One of the great similarities of our economic downcycle and Japan’s two decade long journey to oblivion: both are periods of economic stress caused by private sector deleveraging — in which the government mitigates the resulting pain by borrowing and spending. Japan’s government has run up terminally large debts, on a gross basis equivalent aprox to 2x its GDP. We’re on the same path.
The private sector has too much debt. The process of working the debt down — by a combination of increased savings and defaults — reduces spending, causing a long, deep recession. The government mitigates the pain by tax cuts and increased spending — generating massive deficits, which it borrows. Private debt goes down, public debt goes up. It’s like heroin — effective, but deadly if used too long.
Experts continue to proposed solutions, as they have for decades. To no avail. The public refuses to understand the problem, with no interest in any but delusional solutions.
- Look at the numbers
- The public has its eyes closed, lost in dreams
- Another sensible proposal, fated to rot away ignored like all the others
- For more information, and an afterword
(1) Look at the numbers
In Q1 of 1994 government debt was 36.3% of total credit market debt, a long-term peak.
- State/local debt was $1.15 trillion (9.2%).
- Federal debt was $3.39T (27.1%)
In Q4 of 2007 government debt was 23.1% of total credit market debt, a long-term trough.
- State/local debt was $2.19 trillion (6.9%).
- Federal debt was $5.12T (16.2%)
Now, as of Q3 2009, government debt is 28.5% and rising fast — far faster than private debt is falling.
- State/local debt was $2.30 trillion (6.7%).
- Federal debt was $7.54T (21.9%)
(2) The public has its eyes closed, lost in dreams
From the Mid-June 2009 Omnibus Survey, Pew Research Center for the People & the Press:
The only category getting even a 1/3 vote in favor of cutting expenditures: Foreign Aid. Of course, other surveys show that many Americans believe that the government spends vast amounts on foreign aid.
|
Category
|
Increase
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Decrease
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No Change
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Unsure
|
|
Education
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67
|
6
|
23
|
4
|
|
Veterans Benefits
|
63
|
2
|
29
|
6
|
|
Health care
|
61
|
10
|
24
|
6
|
|
Medicare
|
53
|
6
|
37
|
4
|
|
Combating Crime
|
45
|
10
|
39
|
6
|
|
Help Unemployed
|
44
|
15
|
36
|
6
|
|
Environmental Protection
|
43
|
16
|
34
|
6
|
|
Energy
|
41
|
15
|
35
|
9
|
|
Military Defense
|
40
|
18
|
37
|
5
|
|
Scientific Research
|
39
|
14
|
40
|
7
|
|
Agriculture
|
35
|
12
|
41
|
13
|
|
Anti-Terrorism Defense
|
35
|
17
|
41
|
7
|
|
Foreign Aid
|
26
|
34
|
33
|
7
|
|
State Department
|
9
|
28
|
50
|
12
|
This reflects most America’s ignorance about our spending on foreign aid. From “A Study of U.S. Public Attitudes Foreign Aid and World Hunger“, Program on International Policy Attitudes (PIPA), 2 February 2001):
Just based on what you know, please tell me your hunch about what percentage of the federal budget goes to foreign aid. You can answer in fractions of percentage points as well as whole percentage points.
— Average answer: 24%What do you think would be an appropriate percentage of the federal budget to go to foreign aid, if any?
— Average answer: 10.0%Now, imagine that you found out that the US spends 1% of the federal budget on foreign aid. Would you feel that this is too little, too much or about right?
- Way too little: 13%
- A bit too little: 24%
- About right: 44%
- A bit too much: 8%
Survey results were weighted to the Bureau of the Census’s Current Population Study for education level and age.
(3) Another sensible proposal, fated to rot away ignored like all the others
- “Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt“, The Peterson-Pew Commission on Budget Reform, 16 December 2009
In the this report, the author calls on policy makers to stabilize the national debt through a six-step plan. Crafted over the past year by former heads of the CBO, OMB, GAO, and the congressional budget committees, the plan reflects a bipartisan approach to avoiding the tremendous global risks of America’s expanding debt, without destabilizing the economic recovery. Red Ink Rising is the first of two major reports to be released by the Commission.
