Author Topic: $27,000,000,000,000 US debt  (Read 4025 times)

cubsfan

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Re: $27,000,000,000,000 US debt
« Reply #20 on: September 10, 2020, 06:17:30 PM »
Great post Wabuffo.  There is much regarding this I don't understand, not from your writing but because of the complexity of the topic.

Ditto -  Fabulous post Wabuffo and great contribution. Learned a lot in how to think about the topic.


scorpioncapital

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Re: $27,000,000,000,000 US debt
« Reply #21 on: September 11, 2020, 02:25:16 AM »
Excellent post. I would also say that for those parts of society/government that can go bankrupt or have no printing press there is a very real risk of reduced quality of life. Usually this creeps on through user fees, more aggressive 'penalties' for all kinds of daily transgressions you may not even know you had done. Sometimes higher direct taxation. In a crisis, how much can a government squeeze its residents before they start cheating? Actually you see a lot of black market and corruption in some countries because people have lost faith in the government. Not just lies or policy, but too high costs, low services, and insufficient incomes.

Cigarbutt

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Re: $27,000,000,000,000 US debt
« Reply #22 on: September 13, 2020, 04:51:24 PM »
The insights in this thread are interesting, especially the fiscal room concept and the unrecognized intangible aspect.

The following will be light on numbers but here’s the most recent long term CBO outlook:
https://www.cbo.gov/system/files/2020-09/56517-Budget-Outlook.pdf

Of note, the CBO people periodically report how reliable their “forecasts” are but base their self-administered conclusions on short term segments (year to year) in an auto-correlated way and longer term trends are missed, often wildly so. It’s hard to “see” the longer term outcome from here as the picture will be, as always, very dynamic but there are reasons to think that economic growth (tax revenues) will be muted and that government expenditures may surprise on the upside. The potential resilience is enormous so this exercise is more like trust but verify. The fiscal room and human ingenuity will be tested, i would say.

Back to the future (unaudited), from previous CBO disclosures (all debt measures correspond to government debt held by public):
-From 2000. The theme had to do with surpluses(!). Mid-range scenario expected for public debt to GDP, for 2020, was an actual net negative position (all debt reimbursed and more!).
-From 2010. The theme was more like a new normal. Worse-case scenario expected for public debt to GDP, for 2020, was at 80 to 90%.
-From 2020. Public debt to GDP will be at about 98%. The theme is (IMHO) unusually optimistic under the circumstances as it is assumed that, somehow, the very deep secular trend that has been deeply entrenched for decades will resolve with a free lunch and a debt to GDP at 109% is expected by 2030..

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Let’s try to kill the pessimistic thesis. The US is used as an example because of its size but similar concepts are playing out in most large developed economies and even China. Japan just reported that there was actually no limit whatsoever under any circumstances concerning the amount of government debt that they can issue… The US has the cleanest dirty shirt but it holds the international reserve currency.

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From an international perspective, in 2003, Mr. Buffett weighted in on the question.
https://archive.fortune.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm

Since then, the trade deficit has relatively decreased to some degree but remains somewhat negative, meaning that there are net capital flows going into the US. Looking back, this happened also to a similar degree in the late 1800s when the international capital was invested in productive capacity: industrialization, not consumption. Where is the international capital going now and is it invested in productive capital? Mr. Buffett was worried that a persistently high negative current account balance would mean a declining ownership of real domestic assets. If one follows the numbers, this has not really happened. Dissecting the numbers, the net international capital flows going into the US, mostly, are not coming in as equity purchases or foreign direct investments, they are coming in to buy US government debt. This results in a situation where the international holders of the debt assets (who are also the prospective buyers of newly issued US government debt) would not benefit from rising rates or from a depreciation of the USD. Even in the absence of the final gold restraint repealed in 1971, the US continues, absolutely unabated, to hold an exorbitant privilege. Isn’t it bothersome that there does not exist a limit on how negative the trade balance can be for a country that has a growing net negative investment international position? So, the net capital flows go into debt, as a first but non-effective lien on US economic capacity and that part does not really answer the question as to the productivity of the negative balance so let’s look at the domestic aspect.

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From a domestic perspective, playing with basic math, domestic savings equal domestic investments adjusting for the current account balance. Since the negative current account balance (savings glut from others) is funneled to additional debt, one can focus on the domestic aspect of this question: is the net debt issued at large going to productive use or to consumption?

It appears clear that the only way total debt could reach today’s levels is because of low and declining interest rates and it is quite obvious that rising interest rates with today’s and tomorrow’s debt levels are simply an impossible proposition. Given that interest rates have become now mostly managed (and to be yield-curve controlled), domestic policy makers have developed a domestic exorbitant privilege, thereby removing another natural restraint to debt.  Isn’t it bothersome that there does not exist a limit on how high the government debt can be for a country that has growing unrecognized off-balance sheet liabilities? The key question therefore remains: Is the debt going to productive purposes? Can we grow out of it, eventually, assuming present secular trends?

