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View Diary: Math is Hard: Or why everything we know about debt and deficits is wrong (84 comments)

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  •  Banking 101 (0+ / 0-)

    If you go to a bank and ask for a secured loan it would look at your assets. In that case the bank would attach a lien on the property you are borrowing against. But as far as I can tell when the Chinese and Japanese buy up our Treasury notes we aren't putting up Mount Rushmore and the Washington Monument as collateral. For unsecured loans, on the other hand, a bank will look at a number of factors such as your income and the amount of outstanding debt. For a country the Gross Domestic Product (GDP) is like a country's income and the debt to GDP ratio would be a major input in any international FICO score. The US has a public debt-to-GDP ratio of around 100% and some economists believe anything over 90% or so can put a drag on the economy. Japan has a debt ratio of around 200% and their economy sucks. The Euro zone has roughly our population, aggregate GDP and "assets" (if that matters) and a lower overall debt ratio but the ratio of some individual states are much higher and a Greek default could start a domino effect that brings down the entire currency. Hence, US treasuries seem safer in comparison.

    The reason China and Japan buy Treasuries has nothing to do with our "debt to equity" because they aren't secured loans. It has to do with trade flows, keeping their own currencies depressed so they can sell us more, the stability of the dollar vs. the Euro, etc. Of course the US can always print dollars to pay off its debts but that would decrease the value of the dollar versus other currencies, Chinese and Japanese goods then would become more expensive in comparison (and they would sell less to us as a result), and we would likely see inflation at home. At least that is what the conventional economic wisdom says. But according to the Modern Monetary Theory folks conventional wisdom is all wrong. From what I've read on economist blogs and podcasts, MMT hasn't earned a lot of street cred yet and, if anything, seems to be dismissed by many in the field.  

    •  Not unsecured, "full faith and credit" (1+ / 0-)
      Recommended by:
      psyched

      and a constitutionally imposed mandate does it for me

      Japan has a debt ratio of around 200% and their economy sucks.
      Japan has a 9/2012 unemployment rate of 4.2%. On what basis do you say the economy sucks. Interest rates? The domestic bond yield is .001%. GDP growth is sluggish (0.5%) but the population is CONTRACTING (-.28% in 2011) so per capita GDP is even better.

      The reason China and Japan buy our bonds is they have traded away real assets (stuff they sold us after investing their own capital, labor, materials, energy and social costs) for non performing financial assets. Offering to exchange the non-performing cash for interest bearing bonds is entirely largess on the part of the United States Government.

      Copernicus did what MMT has done. He look at the object of his curiosity with scrupulous care after first suspending a-priori judgments. And I'm sure some Blubba back then said, "But according to Copernicus and the heliocentric folks conventional wisdom is all wrong. Well it hasn't earned a lot of street cred yet and, if anything, seems to be dismissed by many in the field."  

      In the field, Krugman and Stiglitz are both beginning to see the light. Here's a recent paper by Krugman (pdf).

      •  Any country can use the (0+ / 0-)

        "Full faith and credit" line, even countries that aren't doing well. It isn't copyrighted for our exclusive use and means nothing.

        Unemployment in Japan may be low but that is in no small part because their banks prop up unprofitable and uncompetitive "zombie" companies. That strategy is not sustainable long term. Its workforce is aging even more quickly than in the US meaning. By 2020 there will only be 2.3 workers per retiree, putting tremendously strain on their economy to deal with the medical and infrastructure costs.

        I would be interested in what other economists say in response to Krugman's article. Yes, a drop in the dollar as a result of people not buying our bonds would make our exports more competitive. But it would also make imported goods more expensive. So if you are a farmer or work at Caterpillar you would probably make out OK. If you wait tables or cut hair or work in some other service industry maybe not so much.

        •  So you don't trust the currency even as it stands (0+ / 0-)

          That makes this an entirely useless conversation, don't you think.

          •  I didn't say that. (0+ / 0-)

            The discussion was about whether Treasury notes are secured or unsecured and your inaccurate analogy to banks looking at a person's assets. Currently T-bills are the tallest pygmy but it isn't a status we should take for granted. That is my only point.

            •  No, the discussion was about whether the debt was (0+ / 0-)

              excessive or even meaningful. You seem to be concerned about bond vigilantes. I suggested the assets of the country were so far in excess of debt as to not be meaningful even in neoclassical terms. You rejected this and argued that Treasury securities are "unsecured." You rejected my argument that the full faith and credit of the USA and the specific language of the US Constitution secured treasury notes. Apparently, you believe that a legal pledge of property is the only means of securing a loan. I find it interesting that you have more reliance on statutory than constitutional arrangements. In both cases it is the majesty of the law and the power of the state being invoked, but you accept the lesser and reject the greater power. Curious.

              •  Google it. (0+ / 0-)

                Treasury notes are BY DEFINITION unsecured. BY DEFINITION a secured note is collateralized. ALL countries issue UNSECURED bonds that effectively rely on the "full faith and credit" of the country that issued them. The US is not unique.

                •  So, as I said. You prefer to place you reliance on (0+ / 0-)

                  statute and trust that it secures your debt, because if you do not take physical possession that's all you have to rely upon. My point is that is low order debt. Horizontal debt among agents in the private sector, that relies upon the public sector for enforcement. However, this is all extraneous to the original proposition.

                  What is too much debt and why? What are your arguments in support of your position? The contrary argument has been expounded in this comment string and in the original diary. I read that you reject the arguments in MMT, but you offer nothing cogent in rebuttal. You said you were an interested amateur student of economics. Let's see that and not CW or talking points, because I'm not really sure what it is your are arguing except that perhaps everything MMT is fantasy? If you believe that, fine. Why don't you take one MMT concept, spell it out, and disprove it with either a mathematical or logical verbal analysis. Find a good one, though, something that will make it all unravel, because all of the objections that I have raised have been answered to my satisfaction.  

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