I haven’t been in such a protracted debate about economics since I was in grad school, 44 years ago, when Friedman was in full spew mode. Besides reading his columns in Newsweek, and reading his book, I watched the TV series. It is gratifying that I can still hold up my end of a debate. Apparently, the Alzheimer’s has not set in yet. :^)
Steve
The black helos are probably on their way to pick me up now. I was watching a YT channel by an Aussie EV fan, who has been ripping on Nissan for a while. Last night, he was talking about Nissan closing seven plants around the world, and he said one of them was in Indiana. I went “Nissan has a plant in Indiana? Since when?”. At the same time, he shows the headline from The Economic Times, that says that Renault is buying Nissan’s interest in a JV plant in India. I dared to comment on his piece that there is no Nissan plant in Indiana, the headline he showed says India, and Renault has no presence in the US. I’m probably a goner, but helos are slow, and Australia is a long way away.
Steve
Think about how the government creates money. Every month, the government writes checks for everything from defense to payroll to property leases to what have you. (Almost) every month, there isn’t enough money in the Treasury to cover the checks. That is the moment money is created.
No one consulted the Treasury Department or the Fed, or asked permission. This is not like household debt where you get the loan first, then buy the car. The government buys the car first with money made up out of thin air.
Now all the checks get deposited in the banks. What do the banks do with all the money the government created? They buy treasuries, because that is the safest, highest yield thing to do with the money. Government deficit spending creates the demand for bonds.
It is logical that foreign buyers bid up the price for bonds, hence lowering interest rates, but the observable effect is very small, if any. So while it might be advantageous for foreigners to buy our debt, we don’t need them to do so.
I don’t think you have an inkling about the size and scope of the treasury market. For example, last week ALONE, the treasury issued about $500B of new treasuries. That’s more than ALL of Berkshire’s cash. And some weeks, when they do TIPS and/or longer term bonds, it is even higher. That’s because the debt, ALL THE DEBT, and ALL THE INTEREST, is constantly being refinanced every Tuesday and every Thursday (the bidding is on those days, the actual issue date is a day or a few days later). And this happens 52 weeks a year without stop. Now the bills (that Berkshire holds) are refinanced every 4-weeks, 6-weeks, 8-weeks, 13-weeks, 17-weeks, 26-weeks, and 52-weeks, but the numbers constantly go up … because ALL the debt is being refinanced, and ALL the interest is being financed, AND all the excess current spending is being financed.
Next week is a particularly big week for treasury debt, they will be auctioning:
17-week
4-week
8-week
13-week
26-week
6-week
2-year
5-year
7-year
20-year
10-year TIPS
2-year FRN
That’s true, but it assumes a recession.
Tariffs raise prices which presumably leads to inflation. I say presumably because a number of Fed commentators have mentioned that tariffs don’t have to be inflationary (leading to a wage-price spiral) but are rather a one time event. This apparently is one of the things the Fed is watching to see what happens.
Inflation can have painful effects, but recently during the highest inflation in 40 years the consumer kept spending
Also, looking at the 2018 tariffs the Kansas City Fed concluded that while spending patterns changed “households did not substantially alter their spending in response to tariff hikes by the end of 2019.”
DB2
Government is addicted to borrowing and living beyond its means. It needs to issue credit because the government runs deficits and needs to recycle debt. It is no different than a person charging credit cards to fund their living. Just because you have been borrowing does not mean you have to.
If spending = revenue, then no new need to issue new treasuries.
That isn’t factual.
It is neither the highest yielding nor is it the safest, especially after the downgrade.
I used to work for a bank; they want to loan that money out to businesses and homeowners. They do not want to buy risky and low(er) yielding treasuries with it.
Most longer term treasuries purchased this century are probably trading below par. That would have been a terrible investment for banks to make.
It is different than a person charging credit cards to fund their living. It’s more analogous to a business using debt, rather than equity, to fund their expansion.
If you’re running a growing business, you could limit your investment back into the business solely to your actual earnings. You would only grow as fast as your current earnings allow, but you wouldn’t have any debt.
Most successful businesses don’t run this way, though. Because you can grow faster if you don’t limit yourself only to the funds you generate through your internal operations. If debt is available and inexpensive, it is much smarter to also issue corporate bonds so that you have more assets to invest, so you can grow faster.
Don’t analogize government to a household - you’ll end up reaching the wrong conclusions. A better model (though still incomplete) is to compare it to a business. And as pointed out upthread, most businesses that you would regard as highly successful (like Apple or Tesla) carry debt on their balance sheet for exactly this reason - if debt is cheap, it makes more business sense to carry some debt rather than rely solely on equity to run your business.
This is factually inaccurate and dangerous.
If the cost of debt is more than you can generate profits with borrowing, you are digging the whole deeper. The business WILL go bankrupt. You can only keep borrowing for so long without commensurate cashflow.
