Commentary on Commentary on Debtordammerung
There are several items going around during this debt crisis which I hear often, and upon which I would like to comment.
First, and I paraphrase: "there is no Social Security crisis, the trust fund is good until 20[25|40|etc]." The trust fund is a lie. There are not mountains of money store anywhere, not even electronically.
Yes, on the books, Social Security has billions stashed away to handle the shortfalls which have already begun (earlier than expected) in tax payments for the programme. But none of that money is actually there, because it was borrowed by the Treasury and spent in the general fund. Social Security's excess income has all been spent. All of it.
If I borrow $30,000 from my friend Geri, and then spend it - along with all my other money - on hookers and blow, does Geri still have $30,000? No. Is it likely Geri's going to get the 30,000? Not unless I get a job. Geri has possession of a debt obligation from me saying I owe her $30,000, but that does not make the money actually appear. The US Federal Government can get that money - but it's going to have to raise revenue or cut some other spending to do it.
That's exactly the state of the Social Security Trust Fund. It's empty. Like everything else, it's been part of the looting process I've been talking about for the last several years.
Second, and again I paraphrase, "The banks are sitting on trillions of dollars in taxpayer loans and they won't lend them out!" Mostly, it is asserted, because they're being greedy mean in one form or another. This is true - they are greedy, and the system is corrupt - but not in the way generally discussed.
They do have trillions in dollars, siphoned to them through AIG and various swap vehicles, courtesy of the Fed, and that vampire squid on the face of humanity, Goldman Sachs. This is to mask the valuelessness of those banks, and the zero- to near-zero-value of those CDOs and MBSes and all those other instruments of the last bubble. If they start handing out and loaning out that money at scale, they have to admit they're broke. You remember that boat anchor I keep talking about (see Part IV)? This is that boat anchor. This is the back hole sucking up liquidity and life from the economy.
Third, and another paraphrase, "Debt is good! We don't have a debt problem. We can spend our way out of this - the only problem with the stimulus is that it wasn't big enough!" I want to say first that if you are in the right environment, all these things are true. This would've been certainly true in the 70s and 80s, and maybe the 90s.
But circumstances do not remain static. This has been the failure of the Keyesnians here: Keyesnian spending works when you build credit/pay of debt in better times, which hasn't entirely been happening. At least as importantly, it also requires that the amount you're going to deficit-spend be at least adequate to cover the debt overhang you're trying to patch, and it hasn't been close to that. (Krugman is exactly right here.) But in this case, the stimulus can't fill in that overhang, because it can't be without destroying the currency. The debt overhang, in part thanks to all the looting, is far too large; what you'd actually trigger is a devaluation of the US dollar in rather more abrupt terms, and that triggers the interest rate "death spiral" I discussed in Part IV.
(See also Charles Hughes Smith at Zero Hedge talking about this refusal to acknowledge changes in underlying economic forces, most notably, the institution of "too big to fail," and the resultant behavioural changes.)
It also requires that your borrowing costs be covered by the resultant economic output. That's not happening in no small part because of the debt overhang. Even if you spend it directly on more productive stuff (infrastructure, research science, etc), money is still fungible, and anything excess goes to the financial system and the overhang. The financialisation of the economy has introduced tremendous inefficiencies atop everything else.As a long aside - that's why all this is blockquoted - debt having to pay for itself is true for any debt. If you take out a $10,000 loan to start a small business, and the total interest cost of the loan over its life is $2,000, you need to make $10,000 + $2,000 = $12,000 from the business over the life of the loan, just to break even yourself.
Let's say you don't do that. Let's say you only make $10,000, and you pay the lender. The lender hasn't actually lost anything1 (other than opportunity cost, about which I can rant extensively), but hasn't made anything either. You haven't made anything. The economic return on debt is 1:1 - $10,000 out, from $10,000 put in. More debt wasn't really bad. It wasn't good for anyone, but it wasn't awful.
Let's say you do a little better, and make $12,000 instead. In that case, the lender gets their money back with a profit. You've lost some time, but assuming you had someone else covering your living expenses or had other income for that, you haven't lost anything either. The economic return on debt is 1.2:1. $12, 000 out, from $10,000 put in. That's definitely better. More debt wasn't great, but it wasn't too bad - more economic activity was generated than cost, just not very much more.
