Why The National Debt Doesn’t Matter (And Why It Does)

[Nima]

Here is a new post that was published today, where I explain why the national debt doesn't matter, but also on what regard it does matter! 

 

Here's the conclusion:

 

"Thus, unlike the popular story we’re being told about how poor disenfranchised future generations will be fleeced unless we pay down the national debt, the national debt does matter, only it matters to us in the present right here and now, and not to some obscure future generations down the road."

Feedback & comments as always appreciated!

[Slavik]

  Question, by constantly adding a few numbers by federal reserve thus increasing the amount of currency, we are inflating the dollar, does inflation matter?

[rosencrantz]

Question, by constantly adding a few numbers by federal reserve thus increasing the amount of currency, we are inflating the dollar, does inflation matter?

 

 

Adding a few numbers by the federal reserve doesn't increase inflation if it never goes into circulation. Which is why the Austrians have been wrong since '08 about inflation. According to them, we would be living in a Zimbabwe like situation because of all the QE. 

Inflation is caused only by money circulating in the economy, increasing wages, and declinining productivity. 

QE cannot cause inflation because it only went into assets of banks and never entered into circulation. 

[Nima]

  Question, by constantly adding a few numbers by federal reserve thus increasing the amount of currency, we are inflating the dollar, does inflation matter?

 

It's a great question and a big topic. If the government injects so much money via deficit spending that it significantly exceeds the private sector's net saving demand, it's possible that this will create significant and undesirable inflation. But we're actually far from that right now as far as numbers show. Bank reserves by themselves, as rosencrantz accurately pointed out, are unlikely to produce any inflationary pressures since they don't circulate in the private economy yet the way checking account money does.

[Matthew Ed Moran]

 

Adding a few numbers by the federal reserve doesn't increase inflation if it never goes into circulation. Which is why the Austrians have been wrong since '08 about inflation. According to them, we would be living in a Zimbabwe like situation because of all the QE. 

Inflation is caused only by money circulating in the economy, increasing wages, and declinining productivity. 

QE cannot cause inflation because it only went into assets of banks and never entered into circulation. 

 

 

Assets were severely overpriced as a result of the '08 crash, because monetary inflation that had previously entered the economy gave a  perception of increased savings that was indicated by increasing assets prices in years from '01-'06. By '08 these assets prices were have dropping precipitously; and other assets were being turned into liabilities, because of the resources they needed to be maintained.

 

For instance if you have a house that is vacant, you still need to pay taxes on it and keep it from falling apart. In that case, what was formerly being accounted as an asset because of the future anticipated savings it would have provided, became a liability because there was no demand at any price above zero and there was a cost to maintain it.

 

The government acted to stop the fall of asset prices that was occurring by purchasing assets at inflated values. This continued the perception that savings in the economy was higher than it actually was, and therefore this was inflationary. However, I would argue that the accounting of liabilities as assets changings the consumption patterns of everyone in the market.

 

If I have a house that is providing me value, and it is a very expensive house, and then a number of major companies that pay good wages in the area either relocate or go out of business, the house potentially becomes a liability to me, not an asset. I can pay for the liability by selling it for a price much lower than I paid, but this would reduce my savings and lower my consumption in the future. If these companies which were going out of business are subsidized by the government, or the government buys my house for the price I paid for it, then I don't have to reduce my consumption in the future.

 

So even if the prices in the economy are not rising, if they are higher than they otherwise would be because of government intervention, this is still inflationary.

 

I do not think the Austrian predictions have been refuted just yet. If there is some time in the future when we have deflation and a major reduction in consumption to rebuild savings which have been lost, but not accounted for yet, then I think it will be clear that this period of time was inflationary because it was keeping assets prices higher than they would have been otherwise.

 

To me, and Nima I'd be interested if you think this is a fair characterization, the National Debt represents savings that have been accumulated in the past which either have been depleted, or have turned into liabilities (i.e. in the resources in their current form are a net drain on the economy). I anticipate the National Debt to grow until the domestic population becomes so starved of savings that it must drastically reduce its consumption, and that this will also cause them to want the government to reduce its consumption as well. The only way to "solve" for the national debt crisis is to prevent the government from consuming savings in the present, so the savings it has been eating up can be replenished.