(4a) For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp relevance to this topic:
- about the Financial crisis – what’s happening? how will this end? – esp section 8, about solutions
- about the End of the post-WWII geopolitical regime
- some Good News about America!
Posts on the FM site about the government’s finances:
- Forecasts – Why wait? Read tomorrow’s news … today! (part 3), 17 July 2006
- The most important story in this week’s newspapers, 22 May 2008
- Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
- A certain casualty of the recession: the US Government’s solvency, 25 November 2008
- We have been warned. Death of the post-WWII geopolitical regime, 28 November 2008
- Beginning of the end of the Republic’s solvency. Soon come the first steps to a reformed regime – or a new regime., 14 August 2009
- Update on our government’s deteriorating solvency, 1 October 2009
- Another crack in Republic’s foundations: not the size of the debt, but when it’s due, 30 October 2009
(4b) Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
May I just state that it is kind of new to me, the way you have consistently pointed this out without any apparent partisan attacks? In my experience, I’ve never ever ever seen the US governmental debt discussed in public … except as a way for Ayn Rand fans to argue that we need to END MEDICARE & SOCIAL SECURITY & DUMP PUBLIC EDUCATION RIGHT THE HELL NOW!!! I’m glad you have decided to do this though. Because looked at objectively, it actually is pretty freaking enormous.
To atheist:
I can only assume you are independently wealthy. You must have a million or more in the bank and health care insurance paid for by someone else. Your job must be secure from all econ fallout.
Re: END MEDICARE & SOCIAL SECURITY & DUMP PUBLIC EDUCATION RIGHT THE HELL NOW!!! It is easy to spout such nonsense when you have a belly full of food, a warm dry bed to sleep in, and someone to care for you when you get sick. Others of us are not so lucky. Many of us live from paycheck (if we have one ) and get bankrupted when a medical crisis occurs. It almost happened to me. You do not state whether you were educated by the system or were home schooled. If you were home schooled, how did you get a job? One of the first things an employer asks for is your educational history. Oh, I forgot! You are independently wealthy and do not need to work. If you got your education from private schools, it says you lived in an affluent atmosphere as a child. Many of us are not that fortunate and have to rely on the system to educate us.
Mr atheist, as Mr Spock would say: “Live Long and Prosper”, especially the prosper part. You will need your prosperity when you are no longer able to work. Oh, I forgot! You don’t have to work.
The survey of possible reductions/increases in federal expenditures curiously omits any mention of military expenditures, currently more than half of the federal budget. Much more alarming than public indifference to or ignorance about these issues, is the bland assumption by the experts that the military budget is untouchable.
I didn’t download the report on how to “stabilize” the federal deficit, but did read as far as the table of contents, which does not mention any specific steps to take toward this end. Certainly one way to stabilize the deficit would be to rescind some of the tax cuts enacted under Pres. bush. This also seems to be off the table for the “experts”.
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FM reply: That’s an important, perhaps vital, insight. We fight our wars with no evident interest in comparing the cost vs. alternative uses of such vast sums. That suggest either than we’re insane, or that this aspect of public policy has been hijacked by those for whom private interests are more important than the public interest. Or both.
I found this blog post about how much the US does spend on foreign aid detailed by component and compared to others.
gregle (Comment #2), I believe you need to read atheist’s comment more closely (I’m guessing you only read what was in all caps). The full line was “In my experience, I’ve never ever ever seen the US governmental debt discussed in public … except as a way for Ayn Rand fans to argue that we need to END MEDICARE & SOCIAL SECURITY & DUMP PUBLIC EDUCATION RIGHT THE HELL NOW!!!”
As you can see, atheist was actually indicting people who say the part you picked out.
RE: #2
Gregle, I believe I wan’t clear.
