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

[Pointedstick]

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.

Perhaps the confusion results from "money" and "part of the money supply."

$1000 dollars in my pocket is money, right? Now, let's say I deposit that $1000 into my savings account, and my bank uses it to buy a T-bill (a simplification, but generally true), is it your view that:

a) the money supply has dropped by $1000 because the dollars (money) have been transformed into non-money (highly liquid government debt)
b) the money supply remains unchanged because those dollars are still dollars even if they're backed by government debt
c) the money supply remains unchanged because the dollars (money) have been transformed into another form of money (highly liquid government debt)

My answer is 'b'.

As for what backs the debt, my view is that for all intents and purposes it debt is backed by nothing, except maybe the government's power to inflict violence. It is not backed by the ability of future taxpayers to generate taxes because it is possible for tax receipts to be $0 and for the government to make payments on its debt anyway by issuing more debt. Regardless of how you feel about this practice, it's possible. Not only that, it's been happening for decades--every year there's a deficit. Again, this is passing no judgement about it.

[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.

Perhaps the confusion results from "money" and "part of the money supply."

$1000 dollars in my pocket is money, right? Now, let's say I deposit that $1000 into my savings account, and my bank uses it to buy a T-bill (a simplification, but generally true), is it your view that:

a) the money supply has dropped by $1000 because the dollars (money) have been transformed into non-money (highly liquid government debt)
b) the money supply remains unchanged because those dollars are still dollars even if they're backed by government debt
c) the money supply remains unchanged because the dollars (money) have been transformed into another form of money (highly liquid government debt)

My answer is 'b'.

As for what backs the debt, my view is that for all intents and purposes it debt is backed by nothing, except maybe the government's power to inflict violence. It is not backed by the ability of future taxpayers to generate taxes because it is possible for tax receipts to be $0 and for the government to make payments on its debt anyway by issuing more debt. Regardless of how you feel about this practice, it's possible. Not only that, it's been happening for decades--every year there's a deficit. Again, this is passing no judgement about it.

One step at a time please. Before I address your points please answer my question as to what you consider non-government backed debt to be.  Money or not money?

[Gumby]

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

Assuming Pointedstick is credit worthy, and assuming there is a highly liquid market for PSNotes, the purchasing power would be ~$100,000 (give or take whatever the market is trading a PSNote for, accounting for interest, etc.). If PS becomes un-creditworthy, your purchasing power could be zero overnight. That's just one of the risks of private credit.

In other words, your company should be able to quickly trade your $100,000 PSNote for ~$100,000 in base money at any given moment. The PSNote is a "store of value" in that case — which is one of the conditions that Wikipedia defines as "money" (even though the PSNote is not a "medium of exchange").

And it's highly liquid, so it's really no different from moving non-cash savings from your savings account to your checking account. You don't get richer when you move money from savings to checking — your just making it more liquid (i.e. trading your purchasing power for a medium of exchange).

[Kshartle]

Another potentially interesting interesting thread successfully derailed.

Congrats guys, my unofficial count puts this at number 250. I derived that number based on a reference search of "base money". Perhaps I should have searched on "Broad liquidity" instead.

F lame.

[MediumTex]

Fellas, let's be friendly with one another.

We all feel strongly about what we believe to be right.

What makes this forum good is the civility.  Please respect that.

[Pointedstick]

One step at a time please. Before I address your points please answer my question as to what you consider non-government backed debt to be.  Money or not money?

Money. In the same way that my savings account or treasury money market fund is money.

[Mdraf]

Assuming Pointedstick is credit worthy

I used "Pointedstick" as an example of someone that is not credit worthy and that nobody has heard of. (Sorry PS - I assume that is not your real name . There are no PSNotes.  Stop going off on nonsensical tangents.

[Kshartle]

One step at a time please. Before I address your points please answer my question as to what you consider non-government backed debt to be.  Money or not money?

Money. In the same way that my savings account or treasury money market fund is money.

Sounds like we are at an impass on whether or not debt is money.

