Will the U.S. government ever have difficulty servicing its own debt?

[Pointedstick]

We use the word money very loosely now that we are using using fiat money. fiat money has no intrinsic value so I don't truly consider it money. It can't store value if it really doesn't have value. It's only value is artificially created. Absent the manipulation of very few people (government), no one would want to trade for it. Instead it's a money substitute. It is functioning as money though and for our purposes it's easier if we call dollars money, though again if truly pressed on the concept I wouldn't define them as money.

For our discussion....sure....dollars are money and that would include the dollars in your savings account or money market to be part of the money supply.

That is an important concession; thank you! And for what it's worth, I kind of agree with you. But in the world we live in, we don't buy things with gold and silver, so to be on the same page with the rest of America, it's important that for communication purposes we call dollars money even if they're only money because a gang of thieves and murders threatens us with death for behaving as though they're only paper.

[Kshartle]

You seem to think that you can predict inflation by only looking at M0 (base money). But, nobody — and I mean nobody — does that.

This is called an appeal to authority. "Since NOBODY, and I mean NOBODY thinks 2 + 2 = 4 it doesn't." What people think isn't relevant, it's what logic and reason can prove that's relevant.

Because while M0 is most certainly our medium of exchange (what you mean by "money") it most certainly does not represent our purchasing power as individuals.

This is called a strawman. You've invented an argument, attributed it to someone else and claim it's false. It's actually less than a strawman because you didn't even knock it down, just claimed it was flase but I'll not be too picky.

Here's an equation that might clear this all up.

MS = Money supply
BM = Base Money
OM = Other money

BM + OM = MS

Therefore.....2BM + OM = BM+BM+OM = Original MS + BM

See how increasing BM adds to the money supply?

The general price level as defined by HB in "How you can profit from the coming devaluation is MS/all goods and services available.So when MS goes up and goods and services stay static, the general price level goes up.

Absent other factors an increase to BM increases MS, thus increasing the general price level (what I assume is your definition of inflation).

[Pointedstick]

Absent other factors an increase to BM increases MS, thus increasing the general price level (what I assume is your definition of inflation).

That's the rub. "OM" accounts for far, far more than "BM", so while your equation is correct, the focus on the government's contribution to the total money supply and general disregard for the private component of the money supply--which you lump in with "other money" doesn't tell a complete picture, IMHO.

It's like saying "adding more chlorine to the pool will cause the water level to rise", which--while true--shifts the focus away from the other fact that the vast majority of the pool's composition is not chlorine but water.

[Pointedstick]

In other words, I will agree with your equation, but stridently put forth that OM is just as important to examine as BM if we wish to truly calculate the total quantity of money in the economy. We can't assume that an increase in BM will push up inflation without knowing what OM is doing at the same time.

[Gumby]

For our discussion....sure....dollars are money and that would include the dollars in your savings account or money market to be part of the money supply.

Good. Because that's the common convention. The "money" in savings accounts and money market funds are not a "medium of exchange" (we agree). Only base money is a medium of exchange. But, savings accounts and money market funds obviously represent our purchasing power.

Wikipedia explains...

Saving accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money in the narrow sense of a medium of exchange (for example, by writing a cheque). These accounts let customers set aside a portion of their liquid assets while earning a monetary return. For the bank, money in a savings account may not be callable immediately

Source: http://en.wikipedia.org/wiki/Savings_account

So, if you concede that that the dollars in your savings account are part of the money supply, then you've just admitted that while debt is not a medium of exchange, debt is clearly part of our savings (i.e. "money" in this discussion).

Why?

Because... Savings accounts are invested in a combination of Treasury Bonds and Reserve Accounts by the bank. Therefore, those Treasury Bonds are literally representing money in a savings account (i.e. Treasury bonds are "money" in this case, even though they aren't a medium of exchange).

And secondly, if I have a Treasury Money Market Fund (as Harry Browne recommends) then you've just admitted that my Treasury Money Market Fund is money!

See how easy that was?

By the way, it works the same way in Japan. Japanese citizens and businesses get tons of base money from the government. They deposit that base money in their accounts at the Post Bank and the Post Bank goes out and invests all of their savings into Japanese Government Bonds. The JGBs are "money" in that scenario but the account holders just see "Yen" on their statement and don't even know that their savings are stored in JGBs.

So, Debt=Money. We all agree now.

[Gumby]

It's like saying "adding more chlorine to the pool will cause the water level to rise", which--while true--shifts the focus away from the other fact that the vast majority of the pool's composition is not chlorine but water.

Exactly.

OM is far more important. Which is why anyone who tries to predict inflation using the money supply (i.e. Monetarists) will use "broad liquidity" (i.e. highly liquid broad money). Looking at narrow money tells us virtually nothing.

Once again...

