Being as how we have recurring debt ceiling crises and sincere worries that we might simply default on our debts even though we're perfectly capable of servicing them, what ought to be surprising...
Being as how we have recurring debt ceiling crises and sincere worries that we might simply default on our debts even though we're perfectly capable of servicing them, what ought to be surprising is that it took this long.
The Republican party's debt ceiling hijinks have been wholly corrosive to politics as well as the actual effectiveness of the federal government agencies. The fact that it's become a regular feature of our politics with nary a word of condemnation anymore is insane.
Worth adding to this that this "debt ceiling" nonsense is completely fabricated. For one, the federal government doesn't have "debt" in the way that you and I understand it - that's literally not...
Worth adding to this that this "debt ceiling" nonsense is completely fabricated. For one, the federal government doesn't have "debt" in the way that you and I understand it - that's literally not how federal financing works. Treasury bonds are just a mechanism by which the government puts cash into the economy. Calling it "debt" is purely a propaganda term popularized by Reagan to con people into thinking there was a budget crisis requiring defunding of social services, and to make people forget that the federal government can and should literally "print" money (although the "printing" is all done by keyboard these days) to pay for its financial obligations. For two, the "ceiling" on this artificial finance propaganda is completely arbitrary and meaningless except as a propaganda wedge. Unfortunately, propaganda works.
Can you elaborate a bit on this? The way I understand it: 1.) the Dept. of Treasury issues the US Treasury Bonds 2.) investors purchase the bonds (usually at discount from the par value) which...
Treasury bonds are just a mechanism by which the government puts cash into the economy.
Can you elaborate a bit on this? The way I understand it:
1.) the Dept. of Treasury issues the US Treasury Bonds
2.) investors purchase the bonds (usually at discount from the par value) which would take cash out of the economy
3.) the cash received by Treasury from the investors goes on to pay for government expenses that tax revenue may not cover
4.) Treasury repays the bond to the investors at par value (injecting the initial cash back into the economy plus the earned interest)
Is this the process you're referring to? I think the neo-liberal response is that: 1.) Treasury having the money to payback the investors isn't a guarantee if we run a deficit without issuing more bonds, and 2.) Using this process keeps kicking the can down the road. Ultimately I agree with your two points. The "ceiling" is 100% arbitrary and a self-imposed legal constraint as our lenders (i.e. the investors from above) aren't holding us to it. And the process outlined above (to which I think you're referring) doesn't really matter if it leads to increasing debt and "kicking-the-can-down-the-road" because, as any good Keynesian will tell you, in the long run we're all dead...
Anyways, no disagreements on my end. Just wanted to ask your thoughts on it for some clarification on what you're saying.
It's referring to the idea that government "debt" isn't real, it's just a phrase/analogy that was made up to be relatable to citizens. The government can make money. They could make enough money...
It's referring to the idea that government "debt" isn't real, it's just a phrase/analogy that was made up to be relatable to citizens.
The government can make money. They could make enough money to pay off all "debt" tomorrow if they wanted. It just wouldn't be good for the economy. So what's good for the economy is the real question, and it's more complex. Hiding that complexity behind the concept of debt is reductive, but useful for political shenanigans.
Say the government wants to build a bridge that costs $1M. They have three ways to get that money.
Collect taxes. They don't add more money to the system, and they don't remove any either (more on that later).
Print money. Add $1M to the system and make all money worth less. This may or may not be OK depending how the economy is doing and how much money is being added to the system elsewhere (inflation).
Issue bonds, as you said. Now we're adding 5% (or whatever) of $1M to the system. We still need to find $1.05M somewhere (see 1 or 2) to repay the bond, but we have some time to do it.
1 is ideal, but overly simple. 2 is not good, 3 is just a strategy to help you do 1 or 2.
So in practice what the government wants to do is print money for the bridge, but then also collect taxes in equal proportion. But rather than simply having more money in the system from when it's printed, the government takes money out of the system (literally burning it) from when they collect taxes. This way they don't need to wait for taxes to come in before they can build a bridge. But they also don't create inflation.
Then they can use bonds as a strategy to smooth over the process. Because they can print money and/or collect taxes over the period that it takes the bond to mature.