[Slavik]

It's a great question and a big topic. If the government injects so much money via deficit spending that it significantly exceeds the private sector's net saving demand, it's possible that this will create significant and undesirable inflation. But we're actually far from that right now as far as numbers show. Bank reserves by themselves, as rosencrantz accurately pointed out, are unlikely to produce any inflationary pressures since they don't circulate in the private economy yet the way checking account money does.

The inflation is in the annual report, so then how is inflation is shown in the yearly report, yet you are referring to someone saying that there is no inflation? 

[Slavik]

 

Adding a few numbers by the federal reserve doesn't increase inflation if it never goes into circulation. Which is why the Austrians have been wrong since '08 about inflation. According to them, we would be living in a Zimbabwe like situation because of all the QE. 

Inflation is caused only by money circulating in the economy, increasing wages, and declinining productivity. 

QE cannot cause inflation because it only went into assets of banks and never entered into circulation. 

 

So, to pay off the debt the Federal Reserve creates money which is not even backed by productivity, but the inflation is not seen because it only goes into the assets of the banks, and will never see the day light (being in the market), at the same time we have an actual inflation reports of certain percentage per year which by many claims is way below an actuality.  And finally why dont we just pay down the debt completely in this matter if it doesnt matter at all?  Why do we keep on growing the debt?

[sweathog1]

60 years ago I can remember saving up 10 cents and being able to buy a can of pop. How much is it now? Bunch of mubbo jumbo  confusing/meaningless language.. The more money they print the less our purchasing power. period

[rosencrantz]

So, to pay off the debt the Federal Reserve creates money which is not even backed by productivity, but the inflation is not seen because it only goes into the assets of the banks, and will never see the day light (being in the market),

 

Indeed. Saving banks that are bankrupt is deflationary for the economy. There is a case study where a federal bank does the same as the US tries. In Japan there is no economic growth nor inflation for almost 30 years despite the federal bank pumping billions of Yens pumping into the banking system.

[deadflagblues]

Why exactly don't the banks circulate the money that is injected into them by the Fed in order to pay off debts?

If they are bound to not circulate it then what value does this money actually hold for them and why do they accept it as a form of payment on a debt?

[Nima]

The inflation is in the annual report, so then how is inflation is shown in the yearly report, yet you are referring to someone saying that there is no inflation? 

I didn't say "no inflation" at all. But generally it's been pretty low and most importantly predictable. Shocks are what's most problematic.

 

To me, and Nima I'd be interested if you think this is a fair characterization, the National Debt represents savings that have been accumulated in the past which either have been depleted, or have turned into liabilities (i.e. in the resources in their current form are a net drain on the economy). I anticipate the National Debt to grow until the domestic population becomes so starved of savings that it must drastically reduce its consumption, and that this will also cause them to want the government to reduce its consumption as well. The only way to "solve" for the national debt crisis is to prevent the government from consuming savings in the present, so the savings it has been eating up can be replenished.

 

The government debt represents exactly the private sector's interest bearing component of its net saving, that is its claims on the public sector's acceptable tax settlement tokens.

And finally why dont we just pay down the debt completely in this matter if it doesnt matter at all?  Why do we keep on growing the debt?

 

... one hypothesis I would advance is that lazy rich people like safe guaranteed long term income, and rich people are also politically involved

And finally why dont we just pay down the debt completely in this matter if it doesnt matter at all?  Why do we keep on growing the debt?

 

... one hypothesis I would advance is that lazy rich people like safe guaranteed long term income, and rich people are also politically involved

And finally why dont we just pay down the debt completely in this matter if it doesnt matter at all?  Why do we keep on growing the debt?

 

... one hypothesis I would advance is that lazy rich people like safe guaranteed long term income, and rich people are also politically involved

So, to pay off the debt the Federal Reserve creates money which is not even backed by productivity, but the inflation is not seen because it only goes into the assets of the banks, and will never see the day light (being in the market), at the same time we have an actual inflation reports of certain percentage per year which by many claims is way below an actuality.  And finally why dont we just pay down the debt completely in this matter if it doesnt matter at all?  Why do we keep on growing the debt?

 

... one hypothesis I would advance is that lazy rich people like safe guaranteed long term income, and rich people are also politically involved

So, to pay off the debt the Federal Reserve creates money which is not even backed by productivity, but the inflation is not seen because it only goes into the assets of the banks, and will never see the day light (being in the market), at the same time we have an actual inflation reports of certain percentage per year which by many claims is way below an actuality.  And finally why dont we just pay down the debt completely in this matter if it doesnt matter at all?  Why do we keep on growing the debt?