I was trying to say out that normally, when I’ve seen the federal debt mentioned, it appears to be mentioned as a reason for ending social programs such as Medicare, or sometimes to attack a political party. Whereas here, Fabius appears to be mentioning the federal (and other) debts as a way of reminding folks of their inherent danger to the entire USA. That was the point I failed to make… the lack of desire to tear something down.
I think that the exchange between atheist and gregle might be one of the more illustrative lessons that has appeared on this website for those who want to actually influence real people mired in the actual world we’re stuck in right now. FM’s project will have to engage this at some point. . .
Reducing the cost of health would be a great leap forward. But that is off the table. It would be less profitable for the industries whose lobbyists pay for political campaigns. Oh darn.
I guess time for such a timid proposals is over. Look at this report (on base of official reports): Fed have covertly monetized 510 billions in three quarters of 2009Y in addition to 300 billions of quantative easing. I think more desperate plans such as this plan of Nathan Martin is now appropriate.
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FM reply: These kind of statments are little more than agitprop, circulated to arouse fears among those ignorant of basic economics — false on many levels. First, Sprott’s reports are highly speculative — hardly authorative (IMO many aspects are cetainly false). Second, the Fed’s supplying money to meet the public’s demand for cash during the 4th quarter was essential to prevent a deflationary spiral — almost certain to cause a deprssion. Third, the Fed can easily withdraw this monetary expansion during a recovery. This was proven by the Bank of Japan’s success at this during the late 1990’s.
Foreign aid is guns , healthcare is profits , welfare is slough , education is fog , defence is hot air .Taxpayers – workers and businesses have to pay for it all , waste , inefficiencies , inameetings , computorsaysnos .
Perhaps we could learn from the Third World – slash taxes , pay direct , and gain honour in this world and the hypothetical next , by donating to Charities and looking after our own families and friends .
Yes, we could divide up the countryside, so that each farm was just large to support a knight or two. Make them indivisible and non-transferable, maybe passed down to each eldest son. Oh yes, Your Highness, i believe that COULD work! Hehehehe.
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Back to Steve Keen one of the 12 economists, out of all those thousands, that predicted with scientific rigour the GFC. He has a wonderful article about how we Ozzies have beaten you septics* again! We are very competative and we love our gold medals.
On top of us now becoming the Worlds largest per capita CO2 emmitter, yep we’ve beat you this year, we now have the largest household debt to GDP ratio in the World. And the most expensive housing ratio to income!
“Anything you can do we can do better”. God, or China of course, help Australia. Our Reserve Bank actually has an official policy to run down our miniscule manufacturing, just in case it ‘crowds out’ mining. Trust me on this the US does not have a monoploy on stupidity (though you are trying hard).
*Septics, Oz slang. Septic Tanks = Yanks. A Septic Tank is where all the human waste goes in bush properties.
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FM reply: (1) One successful forecast means nothing. History is filled with economists who made one good call and little else. (2) The close economic similarities of these 3 english-speaking nations (US, Australia, UK) is remarkable, given their very different circumstances. As are Canada’s usually taking a different path.
We’re falling behind! Keep shopping, boys! And raise up a cheer!
One of the problems facing the US regarding the managing of government debt a high level of household debt. The combined level of debt private and public. The big differences from Japan
Any major increase in taxes to finance public debt will put pressure on a large group of households struggling with high debt level themselves. That could then result in new pressure on banks due to defaults.
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FM reply: It’s not really different. Japan’s 1989 crash occured with high levels of corporate debt and relatively low government debt — vs. the US with high HH debt and low-ish government debt. Otherwise the dynamics are quite similar.
17 years go, on the eve of his inauguration, Robert Rubin reportedly informed Bill Clinton that he would have to forgo most of the progressive programs he promised during his campaign, and attend to balancing the budget instead. Otherwise the financial community would lose confidence in the US economy, and that would produce grave consequences for all of us.
Why is it that the financial community (i.e. US capital in general) is now ok with massive federal deficits?