So let's just proceed with that difference and see if we can discuss topics where our disagreement isn't really relevant. We could try with the purpose of this thread.

[Mdraf]

One step at a time please. Before I address your points please answer my question as to what you consider non-government backed debt to be.  Money or not money?

Money. In the same way that my savings account or treasury money market fund is money.

So you consider the IOU you give me is money and is the same as a money market fund.

Ok at this point as Kshartle said let's go back to the original topic of the thread.

[Kshartle]

Assuming Pointedstick is credit worthy

I used "Pointedstick" as an example of someone that is not credit worthy and that nobody has heard of. (Sorry PS - I assume that is not your real name . There are no PSNotes.  Stop going off on nonsensical tangents.

Assuming Pointedstick was the government and could tax us at 100% and issue currency and arrest us for not using PSNotes and........

The entire thread, like any thread discussing LTBs is just a series of nonsensical tangents.

[Gumby]

Assuming Pointedstick is credit worthy

I used "Pointedstick" as an example of someone that is not credit worthy and that nobody has heard of. (Sorry PS - I assume that is not your real name . There are no PSNotes.  Stop going off on nonsensical tangents.

If you don't want PSNotes, then use Verizon Commercial Paper. The choice is yours.

[Kshartle]

1. Will it have difficulty getting buyers for bonds?

2. Will it have to print massive amounts of money and cause a lot of inflation?

3. Will higher interest rates make further borrowing more difficult?

Discuss.

1. Absent some type of rejection of the dollar due to inflation I think the gov't will always technically be able to find buyers, even if it's credit worthiness is called into question. The question is what rate will the lenders demand and will the gov't accept such rates or use some other method to deal with it's deficits.

2. The only way they avoid trying to print their way out is to make a major cutback on the budget vs. the total economy/GDP or a major asset sale I think. The government has trillions in assets it could potentially sell to private buyers or foreigners. It probably will need a combination of these two to make good on all it's promises to the dependent classes. It also has to stop adding them (dependents). A bonus of the government slashing it's budget would be less distortion in the productive economy. Paying people to either not work or interfere with trade (regulation) just hurts the country economically so eliminating agencies and refusing to add more freeloaders would help us all out. More people could stop riding in the wagon and actually get out and pull. The question here is how bad will the disruption/recession be in the short run.

Those options which I think are best just seem like political suicide. While not impossible, I can't imagine any politicians actually doing the right thing vs. the politically expedient one. As the country gets poorer, pandering to the poor and promising to steal for them becomes the only way to get elected. I wouldn't count on the voters to ever understand any of this and for anyone other the one who promises the most free stuff to win. I mean, they elected Obama twice. The Republicans ran a socialist so clearly they think that's the way to go also. Romney could have run in place of Clinton just 2 decades ago and fit right in as a democrat (Opinion).

3. Again I think higher rates make legitimate borrowing more attractive to the creditors. The problem is finding a way to pay all the interest. They are already relying on the FED to loan them 40 billion a month interest-free, even at these low rates. At higher rates the need to print gets ever higher. Not to mention the FED printing another 45 billion to reduce the supply of credit out there in the form of MBS. Reduced supply makes prices go up. Higher prices for debt means lower interest rates and debt-service for borrowers like the government gets easier. We focus on long-term debt a lot but forget the government has to borrow over 5 trillion a year to service it's debt. The maturity on the it's liabilities is very short so higher rates are going to add hundreds of billions a year to the deficit should rates move up before any of this is solved.

All in all I think the US government is caught between a rock and a hard place. I don't think the political will exists to do the right thing. That leaves it up to the FED and the market to reign it in. And if the FED refuses and leaves it all up to the market.....well that's going to make the ensuing depression even worse.

I've re-posted sans the bonus section I orginally had in here.

I'm open to being either proven wrong or have my opinions changed on the above.

If you disagree, please consider posting some reasoned analysis of why.

[Pointedstick]

Sounds like we are at an impass on whether or not debt is money.

