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In every interview, he gives off an impression that the US shoud not be concerned with the debt and spend more for domestic investments. He is right. As long as people buy US bonds, the defcit means nothing. The US was founded on deficits. It won't weaken the country.
Apparently we need to know how things work, to understand why massive government debt IS a major problem, and doesn't just weaken the country--it will create an nationwide economic collapse that makes the Great Depression seem like the Roaring 20s.
First of all, the largest buyer of U.S. bonds (debt securities) now is our own Federal Reserve--in effect, we are primarily paying off our old credit cards by getting new ones. Years ago, China and other nations bought the bulk of our debt issuance, but they STOPPED doing that and are now divesting their dollar holdings (due to our ongoing currency devaluation). Recently even the major American investment houses, like PIMCO, announced THEY would no longer be buying U.S. debt issuance. And the American people (if you mean the average citizen in aggregate) are broke and have no money to invest; they are paying down their current debts as the economy continues to degrade. Too bad our leaders aren't this smart.
Check these facts if you don't believe me, and research these topics if they are fuzzy to you. Don't let your nation and future be destroyed because you were waiting for your favorite liberal news channel to explain it to you in a few sound bites.
So the Federal Reserve (aka The Fed) now absorbs the vast majority of our government debt issuance--with money created from nothing, by simply printing more dollars. As a result, inflation is accelerating (at over 9% when measured by non-biased sources), and the dollar's buying power is being degraded at a frightening rate. Every dollar you are paid with today, is worth 40% less than the dollar you earned 10 years ago. Every savings account, retirement account, or investment, is being devalued by the "stealth tax" of currency devaluation. Worse, inflation and currency devaluation are separate things that produce a "double whammy," where your savings and earnings virtually evaporate.
"When measured against the standard basket of currencies, the US dollar has fallen by some 30 percent over the past decade. However, most of those currencies are also depreciating in real terms." US Dollar Devaluation – A Bad Plan Poorly Disguised Compared to gold and other precious metals, the dollar has been devalued 40% over the last ten years. In effect, if you put $100,000 in the bank 10 years ago and got no interest, you would now have an equivalent buying power of only $60,000. In other words, you got hit with the "stealth tax" of 40%.
Every single American pays for the massive debt of government overspending, by losing buying power every year. Your income or retirement pension must therefore almost double every 10 years--JUST TO STAY EVEN.
In terms of simple analogy, yes, American families have traditionally bought houses with 30 year loans. That's fine when you have a steady job and income, and don't have mortgage payments so large they result in you starving or not being able to pay your property taxes and utilities bills. But that doesn't mean that the average American family can buy and keep a $10 million dollar mansion with an income of only $10,000 a year. Not even if a corrupt banking system will give the family that loan, as happened in the housing bubble.
The whole house of cards of over-borrowing MUST collapse, because it is not sustainable. While it looked like everything was okay for a few years, banks were racking up huge levels of "toxic mortgages" and housing prices skyrocketed into a speculative bubble, as everyone wanted to cash in on the huge annual price increases. Then both the housing markets and the Banking system collapsed, and we ALL suffered--even when we personally had done nothing stupid.
Our houses, even if paid for them in cash with our savings, are now worth 1/2 their previous price--so we'd lose half of the money we earned and invested if we need to sell before the housing collapse ends. And we might easily need to sell before housing prices recover in a decade or so: job loss or transfer, health problems, massive property taxes, or a thousand other events could occur.
Then, to doubly punish us for the mistakes of others, Big Banking (which always all their massive profits to themselves), now called Obama and said “We want a taxpayer bailout!” And naturally, Obama gave it to them, since he knows that Big Government is the servant of Big Business--plus, he’ll be personally rewarded for giving our money away. No wonder his campaign coffers are overflowing, thanks to grateful Big Business recipients of the taxpayer's hard-earned money.
Make no mistake, our government's insane overspending and over-borrowing is similarly going to hit the fan soon. And yet again, the blameless average American will pay the price. Pretending everything is fine, and refusing to understand what is going on, won't save you.
No matter how much we spend, Krugman never seems to be satisfied. One would think he wasa moderate from how he writes his textbooks, but every time he opens his mouth it's the same crap over and over.
Dr. Krugman believes debt in the short-term, when 14 million are unemployed, is not the problem but recognizes that the long-term debt must be addressed.
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Originally Posted by Swingblade
Do you have me on ignore ? I have been harping ad nausem on the dire condition of U S bonds for 2 years. I just posted a couple of days ago that the last auction was a disaster and foreign investors only made up 12% of the dismal number. Why do you think there is talk of QE3 if treasuries are such a hot cake item ?
Investors bid down U.S. bonds to record low interest rates -- which is good for government borrowing and indicates confidence in the U.S. ability to pay the debts. The last auction represented movement from stocks to safe investments.
Apparently we need to know how things work, to understand why massive government debt IS a major problem, and doesn't just weaken the country--it will create an nationwide economic collapse that makes the Great Depression seem like the Roaring 20s.
If it gets to that point, yes; the fact is that the U.S. is not currently in danger of an actual default. It was very close to hitting a legislative limit on debt which would have forbade it to make payments on debt, and the debate to raise the debt ceiling never should have been an issue. The tea party Republicans wanted to make it an issue, so it became one.
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Originally Posted by NHartphotog
First of all, the largest buyer of U.S. bonds (debt securities) now is our own Federal Reserve--in effect, we are primarily paying off our old credit cards by getting new ones. Years ago, China and other nations bought the bulk of our debt issuance, but they STOPPED doing that and are now divesting their dollar holdings (due to our ongoing currency devaluation). Recently even the major American investment houses, like PIMCO, announced THEY would no longer be buying U.S. debt issuance. And the American people (if you mean the average citizen in aggregate) are broke and have no money to invest; they are paying down their current debts as the economy continues to degrade. Too bad our leaders aren't this smart.
