patrick.net

1) Total Public Debt as Percent of Gross Domestic Product:
2013-04-01 100.7%
2014-04-01 101.8%

Of course it looks like dramatic than "adding a trillion".

2) this money was injected in the economy, and it is not lost. It is still there. The wealth of people in the US, as measured in nominal dollars, goes up when the government debt increases.

This means the government can tax it back and just go back to where we were before they injected it.

It's really simple: They can give it and they can tax it back at will.

Or they can print more and automatically take value from those owning this new money - and from bond holders.

3) Jefferson didn't say that in the context of a fiat currency. The money considered is a measure of value a time t, used for exchanges. It is not a store of value.

Given all of the above, explain again why our children are on the hook for the added money.

Heraclitusstudent says

Given all of the above, explain again why our children are on the hook for the added money.

The argument you make is from a Keynesian/fiat point of view. Since I don't ascribe to that point of view, I believe your argument to be bugus. We will eventually see, of course.

You are assuming the Fed can hold all/most of the debt they have acquired in bonds to maturity, thereby eliminating the necessity to monetize the debt. I counter that rapidly rising interest rates will force them to monetize to stay solvent. They won't be able to do it. 2008 was a cake walk compared what is coming in the not too distant future. Keep your eye on the 10 YR. It's yield will hit 5% in the next year or so and continue to rise as the crisis deepens. Debt is debt. It doesn't come and go at the whim of a quasi-governmental agency.

In turn, rising yields will create havoc with the bond markets, in general. The Fed does NOT have any ability to control interest rates regardless of what they purport. Having to lower the discount rate to 0% should have been your first clue. Remember when going to the discount window was a sign of weakness and embarassment? Now its a casino window.

Unfortunately, Cheney was wrong... deficits do matter. Neither of us can win this argument today. Check back in 18 months and let's see who is closer to reality.

Heraclitusstudent says

Jefferson didn't say that in the context of a fiat currency.

You are absolutely correct. Jefferson hated fiat which is why there was no provision in the Constitution for it. The Founding Fathers knew fiat was easy to counterfeit (today we just call it "money printing" or "increasing the money supply" -- it's still counterfeiting no matter how you say it) and they took specific precautions not to allow government to use it. The colonies had already learned the lessons of fiat from the defunct Continental Dollar only a couple of decades earlier. History records no fiat currency that has stood the test of time... not even one.

A simple SQL update will take care of the debt.

darlag says

The argument you make is from a Keynesian/fiat point of view. Since I don't ascribe to that point of view, I believe your argument to be bugus.

I made a logical argument, you don't believe it, but you're not explaining what is the logical flaw in my thinking.

darlag says

You are assuming the Fed can hold all/most of the debt they have acquired in bonds to maturity, thereby eliminating the necessity to monetize the debt.

I made no such assumption. They already monetized the debt when they bought it.

darlag says

Keep your eye on the 10 YR. It will hit 5% in the next year or so

This cannot happen in a deflationary background.
We've already beat this to death in an other thread. You simply don't have a logical explanation of why investors would:
- either keep cash (returning less), or
- invest in something else (extremely risky in a deflationary context where everything outside cash goes down).

The only reason to hold cash instead of gov bond would be if there was a risk of government default. Yourself agreed you don't think the gov would default. If the government DID default, the economy worldwide would be massively disrupted. There just isn't a set of circumstances in which this would become palatable, especially in a deflationary background, when printing money is easy and popular.

jvolstad says

A simple SQL update will take care of the debt.

Your exactly right. These numbers are just abstraction. A debt of $18 trillions is meaningless in a context where you can just add $20 trillions to the government account though a sql update.

This debt is not the problem. The reality is the problem: You don't just add 20 millions jobs or 18 billions barrel of oils to US reserves through a sql update.

Darlag is simply not focusing on the right issue here.

Heraclitusstudent says

I made no such assumption. They already monetized the debt when they bought it.

