Trump's desire to reduce the deficit. Can someone explain to me how this is a good thing?

It is a simple proportionality.
Using this relationship, there is no way to determine the effects on V or P by an increase in M.
It has no predictive ability, given that they are each multivariate functions, with variables that are largely undefined and unquantifiable.

 

Do you think that you can say that if the cumulative result of MV increases that it will have a positive effect on Py, even if you can't say exactly how? That is, do you think it's possible to increase MV and have a decrease in Py? I mean, assuming a reasonably significant change.

 

They are fine with losing the principal as long as they get the interest? But I too struggle with trying to understand the inertia that continues in an obviously failing enterprise.

Our GDP has greatly moderated while our debt has soared. The answer the folks who clearly and quite smugly see themselves as the smartest and best informed, is that we just haven't run up enough debt, yet! When we ask pointed questions about why any reasonable person would believe this to be true, they present their credentials and pound the table.


Credentialed, but not qualified.

The United States, since the turn of the new millennium, January 1, 2001, has seen real GDP increase 77 percent while over this same period, government debt has spiked 250 percent. Obviously, some sort of reckoning’s in order to bring the books back into balance. The counter-claim, offered with no convincing evidence, is that the answer is more debt and an end to even concern about debt.

Additions of government debt over this same time have been at a diminishing return. At the start of the new millennium the debt to GDP ratio was about 54 percent. Today, it’s well over 100 percent.



“it is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.”
~ Mises.

The idea that the government could spend borrowed money to grow the economy out of debt is become patently ridiculous. And as we ponder why supposedly intelligent, and generally well-credentialed folks would continue to advocate these policies, at some point we realize that they have no other alternatives.

Today, we are again have caught up with the can we kicked down the street earlier and are again up against out debt ceiling with the US Treasury's cash balance plunging from over $400B in the last quarter to just $75B as of mid-March:



The treasury amassed the 4th quarter balance by issuing humongous amounts of debt, in the dying days of the Obama administration, the federal deficit exploded by a stunning 208 billion dollars.

We have working lifespans of 50 years, if we stretch it, and in this time can make the money that will carry us through the time from the end of our work-life until our inevitable death. While the credentialed assure us that there is little impact between average 2% growth and average 3% growth, an economy that expands at 3 percent annually, will double the average living standard every 24 years. In contrast, an economy that expands at an annual rate of 2 percent, will take 36 years to double the average living standard. That's a big difference to folks stretching to work productively for 50 years.

The average annual rate of real GDP growth of the U.S. economy in the 21st century has been 1.78 percent. The average annual rate of real GDP growth of the U.S. economy for the 16 preceding years was 3.43 percent – nearly double. It has been 12 years since the U.S. economy’s eked out a single year of 3 percent GDP growth.



Economic output as measured by GDP is clearly on a long-term falling trajectory. Political elites and bureaucrats continue to prosper, but the rest of us are becoming steadily more impoverished while the elites and the bureaucrats encourage us today to stay the course, later if they can, they will demand we stay this course.

Attempting to spend a nation to prosperity using borrowed money has consequences. The illusion of wealth gives way to decay and disrepair as we steadily grow poorer, our infrastructure, once grand, crumbles around us. Look at our dams, our roads, our airports, our bridges. Glance up at their rusting substructures as you pass beneath them. Watch the gas pump spin faster as it collects your taxes with every tank fill, money we were told was committed to maintaining these very structures.

In nearly every major American city we see the same, clean bustling metropolis around the financial, nice buildings, well dressed people living obviously prosperous lives, changing quickly as you venture outward to a deteriorating sea of multilevel residential dwellings mixed with commercial and industrial properties in varying degrees of decay extend for miles with increasing amounts of the shopping carts of the homeless huddled under old rotting tamps and gathering under our crumpling bridges for shelter. Buildings, homes and structures that 50 or 60 years ago were clean and well-kept. Now the concrete is crumbled, the wood is rotted and unpainted and the windows are heavily barred.

Debt based stimulus didn’t produce the nirvana of rising long run living standards. Rather it produced the disparity of stagnating GDP and rapidly rising government debt. Later it produced the hell of declining living standards over the long run.

Keyes said that "in the long run, we are all dead". But some of us are still here, living with the consequences of the shortsighted economic policies.

