Person the life-boats! Get the hard hats out! Strife and pestilence is coming! I am wondering what all these loons – the deficit terrorists – who are now elevating a simple endogenous fiscal balance into a national emergency – will say in a few years when growth returns, unemployment falls, people start rebuilding their savings and most importantly their children do not go into slave camps making widgets to send back to the previous generation to pay for the fiscal balances and … the sky stays firmly above our heads although it does rain occasionally down on us to help farmers grow vegetables. What will these hysterical idiots say then? Today, the budget deficit has become the latest WMD. A seek and destroy mission is required. Bring out the military and attack treasury offices everywhere. Rally patriots the hour of calling is nigh?
Before starting this blog I urge everyone in the US to visit the US Government’s Ready site and ensure you have the following recommended Emergency Kit items near to hand:
- Water, one gallon of water per person per day for at least three days, for drinking and sanitation;
- Food, at least a three-day supply of non-perishable food – noting that we only eat vegetarian around here!
- Battery-powered or hand crank radio and a NOAA Weather Radio with tone alert and extra batteries for both;
- Flashlight and extra batteries;
- First aid kit;
- Whistle to signal for help;
- Dust mask, to help filter contaminated air and plastic sheeting and duct tape to shelter-in-place;
- Moist towelettes, garbage bags and plastic ties for personal sanitation;
- Wrench or pliers to turn off utilities;
- Can opener for food (if kit contains canned food);
- Local maps;
- Cell phone with chargers;
You also have to make a Family Emergency Plan, which involves: (a) identifying “an out-of town contact” – y’all put my name down – I am safe at present; learn how to use the telephone and SMS; and “subscribe to alert services” – I suggest you subscribe to billy blog’s RSS feed – when the ship starts to sink I will hand over my communication capacity to the state to keep everyone totally informed – $ by $.
For you net-savvy billy blogsters you can even do the on-line emergency preparation wizard. Its hot. Together I think we will ensure minimal losses but it sure looks like getting ugly – real soon!
And why is that?
This week, the world’s financial press (mainly the US commentators) stepped its lunacy up a notch. You have to hand it to these conservatives (and the progressives that give them succour) – always on the lookout for gaping holes in our security. After 9 years of being on high alert they still haven’t stopped people getting on planes with bombs. But they keep trying. They did succeed, I suppose, in getting rid of Saddam Hossein even though it was like attacking ants with a sledge hammer which is the typical way bullies fight. The only problem then was there were no WMD. These governments and the commentators that supported their illegal invasion lied to us about that.
They are lying to us again about the deficits.
The WSJ carried a story yesterday (February 2, 2010) from one Gerald F Seib, who claimed today that the US Deficit Balloons Into National-Security Threat. Sounds like the latest WMD. Hit the bunkers.
Seib opens with:
The federal budget deficit has long since graduated from nuisance to headache to pressing national concern. Now, however, it has become so large and persistent that it is time to start thinking of it as something else entirely: a national-security threat.
The budget plan released Monday by the Obama administration illustrates why this escalation is warranted. The numbers are mind-numbing: a $1.6 trillion deficit this year, $1.3 trillion next year, $8.5 trillion for the next 10 years combined—and that assumes Congress enacts President Barack Obama’s proposals to start bringing it down, and that the proposals work.
This graphic appeared in the financial press pointing to Seib’s article.
So there you have it. America is now under threat of losing its security. I though national security threats would involve an invasion force or a major disaster like the Black Plague or something similar.
Some numbers on a piece of paper are not my idea of an emergency or a loss of securitty. First, absolute figures mean nothing without scale. Cheats always uses absolutes when only relativities can be understood.
Second, even in the case of relative sizes – that is, the deficit as a percentage of GDP – who cares? When I consider the rate of GDP growth, the extent of excess capacity, the current account drain, the rising private saving ratio then I would conclude without question the relative size of the deficit is too small if the US Government actually wants to improve real standards of living by keeping aggregate demand high.
Third, without a trace of accelerating inflation evident I think this guy should just apologise as he is locked up for joking about national security threats (see my plea at the end of the blog).
Seib then reveals that he is not only intent on deception but actually doesn’t understand the monetary system. To motivate his national security argument, he says:
The U.S. government this year will borrow one of every three dollars it spends, with many of those funds coming from foreign countries. That weakens America’s standing and its freedom to act; strengthens China and other world powers including cash-rich oil producers; puts long-term defense spending at risk; undermines the power of the American system as a model for developing countries; and reduces the aura of power that has been a great intangible asset for presidents for more than a century.
“We’ve reached a point now where there’s an intimate link between our solvency and our national security,” says Richard Haass, president of the Council on Foreign Relations and a senior national-security adviser in both the first and second Bush presidencies. “What’s so discouraging is that our domestic politics don’t seem to be up to the challenge. And the whole world is watching.”
