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The U.S. *Is Not* The Next Greece

ResponsiblyIrresponsible
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7/4/2015 3:10:37 PM
Posted: 1 year ago
Preemptive tl;dr: When Donald Trump or some other economically illiterate dipsh1t says "We're going to be the next Greece!" it makes my blood boil. It couldn't be further from the truth. In fact, you shouldn't give the slightest sh1t about reducing the deficit right now. I'll explain why in a bit.

I'll preface this rant with a brief update on Greece: it defaulted on an IMF loan on Wednesday, and its banks are currently shutdown. ATM withdrawals have been capped at about 60 euros a day and the ECB froze emergency lending. The referendum is obviously coming tomorrow, and it seems that it will pass. This is a good thing, but *not* for the reasons many conservatives think.

It is true that, at some point in time, governments need to balance their books (contrary to the right-wing folklore that *anyone* thinks we can run deficits forever: the only people who fall squarely into that category are MMT'ers, whom we all acknowledge as nuts). A bloated debt-to-GDP ratio with no end in site could spell trouble down the road: it could lead to inflationary pressures, a spike in interest rates, and/or debt intolerance, and could force the central bank's hand (fiscal dominance). There are also implications for inflation expectations and the credibility of a country's monetary regime and its institutional commitment to price stability; of course, excessive inflation has a number if costs, so it would become at some point necessary to bring down the inflation rate. Absent credibility, we get the Volcker Disinflation - sudden, broad and aggressive monetary contraction to prove to the public that it's actually serious about bringing inflation down. Central banks know how to combat inflation, and we could do it if need be, but it's long, hard, and painful, so we best avoid.

Now that I'm done preempting strawman, let's discuss why this is *not* a worry for the U.S. economy - or for the U.K., or for Japan, but it is for the ECB, though doesn't have to be. The U.S., U.K., and Japan have one thing in common: they borrow in their own currencies. In other words, they have an independent monetary regime and can exercise control over interest rates, inflation, and the money supply. In fact, the Treasury could literally print dollars to finance deficits, and several economists - namely loony MMT'ers - were calling for this type of "helicopter drop" as a substitute for QE. Ignoring the obvious problems with QE, that's a horrid solution, but I digress.

The point is, we don't rely on foreign investors to set the rate of interest or the cost of that money - we could literally come up with it ourselves if need be. In fact, a substantial portion of gross debt is money we owe to ourselves, either to U.S. citizens or to government agencies (the SSA is a substantial holder of U.S. Treasury bonds, which is another reason conservatives are flat-out wrong on Social Security going "bankrupt," but that's a rant for another day).

So, we've established that we don't rely on China's holding of U.S. Treasury bonds to actually run deficits, but there's a broader implication as well: we don't need to run deficits at all. The ECB runs monetary policy for 19 countries, all of whom share a currency. It obviously can't adjust policy in a more accommodative direction such that it benefits peripheral countries at the expense of Germany, nor could it readily tighten if it feared Germany would overheat. The Fed, the BOE, and the BOJ face no such concern, because their objectives are to set monetary policy for *one* country - and, thus, there can be a certain degree (though implicit) between monetary and fiscal policy. For instance, in the case of fiscal austerity, a country with an independent monetary regime can slash nominal interest rates, buy assets, depreciate its currency, etc. (mind you, this is a simplification of what central banks can do, but I digress) to lean against a contraction in NGDP. The ECB, obviously, can do no such thing, especially when one country - Greece - is periled with so-called "structural reform," notwithstanding the threat of contagion to other peripheral countries.

Finally, there's this bullsh1t argument that's made by Peter Schiff and other know-nothing clowns, namely on CNBC and Fox Business (whom you should never take seriously, by the way). It's this notion that the Fed cannot tighten lest it set off a debt timebomb: servicing costs will rise, so the government will need to cut back in other areas, which could induce a contraction and thus prompt the central bank to cut interest rates once again.

Here's why this is horsepucky: the actual level of interest rates says nothing about the ability of a government to service that debt. In much the same way that you're indifferent about a 4 percent inflation rate insofar as your nominal wages also rise by 4 percent, you won't care if interest rates, induced by faster growth, rise. The goal of the Fed is *not* to lean against or even to endorse fiscal profligacy; that's part and parcel of what it means to be an independent institution. Rather, it's to target the Wicksellian equilibrium real rate, or the real interest rate that clears markets - raising rates beyond it when it wants to bring down inflation, reducing rates below it when it wants to induce inflation, and setting rates equal to it when it wants to stabilize inflation. That rate rises during good times and falls during bad times. If it rises such that it justifies the Fed to increase interest rates - mind you, this assumes the Fed can perfectly target an unobservable rate, which it cannot (and thus it's an argument for caution) - growth will accelerate and deficits will shrink in nominal terms and as a percentage of GDP. Inflation may even accelerate, which would reduce real returns on fixed debt.

