their mind and body.

07.06.2015 23:41
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Helsworth
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Post: #6
RE: If the US paid off all its debt

Ajay Alcos Wrote:

Helsworth Wrote:
Sure, other countries could have chosen to be net exporters of their own currency in such a scenario. I highly doubt that US planners would have allowed for such a thing anyway. Government can still issue debt (interest bearing securities) even if it is running budget surpluses. Australia did this in the past when it ran surpluses, simply because there was demand from the finance sector for such a move. The government debt is the movement between the currency and bank reserves. So it ultimately becomes a shuffling of money - while the government is destroying net financial assets via budget surpluses, the rich still get access to government interest bearing securities. Still, this is no solution - the recession will kick in anyway, and the automatic stabilizers will turn the surplus into a deficit quickly and efficiently - provided of course blasted politicians don't intervene to sabotage the process with austerity measures.
As for debt ceilings, yes, they are totally arbitrary make no economic sense. For the government's fiscal position in the present and over time (the gov debt) are the result of the economy, not the cause of it. Government and Nongov sectors live in the same environment; and private sector spending patterns impact the fiscal numbers. So at the next crisis when the debt ceiling is reached, parliament will simply vote to increase the ceiling...


I totally agree with you. Then again, with all this obsession with austerity one would think that the governments which have implemented those policies might've learnt to change course by now. I mean, one only needs to further focus on stimulating growth to offset rises in debt. Having austerity in my eyes is akin to eating nothing other than bread just to keep the food bills down... Both are unhealthy, whether it be for one's wallet or their mind and body.

Yes, it's mass insanity. People look at one piece of the puzzle and think they know the whole puzzle; they just can't understand that all those pieces belong to the same world. They foolishly equate the public purse as their own private purse, and if the government is running deficit (incurring debt), they think that means their own private purse is losing money.
They just don't understand double entry bookkeeping; it must be 1 entry too many, LoL. They can't understand that Spending is Income. And that demand leakages in the nongovernment sector can only be covered by government spending. Somehow, countries managed to live well with big post-war deficits and debts - yet now, we must cut the two otherwise we'll indebt future generations and burden them. What? We're burdened now! We're indebted now! In the present! We cannot repay the loans we honest folk took for renovating our homes, our school loans, our car loans, because we've been sacked, because our firms where we worked at no longer sold as much as it used to - because people no longer could afford to spend as much (b/c of higher savings desires which naturally comes by contracting bank debt) b/c debt servicing takes up more of their income.
But hey, it's alright to give a blank check to the military in order to fund the means of death and the destruction of life - but it's bad to give a modest welfare check to those who need it, bad to let households to keep more of their income, bad to create schools and ensure good nutrition et all. Fuck this world!


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08.06.2015 09:00
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MDiddy
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Post: #7
RE: If the US paid off all its debt

I totally disagree with you guys. Yes, government spending increases the GDP, but it increases it only in the short-term. In the long run, due to ever increasing debt levels, an ever larger portion of the GDP goes to interest payments and hence is not available for (public) investments. With a large share of those interest payments going either to foreign bond holders (e.g. China) or "the rich", who spend a smaller share of their money than the average American, Capital is either leaving the country or less of it is in circulation. To keep the economy growing the government needs to spend even more money than before. This is not just a witches circle, it is insane!

If it weren't for Janet Yellen bailing the government out with QE, it would have been broke already. Unfortunately all the people, who saved for their retirement or for the education of their children, will have to foot the bill of her actions. Inflation is inevitable!

"You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time."
Abraham Lincoln

10.06.2015 02:18
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Helsworth
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Post: #8
RE: If the US paid off all its debt

MDiddy Wrote:
I totally disagree with you guys. Yes, government spending increases the GDP, but it increases it only in the short-term. In the long run, due to ever increasing debt levels, an ever larger portion of the GDP goes to interest payments and hence is not available for (public) investments. With a large share of those interest payments going either to foreign bond holders (e.g. China) or "the rich", who spend a smaller share of their money than the average American, Capital is either leaving the country or less of it is in circulation. To keep the economy growing the government needs to spend even more money than before. This is not just a witches circle, it is insane!