The monetization process is not complete until the debt has been held to maturity leaving the monetary system with the increased money supply. I am saying the Fed will be forced to sell early for pennies on the dollar because doing otherwise would make them insolvent... which I believe will happen to them anyway.

Keep your eye on the 10 YR. It will hit 5% in the next year or so

This cannot happen in a deflationary background.

It can and it will. This is what you Fed apologists do not understand. It happened in the 30s and briefly in 2008 when liquidity dried up. It will happen again whether or not you believe otherwise.

darlag says

The monetization process is not complete until the debt has been held to maturity leaving the monetary system with the increased money supply. I am saying the Fed will be forced to sell early for pennies on the dollar because doing otherwise would make them insolvent... which I believe will happen to them anyway.

This paragraph absolutely doesn't make any sense. They monetized the debt by giving new money and absorbing the debt. If this debt was paid back the money would return to the central bank into the aery chasm from whence it came. The fed will not do that they will roll-over the debt.

As for being insolvent I wonder how this could happen to an institution with a printing press in its basement. You're thinking the bonds will lose value. They wouldn't if they are held to maturity and rolled over. Your thinking the government could default on them, clearly they wouldn't let that happen. Even if the government defaulted, they wouldn't be "insolvent" in any meaningful sense.

All the numbers they manipulate can be changed AT WILL. You're assuming there are rules they obey in doing that. There aren't. They will change the numbers as they see fit. You still have to wrap your head around this.

The real economy can't be changed at will.
The central bank numbers definitively can. All of them. As easily as you edit a spreadsheet.

If you think any of these numbers are somehow problematic, you're barking at the wrong tree. It's not like there's a shortage of real issues without inventing some.

darlag says

This cannot happen in a deflationary background.

It can and it will. This is what you Fed apologists do not understand.

I hope you realize you are asserting something while giving absolutely 0 logical argument to support it. Your comparison to the 30s is meaningless. There was a gold standard then. the fed raised rates back then. etc, etc....

Heraclitusstudent says

Your comparison to the 30s is meaningless.

We shall see.

darlag says

in 2008

what happened in 2008 was the 2002-2007 debt edifice collapsing like a WTC tower.

people started defaulting on their loans because they ran out of money.

The Fed cannot run out of money, not unless the Executive appoints super hawks and/or Congress takes its toys away.

It will happen again whether or not you believe otherwise.

This is just your own belief system doing the talking.

The fact is the world economy is covered corner to corner with fiat currency systems now. This is not the 19th century or the 1920s, nor the 1970s.

I don't pretend to understand or foresee what's going to happen over the next 30 years (if I could, simple currency hedging would make me a billionaire), but I do know our macro systems can remain crazier than the observer can remain sane.

I think what's gone on 1984-now is going to continue through to 2044 and beyond.

shows how 2000-2010 was The Great Leveraging.

We'll figure out how to do it again. Life is so great when everyone can borrow money, as much as they want.

Heraclitusstudent says

As for being insolvent I wonder how this could happen to an institution with a printing press in its basement.

The Fed doesn't literally print money, it extends credit (debt). The term "printing press" is a euphemism for debt expansion. So what happens when no one wants anymore credit? The Fed assumption is that that will never happen. There is always a price point, an interest rate at which someone can be coerced into borrowing more money. I say that is a bogus assumption that will become evident as yields rise and servicing existing debt becomes almost impossible.

When the stock market crashed in 1929, J.P. Morgan walked around the trading floor buying stock from all the market makers, throwing tens of thousands of dollars around in an attempt to instill a sense of confidence that everything was all right. But the herd's mentality told them otherwise. Morgan forestall the collapse for a few weeks, but eventually people lost confidence and no amount of bluster could convince them otherwise. The Fed is trying to act like Morgan today. "Sure we'll buy another $85 billion. Trust us. Everything will be all right." The herd has bought it so far but there are increasing signs they are fast losing confidence. Negative endogenous social mood will prevail and even "easy money" won't solve the problem when it does.