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FM reply: For the same reason heroin is used as an analgesic, while illegal for casual use. The US economy expanded during the Clinton era (1993-2001), during which periods the US should be running surpluses to off-set the inevitable deficits during recessions. Note that using real accounting (not the government’s fraudulent cash accounting), the US never ran a surplus during the Clinton Administration — despite the Republican-led pressure on the budget and asset sales (e.g., the navy’s oil reserve).
Large deficits were inevitable during the worst and longest recession since the 1930’s, as taxes collapsed and costs increased. Plus they serve as a counter-cyclical stabilizer. That so many American’s have forgotten this 101 Economics is among the most disturbing revelations of the past two years. It’s as if we’re debating building airplanes and forgot about gravity.
Apologies to atheist for not reading his passage more closely. I was sober too.
I was thinking about where you could levy the tax income to repay the debts. Corporations or households. Households are the easiest to fleece. Most can’t afford to buy expert advice to avoid taxes. A federal sales tax of 15-20% for example. Corporations are much harder marks.
FM reply to #16: “Large deficits were inevitable during the worst and longest recession since the 1930’s, as taxes collapsed and costs increased. Plus they serve as a counter-cyclical stabilizer”
I misunderstood the point of your post. I thought you were implying that large deficits posed a catastrophic threat to us.
I still wonder why “Wall Street” is not alarmed this time. Perhaps the answer is that Rubin’s warnings to Clinton 17 years ago were simply a reminder of the underlying conservative, pro-business bias of the American state, the basic worldview of its ruling state, whereas today, under Obama, there is no countervailing progressive impulse, despite BO’s campaign rhetoric to the contrary. The massive federal deficit, and the shortfall in revenues of state governments, has already made any new social support programs unthinkable.
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FM reply: Large deficits do pose a catastrophic threat to us. Just as herion does if overused. Keynes recommended counter-cyclical deficits, run only during recessions. We’re locked into secular deficits, run during booms and busts. That does not mean they’re unnecessary during downturns (addicts still need painkillers during surgery). But our political system is addicted, in a loose sense, to deficits. We all know the danger, but lack to will to break the cycle.
FM From #16: “Note that using real accounting (not the government’s fraudulent cash accounting), the US never ran a surplus during the Clinton Administration”
This is interesting. May I ask, how does this fraudulent cash accounting work? Is there a name for what the government does in this regard?
Just accounting on a cash basis rather than an accrual basis, i.e. recording income and expense when you receive or write a check (cash basis), rather than when you create an invoice or receive a bill (accrual). AFAIK no business is allowed to do its accounting on a cash basis.
Cash based vs. Accrual based accounting. Interesting, thanks. My knowledge of accounting could be fit on the back of a postage stamp.
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FM reply: Here’s a brief look at the difference — The most important story in this week’s newspapers. Another way to learn the difference is to start a corporation (of some size) and use cash accounting. If you’re lucky, the shareholder’s litigation will provide a lesson. If unlucky and prosectuted for fraud, the resulting jail time will provide opportunities to learn accounting. Our politicos are, of course, immune to learning about these things.
It’s worth noting that if we cut our insane 1.45 trillion dollar a year military budget by 2/3, we could eliminate America’s annual deficit and start to pay down our national debt. Then we could prepare for the fiscal onslaught of baby boomer retirement.
Or we could continue to send the U.S. army into third world hellholes where it gets soundly defeated by 15-year-old kids who fight with bolt-action rifles.
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FM reply: You go to the heart of the great mystery. Why do war mongers almost never compare the benefits of this money spent on other things? I have long pondered this, and consider insanity as the only explanation. But it’s an unsatisfactory answer.
From FM #22: “Here’s a brief look at the difference — The most important story in this week’s newspapers.”
Thanks for linky will check out
FM asks “Why do war mongers almost never compare the benefits of this money spent on other things? I have long pondered this, and consider insanity as the only explanation. But it’s an unsatisfactory answer.”
Two answers come to mind — one commonsensical, the other disturbing.