Do we have no choice? Is our only path, ever more debt to produce the illusion of prosperity for the few, while the most experience the transformation of small pockets of slums expanding into ever larger ghettos?

http://www.zerohedge.com/news/2017-03-18/long-run-economics-debt-based-stimulus

 

The problem with debt is that it has to be repaid. Today all (actually most) of the money collected from income taxes goes to pay the interest on the National Debt. Better we had that money to build capital goods and infrastructure. It is really quite simple.

 

Who is losing principle?

That's part of your problem. The economy isn't run as an "enterprise".

Only in nominal terms, not in real terms.

The answer the folks who clearly and quite smugly see themselves as the smartest and best informed is that we just haven't run up enough debt, yet![/quote]

I consider myself well informed, but not because I own a business or pay attention to the FOX Business report. It's because I've taken the time to learn it.

Some people do that, but I'm happy to point to reality and back it up with facts if necessary.

And what do you think will occur as a result? Where is the problem? Tell me how it affects me today, right now.

You've played Monopoly or are at least familiar with it?

Tell me, when playing the game what are some things the players do before the game begins? (one of these is wrong)

1) Set up the board
2) Pick your piece
3)Tax players so the bank can have money to give out
4) Figure out who goes first
5) Hand out money to players

Can you see which one does not belong?

Monopoly uses a fiat currency, the bank creates it and can never run out, thus #3 does not belong.

The US government, just like the bank in Monopoly creates the nation's currency. I admit it's done in such a way that obscures what is really going on, but it doesn't change the fact that the government is the root of all money creation. Thus the government does not have to tax in order to have money.

The debt ceiling is a farce. Only in the US does Congress create a budget and spend money on the items it's approved and then a year later vote to repay spending it already allocated. That's like you and your wife planning out your budget, spending all your money for that month and then sitting down when the bills are due and deciding whether or not to pay for the things you've bought.

If that's not clear, HERE IS A VIDEO that explains just how dumb the concept of a debt ceiling is.

Yeah, I'm not sure it works like that. First, it would depend on how income is distributed and how many people there are relative to the gains that are achieved. Lastly, 2% of $2 trillion (the GDP of Russia) vs 2% of $20 trillion (The GDP of the US). That's $40 billion for Russia and $400 billion for the US. That's $279 dollars per person in Russia and $1226 dollars in the US. Point is, as the economy grows relative to the population, the gains are larger per person, that is, 2% of a really large number represents more growth than 2% of a small number. This is evidenced by the fact that we have more than twice the population and earn 4 times the return relitive to Russia. If we had the same population , we'd earn 8 times per person.

Yes, and the irony is that when you propagate the idea that debt=bad (in all circumstances), unwittingly, you are helping the wealthy elite.

1) The money the government spends is not borrowed.

Another Monopoly analogy.

Let's imagine that there are 4 players in the game of Monopoly. They have an average of $3000 in cash, thus there is $12,000 in cash in the game between the 4 players. Now let's imagine that as the banker I can impose taxes and I call for a balanced budget, meaning the money earned by the players via passing Go and picking cards that give rewards must not allow the overall cash in the game to grow. So the free parking space is changed into a "pay your taxes space". People pass go and are paid their income FIRST. Now in order to make this example more understandable in a modern context. Imagine that each player has a smartphone and on each phone, there is an app that shows their balance. There is no physical cash in the game.

So when a player passes Go, the banker simply marks up the account of the person passing Go and the bank accounts for that spending by creating a negative balance with the bank. So if the players hold $12,000 the bank is -$12,000.

When the bank collects the money for taxes, where does it go? Does the bank have more money when a player pays taxes? No, the bank is -$12,000. If a person passes Go and collects $200, the bank is -$12,200. When it imposes the tax, the bank doesn't have $200, it has $200 less debt and the bank is back to -$12,000.

This is exactly how the government works. When it collects taxes, the government doesn't have more money, it's just negative less money.

In Monopoly, the players have $12,000 because the bank (which is really analogous to the government) is -$12,000. The players, as a group, will never have more money and assuming that there are still things to be bought in the game, at a net level the value of the properties, houses and hotels will never exceed $12,000, even if the amount of money each player hold fluctuates.

So, the bank's debt is equal to the money the players hold. If you pay the debt owed by the bank you reduce the amount of money in the game. If you reduce the amount of money in the game, players must sell their property as prices will eventually be too high relative to the money in the game. What if the bank paid interest on the money it borrowed? Who would it pay interest too? The players who have the money and could buy the banks debt. So when interest was paid, it would be earned by the players as an INCOME. Which, in a state of a balanced budget would then simply be taxed away and we'd be back where we were.