"Easy money" created the real estate bubble and that didn't work out so well. It has now created a stock market bubble, a credit card bubble and a student loan bubble simultaneously. When the herd quits borrowing the party is over. The Fed loves formulas and equations for explaining the movement of money in the system. But there is no formula for explaining how people behave under the pressure of mounting debt. They simply quit borrowing and start saving ("hoarding money" - too funny :-)) and paying down debt. And that is a formula for disaster.

Bellingham Bill says

I think what's gone on 1984-now is going to continue through to 2044 and beyond.

And this is not your belief system doing the talking? History is on my side BB. It's not going to be "different this time" just because we live in a globally fiat world today. What it means is that the entire world will suffer, not just a few nations.

darlag says

So what happens when no one wants anymore credit? The Fed assumption is that that will never happen. There is always a price point, an interest rate at which someone can be coerced into borrowing more money. I say that is a bogus assumption ...

Great timing... moments ago from Goldman Sachs in reference to the ECB's latest round of LTRO :

"€82.6 bn of TLTRO funds were allocated today, in the first of two auctions, where theoretical take-up is capped at €400 bn (we refer to them as “LTRO-3”). Consensus expectation is for €267 bn to be allocated over both auctions:

The initial LTRO-3 auction therefore:

(1) amounts to 31% of consensus expectations for combined take-up in both auctions
(2) leaves €184 bn of take-up for LTRO-3 December auction, were consensus expectations to be met. This would represent a €102 bn (123%) increase on today’s auction
(3) is unlikely to leave the equity market excited, in our view."

The consensus was for European banks to take anywhere between €100 and €300 billion in nearly zero-cost credit from the ECB (at 0.15%) but nobody wanted it - at any price. Just €82.6 billion was allotted across 255 counterparties.

So again I ask, what happens when nobody wants anymore credit? That really is the question you know. We've seen it all over Europe lately. It will come to the U.S., I assure you - it's just a matter of time.

darlag says

So again I ask, what happens when nobody wants anymore credit? That really is
the question you know. We've seen it all over Europe lately. It will come to the
U.S., I assure you - it's just a matter of time.

And why would that make interest rates go up?

tatupu70 says

And why would that make interest rates go up?

I will assume you are talking about Treasury yields. (If not, specify).

The Fed has no control over yields. The market controls them. Yields are obviously a function of risk. The more perceived risk, the higher the yield. Just because Treasuries are backed by the "good faith and credit" of the U.S. government doesn't mean people actually will have faith in them. The more Fed operations are perceived as ineffective, or worse yet, as a failure, the less faith buyers will have in their purchases of government debt and the more return they will want for their risk.

While the Fed can control discount rates, yields are an entirely different matter.

PCGyver says

don't think darlag said intrest rates would go up

He did earlier--I'm trying to understand exactly how he sees this scenario unfolding...

darlag says

The Fed has no control over yields. The market controls them. Yields are
obviously a function of risk. The more perceived risk, the higher the yield.
Just because Treasuries are backed by the "good faith and credit" of the U.S.
government doesn't mean people actually will have faith in them. The more Fed
operations are perceived as ineffective, or worse yet, as a failure, the less
faith buyers will have in their purchases of government debt and the more return
they will want for their risk.

While the Fed can control discount rates, yields are an entirely different
matter.

Historically, that's not how it's worked. Treasury bonds are always seen as a safe haven. What basis do you have for your feeling that ineffective Fed operations would lead to lack of faith in the US government meeting its obligations?

tatupu70 says

Historically, that's not how it's worked. Treasury bonds are always seen as a safe haven. What basis do you have for your feeling that ineffective Fed operations would lead to lack of faith in the US government meeting its obligations?