Net national savings (government, households and corporates) have been going down and are now net negative meaning a corresponding trend for net investments. This means that the capital assets after depreciation will have a tendency to go down. The general conditions of infrastructures may be a reflection of that. From that perspective, it is hard to argue that debt (government included) is going to productive purposes. This would suggest a negative self-feeding and eventually non-linear loop.

What about the intangible investments that may not be recognized as lasting value because of modern accounting’s ‘failure’ to grasp the lasting value of these expenses? There may be some kind of delay and evolutionary changes may become revolutionary but, so far, these productive expenses have not showed up in productivity numbers and in overall GDP growth, in fact, quite to the contrary.

So far, tangible effects of residual tangible and intangible investments are not supporting the argument that debt is going into productive use and are supporting the argument that debt is going mostly into consumption, various non-productive ‘services’ and status-quo maintenance.

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Periodically, it has been argued that the market has been better suited to recognize the intangible value created by intangible investments. A basic premise here on my part is that the net worth of a country should be correlated to its net earnings. The graph can be updated to September 2020.
https://fred.stlouisfed.org/graph/?g=Egr#0

Clearly, something has been going on here, with an upward trend occasionally disturbed by incomplete(?) corrections.

Right around the first peak (following link from 1999), it was argued that the market should be relied upon to judge the value of intangible investments. Recognizing realized gains and market value of traded securities would have better reflected the ‘true’ economic progress. The proposed reform would have also conveniently contributed to deeply needed upward adjustments in the national private savings rate.
https://fraser.stlouisfed.org/files/docs/historical/frbphi/businessreview/frbphil_rev_199907.pdf

Right around the second peak (housing bubble), it was argued that raising house prices were based on fundamental and often unrecognized intangible (including hedonistic) principles. Mr. Bernanke, in real time, failed to appreciate the disconnect and failed to assess the potential consequences as the downturn started. In retrospect, he (and his tribe) attributed the “bubble” to others (!) including international cash flows leading to global demand of mortgage-backed securities (!) and to the fact that financial institutions were affected by a growing component of intangible assets and “declining quality of capital” during the run-up (!) among others, giving little attention to the very unusual low interest post dost-com response leading itself to unusual leverage and, in large part, to the result we know of now and to the more-of-the-same monetary policy response that the Fed has engineered, so far, in response to the central thought process.

And the trend is again up, reaching new heights, and the underlying justification is still based on the notion of unrecognized intangible value. It may be different this time?

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It is being reported that the US annual deficit will reach about 26K per household for 2020.

A country (especially if it can print money) is different from an individual or a household as it is, in theory, a perpetuity. However, individuals and households have to live with certain constraints that are conducive to survival which equates to a variable but definite deadline. There was no doubt that the country would survive the virus as the concern was always centered on the host. The virus will be eventually conquered and may even disappear but the crying wolf says that the host will live on.

In David Copperfield, Dickens described how the difference between happiness and misery was really a function of the bottom line. I wonder about the risk of the transition between Great Expectations and Hard Times.

Apologies for the shared negativity but it seems to me that the debt expansion is extremely foolish and nobody I know gives a hoot.

LongHaul

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Re: $27,000,000,000,000 US debt
« Reply #23 on: September 13, 2020, 06:45:51 PM »
Wabuffo,

What is your best guess then to how this plays out in the US and Japan which have a lot of debt but also have their own currency?
Seems like could be a big cost at some point.

Is the most likely scenario high inflation and higher taxes with lower spending in the US and Japan?

Also,  how about historically all the countries that defaulted - Russia and Argentina in the last 25 years.  They had their own currency but issued dollar debt but still defaulted - couldn't one have argued that they could of just issued more debt in local currency and paid back their USD bonds rather than defaulted?  I wonder if it is sometimes easier politically to just default and screw the creditors.

It is interesting to me that if there is debt to the public of 200% of GDP then at "normal interest rates of say 5% interest costs alone would be 10% of GDP which is much harder to keep paying.


wabuffo

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Re: $27,000,000,000,000 US debt
« Reply #24 on: September 14, 2020, 05:46:25 AM »
From 2000. The theme had to do with surpluses(!). Mid-range scenario expected for public debt to GDP, for 2020, was an actual net negative position (all debt reimbursed and more!).

CB - one of the more interesting periods of economic history (for a nerd like me) was the 1997-2001 period of consecutive federal surpluses.  The United States was actually paying down its Treasury debt!   But be careful what you wish for.  It unleashed a period of monetary deflation and (along with China's entry in the WTO in 2001 ramping up the trade deficit) triggered the beginning of the mortgage crisis that blew up years later.  There is an interesting macroeconomics book to be written about this period but no one is writing it, unfortunately.   Sad.

wabuffo

wabuffo

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Re: $27,000,000,000,000 US debt
« Reply #25 on: September 14, 2020, 05:59:44 AM »
What is your best guess then to how this plays out in the US and Japan which have a lot of debt but also have their own currency?  Seems like could be a big cost at some point.

I'm probably going to disappoint you but I see a lot of one-timers here.  For one, tax revenues during the pandemic have collapsed.  The biggest source of Federal Tax revenues is employment income.  It brings in around $3t per year - give or take.   Here is a graph of federal employment withholding taxes on a rolling 2-week basis using the Daily US Treasury statements (here - I'm trying to simulate a rolling 2-week national payroll account extrapolated for an annualized number).



