I’ve gone on about this elsewhere, but thought I should bring it up front and center here.
While everyone hyperventilates about government debt, they don’t seem to be aware of the massively greater load of private debt, and its spectacular runup compared to government debt:
This from Steve Keen’s latest. (It’s not very long. There are lots of pictures. It makes every kind of sense. Read the whole thing.) The blue line is publicly held debt — not including money the government owes itself (on the consolidated budget) for Social Security and Medicare.*†The red line is debt of 1. households and nonprofits, 2. nonfinancial businesses, and 3. financial businesses.
Here’s how those sectors break out:
Again, you hear all sorts of hyperventilating from the morality-based school of economics about households/consumers going on a debt-financed spending binge, especially in the 00s. And that definitely happened. With the financial industry begging them to borrow — almost literally throwing money at them — and telling them authoritatively that it’s free because house prices always go up, it’s not surprising. Humans will be humans; who’s gonna turn down money when the powers that be — who presumably know a lot more about finance than a high-school-educated homeowner working at a lumber mill — say it’s free?
But that ignores the really massive runup: financial corporations’ debts. Starting at a little over 10% of GDP in 1970, they hit almost 80% by 2000, and when the crash hit they were over 120% of GDP — a 10x, order-of-magnitude increase over 40 years.
The story explaining these pictures was told long ago — notably by Irving Fisher in 1933 (only after he had driven his Wall Street firm to ruin and lost everything, including his house, by clinging, Polyanna-like, to the kindergarten-ish Price-Is-Right! nostrums of classical economics). Minsky told it in cogent and convincing detail.
The basic story is very simple. It goes like this (in my words):
• Banks (and shadow banks) make money by lending. Bankers have every incentive to increase their loan books, even by extending questionable loans, because bankers don’t personally bear the eventual, down-the-road losses from loan defaults — they’ve gotten their money already.
• When banks run out of real, productive enterprises to lend to — enterprises that can pay back loans and interest from the production and sale of real goods that humans can consume — they start lending to speculators (gamblers) who are buying financial assets in hopes that their prices will rise.
• That lending — extra money being pumped into the system — does indeed drive up the price of financial assets, far beyond the value of the real assets that (according to most economists you listen to) supposedly underpin those financial assets’ value.
• Eventually people realize that the value of financial assets far exceeds the value of real assets — and far exceeds the capacity of the real economy to service the loans that drove up those financial asset prices. Prices of financial assets plummet, borrowers default because there just ain’t enough real income to service the loans, financial-asset prices plummet some more, all in a downward spiral — with all sorts of collateral damage to the real economy.
There’s your (economy-wide) Ponzi scheme. Households and nonfinancial businesses definitely participate (the financial industry makes it almost irresistible not to), but it’s driven by the financial industry, and a huge proportion of the takings go to players in the financial industry.
But as Keen points out, the powers that be almost completely ignore that simple story. He quotes one of Bernanke’s extraordinarily rare mentions of either Fisher or Minsky:
Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects… (Bernanke 2000, p. 24; emphasis added)
The rarity — inexplicable to me, at least — speaks even more loudly and eloquently than this blithely dismissive quotation does.
When really smart people like Ben Bernanke constantly ignore an elegant, simple, even obvious explanation that’s been lying on the ground, ready to pick up, for at least 75 years, you gotta figure they’ve got some incentive — whether they’re conscious of it or not. That’s what I talked about the other day.
Again, read Steve’s whole piece. And if you have any interest in economics and haven’t bought the new edition of his book yet, do.
* Please don’t try to dismiss this by pointing to the net present value of SS/Medicare liabilities extending into the infinite future. 1. Including those intra-government debts doesn’t change this picture much at all. 2. It’s a completely separate discussion, about whether we choose to provide those services out of current GDP over future years and decades. 3. If charges by health-care providers were rising at the same rate as inflation, even that future cost would not be a terrible burden. 4. Social Security is actuarily solid on a cash-flow basis for decades, and beyond the foreseeable future (75 years+) if we simply Scrap The Cap on the payroll tax, requiring high earners to pay their full share.
†I’m not clear whether he includes bonds held by the Fed — again, money the government owes itself, if you view Treasury and Fed as both being part of the government — which total a whopping $1.6 trillion or so, more than 10% of GDP, last I checked. I don’t actually know if Fed holdings are included in “debt held by the public.” (You gotta wonder whether the Fed counts as “the public.”) Little help, so I don’t have to go Google it up myself?
Cross-posted at Angry Bear.
Comments
16 responses to “It’s the Private Debt, Stupid”
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” I’m not clear whether he includes bonds held by the Fed — again, money the government owes itself, if you view Treasury and Fed as both being part of the government — which total a whopping $1.6 trillion or so, more than 10% of GDP, last I checked. I don’t actually know if Fed holdings are included in “debt held by the public.†(You gotta wonder whether the Fed counts as “the public.â€) Little help, so I don’t have to go Google it up myself?”
