Part II, the future debt.
On Thu, 03 Apr 2008 20:15:27 -0500, Les Cargill
cfl.rr.com>
wrote:
>RogerDodger wrote:
>> On Wed, 02 Apr 2008 23:46:07 -0400, Les Cargill
cfl.rr.com>
>> wrote:
>> >>> RogerDodger wrote:
>>>> On Wed, 02 Apr 2008 21:00:17 -0400, Les Cargill
cfl.rr.com>
>>>> wrote:>....
>>>> As Milton Friedman used to say, the cost of government is the amount
>>>> of its spending
>>> What it spends is not the same thing as debt issued.
>>
>> Spending equals taxes collected + debt issued. Period.
>>
>> (OK, plus revenue from selling off the national parks and stuff, but
>> that amounts to 0%%.)
>>
>
>That's not what others say. Yes, in dollar terms, 'tis true. But
>a dollar represents a declining fraction of GDP....
If you prefer...
Spending as a %% of GDP = taxes collected as a %% of GDP + debt issued
as a %% of GDP. OK? Same thing.
Do you really know any people who deny this?
>>> In a fiat money
>>> system, M1 growth is managed by issuing bonds.
>>
>> ??? Money supply growth has nothing to do with the national debt.
>>
>
>Huh?
Huh?? Does this come as a shock?
If so, you should spend less time on usenet and more reading an Econ
textbook, or maybe the Fed's explanation of how the money supply works
on its web site.
>> The Treasury issues bonds and notes to finance the annual deficit.
>> This has *no* net effect on the money supply, because the money
>> collected by Treasury is promptly respent by it -- as in "deficit
>> spending" -- so it just recirculates.
>>
>
>The government borrows from the Federal reserve....
STOP. The Treasury does no such thing.
The Treasury finances the annual deficit by borrowing from investors
directly. Go to the Treasury Direct web site ...
http://www.treasurydirect.gov/
.. and it will borrow directly from *you*, if you want.
You are not the Federal Reserve.
The Treasury does not finance a penny of the deficit by borrowing from
the Fed. In fact, it is explicitly against the law for it to do so.
Every dollar the Treasury borrows is traceable by the public. It comes
from investors -- you, the Japanese, the Chinese.
None of it is traceable to the Fed. Don't make stuff up.
> Other people buy
>instruments based on T-bills, which flow back to the Fed, but there's
>a "sea-floor spreading" in the "plate tectonics" of the economy, where
>money supply is created.
"Plate tectonics" ;-)
C'mon, do you go to geology newsgroups and talk about how "the rise of
mountains is due to a force like the 'open market operations' of
geology."?
The defict-financing and money-creation processes are very clear and
describable in plain English.
The need to resort to such bizarre analogies that say nothing at all
simply indicates one can't put what one wants to say in clear English
-- very likely because it's just not true.
The Treasury and Fed web sites and textbooks all describe what goes on
with no need to resort to the likes of "sea-floor spreading".
And all those sources will tell you the annual deficit doesn't affect
the money supply at all, because it merely recirculates previously
existing money.
Of course, if you think the government and all the textbooks are liars
... you might be on usenet! ;-)
>> Result: No effect on money supply, permanent national debt goes up.
>>
>> OTOH the Fed buys and sells (not even, merely borrows and loans
>> usually) short-term T-notes, not bonds, to keep the price level
>> stable, and give the economy a liitle boost or break occassionally.
>>
>> Two entirely different processes.
>>
>
>I disagree - two highly *coupled* processes.
Specify how, without reference to the floor of the sea.
>Indeed, from a governance
>perspective, they're independent,
Correct.
>but that's where increases in money supply come from.
How? By magic?
The Treasury borrows $1,000 of circulating money from you via issuing
you a bond that you buy at
TreasuryDirect.com
In then immediately spends that very same $1,000 of money in
circulation on paperclips or bullets or Social Security benefits or
whatever.
You are saying that this somehow creates *more* than that $1,000 of
money in circulation??
Please explain how.
>Iraq is financed by issue of bonds. I'm not saying we're not
>overdoing it, but the effect is the same. It's all keynsian
>money-pumping.
Keynsian stimulus is NOT money creation.
The fundamantal principle of Keynsianism, its essense as per his
General Theory, was that money creation didn't work.
Keynsian stimulus is an entire 'nother issue
>just where do you draw the boxes
>around the individual components.
>
>Sorry, my primary thing is history, and I am a student of
>economics. I do make mistakes.
>
>>>> -- that's what determines how much in taxes it will
>>>> collect, to the dollar. Borrowing merely affects when they will be
>>>> collected.
>>> Exactly.
>>>
>>>>>> But on the other
>>>>>> hand the US isn't in any immediate danger of going bankrupt either.
>>>>>>
>>>>>> The wealth of the US does offer one significantly positive
>>>>>> possibility. With fiscal prudence - especially cutting gov't spending
>>>>>> - it wouldn't have to take that long to pay off the debt.
>>>>>>
>>>>> And we'd promptly crash the economy.
>>>> No it wouldn't. But not to worry -- it ain't going to happen.