Let me guess, you're talking about the May/June Treasury report?
First of all, I think you misrepresent the big picture here. China did not get rid of all bonds; they got rid of short-term bonds that mature in less than a year. That type of debt was probably about 11-13 percent of China's debt holdings back in the spring of 2009. Before that time, China's investment in short-term debt was quite low. Much lower than what it was after the 2009 purchases. We're basically getting back to where we were in 2008, with regard to short-term bonds.
From the Chinese point of view, the debt risk made sense. They were making a short-term bet (if you want to call it that) with a note that had great track record of being repaid on time. It also increased China's political influence in the U.S., but economically, it helped China stabilize an economy that was essential to their own economic well-being, and there was no reason to expect the debt not to be repaid. This confidence was strengthened by the fact that the democrats had just taken power, and that they believed that spending would bring back U.S. jobs and that tax increases would eventually be applied to even out the deficits. That's why the Chinese bought short-term bonds back in 2009.
The reason they stopped buying bonds is because it became increasingly clear that the U.S. political situation was spinning out of control, and they were dealing with a bunch of tea party ideologues who openly tossed around the idea that the debt ceiling could be used as a political tool to force the president to make immediate and massive cuts to spending, and also to preserve tax cuts. Rand Paul even said that a short-term default would be okay (something which China angrily and immediately dismissed as insane rhetoric). That would be why China backed away from U.S. debt. Not because of economics, but because of farm-boy idiots in congress who don't have any idea about how an economy actually works.
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Compared to gold and other precious metals, the dollar has been devalued 40% over the last ten years. In effect, if you put $100,000 in the bank 10 years ago and got no interest, you would now have an equivalent buying power of only $60,000. In other words, you got hit with the "stealth tax" of 40%.
Gold is going up because people don't know when even if the dollar is going to fall. And they don't know how fast it would fall even if it does. Gold's a good bet - until fiscal sanity actually returns to Washington. The other reason that gold's a good bet, and the real reason that the dollar is falling, is because the U.S. is increasingly a nation that has fewer things of value that back the dollar. It's not just the printing of money; it's the fact that the U.S. has to import more and more energy to keep its economy going. It's the fact that the U.S. doesn't make anything actually valuable anymore. It imports instead of exports. Even so, some dollar devaluation is to be expected. We no longer pay a nickel for bottled cola.
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Our houses, even if paid for them in cash with our savings, are now worth 1/2 their previous price--so we'd lose half of the money we earned and invested if we need to sell before the housing collapse ends. And we might easily need to sell before housing prices recover in a decade or so: job loss or transfer, health problems, massive property taxes, or a thousand other events could occur.
That has absolutely nothing to do with the dollar's depreciation against world currencies. The value of housing has to do with the laws of supply and demand.
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Then, to doubly punish us for the mistakes of others, Big Banking (which always all their massive profits to themselves), now called Obama and said “We want a taxpayer bailout!” And naturally, Obama gave it to them, since he knows that Big Government is the servant of Big Business--plus, he’ll be personally rewarded for giving our money away. No wonder his campaign coffers are overflowing, thanks to grateful Big Business recipients of the taxpayer's hard-earned money.
Yeah, I like how you conveniently forget the fact that TARP went into effect in the fall of 2008, before he even took his oath of office. Bush signed TARP into law; Obama reauthorized the rest of the TARP funds which had already been appropriated by Bush and congress. Get your facts straight, chief.
Dr. Krugman believes debt in the short-term, when 14 million are unemployed, is not the problem but recognizes that the long-term debt must be addressed.Investors bid down U.S. bonds to record low interest rates -- which is good for government borrowing and indicates confidence in the U.S. ability to pay the debts. The last auction represented movement from stocks to safe investments.
The chart you listed I think is for 10 year treasuries? and there is 2 reasons why they hit record lows. And both those reasons have to do with Uncle Ben :
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the Fed vowed to keep interest rates near zero through at least mid-2013. In pledging to keep its benchmark rate at an all-time low, the Fed also discussed a range of policy tools to bolster the economy, saying it is prepared to use them “as appropriate.”
The statement fueled speculation the central bank may consider a third round of quantitative easing through bond purchases to revive a recovery it said is “considerably slower” than anticipated.
But for 30 year treasuries :
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“People didn’t show up for this one,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 20 primary dealers that are obligated to participate in U.S. auctions. “Increased worry about inflation has to get priced into the long bond, given the Fed’s accommodative stance. For now, there will be apprehension to buy that far out on the curve at these yield levels.”
The current 30-year bond yield increased 25 basis points, or 0.25 percentage point, to 3.77 percent at 5:01 p.m. in New York.
So we have Krugman saying long term debt needs to be addressed but back to reality investors are shying away from 30 year bonds. Now lets say this is a trend Uncle Ben will not be buying up 30 year treasuries since it is mainly a no show.
Regardless of what the Fed does, nobody is forcing anyone to purchase T-bills. However, right from the prof. himself:
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Update: A key insight from this whole approach is that a liquidity trap corresponds to a situation in which the “natural” real rate of interest — the real rate consistent with more or less full employment — is negative. On that note, consider real yields on inflation-protected US bonds, which ended last week negative at all maturities 10 years and shorter, and were only 1.03 percent on 30-year bonds — this after what was widely viewed as a disappointing 30-year auction. And these are not, of course, real rates consistent with full employment — they’re real rates consistent with very high unemployment, so the natural rates must be even lower.
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