So let's just proceed with that difference and see if we can discuss topics where our disagreement isn't really relevant. We could try with the purpose of this thread.

Good idea. I created a new thread for the "what is money?" question.

[Kshartle]

The choice is yours.

Choose wisely now.....

[Kshartle]

Good idea. I created a new thread for the "what is money?" question.

Will you pardon me if I avoid it like the plague mixed with a side of herpes?

[Pointedstick]

Good idea. I created a new thread for the "what is money?" question.

Will you pardon me if I avoid it like the plague mixed with a side of herpes?

Nah. Your choice.

[Gumby]

The choice is yours.

Choose wisely now.....

Agreed. But, how is it possible for a fiat government bond to not be paid back? Even if the government doesn't collect any taxes, it can always issue more bonds to pay back the principal and interest. The money to buy those bonds will always be available as excess reserves, since the Treasury is always spending an amount into the private sector equal to the amount of the bonds being issued.

It's just a giant scheme. The government is literally creating the money to buy those bonds whenever it spends money. The money enters the banking system and if you don't choose to buy the bonds, the bank will do it for you (via your savings account).

[moda0306]

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.

I'm not even sure what comments you were referring to.  What assertion are you done addressing?  I guess I didn't see it before you deleted it.

Regarding the difference between money and debt, IOU's were actually quite often used as money in the past.  If Peter owed Paul a pig, that document could be and was used as money.  In fact, early forms of paper money were simply gold IOU's from a bank so people didn't have to carry around gold coins.


I think a deeper question might be, whether something is a medum of exchange or not is really THAT important.  The government could draft a list of items that now can be used as medium of exchange (let's say salt, t-bills, gold, silver, and beaver pelts), and it wouldn't change things all that much... we still have a lack of liquid nominal purchasing power in relation to our productive potential.

To me, what's more important is how many fiat, non-asset-backed financial instruments exist in an economy of a given GDP.  I'd classify our economic assets in the following manner:

- Real Assets (factory, land, home, car, gold, even an idea has "real" value)

- Financial Assets (bonds, stocks, dollars)


Now since financial assets have no real value, they're offset by somebody else's liabilty.

But most of these instruments are very liquid.  They exist in a financial arena along side our "medium of exchange" and for the most part can be turned into cash super fast.

Any increase of these assets increases our fiat, nominal purchasing power... unlike making salt, gold, silver, and beaver pelts "money."  If the government simply borrowed $1 Trillion dollars and sent $3,300 to every man, woman, and child in the US, this wouldn't increase the "medium of exchange" in the economy, but it would vastly increase the "fiat nominal purchasing power in highly-liquid asset," and would have MUCH more inflationary potenial than making the aforementioned items into "legal tender," don't you think?


I don't know about you, but I think this discussion about the "moneyness" of assets and what actually increases our fiat nominal purchasing power is absolutely vital to the discussion, even if we're just talking about "solvency" of the federal government, because then we realize that it's just fiat assets lubricating a real economy, and if those fiat assets change in makeup, but not amount, it's not going to fundamentally change our nominal position in a real economy, which is what makes inflation happen... not just because some real or financial assets may or may not be usable to buy groceries directly.

[Gumby]

...As Thomas Edison explains:

If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good...It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either

Thomas Edison, quoted in NY Times, Dec. 6, 1921

[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.

I'm not even sure what comments you were referring to.  What assertion are you done addressing?  I guess I didn't see it before you deleted it.

No deletion. I'm just going to avoid words like nonsense and mantra when describing some else's beliefs.

[Kshartle]

Regarding the difference between money and debt, IOU's were actually quite often used as money in the past.  If Peter owed Paul a pig, that document could be and was used as money.  In fact, early forms of paper money were simply gold IOU's from a bank so people didn't have to carry around gold coins.

The debt is not the unit of account. The debt has a value that's measured in whatever is being used as money just as the pig is. If both parties are satisfied with their valuations and both feel they are getting more value by trading then they do.

I can trade a pack of gum for an egg but that doesn't make either of them money, and certainly not money as we currently experience it (dollars).

