I O Who?

Okay Ratty, I know you will probably make fun of me for this, but with our government spending 2 trillion today, when we are already hopelessly “in debt”,

I have been trying to figger out: in debt to whom? Who is our lender?

And what  I’ve gleaned so far is, mos’ly : the American public.    So, um, I know I must be missing sump’n, but:  if you spend your own money earlier than you expected-yeah, so what?  What is all this crap about “our children and grandchilden”?  Let ‘em get their own $$$$.  I mean why not?  Seriously, wealth is always something created, not consumed.

Then, there are also foreign holders of our debt.  In this order: China( 😱) Japan, Brazil (😳) , the U.K.

So could they,like, repossess our country?

What, exactly, COULD  they do?

5+
avataravataravataravataravatar

37 thoughts on “I O Who?”

  1. I’ve been thinking about this ever since the proposal for this US$ 2 trillion “stimulus”: I wrote a comment last Wednesday asking, “Who is going to loan the U.S. two trillion dollars to be spent on current consumption, and what interest rate will they demand for that loan?”  Then, and now, my reply is “beats me”.

    This “stimulus”, as I said in the question, consists of borrowing a sum of money which is on the order of 10% of the entire public debt and, coincidentally (or maybe not—it’s an indication the U.S. is “borrowed up” to the danger zone) 10% of the GDP of the entire U.S. economy.  Most of this money will be immediately spent: indeed, that’s the (flawed  and discredited) idea behind “stimulus”—that spending will create a multiplier effect through the economy and help reverse the economic slow-down.

    But that doesn’t work when an entire economy is borrowed up the nostrils.  What happens, instead, is that the “stimulus” money is used to service existing debt and keep the borrowers from being foreclosed upon and bankrupted.  So what happens in that Uncle Sam borrows money for which the taxpayers are on the hook, spews it out to borrowers in the private sector, who use it to pay off their creditors in the private sector, with the net result when all of this shuffling of money is done, that the debt obligation has just been shifted from the borrowers who ran it up to the taxpayers.  Where’s the “stimulus” in that?

    How is this financial legerdemain going to generate revenue to service or retire this new debt?  Beats me.  So this just piles onto the existing debt which is already near the breaking point.  There is a financial derivative instrument called a “Credit Default Swap” (CDS), which can be thought of as insurance against a borrower defaulting on an obligation or, equivalently, a bet that a bond will not pay off.  The price of a CDS on a bond is a measure, based on the real market of people betting real money, not the fantasies of credit rating agencies, that the issuer of a bond is going to go bust and stiff the lenders, in whole or in part.

    Normally, sovereign governments who issue bonds in currencies they can print have negligibly small CDS premiums since, in extremis, they can always just print money to pay off the creditors.  (This will almost always result in the creditors getting back money that’s worth less than they paid for the bond due to inflation, but a CDS doesn’t protect against that—there are other ways to hedge against inflation.)  Here is a chart of the premium on 5 year Credit Default Swaps on U.S. Treasury debt for one year through today.

    US Credit Default Swap 5Y through 2020-03-27

    Look at what happened in March!  The price of insuring against the U.S. defaulting on its Treasury debt has increased by almost 50% in the last couple of weeks.  Now, premiums this high are not unprecedented: if you look the chart from 2017 (which you can do by clicking the chart and using the tabs on the page that opens), you’ll see that back in 2017, during budget battles and shutdown threats, we’ve seen levels like this before.  But clearly, investors have perceived a change in what’s going on since the start of March and are willing to pay to insure against the unthinkable.

    7+
    avataravataravataravataravataravataravatar
  2. Hypatia:
    Who is our lender? And what I’ve gleaned so far is, mos’ly : the American public. So, um, I know I must be missing sump’n, but: if you spend your own money earlier than you expected-yeah, so what? What is all this crap about “our children and grandchilden”? Let ‘em get their own $$$$. I mean why not? Seriously, wealth is always something created, not consumed.

    So there’s a flaw in that, which is that we ourselves should probably get our own money, too, right?  Let’s not borrow from our kids, but pay for what we spend, right?  Let’s say that “we” means everybody alive right now, and “them” means everybody alive twenty-five years from now.  There’s a lot of overlap, but if in twenty-five years I get charged again for what we’ve spent in the intervening years, then that works.

    So we right now, using Fisher-Price math and assumptions, pay about $11.5K per year to support the ongoing spending ($4T/350M).  Adding $2T would make that about $17K for this year.  Fair enough, but 1) most people aren’t even paying taxes, and 2) of those who do, most pay less than what you do.  The bottom 50% of people by income (sub-$40K/y)  pay less than 4% of federal taxes, which might as well be nothing, so if you make more than $40K, you pay double the burden, and they pay nothing.  Obviously, that’s a huge wide group, so it’s not as though those making $40K plus a dollar must pay $34K to Uncle Sam, but that *is* the average paid by the upper 50%, which includes zillionaires.

