Ahh, remember the good old times under Clinton when we were actually paying off the debt. What happened then? They mocked Al Gore for his plans to pay off the debt (remember all the "lockbox" stuff) and then we got a president that promised tax cuts and drastically increased federal spending, and added a couple of wars just for fun. Now there is absolutely no danger of paying off the debt.
By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD. Just set the risk free return to zero and you can use all of your old formulas. Yes several bank departments would not be able to make money for absolutely zero risk as they do now. Oh well, I suppose the banks would have to do what they are supposed to do, i.e., calculate risk properly.
But of course it is all academic now. Because it is unlikely to ever happen. Paying off the debt means doing something to help the future generations of Americans and it is doubtful any president would do such a thing, and if he did he would probably have to face a lot of angry voters who do not give a shit about the future generations as happened with Al Gore.
Actually, we did start to pay off the debt but this was at the very end of the Clinton administration. If you'll look closely at the graph you supplied you'll see this. Note that the first Bush budget wouldn't be until 2001.
The debt wasn't being paid off at a great rate but it was being paid off and the person's main point that you responded to is correct. We were well off financially until some very irresponsible actions by the Bush administration.
I disagree with the point about us never being able to pay off the debt. It can be done and there are historical examples of countries with higher debt/GDP ratios that were paid off.
Note: When talking about debt of a country people generally mean the debt of the government. There was a budget surplus at the end of the Clinton presidency and this is what people usually mean when they claim a government was/is "paying off the debt".
According to the Congressional Budget Office there was a decrease in 2000/2001. According to the NPR story and the original graph you linked to there was a decrease at this time.
According to your CBO link, debt held by the public decreased. I'm not disputing this point. However, debt held by the public is only one component of federal debt.
The other kind of federal debt is intragovernmental debt; that is, debt which the federal government owes to itself. This category includes the Social Security Trust Fund.
And that does not really count. If government department A owes 10 dollars to government department B, the total net government debt does not change. So yequalsx's data is correct for the purposes of the present discussion.
If you borrow from your 401K, you're borrowing from yourself, and you eventually have to pay it back. It's money that you owe, to be paid with funds that can either be used to buy jelly beans or put back in your 401K.
If the government borrows from Social Security, it takes that money out of itself and spends it out in the economy. SS and the government has a smaller pile of cash, and the government owes itself. When the money is put back, it's with funds that could either be used to buy bullets or put back in SS.
Why does it not really count if you're actually paying back the social security trust fund? They can borrow from it, surely it also counts as debt. Just because you say it's going from department a to b doesn't mean there aren't real implications for that money being owed or not.
It's perfectly possible to balance the budget, create a surplus and start paying down the debt, and have the debt still increase because the interest exceeds the surplus. This is what happened under Clinton, he created a surplus and started using it to pay down the debt but it wasn't big enough to stop the growth. Had Bush stuck to Clinton policies, it would have been.
We could pay off the debt if we wanted to; it definitely is possible.
The question in my mind is - if a country like the US has the ability to print the world's reserve currency, isn't it beneficial to run a small deficit to increase GDP? I don't see any problems running small deficits, of course large amounts of public debt are rarely ever a good idea.
It is absolutely beneficial, in most cases, and it's not even a question of having the world's reserve currency.
A look at sectoral balances helps to analyze this: the government's budget deficit is equal to the non-government's (private plus external sector) budget surplus. That's just a basic accounting fact.
So if the non-government sector desires to be in surplus (as it usually does), then the government must run a deficit. If it tries to run a surplus despite the non-government desires, there is a conflict, and someone will have to budge. Usually, the first ones forced to budge are those with the least economic clout. The result tends to be large scale unemployment.
There is nothing inherently bad or good about government deficits (I dislike the sentiment that is so often voiced by politicians, who frame the deficit and debt as a moral issue - those are just numbers in computers, for Bob's sake! Unemployment, poverty, those are issues where morals come into play). It's simply that given the typical long-term private sector behavior, a long-term government deficit is the pragmatic and economically responsible thing to have.
