From an outsider living a long way from USA, for many years now I haven't understood how the financial instruments of USA work. It constantly looks like the country is merely printing more money to stay afloat.
If I printed some $100USD bills, took them to the bank and tried to deposit them, they would have no value. The consensus is that you aren't allowed to print money.
The United States Government prints money all the time. This money has value because there is a world-wide consensus that it has value.
The simple fact is that there is and has been (for many decades) no safer place to park vast sums of money than with the United States Government.
There are limits, though it's not clear what they are. If the US Government printed 330 billion trillion dollars, and gave a trillion to each US citizen, then the consensus would be instantly broken.
The US Government printing 'a trillion here, a trillion there', at this moment in history, is not materially damaging the global consensus. This confidence is relatively easy to measure: when the US creates more debt, are there buyers? The answer is and has been for many decades 'absolutely yes'.
I'm not trivializing this borrowing, and I'm not vilifying it. It is a unique tool that should be used wisely.
> The United States Government prints money all the time. This money has value because there is a world-wide consensus that it has value.
No the Government borrows against future taxes (consider that an accounts receivable), the borrowed money doesn’t have value because of consensus it has value because it is backed by future tax revenue.
If the government did as you say and borrowed a trillion per taxpayer the system would breakdown but not because of some “consensus” but because the account receivable (future taxes) is insufficient to payback the borrowed money.
It is rather astonishing that rational people continue to believe that there is enough future tax revenue to justify this. It's entering dotcom-boom territory, where even the most optimistic future profitability can't justify this level of backing.
Part of it, I imagine, is that the US government is likely to benefit from future tech booms, as it has in the past (despite tax shenanigans from the tech companies themselves). It gets a piece of stock market profits -- a stock market whose own levels are also currently out of keeping with rational revenue expectation.
It’s never getting paid back, there is so much number fudging to hide the reality of debt and guaranteed payments for future liabilities...we pretend we are $26T in debt (but when you add in the future liabilities We are over $148T in debt).
To your point being rational doesn’t really give insights into these issues, but talk to any government budget officer and the can give you a sobering reality of the situation.
I wouldn't expect to pay it back in the sense of reducing the debt to zero. A government is (nominally) eternal, and can continue to revolve its debt indefinitely. It doesn't retire or die the way a person does. As long as it pays its interest, it can just borrow again every time a debt comes due.
But it's not reasonable for that debt to grow without limit. It has to be able to pay the interest on the debt, for which it requires revenue. We take in only around $3T a year in total. That's still a large fraction of that $26T debt, but we're also supposed to pay our actual obligations out of that -- which at the moment are over $4T. Eventually the debt service is going to be larger than our revenue, and I just don't see investors being willing to just let that amount ride as new debt.
And yet people will loan us money for 10 years at well under 1% interest. That keeps the interest burden down -- and yet with the debt growing at over $1T per year it can't last forever.
Those seem like something someone with wealth might want to do. But for those without wealth... protests are pretty much the top of the short list of options they can take.
> No the Government borrows against future taxes (consider that an accounts receivable), the borrowed money doesn’t have value because of consensus it has value because it is backed by future tax revenue.
This is one of two reasons it has value.
As other comments mention, the other reason is because it's by far the leading global reserve currency. Which is to say it's an attractive mix of liquid, stable, and available, compared to alternatives.
Furthermore, there are certain commodities (e.g. oil), for which dollars are required.
As a result, other countries / parties may believe the dollar is overvalued, but they will still have to acquire them, at the market rate, to execute transactions.
As a result of that ongoing demand, the dollar will tend to be valued both on its future tax revenue value AND as a result of a substantial, continuous demand.
The current US federal debt is roughly 110% of GDP. In a few weeks, I'm going to borrow about 350% of my yearly income in the form of a home loan. I'm currently paying about 30% of my pre-tax income on rent, and this future mortgage will be about 22% of my pre-tax income, so on that basis alone it makes a lot of sense.
Less than 10% of the total federal budget goes into debt payments.
The absolute numbers don't really matter, but the percentages do. Trends also matter, as long as they're considered carefully.
One interesting thing about the federal government's debt is that it behaves very little like an individual's debt.
A pretty decent 10-year student loan right now is at 4% interest. And you generally have to pay it back with actual money that you earn.
A 10-year treasury note is at more like 1%, and nobody bats an eye at the government covering payments by issuing more notes. Meaning that, in effect, the US government is getting an indefinite interest-only loan at a pretty low rate.
Actual humans don't get to do that because of a sticky problem: eventually we age out of our money-earning years, and (hopefully some time later) we die. Lenders, understandably, have an interest in getting their money back before that happens. Or at least in getting to the point where the loan is collateralized by assets that are worth more than the loan's balance by the time that happens. And that's the ultimate reason why revolving debt gets worrisome: It's running down the clock.
The US government, on the other hand, is theoretically immortal. There's a risk that it might become insolvent at some point in the future, but there's not the same reason to worry about handling debt by endlessly revolving it, because there's no proverbial clock for it to run out.
This is all true and on target. Comparing US federal debt to personal debt beyond anything but the most surface level is inappropriate.
Another class of entities that have a kind of 'forever debt' are large corporations. In general, they never want to be debt free. As I said elsewhere, it's about the percentages and trends.
To be clear: even this comparison has weaknesses. Indeed, US federal debt truly has no direct parallels.
Where do dollars come from? Many observers say that the Federal Bureau of Engraving and Printing manufactures them. These manufactured dollars are then distributed to banks and through banks to other firms and to the public. They are manufactured in the quantities necessary for efficient settlement of loans and other financial instruments. In particular, attention is paid to current goals for purchase of "Treasury" notes. These instruments are also manufactured by the USA government.