>>>>
>>> Are you sure? I'm still trying to find the historical example. But
>>> the way the math works, with no increase in money supply, deflation
>>> sets in and a depression ensues.
>>
>> ??? The government borrowing money has *zero* effect on the money
>> supply because it immediately spends the money back into the economy
>> from whence it came.
>>
>> That's why it has to borrow -- to spend!
>>
>
>It spends it into "circulation". How can that *not* create money supply?
It borrows money circulating money from a citizen -- say, you -- then
spends that very same money. How is it possible that that *can* create
money?
If you borrow $100 from your cousin Charlie do you increase the money
supply?
>It borrowed it from the Fed....
It did not.
Stop saying this.
>
>> BTW, if the government redeems its debt during surplus years, that has
>> no effect on the money supply either, because it spends the surplus
>> tax collections by paying them to the owners of the redeemed bonds.
>> The money recirculates either way.
>>
>> So government issues debt, government redeems debt, no effect on money
>> supply either way. Ergo no inflation, no deflation, from what the
>> govt does with its debt.
>>
>
>Well, that's good to know. The Iraq bonds are what, a figment of our
>collective imagination? :)
No, they are bonds.
The figment of your imagination is that added anything to the money
supply.
>I realize I am conflating two things that people usually keep
>seperate, but I think that's an accounting artifice, a distinction
>without a difference.
Mmmm .... Nope, you are mistaken. Sometimes accountants know what they
are doing.
BTW, if the Treasury issued bonds to borrow money and then didn't
spend the money, it would REDUCE the money supply.
How you are imagining that issuing bonds increases the money supply is
something I can't figure out.
>>>> The *real* debt crisis is coming in the years after 2017 when the
>>>> boomers are retiring in force and collecting Medicare and Social
>>>> Security.
>>>>
>>> That's a low-velocity problem. Really. Medicare's more of a tough
>>> one than SS - the gummint can simply issue the checks.
>>
>> The Weimar government simply issued checks and got a hyperinflation
>> the Germans still remember.
>>
>> You can't issue the checks without collecting the taxes, unless that
>> is what you want.
>>
>
>Weimar hyperinflation is completely different from what we are facing
>here. That was specifically designed to destroy the value of the
>Versailles treaty WWI war reparations.
No, the hyperinflation was not intentionally "designed" -- it didn't
exactly make the government popular with the people! ;-)
There was a workers' general strike against the terms of the Treaty.
The strike kept the government from being able to collect the taxes it
needed. The government supported the strikers, so it decided to pay
its expenses -- including support payments to them -- anyhow with new
currency it ran off the presses. *That* created the hyperinflation.
The same thing will happen in the US (or anywhere else) if the govt
decides to pay surging retiree benefits in the future by printing
money instead of collecting the taxes needed to pay them.
The reason is simple: currency printed by the govt to pay its bills is
base money, "high powered" money that gets multiplied by the money
multiplier.
E.g.: say the govt wants to pay $100 to buy a hammer for the army, but
it doesn't have the $100. It has three options:
1) Collect $100 of new taxes. It takes $100 of money from a taxpayer,
maybe you, and gives it to the hammer supplier.
Result on money supply: no change. $100 just moves from your
bank account to the hammer-seller's account.
2) Borrow $100. It borrows $100 of money from a lender, maybe you,
and gives it to the hammer supplier.
Result on money supply: no change. $100 just moves from your
bank account to the hammer-seller's account.
3) Print $100 and pay it to the hammer supplier. The supplier then
deposits this *new* money in its bank, which lends/spends it to
someone else, who deposits it in another bank, which/lends spends it
to someone else ... etc.
Result on money supply: It rises not merely by $100 but through
the multiplier by $300, or $500, or $700, whatever.
BOOM, there goes your price level. Welcome to Weimar!
This is why govt spending must always be paid for with taxes --
remembering that deficit spending of $1 always reduces to taxes of $1.
>
>>> They have
>>> no real requirement to be in-the-black solvent on those
>>> accounts, the money will move fast.
>>
>> If the government is going to spend money the government has to
>> collect money. That means taxes.
>>
>> Period.
>>
>
>Then we can't run deficits? Ever use a balloon note?
Of course the government can run deficits.
And it must pay interest on the debt that results, right?
And the present value of the interest on the debt exactly = the value
of the debt, right?
And that interest must be paid with taxes, right?
Thus, it must collect taxes exactly equal at present value to the
amount of the debt, right?
So issuing debt **doesn't save a penny of taxes**, right?
It only affects the TIMING of the taxes, right?
We've been over this before -- if there's a step you don't understand
please name it and I'll clarify it.
Deficit spending = NO FREE LUNCH.
(Except to the politiicans of today who kick the cost of collecting
taxes forward onto the politicians of the future)
>> It can't even defer these taxes with deficit spending as with WWII,
>> because that only works with a "hump" expense that soon passes. With
>> 30-year bonds you can spread the cost of a big short-term, 5-year
>> expense over a generation. But if your expense is going up, up, up
>> every year forever, that trick don't work.
>>
>> The Social Security cash flow shortfall is 2 points of GDP in the
>> 2030s. That 2 points of GDP is about an 18%% income tax hike across
>> the board on everybody, individuals and businesses.