Let's say you do a lot better! If you make $50,000, you've profited by $38,000! ($50,000 - 12,000 = $38,000.) The lender makes a profit; you make a profit; everyone is happy! And the economic balance is $50,000 out on $10,000 put in; economic return on investment is 5:1! That's really great! Lots of economic activity was returned vs. cost!
But if you only make $5,000 - now there's a problem. $10,000 went in, and only half of it came back. You lost half the money. That's $5,000 out on $10,000 in, an economic return on debt of 1:2, or less than one. The additional debt resulted in a net reduction of economic activity.
The additional US debt that has been taken on thus far has produced much less little additional economic activity than new debt. Calculations I've seen indicate that the return on the new Federal borrowing is barely breakeven, if that (1:1). (Some estimates say it's worse, at 0.8. The best easily-accessible analogue to calculation, the M1 Money Multiplier, has crashed to 0.73ish, the lowest point since records are on file. That's bad, but I don't know how it correlates to the real figure since I haven't got access to the more recent complete figures I saw before. Stupid paywalls.) If interest rates rise, then we will also have to pay off that debt, which means we'll have to subtract that interest back out - and you'll go below 1.0.
When this happens, it means that more debt means lower economic production, not higher. It boosts the GDP briefly because of the immediate expenditures - go back and read Part II and look at how GDP is calculated - but it actually reduces net economic output.
This is a credit death spiral and it is intensely deflationary.
So please, remember, spend-your-way-out is situationally dependant. The growth rates advocates say are required to "grow out of" the debt required to kick over this debt overhang have never been achieved in modern history, at least not over the amount of time required. (10 years of 8% real growth? That's one figure I read from one Keyesnian advocate, and I'm sorry, but no. Because no.)
Fourth, "We give BILLIONS in FOREIGN AID!! Why the hell are we doing that when there are [X] NEEDS HERE" and also, "WHY are we talking about DEBT when the WORLD owes us SO MUCH MONEY from FOREIGN AID!" The capslock is typically part of the complaint. (I see this on Facebook a lot, along with "bet you won't dare to repost this!!" addendum. Well, you're right, I won't, because it's stupid and wrong.)
The United States has not been a net creditor nation since Ronald Reagan, running massive trade deficits for decades. It has mostly also run massive current accounts deficits since Mr. Reagan as well. The United States is not a net creditor. It is a massive debtor nation.
Does the US spend "billions" in foreign aid? Technically, yes. But the implication is that it's a substantial part of the budget. It's not. In 2008, which is the latest you get in the 2011 census report, there was US$33.6 billion in non-military foreign aid, of which US5.1B went to Iraq and Afghanistan. It's about 0.6% of the US Federal budget. Add in military foreign aid (which I argue is generally not aid) and you get up to around 1%. Take back out Iraq and Afghanistan - where most economic aid is pretty military in nature - and you're looking at about half a percent of the total US budget.
You're not balancing the budget on that.
Fifth, and yet another paraphrase, "Half of Americans pay no taxes!" implying that they're all, I don't know, bums of one sort or another, or that tax burdens on "the wealthy" are too low. Okay, first, that's just wrong. 46% of taxable units do not pay income tax, which is a very different statement. Everybody's paying sales tax, for example.
Of those "taxable units" (mostly households) which don't pay income tax, half of those are because they don't make enough income to qualify; no income means no income tax. Gosh, really? What's that say about tax rates? Not much. It says a lot more about incomes, not much of which is good.
That leaves 23% who are making some money. Most of those households are earning between $20,000 and $30,000/year. 23% breaks down to 10% who are elderly and income-sheltered, 7% who have enough deductions and tax credits that they wipe out their income tax, and 6% who are getting tax credits for children and/or are working poor. (sources)
Good luck balancing the budget by taxing people with no money. That doesn't work either.
That's all for now. Good luck.
1: I am ignoring actual costs of loan processing and such here; I'm oversimplifying to communicate an important idea. Please bear with me, those of you who know better.
