Saturday, July 16, 2011

Who's got the biggest piggy bank?

Some notes on the US federal debt.

It is important to realize what a non-issue the US federal debt is, and thus what a stalking horse it is for the same old class war of rich vs poor and capital vs labor. This was clarified when, after voting against raising the debt ceiling, House Republican leaders hurried to assure Wall Street bankers that they were just bluffing- they would surely raise the debt ceiling in the end, but just wanted to put some more theatrical pressure on the Democrats to squeeze out more spending cuts, presumably so that the economy performs worse during the upcoming election. Government is always bad, when it is run by Democrats.

One would think that savings are a good thing to be encouraged, so increased government bond holdings by individuals would be a good thing, insulating them against future calamity, funding their retirements, paying for their medical services, etc. The Federal reserve has certainly encouraged banks to save lots of money, pumping them full of reserves and offering them bonds so that they can make a bit of money and crawl their way back to solvency without lending.

But one person's saving is another's liability. Why not leave these liabilities in the private sector instead of the government sector? The private sector recently went through a meltdown where some savings were lost due to bankruptcy, and other savings through vertiginous market drops- a highly unpleasant situation. Federal debt has zero financial risk, (though the risk of political idiocy rises by the day). The US government has never defaulted, has never repaid substantial amounts of its own debt, and can print up more money any time. So from the customer's standpoint, safety is worth the low interest rates the government offers.

On the other hand, is the government robbing the private sector of capital, "crowding out" sources of savings? Hardly ... the world is awash in savings, increasingly desperate to chase even meagre returns. Obscure economies were inudated with investment in the 90's, only to be whipsawed by its fickle exit. The Chinese, of all people, are saving prodigiously. The dot-com boom showed the nation's enormous appetite and financial capacity (via other people's savings) to support risky schemes that end in tears. Ditto for the housing boom just ended. Most companies are sitting on hoards of cash. Any decent commercial investment can find plenty of money, but with demand guttering, few companies have strong growth and investment prospects. Bankers are reluctant to lend, but not for lack of money.

Granted, the private financial sector (or FIRE) would prefer to force the regular savers and pension funds to invest through their greedy minions. Thus the ideological push to privatize Social Security, Medicare, 401k's, and anything else they can get their hands on. But while private finance is surely important, (though its "innovations" are anything but), it is not ideal for many forms of investment, retirement perhaps among them.

But what of the risk to the government? Isn't its debt bomb "exploding"? Or spiralling? Or "out of control"? This where the title comes in, because if we take a step back, we can see that of all the savings kitties out there, the government has the largest one by far. The power to print money is equivalent to having an infinite piggy bank. It can spend any time, as much as it wants. It can also reverse course and add to its virtual savings by running overall budget surpluses (drawing dollars back out of the private balances, which is typically quite destructive to economic growth). So of all the actors on the scene, the federal government is best equipped to weather any storm and meet any calamity. The question is mostly whether it wishes to do so, and secondly, whether its use of that piggy bank is consistent with keeping the value of the money stable.

Inflation can be caused by unbalanced spending from any source- if the government prints and spends too much money, or if China suddenly decides to dump all its dollars and buy US real estate, or if the older generation suddenly joins a Buddhist cult en masse and gives all its money away, or if banks keep lending and creating money without proper oversight and capital backing. The economics would be the same- galloping inflation when spending of saved dollars far outstrips the productive capacity of the economy. So whoever has the dollar stash is a source of inflation risk, just as sudden credit destruction and a pell mell flight to safety leads to the economic tailspin we are experiencing now.

It is uniquely the government's job to 1. regulate the banking sector which creates most of the money, and  2. meter out its own spending to counteract whatever monetary pressures there are, whether contractionary or inflationary. Today the pressures are clearly contractionary. With interest rates at zero, the Fed has found it impossible to prod banks to create more money by lending. More spending is called for, and indeed a higher explicit inflation target is called for as well. (A whacky site hosts a good video series on money & banking, at least in the opening three parts- especially note the equation of debt with money.)

Note how different this is from an individual Euro country, which has no implicit pile of savings to work from, or from a gold-standard country, which likewise is limited to whatever its miners happen across in their voyage of environmental destruction. The powers of having an unlimited piggy bank are enormous, as are the dangers, which is why governments have tried to paint central banks as mysterious, oracular, god-like, non-political entities.