Nowhere in that process is there debt in the sense that you or I might have debt. Because you and I can't just get more money instantly.
The big caveat is that this only applies if your debts are denominated in the same currency you spend in (which the US dollar is). This is not necessarily the case for many other countries.
The big caveat is that this only applies if your debts are denominated in the same currency you spend in (which the US dollar is). This is not necessarily the case for many other countries.
Yes this is absolutely true - we're only talking about the U.S. here, which issues its own currency (there's a specific term for this that I'm blanking on at the moment).
Yes this is absolutely true - we're only talking about the U.S. here, which issues its own currency (there's a specific term for this that I'm blanking on at the moment).
Right. So it's really just a liquidity issue when framed this way. This is where I see the sticking point with this whole debate. If the US continually runs a deficit, than 1 isn't an option and...
Right. So it's really just a liquidity issue when framed this way.
We still need to find $1.05M somewhere (see 1 or 2) to repay the bond, but we have some time to do it.
This is where I see the sticking point with this whole debate. If the US continually runs a deficit, than 1 isn't an option and it's forced into either 2 or 3(i.e. second order 3 to pay back first order 3). This is the point that needs to be addressed.
What frustrates me most with this whole debate is that tax revenue doesn't get enough attention. If we gave the IRS the resources to better collect taxes, we wouldn't even need to touch tax rates and we'd generate more revenue to decrease the deficit/potentially even run a surplus. Of course, the IRS is an easy target to attack since tax payers don't like the tax-man; so defunding them is easy to do politically....
There are some really simple solutions to solve this problem, but the political will to meaningfully do it isn't there. The legislators seemingly don't have the gumption to do something that would be good for their constituents even though they may not like it. The ratings agencies are absolutely right in downgrading the US.
Except that's not a sticking point at all, it's just propagandized to be. The federal government doesn't have to "find" money anywhere -- it literally creates it out of thin air when it needs it....
Except that's not a sticking point at all, it's just propagandized to be. The federal government doesn't have to "find" money anywhere -- it literally creates it out of thin air when it needs it. That's actually one of the Constitutional jobs of the federal government, specifically Congress.
It's silly to set having no deficit or a surplus as the goal of our monetary policy. If we ran a surplus then the government would just be taking money out of the economy for no reason and most...
It's silly to set having no deficit or a surplus as the goal of our monetary policy. If we ran a surplus then the government would just be taking money out of the economy for no reason and most likely stiffling economic growth. Our monetary policy's goal should be to give our economy the most money it can handle while avoiding inflation. Under a growing economy this inevitably means the government will be at a deficit. And under a shrinking economy higher taxes to take money out of the total supply should lead to a surplus.
Very good points. I think I brought up deficit/surplus because the loudest voices in the debate seem to be concerned about deficit/surplus considerations - to which I'm trying to point out...
Very good points. I think I brought up deficit/surplus because the loudest voices in the debate seem to be concerned about deficit/surplus considerations - to which I'm trying to point out solutions around those considerations.
But you're right in that really we should be shifting the frame of the debate to point out that this shouldn't be a concern.
I don't think there's a consensus on whether just printing the money is good or not. In fact, if it doesn't lead to inflation there's no reason it wouldn't be good. And there are certain...
2 is not good
I don't think there's a consensus on whether just printing the money is good or not. In fact, if it doesn't lead to inflation there's no reason it wouldn't be good. And there are certain underutilized (not running at capacity) sectors of the economy where a giant government money dump probably wouldn't cause inflation.
It depends on what that money is turning into. The fundamental rule is that there is a ratio of denominated money to "stuff" out there in the economy. If that ratio gets high (more money or less...
I don't think there's a consensus on whether just printing the money is good or not. In fact, if it doesn't lead to inflation there's no reason it wouldn't be good. And there are certain underutilized (not running at capacity) sectors of the economy where a giant government money dump probably wouldn't cause inflation.
It depends on what that money is turning into. The fundamental rule is that there is a ratio of denominated money to "stuff" out there in the economy. If that ratio gets high (more money or less stuff) then the currency devalues. So with that in mind, there's two issues in play there that usually get ignored by a lot of armchair economists on cable news.