No US dollar funds which the US government spends come from foreign countries. That is a total fallacy. Only the US government issues US dollars – not China, Japan, any European country, nor Australia. These countries may buy US government bonds but they use US dollars which they get through trade.
The US government never loses its ability to spend in US dollars and actions by foreign countries have no influence on that capacity. To suggest otherwise is to lie.
The US government can buy as many tanks, missiles and other ridiculous things they use to impart terror throughout the world as they like independent of what other countries do. The only issue is the availability of these real items in US dollars. As long as there are goods and services for sale in US – the US government has unlimited capacity to purchase them. To suggest otherwise is to misunderstand the nature of a fiat monetary system.
As for the loon who attempts to link solvency with national security I suggest he take an aspirin and lie down and rest. The US government can never be insolvent in its own currency unless it chooses to be for political reasons. It would be an extraordinary event if it did choose this option. The reality is that it will never do so – because ultimately it understands it is the issuer of the currency and it is in charge!
As an outsider I can see things that US citizens cannot. The standing of the US is falling but not because of its budget balance. Futile invasions of countries have made the world more insecure without doubt. Lying about motives (WMD) has not gone down well. And the rest of it. But none of these things are related to the fiscal position.
While Seib should have given up there and looked into another career – perhaps serving donuts or something (they have gaping holes!) – he chose, instead, to continue to outline “just four of the ways that budget deficits also threaten American’s national security”:
– They make America vulnerable to foreign pressures.
– Chinese power is growing as a result.
– Long-term national-security budgets are put at risk.
– The American model is being undermined before the rest of the world.
As noted, foreigners whether they be governments or individuals can not place any fiscal pressure on the US government. The US government ultimately could decide to even stop issuing public debt and finally understand the full potential of the fiat monetary system they command.
But every dollar borrowed by the US government has been previously spent by the US government. Say that over and over again and send it to Seib so that he understands that too.
Further, no American will “chip in more than $800 just to pay interest on this debt” – taxation is levied to regulate aggregate demand. The US government pays the interest in the same way it spends all the dollars it injects into aggregate demand – by crediting bank accounts. The tax collections are independent of this process and totally unnecessary for the smooth functioning of the spending process.
Seib claims that “a debt-ridden U.S. is vulnerable to a run on the American dollar that begins abroad” – which means nothing. First, the US government debt has strict maturities – no-one can demand their “cash” back before that period has expired. Second, what would happen if the foreigners start to sell of their holding of US dollars or US dollar assets. They would start to make capital losses immediately on the unsold stock. They will not do that. Third, even if there was a “sell off” – how would this worry the US government?
Depreciation would stimulate its manufacturing sector and encourage tourism. Some very small inflationary impulse would occur (given the relative closedness of the US economy). Meanwhile, they would be able to blithely continue pursuing public purpose via its US dollar spending – uninterrupted by all this.
Seib then struggles to entangle some of flows of funds:
A lot of the deficit is being financed by China, which is selling the U.S. many billions of dollars of manufactured goods, then lending the accumulated dollars back to the U.S. The IOUs are stacking up in Beijing.
So far this has been a mutually beneficial arrangement, but it is slowly increasing Chinese leverage over American consumers and the American government. At some point, the U.S. may have to bend its policies before either an implicit or explicit Chinese threat to stop the merry-go-round.
Just this weekend, for example, the U.S. angered China by agreeing to sell Taiwan $6.4 billion in arms. At some point, will the U.S. face economic servitude to China that would make such a policy decision impossible?
So lets go through the steps. China net exports real goods and services to the US because they want to accumulate US dollar-denominated financial assets and don’t mind depriving their own citizens of the net real goods and services they send to the US. Result: current account deficit for US against China.
Material result: US citizens have voluntarily acquired more stuff and Chinese citizens have nothing although their Government has some bits of paper.
Many economists and commentators do not fully understand how to interpret the balance of payments in a fiat monetary system. For example, most will associate the rise in the current account deficit (exports less than imports plus net invisibles) with an outflow of capital or even a merry-go-round!
According to this view, the only way that the US government can reduce its “dependency” on foreigners is if it stops living beyond its means. But this ignores what it really going on.
First, exports are a cost – China gives up something real to the US that it could have used itself – this is an opportunity cost.
Second, imports are a benefit to the US – they represent foreigners giving them something real that they could have used themselves but which the US now is using. The opportunity cost is all borne by the foreigners.
On balance, if the US can persuade another nation to send more ships filled with things than the US has to send to the foreigners (net export deficit) then the US enjoys a net real (material) benefit.