First, and I paraphrase: "there is no Social Security crisis, the trust fund is good until 20[25|40|etc]." The trust fund is a lie. There are not mountains of money store anywhere, not even electronically.
Yes, on the books, Social Security has billions stashed away to handle the shortfalls which have already begun (earlier than expected) in tax payments for the programme. But none of that money is actually there, because it was borrowed by the Treasury and spent in the general fund. Social Security's excess income has all been spent. All of it.
If I borrow $30,000 from my friend Geri, and then spend it - along with all my other money - on hookers and blow, does Geri still have $30,000? No. Is it likely Geri's going to get the 30,000? Not unless I get a job. Geri has possession of a debt obligation from me saying I owe her $30,000, but that does not make the money actually appear. The US Federal Government can get that money - but it's going to have to raise revenue or cut some other spending to do it.
That's exactly the state of the Social Security Trust Fund. It's empty. Like everything else, it's been part of the looting process I've been talking about for the last several years.
Second, and again I paraphrase, "The banks are sitting on trillions of dollars in taxpayer loans and they won't lend them out!" Mostly, it is asserted, because they're being greedy mean in one form or another. This is true - they are greedy, and the system is corrupt - but not in the way generally discussed.
They do have trillions in dollars, siphoned to them through AIG and various swap vehicles, courtesy of the Fed, and that vampire squid on the face of humanity, Goldman Sachs. This is to mask the valuelessness of those banks, and the zero- to near-zero-value of those CDOs and MBSes and all those other instruments of the last bubble. If they start handing out and loaning out that money at scale, they have to admit they're broke. You remember that boat anchor I keep talking about (see Part IV)? This is that boat anchor. This is the back hole sucking up liquidity and life from the economy.
Third, and another paraphrase, "Debt is good! We don't have a debt problem. We can spend our way out of this - the only problem with the stimulus is that it wasn't big enough!" I want to say first that if you are in the right environment, all these things are true. This would've been certainly true in the 70s and 80s, and maybe the 90s.
But circumstances do not remain static. This has been the failure of the Keyesnians here: Keyesnian spending works when you build credit/pay of debt in better times, which hasn't entirely been happening. At least as importantly, it also requires that the amount you're going to deficit-spend be at least adequate to cover the debt overhang you're trying to patch, and it hasn't been close to that. (Krugman is exactly right here.) But in this case, the stimulus can't fill in that overhang, because it can't be without destroying the currency. The debt overhang, in part thanks to all the looting, is far too large; what you'd actually trigger is a devaluation of the US dollar in rather more abrupt terms, and that triggers the interest rate "death spiral" I discussed in Part IV.
(See also Charles Hughes Smith at Zero Hedge talking about this refusal to acknowledge changes in underlying economic forces, most notably, the institution of "too big to fail," and the resultant behavioural changes.)
It also requires that your borrowing costs be covered by the resultant economic output. That's not happening in no small part because of the debt overhang. Even if you spend it directly on more productive stuff (infrastructure, research science, etc), money is still fungible, and anything excess goes to the financial system and the overhang. The financialisation of the economy has introduced tremendous inefficiencies atop everything else.As a long aside - that's why all this is blockquoted - debt having to pay for itself is true for any debt. If you take out a $10,000 loan to start a small business, and the total interest cost of the loan over its life is $2,000, you need to make $10,000 + $2,000 = $12,000 from the business over the life of the loan, just to break even yourself.
Let's say you don't do that. Let's say you only make $10,000, and you pay the lender. The lender hasn't actually lost anything1 (other than opportunity cost, about which I can rant extensively), but hasn't made anything either. You haven't made anything. The economic return on debt is 1:1 - $10,000 out, from $10,000 put in. More debt wasn't really bad. It wasn't good for anyone, but it wasn't awful.
Let's say you do a little better, and make $12,000 instead. In that case, the lender gets their money back with a profit. You've lost some time, but assuming you had someone else covering your living expenses or had other income for that, you haven't lost anything either. The economic return on debt is 1.2:1. $12, 000 out, from $10,000 put in. That's definitely better. More debt wasn't great, but it wasn't too bad - more economic activity was generated than cost, just not very much more.
