David Leonhardt has a great catch from a recent Larry Summers speech up at the Times Economix blog today. In the speech, Summers made the following observation:
… even with the dramatic action of the Treasury and the Federal Reserve, the total level of borrowing in our economy is actually lower than in normal times, not higher. Accordingly, the volume of securities that have to be absorbed by market participants is lower, not greater, than normal.
Leonhardt translates:
Even with the big recent increase in government debt, the total amount of debt generated by the United States economy has not been growing especially fast. That’s because the amount of debt being taken on by households and companies has been falling, as they have cut their spending during the recession. Thus the amount of American debt that investors (“market participants”) must buy has not been growing very fast, despite the government’s spending of billions and billions of dollars in response to the financial crisis.
He notes that "total nonfinancial debt grew 6 percent in 2008 and has been growing at annual rate of less than 5 percent this year. It grew at least 8.1 percent every year from 2003 to 2007." Now, obviously, if the government is still borrowing in huge quantities once businesses and consumers start borrowing more heavily, then the supply of debt could start to exceed investors' appetite for it, which would drive up interest rates. On the other hand, since borrowing is related to overall demand, it makes sense for government to step in and borrow more than usual at a time when businesses and consumers have scaled back. It's the basic logic of Keynesianism.
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COMMENTS (8)
I understand the Keynesian logic, but gee, wouldn't it be great if the "fiscal conservatives" who were in charge for the better part of a decade HADN'T been increasing the debt by 8.1% (!) when the economy was booming? Then perhaps we wouldn't be skating on such thin ice when we actually need to take on the debt.
I understand the Keynesian logic, but gee, wouldn't it be great if the "fiscal conservatives" who were in charge for the better part of a decade HADN'T been increasing the debt by 8.1% (!) when the economy was booming? Then perhaps we wouldn't be skating on such thin ice when we actually need to take on the debt.
What would all these investors do with their money if they weren't buying treasury bonds? If they lend it to businesses, the money doesn't just vanish, now its in the business bank accounts, what do they do with it? Ultimately no matter how many times that money is transferred among parties, the last bank account it ends up in, the bank holding the excess reserves is going to lend it to the Federal Reserve at the overnight rate. So the government doesn't need to anyone to buy it's debt. All the excess reserves in the banking system, one way or the other end up at the Federal Reserve/Treasury at the end of the day.
What would all these investors do with their money if they weren't buying treasury bonds? If they lend it to businesses, the money doesn't just vanish, now its in the business bank accounts, what do they do with it? Ultimately no matter how many times that money is transferred among parties, the last bank account it ends up in, the bank holding the excess reserves is going to lend it to the Federal Reserve at the overnight rate. So the government doesn't need to anyone to buy it's debt. All the excess reserves in the banking system, one way or the other end up at the Federal Reserve/Treasury at the end of the day.
Hi acria - I'm still struggling with something here.
A lot of the problem with the debt (as I understand it) is that it is being held by foreign actors, and hence the interest we pay is not necessarily circulating around our economy.
Also, and I apologise if you've answered this before and I missed it, but surely at a certain point there can be to much debt, as the interest burden becomes a drag on the economy?
Hi acria - I'm still struggling with something here.
A lot of the problem with the debt (as I understand it) is that it is being held by foreign actors, and hence the interest we pay is not necessarily circulating around our economy.
Also, and I apologise if you've answered this before and I missed it, but surely at a certain point there can be to much debt, as the interest burden becomes a drag on the economy?
http://neweconomicperspectives.blogspot.com/2009/06/will-run-up-in-gover...
I think this article should start answering your question.
The important thing I've accepted is that federal spending adds reserves to the banking system, and these reserves no matter what happens, at the end of the business day have to end up in some sort of federal bond. That means that the federal government never has to worry about people buying it's bonds, because they have no choice if they want ... view full comment
http://neweconomicperspectives.blogspot.com/2009/06/will-run-up-in-gover...
I think this article should start answering your question.
The important thing I've accepted is that federal spending adds reserves to the banking system, and these reserves no matter what happens, at the end of the business day have to end up in some sort of federal bond. That means that the federal government never has to worry about people buying it's bonds, because they have no choice if they want to save their dollars. The next logical conclusion is that the federal government also doesn't need to pay interest, but only chooses to do so, so that interest rates in the banking system do not go to zero.
The future interest on the debt that you are worried about only represents future spending directed to the treasury holders. If it's not in the public's interest to reward people who save dollars (I would argue it's not). The federal government should just stop offering interest, or lower the rate to whatever we the people want to reward savers with.
In the particular case of the Chinese, I highly doubt they will ever spend their pile of dollars, so most likely any interest paid would simply be added to their savings. They've pegged their currency to a fixed amount of dollars, so as long as they want to maintain that peg, they have to collect dollars.