There are different levels of default. You can default without actually saying it. It is not out of the question that in a crisis the Treasury could extend the maturity of a 30 year bond to 50 years, a 2YR to 5Yrs, etc. Is that default? Perhaps not in its purest meaning. But if you thought that might happen to you, would you want more yield?

darlag says

There are different levels of default. You can default without actually
saying it. It is not out of the question that in a crisis the Treasury could
extend the maturity of a 30 year bond to 50 years, a 2YR to 5Yrs, etc. Is that
default? Perhaps not in its purest meaning. But if you thought that might happen
to you, would you want more yield?

In my mind, it's pretty far out of the question. And that risk is much lower than the risk of investing it anywhere else. The safe haven always causes Treasury yields to fall in such a situation, not rise.

tatupu70 says

In my mind, it's pretty far out of the question. And that risk is much lower than the risk of investing it anywhere else. The safe haven always causes Treasury yields to fall in such a situation, not rise.

You are missing the deflationary part. In your inflationary scenario, the price of bonds goes up, so yield goes down in the flight to safety. But we are talking deflationary collapse. The price of bonds will fall so yields will rise to compensate for the risk of loss. It's still a flight to (relative) safety, but purchasers won't just take their losses without trying to mitigate them, safety or not.

PCGyver says

Heraclitusstudent says

The wealth of people in the US, as measured in nominal dollars, goes up when the government debt increases.

Unfortunately only the very rich have gotten richer. So there might be more money but its velocity slows because the rich can only spend so much.

True, but it doesn't change the fact this money is there and can be taxed.

PCGyver says

Heraclitusstudent says

This means the government can tax it back and just go back to where we were before they injected it.

This wont happen because the money was given to the rich. They use this money to bribe politicians so that they can make even more money or to keep taxes low for them.

True as well. They can push to defund social security instead, if this is politically more feasible.

But when it comes to government default and assuming we come close to that, believe me politicians will become VERY motivated to take that money back, and the rich will be much less reluctant considering the alternative.

darlag says

The Fed doesn't literally print money, it extends credit (debt). The term "printing press" is a euphemism for debt expansion.

Absolutely not. The fed does literally prints money.
They can use this money to buy debts.
Or they can give away money with no debt attached.
That is their choice.

darlag says

They simply quit borrowing and start saving ("hoarding money" - too funny :-)) and paying down debt. And that is a formula for disaster.

They CAN give every person in the country a million dollars and watch who saves it and who rushes to spend it.

http://finance.yahoo.com/news/instead-qe-fed-could-given-094500275.html

darlag says

It is not out of the question that in a crisis the Treasury could extend the maturity of a 30 year bond to 50 years, a 2YR to 5Yrs, etc. Is that default? Perhaps not in its purest meaning.

This would absolutely be considered a default.
And there would be absolutely no reason for a government with a printing press to do that in a deflationary background.

darlag says

You are missing the deflationary part

Nope. In a deflationary period, bond yields go down.darlag says

The price of bonds will fall so yields will rise to compensate for the risk of
loss

Show me a time period where yields rose during a deflationary period. I'll show you 10 times where yields came down during periods of deflation.

The Professor says

There it is.

The fed can never go insolvent because the "reserve notes" not only have no intrinsic value, they are backed by a building horde of debt. Sure they can "print" more, but they have already increased the supply exponentially. when the fed approaches the asymptote of printing THAT Ponzi scheme will be over.

An exponential has no asymptote.

The only condition in which it makes sense to stop is if people who are saving the cash actually spend it and the velocity of money rises. This is not a deflationary situation.

Of course they have the responsibility to avoid suddenly destroying the currency through inflation. They will not let this happen either.

The Professor says

We can't even agree that rising debt and a semi-secret, quasi-governmental, cartel controlling the printing and distribution of our currency is a very bad idea.

What's really a bad idea are the real-economic reasons for massive inequalities and low job growth. The rising debt is a consequence of that. Without this background, monetary policy and its priesthood would never become the problem it has become, and would not be debated in forums.

tatupu70 says

Show me a time period where yields rose during a deflationary period. I'll show you 10 times where yields came down during periods of deflation.