How soon we forget. At the end of the Clinton years, government surpluses were treated as a frightening inevitability by Fed Chair, Alan Greenspan:
Mr. Greenspan said he was concerned that if the government did not begin to curtail its revenue, it would have more money than it needed when most of its debts were paid, leading to an accumulation of cash that he opposed. He said the government needed to start planning soon because there was $750 billion of debt that would not mature by 2011, so cash accumulation would begin by then, based on current projections, even though some of the debt would remain unpaid.
It would be interesting to see a country like the US buy so many bonds of another country that it effectively owns the other country in the end. A nice capitalist way to expand your country.
Government Bonds are not like equity. You could own every single Treasury Bond and still not have any claim of ownership. Obviously governments still try to appease the bond markets but that is not due to obligation, it is self interest.
How so? China owns ~10% of US treasury bonds, which makes them the largest single holder of Treasury Bonds. This does not mean they bought anything other than a promise for repayment at a stated rate.
http://www.treasurydirect.gov/NP/BPDLogin?application=np
This site records debt to the penny, daily. There's a fair amount of up and down in such a measure, as you might expect. There are certainly (long-ish) periods during Clinton's presidency where the total debt, as well as debt held by the public, decreased from the day at the start of the period to the day at the end.
That is not a good measure of debt. Government debt is only meaningful as a fraction of GDP (large countries have more debt than small ones, e.g.). So in this case you want this graph:
http://research.stlouisfed.org/fred2/graph/?g=2TG
which is (Gross Federal Debt)/(Gross GDP), and was clearly decreasing.
The distinction between gross and public-held debt is also not very useful. The difference between them is government debt held by parts of the government, which is money that the government owes to itself. Public-held debt was decreasing even more:
http://research.stlouisfed.org/fred2/graph/?g=2TI
When it comes to talk about paying back the debt, that 2TG graph is misleading, though. Throughout the entire period of debt reduction starting in 1950, the government did not pay down its debt. Instead, the economy was growing.
So the graph is misleading in the sense that some people may draw the conclusion that government has used austerity measures, run surpluses, to reduce its debt. In fact, the government did not run surpluses during those periods in which the debt-to-GDP ratio was reduced so drastically. It ran deficits, which helped an already growing economy further along.
Implementing austerity is not going to start a sudden and drastic drop of debt-to-GDP measures in the current economic climate. If you honestly care about debt-to-GDP (why, btw?), you'd do better to stimulate the hell out of the economy.
I wish I could upvote this a hundred times. You cannot, by definition, simultaneously maintain a trade deficit and reduce the sum of public and private debt.
Deficit's include investments. If China where to buy 100 billion in US stock and then receive payments on that stock forever it could maintain a continuous trade imbalance with minimal impact on the US economy over the long term. In the wider context, with continuous inflation the US can export an ever growing amount of USD without changing the ratio of USD in the US vs other countries. And in those terms there is little reason not to do so as long as other countries want USD. In some ways exporting constantly inflating USD is the best trade relationship possible because you get non US goods for what amounts to free money.
Ron Paul wants to cut $1 trillion in the first year, and end the wars. That would go a long way to paying off the debt. Plus he was against increasing the debt limit, so he's the only one who truly realizes the debt problem, and that the country might implode if they keep spending as they do, with no cuts whatsoever.
Balanced budgets as a long term policy are a fine thing, and absolutely a good idea. Austerity in the face of recession is madness. This is the Greece/Portugal/Ireland solution, and it's a terrible one. Paul may be one of the few politicians to earnestly care about the first issue; but he's yet another tea party whackjob with his head in the sand about the second.
Actually if you look at the economic growth of the 'austerity' countries it has been better than the economic growth of the 'stimulated' countries. They are both feeble, but Austerity is marginally outperforming stimulating at the current time, and down the track it will beat it hands down.
Yes, it sucks either way, but when debt is the problem, more debt is not the cure. 'Stimulating' is just borrowing future funds to try and get things going now, which, at best, just moves the problem down the road.