    There’s a power law in here which I’m not going to poke right now, but unless you are scraping by on next to nothing (this may not be the right characterization for fixed-outgo, no-surprises lifestyles), you are paying your taxes and somebody else’s.

    Also, there are not 350M taxpayers (where “payer” just means on the rolls, to include net recipients).  The work force is something like half of the population (IIRC), so we can double that individual tax burden AGAIN.  This is a little blunt, and probably overstates the impact, but not by as much as we might think — after all, the power law distribution of darned near everything means that half pay nothing, some pay a bunch, and just a few pay an amazing amount.  “Amazing” is relative, however, as we’ll see if I can get my hamsters together and come up with a simple “tax share as function of income” scalar.

    So — shall we stuff-posters here on Ratburger prepare to pay, on average, about $70K in Federal taxes this year?  That would be about $24K for the Coronavirus spending spree, on top of the $43K we pay, on average, every year.

    What, you (the aggregate Ratburger average) don’t pay anywhere near $43K per year in federal taxes?  The difference is what we are *already* borrowing, one way or another.

    6+
    avataravataravataravataravataravatar
  3. Hypatia:
    I mean what can actually happen to our country and to us  personally?

    This.

    Hyperinflation: wheelbarrow of money

    See Adam Fergusson’s classic, When Money Dies.  And when it happens, the causes will all be a mystery, and it will be blamed upon “rapacious foreign creditors”, “speculators”, and “greed”.

    Zimbabwe: 100 trillion dollar note

    After this week, a hundred trillion dollars doesn’t seem like that much any more, does it?  I mean, they just borrowed two trillion on a voice vote.

    8+
    avataravataravataravataravataravataravataravatar
  4. Hypatia:
    Thanks, gents.  But what IS “the unthinkable “?  I mean what can actually happen to our country and to us  personally?

    That depends what we’re willing to go to war over.  If the next generation refuses to pay our bills, perhaps we make war on them.  Or perhaps other countries make war upon all of us.  I know it sounds old-fashioned, but one constant in history is that those who decide war is obsolete rapidly wind up fighting.

    3+
    avataravataravatar
  5. John Walker:

    Hypatia:
    I mean what can actually happen to our country and to us  personally?

    This.

    Hyperinflation: wheelbarrow of money

    See Adam Fergusson’s classic, When Money Dies.  And when it happens, the causes will all be a mystery, and it will be blamed upon “rapacious foreign creditors”, “speculators”, and “greed”.

    Zimbabwe: 100 trillion dollar note

    After this week, a hundred trillion dollars doesn’t seem like that much any more, does it?  I mean, they just borrowed two trillion on a voice vote.

    So: a tremendous devaluation of our currency.   But wouldn’t it have  to be a devaluation to the benefit of another country?  I don’t know the provenance of this picture but I have often  seen similar ones out of Germany after WW  II.
    And HD, why would making war avoid the reckoning?  I understand why WW II got us outta the depression—is that what you mean? 


    Speaking of benefitting another country: ok, if China  is our main foreign creditor, and now they’ve engineered a recession(at best)—what will be their next move? 

    1+
    avatar
  6. Hypatia:

    John Walker:

    Hypatia:
    I mean what can actually happen to our country and to us  personally?

    This.

    Hyperinflation: wheelbarrow of money

    See Adam Fergusson’s classic, When Money Dies.  And when it happens, the causes will all be a mystery, and it will be blamed upon “rapacious foreign creditors”, “speculators”, and “greed”.

    Zimbabwe: 100 trillion dollar note

    After this week, a hundred trillion dollars doesn’t seem like that much any more, does it?  I mean, they just borrowed two trillion on a voice vote.

    So: a tremendous devaluation of our currency.   But wouldn’t it have  to be a devaluation to the benefit of another country?  I don’t know the provenance of this picture but I have often  seen similar ones out of Germany after WW  II.
    And HD, why would making war avoid the reckoning?  I understand why WW II got us outta the depression—is that what you mean? 


    Speaking of benefitting another country: ok, if China  is our main foreign creditor, and now they’ve engineered a recession(at best)—what will be their next move? 

    Your question here touches on how I tend to think about this. That is, after everything shakes out and the world starts to operate again in what we think of as normal. the country that is the most productive,  inventive and free should quickly be restored to its logical position.