Let's say you do a lot better! If you make $50,000, you've profited by $38,000! ($50,000 - 12,000 = $38,000.) The lender makes a profit; you make a profit; everyone is happy! And the economic balance is $50,000 out on $10,000 put in; economic return on investment is 5:1! That's really great! Lots of economic activity was returned vs. cost!
But if you only make $5,000 - now there's a problem. $10,000 went in, and only half of it came back. You lost half the money. That's $5,000 out on $10,000 in, an economic return on debt of 1:2, or less than one. The additional debt resulted in a net reduction of economic activity.
The additional US debt that has been taken on thus far has produced much less little additional economic activity than new debt. Calculations I've seen indicate that the return on the new Federal borrowing is barely breakeven, if that (1:1). (Some estimates say it's worse, at 0.8. The best easily-accessible analogue to calculation, the M1 Money Multiplier, has crashed to 0.73ish, the lowest point since records are on file. That's bad, but I don't know how it correlates to the real figure since I haven't got access to the more recent complete figures I saw before. Stupid paywalls.) If interest rates rise, then we will also have to pay off that debt, which means we'll have to subtract that interest back out - and you'll go below 1.0.
When this happens, it means that more debt means lower economic production, not higher. It boosts the GDP briefly because of the immediate expenditures - go back and read Part II and look at how GDP is calculated - but it actually reduces net economic output.
This is a credit death spiral and it is intensely deflationary.
So please, remember, spend-your-way-out is situationally dependant. The growth rates advocates say are required to "grow out of" the debt required to kick over this debt overhang have never been achieved in modern history, at least not over the amount of time required. (10 years of 8% real growth? That's one figure I read from one Keyesnian advocate, and I'm sorry, but no. Because no.)
Fourth, "We give BILLIONS in FOREIGN AID!! Why the hell are we doing that when there are [X] NEEDS HERE" and also, "WHY are we talking about DEBT when the WORLD owes us SO MUCH MONEY from FOREIGN AID!" The capslock is typically part of the complaint. (I see this on Facebook a lot, along with "bet you won't dare to repost this!!" addendum. Well, you're right, I won't, because it's stupid and wrong.)
The United States has not been a net creditor nation since Ronald Reagan, running massive trade deficits for decades. It has mostly also run massive current accounts deficits since Mr. Reagan as well. The United States is not a net creditor. It is a massive debtor nation.
Does the US spend "billions" in foreign aid? Technically, yes. But the implication is that it's a substantial part of the budget. It's not. In 2008, which is the latest you get in the 2011 census report, there was US$33.6 billion in non-military foreign aid, of which US5.1B went to Iraq and Afghanistan. It's about 0.6% of the US Federal budget. Add in military foreign aid (which I argue is generally not aid) and you get up to around 1%. Take back out Iraq and Afghanistan - where most economic aid is pretty military in nature - and you're looking at about half a percent of the total US budget.
You're not balancing the budget on that.
Fifth, and yet another paraphrase, "Half of Americans pay no taxes!" implying that they're all, I don't know, bums of one sort or another, or that tax burdens on "the wealthy" are too low. Okay, first, that's just wrong. 46% of taxable units do not pay income tax, which is a very different statement. Everybody's paying sales tax, for example.
Of those "taxable units" (mostly households) which don't pay income tax, half of those are because they don't make enough income to qualify; no income means no income tax. Gosh, really? What's that say about tax rates? Not much. It says a lot more about incomes, not much of which is good.
That leaves 23% who are making some money. Most of those households are earning between $20,000 and $30,000/year. 23% breaks down to 10% who are elderly and income-sheltered, 7% who have enough deductions and tax credits that they wipe out their income tax, and 6% who are getting tax credits for children and/or are working poor. (sources)
Good luck balancing the budget by taxing people with no money. That doesn't work either.
That's all for now. Good luck.
1: I am ignoring actual costs of loan processing and such here; I'm oversimplifying to communicate an important idea. Please bear with me, those of you who know better.