 

... one hypothesis I would advance is that lazy rich people like safe guaranteed long term income, and rich people are also politically involved

60 years ago I can remember saving up 10 cents and being able to buy a can of pop. How much is it now? Bunch of mubbo jumbo  confusing/meaningless language.. The more money they print the less our purchasing power. period

 

Nobody denies that there is some level of ongoing inflation in this system. But some people have shown that empirically people adjust pretty well to slow and predictable price changes, it's shocks that create much more chaos & disruption.

60 years ago I can remember saving up 10 cents and being able to buy a can of pop. How much is it now? Bunch of mubbo jumbo  confusing/meaningless language.. The more money they print the less our purchasing power. period

 

 

Why exactly don't the banks circulate the money that is injected into them by the Fed in order to pay off debts?

If they are bound to not circulate it then what value does this money actually hold for them and why do they accept it as a form of payment on a debt?

 

The banks naturally only need bank reserves (a) in order to settle checks between different banks and (b) settle tax payments between taxpayer and the government. In the US for example they also need bank reserves to always be at a certain percentage of checking account money in circulation, mostly because people don't really understand how this monetary system works and that the Fed always accommodates the demand for reserves anyway in case a bank doesn't have reserves to clear a check or a tax payment. Bank reserves that banks have to hold over what they would naturally want to hold function basically like a tax on banks, because they can't invest the money in other, higher interest bearing assets. Canada for example has no bank reserve requirements at all.

[Iron Horse]

"Thus, unlike the popular story we’re being told about how poor disenfranchised future generations will be fleeced unless we pay down the national debt, the national debt does matter, only it matters to us in the present right here and now, and not to some obscure future generations down the road."

Feedback & comments as always appreciated!

What exactly is obscure about your children, or your grandchildren?  Both of which you have the highgest possible chance in the World of holding in your arms.

[deadflagblues]

The banks naturally only need bank reserves (a) in order to settle checks between different banks and (b) settle tax payments between taxpayer and the government. In the US for example they also need bank reserves to always be at a certain percentage of checking account money in circulation, mostly because people don't really understand how this monetary system works and that the Fed always accommodates the demand for reserves anyway in case a bank doesn't have reserves to clear a check or a tax payment. Bank reserves that banks have to hold over what they would naturally want to hold function basically like a tax on banks, because they can't invest the money in other, higher interest bearing assets. 

So when this new money is injected into banks, what's actually stopping it from entering the wider money supply? Is there really an ad infinitum back and forth between banks to settle checks? I feel like I understand the reason why money is given to banks to settle taxpayer payments, but how does the money supply not eventually grow because of need (a) that you listed?

Thanks for your work.

[Nima]

So when this new money is injected into banks, what's actually stopping it from entering the wider money supply? Is there really an ad infinitum back and forth between banks to settle checks? I feel like I understand the reason why money is given to banks to settle taxpayer payments, but how does the money supply not eventually grow because of need (a) that you listed?

Thanks for your work.

 

New money only enters the wider money supply when either the government spends money via the treasury (resulting in someone's checking account markup along with his bank's bank reserve markup at the Fed), OR when a private bank makes a new loan to someone, again resulting in the recipient's checking account markup at this private bank (this time no added bank reserves though). Banks generally make new loans when they find willing and able borrowers, meaning people who need permission to withdraw labor, machinery, and other productive factors from the market (that permission being granted in the form of a checking account markup) and who are in the bank's estimation going to improve existing production processes as a result and be rewarded with a profit, in short entrepreneurs. Everyone who has received a loan before needs a checking account markup in order to repay the loan. This, along with government deposit insurance and the bank's guarantee to convert the markup into bank reserves upon clearing and cash upon withdrawal, creates an inherent demand for checking account markups. See the section "Private Bank Lending" in my post https://beinglibertarian.com/mmt/for a more elaborate description, does that help maybe?

[Nima]

What exactly is obscure about your children, or your grandchildren?  Both of which you have the highgest possible chance in the World of holding in your arms.

I don't have children or grand children. But the point is that it's not future generations that are impacted by present day fiscal policy decisions, it's always present day people and the power is in the hands of present day people to change the country's debt condition, meaning how much spending power is allocated towards today's bondholders is always a decision we can make today. When politicians tell you that it's not, they're LYING to you.