Many people are quick to try and string up politicians who point out the truth. Sadly this means the politicians who push the problem forwards and reassure people are the ones that get voted in. And the problem gets pushed further down the track and gets even more malignant.
Greece is a smoking ruin and getting worse. The UK was outperforming Ireland until the new UK government started swinging a chainsaw around in an ideologically-based austerity drive, and now its growth has vanished.
Ireland is improving (hello from Cork) in relative terms because it genuinely had nowhere further south left to go. 20% of the population is on the dole, property prices are down 60% from 2007 and are still falling, mobility of potential jobseekers has been curtailed by the fact that they can't sell up and move because their mortgages are worth twice what the house is.
We also took the old government out back and swung an axe into its head in February. The party of government for 80% of the entire history of Ireland as an independent state is now polling in fourth position. Its erstwhile coalition partner is within the margin of error of zero.
You cannot but imperil private sector growth by removing massive amounts of cash from the economy all at once[1]. Public employees spend that money they're paid.
Couldn't it go either way though? I mean ultimately it just depends on what returns they can get. My impression is that the New Deal in the Depression gave good ROI because the infrastructure improvements opened up new avenues of growth. However if you have massive corruption like in Greece then you're probably better off with austerity.
When you build the Hoover dam and the interstate system, yes.
When you loan money to stimulate defense contractors, non-competitive solar manufacturers and for all sorts of other boondoggles and build bridges to nowhere, no.
The problem is that the process of spending on infrastructure rarely is positive in most places for a whole host of reasons. Therefore, austerity is better because it avoids malinvestment. Doing nothing is better than wasting capital.
If you borrow money to spend, the spending has to create more return than the cost of the borrowed money, or the money is wasted. This is true in the case of the individual, the company and the government. Individuals rarely invest money for greater returns (think : new cars), companies that last always invest for greater returns, but governments have few incentives to do so.
They would much rather make a big splash and announce jobs now, than worry about whether or not they are creating something worthwhile.
The problem, of course, is always in measuring the positive returns of large public spending. But again, in times of over-borrowing, governments should always err on the side of caution.
Honest question: why "austerity in the face of recession is madness" for the countries in Europe, but it is the only proposal given by the IMF to Mexico in 1996 and Brazil in 1996-2000?
Austerity plans are always a tough pill to swallow, and they can cost elections - as it did to Cardoso's sucessor in 2002 - but I fail to understand what is this madness you are talking about. If it were not for the economic policy that forced a surplus in the Brazilian budget, I don't think they would be in the (calmer) situation they are today.
The IMF regime was utter madness and disaster for Brasil. It resulted in a freefall of the Brasillian gdp. GDP growth only happened after Brasil removed and loosened IMF restrictions in the mid 00's.
Wrong in all accounts. The GDP never actually fell. Average growth in 1994-2002 was actually just shy of 3%/year. Not good, but never negative.
As for the boom that came afterwards: Lula kept the basis of the economic policy started by Cardoso. In was only in the last two years of Lula's second mandate (2009-2010) that they tried to loose a little bit on government spending (as a way to fight contagion by Housing Crisis), and inflation had shown signs on creeping up again.
And even that increase in spending was only possible due to the austerity policies from the previous 15 years that allowed the country to grow their reserves. Had they not followed the IMF rules, they would be in the same situation that Greece/Portugal/Ireland/Italy are today.
And this is why politicians can lie with statistics.
GDP in dollars fell in 1998 due to changes in the exchange rate. The price of the dollar went from BRL 1.2 to 1.98 in a matter of a week.
Further, the spike that you see in your chart after 2002 was due to the dollar hitting an all-time high of BRL 4.00 when Lula was elected, and there was huge speculation in the market. After he took office and kept the monetary policy, the market calmed down and the BRL has been rising in value since.
Had the price of the dollar kept stable during these years, you would see a curve that shows exactly the numbers I mentioned before.