>>
>> Medicare at the same time reaches a 4 points of GDP shortfall, or a
>> 36%% income tax increase -- 54%% overall.
>>
>> Social Security stablizes at that 2 points but Medicare keeps going up
>> forever.
>>
>
>This is true. Pete Peterson was on Charlie Rose last night...
Reality rears its ugly head on TV.
(No offense, Pete)
>> This is not counting other significant items like federal/military
>> retirement benefits.
>>
>>>> Then all income taxes have to go up by more than 50%% by the 2030s and
>>>> keep rising forever after, or the government collapses in that period
>>>> under the massive debt, projects GAO and other sources.
>>>>
>>>> Unless SS and Medicare are sharply cut back. Which would be political
>>>> fun too.
>>>>
>>> I really don't think those are the risk everybody thinks they are.
>>
>> Everbody is wrong. Occam's razor in reverse, eh?
>>
>
>The only really scary thing is Medicare, which grows much faster. The
>fraction of GDP represented by Social Security is *more* manageable,
>but yet unprecedented.
Yes, the "minor" problem is "unprecedented" in size.
Remember the big Clinton tax increases that passed a Democratic Senate
and Democratic House by one single lonely vote?
The tax increase needed to close the SS cash flow gap is going to be
more than three times larger than that, and that's the minor problem.
Medicare and SS combined are going to need a tax increase 10x larger
than Clinton's -- and that's just for starters circa 20 years from
now, it goes up from there.
>It's not that "everybody is wrong", it is just that we'll deal
>with it, one way or the other.
Well, sure, lots of people have to deal one way or another with things
that make them miserable and angry and even poor, all the time.
> I figure means testing is a good start, for both.
So do I.
Now go over to the discussion boards at
AARP.org and tell them that,
and ask what THEY think!
I have. OUCH!! ;-(
> We may end up with some sort of publicizing of
>health services. We may anoint a new class of physician's
>assistant. Maybe there are tech efficiencies (hah!). At my
>doctor's office, there is one doctor, three nurses and a small
>army of clerks.... most of the clerks appear to be required
>by regulations and insurance .... inefficiencies...
>
>There is rent in medicine. Lots of rent. That's probably a
>good place to start....
Yeah, taxing "rent" in medicine, that's the solution!
You guys gotta take a vacation from listening to Roy, get some
perspective back on the real world.
>The whole mess was *created* by gummint in the first place,
Very true!
And now we are going to see government solve it. ;-(
If only we could hand control over all land and all natural resources
to the politicians too, to manage equally as well ... but I digress.
>though...wage freezes by Truman/(Eisenhower?). Trying
>to prevent inflation.... led to BCBS, decoupled price
>feedback...
>
>>>> Standard & Poors and Moody's both have the US govt's AAA credit rating
>>>> starting to plunge after 2017 on current law -- S&P projects it to
>>>> reach "junk" by 2027. In just 10 years, only 20 from now.
>>>>
>>> I'll believe it when I see it.
>>
>> When your tax bill arrives?
>>
>>>> Fortunately, Japan and Europe go off the same cliff first. ;-)
>>>>
>>> Heh. You don't have to outrun the bear... the point is - people
>>> still have to live in the world. We'll manage.
>>
>> Of course we'll manage. It won't be like being in Poland in 1939 when
>> the German army came in.
>>
>> It's only money -- taxes and retiree benefits -- that everybody's
>> going to be fighting about.
>>
>
>We are completely dependent on GDP growth to cover it.
There isn't a *prayer* that GDP growth will cover it.
Tax increases and benefit cuts will cover it, by arithmetic.
>We better get
>back to work. Yes, it *is* only money.
>
>>> Indeed, I'd rather
>>> see fiat funds adding to retiree's lives
>>
>> You've got to get it out of your mind that the gov't can print fiat
>> money to pay what it owes to all these retirees.
>>
>> It can't -- every dollar is going to come from taxes.
>>
>> All that printing fiat money does is create ever-accelerating
>> inflation, say "Weimar".
>>
>
>See above.
>
>> And even that won't get the gov't out from under the cost of retiree
>> benefits, because SS is explicity price indexed and Medicare
>> effectively is -- the Medical care the gov't promises everybody is
>> going to cost what it costs, and if inflation runs that cost way up
>> the government is still going to have to pay it.
>>
>> And such ever-accelerating inflation is very bad for the rest of the
>> economy.
>>
>> In fact, as Keynes himself pointed out, it is the effective equivalent
>> of taxes.
>>
>>> than funding an endless
>>> series of bubbles. The flows work out better.
>>
>> Tax hikes don't create "bubbles".
>>
>
>We're not talking about a tax hike.
We are talking about a tax hike exceeding 6 points of GDP annually,
for SS and Medicare costs alone 20 years from now, rising from there.
There is no alternative to that but benefit cuts. Money to pay
benefits has to come from somewhere.
For perspective, after Pearl Harbor the tax hikes put in place in 1942
to fight World War WII equalled 5 points of GDP.
And they were mostly temporary.
>> Except in the markets for tax lawyers and tax shelters.
