Author Topic: $27,000,000,000,000 US debt  (Read 4990 times)

Packer16

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Re: $27,000,000,000,000 US debt
« Reply #10 on: September 07, 2020, 06:14:24 PM »
The exit is to pay down the debt over time.  This will reduce growth over time.  We have seen the government debt go up but personal debt go down.  Worse come to worse there will be high taxes on either high income individuals or large companies as the first lien is called.  However, since most US debt is owned by US citizens most if not all the debt can be rolled indefinitely.  This is what is happening to Japan.  Watch Japan for clues to how a large internally owned debt is dealt with. 

Given the advances in technology & supply, we can monetize the debt with low/modest inflation. We have not reached the point where debt has crowded out investment as real rates are very low.

As outlined in the Fisher paper, as long as the debt is being serviced, any new money printed will decrease velocity thus no inflation & more deflation as aggregate demand is reduced to service/payback the debt. 

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BPCAP

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Re: $27,000,000,000,000 US debt
« Reply #11 on: September 07, 2020, 06:30:19 PM »
The exit is to pay down the debt over time.  This will reduce growth over time.  We have seen the government debt go up but personal debt go down.  Worse come to worse there will be high taxes on either high income individuals or large companies as the first lien is called.  However, since most US debt is owned by US citizens most if not all the debt can be rolled indefinitely.  This is what is happening to Japan.  Watch Japan for clues to how a large internally owned debt is dealt with. 

Given the advances in technology & supply, we can monetize the debt with low/modest inflation. We have not reached the point where debt has crowded out investment as real rates are very low.

As outlined in the Fisher paper, as long as the debt is being serviced, any new money printed will decrease velocity thus no inflation & more deflation as aggregate demand is reduced to service/payback the debt. 

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All of that is the exit of course, but it's also the optimistic (maybe overly optimistic case) scenario, one that is fragile to adverse contingencies (war, demographics, pandemic, real socialism, etc.). An exit and plan/strategy are two different things, especially when people in control at any given point in time have 1) short term incentives vs. large, and 2) no skin in the game.

The necessary exit for someone in deep credit card debt is somewhat obvious, but he has no real chance of reform if he doesn't do anything differently.

I agree we can amass debts and print money for quite some time. Probably much longer than anyone thinks. Or how or when exactly that manifests itself beyond deflationary forces, greater share of public vs private when it comes to balance sheet and the economy, lower real returns, etc.--is anyone's guess. Something could break, hard. When? Who knows.

Thinking of all this makes me a little more understanding when it comes to those dabbling in gold or Bitcoin. Who am I to say their fears are wrongheaded or that what yhey're doing isn't appropriate?

Packer16

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Re: $27,000,000,000,000 US debt
« Reply #12 on: September 07, 2020, 07:05:28 PM »
I think it reflects the reality today. To expect the system to blow up is the pessimistic IMO.  The government debt is different than credit card debt because someday the CC holder will die but not the US.  If the US dies, then there will be bigger problems than all of our portfolios.  The fear of the pessimistic case clearly is driving bitcoin & gold but there is a large opportunity cost to holding gold/bitcoin versus CF generating asset like stocks & real estate.

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Cigarbutt

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Re: $27,000,000,000,000 US debt
« Reply #13 on: September 07, 2020, 08:56:57 PM »
^The reality today is seeing many peaks.

1-Funds allocated to intangible assets are expensed from an accounting point of view but are captured in final GDP measures. American GDP per hour grew 1.79 per cent per year between 1870 and 1920, 2.82 per cent per year between 1920 and 1970 and 1.62 per cent per year between 1970 and 2014 (similar out to 2020). Where is the productivity miracle?
2-If there is no crowding out, why is the productivity of debt (amount of GDP per unit of debt incurred) falling in the US and globally?
3-Isn't the definition of a restructuring a new beginning and not an end in itself and is doing more of the same and hoping for something good to happen the best strategy?

Recently, a "friend" sent me a link in order to improve "productivity". i wonder if reading this link means wasting precious intangible time.
https://www.insidehook.com/article/advice/best-products-apps-productivity
Of public credit is a good essay.

BPCAP

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Re: $27,000,000,000,000 US debt
« Reply #14 on: September 08, 2020, 11:36:14 AM »
I'm neither optimistic nor pessimistic, just acknowledging that it's perhaps not smart to either panic or totally dismiss the debt and money printing issue.