The IMF has not been kicked out of the country. Debts with the IMF were paid, but the monetary and economic policy is still there. The Brazilian Central Bank still recommends austerity policies for government spending. They still have the highest interest (inflation adjusted) rate in the world. Your cute chart does not prove anything.
P.S: It's in times like these that I really hate voting in discussion forums, and makes me even less of a believer in "the rule of the mob". You are completely wrong, but your cheap jab managed to convince a couple of uninformed people that what I said is worthy of a down vote.
This is GDP in current US dollars. Not in what US dollars were at the time. This is the only way to meaningfully compute GDP. Of course the choice of US dollars is arbitrary. But if you do some math you would realize that if you calculated it as GDP in current BRL you would get exactly the same curve.
But the only way to meaningfully measure GDP is to measure it against a single unchanging metric, and that's what they did here. Otherwise a country could double its GDP by simply devaluing its currency by half.
Are you sure about that? The chart is showing a growth in GDP of 21% in 2007-2008. The growth rate in 2008 was ~5%.
More importantly, it looks like it works the other way around. If you are devaluing your currency in half, your GDP in dollars (or whatever means of comparison you use) will be cut in half, not double. This is what your chart is showing. It will be a bigger number in the domestic currency, but then it doesn't mean anything because you are just changing the scale.
Anyway, we are arguing over details. The larger point is that the economic policy mandated by the IMF is still largely in place, and whenever the Brazilian government tried to increase government spending, a short growth burst was experienced with a very long bust.
Lula gave a 1001 speeches saying that "they were breaking free from the IMF", but in the end it is just political bullshit: interest rates are still high and it is the only instrument the Central Bank is able to use to keep inflation under control. This is pretty much the IMF "formula".
Update: looks like you are correct that they use current dollars. It still seems a misleading chart. Take a look at http://goo.gl/BCNIo and you can see the numbers I was mentioning.
The IMF does not exist for the well-being of (former) third world countries. It exists for the well-being of its masters, i.e. the US and Western Europe. This explains most of the policies that the IMF likes to push on developing countries.
Note that IMF-type policies of austerity can theoretically "work", if there are sufficient net exports. Even when domestic demand is savaged by austerity measures, the economy can grow by producing goods for the US and the EU at cheap prices. But net exports-led recoveries are a typical case of fallacy of composition: if there is a world-wide recession, then going for net exports will fail (unless we somehow manage to export to Mars...).
The problem facing the US and EU these days is that people seem to have forgotten that austerity was only ever a policy meant for the others.
José Serra, Fernando Henrique Cardoso's successor, actually lost the ellections not because of IMF policies was in place. Cardoso's party (PSDB) showed clear disregard for social problems - a considerable part of the population was so poor that they could barely buy any food, they didn't care about IMF, they had other basic needs.
Luiz Inácio da Silva, on the other hand, was clearly a candidate of the people, he'd go to great lenghts to assure people that his duty was to put food on the table of those very poor people, while not screwing up middle class brazilians.
So, it's not right to blame PSDB's failure on ellections on the IMF policies, it was they ignorance of the more urgent people's needs (not to talk about they selling huge state enterprises priced like bananas, corruption scandals, etc. that got people really tired of PSDB rulling the country).
Ron Paul is the only candidate in the election with a voting history to back his beliefs. He may say some crazy things, but at least he's honest, and on the up and up.
I'll take a dishonest politician who votes for the right things over an honest one who is wrong any day of the week. Paul is a nut. The fact that he's right about a handful of things doesn't mean much: stopped clock, yada yada.
I don't think that someone is a liar because they don't always vote in line with their beliefs. There are good reasons for occasionally voting for things that are not 100% inline with what your goals are for one particular issue. Sometimes compromises need to be made in one area to make progress in another.
Ron Paul is somewhat an illogical idiot.. ever hear of the 1920s crash? We got out of that situation by guess.wait for it.. debt spending in ramping up to fighting WWII..
You do forget or skip over 12 long years of massive spending and borrowing in order to try and get the economy going. Spending and borrowing that, by any objective measure, achieved very little in economic terms.