The commonsense answer is that war is spectacular, while rebuilding infrastructure or improving a nation’s health care provide no impressive TV sound bites or jazzy headlines. Blowing up stuff in some third world country looks impressive. Americans can instantly see that something’s happening. They can see what they’re getting for the money they spend on their military.
But spending the same military money on other more useful projects, like painting bridges to keep ’em from collapsing, or vaccinating children to improve preventive health care, is invisible. You can’t see what you get for the money you spend on that. And even if you could…how many news organizations have ever broadcast or printed a story about workmen painting bridges with the headline ROUTINE MAINTENANCE PREVENTS EXPENSIVE BRIDGE REPAIRS…?
The other answer proves more disturbing. America no longer manufactures much of anything, aside from weapons. Our manufacturing base has eroded to the point where America’s main profit centers now involve intangible like finance and “intellectual property” such as movies and music CDs and software.
We can only enforce draconian intellectual property treaties like ACTA if we have a military so huge it makes the rest of the world tremble. So the other answer is that the vast profits from American finance and software and moviemaking and music business (which are all forms of Ponzi schemes which produce intangible “products” whose value is only determined by what Americans can force other countries to pay for these intangible things) can only be maintained by holding a gun to the rest of the nations on earth in the form of the U.S. military.
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FM reply: I was hoping for a more hopeful answer, but this makes sense. One aspect of this is too bleak, however…
“America no longer manufactures much of anything, aside from weapons.”
That’s a myth. Manufacturing output in the US has increased steadily for generations, but at a rate slower than the overall growth of the US economy. Hence manufacturing’s contribution to GDP was only 11.%, vs. 20% in 1980. Just like agriculture. See the BLS tables here.
One of the major problems with US manufacturing is the overvalued dollar (much as the overvalued pound was for the UK after WWI). When the bizarre large imbalances in the global economy right themselves, our trade deficit will melt away. That can happen in many ways, some more pleasant for us than other. I recommend that we do not continue trusting to luck in these matters. Some planning and effort now might prevent much pain in the future.
FM claims: That’s a myth. Manufacturing output in the US has increased steadily for generations, but at a rate slower than the overall growth of the US economy. Hence manufacturing’s contribution to GDP was only 11.%, vs. 20% in 1980. Just like agriculture.
Sorry, the myth that manufacturing in America has declined is a myth. The vast majority of the so-called “increase” in American manufacturing in the BLS tables comes from arms production for the Pentagon.
Not only has skyrocketing military spending crowded out domestic manufacturing, the hard cold statistics proves that military spending produces far fewer jobs per dollar than domestic manufacturing. So it’s a double whammy.
Before citing lumped bulk statistics like the ones the BLS puts out, you need to do some research and disentangle the components of the bulk durable goods orders statistics. The evidence that American manufacturing is disappearing far faster than the simple “growth” in the U.S. economy (quotes, because most of the so-called “growth” in the U.S. economy over the last 30 years has occurred in the financial services sector, which is simply a Ponzi scheme) is overwhelming and conclusive and incontrovertible. Just look at the chart. America makes essentially nothing but weapons today.
Congress’ own research arm of course agrees with me and with the evidence and with most economists, and disagrees with FM. To quote from congress’ U.S.-China Economic Security and Growth Commission {FM note, this is from their 2006 report}
“As the U.S. manufacturing base diminishes, the U.S. military risks losing its ability to easily, quickly and reliably procure much-needed weapons systems, components and spare parts,” says the U.S.-China Economic and Security Review Commission (USCC), an entity created by Congress in 2000 to serve as a watchdog for the worrisome Chinese military growth trend. “With a smaller industrial base to draw from, military leaders are increasingly concerned about maintaining warfare capabilities, especially in the event of actions not supported by the People’s Republic of China.”
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FM reply: Most of the material you cite is unrelated to either of your assertsions (that US mfg is declining, and that the increase results mostly from military spending. You cite 3 relevent articles…
(1) “overwhelming” evidence: “Death of Manufacturing“, Patrick Buchanan, American Conservative, 11 August 2003.