    2+
    avataravatar
  7. I think it gets to a point that Monopoly money will seem more secure than US currency and bonds.

    The economies are all interconnected so if the US goes down there will be widespread disruption. All the people will have there assets evaporate. It will be like having millions of dollars of Enron stock after they go bust.

    A few years ago a 2 trillion dollars debt would have been a punchline for it would have been unimaginable. Now as John pointed out it was insignificant enough to be passed with a voice vote.

    2+
    avataravatar
  8. Hypatia:

    John Walker:

    Hypatia:
    I mean what can actually happen to our country and to us  personally?

    This.

    Hyperinflation: wheelbarrow of money

    See Adam Fergusson’s classic, When Money Dies.  And when it happens, the causes will all be a mystery, and it will be blamed upon “rapacious foreign creditors”, “speculators”, and “greed”.

    Zimbabwe: 100 trillion dollar note

    After this week, a hundred trillion dollars doesn’t seem like that much any more, does it?  I mean, they just borrowed two trillion on a voice vote.

    So: a tremendous devaluation of our currency.   But wouldn’t it have  to be a devaluation to the benefit of another country?  I don’t know the provenance of this picture but I have often  seen similar ones out of Germany after WW  II.
    And HD, why would making war avoid the reckoning?  I understand why WW II got us outta the depression—is that what you mean? 


    Speaking of benefitting another country: ok, if China  is our main foreign creditor, and now they’ve engineered a recession(at best)—what will be their next move? 

    WWII did not get us out of the Depression. There have been numerous economic studies showing that growth in the private sector did not turn positive until 1948. So unless you are willing to say that rapid growth in government is good for the private economy, then WWII did not end the Depression.

    1+
    avatar
  9. Robert A. McReynolds:

    Hypatia:

    John Walker:

    Hypatia:
    I mean what can actually happen to our country and to us  personally?

    This.

    Hyperinflation: wheelbarrow of money

    See Adam Fergusson’s classic, When Money Dies.  And when it happens, the causes will all be a mystery, and it will be blamed upon “rapacious foreign creditors”, “speculators”, and “greed”.

    Zimbabwe: 100 trillion dollar note

    After this week, a hundred trillion dollars doesn’t seem like that much any more, does it?  I mean, they just borrowed two trillion on a voice vote.

    So: a tremendous devaluation of our currency.   But wouldn’t it have  to be a devaluation to the benefit of another country?  I don’t know the provenance of this picture but I have often  seen similar ones out of Germany after WW  II.
    And HD, why would making war avoid the reckoning?  I understand why WW II got us outta the depression—is that what you mean? 


    Speaking of benefitting another country: ok, if China  is our main foreign creditor, and now they’ve engineered a recession(at best)—what will be their next move? 

    WWII did not get us out of the Depression. There have been numerous economic studies showing that growth in the private sector did not turn positive until 1948. So unless you are willing to say that rapid growth in government is good for the private economy, then WWII did not end the Depression.

    It would be fair to say the war ended unemployment. I think it helped that the other economies were destroyed by the war so American companies had many people to sell to.

    3+
    avataravataravatar
  10. I think though the point is that the value of currency is debased when you artificially flood the market with paper money. It is simply foolish to think that one can just create wealth, value, or currency out of thin air. And every time the government deficit spends, that is exactly what they are doing. This makes current dollars worth less than they were just before the new deficit spending entered the market.

    4+
    avataravataravataravatar
  11. 10 Cents:

    Robert A. McReynolds:

    Hypatia:

    John Walker:

    Hypatia:
    I mean what can actually happen to our country and to us  personally?

    This.

    Hyperinflation: wheelbarrow of money

    See Adam Fergusson’s classic, When Money Dies.  And when it happens, the causes will all be a mystery, and it will be blamed upon “rapacious foreign creditors”, “speculators”, and “greed”.

    Zimbabwe: 100 trillion dollar note

    After this week, a hundred trillion dollars doesn’t seem like that much any more, does it?  I mean, they just borrowed two trillion on a voice vote.

    So: a tremendous devaluation of our currency.   But wouldn’t it have  to be a devaluation to the benefit of another country?  I don’t know the provenance of this picture but I have often  seen similar ones out of Germany after WW  II.
    And HD, why would making war avoid the reckoning?  I understand why WW II got us outta the depression—is that what you mean? 


    Speaking of benefitting another country: ok, if China  is our main foreign creditor, and now they’ve engineered a recession(at best)—what will be their next move? 

    WWII did not get us out of the Depression. There have been numerous economic studies showing that growth in the private sector did not turn positive until 1948. So unless you are willing to say that rapid growth in government is good for the private economy, then WWII did not end the Depression.