Conversely, it does the government no good to pile up surpluses. Since its "savings" are infinite, it need pile up no savings against a rainy day. Indeed, any surplus it runs is useless, flushed down an accounting hole. Surpluses represent money withdrawn from the private sector (by excess taxation) which is simply extinguished ... it is not stored in a vault somewhere, or used to buy private bonds, etc.. it is deflationary destruction of the same money it creates effortlessly on the other end. Sometimes such deflationary pressure is helpful, but of course not today.

It is also worth noting that issuing government bonds to balance government spending is no protection against inflation. Bondholders give up short notes (dollar bills) in exchange for long notes (bonds). But nothing much else changes as far as anyone is concerned. The government had spent the money originally in any case, the money was intended to be saved in any case, the savers still possess the money in any case, and they can redeem their bonds in the market at any time, given the government's commitment to keeping it liquid and functioning. With bonds, the spending of those dollars is notionally barred for the term of the bond, and in return, government throws in a small annuity, paid from its infinite stock of savings or from taxes. But these are very minor effects in the normal course of affairs.

The bond rigamarole is virtually pointless from a macroeconomic standpoint, though from a political standpoint, it can "bond" the rich to the financial soundness of the government (though Republicans may not have gotten the message!). Government bonds also provide provander for central bank's management of bank reserves and interest rates, though it certainly doesn't need endless trillions for that purpose in the normal course of events.

Anyhow, the bottom line is that savings in government bonds will be an increasing and stabilizing feature of our financial landscape. By all means, private issuers should have first priority in the market, getting all risk-seeking money that wants higher rates. But our future looks much like Japan's present, with high levels of federal bonds held by individuals as a stable core of savings. And that future looks very good, as far as the government's accounts go.

How much is too much? We are closing in on a federal debt of 1X GDP, or about $14 trillion. Japan is at roughly 2X GDP. How much do you have in savings personally? Do you want to have one year's income, or two year's? These seem like paltry amounts, really, compared to what is needed for serious retirement, so averaged over a population, 2 or 3X GDP sounds perfectly reasonable as a steady-state level of population savings parked in safe government bonds, balancing consumption with savings. (The fact that these holdings tend to be held highly unevenly among income groups is a separate issue.)

The problem in the mean time is that savings desires are running ahead of consumption desires, resulting in depressed economic activity and unemployment. Here is where the our political will comes into play. It is the government that can support both the desire of people to save after the recent profligate boom, and also the horrifying unemployment that continues in its wake.

There is no inherent contradiction between the two. The government clearly needs to spend more, within its inflationary constraints, which are right now extremely low. It would also help if it spent in targeted ways that directly create jobs, rather than disproportionately giving to the rich through tax gifts, etc. and waiting for the shower of money to trickle down. And the point doesn't have to be consuming more stuff made in China. With a little political foresight and leadership, we could be spending on remaking our energy system and rebuilding our infrastructure and educational system. There is a great deal to be done to make our country and world a better place.

"The national government in a sovereign nation (currency issuing with floating exchange rate) always chooses the national unemployment rate. Not sometimes, but always."


  1. Hear hear!

    One hears the non-stop litany of "the government is over-spending!" - which of course makes little economic sense.

    What they really mean is that they are politically opposed to too much collectivism, but they are disguising it as an economic argument.

  2. Thanks, Steven. One can make a principled case against "excess" government spending, if the government were somehow objectively holding back the progress of private enterprise. But it isn't. Quite the opposite- in so many areas, like research, schools, roads, military spending, agricultural extension, and on and on, the government is in a productive partnership with private enterprise.

    The main thing that government activities hold back are many forms of private corruption (via regulation) and harms to the public good (pollution, poverty, etc.).

    This is all particularly true of the financial sector, which relies entirely on the services of government for basic support, like the currency, not to mention bailouts after unpleasant free-market blowups.

    I guess what you mean by collectivism is any responsibility to their fellow-citizens other than haranguing them to get moral and get rich and get god, as if that would miraculously produce spending/jobs in the current environment. Perhaps saying it more often would help!