Yet Another ‘Innocent Fraud’ Attack On Social Security And Medicare

The Future of Public Debt

By John Mauldin

For the rest of this letter, and probably next week as well, we are going to look at a paper from the Bank of International Settlements, often thought of as the central bankers’ central bank. This paper was written by Stephen G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli. ( http://www.bis.org/publ/work300.pdf?noframes=1)

The paper looks at fiscal policy in a number of countries and, when combined with the implications of age-related spending (public pensions and health care), determines where levels of debt in terms of GDP are going. The authors don’t mince words. They write at the beginning:

“Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable.

Solvency is never the issue with non convertible currencies/ floating exchange rates. The risk is entirely inflation, yet I’ve never seen a manuscript critical of deficit spending that seriously looks at the inflation issue apart from solvency concerns.

Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.”

The negative consequences are always due to the moves presumed necessary to reduce deficits, not deficit spending per se.

Drastic measures is not language you typically see in an economic paper from the BIS. But the picture they paint for the 12 countries they cover is one for which drastic measures is well-warranted.

That would mean a hyper inflation scare, not solvency fear mongering.

I am going to quote extensively from the paper, as I want their words to speak for themselves, and I’ll add some color and explanation as needed. Also, all emphasis is mine.

“The politics of public debt vary by country. In some, seared by unpleasant experience, there is a culture of frugality. In others, however, profligate official spending is commonplace. In recent years, consolidation has been successful on a number of occasions. But fiscal restraint tends to deliver stable debt;

Stable public debt means stable non govt nominal savings with economies that require expanding net financial assets to support expanding credit structures and offset institutional demand leakages.

rarely does it produce substantial reductions. And, most critically, swings from deficits to surpluses have tended to come along with either falling nominal interest rates, rising real growth, or both. Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if.

Govts with non convertible currency/floating fx are not subject to pressure from markets with regards to funding or interest rates.

“When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways?

Investors have to take what’s offered, or exit the currency by selling it so someone else. And floating exchange rates continuously express the indifference levels

In some countries, unstable debt dynamics, in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels, are already clearly on the horizon.

Only countries such as the euro zone members who are not the issuer of the euro, but users of the euro. They are analogous to us states in that regard, and are credit sensitive entities.

“It follows that the fiscal problems currently faced by industrial countries need to be tackled relatively soon and resolutely.

Agreed, except fiscal drag needs to be removed to restore private sector output and employment. They have this backwards.

Failure to do so will raise the chance of an unexpected and abrupt rise in government bond yields at medium and long maturities, which would put the nascent economic recovery at risk.

Like Japan? Triple the ‘debt’ of the US with a 1.3% 10 year note? And never a hint of missing a payment. And Japan, the US, UK, etc. all have the same institutional structure.

It will also complicate the task of central banks in controlling inflation in the immediate future and might ultimately threaten the credibility of present monetary policy arrangements.

Yes, inflation is the potential risk, which is mainly a political risk. People don’t like inflation and will topple a govt over it. But there is no economic evidence that inflation is a negative for growth and employment.

“While fiscal problems need to be tackled soon, how to do that without seriously jeopardising the incipient economic recovery is the current key challenge for fiscal authorities.”

Yes, exactly. Because they have it wrong. The fiscal problem that has to be tackled soon is that it’s too tight, as evidenced by the high rates of unemployment.

They start by dealing with the growth in fiscal (government) deficits and the growth in debt. The US has exploded from a fiscal deficit of 2.8% to 10.4% today, with only a small 1.3% reduction for 2011 projected. Debt will explode (the correct word!) from 62% of GDP to an estimated 100% of GDP by the end of 2011.

Yes, and not nearly enough, as unemployment is projected to still be over 9%, and core inflation is what is considered to be dangerously low.

Remember that Rogoff and Reinhart show that when the ratio of debt to GDP rises above 90%, there seems to be a reduction of about 1% in GDP. The authors of this paper, and others, suggest that this might come from the cost of the public debt crowding out productive private investment.

Can be true for fixed exchange rate regimes/convertible currency, but not true for today’s non convertible currency and floating fx regimes. And today, deficits generally rise due to slowdowns that drive up transfer payments and cut revenues ‘automatically’ (automatic stabilizers) so it’s no mystery that rising deficits are associated with slowing economies, but the causation is the reverse RR imply.