    It would be fair to say the war ended unemployment. I think it helped that the other economies were destroyed by the war so American companies had many people to sell to.

    No it wouldn’t. Again you are looking at an artificial skewing of the labor market by killing of a vast portion of it. That is not decreasing unemployment, it is wasting human capital.

    1+
    avatar
  12. Robert A. McReynolds:

    10 Cents:

    It would be fair to say the war ended unemployment. I think it helped that the other economies were destroyed by the war so American companies had many people to sell to.

    No it wouldn’t. Again you are looking at an artificial skewing of the labor market by killing of a vast portion of it. That is not decreasing unemployment, it is wasting human capital.

    Even aside from the people killed in the war, the “full employment” and “100% factory utilisation” during wartime is illusory because it was accomplished by consuming capital to produce goods (tanks, rifles, aircraft, combat ships, ammunition, etc.) which with few exceptions are of no use whatsoever to the population or on the global market when the war is over.  You can create the illusion of prosperity during wartime because everybody has a job and the factories are cranking out lots of stuff, but if that stuff is of no use other than fighting other countries who are similarly cranking out weapons, it does not benefit the population, who are coerced into pouring their savings into war bonds to finance the expenditures and, even if they didn’t, wouldn’t have any consumer goods on which to spend their earnings because civilian production has been curtailed and everything is rationed.

    The idea that you can create prosperity by staying on a permanent war footing doesn’t work any better than socialism: since a war economy is funded by consuming capital and does not generate capital, eventually it runs out.  Britain after World War II is an excellent example of this: it “won” and was never invaded, but it never recovered its economic position before the war and its citizens were subjected to decades of austerity and decaying infrastructure.  The same thing would have happened in the U.S. if the war had gone on for a few more years.

    4+
    avataravataravataravatar
  13. John Walker:

    Robert A. McReynolds:

    10 Cents:

    It would be fair to say the war ended unemployment. I think it helped that the other economies were destroyed by the war so American companies had many people to sell to.

    No it wouldn’t. Again you are looking at an artificial skewing of the labor market by killing of a vast portion of it. That is not decreasing unemployment, it is wasting human capital.

    Even aside from the people killed in the war, the “full employment” and “100% factory utilisation” during wartime is illusory because it was accomplished by consuming capital to produce goods (tanks, rifles, aircraft, combat ships, ammunition, etc.) which with few exceptions are of no use whatsoever to the population or on the global market when the war is over.  You can create the illusion of prosperity during wartime because everybody has a job and the factories are cranking out lots of stuff, but if that stuff is of no use other than fighting other countries who are similarly cranking out weapons, it does not benefit the population, who are coerced into pouring their savings into war bonds to finance the expenditures and, even if they didn’t, wouldn’t have any consumer goods on which to spend their earnings because civilian production has been curtailed and everything is rationed.

    The idea that you can create prosperity by staying on a permanent war footing doesn’t work any better than socialism: since a war economy is funded by consuming capital and does not generate capital, eventually it runs out.  Britain after World War II is an excellent example of this: it “won” and was never invaded, but it never recovered its economic position before the war and its citizens were subjected to decades of austerity and decaying infrastructure.  The same thing would have happened in the U.S. if the war had gone on for a few more years.

    That is exactly what the Tom Woods link I posted said, but it took him 30 minutes.

    0

  14. Robert A. McReynolds:

    10 Cents:

    Robert A. McReynolds:

    Hypatia:

    John Walker:

    Hypatia:
    I mean what can actually happen to our country and to us  personally?

    This.

    Hyperinflation: wheelbarrow of money

    See Adam Fergusson’s classic, When Money Dies.  And when it happens, the causes will all be a mystery, and it will be blamed upon “rapacious foreign creditors”, “speculators”, and “greed”.

    Zimbabwe: 100 trillion dollar note

    After this week, a hundred trillion dollars doesn’t seem like that much any more, does it?  I mean, they just borrowed two trillion on a voice vote.

    So: a tremendous devaluation of our currency.   But wouldn’t it have  to be a devaluation to the benefit of another country?  I don’t know the provenance of this picture but I have often  seen similar ones out of Germany after WW  II.
    And HD, why would making war avoid the reckoning?  I understand why WW II got us outta the depression—is that what you mean? 


    Speaking of benefitting another country: ok, if China  is our main foreign creditor, and now they’ve engineered a recession(at best)—what will be their next move? 

    WWII did not get us out of the Depression. There have been numerous economic studies showing that growth in the private sector did not turn positive until 1948. So unless you are willing to say that rapid growth in government is good for the private economy, then WWII did not end the Depression.

