Mystery Donor Pays Off $2.2M of National Debt

[Viper0011.]

Why the experts are predicting the next financial crises to be eminent? WHY ... you might find the answers in the video below (my apologies for posting a long video but I believe there is a lot to learn from the presenters as they have great credentials):

Many observers of the U.S. financial system increasingly believe that the United States will soon experience another financial crisis – the only questions are when and how bad will it be? With that expectation in mind, the panel could address the following issues: What are the likely early indicators that another crisis is in the offing? What economic conditions are the likely causes of that crisis (rising housing prices, the reemergence of shadow banking, other consequences of Dodd-Frank, crises emanating from other countries, etc.)? What might ignite that crisis? Who will likely be blamed for causing the next crisis and who or what should be blamed? What might be the political/legislative response(s) to the next crisis? What, if anything, can be done to mitigate the consequences of the next financial crisis and possibly even steer the U.S. economy away from future financial crises?

Financial Services: Explaining the Next Crisis

--Hon. Phil Gramm, Senior Advisor, US Policy Metrics and Former United States Senator
--Mr. Frank Medina, Senior Counsel & Director of Research, Better Markets
--Ms. Karen Shaw Petrou, Managing Partner, Federal Financial Analytics, Inc.
--Prof. J.W. Verret, Assistant Professor of Law, George Mason University School of Law
--Moderator: Hon. Edith H. Jones, U.S. Court of Appeals, Fifth Circuit

I am watching and learning as well...so please do not expect me to answer your complex queries at this time ....

There was a group of some version of Christianity who predicted the world would end in 2012. Poor fellows even went to that place where the "magic" was going to happen. They spent days there and came back!!!! There were scores of people since WWII (top educated, smart and all, like the above list), who spent the next 45 years, post WWII, predicting the Cold War and the chances of that turning into a WWIII.

Similarly, in markets, specially after the screw up of 2008, there is a lot of oversight and constant predictions. But just like the Cold war and tension with the Russians, no real issue is coming out for the US economy just yet.

I know a thing or two about all this. The Dodd-Frank law has further put the responsibility on Financial institutes to monitor a BUNCH of things, including Financial health, stress testing of worst case scenarios, and bad debt management. The banks just don't give out loans randomly like it used to be. Same for the Commercial lending, its tightened up a LOT. So "predictions" are great and oversight is necessary and there will always be room to improve. But there is no "serious" threat to the US financial system right now. In fact, its growing and so is the confidence of people and investors.

Rising home prices are just an indicator of demand. If the home prices are rising, the fact is, people are affording the higher prices. If there was no demand, than the law of elasticity would tell us the housing market would go through a correction, and the prices will come down a little. Common sense. So like I said, there is and will be strict oversight on the Financial industry within the US, including the Fed carefully analyzing the markets too. These reports and discussions are good too. Without criticism, you couldn't improve anything. But predictions or reports don't mean that the market is going to tank. That's silly. The US takes her economy very seriously as it has impacts across the globe. So it's foolish to see no one is monitoring it. These guys here, are a part of one of many groups playing Devil's advocate, so that everyone is on their toe and careful, not to repeat any mistakes again.

This is great for the consumers / American citizens and for the globe. People would know that their money is safe while invested in the US!!

 

[Adecypher]

These guys here, are a part of one of many groups playing Devil's advocate, so that everyone is on their toe and careful, not to repeat any mistakes again.

I agree; off-topic: Who is your next US Presidential candidate...if you don't mind me asking?

 

[Viper0011.]

I agree; off-topic: Who is your next US Presidential candidate...if you don't mind me asking?

I think Carson should be. But Trump wold be in reality...

 

[LeveragedBuyout]

@LeveragedBuyout Sir, would you like to comment on this thread. Not the OP, but how critical is the $18+Tr Debt situation?

I'm feeling generous because it's Thanksgiving, so even though I'm averse to posting on PDF these days, I'll play. There are a few ways to look at the debt, and how one looks at the debt determines how critical the $18tn level is. I will approach this from the financial markets perspective, since I'm not an economist.

1) Interest coverage: The interest expense for FY2015 is $402bn against a budget of $3.8tn, or approximately 10.5% of the budget. There is a lot of capacity to prioritize interest payments in the budget, or raise revenues by increasing taxes if necessary. From this perspective, the $18tn of debt will not be an issue for the medium-term.