The Austrians would have the amount of money in the game stay the same and adjust prices. I hope the reasons why that wouldn't make for a very stable economy are obvious.

The amount of debt created since 2008 pales in comparison to the private debt losses. That's why the "stimulus" did very little. The Stimulus stopped the bleeding, but the patient is still wounded. The problem is, people are just evaluating the money spent, but they aren't actually evaluating it in any sort of context. "The numbers are large, therefore they are BAD!!! "

Almost no one has any idea how to evaluate these numbers. When I ask people "how much debt is the right amount". NO ONE has an answer based on anything but intuition because no one knows how to evaluate the debt and deficit.

Did you copy this from Zerohedge?

In any event. Whoever wrote this is clueless. The Ghettos are expanding because people believe that public debt is bad, even though as a percentage of GDP is's still well below its historic high, while private debt to GDP is off the chart historically.[/QUOTE]

 

Why?

100% wrong. None of your taxes go to repay debt. Not $1.

There are enough people in the world that wish to save in US dollars. The US government can sell more Treasuries that it need to repay those that wish to redeem their Treasuries.

US Government Treasury Statement.

Click on the link above, go to "Issues". Notice that the big number at the bottom is larger than the Big number under "Redemptions"?

The issue hasn't been money since 1970. The question is, do we have the real resources and labor, if the answer is yes, then we are wasting that labor and resources (productivity) by not creating the money to put it to use.

 

I consider myself well informed, but not because I own a business or pay attention to the FOX Business report. It's because I've taken the time to learn it.




Some people do that, but I'm happy to point to reality and back it up with facts if necessary.



And what do you think will occur as a result? Where is the problem? Tell me how it affects me today, right now.



You've played Monopoly or are at least familiar with it?

Tell me, when playing the game what are some things the players do before the game begins? (one of these is wrong)

1) Set up the board
2) Pick your piece
3)Tax players so the bank can have money to give out
4) Figure out who goes first
5) Hand out money to players

Can you see which one does not belong?

Monopoly uses a fiat currency, the bank creates it and can never run out, thus #3 does not belong.

The US government, just like the bank in Monopoly creates the nation's currency. I admit it's done in such a way that obscures what is really going on, but it doesn't change the fact that the government is the root of all money creation. Thus the government does not have to tax in order to have money.



The debt ceiling is a farce. Only in the US does Congress create a budget and spend money on the items it's approved and then a year later vote to repay spending it already allocated. That's like you and your wife planning out your budget, spending all your money for that month and then sitting down when the bills are due and deciding whether or not to pay for the things you've bought.

If that's not clear, HERE IS A VIDEO that explains just how dumb the concept of a debt ceiling is.



Yeah, I'm not sure it works like that. First, it would depend on how income is distributed and how many people there are relative to the gains that are achieved. Lastly, 2% of $2 trillion (the GDP of Russia) vs 2% of $20 trillion (The GDP of the US). That's $40 billion for Russia and $400 billion for the US. That's $279 dollars per person in Russia and $1226 dollars in the US. Point is, as the economy grows relative to the population, the gains are larger per person, that is, 2% of a really large number represents more growth than 2% of a small number. This is evidenced by the fact that we have more than twice the population and earn 4 times the return relitive to Russia. If we had the same population , we'd earn 8 times per person.



Yes, and the irony is that when you propagate the idea that debt=bad (in all circumstances), unwittingly, you are helping the wealthy elite.



1) The money the government spends is not borrowed.

Another Monopoly analogy.

Let's imagine that there are 4 players in the game of Monopoly. They have an average of $3000 in cash, thus there is $12,000 in cash in the game between the 4 players. Now let's imagine that as the banker I can impose taxes and I call for a balanced budget, meaning the money earned by the players via passing Go and picking cards that give rewards must not allow the overall cash in the game to grow. So the free parking space is changed into a "pay your taxes space". People pass go and are paid their income FIRST. Now in order to make this example more understandable in a modern context. Imagine that each player has a smartphone and on each phone, there is an app that shows their balance. There is no physical cash in the game.

So when a player passes Go, the banker simply marks up the account of the person passing Go and the bank accounts for that spending by creating a negative balance with the bank. So if the players hold $12,000 the bank is -$12,000.