When excessive debt is the problem, no amount of spending can cure it. The debt must be paid down or written off, most likely a combination of both.
Sadly your type of thinking is pervasive because it sounds so compelling. But while nobody in their right mind runs up a credit card thinking that this will somehow make them richer, there persists a widespread belief that borrowing and spending somehow makes a country better off. It doesn't, and it won't.
If anything positive is to come out of all of this, it might be the final discrediting of borrow and spend programs created in the name of Keynes. It will hopefully be the death of the widespread belief that you can borrow or tax your way to prosperity. Perhaps someone will come up with a kindergarten rhyme to teach children not to believe in free lunches.
Not sure what your point is. The Great Depression didn't end for the U.S. until World War II had begun and the U.S. had embarked on a massive public spending program - buying weapons.
GDP rose during the war, but it felt like a depression. What good is an increase in GDP if basic foodstuffs need to be rationed and people are getting killed? The recovery actually came in the post-war boom when government spending was slashed and 5 million people left military operations and joined the civilian workforce.
No, you want lots of people to enter the workforce and be productive.
The growth happened after the government spending (ie, military) was wound down. It was the retiring servicemen and women wanting to get on with the rest of their lives that caused the productivity boom.
Really? You think that the government spending lots of money on the war is not what got us out of the Depression? Of course the boom happened after the war was over. During the war... there was a war on. All that effort was getting dropped on Europe instead of raising the standard of living in the US. People may not have had a lot material luxuries during the war, but they sure weren't unemployed.
The point is that it wasn't just us borrowing more money. We did that for 12 years with no real success. The war brought huge amounts of demand for our goods from all over the world.
No, the war brought huge amount of demand for goods from the U.S. Government, which wanted tanks and fighters and artillery shells. This demand created full employment and economic rebound - during the war. Even - gasp! - women were sucked into the labor force.
After the war, the U.S. was in a great position to supply the world, having an economy running at full steam and no war damage to repair. But the Great Depression ended as war began, due to demand for military equipment.
Yes, the economy was soaring thanks to the technology and housing boom.
You can pretend that our economy revolves around who's president and what political party system they belong to but no matter how hard you pretend it still isn't true.
Last I checked the "Bush tax cut" was a real bill, championed by one particular party, passed via a vote that went broadly along party lines, and signed by a president of that party whose administration worked hard to put his name on it. The guy in the other party, as I remember, wanted to do something like "save social security now".
Those are real policies, and they have real impact. You can pretend that they don't and that politics is all a "game", but no matter how hard you pretend it isn't true. (Sure, it's mostly a game, but at the margins it's important stuff, and not well served by bland internet cynicism).
Certainly the policies of the government in place can have an effect but for the most part that effect is not felt immediately and many times it can be years and years before any policy change ripples down to cause any type of drastic change in the economy.
Suggesting that Clinton was responsible for the takeoff of internet companies in 2000 and the housing boom is silly. He was a major beneficiary of a great economic time.
Not Clinton, but you could make a case that Gore was responsible. There is a lot of noise laughing at him for supposedly saying he created the Internet, but he did co-sponsor an important bill in 1988, and was honored with a Webby Award in 2005 for contributions to the Internet.
Don't be dense, the parties have a lot of power in the economy.
The crash of 2008? Many economists wisely point to Republican-led market deregulation, notably the repeal of Glass-Steagal in 1999, as the causes.
Considering that Democrats fight for stronger regulation and pass them (Dodd-Frank... even if that one is DOA), while Republicans fight for deregulation, it's a bit off to imply that the party has no effect on the economy.
That's a huge ideological difference and one that has significant effects on the economy, even in the short-mid term.
Many economists wisely point to Republican-led market deregulation, notably the repeal of Glass-Steagal in 1999...
Um, Gramm-Leach was supported by a majority of both Dems and Reps. Clinton signed it.
The only major dispute between the parties was over whether to make CRA compliance a precursor for banking mergers. (I.e., banks can't merge or acquire if they don't lend to enough minorities.)