Think about that for a moment. We are on an almost certain path to a debt level of 100% of GDP in less than two years. If trend growth has been a yearly rise of 3.5% in GDP, then we are reducing that growth to 2.5% at best. And 2.5% trend GDP growth will NOT get us back to full employment. We are locking in high unemployment for a very long time, and just when some one million people will soon be falling off the extended unemployment compensation rolls.

Nothing that a sufficient tax cut won’t cure. There is a screaming shortage of aggregate demand that’s easily restored by a simple fiscal adjustment- tax cut and/or spending increase.

Government transfer payments of some type now make up more than 20% of all household income. That is set up to fall rather significantly over the year ahead unless unemployment payments are extended beyond the current 99 weeks. There seems to be little desire in Congress for such a measure. That will be a significant headwind to consumer spending.

Yes, backwards policy. They need to work to restore demand, not reduce it.

My first proposal is for a full payroll tax (fica) holiday, for example.

Government debt-to-GDP for Britain will double from 47% in 2007 to 94% in 2011 and rise 10% a year unless serious fiscal measures are taken.

Or unless the economy rebounds. In that case the deficit comes down and the danger is they let it fall too far as happens with every cycle.

Greece’s level will swell from 104% to 130%,

Yes, and they are credit sensitive like the US states.
This is ponzi.
Ponzi is when you must borrow to pay maturing debt

The US, UK, Japan, etc. Have no borrowing imperative to pay debt, the way Greece does.
They make all payments the same way- they just mark up numbers on their computers at their own central banks:

(SCOTT PELLEY) Is that tax money that the Fed is spending?
(CHAIRMAN BERNANKE) It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

Bernanke didn’t call china to beg for a loan or check with the IRS to see if they could bring in some quick cash. He just changed numbers up with his computer.

so the US and Britain are working hard to catch up to Greece, a dubious race indeed.

Confused!

Spain is set to rise from 42% to 74% and “only” 5% a year thereafter; but their economy is in recession, so GDP is shrinking and unemployment is 20%. Portugal? 71% to 97% in the next two years, and there is almost no way Portugal can grow its way out of its problems.

Yes, they are in Ponzi

Japan will end 2011 with a debt ratio of 204% and growing by 9% a year. They are taking almost all the savings of the country into government bonds, crowding out productive private capital.

Nothing is crowded out with non convertible currency and floating fx. Banks have no shortage of yen lending power. The yen the govt net spends can be thought of as the yen that buy the jgb’s (japan govt bonds)

Reinhart and Rogoff, with whom you should by now be familiar, note that three years after a typical banking crisis the absolute level of public debt is 86% higher, but in many cases of severe crisis the debt could grow by as much as 300%. Ireland has more than tripled its debt in just five years.

Ireland is in Ponzi as they are users of the euro.

The BIS continues:

“We doubt that the current crisis will be typical in its impact on deficits and debt. The reason is that, in many countries, employment and growth are unlikely to return to their pre-crisis levels in the foreseeable future. As a result, unemployment and other benefits will need to be paid for several years, and high levels of public investment might also have to be maintained.

“The permanent loss of potential output caused by the crisis also means that government revenues may have to be permanently lower in many countries. Between 2007 and 2009, the ratio of government revenue to GDP fell by 2-4 percentage points in Ireland, Spain, the United States and the United Kingdom.

Again, failure to recognize the critical differences between issuers and users of the currency.

It is difficult to know how much of this will be reversed as the recovery progresses. Experience tells us that the longer households and firms are unemployed and underemployed, as well as the longer they are cut off from credit markets, the bigger the shadow economy becomes.”

Yes, responsible fiscal policy would not have let demand fall this far. The US should have had a full payroll tax holiday no later than sept 08, and most of the damage to the real economy would have been avoided.

We are going to skip a few sections and jump to the heart of their debt projections. Again, I am going to quote extensively, and my comments will be in brackets [].Note that these graphs are in color and are easier to read in color (but not too difficult if you are printing it out). Also, I usually summarize, but this is important. I want you to get the full impact. Then I will make some closing observations.

The Future Public Debt Trajectory

“We now turn to a set of 30-year projections for the path of the debt/GDP ratio in a dozen major industrial economies (Austria, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, the United Kingdom and the United States). We choose a 30-year horizon with a view to capturing the large unfunded liabilities stemming from future age-related expenditure without making overly strong assumptions about the future path of fiscal policy (which is unlikely to be constant). In our baseline case, we assume that government total revenue and non-age-related primary spending remain a constant percentage of GDP at the 2011 level as projected by the OECD. Using the CBO and European Commission projections for age-related spending, we then proceed to generate a path for total primary government spending and the primary balance over the next 30 years. Throughout the projection period, the real interest rate that determines the cost of funding is assumed to remain constant at its 1998-2007 average, and potential real GDP growth is set to the OECD-estimated post-crisis rate.