When the bank collects the money for taxes, where does it go? Does the bank have more money when a player pays taxes? No, the bank is -$12,000. If a person passes Go and collects $200, the bank is -$12,200. When it imposes the tax, the bank doesn't have $200, it has $200 less debt and the bank is back to -$12,000.

This is exactly how the government works. When it collects taxes, the government doesn't have more money, it's just negative less money.

In Monopoly, the players have $12,000 because the bank (which is really analogous to the government) is -$12,000. The players, as a group, will never have more money and assuming that there are still things to be bought in the game, at a net level the value of the properties, houses and hotels will never exceed $12,000, even if the amount of money each player hold fluctuates.

So, the bank's debt is equal to the money the players hold. If you pay the debt owed by the bank you reduce the amount of money in the game. If you reduce the amount of money in the game, players must sell their property as prices will eventually be too high relative to the money in the game. What if the bank paid interest on the money it borrowed? Who would it pay interest too? The players who have the money and could buy the banks debt. So when interest was paid, it would be earned by the players as an INCOME. Which, in a state of a balanced budget would then simply be taxed away and we'd be back where we were.

The Austrians would have the amount of money in the game stay the same and adjust prices. I hope the reasons why that wouldn't make for a very stable economy are obvious.



The amount of debt created since 2008 pales in comparison to the private debt losses. That's why the "stimulus" did very little. The Stimulus stopped the bleeding, but the patient is still wounded. The problem is, people are just evaluating the money spent, but they aren't actually evaluating it in any sort of context. "The numbers are large, therefore they are BAD!!! "

Almost no one has any idea how to evaluate these numbers. When I ask people "how much debt is the right amount". NO ONE has an answer based on anything but intuition because no one knows how to evaluate the debt and deficit.



Did you copy this from Zerohedge?

In any event. Whoever wrote this is clueless. The Ghettos are expanding because people believe that public debt is bad, even though as a percentage of GDP is's still well below its historic high, while private debt to GDP is off the chart historically.[/QUOTE][/QUOTE]

Debt, deficits, balanced budgets, fiscal responsibility etc. are generally just talking points introduced by the political class to justify tax hikes.

Does anyone really know how large the real total debt is now?

 

Not trying to be evasive, but what do you mean when you say "real debt"?

 

No. In real terms.

I figured this is where this thought process was headed. The government figures out what is wants to do, who it wants to have what, prints the money up and hands it to them. Money is always a draw on labor in some form, and this gives government complete control over all labor and the value of all labor.

There are multiple checks and balances throughout our system, that is just one of them. For example, legislation for a physical barrier was approved in 2006. Both Hillary and Obama voted for it, as did Harry Reid and others, but then the money to actually build the barrier was never appropriated, so it wasn't built. Your argument is simply one against checks and balances and since you see the government as having an unlimited amount of funds, though the labor that is purchased with these funds is obviously limited. To you the debt doesn't matter, taxes don't matter, the government can just print money.

Humans have been coining money for 5,000 years, do you honestly think you are the first one to ever think of this?

Don't put words in my mouth. I have never argued the proposition you just attributed to me. Debt is fine as long as the value received exceeds the costs, and especially if efficiency is improved in the process. Keynes used the example of burying money and then paying people to dig it up. That is a worthless enterprise, whereas mining mineral assets is not.

It is if it increases the debt.

Yes. It has reduced its liabilities.

That's childish. The context is the value received, which was negligible compared to the costs assumed. The very people who point out that stimulus was largely wasted are largely on board with even larger expenditures that will be spent on actual infrastructure upgrades. Unfortunately our government procurement of services processes are so badly filled with inefficiencies that its very difficult for even massive amounts of Federal spending to result in real value received. I spent the entire stimulus era commuting on a span of freeway that covered about 4 freeway exits. They spent 8 years adding one lane to each side and its still a bottle neck. In 4 years, in the 1930's our parents and grandparents built both the Bay Bridge and the Golden Gate.

Nonsense, I just gave it to you in a single sentence.

 

The real total - every bit of government debt of every kind.

 

Some think that the larger the deficit is the more private investment is "crowded out" because of the funding of the deficit. During the Clinton administration the deficit was cut and some economists think that's one reason for the economy boom . When Bush came in the deficit went back up because of tax cuts and war spending, and the Clinton era boom disappeared, although a lot of people will give other reasons why that happened.