Thanks acria -
I completely agree with that article in that higher debt levels do not necessitate higher interest rates and have been having fun reading their various posts since you first linked to it.
However that theory seems to skip something that I'm still hung up on - the money we do use to pay for the interest in the debt is money that we can't spend on something else. Even though interest paid is taxed, it's not taxed at 100% so the government has less money. And as the percentage of revenue that needs to be spent on these commitments rises, we become less able to afford the things we want.
The article did rather tritely say that today's taxes do not pay for yesterday's debt, bu ... view full comment
Thanks acria -
I completely agree with that article in that higher debt levels do not necessitate higher interest rates and have been having fun reading their various posts since you first linked to it.
However that theory seems to skip something that I'm still hung up on - the money we do use to pay for the interest in the debt is money that we can't spend on something else. Even though interest paid is taxed, it's not taxed at 100% so the government has less money. And as the percentage of revenue that needs to be spent on these commitments rises, we become less able to afford the things we want.
The article did rather tritely say that today's taxes do not pay for yesterday's debt, but then demures on what will.
As one commenter noted, to claim that we can print as much money as we need and can keep accumulating debt forever implies that we can just all stop working and paying taxes, and the government can just give us money. Either we (and everyone else) are just plain stupid to have not worked this out, or something is wrong with the theory.
Taxes have 2 purposes, one they establish demand for currency. You wouldn't accept dollars as payment if it wasn't for the fact that the government makes you pay some taxes. Two, they make room for government spending by reducing private demand. But if citizens aren't spending their dollars, then high taxes aren't necessary. You'll know when you need taxes, as soon as unemployment is zero, then every additional dollar of spending would be inflationary and we should raise taxes.
We have the power to set interest rates. Just lower them, or make them all zero. If you don't want to reward people who save money.
Another fun article, by Paul Krugman:
view full comment
Taxes have 2 purposes, one they establish demand for currency. You wouldn't accept dollars as payment if it wasn't for the fact that the government makes you pay some taxes. Two, they make room for government spending by reducing private demand. But if citizens aren't spending their dollars, then high taxes aren't necessary. You'll know when you need taxes, as soon as unemployment is zero, then every additional dollar of spending would be inflationary and we should raise taxes.
We have the power to set interest rates. Just lower them, or make them all zero. If you don't want to reward people who save money.
Another fun article, by Paul Krugman:
http://www.slate.com/id/1937/
if you read it, click the link near the end to the sidebar "quite obvious"
As for taxes and debt, taxes don't "pay debt." Government debt maintains interest rates, you don't even need to issue debt if you don't care about interest rates. Whenever someone wants their money back, the government just credits their account.
Sorry to be dense, but what does it credit the account with? Money it just prints (inflationary) or money that it borrows elsewhere (no change in position)?
Sorry to be dense, but what does it credit the account with? Money it just prints (inflationary) or money that it borrows elsewhere (no change in position)?
I hate to answer a question with a question but where do you think the person who buys treasury bonds got that money from?
My answer to your question would be the government has to spend money (credit a person's account) before it can borrow that money (debit a person's account). But really it's a chicken or egg question, the point is that all excess reserves in the banking system (people's savings & checking accounts) are automatically put into the Federal Reserves computers in what amount to overnight Treasury bonds.
So if the Chinese government had a $100 30 year bond that came due, the Federal Reserve would subtract $100 from the Treasury's accounts, put $100 in China's checking acc ... view full comment
I hate to answer a question with a question but where do you think the person who buys treasury bonds got that money from?
My answer to your question would be the government has to spend money (credit a person's account) before it can borrow that money (debit a person's account). But really it's a chicken or egg question, the point is that all excess reserves in the banking system (people's savings & checking accounts) are automatically put into the Federal Reserves computers in what amount to overnight Treasury bonds.
So if the Chinese government had a $100 30 year bond that came due, the Federal Reserve would subtract $100 from the Treasury's accounts, put $100 in China's checking account, the Chinese have three choices, spend the money, in which case $100 goes to someone else's checking account, or buy another treasury bond of some duration, or do nothing. If Option 1, then the new guy with $100 has the same 3 choices the Chinese did. If Option 2, then the $100 is subtracted from China's account, they are presented with a shiny new piece of paper saying they own a treasury bond, and the $100 is credited back to the Treasury's account. If Option 3, then the $100 sit in China's savings account at some American bank. That $100 is an excess reserve, and if left in the banking system, would drive interest rates down. So the Federal Reserve does it's job and borrows the $100 from the bank, at the interest rate it set. And the Fed puts $100 into the Treasury's account. No matter what option is chosen by the Chinese, the result is the same.