I, too, believe in buying quality, cash generating businesses with competitive advantages. I don't like the idea that one needs bonds, gold, bitcoin, etc. to get them where they want to go.

Underlying the buy and hold thesis (and putting one's head in the sand when it comes to bigger picture analysis) is the assumption that stocks, etc. can only go up over time. That's been the case in the U.S. for quite sometime,;but worldwide and over time, we have been quite the exception rather than the rule. There's no guarantee our good fortune is permanent or unbreakable.

Countries of prosperity and law often found themselves in a very different system. I was told two stories, of investors in France in 1939 and Shanghai in 1949. Both never thought they had to do much differently as there would be a return to the mean and things would blow over. The only investment decision for both investors was to get out of town, forever, in retrospect.

Those stories and others like it have stuck with me (talk to an immigrant, especially ones from SE Asia, Africa, Eastern Europe and you'll have a greater appreciation and definition of risk). They have made me grateful for the time and place I was born. They also make me realize nothing is certain, despite what Bogle and Buffett say.

But, of course, I hope (and still think), these wisemen are more likely than not to be right.

rkbabang

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Re: $27,000,000,000,000 US debt
« Reply #15 on: September 08, 2020, 01:53:31 PM »
There is no exit strategy for the debt. No plan or easy answers, especially in a democracy.

We will borrow and print money--until we can't.

Exactly.  The best analogy for democratic government is it is like a cancer that will grow and consume more and more resources right up until it can't because the host is dead.

LongHaul

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Re: $27,000,000,000,000 US debt
« Reply #16 on: September 09, 2020, 04:36:17 PM »
I have no idea when country defaults will occur but if history is any guide they will occur.  There have been waves of cycles of default in history.  Frankly I don't think ANYONE really knows when and if a default or high inflation will occur - way too many variables.  Even the PHD economists have no idea and I don't trust their viewpoint.  In the US historically before ~1970 it seems like both sides wanted and had low debt.  THat is now gone and the mantra of more debt - no problem defies common sense.  Which means it is likely a higher probability to occur in my opinion.

https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises

Packer16

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Re: $27,000,000,000,000 US debt
« Reply #17 on: September 10, 2020, 04:42:41 AM »
IMO there are 2 factors most forget when talking about debt.  First, the debt is the first claim (via taxes) on the economy of the country.  As long as the country is viable, the debt never has to be repaid but just serviced.  Also, in the case of large domestic debt countries (incl US), the debt of a country is the lowest risk asset available to investors.  These are the reasons why Japan will not explode until either there savings disappear and/or there economy (GDP) declines sharply & permanently.  I am not saying changes in financial conditions will not effect the currency on the edges but in the currency game you are compared to the next best alternative & at this point all large alternative are worse.

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wabuffo

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Re: $27,000,000,000,000 US debt
« Reply #18 on: September 10, 2020, 06:35:32 AM »
I tried hard to resist this topic - but its like cat-nip - so here goes.

1) Everything about how we think and talk about US Federal debt is wrong.  The framing is wrong and the structure is wrong.  Other than that...  8)

A sovereign issuer of currency that doesn't peg to gold runs a pay-go system.  There is no debt to pay back - its an accounting fiction.  "Debt", such as it is, will always get "paid back" by rolling it over at redemption time with new "debt".   There can't ever be a default for many reasons.   What matters is the real-time deficit spending relative to the size of the US and world economies, in the case of US deficit spending.  A sovereign spends first, creating a bank deposit somewhere in the private sector and then withdraws some of it via taxes or fees or legal judgements, etc...  In fact, what gives a sovereign currency its initial value is that it is the only thing with which the private sector can extinguish its tax obligations to the sovereign.  But that's an initial condition, after which the whole monetary system begins to run on its own as a flywheel.  The important thing to key in on is that sovereigns must run a perpetual deficit year-in and year-out. If they try to run a multi-year surplus, they will reduce money and unleash deflation.  So what matters is running a deficit that is "reasonable" in size over time.

Not all governments are sovereigns - state, provincial, local (even national governments in Euroland) don't control or issue a currency and as such are like you and I.  Their debt is real debt and they can and do default - since in these cases they must find a way to balance cash flows over time (or run out of money).  Sovereign governments that issue sovereign debt in a foreign currency can also default. A sovereign that pegs to gold (like the old days) and then issues debt is also issuing debt in a de facto “foreign currency” if its currency is redeemable in gold.