The US is running about $500B+ below where it should be in annualized federal tax revenues for employment payroll withheld at source.   Hopefully that should normalize at some point.   

In addition, most of the spending programs are one-time in nature and are ending at the Federal level.  While there may be continued support - it looks like it will be at lower levels.  So the history of these kinds of one-time shocks or national economic crises (like wars) are that the deficit blows out for a few years but then reverts back to its normal run rate after a few years' time.

Is it possible that this time is different?  Are politicians starting to buy into the MMT prescriptions of running much larger deficits has very little cost?  I have no idea.  But as I said, I am getting a bit nervous that MMT is being bandied about as an excuse to really blow out Federal spending.   That's new - but I don't know if its really gone mainstream yet.

wabuffo
« Last Edit: September 14, 2020, 06:11:55 AM by wabuffo »

Cigarbutt

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Re: $27,000,000,000,000 US debt
« Reply #26 on: September 14, 2020, 06:06:42 AM »
^Debt like greed is good, with the proviso that it needs to be kept to a reasonable level and for productive purposes. The definition of those terms is up to you.
The 1997-2001 period is interesting (this was the time i started to take investing seriously) indeed but it's not clear if it's worth it to discuss what is correlation or causation and the direction of such?
What is amazing though is the idea that cycles no longer exist. When we entered the macro-prudential era, the initial terms of the contract implied to alternate between using a margin of safety and then building it (which IMO is the second-best approach) but this MMT thing just feels like a huge free lunch.

wabuffo

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Re: $27,000,000,000,000 US debt
« Reply #27 on: September 14, 2020, 06:14:06 AM »
The 1997-2001 period is interesting (this was the time i started to take investing seriously) indeed but it's not clear if it's worth it to discuss what is correlation or causation and the direction of such?

"For the federal government to run a surplus, the private sector must run a deficit (ie, borrow to consume or spend)."   

wabuffo

rb

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Re: $27,000,000,000,000 US debt
« Reply #28 on: September 14, 2020, 06:48:52 AM »
Wabuffo,

What is your best guess then to how this plays out in the US and Japan which have a lot of debt but also have their own currency?
Seems like could be a big cost at some point.

Is the most likely scenario high inflation and higher taxes with lower spending in the US and Japan?

Also,  how about historically all the countries that defaulted - Russia and Argentina in the last 25 years.  They had their own currency but issued dollar debt but still defaulted - couldn't one have argued that they could of just issued more debt in local currency and paid back their USD bonds rather than defaulted?  I wonder if it is sometimes easier politically to just default and screw the creditors.

It is interesting to me that if there is debt to the public of 200% of GDP then at "normal interest rates of say 5% interest costs alone would be 10% of GDP which is much harder to keep paying.
As Wabuffo explained earlier.

In respect to countries that issue debt in their own currency the debt is not so much real. It is money that a country owes itself. Japan is actually the best case of this because they haven't been running trade deficits. So those JGB that are the private sectors' assets. So what actually happens will be dictated by the private sector's appetite for assets and the associated impact with that. In your example you mention interest rates of 5%. OK, well what's gonna cause rates to go to 5% and what effect will that have on the economy?

To take your Japan example, if you're gonna have debt paydown in Japan that will be because the population will want to hold less bonds. That means that they will take that money and spend it which will actually be a very positive thing for Japan.

In the case of Russia, they had to borrow in foreign currency. That's because they were running current account deficits. Basically they were a net importer of goods. These goods were sold in rubbles. But none of the exporters wanted to hold rubbles so they exchanged them for dollars. Then the Russian government had to go out there and borrow those dollars in order to balance the equation.

Cigarbutt

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Re: $27,000,000,000,000 US debt
« Reply #29 on: September 14, 2020, 07:02:38 AM »
The 1997-2001 period is interesting (this was the time i started to take investing seriously) indeed but it's not clear if it's worth it to discuss what is correlation or causation and the direction of such?
"For the federal government to run a surplus, the private sector must run a deficit (ie, borrow to consume or spend)."   
wabuffo
Thanks for the reminder related to elementary school math. :)
However, even if the saving, investing or withholding have to achieve mathematical balance, this balancing does not mean net saving or, equivalently, net investment will be high, zero or negative. The balance also does not mediate what is consumed and what is invested. The following graph shows the mathematical balance always at zero but does not help to understand what has happened to the saving or investing trend:
(picture borrowed from O'Shaughnessy Asset Management and saved for an example here)


If you want to apply this 'concept' to what has recently happened with Covid (just an acceleration of deeply entrenched secular trends IMO), look at the following:
(picture borrowed from Goldman Sachs and saved for an example here)

The government borrowed to compensate for the recipients in need of saving (the areas under the negative and positive curves do match quite nicely) and to support consumption and now we're back to where we were before (long term trend line) except that debt to GDP has risen to a significant degree.
It's hard to swallow that the recent rise in debt is "not so much real". ???
« Last Edit: September 14, 2020, 07:08:07 AM by Cigarbutt »