[That makes these estimates quite conservative, as growth-rate estimates by the OECD are well on the optimistic side.]

Yes, future liabilities are always quoted in isolation from future demand leakages including growth of reserves in pension funds, insurance companies, corps, foreign govts, etc.

And they are always used to imply solvency issues. No actual calculations are ever done regarding inflation.

Debt Projections

“From this exercise, we are able to come to a number of conclusions. First, in our baseline scenario, conventionally computed deficits will rise precipitously. Unless the stance of fiscal policy changes, or age-related spending is cut, by 2020 the primary deficit/GDP ratio will rise to 13% in Ireland; 8-10% in Japan, Spain, the United Kingdom and the United States; [Wow!] and 3-7% in Austria, Germany, Greece, the Netherlands and Portugal. Only in Italy do these policy settings keep the primary deficits relatively well contained – a consequence of the fact that the country entered the crisis with a nearly balanced budget and did not implement any real stimulus over the past several years.

Yes, this is big trouble for the solvency of the euro zone members, but not the rest.

“But the main point of this exercise is the impact that this will have on debt. The results plotted as the red line in Graph 4 [below] show that, in the baseline scenario, debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States. And, as is clear from the slope of the line, without a change in policy, the path is unstable. This is confirmed by the projected interest rate paths, again in our baseline scenario. Graph 5 [below] shows the fraction absorbed by interest payments in each of these countries.From around 5% today, these numbers rise to over 10% in all cases, and as high as 27% in the United Kingdom.

“Seeing that the status quo is untenable, countries are embarking on fiscal consolidation plans. In the United States, the aim is to bring the total federal budget deficit down from 11% to 4% of GDP by 2015. In the United Kingdom, the consolidation plan envisages reducing budget deficits by 1.3 percentage points of GDP each year from 2010 to 2013 (see eg OECD (2009a)).

Why would anyone who understood actual monetary operations want to increase fiscal drag with elevated unemployment and excess capacity .

“To examine the long-run implications of a gradual fiscal adjustment similar to the ones being proposed, we project the debt ratio assuming that the primary balance improves by 1 percentage point of GDP in each year for five years starting in 2012. The results are presented as the green line in Graph 4. Although such an adjustment path would slow the rate of debt accumulation compared with our baseline scenario, it would leave several major industrial economies with substantial debt ratios in the next decade.

“This suggests that consolidations along the lines currently being discussed will not be sufficient to ensure that debt levels remain within reasonable bounds over the next several decades.

“An alternative to traditional spending cuts and revenue increases is to change the promises that are as yet unmet. Here, that means embarking on the politically treacherous task of cutting future age-related liabilities.

Here we go- this is too often the ‘hidden agenda’

It’s all about cutting social security and medicare.

Who would have thought!!!

Yes, the euro zone’s institutional arrangements that make member govt spending revenue constrained have it on the road to collapse, maybe very soon, and for reasons other than long term liabilities.

The rest of the world doesn’t have that issue, as govt spending is not revenue constrained, and the risk to prosperity is acting as if we all have the same revenue constraints as the euro zone.

With this possibility in mind, we construct a third scenario that combines gradual fiscal improvement with a freezing of age-related spending-to-GDP at the projected level for 2011. The blue line in Graph 4 shows the consequences of this draconian policy. Given its severity, the result is no surprise: what was a rising debt/GDP ratio reverses course and starts heading down in Austria, Germany and the Netherlands. In several others, the policy yields a significant slowdown in debt accumulation. Interestingly, in France, Ireland, the United Kingdom and the United States, even this policy is not sufficient to bring rising debt under control.

35 Responses

  1. Something I do not understand is why, if the debt/GDP ratio is considered a problem, the proposed solution focuses on reducing the debt rather than on increasing the GDP. Especially when the GDP is the shorter term variable.

    I understand why if the argument is special pleading, but surely there is more to it than that.

    1. Min, I presume that the argument is some variation of “crowding out,” which is only applicable in a convertible fixed rate system.

      1. It because they want to increase GDP without increasing Government spending, and they do not know how to increase GDP.

        If increasing “real” GDP were easy, all would do its!