 

There is no "funding of the deficit'.

The money the government spends is created by the US Treasury and spent. Taxes and bond sales come later, however, the money to repay bonds that come due does not come from taxes.

The economy has a certain amount of "buffer" in it. The effect of certain policies can take several years to manifest themselves.

You may be familiar with graphs like the one below. It is large deficits that drive boom periods and small deficits that end up resulting in recession.




Here we see budget deficits since 1960. Budget deficits are government spending minus taxes, when they are below the line it means the government spent more than it taxed and if taxes exceed spending the government goes into surplus, that is, it takes more money out of the private sector than it adds.

Here is a look at something called sectoral balances. When the government goes negative, who goes positive?



Sectoral balances are explained on Wikipedia fairly well as:

In any given time period, the government’s budget can be either in deficit or in surplus. A deficit occurs when the government spends more than it taxes; and a surplus occurs when a government taxes more than it spends. Sectoral balances analysis states that as a matter of accounting, it follows that government budget deficits add net financial assets to the private sector. This is because a budget deficit means that a government has deposited more money into private bank accounts than it has removed in taxes. A budget surplus means the opposite: in total, the government has removed more money from private bank accounts via taxes than it has put back in via spending.

Therefore, budget deficits, by definition, are equivalent to adding net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector.


If there is any doubt about the validity of sectoral balances, let's overlay the government's deficits and see how it effects the private and foreign sectors....


I've added approximations for the years of recessions. Notice how, with some consistency, when the deficit falls below approximately 3% of GDP, the nation falls into recession.

The boom of the 90's was fueled by large deficits coming out of the recession of 1990.

The private sector has money when the government deficit spends as a matter of accounting. There is no theory here, this is accounting identity. If you're interested in the math, Wikipedia provides a pretty detailed explanation. Don't be fooled by all the letters into thinking this is complex math. If you take a few minutes to learn what the letters represent, you realize that all of the numbers are very straight forward and the math is just multiplication and addition. CLICK HERE for the Wiki article.

The problem with the graph is that there are people that actually believe that it is the private sector surplus that drives a decreases the deficit. That is, the more money held by the private sector, that allows for lower deficits. The private sector, when taken in the aggregate cannot create a single dollar. For every dollar of credit created in the private sector, there is an equal debt (greater if you add interest). Only the government can create dollars and spend them into the private sector and that is how private sector surpluses increase.

 

Yes......
The USA Federal Reserve does deserve a lot of credit for doing a reasonably competent job

I personally don't advocate scrapping them......

I actually prefer a different type of money coming from a different direction to
compete with them and buy up USA dollars if they ever are rejected as the primary
vehicle for the exchange of oil from one nation to another......

A Utah State Dollar has enormous potential......
to back up, insure...... and stabilize the value of the USA dollar......

This is certainly an interesting post that forces me to rethink many of my views on economics.......
thank you for this intriguing perspective!

 

Thanks for the post.

So This is what I found from Wikipedia: https://en.wikipedia.org/wiki/Crowding_out_(economics)#Two_extreme_cases



“The extent to which crowding out occurs depends on the economic situation. If the economy is at capacity or full employment, then the government suddenly increasing its budget deficit (e.g., via stimulus programs) could create competition with the private sector for scarce funds available for investment, resulting in an increase in interest rates and reduced private investment or consumption. Thus the effect of the stimulus is offset by the effect of crowding out. On the other hand, if the economy is below capacity and there is a surplus of funds available for investment, an increase in the government's deficit does not result in competition with the private sector. In this scenario, the stimulus program would be much more effective. In sum, changing the government's budget deficit has a stronger impact on GDP when the economy is below capacity. In the aftermath of the 2008 subprime mortgage crisis, the U.S. economy remained well below capacity and there was a large surplus of funds available for investment, so increasing the budget deficit put funds to use that would otherwise have been idle.[4]”



So I agree that austerity is not the right way to go if there is a lot of idle cash lying around in the economy, even if there are large deficits if the economy is in a rut. However, if the economy is percolating along and there are high deficits, this might slow growth. If the government issues bonds, for example, investors will buy.