If the criteria for money is "do people trade with it", then everything would be money. This is silly though and I think we can all see that.

Ohh, IOUs for gold are not money and have never been. They are a reciept for a claim on money. Just because it looks like a transaction involving money it's not. There is no money in the transaction. The paper promise represents a claim. It's like the difference between a deed for a house and a house. You don't live in the deed, paint the deed, hire an exterminator to get the bugs out of the deed.........

[Kshartle]

The choice is yours.

Choose wisely now.....

Agreed. But, how is it possible for a fiat government bond to not be paid back? Even if the government doesn't collect any taxes, it can always issue more bonds to pay back the principal and interest. The money to buy those bonds will always be available as excess reserves, since the Treasury is always spending an amount into the private sector equal to the amount of the bonds being issued.

It's just a giant scheme. The government is literally creating the money to buy those bonds whenever it spends money. The money enters the banking system and if you don't choose to buy the bonds, the bank will do it for you (via your savings account).

I'll get to this. There are some assumptions about how humans will behave being made here that need to that need to be exposed as that if an understanding of how government bonds could default outright.

I'm at work and this one will require some effort.

[Gumby]

Regarding the difference between money and debt, IOU's were actually quite often used as money in the past.  If Peter owed Paul a pig, that document could be and was used as money.  In fact, early forms of paper money were simply gold IOU's from a bank so people didn't have to carry around gold coins.

The debt is not the unit of account. The debt has a value that's measured in whatever is being used as money just as the pig is. If both parties are satisfied with their valuations and both feel they are getting more value by trading then they do.

I can trade a pack of gum for an egg but that doesn't make either of them money, and certainly not money as we currently experience it (dollars).

If the criteria for money is "do people trade with it", then everything would be money. This is silly though and I think we can all see that.

Ohh, IOUs for gold are not money and have never been. They are a reciept for a claim on money. Just because it looks like a transaction involving money it's not. There is no money in the transaction. The paper promise represents a claim. It's like the difference between a deed for a house and a house. You don't live in the deed, paint the deed, hire an exterminator to get the bugs out of the deed.........

KShartle, by your definition, we don't use any "money," today aside from minted coins. Is that what you are saying?

Other than coins, which are issued debt-free, all base money is created from the issuance of a Treasury Bond or a form of private credit. The Fed swaps the Treasury bond (or private credit) with the Primary Dealers and issues base money. If the debt or credit does not exist in the first place, base money cannot be created, unless the Treasury is minting a coin.

In the middle ages, kings had to "borrow" the gold to make their coins from goldsmiths. The kings were actually indebted to the goldsmiths.

There are only two kinds of money: debt-free money and debt-based money. Coins minted by the US Treasury are currently the only debt-free money in our society (since "Greenbacks" are no longer in circulation).

[Kshartle]

KShartle, by your definition, we don't use any "money," today aside from minted coins. Is that what you are saying?

Other than minted gold and silver coins, perhaps platinum we are not really using money. There might be other acceptable forms we are not using. This would be money that we would all agree upon vs. the peices of paper that we use because we are forced to.

However as I said earlier, for purposes of our discussion we can just refer to dollars as money and gold as gold. It makes things easier since dollars are performing money's function (very poorly I might add).

This is probably better in the "what is money" thread.

[Gumby]

There are some assumptions about how humans will behave being made here that need to that need to be exposed as that if an understanding of how government bonds could default outright.

I'm at work and this one will require some effort.

That's all well and good, but my argument is — and will be — that the government and banks have devised a scheme that removes the human element altogether. The fact of the matter is, if you aren't enticed to buy a government bond, the banking system will do it for you whether you realize it or not. In fact, the banks are required to do so.

The reason why Treasury Bonds still exist is because they add "free" money into bank accounts. The money to pay Treasury Bonds isn't designed to come from taxes — since the base money to pay your taxes comes from the base money that the government creates from debt in the first place!

Basically, the banks engineered a system where they grow richer and richer over time from the government's interest payments.