For fiscal year 2024, based on available data:
These figures reflect a deficit of around $1.8 trillion for FY 2024
Sure. But that hasn’t been the case, historically, for the United States. Our debt has been inexpensive, and our economy has grown solidly.
The relevant analog to the “business” isn’t the federal government - it’s the entire economy. The federal government provides a ton of services to individuals and firms - national defense, health and unemployment insurance, and pensions for the most part. Because those services are provided by the federal government, private parties (and state governments) don’t have to devote as much of their personal assets to those things - they can instead use those assets to go out and do things that are productive to the economy. The federal government can borrow more cheaply than any private entity in the nation, so it makes a ton of economic sense to do that.
Correct. But we cannot assume that will be true forever. There will come a time when it will be a problem, or could turn into a problem. For example, Trump’s proposed budget is going to add $4T to the deficit in a single year. I don’t see how that is not going to be a problem. I don’t understand how the party of fiscal conservatism can even bring a bill like that to the floor, let alone pass it.
It’s enough that I’m now over 50% foreign investments in the IRA, at close to 60%. And I keep thinking it needs to go up. (VGK, VXUS and BNDX).
We do need to reign the budget shortfalls in. (not convinced the deficit needs to be zero) We are not doing the things that will do that, however. Historically, that is a trait of GOP leadership unfortunately.
Of course. But the federal government has a much lower cost of debt than any private entity. It has a lower cost of debt than any state or municipal government. By virtue of the dollar’s status as the global reserve currency, it has among the lowest cost of debt of any entity on the planet.
So while trees don’t grow to the sky, and obviously there’s a limit to how much debt the federal government can (and should) take on relative to the size of the economy, it’s just absolutely bonkers to think it should be a very small amount - or that the federal government should be analogized to a household budget.
We all are going to see what is going to happen. He can’t even get a tariff treaty done with one country in 90 days. IF he doesn’t back down, which I believe will happen, then most likely we will go into recession. While we did have a mild recession in 2019 we will see what happens this time
FWIW, real US GDP growth for 2019 was a healthy +3.4%.
DB2
Banks are in the business of lending money, so yes that’s why will try to do. I meant in the sense it is safer and more profitable than holding cash. And yes, banks buy government bonds with money they don’t lend because that is the best use of funds.
The key qualifier in your post. Buying govt bonds is generally the last thing they want to do with cash, not the first thing.
Additionally, your graph charts govt debt and commercial loans but excludes the MUCH LARGER household debt (credit cards and mortgages).
Sure, free money !
$1Trillion+ in interest payments on revenues of $4.9Trillion.
Would you invest in a business that has debt growing every single year a percent or two (or three) over how fast their company is growing? Or worse, in some years the debt grows while the company shrinks?
This is incorrect. Debt matures all the time and is rolled over. This is irrespective of whether spending = revenue. If spending = revenue, and spending includes all the interest on all the debt, then it would be solely the principal that is rolled over each week.
Now, very roughly, when $70B of 4-week bills mature, if the treasury wants to maintain all proportions of bills/notes/bonds as is, then the next round of 4-week bills would be about $70.25B. If the budget is perfectly balanced (including interest payments), then when $70B matures, a new $70B would be auctioned. In total, about $9.3T of treasury debt will mature between April 1, 2025 and March 31, 2026. That means that with a completely balanced budget, $9.3T of new treasuries need to be issued.
I’ve tried to get the arithmetic of our debt discussion started a few times in recent years, but seems like nobody wants to talk about numbers. It would be instructive for everyone to create a spreadsheet with the numbers and to look closely at it. Pick a number for GDP growth (even a rosy number if you like), pick an average interest rate during that GDP growth, then make a chart in your spreadsheet with 3 columns. First column is debt, second column is GDP, third column is debt / GDP expressed as a percentage. Pick a number for budget deficit (you can even pick a rosy number like 0). Now make 10 or 20 rows and apply the interest rate you chose to the first column and add the budget deficit you chose to it each row. And apply the GDP growth number you chose to the second column for each row. Now look at the third column and tell me what you see. This is a [very] rudimentary first order illustration of the numbers.
Now, you can get fancy. Many people say we should raise taxes. And rising by a tiny amount is essentially meaningless. You have to raise by something like $1T a year to even make a dent. So now, you can make your assumptions of how much faster GDP grows, and how much slower the debt grows, if you take an additional $1T OUT of the private sector and pass it through the government sector. Or you can choose to simply lower the deficit by $1T each year, and rerun the numbers. What do you see?
Just for fun, I took 2 minutes and created the simple spreadsheet I described above (I had a previous one somewhere, but I can’t find it, so I made a new one). This is using quite rosy numbers here. It is using a 3.5% GDP growth, no recessions, no slowing, none of that. And because GDP growth is so strong and steady, with no recessions, I am using a 4.0% interest rate (a little lower than current rates). And instead of the current massive budget deficit, I am using only $500B a year of deficit (let’s say spending goes down a lot and revenue goes up a lot).