[deadflagblues]

New money only enters the wider money supply when either the government spends money via the treasury (resulting in someone's checking account markup along with his bank's bank reserve markup at the Fed), OR when a private bank makes a new loan to someone, again resulting in the recipient's checking account markup at this private bank (this time no added bank reserves though). Banks generally make new loans when they find willing and able borrowers, meaning people who need permission to withdraw labor, machinery, and other productive factors from the market (that permission being granted in the form of a checking account markup) and who are in the bank's estimation going to improve existing production processes as a result and be rewarded with a profit, in short entrepreneurs. Everyone who has received a loan before needs a checking account markup in order to repay the loan. This, along with government deposit insurance and the bank's guarantee to convert the markup into bank reserves upon clearing and cash upon withdrawal, creates an inherent demand for checking account markups. See the section "Private Bank Lending" in my post https://beinglibertarian.com/mmt/for a more elaborate description, does that help maybe?

Yes, this helps. I was under the impression that banks were almost universally pushing the limits of what is allowed by the current fractional reserve ratio, and so was assuming that any money added to the bank's banks when debt is paid off by the government would almost immediately result in this money being multiplied by the inverse of the current reserve ratio and increasing the money supply.

Thanks.

[Slavik]

If the debt doesnt matter, please explain to me the interest on the debt that we are paying.  By that I mean that the interest is obviously is growing, at some point it will eat up most of the budget.

 

Also, when I asked why wont we just pay off the debt by placing it into the assets of the banks as you have suggested, you said something about politics, I am not sure what politics has to do with it, since we are paying interest on the debt and it doesnt look good for any party.

[DaveR]

 

 

 

Adding a few numbers by the federal reserve doesn't increase inflation if it never goes into circulation. Which is why the Austrians have been wrong since '08 about inflation. According to them, we would be living in a Zimbabwe like situation because of all the QE. 

Inflation is caused only by money circulating in the economy, increasing wages, and declinining productivity. 

QE cannot cause inflation because it only went into assets of banks and never entered into circulation. 

 

 

Have they?

 

Certainly the Schiff hyperinflationista types have been wrong, but REAL inflation (ie wages vs prices) has been severe since 2007, hence, imo, why brexit and the trump candidacy, both anti establishment movements, have been possible.

 

Real wages in the UK have fallen by more than the 70s stagflation, more than the great depression, more than any time in the past 150 years (and, possibly, many centuries). i recall reading real US household income hasnt materially advanced since the 70s (gold standard, anyone...)

 

 

Remember, inflation, or CPi/RPi is whatever govt deems it to be, not what the average person actually experiences. 

 

My first job, about 16 years ago, paid £7 an hour. That gradually went up to about £11 around 2005. Then they fired everyone, re-hired eastern europeans, paid them the then min wage of about £5, and now they still pay min wage, around £7. i doubt thats unusual. 

 

BTW, that graph finishes in 2014, at around 9% 7y ch. For 2015 it had fallen further to 10.4%, and given the weaker £ (inevitable regardless of brexit imo), is likely to hit 12% this year. 

I don't have children or grand children. But the point is that it's not future generations that are impacted by present day fiscal policy decisions, it's always present day people and the power is in the hands of present day people to change the country's debt condition, meaning how much spending power is allocated towards today's bondholders is always a decision we can make today. When politicians tell you that it's not, they're LYING to you.

 

it does and it doesnt imo.

 

Certainly, when debts are created, the bulk of the cost is borne immediately through purchasing power debasement. Yes, the debts never get paid down & are as such not a worry)

 

...but the interest costs remain. My basic view is why have debt money when money can be printed free of debt...

 

https://www.youtube.com/playlist?list=PLc51BC8smYKM9Af4hDWYcQ9WC-FJNeU39

[Nima]

Yes, this helps. I was under the impression that banks were almost universally pushing the limits of what is allowed by the current fractional reserve ratio, and so was assuming that any money added to the bank's banks when debt is paid off by the government would almost immediately result in this money being multiplied by the inverse of the current reserve ratio and increasing the money supply.

Thanks.

