Monday, January 20, 2020

Dumb Quote of the Week

It turns out Bernie's Dr. Stephanie Kelton isn't the only one spewing idiocy.

I get a daily email from a precious metals dealer called Money Metals Exchange, and they'll feature any great monetary idiocy they come across.  They link to Narayana Kocherlakota, the former President of the Federal Reserve bank of Minneapolis, who wants you to know the Federal Government can never borrow too much money.  He wrote an opinion piece for Bloomberg online that has a couple of astounding quotes.

The first is setup:
Policy makers and voters often express concern about the level of the federal deficit, which topped $1 trillion last year, and the national debt, now more than $23 trillion. But, unlike a household that owes money to a bank, the U.S. government has the ability to tax its creditors. This power means that the federal government can afford any level of debt that is owed to American taxpayers.
And the payoff is a few paragraphs later.  First the setup: the government's debt is $100 Million per person in the US (he doesn't specify every taxpayer in the US although he implies that), an amount that's many times the current debt, then specifies that the interest rate is 5% which is higher than the current rates.  How can the government begin to pay this, a figure that amounts to $5 million per person per year?  It's here I find the QoTW. 
Suppose first that all U.S. taxpayers are exactly the same financially and so they each own the same amount of U.S. government debt. Then, the government can tell each person: your tax bill for this year and every year thereafter is equal to $5 million. People can pay this seemingly huge tax by handing over the $5 million in interest that they receive from the government.  The entire process of taxation and debt finance ends up being a complete wash. 
That means every single taxpayer buys government bonds that pay them $5 million interest every year,  and then turns that $5 million over directly to the IRS!!

Why exactly would anyone who could afford to buy $100 million worth of bonds buy bonds that pay them a net zero?  What if the Chinese or another government actually paid them interest that they could keep?  He doesn't propose or answer this simple question. 

After this, he says there's nothing special about these numbers, and goes on to say:
Indeed, if it wanted, the government could retire its entire debt in a similar fashion, rather than simply paying the interest.
In other words, today's national debt is $23.2 trillion, which reduces to a mere $187,629 per taxpayer.  The government could retire its entire $23.2 trillion debt if you'd just pay them $187,629.  Now would be fine.

I do have to give him some credit.  He recognizes that debt owed to other countries is different than debt owed to ourselves. 
The logic of the argument does depend -- critically! -- on the debt being owed to U. S. taxpayers. When the U.S. government borrows from non-taxpayers, such as the Chinese government, it becomes much more like a household that is borrowing from a bank. There is, accordingly, a limit on the level of debt or deficit that can be considered sustainable.
He goes on to say that we currently pay 30% of one year’s gross domestic product to foreign entities, and argues that translates into a non-taxpayer interest obligation of less than 1% of GDP which is “eminently affordable.”

As is often the case, I'm left wondering if he really believes this or he's just trying to sell us on it.  He says, “The government can borrow as much from taxpayers as it wants,” but that's not what's going on.  The fed is creating currency out of thin air.  The Fed is selling bonds to themselves with it, and they're selling bonds to China, Japan, the EU and other foreign entities.  I'm sure some Americans buy American bonds, but it's nowhere near the total amount of debt.  His already-lame arguments don't even seem to apply to the situation he's talking about. 


7 comments:

  1. His comments might be the result of a gender studies PHD.

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    1. The embodiment of, "you'd have to hire someone to be that stupid for you."

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  2. America gets away with it's 'house of cards' monetary policy for the fundamental reason that the US Dollar is the 'benchmark' currency of the world. And as long as WE are the 800# gorilla on the planet with a military that can kick ANYONES ass....and for the most part the ass of any 2 or 3 countries....we will remain the benchmark currency and can inflate and debase it all we like. Of course that which cannot continue will not continue. But the people running the show....and getting FILTHY RICH doing so....are betting that they will be long dead before the whole thing collapses. And it will eventually. Removing the US from position number one militarily removes us from top of the heap economically....and costs us that precious benchmark status. THIS is the major reason for China's MASSIVE investment in it's military over the past couple of decades. Their goal of course is world dominance....and it's better to dominate an INTACT world instead of a post apocalyptic war hulk. So they are going to try and do to us what we did to the Russians....out build and spend us militarily to we collapse. The real question is can they do it....not will they try to.

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    1. John Maynard Keynes, who invented this whole system, acknowledged that it can't last long term and will eventually collapse. He just said, "in the long term, we're all dead." So the idea has always been to prop it up as long as they can and mop up afterwards.

      The thing is, China's economy is even less real than ours. There isn't one stable, commodity-based currency on the planet.

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    2. China's economy has its own problems but when your system is under the iron hand control of commie tyrants you have a lot of options that can't happen in a society lie America.

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  3. I found one of those hostile environment survival manuals written by liberals. It said if you were marooned on a desert island, simply elect a legislature from among your castaways, which then pays you 52 weeks of unemployment benefits.

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