  2. Virtually no one implicitly or explicitly attacking SS and Medicare proposes ending these programs, but rather privatizing them. FIRE and everyone involved in the markets is just dying to those funds funneled into the private sector so they can rake off a piece as either revenue or asset appreciation. Special pleading? Yes.

    1. There is certainly special pleasing involved Tom Hickey, but there is also the simple logic of thrift and resposibility:

      1. save for your own retirement
      2. pay for your own health insurance

      I am no big fan of how SS adn medicare are created now, nor do I like proposals to throw them to FIRE, but please, it does not one good to misrepresent the sentiment behind these things

      1. Well, we agree on this point in principle. Of course, people have a responsibility to take care of themselves and their families, if they reasonably can do so.

        However, for a whole lot of people in the lower rungs of income and wealth, it is just not possible to provide adequately for retirement. In addition, it is not possible for most people, even people who are relatively well off, to either save enough or insure themselves adequately to cover large medical expenses, which almost everyone runs into sooner or later if they live long enough.

        The country needs to have a real debate on these issues instead of the self-serving BS that is now flying around. There are a number of options to consider that haven’t even been floated because the debate has been both skewed and narrow.

      2. zanon:

        to point 1: first, make sure everybody has enough income to be able to afford to save some, then we can talk. second, some kind of multi tier system with mandatory and optional parts probably serves everyone better than a ‘you’re on your own’ system. or what do you do with those who decide not to save?

        to point 2: again, make sure everyone can afford it and then mandate it. i also don’t know whether FIRE is the only problem to be worried about. imo, ones health and any kind of private insurance company are incompatible concepts. only a company that is mandated to accept all patients and pay for all treatments is good enough (for my health at least). and that’s not a very business friendly model. best to get rid of the insurance companies altogether.

      3. Tom Hickeys:

        SS is not for poor, it is for everyone. So why are people perfectly capable of saving for their own retirement not doing so?

        Medicare is for old. Medicaid is for poor. Lots of problems in implementations.

        What I want you to do is not regurgitate left wing pablum and actually understand where people are coming from–they are wrong, it is true, but it is not evil cheney conspiracy.

        Problem with debate isnot “skew and narrow”, it is that people do not know how economy works!

        I tip my hat to job you did at austrian site. they are second or third biggest bunch of religeous fanatics I know of.

        OLIVER: for some reason you think I like current SS or medicine system. I have no idea why you think thi sis case as I clearly said I no like it.

      4. Zanon, I am not recommending any policy here, and I don’t have any specific proposal on this.

        I am saying that we need to balance personal responsibility incentives with economic realities. As Warren observes, there is wiggle room here, but there also has to be some way to decrease moral hazard that leads to cheating. This is actually an evolutionary challenge that other social-oriented species have handled with some success, and human should be able to also.

        One of the problems that we are facing is the prevalent ignorance and confusion about monetary and fiscal matters. Another is the inertia of the past. Once institutions are in place it is difficult to change them even when it becomes clear that they have outlived their usefulness and fresh solutions are needed for evolving conditions.

        So far, most of the debate has involved either ad hoc measures or abolishing the institutions altogether. Neither really seem practical, let alone optimal.

        Now that MMT has shown that funding programs through tax revenue or financing them through debt issuance is required, as many erroneously believe, we can have an intelligent debate about allocation of real resources to public purpose and the proportional distribution of pubic and private use, not only for SS but many other institutions as well.

        Thus far, such a debate has not even begun publicly, except on these rather isolated blogs and in some academic papers. Hopefully, we can change that through persistence.

        Thanks for the kudos on the mises.org posts.

      5. Zanon, I was never under the impression that you liked any of these services. In fact it is me who thinks they are necessary. There is no basic, humane service for the elderly or ill that a nation like the US should not want to afford. Which doesn’t mean there isn’t room for improvement, but there is no moral hazard in being humane . And while I can see the ratchet effect that ESM mentions, in this case, I rather support it :-). The crisis is a good opportunity to squeeze in such things. And, to the extent that the automatic stabilisers don’t take care of it anyway, you can argue about the exact distribution of the financial burden once the shrinking output gap forces an answer.

      6. Tom Hickey:

        You continually attribute motivations of deficit terrorists to being evil right wingers and this is just your own fanatcism talking. It is as boring for me to hear preachings of mainline protestant telling me to embrace the jesus as it is to hear you repeat that canker chomsky.

