U.S. Treasury Data Lab(datalab.usaspending.gov) |
U.S. Treasury Data Lab(datalab.usaspending.gov) |
It leads to other examples being used that just are not true. Like: "It is similar to a person using his or her credit card for a purchase (rather than cash, check, or a debit card) and not paying the full credit card balance each month".
I cannot sell access to my debt to pay for past debts, which is how the government has paid it's debts since 1837 (probably so long ago because that the last time we sought to destroy debt and not pay for things by monetizing debt, it caused the longest depression in American history due to Jackson's monetary policy in 1835). Nor can I create credit out of thin air, by buying treasuries my member banks. Also, I most definitely do not owe 50% of my non-intergovernmental debt to my own central bank and state and local governments and their pensions. Much less, all the while operating with a currency I control.
So yeah, I don't love it, but I get it.
Just a small correction. Federal Government spending was $4.4 trillion in 2019. It was $6.6t for 2020 [2], with $4.6t of that being mandatory spending; tax revenue was $3.4t for 2020 by comparison. We wish outlays were only $3t, we'd have a nice budget surplus right now.
"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default." Alan Greenspan
So yeah, it's just my opinion but to me the mechanics and context of the US's federal debt is so departed from that of household finance, that it's more detrimental than beneficial to even use them in the first place. But again, I understand the desire to anchor it to something people recognize.
Do they? I havent looked in a while but my recollection (of south america in particular) is that the impact of government bond default is actually pretty low. A couple years without good international bond market access, higher premiums for a few years, maybe some wrangling with the IMF and surface level "restructuring." But sooner rather than later its back to issuance on the open market with willing buyers after those premiums.
I can't help but think this is confusing as heck to most Americans.
I'm not sure all of the quoted statements are true. Private banks create a good chunk of the new money that goes into circulation by issuing loans. The Federal government (through the Treasury) creates still more by issuing bonds to cover deficit spending.
The Fed can influence the rate of money creation by setting short term rates. But the Fed can't force banks to loan money, so its power is limited. Especially so with short term rates pegged at zero for most of the last 13 years or so.
Although some view the Fed's QE as a form of "money printing," it's not. It's an asset swap in which the Federal reserve buys a Treasury from a bank, issuing a reserve asset as a credit to the bank. Reserve assets thereby become "trapped" inside the banking system. They are not cash and can only be used under very restricted conditions (not unlike a laundry token) at least according to some sources.
This is their balance sheet released on 9th Sep, 2021 - https://www.federalreserve.gov/releases/h41/current/h41.htm
* https://github.com/fedspendingtransparency/usaspending-api
* https://api.usaspending.gov/docs/endpoints
* For geography based spending - https://github.com/fedspendingtransparency/usaspending-api/b...
https://usafacts.org/data/topics/government-finances/spendin...
Edit: looks like they’re not as up to date, unfortunately.
1. "Amazon Restaurant & Bar Inc" received 1.3M in FY2021 while apparently empolying only 8 people and taking a revenue of 96k (https://www.manta.com/c/mhx084z/amazon-restaurant-bar-inc).
2. Google received 11k in the last 12 months, less than a Florida man named Christian Google.
3. Palantir Technologies Inc. 231.3M, versus Microsoft Corporation 357.5M in the last 12 months.
Bonus question: can you find the judicial branch and the legislative branch?
>In 2020, the federal government collected $3.42 trillion in revenue.
>In 2020, the federal government spent $6.55 trillion.
One wonders why they bother with the effort of collecting taxes.
They should just borrow the entire budget and let everyone get on with their lives.
They'd save money in the long run: no more IRS budget.
>Why can’t the government just print more money?
and thought “because the treasury is not the central bank” LOL
Even this is misleading private banks do not "create" money. They add to the supply but do not create. For every loan credit there is an equal loan debit. The total amount of money, the sum of all credits and debits, is the exact same.
Printed dollars are necessary in an amount proportional to economic activity, and the sum of printed dollars is only loosely related to the total money supply as it affects the macroeconomy (and is becoming less relevant every year).
Yes, a loan creates both a credit and a debit, and they offset exactly. In that sense, nothing is created.
But the credit spends just like cash. The debit, on the other hand, does not spend like negative cash. So in the sense of the supply of money in circulation, bank loans create money.
Can't banks lend something like 7X more money than they have in deposits?