The Fed is “the public” when it buys Tsy-issued bonds. The Fed’s seigniorage rebate to Tsy is an on-budget (i.e. deficit reducing) miscellaneous receipt since its revenue coming in from the public.
The Fed is NOT “the public” when it buys Tsy-issued coins. The Mint’s seigniorage rebate to Tsy is an off-budget “other financing source” since the coin sale revenue is considered an intergovernmental transaction. This is a Tsy accounting decision despite the fact the coins are sold at face value to the Fed and Congress has already declared coin seigniorage rebates to be “miscellaneous receipts”. That’s why those $1 billion of dollar coins are considered a cost and not a benefit. To their credit, a group of Tea Party congressman are trying to amend the Mint Public Enterprise Fund Act to underline, circle and add flashing lights to the words “miscellaneous receipts”.
“(d) Clarification With Respect to Seigniorage- The ninth proviso of section
5136 of title 31, United States Code, is amended, by inserting after
‘miscellaneous receipts’ the following: ‘and such amount shall be included
as an estimated receipt of the Government and a receipt of the Government
under paragraphs (6) and (7), respectively, of section 1105(a) in any
budget submitted under such section’.”
http://www.huffingtonpost.com/2011/09/21/dollar-coins-david-schweikert_n_974430.html?ncid=edlinkusaolp00000008
To switch gears slightly, its odd that few realize the significance of the fact that the $1.6 trillion in Fed-held debt is almost exactly the same amount of excess reserves held by banks. Monetized debt can be sterilized in the T-bond market by Fed’s open market operations or in the banking system by the Fed’s payment of interest on reserves. There’s no economic reason for Tsy to ever go to the bond market, it can use its coinage power today to buy back Fed-held debt and then in the future use coin sales to the Fed to fund govt operations. The Fed will just continue sterilizing excess reserves via IOR (the only question is whether coin seigniorage is on-budget, if so— balanced budgets for all!). If that’s too hardcore, as I’ve suggested before, Congress could order a job swap; Tsy funds spending with off-budget US Notes and the Fed controls interest rates with its own debt issuance.
http://traderscrucible.com/2011/11/03/4-ways-to-change-the-fed/
@beowulf:
Thanks! More than I wanted to know, actually… 😉 Though I do *not* want to discourage you from telling me more than I want to know. Awesome stuff. And I actually knew some of it (though not in such detail)…
So if we consider the Fed and the Treasury as both part of government (and the Fed not part of “the public”), we could say that debt held by the public is actually $1.6 trillion less than is officially stated?
Of course, we do have to presume that sometime, eventually, the Fed will sell those bonds back to the public to sop up all the inflationary money/excess reserves/whatever floating around out there? Then it will once again be debt held by the public. So maybe we should just leave it in that category for the time being (while enthusiastically awaiting the day when the MMT revolution occurs)?
@beowulf
“its odd that few realize the significance of the fact that the $1.6 trillion in Fed-held debt is almost exactly the same amount of excess reserves held by banks”
I have very much noticed that, and somewhat vaguely assumed that it was not a coincidence. Is it because of IOR of .25, and zero short-term rates elsewhere? The Fed just takes bonds and issues equal amounts of reserves, which just sit there?
I think I’ve got that right…?
@Asymptosis
Yeah, that’s right. There’s a third way that reserves can be drained— Just tax it away by pegging FDIC premiums rate (since April, a de facto bank asset tax) to Fed Funds rate or 3 month T-bills.
Debt service and IOR are Tsy expenses, but draining reserves with taxation could make interest rate maintenance a Tsy revenue source (that is, if Congress required excess premiums to be refunded to Tsy instead of insured banks).
“So if we consider the Fed and the Treasury as both part of government (and the Fed not part of “the publicâ€), we could say that debt held by the public is actually $1.6 trillion less than is officially stated?”
During the debt-ceiling debate a while back, somebody pointed out that debt held by the Federal Reserve is counted as part of the publicly held debt. And that we could get under the debt ceiling easily, just by counting it differently. Can’t remember who said it, though.
Looks like maybe the $1.6 trillion number comes from this FRED graph:
http://research.stlouisfed.org/fredgraph.png?g=3XS
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@The Arthurian
“somebody pointed out that debt held by the Federal Reserve is counted as part of the publicly held debt. And that we could get under the debt ceiling easily, just by counting it differently. Can’t remember who said it, though.”
It was Ron Paul! Said we could just burn those bonds, and the debt would go down by $1.6 trillion!
Amazing how clear thinking can exist in the same space with utterly wacky notions…
It occurred to me at lunch today that there’s another way to sidestep the debt ceiling.
