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

Ok, first, why would that hurt the US? Why would it matter who holds our debt? China or someone else. Second, the idea that China would sell off our debt as you've suggested is ludicrous. You realize that they the Chinese government created its own currency to purchase US dollars (that's why they are accused of currency manipulation), thus it is our dollars that China holds as an asset that backs the value of their dollars and by extension their own economy. They can't just sell their treasuries for pennies on the dollar without hurting their own economy.

I really don't think you through this response through. The sale of treasuries will attract dollars to China and disperse treasuries throughout the world. This would lead to the world holding fewer dollars and holding more treasuries. Now, I'm not an expert in world currency exchange, I admit, but just applying the law of supply and demand this would limit the supply of dollars in the world. Any time supply decreases and demand stays the same, the price of that thing rises. Of course, this assumes that China sits on the dollars it acquires via treasury sales.

Would it be a bad thing for the dollar to rise in value? It would probably do damage to our export business while at the same time making foreign exports more affordable. Would I like to pay less for that Japanese sports car or SUV? You bet!

 

Because the government's paying vast amounts in its role as a huge savings bank. The lenders want to be able to lend and get interest, but the government would rather be debt free and not have to spend on borrowing.

I've often wondered how much of a nation's debt is held by its own citizens. I didn't know it was two thirds in the US.

 

It won't. In order to explain why I'd need to see the assumptions made to create the graph.

 

Few thoughts, last point first.

I wasn't specific enough in my statement. I said 2/3 are earned by bond holders in the US, which is true, but I should probably break that down.

1/3 is held by citizens, companies, corporations, states, municipalities, hedge funds etc. The other 1/3 is held by the US government itself including about 15% held by the Fed.

Basically, if the government repaid itself the roughly $7 trillion it owes itself all that would happen is the number of bonds would decrease and the cash it collected to repay those treasuries would VANISH! Why would it vanish? It's the nature of debt born from a promise. When the government creates $1 it creates a $1 liability and the private sector earns that dollar as an asset. The math looks like this:

Government liability -$1 + Private sector asset $1=Zero

If the Government taxes the private sector and it goes -$1 the private sector will have zero, but the government won't have $1 because it has a liability of -$1 + $1 + (-1)= zero!

When you borrow $1 from a friend, you start out with zero and he starts out with $1. The sum is $1

When he lends it to you, you now have $1 and he has zero, the sum is still $1!!!

Does that make sense? Can you see the difference?

The government, despite all the protestations here, does not borrow dollars in order to have dollars. The Treasury spends and then AFTER the fact it sells treasuries (savings accounts) to offset it's spending. This just trades one government liability for another. That's it. When people hold government money in treasuries, this doesn't give the government more money, it takes dollars out of circulation.

Think about it like this. In the game of Monopoly, the rules say that the bank can never run out of money. If the physical bills run out, the bank can just create money using number written on slips of paper. When a person lands on:



And pays the tax, does the bank have $75 more dollars? Well, sort of, but when you realize the bank actually has an infinite capacity to create money, then adding $75 doesn't actually transfer $75 in spending power to the bank. It's spending power was infinite before and infinite after, all that changed was the number of physical bills. The bank doesn't need dollars from the players in order to have or create money, but when a player pays the tax, the players definitely have $75 less money circulating between them. Can you see the distinction?

In Monopoly what the bank "spends" (passing go, rewards picking cards etc) the players earn. The bank's debt is equal the cumulative player's income dollar for dollar.

Can you imagine in the game saying to fellow players, "You guys, the bank's debt is getting way too high, it's going to go bankrupt, we better start giving the bank back $200 everytime we pass go."

It sounds stupid when you say it with respect to Monopoly, it's just as dumb (no offense) when you say the same thing about the US government.

Now imagine a Monopoly Board, all the properties owned and houses and hotels on each property. Now imagine the bank running a surplus. The bank taking in more from players than it pays out. Run that in your head, imagine what would happen in the game as the cash in the game slowly dwindled. Players wouldn't be able to pay rent, they would eventually start to deleverage their assets by selling improvements (houses and hotels) and eventually mortgaging property.

When the bank earns money as a surplus, this does nothing to save money for the players. The same is true of the US government. When it "earns" more money, this does nothing to help people in the private sector. it only reduces cash in the economy forcing people to deleverage.

Government spending is earned as income by the private sector dollar for dollar. When you pay $75 in taxes to the government, it doesn't have another $75, but you definitely have $75 less.

Interest is exactly the same thing. Government spending earned as interest by whoever holds the Treasuries.

 

Ok, so the question I have for you is, what leads to the condition of (price) inflation in the scenario you created?

 

Inflation where?

 

I'll have to get my head around a lot of this, but thanks.

The theme of all the money basically being in one place reminds me of the "credit crunch", which is something I never understood: how does the world "lose money" when all the money is owned within the world?