The only reason the foreigners will give up more real things than they get from the US is because the US current account deficit is “financing” the foreign desire to accumulate net financial claims denominated in $US dollars. The standard conception is exactly the opposite of this – that the foreigners are financing the profligate US spending patterns.
The reality is that the US trade deficit allows China to accumulate these financial assets while the US gains in real terms – more ships full coming in than leave! In general that voluntary outcome is mutually beneficial.
It is clear that China may change their desire to accumulate $US financial assets which will reduce their willingness to allow the “real terms of trade” (ships going and coming with real things) to remain in the US favour. At that point the US will have to adjust its export and import behaviour accordingly. If this transition is sudden then some disruptions can occur. In general, these adjustments are not sudden.
But none of this has any implications for US government fiscal capacity.
Modern monetary theory (MMT) also allows you to understand the transactions that underpin the trade. So the US citizen purchases a Chinese widget (import). What happens?
- US citizen buys widget.
- If purchase is in cash, then the US citizen’s bank account is debited and the Chinese widget maker’s bank account is credited – this has the impact of increasing foreign savings of $US-denominated financial assets. Total deposits in the American banking system, so far, are unchanged.
- Alternatively, if a loan is taken out to buy the widget, then the US citizen’s bank balance sheet now records the loan as an asset and creates a deposit (the loan) on the liability side. When the cheque is handed to the shop representing the Chinese widget maker in the US – the widget maker has a new asset (a $US bank deposit) and the US citizen’s loan boosts overall bank deposits (loans create deposits). Foreign savings in $US’s rise by the amount of the loan.
- So the trade deficit results from the Chinese widget maker’s desire to net save $US-denominated financial assets and sell goods and services to the US in order to get those assets – it is the only way they can accumulate financial assets in a foreign currency.
What would happen if the Chinese widget maker (which could be a state-owned firm – that is, equal to the government) then decided to buy US Treasury bonds instead of holding the $US-denominated bank deposits? The following transactions would occur:
- The Chinese company would put in an order for the bonds which would transfer the bank deposit into the hands of the central bank (Federal Reserve) who is selling the bond (ignore the specifics of which particular account in the Government is relevant) and in return hand over a bit of paper called a bond to the widget maker’s representative.
- The US Government’s foreign debt rises by that amount.
- But this merely means that the US Government promises, on maturity of the bond, to credit the widget maker’s bank account (add reserves to the commercial bank the Chinese firm deals with) with the face value of the bond plus interest and debit some account at the central bank (or whatever specific accounting structure Deals with bond sales and purchases).
- In other words, this merely amounts to substituting a non-interest bearing reserve balance for an interest-bearing Government bond. That transaction can never present any problems of solvency for a sovereign government.
Once you work through that you will realise Seib hasn’t the faintest idea of how the monetary operations occur nor the implications of them.
Seib also claims that with the budget so precarious the US government will have to eventually cut the defense budget which will undermine security (item three above). The US government never has to reduce its spending on defence as long as there are real bombs and guns to purchase.
An outsider with a less martial bent might advise the US government that a spending cut is desirable because their on-going wars everywhere are not helping advance security anyway. The US government would be better off promoting full employment and helping nations improve their labour markets than waging war on them. But that is a value statement. MMT tells you that the US government is not financially constrained in the way Seib claims.
Finally, Seib thinks the “American model is being undermined before the rest of the world” which is the:
… great intangible impact of yawning budget deficits. The image of an invincible America had two large effects over the last century or so. First, it made other countries listen when Washington talked. And second, it often—not always, of course, but often—made other peoples and leaders yearn to be like America. Sometimes that produced jealousy and resentment among leaders, but often it drew to the top of foreign lands leaders who admired the U.S. and wanted their countries to emulate it. Such leaders are good allies.
Mindless patriotism to finish. The point is clear. The US government can go on throwing its military might around wherever it can get away with it independent of its deficit position unless it gets to the point that there are no more real resources (materials or peoples) left to deploy. But that is a real rather than a financial constraint. The rest of the world would actually like the US not to be so martial but that is a separate debate than the one that Seib is trying to link to.
Relatedly, there has been a bit of discussion this week by the billy blog commentators about whether public debt is debt and whether we should call it something else to assuage those that see red when the word is used.
You will note that I tend to use the term debt-issuance rather than borrowing to make the clear distinction between a public and private debt instrument.
I think of national government debt as a largely unnecessary artifact left over from the days of convertible (gold standard) currencies. But its function is clear – it is a form of social welfare whereby the non-government sector is offered an interest-bearing (that is, income flow) financial asset in return for bank reserves that return (typically) nothing.
So after doing good in the world via boosting aggregate demand via net spending the government goes one step further and says – here is a guaranteed income flow to help your saving aspirations.