Obviously, an individual human can't operate like this. The USA government can, and has for decades. Remember the Gospels' admonition to "render unto Caesar."
There is a lot of terminology, and the details are absurdly complicated, but the basic idea is simple:
* businesses make things and sell them
* businesses take loans as a way to have a base of money to operate with, because the costs associated to make things have to be paid before the revenue from selling them comes in, and sales may be cyclical, etc
* businesses pay interest on those loans. (Hopefully this interest rate is significantly less than their profit margin.)
* the issuers of the loans- usually banks- sell the rights to the interest payments of those loans. Why? When a bank makes a loan, it is exposed to the risk of the business failing- if it fails, the loan principal and interest payments are lost. banks don't want this kind of "all or nothing" risk (more below).
* people who buy those rights package those interest payment rights into legal structures that combine interest payment rights from a lot of businesses together
* parts of those melded interest payment legal structures are then sold, often sold back to banks, because now the risk, instead of being "all or nothing" is "diversified".
The same thing happens with mortgages- banks that issue mortgages sell the mortgages and then buy into structures that package the payment rights from many, many mortgages.
For every given institution/bank, the move to sell the specific asset and buy the diversified asset makes sense.
At a systemic level, when everyone is doing this, it becomes systemically risky.
What's happening now, because of the systemic risk, entities that hold these "diversified" assets are themselves selling them to the central bank, which is then absorbing the systemic risk. This article doesn't mention that bank holdings of cash are at all time highs.
In principle, this does not amount to "printing money to stay afloat"- though many will say in practice it does. In principle, it amounts to shifting systemic risk around.
It's weird that people think that it's different anywhere else. In fact, the situation in the US is, if anything, less serious than elsewhere. Especially Europe.
The ECB had to bail out quite a few banks, and several states have done the same. Even now the ECB is preparing new bailouts for European banks:
And when even the ECB thinks banks have behaved so appalingly they deserve to die (trust me this takes quite a bit of really, really bad behavior), the individual countries:
Simple...imagine an accounts receivable that you can borrow against, so when you are low on cash you can borrow money on the basis you will be able to pay in the future with the account receivables.
Only the US account receivable is taxes paid by taxpayers. So what happens is when the rich are in trouble they turn to the government and what the government does is says ok we will borrow against future taxes and just give it to you and typically those being bailed out are banks who turn around and take the taxpayers money and lend it back to the taxpayers. In short the taxpayers get screwed twice once being indebted to the government for future taxes and then again when they have to borrow their own debt from banks.
So imagine I’m your government and say look Bank needs money so I am going to give the bank $100 and you the taxpayers will have to pay that back. Bank gets the money and turns around and lends you $90 while keeping $10 as a fee earned and for lending you the $90 you will need to pay the bank back $100. You see now you need to pay $100 in future taxes to the government and $100 to the bank, so you are really out about $200 less the $90 loan.
>It constantly looks like the country is merely printing more money to stay afloat.
That's basically what's been happening since 2008. The main lesson the Economics profession learned from the Great Depression is that it's better to prevent a full-on depression by any means available than to let it occur and rebuild afterwards. Rebuilding after that level of economic destruction is long and arduous, better to preserve what you have. That's what the 2008 GFC would have caused (or worse) if not for extensive US govt and Fed preventative measures.
The modern means of doing that is for the government to deficit spend and for the central bank to pump the financial system full of cheap or free credit. Problem now is, nobody sees a way of unwinding the deficits and cheap credit without causing the depression they were trying to prevent.
Neither political party has the political will to balance the budget and be the cause of the resulting economic pain. Republicans convince themselves we can outgrow the deficits by cutting taxes, and Dems convince themselves that Modern Monetary Theory will spur growth and limit inflation enough to outgrow the deficits. The Fed tried early in the Trump admin to raise rates back to normality, and the market started crashing again, so they stopped. We're stuck.
It's the most consequential economic experiment since the US left gold standard, and nobody knows how it will turn out. Imho our best hope is for a gradual devaluation of the Dollar and a soft landing, avoiding a major shock. But under precarious circumstances like these, unpredictable shocks are a distinct, if not likely, possibility.
Bingo. Finance is just about allocating risk. When it goes wrong, it's either because 1) the risk taken was misunderstood, and/or 2) too much risk was taken.
Fraud falls into category 1 (as do many other things, like correlation of loan defaults), and leverage into category 2.
The mechanisms by which risk is allocated are generally quite simple.
I would say opaque rather than complex. The details of a CDS aren't complicated, nor is the Eurodollar system. But it can't be inspected from the outside, and even the Fed is reliant on running complex models in an attempt to model monetary policy impact.
Agreed, financial market structure is often intentionally obfuscated by incumbents. The worst public example is undocumented equity order types [1].
The Fed's monetary policy models are another story. If you drill down on the internal politics of the FOMC, you start to see the "research" as Kabuki theater which exists to justify whatever decision the big people upstairs want.
It is this political dynamic, rather than the reduced compensation, that deters most talented people from public service.
If I printed some $100USD bills, took them to the bank and tried to deposit them, they would have no value. The consensus is that you aren't allowed to print money.
The United States Government prints money all the time. This money has value because there is a world-wide consensus that it has value.
The simple fact is that there is and has been (for many decades) no safer place to park vast sums of money than with the United States Government.
There are limits, though it's not clear what they are. If the US Government printed 330 billion trillion dollars, and gave a trillion to each US citizen, then the consensus would be instantly broken.
The US Government printing 'a trillion here, a trillion there', at this moment in history, is not materially damaging the global consensus. This confidence is relatively easy to measure: when the US creates more debt, are there buyers? The answer is and has been for many decades 'absolutely yes'.
I'm not trivializing this borrowing, and I'm not vilifying it. It is a unique tool that should be used wisely.