I woke up this morning to see Ron Baron on CNBC make an analogy of our $17 trillion national debt to the debt on a single family home. He did not expand very much on it nor did he compare Social Security or any other entitlement to credit card or auto debt…so I will.
Essentially, if you have a house free and clear with no debt then you have a very solid footing. The same goes for a nation, if the nation has no debt and doesn’t owe anything to foreign nations (or to “ourselves”) then financially it is on solid footing. The national debt is now virtually equal to the size of the economy, $17 trillion. Janet Yellen talked about this last week; she said that we must grow our debt at a slower pace than the economy grows in order to survive financially. This makes sense right? Too bad it cannot happen.
If you buy a house and put 20% down then over time your equity should grow. You make your payment each month and whittle down the mortgage balance …AND …as the dollar loses value over time your “house” goes up in value right? And the remaining balance becomes less significant. Well yes, this is the theory and in the old days this was correct. So what changed? First, it depends on “where” or at what time in the long term credit cycle you “bought” the house. Did you buy it after a credit “boom” that pushed prices up at truly stupid and manic rates? Also, we have home equity loans that served as “ATM’s” over the last 20 years or so. These “ATM’ machines” allowed many to live the good life, people were able to spend many percentage points more than they were earning to use as “consumption”…with no pain whatsoever (until later). Theoretically the “debt” becomes smaller in absolute AND real terms because it gets paid down and the smaller balance is even less significant because the dollars themselves are “cheaper.”
From a national debt perspective we have done exactly what has happened in the housing market. We have accumulated more debt over time in a manner such that much of our “equity” is gone…it has been consumed. In comparing to a house, home equity loans were originally used to either remodel or expand the house…which morphed into purchasing “fun stuff and going on wonderful vacations.” As a nation this same mentality took over. We no longer “borrowed to make the house a better house.” We have essentially borrowed to pay for social programs. What once went to building roads, plant and equipment that facilitated business to create more activity…has instead been “spent” with no dividends or future value, and it has been eaten just as eating your own seed corn so to speak.
We also have reached a “(in) tolerance level” just as any hard core alcoholic or drug addict does to their choice of poison. It used to be years ago that $1 of debt could create $5 of GDP…debt was “good stuff” if you will because it actually did increase growth. Now however it takes $5 of debt to create $1 of GDP (I have even seen a study where it takes $18 of debt for every $1 of growth)…not such “good stuff?”
I have explained all of the above because Janet Yellen has told us that, “Debt must grow slower than the economy.” She would be correct if we lived in a “traditional world,” we however do not. Because our national “lifestyle” has grown to levels so far above our ability to actually pay for it, debt (deficits) can never go way or even grow “slower” over time. If this were to happen, “depression” would be the result along with social unrest because those receiving “assistance” would revolt. “Revolt” because their “God given rights” were either curtailed or taken away.
The slowing of debt growth also cannot happen because of “math.” Once an economy has come to survive on debt, it cannot mathematically survive without it…lots and lots “more” of it. In order for asset “prices” in dollar terms to just stay level there must be new buyers. Because the macro system is not generating enough “cash” to sustain “prices,” new debt MUST continually come into the system to just maintain prices, never mind pushing prices higher.
In case you had not already made the connection, a Ponzi scheme works in exactly the same manner. “New buyers” absolutely MUST be found and brought into the fold to pay “previous investors.” This is all truly simple stuff but the Fed chair (wo)man has to “say the right things.” She has to tell us that debt must grow slower than the economy because this only makes sense even to 3rd graders with a liberal financial mind…but it no longer is true and has not been since the early 90’s. Slowing debt growth will bring on the end faster than any other policy.
As for the “”house” analogy, the decay rate is increasing because we haven’t done regular maintenance for many many years. Look at our road and bridges. Look at our nonexistent industrial base, capex and R+D has been slashed and yet we live like we live because “we are Americans” and it’s always been this way…we are entitled to it right? The “kids” have been moving back into their parents homes in droves…with friends in tow! Just as in any foreclosure situation, eventually you lose the house!
I would love for someone to show Yellen the trajectory of national debt to GDP growth over the past 50 years, and ask her to fully explain IN DETAIL how she thinks this 50 year trend will suddenly reverse itself. That is exactly what she is implying by making the statement that we must grow debt more slowly than the economy grows!
One thing you can help me with Bill. I can’t quite wrap my brain around is the issue of all money being backed by debt and since the interest doesn’t exist, money must continuously be created or the system collapses. Mike Maloney has made this point. But each dollar can be spent numerous times in a year and pay interest on several obligations. Isn’t the correct answer that it is a little more complicated than the simple example of all interest needing to be created, but the concept still holds that there must be continuous money creation in the exponential fiat world and that on the hockey stick portion of the exponential debt curve, as we are on now, things speed up to the currency’s ultimate demise?
yes, we are in the exponential phase now. From a macro standpoint, the future interest payable does not exist currently and must be created or the system defaults on the payment. In reality, we either do not create the interest and default (defation/implosion) or we do try to exponentially “create” which is the hyperinflation side of the coin. Either way it is $ destructive and the “feel” will be hyperinflation as the dollar loses value. This is what Richard Russell means by “inflate or die”.
