Monday, June 07, 2010

$13 trillion reasons why right-wingers are idiots

Because they get upset that the U.S. government has $13T in "debt".

Note that I say "debt", but it's not, really. Debt has to be paid back. So when does this $13T "debt" have to be paid back? Let's make this a multiple choice question:

  1. Next year
  2. 10 years from now
  3. 100 years from now
  4. Never
Tick....tick...tick....tick... and your answer is? Let's take a look behind... DOOR NUMBER FOUR!

Yes, *NEVER*. Because essentially, this $13T is OWED BY THE SAME PEOPLE WHO LENT IT.

Oh hold on you say, the Treasury holds auctions to sell off Treasury bonds all the time! Well, yes, but the deal is that a) only $3.8T is owed to foreign individuals or government (source), meaning that b) the remainder is money *borrowed* from us that we *owe to ourselves*. And if we choose to never repay ourselves the money that we borrowed from ourselves (or, rather, just roll over the debt year after year), well, so what?

Besides, even $13T is hardly a big deal. U.S. GDP is around $15T/year. If I could afford to buy a $150K house while making $75K/year, then the U.S. could easily repay $30T worth of debt the same way (i.e., by extending repayment over 30 years time). It would require doubling taxes, but it could be done. But really, *why*? I mean, first of all, we owe this money mostly to ourselves, and second of all, the Federal Reserve possesses that most wondrous of inventions, the PRINTING PRESS, and could trade freshly-printed cash for Treasuries with nothing but the stroke of a pen.

At which point I hear the screams of "Inflation!" Well, first of all, as I've repeatedly pointed out, capitalism doesn't work without inflation. Without inflation, money disappears under mattresses and ceases to perform its primary function, which is the lubrication of commercial transactions, thereby causing commerce to grind to a slow drip. And capitalism is a good thing to have, because capitalism allows paying for the capital investment needed to produce future output with the income from that future output, allowing capitalist economies to be far more nimble than economies without capitalism. So... inflation? Given the deflationary pressures we're currently facing, bring it on!

But, more importantly, these Treasuries are already effectively money! The main reason short-term Treasuries are at 0% interest is because people find holding Treasuries to be equivalent to holding cash, and rather than haul around truckloads of cash, they just trade it for Treasuries instead. So if they decide to go the other way around and trade the Treasuries for cash again, how much additional money just got put into the economy? NONE! They started with $1M in cash, and ended up with $1M in cash, for effectively $0 total change in the money supply as far as their personal frame of reference is concerned. In other words, the very act of printing Treasuries is effectively the same as printing money. Making it official at some future point in time makes $0 difference in terms of facts on the ground.

And finally: As I pointed out previously, printing money doesn't cause inflation. Rather, printing more money than there exists goods and services in the economy to trade it for causes inflation. But with 21% real unemployment, there is clearly a *lot* of idle goods and services in the economy that printed money could purchase, with no (zero) change in the effective price of goods and services. In short, we could run a deficit of 10% of GDP this year, financed *entirely* by printing money, and cause no - ZERO - inflation.

So anyhow. Those are the facts. So when hysteria-mongers throw big numbers around and say "oooh, scary" and talk about "solid economic principles", remember: That's solid like THEIR HEADS. Not to mention that this is usually "code" for "gold", about which I've repeatedly noted gold bugs don't understand what money is. 'Nuff said on that.

-- Badtux the Economics Penguin


  1. U6 is hovering around 17%, and the entire world wants to go an austerity program.

    The Chicago School/Austrians/Glibertarians have won, and we are doomed.

    The biggest difference between now and the 14th century is we haven't had a plague.



  2. Right, left, they're all idiots, like penguins, they waddle, squeal, and shit. Hahahahahha

  3. The biggest difference between now and the 14th century is we haven't had a plague.

    We've gotten pretty good at combating nature. But that doesn't mean she can't still whip our asses after we screw things up enough.

    Like turning the gulf into a dead zone. Oh what the hell, I don't live there, why should I care if a bunch of idiots die off.

  4. Well, I have no idea why you chose this topic for this post at this time (!) but many thanks. Maybe I'll even bookmark it & remember next time this ol' debt/austerity nag limps out of the barn. She's holding up surprisingly well, strangely enough. Especially considering how many pot shots have been aimed in her direction recently.

  5. Yeah, Dope, probably just a coincidence that I chose this topic at this time ;).

    BBC: Your cranky old butt is going to be first to die when your Social Security payments quit coming because of these deficit morons. So better start caring.

    Jazz: Somebody has been slipping LSD into the drinking water of our so-called leaders. That's the only thing I can think of. Siiiigh!

    - Badtux the Depressed Penguin

  6. Jazz you're right we'll just starve our way to prosperity.

    Badtux I was thinking of marketing Goldy Flakes made with real gold but no body can afford a box.

  7. Very interesting take on the debt that I have not heard before.

    The right believes we shouldn't be in debt at all. That and there is Proverb that states - "The borrower is slave to the lender."

    And yes there were many on the right quietly complaining about the deficits during the Bush years.

    I'm glad in my personal life I have chosen to pay off my debt, so that I can maximize my greatest wealth building tool - my own income.

  8. TLL, my own debt is at a minimal level at the moment. Next year however I will take on a debt that will consume 28% of my gross income for the next 30 years -- a home mortgage. Should I avoid debt and live in duplexes and apartments for the rest of my life? Debt, properly used, is a way to purchase a durable capital good (such as a home) over the entirety of its lifespan, rather than having to slowly accumulate the money to buy it outright over the course of that lifespan, and thereby increases the supply of goods and services in the economy as compared to the no-debt alternative. At one point in time, the Islamic economies dwarfed European economies. But the invention of modern bank lending (which is outlawed under sharia law) changed that, because suddenly it was possible to make huge infrastructure investments and pay for them over their entire lifespans, rather than having to wait and wait and wait. As a result, the West won, and debt is a big reason for that.

    Of course, there's debt, and then there's debt. If the lifespan of the debt is longer than the lifespan of the durable good being purchased by the debt, the good purchased by the debt adds no economic value, the amount of debt exceeds what you can support with your income, or you're using debt for a non-durable good, you have problems. Putting groceries on a credit card is only acceptable if you pay it off at the end of the month. But used properly, debt is capitalism's biggest tool for creating economic output, since otherwise the economy could not adjust to produce new goods and services until the capital to produce those new goods and services had been slowly accumulated over time.

    And that's Debt 101. I guess I need to make a post on it :).

    - Badtux the Economics Penguin

  9. Have you ever seen the "Money as Debt" video by a Canadian guy named Paul Guignon? (I found out only recently that he lives near here on Vancouver Island.)

    It's a cartoon-format presentation, about 45 minutes, free on the Web. Parts of it might be simplistic for an educated penguin such as you, like the explanation of fractional reserve lending. But it's a good primer on what money REALLY is (i.e. cheque from the cabal of private banks known as the Federal Reserve, nothing more than a debt-IOU.) I recommend it to a lot of novices (not you, obviously) because it will change how they view those all-important pieces of paper we carry.

    I just wish I could get my kid to glom it, but she hasn't even read the copy of Kunstler's "The Long Emergency" that I sent her more than a year ago, and that's the book that lays out a roadmap of what her world will become.

  10. Good points, I do plan on having actually having a mortgage as my only debt. And somewhat like you I plan on using only 25% of my gross pay as the payments, but on a 15-year fixed rate mortgage.

    Yes, I know, 1 extra payment a year and its a 17½ year thing, but only 3% of 30 year mortgages get paid of early.

    I'll wait for your post on debt to continue the discussion.


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