Mr. X owes the bank for the loan on his unsaleable house. He can't pay it, so the bank forecloses and sells his house. Mortgage was $100,000, house ultimately sells for $25,000, bank loses $75,000. So the bank's -$75,000. But Mr. X, who buys the house for $25,000, is now saving $75,000. No money has gone anywhere, and Mr. X now has an additional $75,000 to pump into the economy to offset the negative effect of the loss to the bank. Maybe he can put a bigger down payment on a house in taking out a bigger mortgage that'll earn the bank the money back again. It's a complete zero sum game, your loss is my gain etc. All the money ends up in the bank. In fact, that $75,000 has simply stayed in Mr. X's bank. "The banks" haven't lost a penny. By definition they cannot, because all money is in "the banks", as per the Monopoly example.

Any thoughts? I've never understood this.

 

Well Damn, we've discovered the perpetual motion machine and the fountain of youth rolled into one.
Somebody is shilling for the FED shareholders i'm afraid.

 

You siad "When there is too much money in the marketplace, due to printing more money and borrowing more, it leads to inflation. Few people believe in a sustained inflation."

and I asked...

Ok, so the question I have for you is, what leads to the condition of (price) inflation in the scenario you created?

basically what I'm asking is, do you believe that inflation is caused when the government creates more money as the line I quoted appears to claim?

 

Just think if he needs a new wife..

 

No way he's gonna let that eye candy go....besides she probably has a prenup that makes her head esplode.

 

I can see her offing herself after being hitched with him ten years...

 

have you looked at the equity and bond marketplaces ?

 

First, I want to say that I take exception to your assumptions.

You say that Mr. X buys a $100,000 house for $25,000 and therefore saves $75,000.

Anecdotally this could be the case, but there is a reason that foreclosures sell for less than their non-foreclosed counterparts. Risk.

The market determines the value of the foreclosure. The reason people pay less is because foreclosed properties often have risk associated with them. They are as-is sales. There could be visible damage that you need to repair or unseen damage you learn about after the purchase. Of course, there can also be nothing wrong, which is why people buy foreclosures in the first place. I think it's fair to say that for every Mr. X that saves a substantial a substantial amount, there is someone else that ends up paying more, though I think your 75% off is exaggerating the savings of a typical foreclosure. MLS.com says the average is about 29%.

Next, saving $75,000 doesn't necessarily mean that a person can spend $75,000 somewhere else, nor does saving add money to the economy.

I saved about $50k on my house when I purchased it. I don't have $50k to spend somewhere else. If I couldn't buy my house at the price I paid, I would have purchased a house at the same price, even if I had to give up some benefits.

Banks can hold money as capital, reserves or as deposits. If money moves from the banks capital to customer deposits, the bank definitely loses money.

 

How so?

 

Inflation, as were using it, happens to economies as a whole. Rising prices in individual markets are not inflation

 

Price inflation does not enter all markets equally, and at the same time. Never does.
Have you bought food lately ?
Tried to buy a home ?
Tried to buy an education ?
Paid your healthcare premiums and deductibles lately ?

 

Inflation is a rise in the general price level when aggregated across a basket of goods. Some things are more expensive and other things are less expensive. Like this:



Now, I'm not saying there aren't significant price increases in important areas, but the fact remains that inflation isn't measured in individual costs.

 

I think that deficits are in the part of the economy like private spending. Not the magical wonderland that creates the currency.

So this deficits must be 3.1% of GDP doesn't make sense to me.

We need to run a budget surplus and so it for 30 years to get rid of the debt. 30 years is the maximum period of time a treasury bond can earn interest. I've talked to President Obama about this, in the past, and since then the USA doesn't even issue 30 year bonds anymore.

Another solution to the debt is run interest rates close to zero percent interest so that we don't have to pay so much back on top of the debt. I mean we still have to pay the interest on debt already issued, but going forward the debt will shrink as we pay down and wipe out historical debt.

We should also try for a round of deflation to get prices down.

And we should raise taxes so that revenue grows. Deficits need to be turned into surpluses so we can get the debt down.

 

Your method is as arbitrary as the next.
That will comfort the people who can't afford to purchase a home, or rent, or drive cars, or go to college, or use a doctor, or eat

 

"My method"? It's not my method, it is the definition of inflation.

 

It's an arbitrary construct.
Monetary inflation has caused all of the problems listed, whether you want to label them "inflation" or not. There are thousands of un-named variables and consequences in your very unscientific science. The fact that you limit the name "inflation" to specific outcomes is nice, but of little utility.
Real world pain is real. Definitions in this soft science are arbitrary

 

Are you familiar with MV=Py?

(Go ahead Google it if you need too)

 

It's a proportionality.
Since V and P are undefined multivariate functions of the interactions of billions of people, and since you can't mathematically describe them, the relationship gas little short term predictive ability.

And since you can't define the function that determines P, or describe all of the variables, and have even assigned an arbitrary measurement to quantify it, you can't predict the effect of an increase in the combined effect if M and V.

 

So then you disagree with Friedman's "Quantity Theory of Money"?