Another tl;dr: Stop making dumb comparisons to Greece. It's never going to happen.
~ResponsiblyIrresponsible

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Thefightforfreedom
Posts: 1
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7/13/2015 1:12:36 AM
Posted: 1 year ago
I am not saying we could be the next Greece. But are you saying all we have to do is print more money and it wouldn't send us into hyper inflation? Not an argument just a question.
slo1
Posts: 4,351
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7/14/2015 9:26:12 AM
Posted: 1 year ago
At 7/13/2015 1:12:36 AM, Thefightforfreedom wrote:
I am not saying we could be the next Greece. But are you saying all we have to do is print more money and it wouldn't send us into hyper inflation? Not an argument just a question.

We printed to the tune of $4 trillion in the past 8 years. Where is that hyper inflation?
ResponsiblyIrresponsible
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7/19/2015 9:53:53 PM
Posted: 1 year ago
At 7/13/2015 1:12:36 AM, Thefightforfreedom wrote:
I am not saying we could be the next Greece. But are you saying all we have to do is print more money and it wouldn't send us into hyper inflation? Not an argument just a question.

Yes, I am saying that. Granted, monetary policy is a whole lot more than "printing money," and the base is often misconstrued as a clarion sign of the stance of policy, when in reality it's nothing more than an indicator, and a poor one at that.

As slo noted, the Fed did print close to $4 trillion in the wake of the financial crisis -- through QE1, QE2, QE3, and Operation Twist II -- and the vast majority of that is sitting on bank balance sheets as excess reserves. They could pose a possible *future* inflationary threat, though it's highly unlikely, and a far lesser risk, in light of the Fed's liquidity drainage operations and long-fought credibility as an inflation fighter.
~ResponsiblyIrresponsible

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ford_prefect
Posts: 4,139
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7/19/2015 10:08:42 PM
Posted: 1 year ago
Great post, although I would argue we actually could run deficits indefinitely, so long as our deficit-to-GDP ratio remained relatively stable and all our creditors knew we could continue paying the interest on our debt.
ResponsiblyIrresponsible
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7/19/2015 10:15:03 PM
Posted: 1 year ago
At 7/19/2015 10:08:42 PM, ford_prefect wrote:
Great post, although I would argue we actually could run deficits indefinitely, so long as our deficit-to-GDP ratio remained relatively stable and all our creditors knew we could continue paying the interest on our debt.

I think this is fair. Technically if marginal increases in the debt (i.e., deficits) were equal as a percentage to the marginal increases in GDP, the debt-to-GDP ratio wouldn't move. There might be ramifications to running those deficits -- diminishing returns on investment projects, possibility of inflation and/or consequently-tighter monetary policy, etc. -- but they'll likely be mild insofar as the expenditures are at least remotely productive. I'm not one to think that debt intolerance or Ricardian equivalence are genuine worries, so the actual level of the deficits doesn't concern me much.
~ResponsiblyIrresponsible

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ford_prefect
Posts: 4,139
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7/19/2015 11:55:38 PM
Posted: 1 year ago
At 7/19/2015 10:15:03 PM, ResponsiblyIrresponsible wrote:
At 7/19/2015 10:08:42 PM, ford_prefect wrote:
Great post, although I would argue we actually could run deficits indefinitely, so long as our deficit-to-GDP ratio remained relatively stable and all our creditors knew we could continue paying the interest on our debt.

I think this is fair. Technically if marginal increases in the debt (i.e., deficits) were equal as a percentage to the marginal increases in GDP, the debt-to-GDP ratio wouldn't move. There might be ramifications to running those deficits -- diminishing returns on investment projects, possibility of inflation and/or consequently-tighter monetary policy, etc. -- but they'll likely be mild insofar as the expenditures are at least remotely productive. I'm not one to think that debt intolerance or Ricardian equivalence are genuine worries, so the actual level of the deficits doesn't concern me much.

Yep, true. Honestly I see no reason to believe Ricardian equivalence ever happens in the real world. In theory it makes sense, but the average American is not going to think about fiscal policy to that extent, or even have the discipline necessary to save/invest the money they think will be taxed in the future (either because they can't afford to, or because they figure they'll deal with higher taxes later).