One is that not all spending is created equal. Government spending that promotes more productive capacity can actually not have much impact on inflation at all. In theory, if your returns on investment are good enough, it could even be deflationary (though I don't think that's ever happened in the history of the world, maybe if we invent replicators). So spending on programs that can increase economic output over the long-run, such as smart infrastructure investments or education, would probably be fine. But spending on programs that just increase consumption without associated increases in production (e.g. childcare or housing credits without a plan to expand availability of childcare or housing) will just make that stuff more expensive.
Two is that money doesn't directly translate to "stuff." You can allocate a hojillion dollars to primary education, for example, but if your agencies can't actually turn those congressional allocations into grants then the money just sits there doing nothing. You can also just eat up a bunch of that allocation on excess administration and also wind up with bupkis. These impacts are likely to be severely inflationary, because it really is just a dump of money with no additional productive capacity to show for it.
You're correct, and I agree. I had thought about qualifying that statement when I read it but decided not to in order to keep it simple. Focusing on the idea that we want to keep things roughly...
You're correct, and I agree. I had thought about qualifying that statement when I read it but decided not to in order to keep it simple. Focusing on the idea that we want to keep things roughly even between collecting taxes and creating new money.
I tend to agree with the MMT interpretation of money, but I am aware that there are other schools of thought that might end up being correct. In MMT, the total supply of money is viewed as water...
Exemplary
I tend to agree with the MMT interpretation of money, but I am aware that there are other schools of thought that might end up being correct. In MMT, the total supply of money is viewed as water filling up a sink with variable volume. The government's responsibility is to make sure there's always enough water for the economy to function but there's not too much water that the sink overflows. The sink overflowing would be akin to a hyperinflation crisis. The sink not having enough money in it can be viewed as a stagnant economy where no one wants to spend. Looking at it this way it makes perfect sense for the government to print more and more money as the economy grows in order to keep it running. If the government were to never have a deficit it would lead to our economy's growth stopping. At the other end, taxation is the mechanism the government should use when there is too much water, and there could be some scenarios where high taxation would be necessary to keep the economy stable.
Generally speaking that's close: I was mainly trying to make the point that Treasury bonds aren't "debt" in the way you and I recognize it, b/c (so far) the feds can always fulfill the promise to...
Generally speaking that's close: I was mainly trying to make the point that Treasury bonds aren't "debt" in the way you and I recognize it, b/c (so far) the feds can always fulfill the promise to pay by creating money. I should also point out that 3) is completely false -- there is no accounting trail b/t money that the Fed receives and money that it pays out. Again, it's a useful propaganda gimmick b/c that's how ordinary people understand payments/obligations, b/c that's how it works for us. For federal financing, money that the Fed collects is destroyed; money that the Fed pays out is created. There is no actual connection b/t the two at any step in the process.
Debt is a real thing. If the government literally prints money there will be massive inflation. If the government borrows money, you are only moving money from one pocket to another and there's...
Calling it "debt" is purely a propaganda term popularized by Reagan to con people into thinking there was a budget crisis requiring defunding of social services, and to make people forget that the federal government can and should literally "print" money
Debt is a real thing. If the government literally prints money there will be massive inflation. If the government borrows money, you are only moving money from one pocket to another and there's only inflation to the extent that government purchases place an upward pressure on prices. What the Fed did during the pandemic was not literally printing money (they made it easier for banks to lend more for a given amount of deposits and temporarily swapped their high-quality assets for cash, and this was eventually reigned in or reversed). This whole notion of how debt works that you're describing is modern monetary theory and literally no mainstream economist supports it, and trust me it's not one big cabal (economists vehemently debate each other). Please don't spread misinformation or at least don't present your opinions as facts.
If you use the framework from the Chicago School (and Hayek, Nozick, etc.) that dominates the paradigm than you're not wrong. But I don't think @pedantzilla is wrong nor spreading misinformation....
If you use the framework from the Chicago School (and Hayek, Nozick, etc.) that dominates the paradigm than you're not wrong. But I don't think @pedantzilla is wrong nor spreading misinformation. Over the years, a lot of work has been done that brings into question a lot of the assumptions that the framework of the dominant paradigm relies upon. I think the challenges to those assumptions are valid. Let's not forget that the current paradigm is really only 50(ish) years old. The study of economics existed before it, has undergone changes in the past, and will undergo changes in the future.