2) Leverage to "income": The US officially has a debt/GDP ratio of approximately 101% as of Q2 2015, which is quite a bit, but the growth in debt/GDP has leveled off recently, and appears to be under control. With recent budget discipline and an apparent recovery of economic growth, we can begin to hope that it may start to decrease:

Relative to other advanced economies, the US level of leverage is not unusual, so from this perspective, as long as the debt/GDP level doesn't explode upward like it did in the financial crisis, this is not a problem (yet). Of course, if we have another financial crisis, as some in this thread are predicting, all bets are off.

3) Leverage to "equity": As others have mentioned, the assets available to the United States are vast (technically, we are the government, so in an emergency, taxation of assets is a tool available to the government, even if it's not something we citizens would easily agree to). As of Q2 2015, the net worth of US households and non-profits was $85tn. We can easily cover the debt by liquidating assets if taxation of income is not sufficient. Such a scenario is not on the horizon, however.

4) Faith in the credit of the US, aka capital inflows. From a big picture perspective, a government can raise debt so long as investors have faith that the debt will be repaid. That's why, even at over 100% of GDP for the US, and over 230% of GDP for Japan, advanced economies tend to easily raise debt, while developing economies struggle. We have a good track record of repaying debt, and sufficient institutional stability to guarantee that no matter what type of government is in power, interest payments will be made responsibly. That is why so many countries feel comfortable parking their capital surplus in the US in the form of US treasuries, because they know that our government will uphold its commitments and repay its debt. In turn, because we have such a large pool of debt and so many investors, the debt market is deep and liquid (that is to say, transactions will not significantly impact the price, and one can invest and liquidate very quickly, if necessary). Our capital account is open, unlike, for example, China--so foreigners can invest in the US and repatriate capital easily. This, in turn, makes US debt far more attractive than other forms of debt, and thus attracts more investment. The virtuous circle is born.

5) Risk vs. reward. Everything is relative. This chart is about half a year old, but tells the tale well:

We are a good risk, especially for foreigners. The strength of the USD (and it will get even stronger after the Federal Reserve starts raising interest rates) means that returns are quite high when denominated in foreign currencies. We provide a higher return, so we attract more investment.

Conclusion: The $18tn in debt is not at crisis levels. It's the trajectory that bothers most serious thinkers: our entitlement system will consume a larger and larger percent of the budget unless it is reformed. If it is reformed, we will be able to sustain the current tax system, more or less. If it is not reformed, taxes must rise to finance the entitlement system and still be able to provide for the actual, legitimate functions of government (e.g. defense). But as we have a vast capacity to raise taxes (as undesirable as it is), this is not a crisis situation. Sorry to disappoint the anti-American cohort here.

 

[Nilgiri]

Basically spot on @LeveragedBuyout. Well presented good sir!

 

[Jacob Martin]

@Jacob Martin might have some good input to add as well.

Thanks for tagging me. would have been a better discussion, if, as you rightly said, people here had a fundamental understanding of how debt works. But I don't blame them - media provides too much data and too little analysis.

IMO, the short answer to the question whether US can write off its debt is - yes it can. @LeveragedBuyout has given a detailed explanation, I would like to follow that up with my understanding of how public debt functions in the first place.

On the point of the debt owed to China - China will automatically accumulate US-dollar denominated claims as a result of it running a current account surplus against the US. These claims are held within the US banking system somewhere and can manifest as US-dollar deposits or interest-bearing bonds. The difference is really immaterial to US government spending and in an accounting sense just involves adjustments in the banking system.The accumulation of these US-dollar denominated assets is the “reward” that the Chinese (or other foreigners) get for shipping real goods and services to the US (principally) in exchange for less real goods and services from the US.

So what is the impact of this debt on the US? Can it go bankrupt as a result? Not really.

Let us compare the US with a country that can indeed go bankrupt, such as Greece. That is so because of the difference between the monetary system (EMU) that Greece has to operate within and the fiat monetary system that the US government runs as a monopoly-issuer of its own currency. Greece could go bankrupt, because it effectively uses a foreign currency and cannot instruct the central bank to provide adequate funds. It actually doesn’t have a central bank anymore given that the Greek central bank is part of the European Central Bank system. In that sense, Greece is less a country and more a corporation.