This provides zero evidence for your claim. Since you cite Buchanan as an authority, does that mean you also share his views about the NAZI’s? What would you say to someone else who cited Buchanan as an authority (on anything)?
(2) “incontrovertible” evidence: Why a Recovery May Still Feel Like a Recession, NY Times, 31 July 2009 — specifically this chart showing change in military and non-military durable goods shipments since 2000.
This does not support your assertions, either.
(a) It shows durable goods, which are aprox half of total manufacturing.
(b) It shows relative growth rates; not the relative size of military and non-military goods shipments.
(c) The period shown (2000-2009) is unrepresentative (aka cherry picking to prove a point). It includes 2 of the 3 recessions during the past 28 years.
(3a) “Congress’ own research arm of course agrees with me and with the evidence and with most economists”
Do you have any evidence to support these statements, or are you just (again) making stuff up? BTW, Buchanan is not an economist.
(3b) “U.S.-China Economic Security and Growth Commission”
“Congress own research arm” is the respected Congressional Research Service. The Commission you cite is a seperate entity, which looks like something created by the Bush Administrations’ neo-cons to spark a cold war with China. The conclusions they cite result from a study of one industry: autos. Not remotely representative of American industry. This looks like their m.o. Even their charter looks like they assumed what they proved:
FM reply: “These kind of statments are little more than agitprop, circulated to arouse fears among those ignorant of basic economics — false on many levels. First, Sprott’s reports are highly speculative — hardly authorative (IMO many aspects are cetainly false).”
Fabius, I do not think you make a convincing argument here. Sprott and Franklin make concrete, falsifiable assertions in their analysis. Such as that:
Then they show FEDs definition of Household sector:
And conclusion:
All through the report they make a reference to the relevant treasury and FEDs papers, and show their methods of calculations.
I think a honest way to dismiss their conclusion is to refute it, not blandly dismiss as not authoritative. Are you taking in account only opinions of Nobel Laureates and Fed’s officials?
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FM reply: No, I say that on the basis of 30 years reading this kind of material. Statistics on our large, rapidly changing, increasingly globalized economy are defective in many ways. Esp as the agencies collecting the economic statistics are brutally underfunded (if the post office had that level of funding, you’d get mail once per week — and once per month it’d be someone else’s mail). This allows people to develop all sorts of mysteries. John Edwards of Shadowstats has built a business out of this. While these tales are not always wrong, they are usually wrong.
In this case there is almost nothing there. Household savings rates are rising, and people are putting most of that into bonds (flows into bond funds are at record highs). As are banks. Sprott finds that surprising (implying in effect that its impossible). It’s neither.
Look at today’s treasury bill auction. The bid to cover ratio was 5.5. That means bids totaling $88 billion made for $16 billion in 28 day t-bills. Far more demand than supply, with the result being a low price (i.e., a median yield of 0.02%).
Fabius, I have to disagree with your analysis for two reasons, one generic, the other specific. The generic critique is that the government is not a household, and it doesn’t make sense to treat it like one. The GBC is self-imposed, but is not a real constraint, because the US government issues debt denominated in the fiat currency it controls. It faces no solvency risk, and can pay back the debt whenever it likes, if it so desires: just a matter of some numbers on a screen changing as accounts get credited. Most people commenting on national debt and deficit spending are still operating within a no longer relevant gold-standard paradigm.
The specific critique is that even if we think that government debt is “bad” (as opposed to necessary given the saving wishes of the public), it is still the case that even a large national debt only requires a stable and modest rolling deficit. No big deal.
If the US government starts to run a surplus again it will merely be reducing potential output for no good reason (since the difference between taxation and spending is obviously lost forever as the period in which the economy was operating below capacity moves into the past). The government cannot save because it is not a household or a firm–it is the issuer of a fiat currency. It makes no sense to think of the government “saving” in the boom periods to spend in the busts. The government is not revenue constrained at all, except where it decides to be (GBC, e.g.).
