April 26, 2012

Noodling on the National Debt

Paul Krugman is fond of saying that the U.S. economy (or any economy) "is not a morality play." I think I understand what he means.  For example, the current national debt in the United States is about $15.7 trillion (you can follow the number with the gadget over on the right.  As you watch the numbers whirl, you'll see that the "public" part of the debt [about $11.6 trillion] increases at the current rate of about $3 million per minute, a rate which is always increasing, of course.  The magic of exponents!)

What Mr. Krugman is saying, however, can be succinctly summed up as follows: So what?  The absolute numbers do not matter so much, at least at present.  What matters is the actual carrying cost of the public part of the debt, which is to say, interest expense.  The average interest rate applied to the American pile of public debt is currently only about 2%.  The bond auctions conducted by the Treasury usually go off without a hitch, with probably 3 bids for every bond sold.  Shorter term bills (one year and under) essentially pay no interest at all (and relative to inflation, they yield a negative return), yet those are all sold as well.  Indeed, unless you're willing to buy the ultra "long" bond (30 years), you can't earn a real return on any U.S. paper.  Yet the Treasury sells all of it, week in and week out.

The $11.6 trillion figure itself has to be reduced by about $1.3 trillion, because this latter figure represents the holdings of the Federal Reserve.  The Treasury does not really "pay" interest on these bonds; indeed, it works the other way.  The Treasury "credits" the Federal Reserve with interest on the bonds the Fed holds, and the Fed uses this "money" to pay its expenses and then remits the "balance" back to the Treasury, representing "income."  Thus, the more "debt" the Fed holds, the more money the Treasury can make on its own debt.  This is one of several ways that the United States Treasury hallucinates money into existence.  Another is the "interest" paid by the Treasury on the "intragovernmental" part of the debt (about $5.6 trillion, representing the Social Security and Medicare trust funds and other funds, such as government pensions).  The current shortfalls in Social Security, for example, measured as the difference between the amount of FICA taxes actually collected and the amounts paid out to the burgeoning rolls of recipients (the Boomers! my Peeps!) is made up by pretending the huge stack of stationery in a couple of file drawers in West Virginia (this was actually one of George W. Bush's insights, and I thank him for the colorful description) actually produces "money."

Still, suppose we keep doing what we're doing (and we will) and the public part of the debt rises to $30 trillion over the next decade or so.  Let's suppose that the Fed holds its position as a 9-10% stakeholder, or about $3.0 trillion, leaving $27 trillion actually owed to the public.  Well, if the carrying cost stays at about 2%, the total interest expense, to the extent it matters, is about $540 billion per year.  And against this figure we can subtract the money the Treasury "earns" by pretending to pay interest on the money the Fed pretends to pay back to the Treasury, which should be about $60 billion or so (the Fed currently "pays" about $75 billion per year to the Treasury, reflecting, I guess, some higher-paying vintage bonds). 

Krugman and New Keynesians like him are, I believe, influenced by the ideas of Modern Monetary Theory, and when you come right down to the cult-like basis of MMT, it is a concept that money does not, as it traditionally did, bear a real relationship to some point of reference, such as gold or the underlying value of goods and services which money can pay for or command.  Money (or the idea we call Money) Is A Thing Unto Itself now, an electronic creation, which enters the economy by government fiat, and once it's there, it's the same dollar in your pocket regardless of its origins. Thus, the whole system is now permeated and shot through with huge elements of both "traditional" money and the increasing supply of conjured electronic money, and the American economy depends on both without differentiation.

All the big central banks (European Central Bank, the Bank of England, the Bank of Japan, most certainly the Federal Reserve) are now playing this game.  "Rogue" economists such as Steve Keen point out, indisputably in my opinion, that this is little more than an electronic Ponzi scheme: electronic money is conjured out of thin air in order to pay preexisting debts, many of which were also based on obligations created with "fictitious" money.  The whole contraption of international money does have a slightly queasy, vertiginous feel to it, as the printers at the various central banks, faced with huge, unpayable debts (unpayable in the sense of paying with the "old" money based on reference to an underlying measure of value) go into hyper-overdrive.

Still, it's not a "morality play."  I agree with that. We're a long ways past the old traditional, Mom 'N Pop ideas of thrift and understandable finances. The lives, and the livings, of millions and millions of real people, who are themselves cut off from things of real value and sustenance (such as food producing land) depend on the continuation of this game.  It is a game, however, with many hidden points of vulnerability, as with any complex system with many interacting parts providing negative and positive feedback loops, and many of the factors are not under direct U.S. control.  But we can't suddenly stop playing this game, even if it's the "moral" thing to do.  The U.S. deficits are "structural" at this point.  Raising income tax rates on the super-wealthy will not come close to closing the gap. Cutting defense by 50% will not come close, even in combination with massive tax increases (and cutting defense will entail the negative feedback of huge job losses, since war is an important American industry - one of the biggest).  The U.S. economy cannot really create enough jobs that pay enough money to provide a tax base that can stay up with ever-increasing U.S. federal and state expenditures.

Unless we want to face what this is (and we don't), we're stuck.  It's not a "morality play."  It might be a different drama, however:  Jean-Paul Sartre's "No Exit."


Many thanks to John M. for his very helpful suggestion of a Kindle version for some of my cousin's out-of-print books.  I have passed that idea along to Jim's literary executor, with credit where it's due.

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