Another measure of money, M0, is also used; unlike the other measures, it does not represent actual purchasing power by firms and households in the economy. M0 is base money, or the amount of money actually issued by the central bank of a country.

Source: http://en.wikipedia.org/wiki/Money

[Pointedstick]

Because... Savings accounts are invested in a combination of Treasury Bonds and Reserve Accounts by the bank. Therefore, those Treasury Bonds are literally representing money in a savings account (i.e. Treasury bonds are "money" in this case, even though they aren't a medium of exchange).

Devil's advocate: if I put my dollars into a sleazy savings account that invests in mortgage-backed securities, does that make MBSs money?

If I put my dollars into a savings account that invests in gold, does that make gold money?

[Gumby]

So... let's look at your overly simplistic equation — and never mind that it doesn't take velocity, etc. into account.

Here's the base money supply over time...

[align=center][/align]

Looks really inflationary, doesn't it? Now let's look at that explosion in base money's effect on broad money (or as you say, "other money").

[align=center][/align]

Looks a lot less inflationary now, doesn't it?

Most Monetarists believe that this base money will explode the broad money supply through the "money multiplier". But, alas, the "money multiplier" effect is a myth. Increasing the base money supply does not cause the broad money supply to explode, as we see with MZM (the broadest money supply indicator published by the Fed), above.

So, where is the explosion in the broad money supply (MZM)? It's not there. The change is increase gradual and a lot of the population is still unemployed. When people whine and complain about M0 exploding, they are usually trying to scare you with something that is largely irrelevant (i.e. politicians or political pundits masquerading as economists).

[Mdraf]

This is a very confused way of looking at money. Money is generally considered a medium of exchange. That is, we exchange money for other goods and services, and vice versa, because we know others will accept money for what we want to buy later on. It is, in other words, the most liquid commodity. If you want to buy something, people will always accept money.

Debt is not  money. If I lend Pointedstick $1000 what can I buy with his IOU? Nothing.

You view money as somehow being a debt instrument, a promise to pay, but this is not part of money at all. There is no indebtedness when money is exchanged for goods. The exchange is complete in itself. It does not replace any verbal bond. It is two people exchanging for the what they prefer, one the money, the other the good or service. Beginning and end of story. The money does not in any way represent indebtedness (unless of course one person is borrowing money and the other lending it). Once, the exchange takes place (outside of the special case of a loan), the two people may never see each other again.

In other words, you apparently consider, in some poorly defined way, that money is an accounting system that regulates the demand for the goods and services offered in an economy. It is no such thing. It is a very liquid commodity. It doesn't appear you guys get any of this in his world of money as accounting and indebtedness units.

[Gumby]

Devil's advocate: if I put my dollars into a sleazy savings account that invests in mortgage-backed securities, does that make MBSs money?

Yes. Money as a store of value — not as a medium of exchange. Though, banks tend to use CDs for those kinds of investments.

If I put my dollars into a savings account that invests in gold, does that make gold money?

Yes. But, Gold is often accepted as a final payment (i.e. a medium of exchange), so gold is money anyhow.

[Pointedstick]

This is a very confused way of looking at money. Money is generally considered a medium of exchange. That is, we exchange money for other goods and services, and vice versa, because we know others will accept money for what we want to buy later on. It is, in other words, the most liquid commodity. If you want to buy something, people will always accept money.

Debt is not  money. If I lend Pointedstick $1000 what can I buy with his IOU? Nothing.

From a micro perspective, this is true. I can't buy groceries with a T-bill. You can't buy groceries with my "P-bills."

But from a macro perspective, it's actually false. The money in my checking account or treasury money market account--which I can write checks against and use as a medium of exchange--only look like dollars on my end; under the hood, they're invested in debt.

So while it's true that debt is itself not a medium of exchange, debt underpins financial accounts that are used as a medium of exchange.

[Gumby]

This is a very confused way of looking at money. Money is generally considered a medium of exchange.

True, but not entirely true...

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money.

Source: http://en.wikipedia.org/wiki/Money

Debt is not  money. If I lend Pointedstick $1000 what can I buy with his IOU? Nothing.

Again, your definition of "money" is too narrow (see Wikipedia definition, above). The fact of the matter is that non-cash assets (Savings Accounts, Money Market Funds, CDs) make up a much greater portion of our purchasing power than the money that's in our pockets at any given time.

Once again...

Another measure of money, M0, is also used; unlike the other measures, it does not represent actual purchasing power by firms and households in the economy. M0 is base money, or the amount of money actually issued by the central bank of a country.

Source: http://en.wikipedia.org/wiki/Money

[Kshartle]

Kshartle,

To your points:

"Just so we can avoid the same repetitive discussions, debt isn't money."

Actually, our money is debt. It's a liability of the federal reserve and an asset of the private sector.

Per Wikipedia = Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country."