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
According to the lede of [1], "[Federal Reserve Deposits] are interchangeable with Federal Reserve Notes", i.e. cash. But you are claiming the opposite. Do you have a source?
[1] - https://en.wikipedia.org/wiki/Federal_Reserve_Deposits
This is how I see it. Treasury makes new treasuries, and the Federal reserve buys them (through a bank, but it is a middle man only). Essentially, Federal reserve created money and loaned it to the government, holding the treasuries as IOU. This is further complicated as the Federal reserve is also mandated to give all profits to the treasury. So, essentially, the treasury did not create the money, only got a loan, but its loan payments are going to come back to itself.
I personally find it easier to dispel with the illusion of an independent fed, and just say the government (which includes both fed and treasury) prints money.
New money is created by debt issuance. This comes from both the federal government, which supplies the monetary base, and from commercial lenders, which leverage the monetary base through loans to the “real” economy—business startup loans, mortgages, supply chain finance, revolving lines of credit, etc.
I think you’re technically right; I would only call it outright printing if the Fed actually canceled the debt rather than rolling it over.
When the base money is itself an IOU, then debt issued by the privileged party is indeed printing money, albeit money with an expiration date.
Argentina: decades of inflation and economic stagnation.
Venezuela: societal collapse.
With game theory, you can see how a certain amount of debt, especially when borrowed from foreign lenders, can be the optimal choice for long term relative national growth. That's pretty much what the US did for most of its history up to ~2001. But unsustainable, growing debt, certainly has consequences.
For a government default is *very* similar to the US personal & commercial bankruptcy process. Its generally structured, governed by contracts, creditors take a negotiated "haircut", payments are deferred or restructured, etc.
In light of this yes, Argentina is a great example of teh real effects. This quick hit from WSJ[1] highlights argentina issuing a new 100-year bond in 2017, with massive subsciption, 3 years after a default and 3 years before the next.
Looking at the articles infographic[2] the timeline actually includes two different defaults, 2001 & 2014. There are 4 lean years of little to no issuance in 02-05, and a tiny hit in the number of issuance in 14-15. My recollection is that larger studies across time and geography actually show minimal impact to yields ~7 years after default.
So yes, governments absolutely have access to mechanisms similar to bankruptcy. And no, default is absolutely not catastrophic to future funding, debt management, or spending. And yes again, the people of places like argentina & venezuela have suffered greatly for generations but that seems to be a different proposition than "governments cant manage huge and/or unsustainable debts without drastic outcomes."
[1] https://www.wsj.com/articles/argentina-sells-2-75-billion-of... [2] https://si.wsj.net/public/resources/images/BF-AR635_ARGENT_1...
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
The multiplier is an upper bound on money creation by banks, and it does not specify a timeline. That's a fact. Obviously, not every bank loans all the way to the minimum reserve ratio (for example, currently, the reserve ratio is zero in the US, which makes for a poor denominator). Nor does every recipient of proceeds from a loan put all of that money into a lending bank. However, the money supply is still increased via lending. The increase from the issuance of a loan is immediately reflected in total deposits.
What your link is stating is that central banks respond dynamically to the total number of bank deposits, and apply other policies (such as influencing interest rates) against that number directly, which can overpower the effect of the multiplier, if the central bank chooses. However, it does not nullify it, and it very much depends on a central bank taking that action. Your link also mentions regulations which may be specific to the UK about how banks lend, but the underlying principle of money creation remains unchanged.
1. It allows the government to spend more money, which ends up going to a bunch of places that can't be "unspent" (government worker salaries, contractors, equipment, etc.). That money goes into various banks and ends up getting irreversibly multiplied.
2. In order to fill bids for Treasuries, the Fed front-runs other market participants with artificially low interest rates (below market), forcing other major Treasury participants (like banks) to lower their commercial interest rates in order to do something with their deposits, resulting in more borrowing.
It should also be noted that the Fed sets the Fed Funds Rate, but my understanding is that this has a less pronounced effect. And it sets the minimum fractional reserve ratio, which as of COVID, is ZERO (infinite multiplier potential, although most big banks are pretty conservative with their reserves. Although IMO they do not need to be, since the odds of a run on the bank in an approaching-cashless society is nil).