If the government literally prints money there will be inflation.
If I take the rule-of-thumb interpretation of inflation as "too much money chasing too few goods" this might not always be the case. The way I see it, if productivity increases in step with increases in money supply, you might not get inflation. And let's not forget that deflation has economic impacts as well. Depending on what the government spends it's money on with the cash generated from issuing bonds, you could get increased productivity. For me, it all comes down to the ability of our legislators to choose which projects will bring the greatest productivity returns. This should really be the guiding principle for good fiscal policy.
Mainstream economics is full of people outside of the Chicago school (most notably Keynesians which were behind the New Deal) and still nobody takes it seriously.
Mainstream economics is full of people outside of the Chicago school (most notably Keynesians which were behind the New Deal) and still nobody takes it seriously.
This is a massive oversimplification. So much so that it is often plain wrong. See Japan over the last 30 years who have had giant deficits but little to no inflation.
If the government literally prints money there will be massive inflation
This is a massive oversimplification. So much so that it is often plain wrong. See Japan over the last 30 years who have had giant deficits but little to no inflation.
Deficit spending is not money printing. The Japanese government, like virtually every other government, doesn't print money to fund its deficits. It issues bonds and people give money to the...
Deficit spending is not money printing. The Japanese government, like virtually every other government, doesn't print money to fund its deficits. It issues bonds and people give money to the government to buy the bonds.
(Emphasis added.) The article goes on to list a number of (not unexpected) figures who said the downgrade was "absurd", "bizarre and inept", "likely to be dismissed". and "a strange move". And yet...
Fitch, one of three major independent agencies that assess creditworthiness, cut the rating from the top level of AAA to a notch lower at AA+.
"The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance" relative to peers, said Fitch in a statement.
"In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025," the rating agency said.
(Emphasis added.)
The article goes on to list a number of (not unexpected) figures who said the downgrade was "absurd", "bizarre and inept", "likely to be dismissed". and "a strange move". And yet...
Another credit rating agency, Standard & Poor's, has already reduced the US's rating from the top AAA status to AA+ following a similar row over the debt ceiling in 2011.
I also found it a bit dismissive of the repercussions when reading this article. While I’m all for avoiding a run on the market, and my stocks doing well, I also don’t want to downplay the...
I also found it a bit dismissive of the repercussions when reading this article. While I’m all for avoiding a run on the market, and my stocks doing well, I also don’t want to downplay the ridiculous behavior of Congress with our nation’s fiscal health. It is embarrassing and certainly doesn’t reflect the best credit rating.
Okay, does this mean literally anything for the US though, at the end of the day? Considering the entire planet operates on the usd, is there going to be even a hint of a difference?
Okay, does this mean literally anything for the US though, at the end of the day?
Considering the entire planet operates on the usd, is there going to be even a hint of a difference?
That's why it's such a big deal and why the markets reacted today. Banks and financial institutions hold large amounts of US treasuries because they're considered the safest asset in the world....
Considering the entire planet operates on the usd
That's why it's such a big deal and why the markets reacted today. Banks and financial institutions hold large amounts of US treasuries because they're considered the safest asset out there in the world. They park their money there if they don't want to do anything else with it and use US Treasuries to trade overnight if they're short on cash. Foreign banks and foreign central banks deal in US treasuries as well if they're temporarily short on cash.
When the ratings agencies downgrade the US, you basically lose value on the treasuries because they're no longer as safe. This has huge impacts on the balance sheets of pretty much every bank out there.
Liquidity throughout the world just dried up a little. This means the capacity of banks to pay liabilities has decreased. Their capacity to lend has decreased. This could have huge ramifications for the global economy as a whole (and a potential stressor for triggering that recession we thought we avoided). No doubt, it would be worse if the US actually ever defaulted. And sure, we've been downgraded before. But this is still bad...
All because Congress wants to play games with the Federal budget.
What kind of repercussions did we see globally (financially or otherwise I guess) after the previous downgrade a decade ago or whenever it was? Why does the liquidity dry up simply because the USA...
What kind of repercussions did we see globally (financially or otherwise I guess) after the previous downgrade a decade ago or whenever it was?