    It would be fair to say the war ended unemployment. I think it helped that the other economies were destroyed by the war so American companies had many people to sell to.

    No it wouldn’t. Again you are looking at an artificial skewing of the labor market by killing of a vast portion of it. That is not decreasing unemployment, it is wasting human capital.

    Please tell me how it was not decreasing unemployment. I was going for the bare minimum of what happened. People who had no jobs became soldiers and factory workers. I can’t see how that is not increasing employment.

    It is something else to say if that was an economic good. If someone is working for a bankrupt company one is still working and no longer unemployed.

    1+
    avatar
  15. There was a great talk about the economics of World War II on EconTalk by Robert Higgs. 

    1. The popular view of economic history is that World War II finally pulled the United States out of the Great Depression. Higgs describes three “facts” that are taken for granted in this analysis, yet are incorrect. What are they, and to what extent do you agree that conventional wisdom has gotten them wrong?

    0

  16. 10 Cents:

    Robert A. McReynolds:

    10 Cents:

    Robert A. McReynolds:

    Hypatia:

    John Walker:

    Hypatia:
    I mean what can actually happen to our country and to us  personally?

    This.

    Hyperinflation: wheelbarrow of money

    See Adam Fergusson’s classic, When Money Dies.  And when it happens, the causes will all be a mystery, and it will be blamed upon “rapacious foreign creditors”, “speculators”, and “greed”.

    Zimbabwe: 100 trillion dollar note

    After this week, a hundred trillion dollars doesn’t seem like that much any more, does it?  I mean, they just borrowed two trillion on a voice vote.

    So: a tremendous devaluation of our currency.   But wouldn’t it have  to be a devaluation to the benefit of another country?  I don’t know the provenance of this picture but I have often  seen similar ones out of Germany after WW  II.
    And HD, why would making war avoid the reckoning?  I understand why WW II got us outta the depression—is that what you mean? 


    Speaking of benefitting another country: ok, if China  is our main foreign creditor, and now they’ve engineered a recession(at best)—what will be their next move? 

    WWII did not get us out of the Depression. There have been numerous economic studies showing that growth in the private sector did not turn positive until 1948. So unless you are willing to say that rapid growth in government is good for the private economy, then WWII did not end the Depression.

    It would be fair to say the war ended unemployment. I think it helped that the other economies were destroyed by the war so American companies had many people to sell to.

    No it wouldn’t. Again you are looking at an artificial skewing of the labor market by killing of a vast portion of it. That is not decreasing unemployment, it is wasting human capital.

    Please tell me how it was not decreasing unemployment. I was going for the bare minimum of what happened. People who had no jobs became soldiers and factory workers. I can’t see how that is not increasing employment.

    It is something else to say if that was an economic good. If someone is working for a bankrupt company one is still working and no longer unemployed.

    Please go listen to the Tom Woods bit I linked to above. It’s a half hour. It has all your answers there.

    0

  17. 10 Cents:
    I think it gets to a point that Monopoly money will seem more secure than US currency and bonds.

    The economies are all interconnected so if the US goes down there will be widespread disruption. All the people will have there assets evaporate. It will be like having millions of dollars of Enron stock after they go bust.

    A few years ago a 2 trillion dollars debt would have been a punchline for it would have been unimaginable. Now as John pointed out it was insignificant enough to be passed with a voice vote.

    I don’t quite see it this way.

    Borrowing two trillion dollars was significant enough that all our Representatives, except one, pulled some shenanigans to avoid having to personally register their vote in favor.

    0

  18. 10 Cents:
    There was a great talk about the economics of World War II on EconTalk by Robert Higgs. 

    1. The popular view of economic history is that World War II finally pulled the United States out of the Great Depression. Higgs describes three “facts” that are taken for granted in this analysis, yet are incorrect. What are they, and to what extent do you agree that conventional wisdom has gotten them wrong?

    Woods references Higgs in that link.

    0

  19. Robert A. McReynolds:

    10 Cents:
    There was a great talk about the economics of World War II on EconTalk by Robert Higgs. 

    1. The popular view of economic history is that World War II finally pulled the United States out of the Great Depression. Higgs describes three “facts” that are taken for granted in this analysis, yet are incorrect. What are they, and to what extent do you agree that conventional wisdom has gotten them wrong?

    Woods references Higgs in that link.

    Robert, are you telling me that the people didn’t work in factories and become soldiers? Was it like the moon landing and faked? You must have a special definition of “employment” that I am missing. Is it only employment if considered proper and beneficial?  I agree it was done with smoke and mirrors as Robert Higgs has said.

    0

Leave a Reply