2) The sovereign government's deficit spending is what provides "money" to the private sector.  The private sector then decides what the composition and mix of that money will be (including how much Treasury debt it wants to hold). 

In the case of the US government - it comes in three forms (via the US Treasury and its "bank", the Federal Reserve).  Here are the real-time balances of each liability type (as at Sep 2, 2020).

a) currency in circulation                                                                                                ($ 2.022 trillion USD)
b) bank reserves                                                                                                            ($ 2.851 trillion USD)
c) net Treasury bills/bonds held by the public (less: holdings of Tsy debt by the Fed)           ($16.444 trillion USD)

Thus at this point in time, the total liabilities of the Federal government are $21.316 trillion (the headline to this thread is wrong). These are by definition private sector assets and represent the cumulative sum total of total net deficit spending by the US federal government in its entire history. 

When I say the mix of these three liabilities is determined by what the private sector wants in terms of mix - it helps me to think of these three types of liabilities in the context of the Federal Reserve acting as a bank for the US private sector.  Like a bank, it offers its bank "customers" three types of accounts (which of course are liabilities of the bank):

1) vault cash  (= currency in circulation)
2) demand deposits  (= bank reserves)
3) time deposits, locked up for 30-days up to 30-years  (= treasury bills/bonds).

Historically, the US private sector has preferred the time deposit option because it is more liquid and because it earns interest (1 and 2 don't although 2 has in the past).  In fact, interest rates on all these liabilities are not free-market set - instead they are at the discretion of the US Treasury/Fed.  2) is less liquid because it can only be held by banks and thus not very helpful to the private sector.   The time deposits are risk-free and super-safe and thus are the world's best collateral for lending. In other posts on WFC and the Fed, I also showed that as the US Treasury deficit spends, bank reserves would accumulate in large and unhelpful amounts, so Treasury debt issuance performs an important reserve maintenance function.

3) Of course, we knows this but part of the deficit spending/US money creation goes overseas because of the trade deficit. 

The US more so than Japan, China or Euroland has more fiscal space because the rest of the world wants to net save a portion of its rising wealth in USD and USD assets by net exporting to us.  So not only does the US Federal govt need to run a deficit big enough for domestic savings needs, it must run an extra larger deficit to also accomodate the foreign sector’s need for the reserve currency.  The trade deficit causation is usually talked about in terms of over-consumption by the US when in reality the cause is net exporting by other countries to the US.   It is estimated 60% of 1), 30% of 2) and 20% of 3) are held by non-US residents, foreign banks or organizations and thus circulate outside the domestic US economy.

Will the US continue to be the world's super-power and reserve currency?  The US doesn't just have an advantage due its political system (constitutional republic) but more so than other countries it also has geographic advantages as well that reinforce its political and economic advantages.  I certainly wouldn't want to bet against it.

4) So - nothing to worry about?

Of course not.  But its not paying back the debt that we should worry about.  Its the real-time deficit spending.  As it spends in real-time, the federal government is competing with the private sector in buying goods and services and therefore it is affecting prices.  It is also affecting the real-time supply of money.   I like to measure the real-time growth in federal liabilities (money) by looking at the gold price.  That's because gold supply rises 1.8% per year.  Its not a perfect benchmark - but I feel it is the best one out there. Will that lead to currency debasement because right now federal liabilities are increasing much faster than 1.8% per year?  Gold seems to be feeling it.   Of course, supply is one factor, but demand for money is another.   In late March, worldwide demand for US dollars surged because of a global panic due to the virus.   Gold actually fell pretty sharply for a few weeks in March even as supply of dollars was increasing faster than gold's 1.8% typical increase.   That global panic has receded now, but supply of USD is still ramping though at a lower rate than April-June.   Time to worry?  Maybe - I own some GLD and GLD LEAP calls as insurance - so I'm not agnostic about all this stuff.

Anyway - this is all my opinion and of course, I could be wrong.  But its the model that I use in my head to try to understand the macro monetary flows and has served me well in trying to understand what's going on.

wabuffo
« Last Edit: September 10, 2020, 11:09:48 AM by wabuffo »

LongHaul

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Re: $27,000,000,000,000 US debt
« Reply #19 on: September 10, 2020, 05:36:41 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.