Why does the liquidity dry up simply because the USA got a downgrade? How does the downgrade cost value?
So I'd tackle your questions with two approaches: 1.) in theory, 2.) in practice. It's worth mentioning that these two don't always line up. In Theory When the ratings agencies downgrade someone,...
So I'd tackle your questions with two approaches: 1.) in theory, 2.) in practice. It's worth mentioning that these two don't always line up.
In Theory
When the ratings agencies downgrade someone, they're basically saying that they trust them less to be able to make payments on their debt. Think of it as a FICO score going down for a consumer. Because of this, US Treasury Bonds would be worth less. Enter Repo markets...
The "Repo" (repurchase) Market is a key source of liquidity. It's a market where participants (usually banks and financial institutions) will trade US Treasuries at very short term durations (mostly overnight) in exchange for cash. Say a bank is short $50mil in cash one day that it needs to pay depositors, but it knows it has $100mil in cash coming the next day. In this instance, they can trade $50mil worth of US Treasuries that they have in exchange for $50mil cash; the next day, they'll pay back the $50mil plus the going interest rate, and get their US Treasuries back. US Treasuries are used in this market because they are traditionally the safest, with lots of volume, and lots of stability in price; for these reasons you can most always find someone to buy them and they're considered highly liquid.
If the US gets downgraded, now we're saying those Treasuries are worth less because it's less of a certainty that the US will pay back on their debt. That $50mil in US treasuries that the bank had and needed for cash, is now worth less than $50mil. This is why, in theory, systemically the market would become less liquid.
In Practice
On Wednesday, US Treasury yields did go up (i.e. became less valuable). But on Wednesday, you also had the US Treasury Dept announce that they'd sell/issue more Treasuries, which would also (in theory) impact (i.e. decrease) the value of US Treasuries because of an increase in supply. You also had the jobs data release which suggested unemployment may begin ticking up slightly.
In 2011 when S&P downgraded their US credit rating, yields did tick up briefly. But there was a lot going on then. It's difficult to attribute market reactions and price change to any singular event. It's really just a confluence of events that makes the impact.
For what it's worth, US Treasuries are still the dominant, safest, and most liquid asset out there. But this downgrade does erode that a little bit. And just like it's hard to attribute market reactions to any singular event, it's hard to know the impact of any singular event. There's a potential (even if small) that this could manifest and contribute to some pretty severe consequences. When approaching this from a risk management perspective, it's better to be safe than sorry.
Messing around and playing games with US credit isn't cool. And the fact that the US Congress is seemingly cavalier about the whole thing shows that they don't really understand what the potential consequences of their actions could be.
Being as how we have recurring debt ceiling crises and sincere worries that we might simply default on our debts even though we're perfectly capable of servicing them, what ought to be surprising is that it took this long.
The Republican party's debt ceiling hijinks have been wholly corrosive to politics as well as the actual effectiveness of the federal government agencies. The fact that it's become a regular feature of our politics with nary a word of condemnation anymore is insane.
Worth adding to this that this "debt ceiling" nonsense is completely fabricated. For one, the federal government doesn't have "debt" in the way that you and I understand it - that's literally not how federal financing works. Treasury bonds are just a mechanism by which the government puts cash into the economy. Calling it "debt" is purely a propaganda term popularized by Reagan to con people into thinking there was a budget crisis requiring defunding of social services, and to make people forget that the federal government can and should literally "print" money (although the "printing" is all done by keyboard these days) to pay for its financial obligations. For two, the "ceiling" on this artificial finance propaganda is completely arbitrary and meaningless except as a propaganda wedge. Unfortunately, propaganda works.
Can you elaborate a bit on this? The way I understand it:
1.) the Dept. of Treasury issues the US Treasury Bonds
2.) investors purchase the bonds (usually at discount from the par value) which would take cash out of the economy
3.) the cash received by Treasury from the investors goes on to pay for government expenses that tax revenue may not cover
4.) Treasury repays the bond to the investors at par value (injecting the initial cash back into the economy plus the earned interest)
Is this the process you're referring to? I think the neo-liberal response is that: 1.) Treasury having the money to payback the investors isn't a guarantee if we run a deficit without issuing more bonds, and 2.) Using this process keeps kicking the can down the road. Ultimately I agree with your two points. The "ceiling" is 100% arbitrary and a self-imposed legal constraint as our lenders (i.e. the investors from above) aren't holding us to it. And the process outlined above (to which I think you're referring) doesn't really matter if it leads to increasing debt and "kicking-the-can-down-the-road" because, as any good Keynesian will tell you, in the long run we're all dead...