 

It is a commonly propagated myth that banks multiply loans on top of bank reserves based on the allowed maximum. Empirically that doesn't seem to be the case. Rather, banks make loans first, and later on acquire the required reserves by offering savings accounts or by borrowing on the interbank lending market, or by borrowing from the Fed as a last resort if needed (rare). The amount of loans banks create is constrained by the availability of willing and able borrowers, not by reserve requirements or anything like that.

 

It almost makes more sense to look at the bank as extensions of the government, vested with the permission to make loans in the form of government insured claims to high powered money.

[Nima]

If the debt doesnt matter, please explain to me the interest on the debt that we are paying.  By that I mean that the interest is obviously is growing, at some point it will eat up most of the budget.

 

Also, when I asked why wont we just pay off the debt by placing it into the assets of the banks as you have suggested, you said something about politics, I am not sure what politics has to do with it, since we are paying interest on the debt and it doesnt look good for any party.

 

Well, what I was pointing out is that the interest may be growing but it doesn't HAVE to grow. My point was that at any point the government can decide how many bonds of which duration it wants to sell and how much interest to pay on those. It is a policy choice that the government has 100% control over, if they want to change it.

 

You see evidence of this in that under sovereign floating fiat systems governments which huge national debts, some of the largest public debts/GDP of all industrialized nations such as Japan, are perfectly capable of maintaining a regime of low or even negative interest rates for even their 30 year government bonds!

[Slavik]

Well, what I was pointing out is that the interest may be growing but it doesn't HAVE to grow. My point was that at any point the government can decide how many bonds of which duration it wants to sell and how much interest to pay on those. It is a policy choice that the government has 100% control over, if they want to change it.

 

You see evidence of this in that under sovereign floating fiat systems governments which huge national debts, some of the largest public debts/GDP of all industrialized nations such as Japan, are perfectly capable of maintaining a regime of low or even negative interest rates for even their 30 year government bonds!

Why would anyone invest in negative interest bond? And if the gvt. sells bonds doesnt it become yet more debt?  

[Nima]

Why would anyone invest in negative interest bond? And if the gvt. sells bonds doesnt it become yet more debt?  

 

The main reason someone would buy a negative yielding bond would be that the yield on shorter maturity bonds of the same risk class is even deeper into negative territory.

 

If the government sells bonds it just replaces bank reserves with future claims to bank reserves. Both bonds AND bank reserves are basically a liability of the government, so it's more like one type of liability is swapped out with a different one. The real moment when the government becomes indebted is when it spends money into existence by crediting private sector bank reserve accounts.

[Slavik]

The main reason someone would buy a negative yielding bond would be that the yield on shorter maturity bonds of the same risk class is even deeper into negative territory.

 

If the government sells bonds it just replaces bank reserves with future claims to bank reserves. Both bonds AND bank reserves are basically a liability of the government, so it's more like one type of liability is swapped out with a different one. The real moment when the government becomes indebted is when it spends money into existence by crediting private sector bank reserve accounts.

1) Now this is entering into a false dichotomy, there is not only two options a) Buy long term depreciating bond therefore lose money, or b) buy short term bond with even greater depreciation, the other option I can readily come up with is c) Do not buy any bonds at all.  Im sure there are many other options.   .

 

2) When the government sells bonds it has to repay them at the time of maturity with real money, if it simply prints the money to repay the bonds, the inflation enters the market.  

 

3) Forbes reported at least 4.9% annual inflation growth at the moment.

[Nima]

1) Now this is entering into a false dichotomy, there is not only two options a) Buy long term depreciating bond therefore lose money, or b) buy short term bond with even greater depreciation, the other option I can readily come up with is c) Do not buy any bonds at all.  Im sure there are many other options.   .

 

2) When the government sells bonds it has to repay them at the time of maturity with real money, if it simply prints the money to repay the bonds, the inflation enters the market.  

 

3) Forbes reported at least 4.9% annual inflation growth at the moment.

 

1) Many investors want to reserve a certain percentage of their portfolio for assets that are very safe. A 10 year government bond is safer than ANY other possible 10 year bond you can obtain on the market. Many pension funds HAVE to keep a certain percentage of their holdings in such assets. Just on a personal note, another example: I myself always preserve a certain portion of the portfolio for government bonds in order to be prepared in case a Depression/Deflation occurs.

 

2) The government repays a maturing bond by crediting the bondholder's bank's bank reserve account. This happens via electronic keystrokes and it happens all the time every single quarter, already, the government always "prints" the money to make its payments, to use your terminology. Inflation CAN enter the market for monetary reasons IF the government's deficit spending is so excessive that it exceeds the private sector's demand for net saving, but it doesn't HAVE to happen.