I looked into the sectoral balances and think I understand it (finally) and it does not seem to relate to the crowding out idea except as follows:

A condensed formula of S – I = G – T +(x-m) assuming 0 taxation and net 0 imports and exports might be S - I=G where S is savings, I is investment and G is deficit spending, if 0 tax rate. In this formula, if Government spending goes up and investment does not then Savings will also swell, and this might be what P Krugman was saying in NYT article. This might be why high government spending doesn’t work if the money all goes into savings per the formula Also If Government spending went up, but savings stayed the same, like in a performing economy, then investment would have to go down.

 

Your underlying assertion(shown above) is false.
Whether we're talking about trade or government spending, cutting the deficit does not result in a net loss of money to the economy, necessarily.

All it does for certain is remove that amount of deficit from the balance sheet. Whether it results in a loss of money to the US economy depends on what, exactly the deficit spending being removed is for, and whether or not that spending creates more wealth in the US than it costs.

Like many hot-button issues, deficits, both government spending and trade, is one of those that most people don't understand, but that doesn't stop most from having very strong opinions about it.

It would be helpful if folks would start from the premise that deficits are neither good nor bad in and of themselves, and do not necessarily represent either a net loss or net gain for the US economy. It depends on which deficit one is talking about, and it's often very difficult to discern the final effect a given deficit spending contract has, positively or negatively, on the US economy. Another factor (where trade deficits are concerned) is that the making of just about everything nowadays(especially tech/electronics/cars and other stuff with lots of components) is globalized now to the point that trade statistics as currently set up simply cannot accurately ascertain deficits in today's global economy.

To illustrate this point, when an iPhone is "made" in china, imported to the US and sold to a US consumer for $400, that sale goes on the books as a $400 trade "deficit" with china, but the fact is that less than $10 of that $400 actually goes to china, almost all of which is for simply assembling the parts. The rest goes to the many countries, including the US, that make the various parts and software for the phone; to the various shipping, warehousing, advertising, retailing and other entities that get the product to the consumer and convince him/her to buy it, and to Apple.

Where government deficits are concerned, some are net positive to US budget coffers and some are net negative, but left to balloon long and large enough, budget deficits can be very dangerous to the government's ability to fund itself, and therefor to the economy and society as a whole.

Like income inequality, the strength/weakness of the dollar, immigration, unions and many other issues of both economic and social importance, few people have a good understanding, but there are lots of folks ready to use them for their own perceived political advantage anyway.

 

First, thank you for taking the time to respond. I enjoy the conversation, even if we disagree.

So you are saying that I didn't provide enough context to make my statement true in all circumstances? Sure, I agree, you are correct. I thought it was obvious to assume that we are talking about the economy as it exists today, here in the US, but if you need clarification, there it is. I'm perfectly aware that a nation running a sufficient positive balance of trade can run deficits and have a deficit and still add to its economy.

So let's look at the last 47 years....If you look at the graph below, you'll see the light gray line that represents the deficit (government spending) and the balance of trade (shown as "foreign*" - the dotted line). You'll see there is a single point since 1960, in about 1974 (I've highlighted in yellow), where government deficit is exceeded by foreign sector surplus. In this case, when the dotted line goes below the zero line the US is receiving more export dollars than it spends in deficit.



These are accounting facts. If you think that I'm still wrong, that it's possible, with a negative balance of trade, for the government to decrease spending or run a surplus and the private sector to have more money I'm eager to hear your explanation.

Again, technically you are correct, but this isn't what's happening so I don't explain at the level of detail you are explaining.

If for example, the US only cut foreign aid from the budget, then you are correct, the US private sector wouldn't see any decrease in net assets. However, historically, when we've cut the deficit, we haven't once only cut spending to foreign sources.

So if that's what you mean by "it depends on what, exactly the deficit spending being removed is for...", then yes, in the case of foreign spending I will agree, but again, this isn't something that's ever happened.

Otherwise, whenever the government spends into the US private sector, private sector assets increase, period, full stop. It makes absolutely no difference from an accounting standpoint what those dollars purchase or if any wealth is created. To be clear, somewhere in this long thread I've already stated that money is better spent on places where it produces greater residual benefits (which aren't always easily measured in dollars or "wealth").

Agreed. Most is probably an understatement. I'd be surprised if 1 person in 1000 has a reasonable grasp on the topic/s.

Agree so far...

See, this is where you need to be more specific.

If I fill the tub and then open the drain, the water in the tub is decreasing. However, of I open the faucet to a drip, it is true to say that the drips are adding to the water in the tub, even if the water in the tub, taken as a whole is decreasing. So, to your point, deficits are relitive.