Anyways, no disagreements on my end. Just wanted to ask your thoughts on it for some clarification on what you're saying.
It's referring to the idea that government "debt" isn't real, it's just a phrase/analogy that was made up to be relatable to citizens.
The government can make money. They could make enough money to pay off all "debt" tomorrow if they wanted. It just wouldn't be good for the economy. So what's good for the economy is the real question, and it's more complex. Hiding that complexity behind the concept of debt is reductive, but useful for political shenanigans.
Say the government wants to build a bridge that costs $1M. They have three ways to get that money.
1 is ideal, but overly simple. 2 is not good, 3 is just a strategy to help you do 1 or 2.
So in practice what the government wants to do is print money for the bridge, but then also collect taxes in equal proportion. But rather than simply having more money in the system from when it's printed, the government takes money out of the system (literally burning it) from when they collect taxes. This way they don't need to wait for taxes to come in before they can build a bridge. But they also don't create inflation.
Then they can use bonds as a strategy to smooth over the process. Because they can print money and/or collect taxes over the period that it takes the bond to mature.
Nowhere in that process is there debt in the sense that you or I might have debt. Because you and I can't just get more money instantly.
The big caveat is that this only applies if your debts are denominated in the same currency you spend in (which the US dollar is). This is not necessarily the case for many other countries.
Yes this is absolutely true - we're only talking about the U.S. here, which issues its own currency (there's a specific term for this that I'm blanking on at the moment).
A sovereign financial system?
Yes that's it - monetary sovereignty. Thank you.
Right. So it's really just a liquidity issue when framed this way.
This is where I see the sticking point with this whole debate. If the US continually runs a deficit, than 1 isn't an option and it's forced into either 2 or 3(i.e. second order 3 to pay back first order 3). This is the point that needs to be addressed.
What frustrates me most with this whole debate is that tax revenue doesn't get enough attention. If we gave the IRS the resources to better collect taxes, we wouldn't even need to touch tax rates and we'd generate more revenue to decrease the deficit/potentially even run a surplus. Of course, the IRS is an easy target to attack since tax payers don't like the tax-man; so defunding them is easy to do politically....
There are some really simple solutions to solve this problem, but the political will to meaningfully do it isn't there. The legislators seemingly don't have the gumption to do something that would be good for their constituents even though they may not like it. The ratings agencies are absolutely right in downgrading the US.
Except that's not a sticking point at all, it's just propagandized to be. The federal government doesn't have to "find" money anywhere -- it literally creates it out of thin air when it needs it. That's actually one of the Constitutional jobs of the federal government, specifically Congress.
It's silly to set having no deficit or a surplus as the goal of our monetary policy. If we ran a surplus then the government would just be taking money out of the economy for no reason and most likely stiffling economic growth. Our monetary policy's goal should be to give our economy the most money it can handle while avoiding inflation. Under a growing economy this inevitably means the government will be at a deficit. And under a shrinking economy higher taxes to take money out of the total supply should lead to a surplus.
Very good points. I think I brought up deficit/surplus because the loudest voices in the debate seem to be concerned about deficit/surplus considerations - to which I'm trying to point out solutions around those considerations.
But you're right in that really we should be shifting the frame of the debate to point out that this shouldn't be a concern.
I don't think there's a consensus on whether just printing the money is good or not. In fact, if it doesn't lead to inflation there's no reason it wouldn't be good. And there are certain underutilized (not running at capacity) sectors of the economy where a giant government money dump probably wouldn't cause inflation.
It depends on what that money is turning into. The fundamental rule is that there is a ratio of denominated money to "stuff" out there in the economy. If that ratio gets high (more money or less stuff) then the currency devalues. So with that in mind, there's two issues in play there that usually get ignored by a lot of armchair economists on cable news.