 

3) There are all sorts of "inflation" measures, but for example the most common CPI measure for the past year shows a consumer price increase of only about 1.4% for the past year https://fred.stlouisfed.org/graph/?g=7TjU- but like I said, it's certainly possible to have some price increases over time, however, so long as those are predictable and moderate, people factor it into their future expectations. For example, inflation can also simply occur as a temporary result of private bank lending, where the borrower makes purchases via newly created money, but then uses that money to improve production processes to ultimately bring prices down again accordingly.

[Nima]

 

...but the interest costs remain. My basic view is why have debt money when money can be printed free of debt...

 

https://www.youtube.com/playlist?list=PLc51BC8smYKM9Af4hDWYcQ9WC-FJNeU39

 

I agree. This is why MMT recommends to only issue very short term government bonds if any at all to manage the interbank lending rate. Or they can just do what they're doing now which is to pay interest on reserves, which basically makes even short term treasury instruments obsolete. Or they could not have ANY interest rate meddling, even short term and just let excess reserves drive the short term rate towards zero, as it would naturally if the Fed didn't drain excess reserves via bond sales. Note that any of these assets, bonds and bank reserves are always ultimately a debt of the government, so I wouldn't call it "free of debt", but I think you mean "free of interest bearing debt".

[Slavik]

1) Many investors want to reserve a certain percentage of their portfolio for assets that are very safe. A 10 year government bond is safer than ANY other possible 10 year bond you can obtain on the market. Many pension funds HAVE to keep a certain percentage of their holdings in such assets. Just on a personal note, another example: I myself always preserve a certain portion of the portfolio for government bonds in order to be prepared in case a Depression/Deflation occurs.

 

2) The government repays a maturing bond by crediting the bondholder's bank's bank reserve account. This happens via electronic keystrokes and it happens all the time every single quarter, already, the government always "prints" the money to make its payments, to use your terminology. Inflation CAN enter the market for monetary reasons IF the government's deficit spending is so excessive that it exceeds the private sector's demand for net saving, but it doesn't HAVE to happen.

 

3) There are all sorts of "inflation" measures, but for example the most common CPI measure for the past year shows a consumer price increase of only about 1.4% for the past year https://fred.stlouisfed.org/graph/?g=7TjU- but like I said, it's certainly possible to have some price increases over time, however, so long as those are predictable and moderate, people factor it into their future expectations. For example, inflation can also simply occur as a temporary result of private bank lending, where the borrower makes purchases via newly created money, but then uses that money to improve production processes to ultimately bring prices down again accordingly.

I am going to be completely honest and say that I am a novice or even below when it comes to banking system, BUT, I would love to hear you debate someone who is actually knowledgeable when it comes to this subject.  Is such a debate in a making or have you debated someone before?  

[Iron Horse]

I don't have children or grand children. But the point is that it's not future generations that are impacted by present day fiscal policy decisions, it's always present day people and the power is in the hands of present day people to change the country's debt condition, meaning how much spending power is allocated towards today's bondholders is always a decision we can make today. When politicians tell you that it's not, they're LYING to you.

 

So what you wish to do to the next few generations is what the Baby Boomers did to the current ones?  We run up the cards, they pay them off?

[Nima]

So what you wish to do to the next few generations is what the Baby Boomers did to the current ones?  We run up the cards, they pay them off?

 

No. I'm pointing out the empirical fact that interest on the national debt is paid by the treasury by means of marking up the recipient's bank account, no money is raised via taxation to facilitate this transaction.

[Iron Horse]

So the currency is devalued?  Net loss the nation?

[Nima]

So the currency is devalued?  Net loss the nation?

 

Only if deficit spending exceeds the private sector's saving demand. See https://beinglibertarian.com/balanced-budgets-can-create-unemployment/

[Sima]

How was it with Eastern Europe in early 1990s... Everybody lost their all life savings (sometimes savings of 40-30 years) because of inflation. Its very difficult for people aged 70  suddenly to have to earn money . I suppose to much rubles were printed.  I never heard about currency which doesnt go into market once it is proclaimed to be currency. Government makes money, gives it to banks, and then money disappear? No, one way or another they get into the market, and put prices up. But here is a tendency that they concentrate on certain things: then you get bubbles like housing bubble, stock market bubble, healthcare costs bubble, education fees bubble. In Eastern Europe they got new limited printed currency after ruble, and those were quite stable. And I do believe those countries did not have foreign debts because they got free from Soviet Union.  Future generations might not have to pay the debts of their parents, but they still will lose money having to pay for their parents food and shelter who lost their life savings. So if someone doesnt have children, he will lose all life savings and have to live in the street.

