Robert Solow Speaks From Olympus

[TuffaloDeac10]

http://www.nytimes.com/2013/02/28/opinion/our-debt-ourselves.html?_r=0

THE significance of America’s national debt is a serious question, but you would not know this from the current political rhetoric, which consists mostly of vague apocalyptic warnings. I want to present a calmer view, by emphasizing six facts about the debt that many Americans may not be aware of.

Roughly half of outstanding debt owed to the public, now $11.7 trillion, is owned by foreigners. This part of the debt is a direct burden on ourselves and future generations. Foreigners are entitled to receive interest and principal and can use those dollars to acquire goods and services produced here. If our government had used borrowed money to improve infrastructure or to improve the skills of workers, the resulting extra production would have made repayment easier. Instead, over the last decade, it used the money for wars and tax cuts.

The Treasury owes dollars, America’s own currency (unlike Greece or Italy, whose debt is denominated in euros). So the Treasury can always make payments when due — unless it is prevented from doing so by political blackmail over the statutory debt limit, which is now due to be reached in May. Notwithstanding the unprecedented credit-rating downgrade by Standard & Poor’s in 2011, no foreign lenders realistically expect us to default. If they did, they would be insisting on higher interest rates, which they aren’t. Of course, if we were stupid enough to default even once, the cost of borrowing would go much higher, for a long time.

One way to effectively repudiate our debt is to encourage inflation. When prices rise, interest and principal are repaid in dollars that are worth less than they were when they were borrowed. (This applies to Treasury’s borrowing at home as well as abroad.) The Federal Reserve has promised to keep buying bonds and to maintain near-zero interest rates until unemployment eases, a strategy that some fear could lead to uncontrolled inflation, though there is no indication so far that that will happen.

Treasury bonds owned by Americans are different from debt owed to foreigners. Debt owed to American households, businesses and banks is not a direct burden on the future. Of course the payments of interest and principal are a burden on current and future taxpayers, but they will ultimately be received by American people and organizations, many of them taxpayers. Some of our grandchildren would be paying off others of our grandchildren; the result will be a net transfer from American taxpayers to American bondholders.

The real burden of domestically owned Treasury debt is that it soaks up savings that might go into useful private investment. Savers own Treasury bonds because they are seen as safe, default-free assets, and the government can borrow at lower rates than corporations can. If there were less debt, and fewer bonds for sale, savers seeking higher returns would invest in corporate bonds or stocks instead. Business investment would expand and be more profitable.

But in bad times like now, Treasury bonds are not squeezing finance for investment out of the market. On the contrary, debt-financed government spending adds to the demand for privately produced goods and services, and the bonds provide a home for the excess savings. When employment returns to normal, we can return to debt reduction.

In the long run we need a clear plan to reduce the ratio of publicly held debt to national income. But for now the best chance to reinvigorate the economy, spur business investment and encourage consumer spending is through public borrowing and spending. Instead, we’re heading into an ill-advised, across-the-board austerity program.

Robert M. Solow, a Nobel laureate, is an emeritus professor of economics at the Massachusetts Institute of Technology.

 

[Spot the Wonder]

Roughly half of outstanding debt owed to the public, now $11.7 trillion, is owned by foreigners. This part of the debt is a direct burden on ourselves and future generations. Foreigners are entitled to receive interest and principal and can use those dollars to acquire goods and services produced here. If our government had used borrowed money to improve infrastructure or to improve the skills of workers, the resulting extra production would have made repayment easier. Instead, over the last decade, it used the money for wars and tax cuts.

Interesting that he doesn't mention that this foreign debt is caused by the trade deficit.,

 

[Deacon923]

Interesting that he doesn't mention that this foreign debt is caused by the trade deficit.,

how exactly is the government's foreign debt caused by the trade deficit? I have heard this claim before and I don't understand it.

 

[Spot the Wonder]

how exactly is the government's foreign debt caused by the trade deficit? I have heard this claim before and I don't understand it.

When we run a trade deficit, we send USD overseas for foreign goods. Those nations, like China and Japan, then have a buttload of dollars they need to do something with. They buy US assets. If we had run balanced budgets over the last few decades, those assets would be stocks, companies and real estate. Because we run deficits, the investment option of treasury debt is also available. Due to the advantages that offers, such as safety and ease of sale, foreign countries buy treasuries.

 

[TuffaloDeac10]

Interesting that he doesn't mention that this foreign debt is caused by the trade deficit.,

Why do you find that interesting? I don't think bringing that point in would affect what Solow says. It suggests that we ought to get the trade deficit down, but that doesn't have anything to do with the point of the op-ed. We really should have been making investments in America's future and not building a structural deficit while waging a fucking dumb war in Iraq or spending so much time in Afghanistan. What the fuck difference does it make that China has to recycle its US dollars somehow?

If you go further down the MMT rabbithole, it still makes little difference. Assume every Treasury of any maturity is really a variable rate perpetual bond and we only ever need to make coupon payments. Those coupon payments still need to get made and they're still a transfer of future real claims on American production to foreigners.

 

[Spot the Wonder]

Why do you find that interesting? I don't think bringing that point in would affect what Solow says. It suggests that we ought to get the trade deficit down, but that doesn't have anything to do with the point of the op-ed. We really should have been making investments in America's future and not building a structural deficit while waging a fucking dumb war in Iraq or spending so much time in Afghanistan. What the fuck difference does it make that China has to recycle its US dollars somehow?

If you go further down the MMT rabbithole, it still makes little difference. Assume every Treasury of any maturity is really a variable rate perpetual bond and we only ever need to make coupon payments. Those coupon payments still need to get made and they're still a transfer of future real claims on American production to foreigners.

Wow, you seem to be a bit testy.

 

[TuffaloDeac10]

It's just neither here nor there when it comes to Solow's point. CA and KA have to balance. Not a big deal. I genuinely don't think it's interesting when it comes to discussions about the debt. It does seem interesting if you're talking exchange rate targeting or trade balance, but that neither of those are the point of Solow's op-ed.

 

[Spot the Wonder]

It's just neither here nor there when it comes to Solow's point. CA and KA have to balance. Not a big deal. I genuinely don't think it's interesting when it comes to discussions about the debt. It does seem interesting if you're talking exchange rate targeting or trade balance, but that neither of those are the point of Solow's op-ed.

It's the first point of his piece on the debt. Overall, it's a good piece, but leading with that, some rube somewhere is going to think that deficit speninding is why we owe money to China. It's not. Deficit spending is why we owe money, period. The reason we owe money to China is due to the trade deficit. It's not treasury auctions that are responsible for that, it's billions of purchases of shitty crap at Walmart by people like you and me. He mentions later in the piece about inflating the debt away, but he doesn't discuss how inflation would lower the value of the dollar and pontentially lower the trade deficit, therefore lowering debt owed to foreigners.