As far as I know, Bush's main forays into finance were Sarbox (increasing regulation), his ill-fated attempts to more strictly regulate Fannie and Freddie, and various laws pushing more people into homeownership (again, increasing regulation). Could you point out any acts of Republican-led market deregulation, ideally from the past 10 or so years?
> Um, Gramm-Leach was supported by a majority of both Dems and Reps. Clinton signed it.
While this is true, of those who opposed it, the vast majority were Democrats. 58 Democrats opposed it, only 6 Republicans did. The Republicans also controlled both houses and wrote the legislation so they certainly deserve more blame.
Repealing Glass-Stegal set the fuse by allowing banks to flip loans into the market offloading their risk, but it was the change in the net capital rule (http://en.wikipedia.org/wiki/Net_capital_rule#The_net_capita...) in 2004 under the Bush administration that lit the match and kicked off the crisis by creating a massive amount of potential credit that led to the banks handing out loans like candy to anyone who'd take em knowing they could immediately flip the loan and pocket the profit with little risk.
Repealing Glass-Stegal set the fuse by allowing banks to flip loans into the market offloading their risk...
Glass-Steagall has nothing to do with the secondary market for mortgages. Banks were flipping loans in the early 80's. This is how Salomon Brothers became famous.
...the change in the net capital rule (http://en.wikipedia.org/wiki/Net_capital_rule#The_net_capita...) in 2004 under the Bush administration that lit the match and kicked off the crisis by creating a massive amount of potential credit that led to the banks handing out loans like candy to anyone who'd take em knowing they could immediately flip the loan and pocket the profit with little risk.
I don't think you understand what you are talking about. Flipping is always low risk, regardless of whether you mark to market or mark to model.
All the modified NCR rule would have done is allowed banks to hand out loans like candy and not flip them.
> Glass-Steagall has nothing to do with the secondary market for mortgages.
The repeal of Glass-Stegall let them flip loans to the market while their funding was FDIC insured since they were gambling with depositors money, something they didn't have access to before that. That makes flipping more attractive because you're insured by the FEDS.
The net capital rule change amplified this ability making handing them out like candy attractive; what good is a ton of credit if you don't leverage the shit out of for all you can.
> All the modified NCR rule would have done is allowed banks to hand out loans like candy and not flip them.
Which is what I said; I wasn't implying that the flipping was related to the net capital rule.
Whoa... tell that to the folks who worked at Bear Sterns and Lehman during 2007/2008. This is precisely why all of the major banks needed a bail-out. The risk models all automatically assumed that these instruments would maintain their liquidity, but when that capital dries up, it turns into a game of musical chairs.
When your business model fundamentally relies upon a liquid market for short-term credit[1], you typically end up in bankruptcy court when/if the music stops (unless of course you threaten the entire financial system and get a government bail-out).
When the institutions you rely upon for credit lose faith that you can repay your debts, you're sunk. Mark to whatever, that only matters with long-term debt.
Whoa... tell that to the folks who worked at Bear Sterns and Lehman during 2007/2008.
Bear collapsed because they held huge long bets on housing with high duration. In contrast, companies like Goldman (mostly short term strategies) survived just fine.
I agree that they have power but as I said above that power is usually not felt immediately.
My top comment comes off like I'm a big time republican and that couldn't be further from the truth. I just want to point out that the great economy that Clinton benefited from was not his creation.
I tend to agree that some of the deregulation did contribute to the crash in 2008. Some of that same deregulation also, very likely, contributed to the boom in the early 2000's.
>Yes, the economy was soaring thanks to the technology and housing boom.
The big housing boom started post-Clinton. It was intentional, to get us out of the 1999 tech crash.
Clinton benefited from the tech boom and the end of the cold war. (Bush I got hammered by the post-war transition recession, which ended before the election.)
The banks could not only have done more risky investments. Americans seem to keep forgetting that they are not the only country in the world. American bank can still invest in foreign bonds. There are other countries which also happen to have a better security rating at the moment, you know?