[Nima]

How was it with Eastern Europe in early 1990s... Everybody lost their all life savings (sometimes savings of 40-30 years) because of inflation. Its very difficult for people aged 70  suddenly to have to earn money . I suppose to much rubles were printed.  I never heard about currency which doesnt go into market once it is proclaimed to be currency. Government makes money, gives it to banks, and then money disappear? No, one way or another they get into the market, and put prices up. But here is a tendency that they concentrate on certain things: then you get bubbles like housing bubble, stock market bubble, healthcare costs bubble, education fees bubble. In Eastern Europe they got new limited printed currency after ruble, and those were quite stable. And I do believe those countries did not have foreign debts because they got free from Soviet Union.  Future generations might not have to pay the debts of their parents, but they still will lose money having to pay for their parents food and shelter who lost their life savings. So if someone doesnt have children, he will lose all life savings and have to live in the street.

 

I wonder if you're referring to the Hungarian hyperinflation, which was from what I understand largely caused by the fact that the Hungarian government borrowed Dollars and then issued their own currency that was convertible into dollars at a fixed rate, not floating on the open forex market. Russia was in a similar situation at one point. Whenever you have arrangements like that, sovereign default and even hyperinflation are certainly a possibility. Please specify though which country or countries you're referring to so I can respond more precisely.

 

Yes, housing bubbles and similar things can happen as a result of bank lending, and certainly the government purchasing mortgage backed securities via the Fed doesn't help here, if that's what you're referring to? Empirical evidence seems to show that the types of loans that caused home prices to skyrocket were so called liar loans which at one point supposedly made up 50% (or maybe even more) of all loan originations during the housing bubble peak. It's certainly good for the loan originator to know they have a taker in the Fed ultimately, but not so good for the country.

[AnonymousCoward2]

Here is a new post that was published today, where I explain why the national debt doesn't matter, but also on what regard it does matter! 

 

Here's the conclusion:

 

"Thus, unlike the popular story we’re being told about how poor disenfranchised future generations will be fleeced unless we pay down the national debt, the national debt does matter, only it matters to us in the present right here and now, and not to some obscure future generations down the road."

Feedback & comments as always appreciated!

Interesting, forgive me for not being fully up to date with the latest in Monetary Policy, has been a while since I got my MSc in Economics/Finance. Yet, a few questions:

 

1. This argument is based on a governments ability to issue bonds exclusively denominated in its own currency? Which is basically only valid for the big guys in the world, like US & Japan. Swedish national debt consists e.g.of 31 % of bonds/derivatives denominated in foreign currency: 

 

https://www.riksgalden.se/sv/omriksgalden/statsskulden/Sveriges-statsskuld-oversikt/Statsskulden-fordelad_pa_skuldslag/

 

Instinctively the argument seems based on a closed-loop system, which the said government has 100 % control over.

 

2. The fact that no government under floating exchange rate has ever default is a partial truth. Greece for example defaulted on its debt a few years back. However, how many countries in the world today have free floating exchange rates? Many rates that are formerly floating are de facto manipulated by the government. In any other case we still have a very limited sample of sovereign countries operating under floating fiat under a prolonged period of time. 

 

3. The reason for basically all defaults in history has not been a matter of ability, but rather a willingness to default on their debt. Like everything in economics its all about future expectations, hence governments have an incentive in the present to repay bonds to be able to borrow again in the future. 

 

4. Also:

 

When the Treasury pays interest on the public debt, it does so by asking the Fed (the banks’ bank) to mark up the recipient’s bank’s bank reserves via electronic keystrokes. It doesn’t need to raise taxes anywhere in order to perform this operation.

 

 

 

It does not need to raise taxes, but not raising taxes and thus offsetting the injection into the money supply means it will jerk up the inflation instead? Or am I missing something? 

 

Those are just my2cents.

[Dylan Lawrence Moore]

Resurrecting the topic!