If it weren't for Janet Yellen bailing the government out with QE, it would have been broke already. Unfortunately all the people, who saved for their retirement or for the education of their children, will have to foot the bill of her actions. Inflation is inevitable!

"You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time."
Abraham Lincoln

You are mistaken. A lot of the government debt represents the money for pensions funds! Secondly, the government debt is the stock of nongovernment sector savings - the money for schools, public services, pensions etc comes from the debt. Thirdly, the government's fiscal position is determined not only by the government's active policies, but from the nongovernment sector's economic behavior as well. (Look up Endogenous Money) As private spending flows increase, the automatic fiscal stabilizers reduce the deficit & can even turn the position into a surplus. Like during the Clinton surpluses - which in turn caused the recession. Only a few (heterodox economists) warned that the surpluses were not a good thing - and people laughed at Jamie Galbraith when he warned of the same thing in a speech to Congress. In the downturn, as private spending drops (since spending is income), there is lower spending which leads to fewer sales, to fewer incomes, to less production and fewer jobs. As such, the automatic stabilizers (which always work counter-cyclically) work to expand the fiscal deficit & provide the private sector with net financial assets - less tax revenue & higher welfare spending. And wouldn't you know it, criminally ignorant politicians sabotage the stabilizers by taking active pro-cyclical fiscal measures in the downturn. This only works to prolong the recession, to prolong the private sector's deleveraging time & needlessly exacerbates socio-economic hardships.
What you're so afraid of is nothing more than savings accounts at the Federal Reserve. The Chinese for instance earn interest if they keep their dollars in savings accounts (if they own government interest bearing securities) or they can spend those dollars on purchasing goods and services. Those electronic dollars do not leave the US. So claiming that somehow the economy will be ruined b/c the FED will have more savings accounts there is just nonesense.
Japan for instance has a government debt to GDP ratio of more than 200%; you know what the chances are for it to default? Zero!
As for QE, QE is not bailing out the government, lol. QE is monetary policy (not fiscal policy) and it's meant to keep the price of MBSs from going to a mark which would trigger losses for the banking sector. The FED is simply trading bank reserves in exchange for treasuries (owned by banks) and MBSs usually split 50/50. It's a SWAP operation. When the MBSs & Treasuries mature, so do the bank reserves. Bank reserves are not cash! Banks do not loan reserves to their customers. Banks do not loan money from deposits. Loans create deposits. Banks want your deposit, nor for finance purposes, but to balance their books. Bank reserves are used for accounting and settlement purposes only. The only sector who can create or destroy net reserves is the government via fiscal policy (net fiscal positions).
Logically and operationally, before the Federal government can tax & or borrow (pay interest on) its own money, it needs to spend it first into existence. All the dollars that go to paying taxes & buying government debt come from government spending. The difference between a regular banknote & a government bond (gov interest bearing security) is that the latter is a bond with a maturity date & interest attached to it, while the former is a permanent bond with zero interest to it. The government debt = net fiscal deficits accrued over time + interest in private sector pockets. The government debt = tax-credits (dollars) outstanding in private sector pockets. The government debt is the movement of two buffer stocks, the currency & reserves.
(I-S)+(G-T)+(X-M)=0
Private sector + Gov sector + Foreign sector = 0
(G-T)= -(I-S) -(X-M)
Gov sector = Private domestic sector + Foreign Sector combined (aka Nongov sector)
The sectoral balance represents flows, flows (pluses and minuses) which have to net to zero, otherwise there's an error in the math/info.
As for interest, the natural interest rate of fiat money is zero. Anything above zero is a subsidy, anything below zero is a tax. Issuing government is monetary policy, not fiscal policy - it is an idyosyncratic leftover of the gold standard epoch - it is not some implacable operational necessity.
So do not fear government debt (for all money is debt, all money is credit) contracted in the government's own free floating nonconvertible currency. Instead worry about on what government spends or fails to spend money on.
Good day.
PS: I like this quote from Mark Twain better "It's easier to fool people, than to convince them that they've been fooled."
How a Sovereign Currency works (this does away with the regular economic myths of the orthodoxy)


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This post was last modified: 02.12.2015 18:33 by Helsworth.

10.06.2015 08:37
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