        I do not think your debate can take place until academy understands the system, as policy makers will listen to Harvard economists and Bankers but never some blogger.

        It is challenge for me to imagine anything more ridiculos than a populist movement around bank operations, but that is what the “take to the people” MMT strategy is. And I am SYMPATHETIC!

        Oliver: I both do not like current programs nor do i like implementation of current programs but I do agree that services they provide are necessary. Pls do not mistake me for republican or libertarian, although when I reject democrat point some people may think I am so (it is the “if you are not christian you must be mussalman or jew school of thought”)

      7. Zanon, you continue to be the most annoying commenter on this site. Congratulations I suppose. You must be proud trying to rip down people. Anywho, your comments on Chomsky are ridiculous as he isn’t a left winger he’s an anarchist and political activist, not an economist (obvious). But what do you care about facts.

      8. Zanon: point taken. Not trying to categorize you, just adding my 2 cents while trying to keep it very general as far as politics is concerned. I’m not familiar with the details of any US programs anyway…

      9. Zanon “It is challenge for me to imagine anything more ridiculos than a populist movement around bank operations, but that is what the “take to the people” MMT strategy is. And I am SYMPATHETIC!”

        I think that either you are underestimating or I am overestimating the political effect of populists focusing on bank operations like, say, Ron Paul, Ellen Brown, and Stephen Zarlenga (no implication that they are in the same category other than being popular), all of whom have followings that has gone viral. MMT can, too. I look forward to seeing videos of the Financial Sustainability Teach In put up on YouTube, for example.

        Moreover, I find it doubtful that people in positions of power and influence, or those with vested interests, will convert to MMT unless they are forced to or replaced.

      10. Moreover, I find it doubtful that people in positions of power and influence, or those with vested interests, will convert to MMT unless they are forced to or replaced.

        Figure out which powerful interests would benefit from MMT and sell them on it so they’ll go lean on Congress. Depending on the interest group, the basic pitch is either “we’re overtaxed” or “we underspend”. Obviously, the the anti-tax message will resonate with GOP-leaning groups and the spending issue would appeal more to Democratic-leaning interests (though we shouldn’t forget the military Keynesiasts).

      11. Beuwulf:

        you are too funny! there is no shortage of people thinking we are overtax or underspend. they are call republican and democrat. would you count political parties are “powerful interests?!”

        problem is economics textbooks who say that budget must be balanced, banks lend out deposits, etc. change greg mankiws mind.

        seriously these populist ideas is like man who cannot find own bottocks using both of his hands

      12. you are too funny! there is no shortage of people thinking we are overtax or underspend. they are call republican and democrat. would you count political parties are “powerful interests?!”

        Actually no, political parties are the sails, the “powerful interests” (who promise funding and/or votes) are the wind. Convince the interest groups that bankroll the parties that MMT can be used to their advantage, they will in turn fund the politicians who can make it happen (as well as fund the academics to justify it).

        What’s that great line in Saint-Exupéry’s Night Flight? “I tell you, Robineau, in life there are no solutions. There are only motive forces, and our task is to set them acting — then the solutions follow”. (Chapt. 19).
        http://www.scribd.com/doc/30578641/Exupery-Antoine-Night-Flight

  3. Warren,
    Why don’t you try to send your comments to John Mauldin? I have tried to straighten him out for the last two years, but all I get are canned replies like “thank you for your input”. I wouldn’t care but so many people read the guy. He is seriously confused when it comes to free floating non-convertible currency regimes and doesn’t have a clue about reserve accounting. Yet he writes and publishes all sorts of stuff as if were an “expert” and all his contributors were “experts”. His email is info@frontlinethoughts.com
    Thanks very much!!

  4. I’ve had no luck with Maudlin.

    Regarding soc sec.

    There is no public purpose to ‘savings’ as per the innocent fraud that we need savings to fund investment. in fact, it’s a serious negative as it results in our massive pools of investment funds that feed the financial sector.

    there is no moral hazard to supporting elderly at some minimum rate that makes feel good to be Americans. We aren’t going to let seniors die in the streets even if they didn’t behave well during their productive years.

    Public provision of seniors gives them a sense of independence vs begging and living off of relatives and friends, so I like public provision.

    We produce 8,000 calories of food per day per person so feeding them has virtually no opportunity cost, nor it there a housing shortage.

    etc.

    1. exactly.

      arguments against SS are actually more subtle and have to do with reenforcing traditional family structure etc. Not saying I agree, just saying that those make sense whereas the “we cannot afford it” are incorrect.