The primary reasons for American debt are the trade deficit and the fiscal stimulus package that was implemented to jump-start the economy post-2008. When the US Federal Reserve was about to introduce its Quantitative Easing program for the first time, Alan Blinder, a former vice chairman of the Board of Governors of the US Federal Reserve had this to say when asked to explain how the US Federal Reserve gets “money into the system” :

Well, when the Fed first starts these operations, including the other ones they do, what they try to do is re-jigger their balance sheets, sell one asset, and that for the Fed has been mostly been treasuries, and buy something else.


As that capacity gets used up, the Fed can no longer swap one asset for another. And then it has to … we use the euphemism “print money.” What that really means is somebody is on a keyboard creating electronic images of money. Large amounts of money are not cash.


So these are credits at the Federal Reserve system basically. A central bank can do that; a commercial bank cannot do that.

And that lies at the heart of the confusion. Commercial banks cannot just "print" money from thin air, unless the government authorizes them to do so. People have been fed the wrong notion that the Central Banks are in the same position, which is not the case. Least of all in the case of the US.

Ben Barnanke, then Chairman of the US Federal reserve, was questioned by the US Congress (Committee on Financial Services) on July 14, 2011. The Chair Congressman Duffy asked him:

DUFFY: … When — when you buy assets, where does that money come from?


BERNANKE: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.

Point 1: There are no revenue constrains to the US Federal Reserve/Government buying assets.

The discussion continued:


DUFFY: Does it come from tax dollars, though, to buy those assets?


BERNANKE: It does not.

Point 2: The US tax-payer is NOT paying for what the US Federal Reserve/Government spend.

And further:

DUFFY: Are you basically printing money to buy those assets?


BERNANKE: We’re not printing money. We’re creating reserves in the banking system.

Point 3: He just said that the Fed Reserve simply prints money to buy assets. What he is referring to is the electronic version of printing money.

The conclusion is that the electronic credits that the US treasury spends come from nowhere and enter the non-government sector as a credit against obligations that other people have to government. The source of these funds cannot come from the taxpayer. Similarly, when the credits are redeemed they go nowhere other than into accounting books to record the events. In other words, the US government can "print" as many dollars as it deems fit.

The next question is, can the debt generated thus be simply written off. All governments do that to domestic debt, although that cannot be done to external debt unless your creditor is willing to accept repayment in your currency. The US can discharge its entire external debt in this manner. The T-Bills that are held by the Chinese, Japanese, Taiwanese etc can be paid back on demand. The only fallout will be that questions will be raise about the confidence in the American economy and the USD. A fiat currency is backed by nothing else apart from the word of the Central Bank - so any mass dumping of T-Bills will signal that people are loosing faith in the dollar.

But that's not going to happen, as the Chinese know that the US will honour those T-Bills without batting an eyelid. Besides, the Chinese are engaged in their own "great money printing" exercise for the past 5 years. I will elaborate on that in a subsequent post as I have to go buy groceries.

 

[Nilgiri]

Great post @Jacob Martin as usual. This is basically what I have read in many places as well.

People just do not realise the near absolute power the US dollar still holds as a virtue of US total equity size + US financial credibility perception . The latter is probably the greatest somewhat "hidden" aspect of US soft power.

Looking forward to part II: China when you got time of course.

 

[Taygibay]

There are already signs that Black community is pressuring to gain their autonomous state or moving towards it ,

I know it was an off-topic part of the whole comment but still, personally,
I stopped having any thoughts about answering after reading the above.
Azad's view not being correlated to American reality makes it useless, IMHoO.

Just saying' Azad, all factual & no disrespect intended, Tay.

 

[Faiez]

The conclusion is that the electronic credits that the US treasury spends come from nowhere and enter the non-government sector as a credit against obligations that other people have to government. The source of these funds cannot come from the taxpayer. Similarly, when the credits are redeemed they go nowhere other than into accounting books to record the events. In other words, the US government can "print" as many dollars as it deems fit.

That's not entirely true and you know it.

Credit creation theoretically will have an effect on value of currency and prices.

And that's the "tax".

You don't understand the American economy. The cause was consumer debt, not the national debt. This was and is America's big economic problem. If the banks had gone out of business, it would have been a great thing for the US, because then we would have the opportunity to restructure the economy the way it should be.

That's an excellent point. A free market would have fixed alot of US financial problems for the long term. Bailing out banks was a short term patch up due to political pressure. If Obama really genuinely cared for USA, he would have opposed the bailouts instead of pushing it forward just to have a better chance at a second term in office.

 

[Aestu]

What "tangibles" care to tell me? We are a service based economy, with Financial Services being the CORE of our country's growth and prosperity. The next inline is the Military Industrial Complex.

The infrastructure and know-how to build a service economy is itself a de facto tangible. In finance, we call it "goodwill," and in business management, we call it "going concern". Besides that, the US does indeed produce many tangible tangibles.

In this thread, it's been established beyond serious debate, that, while the US does indeed have serious systemic long-term problems and is probably in decline compared to powers like the EU and India, it's not going to just shut up shop tomorrow or anytime soon. China has bigger and more fundamental social, political, economic and of course environmental problems, and although things are generally getting better in the Third World, as they have for decades now, they aren't going to be on even ground with the US anytime soon.

 

[Jacob Martin]

That's not entirely true and you know it.

Credit creation theoretically will have an effect on value of currency and prices.

And that's the "tax".



That's an excellent point. A free market would have fixed alot of US financial problems for the long term. Bailing out banks was a short term patch up due to political pressure. If Obama really genuinely cared for USA, he would have opposed the bailouts instead of pushing it forward just to have a better chance at a second term in office.

Yes, that is one side to the argument, although I personally do not subscribe to it. For example, some argue that the purchase of interest-bearing assets from the private sector reduces private incomes which some might consider to be a “tax”. Even if that is so, that is just one way government spending is financed. But I won't stress too much on my disagreement with this, as the rest of what you stated is more interesting.

The government budget constraint (GBC) framework identifies three sources of public finance: a) taxes and other receipts; b) interest-bearing bonds, c) non-interest bearing money. The standard assumption is that since issuing of debt will soak up money from the private sector and printing money will cause inflation, so government spending should desirably be funded through taxes.

From that, we derive the understanding that unless the government wants to print money and cause inflation it has to raise taxes or sell bonds to get money in order to spend. But the understanding that taxation and bond sales provide money for the government spending is erroneous. The government is not a household. The user of currency has to finance their spending before-hand, but the issuer of currency faces no such constraint. In fact, it is just the reverse. The Government necessarily must spend first (credit private bank accounts) before it can subsequently debit private accounts, should it so desire. The government is the source of the funds the private sector requires to pay its taxes and to net save (including the need to maintain transaction balances). Therefore, the government is always solvent in terms of its own currency of issue.

Insofar as the claim that infusion of high power “printed” money into the system creates inflation and a run on the currency, for that we need to understand debt monetization. Governments borrow most of their money not from other governments, general public or financial institutions. Most of the money spent by the government is in fact borrowed from the Central Bank. The government issues bonds and asks the central bank to buy them. The central bank then pays the government with money it creates, and the government in turn uses that money to finance the deficit. This process is called debt monetization.

However, as I had explained in the earlier post, most of the money created in this manner is not handed over to the public for consumption. The standard conditions for inflation – too much money chasing too few goods, is not met. Please try and understand that firstly, the government uses debt monetization AFTER having already spent the money. That money is notionally already in the economy. If it had to cause inflation, then its work is already done. And secondly, let us look at the type of situations where the government uses debt monetization. What was the purpose of the stimulus package from the American government? Jump-staring demand in the economy, right? So the Federal Reserve issued money which was handed over to selected entities so that demand could be stimulated.

When the government erases that deficit by debt monetization, it has no further affect on the economy. Whether the measure fails or succeeds, its effect has already played out. The final act of cancelling that debt will not have any impact on the economy, as the government will only take that step when it needs to make fresh expenditure, and not otherwise.

Great post @Jacob Martin as usual. This is basically what I have read in many places as well...........

.........Looking forward to part II: China when you got time of course.

Ya. I was reading some of the earlier posts in this thread. I would like to respond to those and then go on to China. And I also have to answer that Pakistani GDP estimate question on the other thread. That's a really tough one though. I have nearly given up trying to figure it out.

 

[Yousafzai_M]

The debt is paper, mainly in the form of T-bills. The US can wipe the debt out with the flick of a pen simply by printing currency or cancelling the notes. Conversely, the US can pretty much keep doing what it is now doing, just letting the numbers get bigger, for a very long time. America's problems are social and structural, not financial.

The wealth of the US is hard to imagine from the perspective of Pakistan. Microsoft, Google, Facebook, our banking system, all kinds of industrial firms, aren't going anywhere anytime soon. American tax rates are the lowest in the Western world. If tax rates increased even marginally, the US's financial problems would be greatly diminished.

You want to fantasize there's finally going to be some big apocalyptic showdown with the US in which the big bad rich country is going to be humbled by China and Pakistan (and maybe also Indonesia, if you want to get a little fancy?)

It's simply not going to happen.

You probably think too much of yourself Senior. Nobody in Pakistan gives a toss about the financial, social, structural whatever situation in the US. We have our own problems to worry about.

The dude was just giving his opinion, you are free to disagree with him.

 

[Viper0011.]

The infrastructure and know-how to build a service economy is itself a de facto tangible. In finance, we call it "goodwill," and in business management, we call it "going concern". Besides that, the US does indeed produce many tangible tangibles.

In this thread, it's been established beyond serious debate, that, while the US does indeed have serious systemic long-term problems and is probably in decline compared to powers like the EU and India, it's not going to just shut up shop tomorrow or anytime soon.

Changing your flags to India sometime soon? India and EU are not going to compete with the US lol. Not population, man to man wise, anyone would win because they simply have more people to feed, more demand of stuff and more supplies needed!!

The US built India. Mr. Clinton donated hundreds of billions in investments and millions in jobs to stand India in front of China. I think that was a mistake as India will NEVER fight with us. They'll tell us "our public vote for no war with China as they are our neighbors). And we'll realize, holly crap, we put in trillions to make India into a regional power and now we are getting a kick in the rear from them.

And Goodwill is not the ability to produce "infrastructure". Goodwill is a business's reputation based on how well its done. I don't know which school of business you went to, but my curriculum was from Chicago and Harvard school of business, which are the top business schools. But anyway, wrong definitions don't change the facts.

The US is a services economy. If you can give me facts that we meet 100% of our needs internally, I'll rest my case. Otherwise, its useless to get into an argument with someone who doesn't understand the basis of the country's economy he lives in!!

 

[NP-complete]

no single person need to worry about any national debt. we are all citizens of earth and the net debt of our planet is zero.

 

[Aestu]

Changing your flags to India sometime soon? India and EU are not going to compete with the US lol. Not population, man to man wise, anyone would win because they simply have more people to feed, more demand of stuff and more supplies needed!!

I never said that India would. But in point of fact, the EU's combined population and economy are both 50% larger than the US, and more well-balanced, more sustainable economically and environmentally, with a trade surplus and less internal and external debt. The fundamentals are there.

The US built India. Mr. Clinton donated hundreds of billions in investments and millions in jobs to stand India in front of China. I think that was a mistake as India will NEVER fight with us. They'll tell us "our public vote for no war with China as they are our neighbors). And we'll realize, holly crap, we put in trillions to make India into a regional power and now we are getting a kick in the rear from them.

Funny, I thought it was the British XD

And Goodwill is not the ability to produce "infrastructure". Goodwill is a business's reputation based on how well its done. I don't know which school of business you went to, but my curriculum was from Chicago and Harvard school of business, which are the top business schools. But anyway, wrong definitions don't change the facts.

It's the internet, so I'm going to say that I was the CEO of half a dozen Fortune 500 firms. Either way, what does it really matter? How many times have those guys been wrong in the last decade alone? (How hard is it to enroll for HBS Online or summer session? XD)

Anyway, you're confusing things. Goodwill is the financial value of a firm based on its value as a going concern. This is how value is measured in the world of service economy. A going concern is itself a kind of infrastructure - the organization and wealth of ideas/reputation that separate Coca-Cola from a lemonade stand. Yes, that is value.

The US is a services economy. If you can give me facts that we meet 100% of our needs internally, I'll rest my case. Otherwise, its useless to get into an argument with someone who doesn't understand the basis of the country's economy he lives in!!

I wasn't aware there were any autarchies in the world today. But the most self-sufficient economic organization - by far - is the EU...which was my point.