There is only one important deflationary period that I ever talk about... the Great Depression, but Heraclitusstudent has already dismissed that one :-)

Still, here are two charts I can put my hands on quickly. Notice bond PRICES fell like a rock (along with stocks and every other asset class) during the deflationary period ending in 1932. But YIELDS skyrocketed as prices collapsed (this chart is inverted).

But, of course, we are in a fiat world now. That could never happen again - haha!

The Professor says

Do you agree that the fed, a semi secret, quasi-governmental agency, is a bad idea?

- "semi-secret": clearly they have to manage "communication" carefully. That implies that they are secretive.

- "quasi-governmental agency": all central banks have to be "independent" of the government as their goals should be separate from political ones, yet they are clearly part of the "authorities" - i.e. the government - running the country.

So to the extent that you believe there should be a fiat currency at all, with a central bank, I'm not sure what you would do differently.

If anything, you should have a clearer separation from banks, but the rest is moot.

darlag says

There is only one important deflationary period that I ever talk about... the
Great Depression, but Heraclitusstudent has already dismissed that one :-)

Still, here are two charts I can put my hands on quickly. Notice bond PRICES
fell like a rock (along with stocks and every other asset class) during the
deflationary period ending in 1932. But YIELDS skyrocketed as prices collapsed
(this chart is inverted).

But, of course, we are in a fiat world now. That could never happen again -
haha!

Are we talking about corporate bonds?? I thought the discussion was treasury yields??

tatupu70 says

Are we talking about corporate bonds?? I thought the discussion was treasury yields??

All bonds, treasuries included, acted the same. I just didn't have charts of those. The data is available from several sources. I will leave the exercise to you if you are still in doubt.

darlag says

All bonds, treasuries included, acted the same. I just didn't have charts of
those. The data is available from several sources. I will leave the exercise to
you if you are still in doubt.

Consider me still in doubt. I found the FRED graphs and they don't resemble the corporate bonds chart. Which isn't surprising. The treasury yields rose through the 20s until the depression hit, at which point they began falling.

http://learnbonds.com/historical-treasury-yields-2-year-bill-10-year-note-30-year-bond/

And if you look at any delflationary time period, the same is true. Treasury yields fall during recessions.

tatupu70 says

I found the FRED graphs and they don't resemble the corporate bonds chart.

Show me the 1920s charts. The link you provided is post 1970. There have been no deflationary collapses since 1932.

darlag says

tatupu70 says

I found the FRED graphs and they don't resemble the corporate bonds chart.

Show me the 1920s charts. The link you provided is post 1970. There have been no deflationary collapses since 1932.

Sorry--misread the x axis. Try this one:

Not sure why the title didn't copy, but it's:

Yields on short term US securities, 3-6 month treasury notes and certificates, 3 month treasury bills for United States.

Yield very clearly fell throughout the Great Depression.

This discussion of Treasuries has already been hashed in other threads. I have always said cash in the mattress is the best defense, next short-term treasuries would be where you want to keep your cash, rolling it over as necessary. Also FRNs (Floating Rate Notes) are perhaps even better since they don't have to be rolled over. You may not make any money but you stand to lose less.

Clearly short term treasuries fared better than corporate bonds during the Great Depression. Long Term bonds not as well but not terrible as this chart shows. Yields only spiked toward the end of the equity collapse. Sovereign debt is always the best flight to safety.

But that has never been the point of my discussion. Debt is at the center of my point and that rising interest rates in today's economy will burst the highly leveraged debt bubbles that exist today. And there is nothing the Fed can do to stop that. I look for rising yield on the 10 YR as the primary catalyst because it is so pervasive in modern leveraged instruments. The Depression did not end in 1932 when the stock market bottomed, it continued into the early 1940s. All the while, yields rose just as they will for the next few years even after the coming stock market collapse.