Issue perpetual bonds with coupons pegged to CPI index (no maturity, 0 real interest– call them Double Aught Consols). Instead of Tsy setting quantity and letting rate float, offer Consols to all takers by setting a rate (CPI) and letting quantity float. As we’ll see below, there’s no legal reason quantity couldn’t float far above the debt ceiling. Anyway, Consols could be issued under Tsy’s existing bond authority (“The Secretary may issue bonds authorized by this section to the public and to Government accounts at any annual interest rate” 31 USC 3102) since unlike bills and notes, bonds have no time restrictions on maturity.
Now here’s where the magic happens, as the TreasuryDirect website says, “When a Treasury bond matures, you are paid its face value”. A bond’s face value (synonymous with “par value” or “face amount”) is the principal Tsy promises to repay. When a bond is stripped, the face value is what the zero coupon is entitled to while the bond coupons go to the interest-only strip.
Now look at the debt ceiling statute, “The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than…” (31 USC 3101).
Consol bonds are exempt from the debt ceiling in three different ways, 1. If there’s no maturity, the obligation has no face amount to repay, 2. Obligations are defined as having guaranteed principal AND interest, not OR (in a later subsection, the statute does put discounted value of zero coupon bonds within debt limit), 3. In a legal sense, a Consol is a constructively stripped bond with the Secretary keeping the face amount of the zero coupon principal (see above, Tsy-held obligations exempt from debt ceiling) and a separate interest-only annuity that can be sold “to the public and to Government accounts at any annual interest rate”.
I made this point at Brad Delong’s site and suggested that if he didn’t like Double Aught Consols, I could live with DeLong Bonds. :o)
@beowulf “Issue perpetual bonds with coupons pegged to CPI index (no maturity, 0 real interest– call them Double Aught Consols).”
Before reading another word, had to respond:
Don’t we call those “dollar bills”?
@Asymptosis I may have that wrong. These would pay the CPI rate? Not sure I’m going to be able to internalize this and respond intelligently, but will give it a shot.
Right, the UK’s consols were fixed rate (some still paying 2.5% after more than 100 years), what I’m suggesting is a a TIPS bond, the coupon is whatever the annual (or semi-annual) CPI bump is.
While freeing Tsy from the debt ceiling, it would restrict the Fed on raising short-term rates (which it would have to adjust with IOR, unless Congress agreed to raise the debt ceiling, and why would they have?).
@beowulf
I still prefer the platinum coin solution. Somehow, to me it has an elegance about it, and it strips away many of the myths associated with money. It effectively allows “greenbacks” to be issued once again!
@Clonal Antibody
Well, like General LeMay I like to hit targets with two or three different nuclear delivery options. :o)
Anyway over lunch, I followed DeLong’s link to a Cardiff Garcia post at Ft.com site, The Decline of “Safe” Assets…
“Before the crisis, US Treasuries were an important but minority amount of the world’s stock of safe haven assets. Treasuries are now the vast majority of such assets. But this is because of the extraordinary decline in the other kinds of assets and because of quantitative easing by the Fed, not because the outstanding stock of Treasuries has increased by so much.
Issuance in recent years hasn’t been nearly big enough to make up for the decline in other kinds of safe assets or, certainly, to correct the imbalance between investor demand for safe assets and outstanding supply… this further confirms how absurd it is that the US government has spent so much time this year bickering over deficits rather than economic growth, and that the US economy confronts a fiscal drag beginning next year.”
http://ftalphaville.ft.com/blog/2011/12/05/778301/
There’s no way the crew of idiots we have in Congress will ever understand that the global economy’s need for more federal borrowing is as acute as the US economy’s need for more federal spending. Tsy is about $1.3 trillion under the debt ceiling now. If it started offering Consols to all takers, it wouldn’t take long to blow past the debt ceiling.
Ideally, Tsy would spend with platinum coins with one hand even as it borrowed with Consols with the other.
Just as Tsy doesn’t need to borrow when it spends, likewise it doesn’t need to spend when it borrows. Of course it would make everyone (from the President on down) who’s endorsed budget cuts because “we’re out of money” look pretty stupid to then have trillions in bond revenue flow into TGA from around the world. So I suppose Consols would strip away the myths from the other direction.
Hey Beo, been paying a lot of attention to that ftalphaville too, also to Beckworth on the same, and our own Rebecca Wilder:
http://www.economonitor.com/rebeccawilder/2011/12/21/the-broad-sovereign-downgrade/?utm_source=rss&utm_medium=rss&utm_campaign=the-broad-sovereign-downgrade
In the course, came across this and need interpretation:
http://research.stlouisfed.org/fred2/series/FDHBFRBN
Wow! Scott Sumner world? (Check out late 2008.) Was the Fed actually selling bonds massively back then? (In their construct, sucking up money to the tune of $300 billion+?) What in the heck?
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