Who buys our debt and are they just shells for the Fed? Truth is stranger than fiction, but Netflix's "House of Cards" may be more truthful than the real life Administration. What we can learn from both.
I came across this chart from an article at Global Economic Intersection (where I am also a sometimes contributor):
A couple of things stand out:
1.) China and Japan are by far the largest owners of U.S. Treasury debt.
Both benefit from their currency being weakened and ours being strengthened so they can sell us (relatively) cheap goods.
2.) WTF is up with Belgium?
Belgium is rapidly increasing its holdings of American debt, up 31% in just a year. Did Belgium suddenly develop a taste for the dollar? No, according to Paul Craig Roberts:
From November 2013 through January 2014 Belgium with a GDP of $480 billion purchased $141.2 billion of US Treasury bonds. Somehow Belgium came up with enough money to allocate during a 3-month period 29 percent of its annual GDP to the purchase of US Treasury bonds.
Certainly Belgium did not have a budget surplus of $141.2 billion. Was Belgium running a trade surplus during a 3-month period equal to 29 percent of Belgium GDP?
No, Belgium's trade and current accounts are in deficit.
Did Belgium's central bank print $141.2 billion worth of euros in order to make the purchase?
No, Belgium is a member of the euro system, and its central bank cannot increase the money supply.
So where did the $141.2 billion come from?
There is only one source. The money came from the US Federal Reserve, and the purchase was laundered through Belgium in order to hide the fact that actual Federal Reserve bond purchases during November 2013 through January 2014 were $112 billion per month.
So, the Fed is propping up purchases of Treasuries to disguise lack of interest from the usual world buyers.
3.) Is the same thing happening with Luxembourg?
It would certainly seem so. The increase in purchasing is almost as high (28%) and more significantly, tiny Luxembourg now, we are supposed to believe, has 284% of its own GDP invested in U.S. Treasury Bonds. How can that work? How can any country afford that? Why would they even want to try? Especially a country that exports practically nothing to America and so would not gain from a depreciated currency? And anyway, Luxembourg is one of the richest countries in Europe, not a devalued currency country like deflated Greece. Where is this money coming from? Hint: you probably don't have to cross an ocean to find it, just the Potomac River.
The popular Netflix series, House of Cards perpetuated the myth of a finite money supply with this weekend's release of Season 3. In the opening episode, newly ascendent President Underwood presents his plan to create 10 million jobs in an FDR-New Deal type jobs program (good), but proposes to pay for the half trillion dollar program by slashing Social Security, Medicare, Medicaid. The growth of entitlements, he and his staff tell an assembled body of lawmakers and advisers, will bankrupt the country and must be curtailed. I think the current percentage of spending the fictional president cites are 42% presently and 61% by 2020, which is probably pretty close to the deficit hawk values being peddled in real life these days
Social Security does not show up in the Federal Outlay chart because it is independently funded, but the SS Administration says it is the largest part of "total budget expenditures," over 22%:
Presently, the Social Security program is the largest single item in the annual federal government budget. As a percentage of total federal expenditures, in 2002 Social Security benefits were approximately 22.6% of federal expenditures. As a percentage of federal outlays, Social Security benefits have ranged from a low of 0.22% (during World War II) to a high of 23.2% in 2001.
The conventional thinking is that this "expense" - which is really an investment that helps the economy grow almost $2 for every $1 outlayed, because of the money multiplier effect anyway - is paid for from a Trust Fund which in turn is replenished by Treasuries held by that fund, as well as ongoing Payroll deductions. While this is true as far as it goes, it ignores the fact that we have a fiat money system, and the Government could, if it chose to, simply create the money needed in the program without taxing or borrowing anything. And, remember, this program CREATES wealth so it actually saves money to fund it. If we overpay Seniors to the point when they start saving Social Security money and become Asset Investors instead, then it will be a net drain. We are very far from that now...
This once-radical book has become the accepted wisdom
By Rick Boettger
What I wrote in 1997 has now become the conventional wisdom! I debunked the national debt scares before and more forcefully than anyone else. Now it is accepted and casually discussed that of course we will fight the 2008-9 recession with virtually unlimited deficit spending. Even members of the Concord Coalition recently agreed on national TV that the deficit should be ignored now.
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I don't know why people are rushing to explain that Democrats lie too, about other things, or that politicians in general lie. The question can be taken at face value: given that we all agree that all politicians lie and that Democrats lie in ways that arguably create a moral equivalence, why do Republicans lie about debt and spending in particular? (rather than about other things?)
It is a fair question. Of the many things Republicans lie about, debt and spending is probably where they lie the most. The reasons are:
1 It is an important current issue given the state of the economy, so it is worth lying about.
2 The "experts" (economists) are in the doghouse currently and nobody trusts them. Not even liberals. So there is no authority to appeal to who might contradict lies (unlike in the case of say, creationism, where biologists have not lost authority). So debt and spending are safe to lie about.
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Carol Roth | @CarolJSRoth
The biggest news this week revolves around the debt ceiling, deficits and defaults. However, this discussion seems to breed rampant confusion.
Our financially incompetent government has met the financially illiterate public—and in many cases the financially illiterate media too—to spread myths, lies and misunderstanding as far as the eye can see regarding the ongoing U.S. debt issues. Here's what's real- and what's not- in the government debt narrative.
Debt is not the only method to finance overspending
When our government spends more money than it takes in, as it has been doing both consistently and at an accelerating pace for the past 30 years, it has to find a way to pay for that overspending.
As any individual or business knows, there are choices you face when you need more money than you have at hand. You have to find a way to bring in more capital through making more money, selling some assets or securing financing.
That's the same decision the U.S. government faces as well. While raising taxes is an unattractive option given our already slow growth environment, plus the rampant government waste and mismanagement, the U.S. has plenty of assets that it could sell or lease in order to raise money to pay for overspending.
For some reason, the option of utilizing our assets is never legitimately discussed.The default choice for the government for the past three decades has been borrowing to pay for its overspending.
Because of that, over the last dozen year we've added more than $11 trillion in debt, creating the current balance of approximately $17 trillion that we owe and leaving us paying far too much of every dollar for past spending in the form of interest expense (approximately 9% for FY 2013).
In layman's terms, we are paying more and more of every tax dollar to finance past overspending instead of for investing in our future. Debt cannot be used as a continual financing solution without dire consequences.
Failure to raise debt ceiling doesn't mean default
Somehow, the media and political narrative has been that if we don't raise the debt ceiling we will default on our debt. It's a convenient and scary cause-and-effect scenario. The problem is that it's blatantly untrue as well.
Failure to, or postponement of, raising the U.S. debt ceiling means that the government has exhausted all of its borrowing options and it cannot legally borrow any more money (a provision that would have been prudent to enforce long ago).
This means that without debt financing available, whether that be temporarily or indefinitely, the government needs to make some choices.Those choices include raising money in other ways (as I discussed above, perhaps through utilizing its vast assets), postponing payment of some of its obligations or forgoing some of its authorized spending.
The government does have cash flow coming in every month, so the only way the U.S. defaults on its debt is if it chooses not to pursue additional revenue collection and/or does not use the money it has available to make its debt payments (any interest and principal due).
Failure to raise the debt ceiling forces the government to have to make choices, but only their own prioritization of payments would cause an actual default.
Our credit rating is threatened by much more than a default
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