In that sense, retrenching the debt is equivalent to destroying that income flow and stock of wealth. That should always be seen from the non-government’s perspective as unambiguously bad.
The other angle on that perspective is to realise that government bonds are really just savings account at the central bank. In the case of the US, the outstanding public debt of $US13 odd trillion tells us that the holders of that debt including foreign institutions, persons and governments, have that much in these “savings accounts” at the Federal Reserve.
Previously (before buying the debt) the holders of the debt had that much in non-interest bearing reserve accounts at the central bank.
When maturity comes, the funds switch back. Nothing more or less than that happens – as in the transactions I outlined above.
Seib was ably joined this week by one David Sanger who on February 1, 2010 wrote in the New York Times that Deficits May Alter U.S. Politics and Global Power
He said the US federal budget was “filled with mind-boggling statistics” and “two numbers stand out as particularly stunning, for the way they may change American politics and American power”.
Its grim folks.
At least he scaled the deficit against GDP unlike Seib. Sanger said the first “number” to stand out:
… is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.
Yes, all those times were calamatous events in US history although comparing the eras is difficult because there were different monetary systems operating then compared to now.
If a near meltdown of your financial system and “soaring” unemployment and industry collapse isn’t a “war” then what is? The US government hasn’t even responded sufficiently to the crisis.
Sanger’s second number which is “buried deeper in the budget’s projections”:
… is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.
Please define “widely considered sustainable” – in relation to what? By whom?
Further, note once again the absence of any context – just some numbers – meaningless mumble. Also note that he is trying to play the household-government analogy. That is a sure sign that the writer doesn’t have the first clue about the complexity (or simplicity) of the monetary system he is pretending to his readers that he is an expert on.
The NYT should never use this journalist again. He fails basic macroeconomics. The US government issues the currency which the households use. The latter’s spending is always financially constrained whereas the former can never be financial constrained in its own currency.
Once you get to understanding that point then the rest of the gibberish wanes into its own rubbish bin.
Other acts of idiocy
And I was informed overnight that so-called financial expert John Mauldin is up to his normal scaremongering and continuing to perpetuate myths about the Reinhart-Rogoff beat up.
I think the graphic they used to illustrate Mauldin’s latest story We Are So Screwed said more about his state of mind than anything else.
He is even joining the national security movement and suggesting that “If we … [the US] … do not get them … [those evil deficits] … under control, we will one day, and perhaps quite soon, face our own “Greek moment.”” Laughable really.
Greece operates in a fixed exchange rate system with no independent currency, no central bank and no real fiscal capacity. Last time I knew anything about the US it had none of those constraints on its policy makers. He is comparing two totally different monetary systems which cannot be compared in any meaningful way.
Maybe we should all form a circle and join hands and hope that Mauldin was on the boat pictured having his own “moment”.
Please read my blog – Flat Earth theory returns – budget aftermath – for more discussion on this point.
Meanwhile, outbreaks of madness continue
Spanish jobless claims continued rose by 4 million in January taking the official unemployment rate to 17.5 per cent although some are saying it could be as high as 20 per cent. In some Spanish regions, unemployment is now around 45 per cent.
Meanwhile, under the stupid and cruel EMU treaty, the Spanish government is in a process of reducing its budget deficit to 3 per cent of GDP by 2013 down from 11.4 per cent last year. This is equal to spending cuts of about €50m. That alone defines madness. (Source)
And over the Channel, the British opposition treasury spokesperson, the increasingly hysterical George Osborne, said that economic policy (Source):
… should be judged on whether they can defend the country’s AAA credit rating. He stressed that a downgrade from any major ratings agency would be a failure of economic policy.
He will clearly do a fine job. He claimed that he would have been making discretionary cuts to the deficit last year at the height of the collapse. His primary goal is also to increase exports as a percentage of GDP which will further reduce the standard of living of citizens in Britain.
But since when has a sovereign government judged its policy position by what the corrupt and irrelevant credit rating agencies do? Japan certainly didn’t give a toss when they were downgraded several times and its sovereign debt judged as junk. I am sure the investors who buy billions of Japanese government bonds don’t care either.
In a few years, we will have to send these characters E-mails to remind them of how idiotic their public commentary was when they were predicting the skies would fall in.
The problem is that while I make light of it all, these loons actually do damage by deceiving the public that doesn’t know better and, in turn, putting pressure on national governments to abandon their fiscal responsibilities to the jeopardy of the unemployed and poor.
An alternative media campaign has to be waged.
Anyway, I have seen signs like this one that makes it an criminal offence to make false threats about national security. Can someone ring the TSA or the FBI or the CIA or someone and get Seib locked up please?