Repayment of debts. You don't repay debt with debt, you repay with money. One would logically infer that they are not the same thing. This is utter nonsense and the repetition of mantras is tiring and I'm done adressing it after this post. This thread is to discuss the ability of the government to service it's debt.

"You can't buy stuff with debt, you buy with money."

You can't buy stuff with gold, either. Does that make it not money? 

Gold is not functioning as money now. Therefore it is not part of the money supply. We don't buy and sell things in prices quoted in ounces or grams just like we don't slice up government IOUs and trade them for stuff.

If they made t-bills legal tender, would you change your position?

T-bills are an obligation to pay money in the future and not money. If they were transformed into money they would become something other than a T-bill. This would be inflationary since their addition to the money supply would grow it immediately and they would be used to bid up prices.

At the risk of sounding snarky (truly not trying to be), tell that to the guys who borrow treasury bonds from the TLT etf to short them.  We can borrow or lend almost anything.

I appreciate your qualifier. When we borrow a cup of sugar or a wheelbarrow it does not become money (I realize that's not your argument). The point is we borrow things to make use of them. When somone borrows TLT it's not to USE  the debt, it's to sell the debt instrument. It's to sell it to someone else in the hopes that it's value will drop prior to buying it back ( I realize you understand that).

Yes we can borrow or lend almost anything, but you're not borrowing someone's debt when you borrow TLT. You're borrowing another party's obligation to pay. It's not like I say, "Hey Moda, you've got a lot of debt, mind if I borrow it?". You are borrowing an IOU from another party which has actual useful value (since it represents an obligation of another party to pay). I haven't asked the government if I can borrow it's debt. No one does that, anywhere.

I hope that was clear enough, it's a confusing distinction but a critical one if you want to understand the difference between debt and money.

Actually, you don't need to understand the difference. There are other clear distinctions that make it very simple.

Kshartle,

I'm curious, what mechanism is it that you think makes us value the dollar?  At the most simple level possible, why do we crave them?

If you refuse to accept them for payment of debt you will be threatened, possibly kidnapped, possibly thrown in a cage. It's very incentivizing. It has to be. Imagine removing this incentive and trying to get someone to exchange something of value like a car for slips of paper that are identical to billions of others and are backed by nothing.

Also, if an entity can print money (government), isn't the idea that this entity issuing bonds and collecting taxes in a traditional sense a bit ridiculous?

The whole concept of some people in society forcing others to use slips of paper that they the entity can counterfit at will is definatley ridiculous to me. It is the root of nearly all economic problems in my opinion and it will be nice when all people agree it's ridiculous and we stop it.

[Kshartle]

I tend to think that maybe the relationship between base money and price level isn't what you think it is.

Or, in your terminology, maybe there are other factors present; looking only at base money doesn't explain much.

What do you think I think it is?

I would resate your last sentence in this fashion "looking only at base money doesn't explain much everything."

[Kshartle]

It's like saying "adding more chlorine to the pool will cause the water level to rise", which--while true--shifts the focus away from the other fact that the vast majority of the pool's composition is not chlorine but water.

That analogy would make more sense if the rest of the water was a function of the amount of chlorine and other factors. The chlorine not only raises the level in the pool, it adds to a factor that multiplied against other factors creates the product which is the other water.

Here are revised definitions:

MS=Money Supply
BS=Base Money
OM=Other Money=f(BS) which is function of Base Money. There are other factors but this is sufficient for understanding the principle.

Not only does increasing BS money increase the total money supply by an equivalent amount, everything else being equal; it also increases OM if the other multiplying factors do not change to reduce the impact.

[Kshartle]

In other words, I will agree with your equation, but stridently put forth that OM is just as important to examine as BM if we wish to truly calculate the total quantity of money in the economy. We can't assume that an increase in BM will push up inflation without knowing what OM is doing at the same time.

I would say OM is much more important than base money.

I completely agree that an increase in BM will not cause the general price level to increase if other factors offset it.

[Kshartle]

I think I made a lot of interesting comments regarding the goverment's ability to repay it's debts. Maybe they were lousy comments.

Anyone want to comment on any of that and stop this thread from turning into what they always do?

[Kshartle]

This is utter nonsense and the repetition of mantras is tiring and I'm done adressing it after this post.

I'm sorry Moda.

That was harsh. It's like we're disagreeing on which way up is and I'm tired of it. From my perspective you are pointing down and telling me it's up. I imagine I sound the same way to you.

I am done addressing it though, we never get anywhere interesting.

[Kshartle]

I tend to think that maybe the relationship between base money and price level isn't what you think it is.

Or, in your terminology, maybe there are other factors present; looking only at base money doesn't explain much.

What do you think I think it is?

That explosions in the base money cause an increase in price level.  The data I looked at showed that price level increased at the same rate in the presence of and in the absence of explosions.