    2. Moral hazard increases as the level of public support promised to the elderly grows. I was particularly depressed by the granting of a COLA increase last year, when inflation was negative, even though it was a small amount of money in the grand scheme of things. There is clearly a political ratchet effect at work which is pushing promised benefits higher.

      Between rising life expectancy, more healthy years after age 65 (which is not quite the same thing), and the ratchet effect, future retirees are always being promised too much, and will, accordingly, consume too much during their working years and during their retirement years.

      Once our recession is over and the output gap closes, will there be enough resources to meet the consumption desires of retirees with their promised benefits, as well as the consumption desires of the working population with their expectations of a cushy retirement and no need to save?

      I don’t think so, especially given demographic trends. Something has to give, and I hope it is retiree benefits. The best and fairest solution of course is to allow the retirement age to rise slowly.

      1. When the elderly are flying around on private jets on social security we know they are over paid. when they are scrounging in garbage cans for food we know they are under paid. as long as there are excess real resources it’s a political decision.

        I’m ok with enough funding for a couple to live in 800 sq ft and be able to afford home cooked meals and bus fair to get to the stores, as well as pretty good medical care and required drugs. I think we can do that without giving up enough real resources to make a meaningfully negative difference to our lives.

      2. WARREN:

        How about unionized public sector workers.

        LIRR has 30%+ of its employees on disability, unable to work, getting disability ebenfit, but able to play on Govt golf course.

        one could say “thank goodness they are disabled but not too disabled” or one could say “they are overpaid and this is fraud”.

        maybe you would say golf course ok private jet not?

        fights over distribution begin long before lear jet takes off.

  5. The lead author of this BIS article (Cecchetti) replaces William White (who foresaw the subprime bubble) as head of econ and monetary research at the BIS, which signals a rather disburbing shift.

    By browsing through his record it’s clear that he has been striving very hard to be distinguished “me too” of the econ establishment.

    It’s worth comparing Warren’s 2001 skeptical Euro essay with another 2001 paper that he wrote, titled “ECB, view from across the Ocean” which in hindsight probably deserves the “worst blindspot in economics” award.

  6. Mauldin is a fucking retard. He’s today’s equivalent of a medical quack or snake oil salesmen of yesteryear. Problem is, a lot of people read this guy’s stuff.

  7. Solvency is never the issue with non convertible currencies/ floating exchange rates. The risk is entirely inflation, yet I’ve never seen a manuscript critical of deficit spending that seriously looks at the inflation issue apart from solvency concerns.

    This maybe true but the announcement that the USA Government will no longer sell bonds to cover its expenses or that it may not bother to balance its books may send the bond market crazy. The Politicians fear that. Also those who fear Government will fear the further politicization of money. Those who fear inflation will be worried that politicians will tend to let inflation run to far too long as it will take political will to raise taxes.

    1. the bond markets discount future rate decisions, and there’s no reason for the govt to care what they do if they aren’t selling securities.

      and if the govt wants lower long term rates maybe for homeowners, it can offer funding to its banks at any rate it wants to fund home mtgs, for example

      yes, people are always afraid of everything! They are afraid if we don’t appease China the dollar will fall, then we insist China revalue upwards which means an equally lower dollar.

  8. Let me add: Some people like it that Government must tax to spend, they are even unhappy with the borrowing. They want people to know that the Government spending that they demand costs them.

    1. Some people like it that Government must tax to spend, they are even unhappy with the borrowing. They want people to know that the Government spending that they demand costs them.

      For some reason, this sentiment reminds me of the story (true apparently) about why it was Betty Crocker’s instant cake mix was a flop when it was first introduced in the 1950’s:

      the average American housewife very much appreciated the convenience of the cake mix, she felt guilty at deceiving her husband and other guests into thinking she had worked hard for them when, in fact, she had done very little work…
      Their [Betty Crocker] answer: add an egg… By doing more than adding water, by adding a real ingredient, she could assuage her guilt.

      http://changingminds.org/analysis/betty_crockers_egg.htm

  9. And you won’t have any luck with Mauldin. He is bricked into the neoliberal-Washington consensus mindset, by “religious” conversion and by his cronies and contacts.

  10. this book’s so timely. not only is this country’s GDP going to be surpassed by it’s total debt load, but there seems to be a crippling short term memory about mistakes committed about “leaders” just even a few years ago. what’s said in this book is sort of shocking, really sad, and just all around tragic.

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