You could still issue treasuries. As long as we're not experiencing deflation (the Fed is supposed to target 2% inflation), there's plenty of room for the government to borrow money at negative real interest rates, which it should be happy to do even if running surpluses.
Other countries deal with surpluses with sovereign wealth or rainy day funds, but you could just as easily envision rebating a surplus as fully-refundable tax credit "dividends".
The Fed is doing a miserable job of targeting 2% inflation if it's supposed to do that. Even in the face of a week economy and so forth, it's barely managing to hit 1.5% for inflation expectations.
Then again, they don't actually have an official inflation target, so...
I see no reason the Fed wouldn't go for outright deflation if they thought they could get away with it. They seem to be really happy with their current tight money policy. :(
I don't know where this 1.5% inflation figure is coming from. I am seeing a 10-40% (or more) increase in food prices when shopping for groceries. Bottle of hydrogen peroxide used to cost $1.69 a year ago, now costs 2 dollars. I don't belive this 1.5% figure, it does not match what I observed.
Think about it, how could it be that it is only 1.5% inflation when the size of the money supply is doubled or tripled?
It's a little more complicated than that. For one thing, people use the word "inflation" to mean two different (but somewhat related) things. When you or I say "inflation" what we really mean is an increase in the cost of living. But even beyond that everyone has a different cost of living - I bought a house this year, and I paid about half what I would have paid three years ago. When the government reports CPI this is part of the calculation.
For the Fed, "inflation" means an increase in the overall money supply. You get an increase in the money supply when people borrow money, and you get a decrease in the money supply when people pay off (or default) on loans. In a macro-economic sense we've been going through a period of pretty severe deflation since the housing market crashed, which is why the Fed is desperately pumping money into circulation. For all the gory details see here:
Actually, house prices are not factored into the CPI per se. The CPI is based on a basket of goods for an urban consumer who rents (so does include rent). If you don't fit that profile, the CPI may well not have much applicability to you....
Aslo, the Fed is not desperately pumping money into circulation. For example, they're paying interest on reserves (that is, paying banks to park money in accounts at the Fed). If they were trying to get money into circulation, the wouldn't be doing that, or would even be charging interest on excess reserves. Both policies have been used by central banks in the past; in fact the Fed didn't use to pay interest on reserves until the recent bank crisis started.
> I don't know where this 1.5% inflation figure is coming
> from.
For inflation expectations? TIPS spreads.
The actual inflation rate is determined based on a basket of goods, which may or may not match your consumption patterns. Of course things get complicated by substitution effects, hedonic adjustments, etc. I don't know that I believe the official number any more than you do. But the fact is that the official number is what the Fed is supposed to target.
Note that groceries are explicitly excluded from "core" inflation calculations in the US because they're subject to severe supply shocks which have nothing to do with the value of money or inflation, by the way.
> how could it be that it is only 1.5% inflation when the
> size of the money supply is doubled or tripled?
Trivially, if everyone keeps their money under a mattress. We're not quite that bad, but not much better off right now, either.
The "amount" of money is the total outstanding dollars multiplied by the number of times it changes hands (the "speed"). When the economy slows down, the government borrows money and spends it on stimulus, where they hope it will circulate, changing hands as many times as possible.
> By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD.
Depends on what you mean by paying off the debt. If you pay off the debt by just issuing a sufficiently large amount of reserves at the Fed to do so, then yes, I would agree. Then you just transform one form of government liability (treasury bonds) into another form of government liability (reserves). No problem there.
But if you're actually talking about eliminating net government liabilities, you're missing the point. Here's why:
Individuals in the private sector want to accumulate net financial assets, if only to save for retirement. Every financial asset is somebody else's corresponding financial liability.
But retirement funds & co. are huge. Who is going to incur the necessary net financial liabilities to correspond to them? Private entities? Why would we allow private entities to run up that much debt? Also, with private entities you always have the problem that people might change their mind about their credit-worthiness.