I was just saying a dollar can be spent more than once. So even if we have the same amount of debt and money, and the money for future interest payments does not exist, can’t one of the existing dollars be spent TWICE (or more) in the next year, and therefore serve to pay $2 dollars worth of interest payments without the fed (or banks) having to create extra dollars? I still believe the premise is correct, just that it may not be as direct as the simple example implies.
One other thing, didn’t China back off treasury purchases last month but Belgium step in to fill the void? Given what we know about the extent of fed money printing years after 2008/2009 due to the FOIA request, who is to say that the real buyer of our debt isn’t the fed THROUGH Belgium to make it appear like their is foreign appetite for our debt? Further, who is to say the Plunge Protection Team isn’t propping up the stock market more than it already is through QE and low interest rates driving granny into equities? I don’t trust the gubment anymore and realize it will get more deceptive the worse things get.
it probably is the Fed. A gold coin can be spent over and over again but no future coins are “mandatory” as every dollar created has future interest attached to it.
BTW, I think the current projection using the trendline is for $1 of national debt to buy ZERO GDP by mid 2015….
would not surprise me.
Virtually all economic activity (around 95-98% of it) is powered by burning / consuming dead things that used to be alive. This covers food, biofuels, fossil fuels, and all the wonderful materials we play with in our factories (they mostly come from oil, which is dead algae that sank to the bottom of the ocean millions of years ago, or coal, which is petrified swamp forests). Since we have overshot the capacity of the planet to provide dead things for us to burn by about 5 fold (only enabled by our one-time, non-renewable fossil fuel binge which burns through dead algae at a rate 1,000,000 times faster than deposition rates, and is now beginning its decline down the back side of the Hubbert Curve), growth is most definitely NOT good.
Debt is money, and vice versa. When people argue that we should be “debt free”, what they’re actually advocating is that we should return to a barter system, because there would be no money without debt (as the monetary system is currently structured). Of course, with interest, that system must grow exponentially. But the real economy can’t continue to grow, because we’ve exceeded out the amount of dead things available to burn.
This is why Greenspan, Bernanke, and Yellen are among the most dangerous people in the world, likely committing us to a planetary die-off in their pursuit of unsustainable economic (human) growth to appease their ponzi scheme monetary system. Because, all that physical plant stuff (roads, bridges, factories) doesn’t PRODUCE wealth — it CONSUMES wealth because you have to burn dead things that used to be alive in order to build, maintain, and use it. The economists have it totally backwards.
Since economic growth is what historically provided jobs for a large portion of the workforce (building roads, houses, factories etc.), if the economy can’t grow anymore then unemployment will automatically shoot up. This is why I have zero agreement with those in the libertarian movement who criticize Americans on welfare and receiving some form of social assistance as being part of the problem, as if they’re unfairly milking the system. Because THERE ARE NO JOBS. What we’re seeing is an unavoidable result of an economy that has well exceeded its limits, via a 40 year trade deficit facilitating grossly unsustainable consumption of natural resources. That will never return.
I agree with you Mark because we all know that many of these same (unemployed and dependent people), were part of the workforce at some point in their lives. I also would like to add this to your statement “Virtually all economic activity (around 95-98% of it) is powered by burning / consuming dead things that used to be alive”. Don’t forget we eat dead things which we have to burn(cook) then consume to be alive. Which means that it is not 95-98% it is actually 100%..LOL! The day mankind sinned, that was the beginning of everything starting to die off. Just like we need dead things for this body to survive, we have created a world system that works in the same manner.
I fully believe man was not made to create things, because a body that is dying can only create a replica of itself. We build houses, cars, robots etc which are all dead and we try to give them life, however, we were not given the power to give life so we try our best to create it.
This is why we have people like Yellen and Bernanke who’s (“spirits are dead because of what they trust in-the dollar”), are trying to resurrect the monetary system. The money is dead with a dead man’s face on it, but people trust in it not realizing that it cannot give them life. Look how many rich people pay large sums of money to save their lives when they find out they are sick. They are dying and trying to get more days living by trusting is a dead thing and a dying doctor. Only people who are dead in spirit cannot see this error of mankind.
I say all this because it is easy to blame someone who is trying to feed their family that is getting welfare. I am not defending these people, but what I see is blame only comes when there is a time for answers, and especially when things are falling apart. Just look at what happened when Adam and Eve was asked if they ate the fruit. The woman blamed the serpent and the man blamed the woman. No one took the responsibility to say I made the wrong choice. Now this body we live in, which is our House/mansion, is dying just like this country and many others like it is. We have all sinned and have come short of the glory of our true potentials as beings on this earth.