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FM reply: This is too weird to discuss, or even read. Can you provide some expert citations to support your view?
One other thing: the deficit is rising because the American public wants to save.
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FM reply: Can you provide any expert citations to support this theory?
Too weird to even read–how cruel! I’m drawing on Post Keynesianism here. If you really want names of some experts, have a look at the Levy Institute, the Centre of Full Employment and Equity, UMKC economics department in the States, Cambridge over here (the UK)…
That’s not much fun, though, and I know from my own experience that this stuff sounds pretty weird if you have a straight neoclassical background. Specifically what are you having trouble getting your head round?
This stuff is all water-tight, IMO. The PKs were also the single most successful school in terms of predicting the credit crisis. Very much worth investigating.
I mean, we don’t need the presence of experts to think about fiat money. Since the government has monopoly over the issuance of fiat currency, it is not revenue cons, trained. For the exact same reason, it cannot save. People who disagree are operating under assumptions that no longer hold. Can you explain to me how a government budget constraint is anything other than self-imposed, given the fact that the currency is not convertible into anything other than the same currency and the government controls its issuance? We’re really jumping into an abyss here from the orthodox perspective, but the logic appears to be irrefutable to me. I would be happy to be proved wrong, however, so that I can go back to being a happy conservative libertarian.
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FM reply: You’ve had your say. No more about this, please.
In reply to your comment at 30, there is also no need for expert citation, since it is a function of basic accounting identities. If the public wants to net save, the government must net spend. Ceteris paribus, governments run deficits because the people want to reduce their spending.
Probably best to start with Bill Williamson:
http://bilbo.economicoutlook.net/blog/?p=332
http://bilbo.economicoutlook.net/blog/?p=352
http://bilbo.economicoutlook.net/blog/?p=381
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FM note: Bill Mitchell is the Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia.
Er, Bill Mitchell, I mean.
FM reply: “No, I say that on the basis of 30 years reading this kind of material. … In this case there is almost nothing there. Household savings rates are rising, and people are putting most of that into bonds (flows into bond funds are at record highs). As are banks. Sprott finds that surprising (implying in effect that its impossible). It’s neither.”
Well, Fabius, you are not surprised… Lets just specify what namely does not surprise you. We are talking about 700 billion that US households supposedly invested individually (for example by Treasury direct account) in Treasuries in 2009Y. To reiterate Sprott report’s elaboration
In that regard your reference to flows into bond funds are almost irrelevant: That data do not apply specifically to Treasuries, as oppose to corporate bonds Purhases from Bond Funds and Income Mutual Funds do not identified in Fed’s reports as purchases from Household Sector There are about 112 million of US households, so we have 7 000 000 000 / 12 000 000 = 6 250$ individually invested in Treasuries by 2009Y for each US households. Median income of US households is about 50 000$, lets assume that disposable income is about 40 000$ (20% discount for taxes). So we have 15% of disposable income of US household supposedly individually invested in US Treasuries in year 2009.
Well, I am a little bit surprised. Households saving rates are rising indeed. It rose to 3.6% in December. Calculation of saving rates is also based on disposable income. But calculation of saving rate include not only investment in Treasuries but in all sort of securities, account deposits, Bond and Mutual Funds, pension accounts and so on. And, last but not least, payment on debt obligations is also considered as savings. I personally do not see as we may sum that up.
Maybe you would just read Sprott’s report, despite all bad memories of 30 years reading this kind of material
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FM reply: I read the Sprott report when it came out, just as I’ve read his previous reports for years. Anyone familiar with this data knows that its not reliable for these kind of calculations. Which is why most folks rely more on market price signals, which give a clear signal that the government is easily funding the deficit.
If we have another downturn in 2010 (aka a “W” or “double-dip), then the deficit will roar higher — which might produce a funding crisis. I suspect that this would be among the least of our problems in such an event.
“Why It’s So Hard to Cut the Federal Budget“, John Sides, posted at The Monkey Cage, 8 April 2010 — Excerpt: