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Debt really does matter as presses cannot print forever
By Shawn A. Mesaros |
September 27, 2011, Tuesday
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AS Greece reels into the abyss, we are reminded that debt matters.
As Ireland teeters at the edge of the abyss, we are reminded that debt matters.
The problem isn't external debt, or internal debt. In a world of free trade, global capital markets correctly price many assets unless they are being artificially supported.
Where the sellers of such assets don't have the ability to support asset prices artificially, such as in the eurozone, assets reprice to where the market sees capacity to pay vs ability to manipulate.
We respectfully disagree with Robert Shiller's assessment ("World overreacts to debt-to-GDP ratios," Shanghai Daily, August 26.)
"This (negative) feedback has nothing to do with the debt-to-annual-GDP ratio crossing some threshold, unless the people who contribute to the feedback believe in the ratio."
Are we as nations operating on "beliefs-based cash" or cash in the bank?
Since when did Americans buy groceries with beliefs? Overextended is just what it is. Reality, not belief.
Pure stupidity?
"Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity - or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories."
If the world is stupid, then America should retire its debt and tax its citizens less, and grow more. This is what all countries should do? What form of misinformation begins with owing too much?
"We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial - and often irrelevant - constructs that they are," wrote professor Schiller.
If debt is so artificial, then what, exactly, are these "irrelevant" items that the USA owes to China? What caused the UK to pull out of Panama after World War II despite their national interests? Debt to the USA.
History serves as our witness. Money 2 is now going through the roof as the authorities continue to crank rates lower in the United States.
Europe's "inability to print its own money" has unwittingly created a surreal level of demand for US Treasuries, and American politicians see this as a vote of confidence?
Quite the opposite. It is simply the last resort in the great scheme of least-bad alternatives.
In an election year, the USA will use this "least bad argument" to expand spending again and again, flooding the system with cash, buying votes with the taxpayer's own money.
Deficit spending
Mr Shiller might be right, so long as everyone agrees that this is a sustainable policy.
The United State is unique in its financial power to print money well in excess of what it takes in for tax revenue. This is called "deficit" spending.
What it doesn't collect must be financed. The United States has long held a policy of issuing debt vs outright "printing of money" in order to "fund the deficit" that the taxpayer would somehow later become responsible for paying.
Policy makers in the USA have never in their lifetime seen a smaller total budget than the year before.
Our trade partners know full well that they will not be paid back in currency which is worth as much as what was borrowed.
The question trade partners ask in this scenario is "what is our relationship with the United States worth" in terms of opportunity cost when investing in our debt?
The long-term question becomes how much inflation "they" (our trade partners) are willing to suffer with for the opportunity to continue as a partner of the United States of America.
Our trade partners are willing to accept fundamentally flawed, debased paper in repayment of debt, but only because relative to the current state of affairs in Europe - they know the USA is committed to printing the money.
Perhaps Mr Shiller is correct that debt doesn't matter, so long as this is seen as a sustainable policy. He is correct in his assessment, but only if an unlimited printing press is a sustainable policy.
Natural laws
We bring attention to the "corporate model" of country governance.
One cannot "borrow their way" to prosperity (law of diminishing returns) any more than governments can tax their citizens to greater heights of productivity (in which case citizens have no money for productive investment).
These are natural laws, not just financial laws. We would opine that just as every company has shares of "stock" that every country has units of "currency."
As countries "print and print and print" despite a lack of actual GDP growth, they serve only to devalue their own capital stock.
As a famous athlete once joked: "I am really hungry, please cut that pizza into 50 slices."
Politicians love the printing press because it is free money to buy votes, but in the long run, currency loses its purchasing power. The illusion of wealth being larger piles of paper.
The author is managing director of Pacific Asset Management, Pamria, LLC. The views are his own.
As Ireland teeters at the edge of the abyss, we are reminded that debt matters.
The problem isn't external debt, or internal debt. In a world of free trade, global capital markets correctly price many assets unless they are being artificially supported.
Where the sellers of such assets don't have the ability to support asset prices artificially, such as in the eurozone, assets reprice to where the market sees capacity to pay vs ability to manipulate.
We respectfully disagree with Robert Shiller's assessment ("World overreacts to debt-to-GDP ratios," Shanghai Daily, August 26.)
"This (negative) feedback has nothing to do with the debt-to-annual-GDP ratio crossing some threshold, unless the people who contribute to the feedback believe in the ratio."
Are we as nations operating on "beliefs-based cash" or cash in the bank?
Since when did Americans buy groceries with beliefs? Overextended is just what it is. Reality, not belief.
Pure stupidity?
"Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity - or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories."
If the world is stupid, then America should retire its debt and tax its citizens less, and grow more. This is what all countries should do? What form of misinformation begins with owing too much?
"We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial - and often irrelevant - constructs that they are," wrote professor Schiller.
If debt is so artificial, then what, exactly, are these "irrelevant" items that the USA owes to China? What caused the UK to pull out of Panama after World War II despite their national interests? Debt to the USA.
History serves as our witness. Money 2 is now going through the roof as the authorities continue to crank rates lower in the United States.
Europe's "inability to print its own money" has unwittingly created a surreal level of demand for US Treasuries, and American politicians see this as a vote of confidence?
Quite the opposite. It is simply the last resort in the great scheme of least-bad alternatives.
In an election year, the USA will use this "least bad argument" to expand spending again and again, flooding the system with cash, buying votes with the taxpayer's own money.
Deficit spending
Mr Shiller might be right, so long as everyone agrees that this is a sustainable policy.
The United State is unique in its financial power to print money well in excess of what it takes in for tax revenue. This is called "deficit" spending.
What it doesn't collect must be financed. The United States has long held a policy of issuing debt vs outright "printing of money" in order to "fund the deficit" that the taxpayer would somehow later become responsible for paying.
Policy makers in the USA have never in their lifetime seen a smaller total budget than the year before.
Our trade partners know full well that they will not be paid back in currency which is worth as much as what was borrowed.
The question trade partners ask in this scenario is "what is our relationship with the United States worth" in terms of opportunity cost when investing in our debt?
The long-term question becomes how much inflation "they" (our trade partners) are willing to suffer with for the opportunity to continue as a partner of the United States of America.
Our trade partners are willing to accept fundamentally flawed, debased paper in repayment of debt, but only because relative to the current state of affairs in Europe - they know the USA is committed to printing the money.
Perhaps Mr Shiller is correct that debt doesn't matter, so long as this is seen as a sustainable policy. He is correct in his assessment, but only if an unlimited printing press is a sustainable policy.
Natural laws
We bring attention to the "corporate model" of country governance.
One cannot "borrow their way" to prosperity (law of diminishing returns) any more than governments can tax their citizens to greater heights of productivity (in which case citizens have no money for productive investment).
These are natural laws, not just financial laws. We would opine that just as every company has shares of "stock" that every country has units of "currency."
As countries "print and print and print" despite a lack of actual GDP growth, they serve only to devalue their own capital stock.
As a famous athlete once joked: "I am really hungry, please cut that pizza into 50 slices."
Politicians love the printing press because it is free money to buy votes, but in the long run, currency loses its purchasing power. The illusion of wealth being larger piles of paper.
The author is managing director of Pacific Asset Management, Pamria, LLC. The views are his own.
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