One is that not all spending is created equal. Government spending that promotes more productive capacity can actually not have much impact on inflation at all. In theory, if your returns on investment are good enough, it could even be deflationary (though I don't think that's ever happened in the history of the world, maybe if we invent replicators). So spending on programs that can increase economic output over the long-run, such as smart infrastructure investments or education, would probably be fine. But spending on programs that just increase consumption without associated increases in production (e.g. childcare or housing credits without a plan to expand availability of childcare or housing) will just make that stuff more expensive.
Two is that money doesn't directly translate to "stuff." You can allocate a hojillion dollars to primary education, for example, but if your agencies can't actually turn those congressional allocations into grants then the money just sits there doing nothing. You can also just eat up a bunch of that allocation on excess administration and also wind up with bupkis. These impacts are likely to be severely inflationary, because it really is just a dump of money with no additional productive capacity to show for it.
You're correct, and I agree. I had thought about qualifying that statement when I read it but decided not to in order to keep it simple. Focusing on the idea that we want to keep things roughly even between collecting taxes and creating new money.
I tend to agree with the MMT interpretation of money, but I am aware that there are other schools of thought that might end up being correct. In MMT, the total supply of money is viewed as water filling up a sink with variable volume. The government's responsibility is to make sure there's always enough water for the economy to function but there's not too much water that the sink overflows. The sink overflowing would be akin to a hyperinflation crisis. The sink not having enough money in it can be viewed as a stagnant economy where no one wants to spend. Looking at it this way it makes perfect sense for the government to print more and more money as the economy grows in order to keep it running. If the government were to never have a deficit it would lead to our economy's growth stopping. At the other end, taxation is the mechanism the government should use when there is too much water, and there could be some scenarios where high taxation would be necessary to keep the economy stable.
Generally speaking that's close: I was mainly trying to make the point that Treasury bonds aren't "debt" in the way you and I recognize it, b/c (so far) the feds can always fulfill the promise to pay by creating money. I should also point out that 3) is completely false -- there is no accounting trail b/t money that the Fed receives and money that it pays out. Again, it's a useful propaganda gimmick b/c that's how ordinary people understand payments/obligations, b/c that's how it works for us. For federal financing, money that the Fed collects is destroyed; money that the Fed pays out is created. There is no actual connection b/t the two at any step in the process.
Debt is a real thing. If the government literally prints money there will be massive inflation. If the government borrows money, you are only moving money from one pocket to another and there's only inflation to the extent that government purchases place an upward pressure on prices. What the Fed did during the pandemic was not literally printing money (they made it easier for banks to lend more for a given amount of deposits and temporarily swapped their high-quality assets for cash, and this was eventually reigned in or reversed). This whole notion of how debt works that you're describing is modern monetary theory and literally no mainstream economist supports it, and trust me it's not one big cabal (economists vehemently debate each other). Please don't spread misinformation or at least don't present your opinions as facts.
If you use the framework from the Chicago School (and Hayek, Nozick, etc.) that dominates the paradigm than you're not wrong. But I don't think @pedantzilla is wrong nor spreading misinformation. Over the years, a lot of work has been done that brings into question a lot of the assumptions that the framework of the dominant paradigm relies upon. I think the challenges to those assumptions are valid. Let's not forget that the current paradigm is really only 50(ish) years old. The study of economics existed before it, has undergone changes in the past, and will undergo changes in the future.
If I take the rule-of-thumb interpretation of inflation as "too much money chasing too few goods" this might not always be the case. The way I see it, if productivity increases in step with increases in money supply, you might not get inflation. And let's not forget that deflation has economic impacts as well. Depending on what the government spends it's money on with the cash generated from issuing bonds, you could get increased productivity. For me, it all comes down to the ability of our legislators to choose which projects will bring the greatest productivity returns. This should really be the guiding principle for good fiscal policy.
Mainstream economics is full of people outside of the Chicago school (most notably Keynesians which were behind the New Deal) and still nobody takes it seriously.
What’s your animal spirit? ;-)
This is a massive oversimplification. So much so that it is often plain wrong. See Japan over the last 30 years who have had giant deficits but little to no inflation.
Deficit spending is not money printing. The Japanese government, like virtually every other government, doesn't print money to fund its deficits. It issues bonds and people give money to the government to buy the bonds.