In practice it's a lot fuzzier than that, but the above is the basic concept people are usually talking about. The 7x doesn't mean the government or someone else is handing them extra dollar bills, it's just the ratio of what has to be kept in reserves vs. can be loaned out, and the amount that is loaned out effectively gets counted twice in terms of the money supply (and many more times over, since that money will get deposited into a bank and loaned out again at that 7x ratio).
In theory a bank could create an infinite amount of money claims, at least up to the point where nobody wants any more at the interest rate offered. However, the bank is also subject to capital requirements which determine how much risk it can take relative to the amount of equity it has (this used to be called the “reserve ratio” but that is an outdated concept).
> The total amount of money, the sum of all credits and debits, is the exact same
?
This gets to the heart of why there can be negative dynamics in a credit cycle. If I’ve lent 1 real dollar 100 or 1000x then there is a real risk of everyone needs that dollar back today. Similarly if creditors become risk averse and stop redepositing the money into the banking system, the velocity of money will tank and the number of dollars available to lend/spend will collapse. Growing the money supply only through fractional reserve dynamics also poses risks if a systemic imbalance emerges between creditors and debtors requiring some individuals/corps to be permanent borrowers e.x the Great Depression, and Recession.
In many ways the US is using treasuries to counterbalance the above by having the federal reserve purchase treasuries which will never be paid back in real dollars. However until the pandemic the government had limited ability to place those trillions of dollars in the hands of people who needed the surplus.
The economic principle at work is you can have $1 in the bank and loan that to 7 people sequentially (who each redeposit it), or have $7 and loan it to those same people simultaneously (who each redeposit it), but in both cases the same transactions happened ($7 out and $7 in).
No, it exists because government issued commitments to pay people money in the future. A government that creates its own currency has no need to do this to spend more than it takes in in revenue, and even a government that doesn't create its own currency is free to issue such commitments without a deficit.
The two events (1) Congress deciding to spend money (in excess of receipts), and (2) the Treasury issuing debt, are directly causally related. If event (1) doesn’t happen, then event (2) won’t happen. In theory it could, but in reality it does not, period.
In reality, savings and debt are basically two sides of the same coin - one is a promise for future consumption, and the other is a promise to forgo future consumption that balances it out.
One of my favorite simple models is sectoral balances - you can divide US dollar holders into domestic and foreign categories, and then divide up the domestic category into the private sector and the government (leaving 3 categories total).
If you don't print money, the net saving should all add up to zero. If the government is running a surplus, that means the combination of the private and foreign sector is going into debt. If there's a trade deficit, then the combo of the private sector and government are going into debt. Etc.
People can still be against government deficits with such a model, but it's not because everyone should save up at the same time (they literally can't). It's because they want the private sector to go into more debt, and are worried about government debt "crowding out" private sector debt. And more private sector debt isn't always a bad thing - in practice it might mean more housing, factories, and other sorts of investments that debt finances.
Unlike at the micro level, at the macro level your spending is my income.
That alone changes (almost every) received microeconomic intuition.
While this is partially true:
1. Sovereign nations absolutely can and do default. See, Russia in the 1990s and the LTCM fiasco.
2. Even though they do not have to default and can always print money to pay their debts, doing so causes inflation. How much inflation it causes is proportional to how much money is printed.
Now, the dynamics of inflation are pretty complicated, so in certain circumstances you can get away with it for a while. But it is not the case that the government can print money indefinitely with zero consequences.
https://en.wikipedia.org/wiki/1998_Russian_financial_crisis
Most countries just choose not to do this. They weren't forced to default. They could have chosen to monetize their debt. They just didn't choose to do that.
Over time it's gotten harder for me to figure out what the side of caution even is. If they are too aggressive in stimulating the economy, they risk inflation. If they are not aggressive enough they risk a persistently weak economy, escalating political dysfunction, and (if history is a guide) eventual collapse of the status quo and usually even-more-inflationary policies.
It doesn't seem like there is a safe path anywhere - errors on either side seem like they could be potentially catastrophic.
The fed could find itself in the position of fighting a structural imbalance such that for every dollar lent to the government the deficit increases by 1.X dollars. This would be the case under rampant corruption, rampant inflation, or an economy collapsing.
https://en.wikipedia.org/wiki/Carter_bonds https://www.treasury.gov/resource-center/international/ESF/P...
That has negative consequences that are papered over by making simplistic statements like that. The debt is still bad and going to result in bad things happening, and no platitudes from the Fed are going to change that.