I would resate your last sentence in this fashion "looking only at base money doesn't explain much everything."

What does looking at the base money supply explain, then?

I've provided the equations and summaries already. Please review them for logical errors, comment on them, whatever. I'm moving back to the subject of the government's debt if anyone would like to discuss that.

[Mdraf]

This is a very confused way of looking at money. Money is generally considered a medium of exchange. That is, we exchange money for other goods and services, and vice versa, because we know others will accept money for what we want to buy later on. It is, in other words, the most liquid commodity. If you want to buy something, people will always accept money.

Debt is not  money. If I lend Pointedstick $1000 what can I buy with his IOU? Nothing.

From a micro perspective, this is true. I can't buy groceries with a T-bill. You can't buy groceries with my "P-bills."

But from a macro perspective, it's actually false. The money in my checking account or treasury money market account--which I can write checks against and use as a medium of exchange--only look like dollars on my end; under the hood, they're invested in debt.

So while it's true that debt is itself not a medium of exchange, debt underpins financial accounts that are used as a medium of exchange.

Can I write a check  against your IOU ?
Can I deposit your IOU in my checking account?
Let's make it bigger. My company lends you $100,000 to buy a plot of land. Can my company deposit your IOU in its checking account? - Only when you pay me back ! Yes, it's an asset on my company's balance sheet but that's all it is - an accounting unit.

[Pointedstick]

Can I write a check  against your IOU ?

If I am the government (let's call it a Pointedstickocracy) and a financial company created "P-bill money market accounts" with check-writing privileges, then yes.

Can I deposit your IOU in my checking account?

No. But in a Pointedstickocracy, would it surprise you to hear that the money you deposit in your checking account was simply invested in P-bills behind the scenes?


We're not talking about being able to use debt as a medium of exchange. You're right: you can't. We're talking about the things we DO use as a medium of exchange--like checking accounts--being secretly backed by debt behind the scenes. And further, we're talking about things we consider money even though we can't write a check against them--savings accounts, money-market funds without checkwriting privileges, etc.

Despite the fact that my savings account can't be directly used as a medium of exchange in that I can't initiate an ACH transfer of money from the account to the grocery store, my savings account is still money, right?

[Gumby]

Per Wikipedia = Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country."

Way to take the quote out of context. The rest of that Wikipedia paragraph reads...

"...The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money."

Source: http://en.wikipedia.org/wiki/Money

Why are you choosing to ignore the entire Wikipedia definition?

[Mdraf]

Can I write a check  against your IOU ?

If I am the government (let's call it a Pointedstickocracy) and a financial company created "P-bill money market accounts" with check-writing privileges, then yes.

Can I deposit your IOU in my checking account?

No. But in a Pointedstickocracy, would it surprise you to hear that the money you deposit in your checking account was simply invested in P-bills behind the scenes?


We're not talking about being able to use debt as a medium of exchange. You're right: you can't. We're talking about the things we DO use as a medium of exchange--like checking accounts--being secretly backed by debt behind the scenes. And further, we're talking about things we consider money even though we can't write a check against them--savings accounts, money-market funds without checkwriting privileges, etc.

Despite the fact that my savings account can't be directly used as a medium of exchange in that I can't initiate an ACH transfer of money from the account to the grocery store, my savings account is still money, right?

I've already given my opinion on all this before.  You already know what I think.  What I consider money and you consider base money or narrow money is the same thing. You consider debt  backed by the government as money too which I do not. I consider it as any other debt - backed by the ability of taxpayers to make good.  I am not sure what you consider debt backed by non-government to be.

[Gumby]

I've already given my opinion on all this before.  You already know what I think.  What I consider money and you consider base money or narrow money is the same thing. You consider debt  backed by the government as money too which I do not. I consider it as any other debt - backed by the ability of taxpayers to make good.  I am not sure what you consider debt backed by non-government to be.

Truthfully it makes no difference what we call it (money, debt, PSBonds, etc.). The fact of the matter is that what you consider to be non-money makes up the overwhelming majority of our purchasing power.

Once again...

Another measure of money, M0, is also used; unlike the other measures, it does not represent actual purchasing power by firms and households in the economy. M0 is base money, or the amount of money actually issued by the central bank of a country.

Source: http://en.wikipedia.org/wiki/Money

[Mdraf]

I've already given my opinion on all this before.  You already know what I think.  What I consider money and you consider base money or narrow money is the same thing. You consider debt  backed by the government as money too which I do not. I consider it as any other debt - backed by the ability of taxpayers to make good.  I am not sure what you consider debt backed by non-government to be.

Truthfully it makes no difference what we call it (money, debt, PSBonds, etc.). The fact of the matter is that what you consider to be non-money makes up the overwhelming majority of our purchasing power.

What's the purchasing power of the $100,000 note from Pointedstick that's sitting as an asset on my company's balance sheet?