Without man this earth is still a good place to live. But with the corrupt minds and evil thoughts of some of the people, the entire planet is become defiled. Like dropping one drip of poison in a clean glass of water, it is no longer clean. Things will only get better when the people change and right now, many people believe in the change El Presidente sold them on(which is a lie). They should have asked him what kind of change? Pocket change, country destruction change, immorality change etc? These questions were never asked but people believed in change( the lies). Very sad!
yes, very sad indeed.
Interesting thoughts Marco. Just one point: we also get some energy from sources other than burning dead things — we have nuke power plants, wind turbines, hydroelectric dams, and solar panels. These are what the technological cornucopians are pinning their hopes on but when you look at the numbers it becomes clear that they are woefully inadequate to provide a replacement for our energy needs in time before things collapse. They constitute the other 2-5% of the total energy supply (it varies a bit by country of course). Furthermore, they only produce electricity, not carbon based fuels. The energy they provide is therefore much less useful and if we were to switch entirely over to these electrical renewable energy sources we would need a complete rework of the rest of the physical plant of the economy that uses the energy — i.e. no more internal combustion engine cars, only electric, which would be a massive undertaking that would require huge amounts of oil and coal to accomplish! An unfortunate catch 22. We should have started the transition 30 years ago. We only really started 5 years ago, in baby steps with the first EV’s to come to market.
Just produce $17 trillion Treasury dollars as legal tender ,not borrowed but “spent” into existence to payoff all US Federal reserve note debt….Voila! No more debt problem…..no more interest ….What do you think, Bill?
like a $17 trillion “platinum coin”? If this were done…the value of $1 would be what?
If we pulled that idiotic idea embraced by Krugman and his sociopathic socialists, the reserve currency would be SDRs right now and the US would probably comprise 1/3 or less of it, and more importantly, high or hyper inflation would have ravaged the country. People think velocity goes up only when things get better, but fear velocity is powerful and feeds on itself, as people realize the currency is being devalued and spend money quickly to buy real things, which drives up the prices, which causes more people to spend money quickly, etc. I realize Bill knows all this. It was for others who may not be as schooled on all the mechanics.
“Velocity” will go up as everyone tries to “unload it” like a hot potato.
EXACTLY!!!!
Money is supposed to be a claim on real world “goods and services”. If you value a one ounce platinum coin at $17 trillion, then essentially you are saying that the dollar is worthless, and no one will have any confidence in lending you more money, or in holding onto any previous debt obligations they offered you.
no Doug, “money” is supposed to actually “settle” a trade. You cannot do that with a “claim” on something else.
And you “settle” a trade by giving someone the power to claim ownership of some other good or service via the dollar you just gave them as payment, because you you have diminished your ability to do so by giving them the money. Money is the modern day barter system, which essentially is just a method of shifting claims of ownership around between people. I’ll trade you this good or service in exchange for that good or service, but money allows one to delay the consumption of that good or service until another time, or to claim a different good or service provided by a third party not directly involved in the barter. That’s why barter is inefficient, because party1 who offers widget1 for someone else to claim ownership of might not want in exchange the widget2 that party2 has to offer. By obtaining money instead of the widget2 that he doesn’t want, party1 then has the ability to instead go claim ownership of widget3 offered by party3, which is what party1 actually wants to claim ownership of.
I tend to disagree Mark, what you have described is a “currency” rather than “money”. It is exactly what you wrote is the problem with the dollar, it is a claim…not true settlement.
Actually if they were to make 1oz platinum coins at 17T then whoever has a 1oz coin would be worth the same amount. Thats why the idea is so absurd and ridiculous. Because even though they can make special designed coins, platinum is platinum once the weight is the same.
The real problem is that all of our “money” is created as debt, out of thin air, by the fed and the big banks that own the fed. Until this is solved, we are all debt slaves to the banksters forever, and that’s the way they like it!
yes, exactly Art!
Back to Doug’s original question. A dollar indeed can be spent several times in a year to pay interest on several debts, but in the aggregate that would leave the principle untouched as in an interest only loan. Then new money would have to be created to pay the principle because now that money doesn’t exist. I believe Mike Maloney’s explanation is about as good as it gets. It really is that simple. The Fed governors may or may not be bad people but those _ _ _ _ _ _ _ _ that own it have the best heads I win tails you lose game that ever existed.
this is what I was trying to say but maybe didn’t. “In the aggregate”.
Exactly Art! (When I wrote that Bill had not yet responded) This whole system of paper money, credit and debt is a banker’s dream come true. They print the currency, lend it to us, and charge us interest on the loan. We pay to borrow something they created out of thin air, and if we don’t keep up the payments they claim are due they reprocess your collateral, i.e., your house and all the equity in it – all for a paper promise (these days there’s really not even any real paper involved).
RE: Unemployment, welfare, food stamps, social security, whatever. Not to say there aren’t people in need of these things, not to say there are not people deserving of these things, but the reality is there has to be real money to pay for them, while the fact is there is only currency… When the currency is worthless it will not matter how “in need” or deserving a person is. The reality is that reality is heartless…