There are three basic faucets and three basic drains when looking at the economy (if the economy, in this case, is analogous to the tub)

Faucets:

Gov spending (G)
Exports (X)
Investment (I)

Drains:

Taxes (T)
Imports (M)
Savings (I)

Something like this:



Most people get confused when I say that savings are a drain. All you have to imagine is that everyone saves 100% of their income and then realize what that would do to demand.

We need to balance the economy as a whole, not government spending (deficit/ surplus) taken by itself.

Sure, you're right. I just thought I made it clear I was talking about government deficit.

Actually, it's pretty straight forward. My "tub analogy" does this pretty well. I've also created another graph which demonstrates this pretty well. I started in 1992 and measured all inflows and outflows year-over-year. All the stats are in the graph for your inspection.

All I did was take the net inflows, government spending, and exports and subtract them from net outflows, taxes and imports. If taxes and imports exceed government spending and exports then the result is a net loss in assets to the private sector. This allows you to see the effect year-over-year and compare in nominal terms, to other years.

I left out investment and savings because Savings=Investment.

Sure we can. When we purchase something from China we are exporting our dollars and importing goods and services. I mean when you stop and think about it, it's amazing/ We send digital representations of our currency to Chinese companies and in turn they send us real wealth. Tell me, who's getting the better end of that deal?

The Chinese government, in order to keep prices low, "prints" there own currency and uses it to purchase US dollars on the foreign exchange. Today, China holds just under $3 trillion dollars in what amounts to a HUGE checking account (CLICK HERE to see FOREX reserves). They don't earn interest on it and they don't spend it. They use it to defend their currency which get a lot of its value for the US dollars they hold.



They also hold about $1 trillion in US bonds (CLICK HERE)

But so what? What can they do with those slips of paper? Buy stuff priced in dollars. Reverse the situation that exiists today. We become the exporter and they become the importer. Is that bad?

Look at conditions in China and look at conditions here. I'll take being the net importer any day.

I think this is what you are referring too.

I don't think this tells the whole story though.

It is true that the parts come from other nations, but in order to China to acquire them, they must acquire them via trade which affects their own trade deficits/ surpluses. If we were to purchase the iPhone parts from each nation, all that would do is decrease our deficit with China and increase it with other nations. In the aggregate, so what?

In the end, I don't see how it matters what foreign nations that the US runs deficits/ surpluses with, just that, taken in the aggregate we run a net deficit with the rest of the world.

Here's where we completely disagree. The US government, as long as it exists and has the ability to enforce its laws, will never ever have trouble funding itself. The US government creates dollars and as such, it can never go broke. But this reply is already too long and that is a long story we can leave for next time.

Agreed

 

It's ridiculous to argue that the government can just print money till kingdom come and that it will not have an effect because of some "equalizing" formula. The whole reason Nixon finally took The US off the gold standard was due to the profligate money printing to fund the Vietnam War and social programs. This led to inflation and a long bear market. Any economist would have to agree with that.

 

You may enjoy the analysis on the plus side to this by one of the posters here:

http://www.politicalforum.com/index...-analysis-of-usa-relations-with-china.398388/

Is AA correct about his analysis of USA relations with China?

 

No one is arguing that.

 

Nixon took the US off gold because, as a nation, we were importing more than we were exporting. Gold was the international currency and as such foreign nations were exchanging the dollars they earned in our import purchases for gold (we owed France a lot of gold if memory serves). Nixon didn't want to surrender the nation's gold so he took us off the gold standard and the money foreign nations held could now only be used to buy goods and services priced in US dollars.

 

1) It makes no difference if the Chinese government holds US dollars or US Treasuries. They are both liabilities of the US government.

2) China depends on exports and I would agree that it gives us a slight advantage in our relationship with China even though many people believe that because they hold $1 trillion in US Treasuries that gives them an advantage. As if they could stop purchasing Treasuries as a way to prevent the US government from funding itself.