The federal government, on the other hand, is at the top of the pyramid of liabilities (see e.g. here: http://neweconomicperspectives.blogspot.com/2011/09/mmp-blog...), and they can easily incur and sustain the required net financial liabilities to allow the private sector to save in net financial assets.
So government liabilities play an important role in the stability of the financial system.
If you run down the federal debt, you end up in a situation like the Eurozone, where the entity at the top of the pyramid of liability (i.e. the ECB) does not incur sufficient liabilities (and in fact, does not have the mandate to do so, for good reason) to support a stable financial system. The debt crisis is a direct result of this flawed setup, and you would be wise to avoid copying it in the US.
Take a close look at the graph. The debt starts going down for 3 years (at the peak of the market) and they make the assumption that that's going to keep happening for the next 14 years? Yay for gov't estimates.
Second, I think the fact that the market crashed in 2000 might have a little something to do with gov't deficits as well.
Total US debt (in dollars, not as a fraction of GDP, which is a horrible measure) increased every year through Clinton (and basically everyone else in modern history).
Is it more useful to talk about "Total US debt" than "US government debt"? When I first read your comment, I thought you were making the point that the article was misleading because it was using a fraction of GDP as a measure, when it in fact the main feature graph is measured in trillions of dollars.
To a lay reader like myself, it would easily lead to confusion if people talk about different numbers without making the distinction clear. Is there a well known relationship between government debt and private debt? Or is talking up Total US Debt just a distraction from the article, which talks about Government Debt?
I wasn't recommending holding the trade deficit constant, I was isolating the relationship between public and private savings. And if I ever say "all other things being equal," I'm not actually recommending that all other things be made equal.
Nominal debt seems like a pretty horrible measure. By that measure, Greece is much better off than the U.S., because its debt is a fraction of the size. Of course, it also has a smaller population and a smaller GDP--- exactly why it makes sense to report debt at least normalized by population, and probably, better, by GDP.
The nominal value of the debt is not a good measure because it disregards the fact that the value of a single unit (the dollar) changes over time, and doesn't reflect the difficulty in paying it off (i.e. % of national GDP).
It's also a bit of apples-and-oranges when you compare the nominal debt of one country with another without looking at the differences in GDP between the countries, i.e. the size of each country's economy.
Because we can increase GDP (via public spending, yay!) and make our debt situation look like it's improving. Look, nominal total debt may not be perfect either, but saying Clinton reduced debt is factually wrong. In every year, we spent more than we had. Debt increased. They all do it.
The debt dollar is a horrible instrument that will not end well. We may be decades off, but it's gonna be ugly.
The nominal value of public debt is an unreliable measure. Ireland's national debt was €30bn in 1987 and €36bn in 2002. But in the same period it went from around 128% of GDP to 32% of GDP.
The Gingrich Congress, not Clinton, controlled spending and gets most of the credit for the improved budget situation. That plus tax revenue from a massive tech bubble.
Spending increased more slowly from 92-94 before the Gingrich congress came to power, than it ever did afterwards. And Clinton didn't have to shut down the government to do it.
Clinton never shut the government down. Clinton did not have the power to shut it down. Why are you changing history? I don't understand why people do that.
The congress passed continuing resolutions that would have kept the government running. President Clinton vetoed the resolutions, so there was no money for operations. That caused major portions of the government to shut down. unless you are really trying to parse the words, I'm not sure why it isn't fair to say Clinton shut the government down.
By the way that report is absolutely wrong. Nothing terrible would happen if we paid off the debt. So there wouldn't be federal treasuries. BFD. Just set the risk free return to zero and you can use all of your old formulas. Yes several bank departments would not be able to make money for absolutely zero risk as they do now. Oh well, I suppose the banks would have to do what they are supposed to do, i.e., calculate risk properly.
But of course it is all academic now. Because it is unlikely to ever happen. Paying off the debt means doing something to help the future generations of Americans and it is doubtful any president would do such a thing, and if he did he would probably have to face a lot of angry voters who do not give a shit about the future generations as happened with Al Gore.