(Emphasis added.)
The article goes on to list a number of (not unexpected) figures who said the downgrade was "absurd", "bizarre and inept", "likely to be dismissed". and "a strange move". And yet...
Interesting that Moody's and S&P both upgraded their outlook last month but Fitch downgraded the rating. I have no idea if that's normal or not.
I also found it a bit dismissive of the repercussions when reading this article. While I’m all for avoiding a run on the market, and my stocks doing well, I also don’t want to downplay the ridiculous behavior of Congress with our nation’s fiscal health. It is embarrassing and certainly doesn’t reflect the best credit rating.
Okay, does this mean literally anything for the US though, at the end of the day?
Considering the entire planet operates on the usd, is there going to be even a hint of a difference?
That's why it's such a big deal and why the markets reacted today. Banks and financial institutions hold large amounts of US treasuries because they're considered the safest asset
out therein the world. They park their money there if they don't want to do anything else with it and use US Treasuries to trade overnight if they're short on cash. Foreign banks and foreign central banks deal in US treasuries as well if they're temporarily short on cash.When the ratings agencies downgrade the US, you basically lose value on the treasuries because they're no longer as safe. This has huge impacts on the balance sheets of pretty much every bank out there.
Liquidity throughout the world just dried up a little. This means the capacity of banks to pay liabilities has decreased. Their capacity to lend has decreased. This could have huge ramifications for the global economy as a whole (and a potential stressor for triggering that recession we thought we avoided). No doubt, it would be worse if the US actually ever defaulted. And sure, we've been downgraded before. But this is still bad...
All because Congress wants to play games with the Federal budget.
What kind of repercussions did we see globally (financially or otherwise I guess) after the previous downgrade a decade ago or whenever it was?
Why does the liquidity dry up simply because the USA got a downgrade? How does the downgrade cost value?
So I'd tackle your questions with two approaches: 1.) in theory, 2.) in practice. It's worth mentioning that these two don't always line up.
In Theory
When the ratings agencies downgrade someone, they're basically saying that they trust them less to be able to make payments on their debt. Think of it as a FICO score going down for a consumer. Because of this, US Treasury Bonds would be worth less. Enter Repo markets...
The "Repo" (repurchase) Market is a key source of liquidity. It's a market where participants (usually banks and financial institutions) will trade US Treasuries at very short term durations (mostly overnight) in exchange for cash. Say a bank is short $50mil in cash one day that it needs to pay depositors, but it knows it has $100mil in cash coming the next day. In this instance, they can trade $50mil worth of US Treasuries that they have in exchange for $50mil cash; the next day, they'll pay back the $50mil plus the going interest rate, and get their US Treasuries back. US Treasuries are used in this market because they are traditionally the safest, with lots of volume, and lots of stability in price; for these reasons you can most always find someone to buy them and they're considered highly liquid.
If the US gets downgraded, now we're saying those Treasuries are worth less because it's less of a certainty that the US will pay back on their debt. That $50mil in US treasuries that the bank had and needed for cash, is now worth less than $50mil. This is why, in theory, systemically the market would become less liquid.
In Practice
On Wednesday, US Treasury yields did go up (i.e. became less valuable). But on Wednesday, you also had the US Treasury Dept announce that they'd sell/issue more Treasuries, which would also (in theory) impact (i.e. decrease) the value of US Treasuries because of an increase in supply. You also had the jobs data release which suggested unemployment may begin ticking up slightly.
In 2011 when S&P downgraded their US credit rating, yields did tick up briefly. But there was a lot going on then. It's difficult to attribute market reactions and price change to any singular event. It's really just a confluence of events that makes the impact.
For what it's worth, US Treasuries are still the dominant, safest, and most liquid asset out there. But this downgrade does erode that a little bit. And just like it's hard to attribute market reactions to any singular event, it's hard to know the impact of any singular event. There's a potential (even if small) that this could manifest and contribute to some pretty severe consequences. When approaching this from a risk management perspective, it's better to be safe than sorry.
Messing around and playing games with US credit isn't cool. And the fact that the US Congress is seemingly cavalier about the whole thing shows that they don't really understand what the potential consequences of their actions could be.