1) The US government could fund itself with or without China's debt purchases, period full stop.
2) If China stopped buying Treasuries it would accumulate even larger stocks of FOREX reserves (or it's currency would climb in value causing it's exports to decline and it's private sector would crash) which are prone to lose value (because they don't earn interest) due to inflation. If China were to stockpile 4 or 5 trillion in US dolalr assets, tiny rises in inflation would cost China hundreds of million in buying power.
3) If China stopped purchasing Treasuries, the Treasury would just offer them to other buyers. Most people don't realize this, but the nations primary dealers are obligated to purchase Treasuries, from there, it is the private sector that has to sell them. Even if no one wanted them, which is pretty unlikely given the fact that there is roughly $10 trillion dollars in FOREX reserves floating around the world (of which China holds about 1/3) the Fed could purchase them from the primary dealers as a way to keep the system moving. Most people would call that "monitizing the debt", but in reality, all debt is monitized.
​

3) As far as crashing the Chinese economy on a whim. I think that's something that far too difficult for anyone to know this as fact. I suspect that the Chinese aren't stupid and have contingencies for such a thing. Not to mention the fact that blocking Chinese exports would lead to massive shortages here in the US and prices would skyrocket as inflation set in because demand would exceed supply not to mention the fact that China is a reliable source for cheap goods, even if the rest of the world could fill the void left by the lack of Chinese products, they would cost more.

4) I've studied economics for the last 13 years, so I don't claim to be an expert on the military. I will say that the US, taken as a whole minus nukes is the most formidable military in the world, having said that, China could wreak havoc on the everyday lives of US citizens. They have missiles that can shoot down satellites in orbit, something almost impossible to defend against. Given the nation's reliance on satellites, that's something I wouldn't want to see. Not to mention that in a conventional war, we would not come out unscathed.

Here's a neat video on China vs US in terms of military power.

 

I missed this a while back, but I wanted to correct it. For anyone that cares, when it comes to shares held in the Fed here are a few facts...

Don't banks own stock in the Fed?"

Why yes - sort of. Common stock confers ownership. There are other sorts of stock which do not - like preferred stock.

Fed stock is like preferred stock. (<---Click for explanation)

First, there is no stock in "the Fed".

The Fed consists of "agency-like" entities, like the Board of Governors, which members are federally appointed, and who take federal oaths of office.

The Fed also consists of twelve regional banks, which are wholesale banks. They do not make monetary policy. They're banks.

The stock is in the banks. When a member bank buys stock in the Richmond Fed, it's ONLY stock in the regional bank in Richmond.

It gives that bank no say over monetary policy.

Do stockholders get any profits? No. Like preferred stockholders, they get a guaranteed 6% dividend on paid-in capital. In other words, no matter how much "profit" the regional bank makes, they get the same 6% of their paid- in capital as a dividend.

Banks are also subject to assessments, or cash calls.

Banks cannot trade their stock. They can only sell it back to the regional bank at the same price they bought it.

Banks cannot buy more or less stock. The Fed tells them, based on their size, how much capital they must pay in to be Fed member banks. No matter how much they are assessed, they have one vote. One share, one vote. Your local bank, if a Fed member, has exactly the same number of votes as Citibank - one.

 

The action is in the wall street banks of which the 5 largest can leverage up $200 trillion in dollar based derivstives, on a mere $10 trillion in real assets(check out the office of the comptroller of the currency), get bailed out when they fail, get $1.3 trillion from the FED for 4 years running, while unloading their bad investments on the FED in exchange. Get mark to market and GAAP accounting rules sudpended. Get to massively naked short markets. And get to bonus themselves out record bonuses while the economy has oozed along in the gutter since 2008.

Yup, that FED and those bankers, doing God's work.

 

Actually....... under certain conditions.........
planned properly, I personally believe that the
possibility exists to print over a quadrillion volunteerism hours or
volunteerism dollars of some sort...... pay off the national debt of Israel.....
then the USA or Australia..... or New Zealand...... then Canada.....
and move on from there to a higher valuation on life itself...... and on all
assets that improve or save lives..... such as land.

I am of the belief that this should begin as an economic experiment.... somewhat similar to the
Worgl, Austria local money experiment that was replicated so successfully all over America during
the Great Depression.


http://www.politicalforum.com/index...iment-can-be-applied-in-america-again.387345/

Do you think that the Worgl, Austria experiment can be applied in America again?

 

If nobody else is arguing that......
then I will........

Here is some background information on why I feel that this should begin in the nation of Israel.....
perhaps with an experiment in "Minimum Income?"

http://www.politicalforum.com/index...on-could-bring-world-out-of-recession.406872/

Artistic Hollywood style "Armageddon" could bring world out of recession?!