But yes, it's very irritating to see people compare the national economy to a household budget. Very different rules apply, but most people are too ignorant to understand this. They just see a big number with lots of zeroes and panic. The irony is, the politicians who act on this panic and cause government shutdowns, are the ones who are actually hurting the economy, since it's stunts like that that create doubt as to whether we will pay our debts!
ResponsiblyIrresponsible
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7/20/2015 12:35:17 AM
Posted: 1 year ago
At 7/19/2015 11:55:38 PM, ford_prefect wrote:
At 7/19/2015 10:15:03 PM, ResponsiblyIrresponsible wrote:
At 7/19/2015 10:08:42 PM, ford_prefect wrote:
Great post, although I would argue we actually could run deficits indefinitely, so long as our deficit-to-GDP ratio remained relatively stable and all our creditors knew we could continue paying the interest on our debt.

I think this is fair. Technically if marginal increases in the debt (i.e., deficits) were equal as a percentage to the marginal increases in GDP, the debt-to-GDP ratio wouldn't move. There might be ramifications to running those deficits -- diminishing returns on investment projects, possibility of inflation and/or consequently-tighter monetary policy, etc. -- but they'll likely be mild insofar as the expenditures are at least remotely productive. I'm not one to think that debt intolerance or Ricardian equivalence are genuine worries, so the actual level of the deficits doesn't concern me much.

Yep, true. Honestly I see no reason to believe Ricardian equivalence ever happens in the real world. In theory it makes sense, but the average American is not going to think about fiscal policy to that extent, or even have the discipline necessary to save/invest the money they think will be taxed in the future (either because they can't afford to, or because they figure they'll deal with higher taxes later).

Exactly; I think, even insofar as households are forward-looking -- and they might be to some extent, which is why I think the Keynesian idea of precautionary cash holdings bears some merit -- they won't be able to accurately predict future tax liabilities. And, even if they could, there's probably a psychological argument for instant gratification.

My big thing about Ricardian equivalence, also, is that it assumes an equal amount of savings per increase in the deficit. It almost presupposes its conclusion: households assume that they, as a collective unit, will save enough that growth, and thus tax receipts, don't change on net. If they predict some amount of growth, and thus save less because they expect future taxes to fall, then it almost sounds as though they can will growth into existence. Not to mention, that doesn't account for spending cuts or endogenous fiscal policy changes.

But yes, it's very irritating to see people compare the national economy to a household budget. Very different rules apply, but most people are too ignorant to understand this. They just see a big number with lots of zeroes and panic. The irony is, the politicians who act on this panic and cause government shutdowns, are the ones who are actually hurting the economy, since it's stunts like that that create doubt as to whether we will pay our debts!

I couldn't agree with this any more if I tried. The paradox of thrift is Macro 101; if only it were more commonplace to view the government not as an individual household or business, but as a unit or a lynchpin holding the entire system together.
~ResponsiblyIrresponsible

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ax123man
Posts: 317
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7/20/2015 9:11:25 PM
Posted: 1 year ago
You guys obviously know a lot more about economics than I do, but I think this:

"a substantial portion of gross debt is money we owe to ourselves"

is BS because the debt is related to things I don't want and never asked for. The only way to know if someone wanted something is if he bought it voluntarily. Unless I'm misunderstanding what that means.
ResponsiblyIrresponsible
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7/20/2015 9:29:47 PM
Posted: 1 year ago
At 7/20/2015 9:11:25 PM, ax123man wrote:
You guys obviously know a lot more about economics than I do, but I think this:

"a substantial portion of gross debt is money we owe to ourselves"

is BS because the debt is related to things I don't want and never asked for. The only way to know if someone wanted something is if he bought it voluntarily. Unless I'm misunderstanding what that means.

The first point is irrelevant because, even if you didn't ask for it and never personally purchased it, you nevertheless paid forward some of your income to assist in purchasing it. The morality of that is ambiguous, but *you* nevertheless owe part of that.

I don't even see how the degree of voluntarism even matters to that point, though. When I say that it's "debt we owe to ourselves," I'm saying that one person's debt is another person's asset, and much of our debt is owed to Americans or to government agencies. It's a liability for the U.S. government, but an asset for the Americans who purchase Treasury bonds.

Krugman has a great post on this: http://krugman.blogs.nytimes.com...
~ResponsiblyIrresponsible

DDO's Economics Messiah