[adr1an]

Is it that taxes will need to be raised? No, the government does not use tax money to pay its bills. In fact if taxes were reduced to $0 or increased to $100 trillion, neither event would affect the government’s ability to pay its bills.

Is it that federal deficit spending will cause inflation? No, contrary to what the Tea Party tells you, there has been no relationship between federal deficits and inflation. See: Cause of Inflation

Is it that foreign countries will stop lending to us? No, since we went off the gold standard in 1971, the federal government has had no need to borrow the dollars it can create without limit. If the Treasury stopped issuing T-securities, this would have no effect on the government’s ability to pay its bills. We could “pay off”China tomorrow at the press of a computer key.

Is it that “future generations” will pay for the debt? No, the debt merely is the total of outstanding T-securities, which the government services by crediting the bank accounts of T-security holders. It can do this endlessly. Nobody pays, not today’s generation, nor tomorrow’s. But future generations will pay by receiving less Social Security, less Medicare, less Medicaid — in short, our children and grandchildren will lead worse lives because of deficit cutting today.

Umm - the US can't "pay off" China tomorrow at the press of a computer key. You do know how Foreign Exchange works ? I know its a new concept for most Americans, since the whole thought that $1 US Dollar could be worth less than... $1... is new and scary. If the US printed cash to facilitate the debt, this WILL cause Inflation running into Hyperinflation as it spirals down (again - you do remember how the Great Depression started don't you ? ). This will cause the *value* of the Dollar to Fall. This WILL MEAN you have to PAY MORE to service the Debt. This WILL MEAN that you have a choice - contract GDP and hope it staves off inflation (it never does since so much industry falls in the process) - or Dump more cash into the economy, in a hope that it offsets the loss of value in the dollar - which never works.

Heres whats happened to the last country that thought it could just print money to service its debts:

Government spending is 97.8% of GDP. It has partly been financed by printing money, which has led to hyperinflation. State enterprises are strongly subsidized, taxes and tariffs are high. State regulation is costly to companies, starting or closing a business is slow and costly.[13] Labor market is highly regulated, hiring a worker is cumbersome, firing a worker is difficult and unemployment has risen to 94% (at the end of 2008; the figure was 80% in 2005)

You might have heard of Zimbabwe in the news before.... Their 1 Trillion Dollar Notes are well sought after on ebay now for about $20....

Oh, and re the Gold Standard.. Why did the US switch off of the Gold Standard ? Interesting and relevant story that.... and no - it doesn't setup the US for the endless ability to print cash....

The strong dollar led to inflation and a large balance of payments deficit in the U.S. which in turn helped to create staglfation. The U.S. started to deflate the dollar in terms of its value in gold to curb double digit inflation. In 1971, gold was repriced to $38 per ounce, then again to $42 per ounce in 1973. As the dollar devalued, it motivated people to sell their greenbacks for gold. Finally, in late 1973, the U.S. government decoupled the value of the dollar from gold altogether.

Stagflation, incidentally:

Stagflation is when the economy experiences slow GDP growth (stagnation) with high inflation. This occurred in the 1970's, when there were six quarters of negative GDP growth. (Source: BEA, Chart of 1970-1979 GDP).

Inflation tripled in 1973, rising from 3.4% to 9.6%. It remained between 10-12% from February 1974 through April 1975. (Source: BLS, Chart of 1970-1979 Inflation)

When the economy is working normally, stagnant economic growth reduces demand, which keeps prices low, preventing inflation. Stagflation can only occur when fiscal or monetary policy sustains high prices, and inflation, despite slow growth.

Stagflation is normally blamed on the oil supply shocks of 1973, when OPEC cut its quota and prices quadrupled. However, several other shocks occurred:

• The U.S. went off the gold standard (Bretton Woods Agreement), which increased the money supply. This created inflation, as too many dollars chased too few goods.
• As prices rose, demand fell, and businesses cut back on production.
• However, the effect of the sudden surplus of dollars kept an upward pressure on prices even after the economy became sluggish. Ultimately, inflation rose to double digits.
• President Nixon instituted wage and price controls, throwing off the ability of the markets to self-correct.
• To fight inflation, the Fed kept raising the Fed Funds rate, reaching a peak of 20% in 1979. However, it did so in a "stop-go" fashion, confusing price-setters, many of whom kept prices high.

But seriously.. you should study up on Hyperinflation before you declare that the US can just 'pay off china' with the press of a button - or just keep printing money as needed..... A vicious circle is created in which more and more inflation is created with each iteration of the ever increasing money printing cycle.

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Last edited by adr1an; 07-17-2011 at 06:53 PM.

[jeffkrol]

Zimbabwe hyperinflation is the usual smoke and mirrors.. They destroyed their ability to create anything (grow crops) and had NOTHING whatsoever to do w./ the US......
Reasons behind Zimbabwe hyperinflation*political | Modern Money Mechanics

sorry to see you believe in the flat earth theories of economics..............

[adr1an]

Zimbabwe hyperinflation is the usual smoke and mirrors.. They destroyed their ability to create anything (grow crops) and had NOTHING whatsoever to do w./ the US......
Reasons behind Zimbabwe hyperinflation*political | Modern Money Mechanics

sorry to see you believe in the flat earth theories of economics..............

I didn't say their economy was screwed because of the hyperinflation - granted their economy was doomed due to the reallocation of farming land, crop growing areas and the decimating of local industry - the Hyperinflation simply massively contributed to the eventual collapse of their dollar....

Some wags could even argue I'm sure that there isn't much leap between "reallocation of farming land" with "collapse of US Financial Institutions" and "decimating of local industry" with "explosion of US Unemployment"... But I know that would be a tenuous link at best...

So no.. don't believe in flat earth theories at all. Would you mind explaining for all though how the US can just pay off china with a press of the button with zero impact to the value of the US Dollar, which will - if you don't believe in the flat earth theory that is - have hard, far reaching effects on the US Internal AND External Economies ? Thats how a non-Gold Standard based Dollar works isn't it ? Or do you think Bretton/Woods were onto a good thing ?

You are also aware that the US has been recording falls in Consumer Sentiment... Personal consumption accounts for more than 2/3 of US GDP. That can't be good....

Also - don't be so Fox News dude... Don't pick a single small element of a statement and start singing how thats the rule that proves the exception etc... Address the entire argument rather than select points that are perceived to provide political grandstanding...

[jeffkrol]

After the gold standard we never had to "borrow" anything........

Create debt that we pay off in US currency...... think about it.

Bottom line.. we send China worthless paper and they send us"stuff" Who's really screwed...

Will get back to this in a bit.........

[GeneV]

Umm - the US can't "pay off" China tomorrow at the press of a computer key. You do know how Foreign Exchange works ? I know its a new concept for most Americans, since the whole thought that $1 US Dollar could be worth less than... $1... is new and scary.

Is the debt denominated in dollars or Yuan? If it is in dollars, then, yes, it can be paid with the push of a button.

If the US printed cash to facilitate the debt, this WILL cause Inflation running into Hyperinflation as it spirals down (again - you do remember how the Great Depression started don't you ? ). This will cause the *value* of the Dollar to Fall. This WILL MEAN you have to PAY MORE to service the Debt. This WILL MEAN that you have a choice - contract GDP and hope it staves off inflation (it never does since so much industry falls in the process) - or Dump more cash into the economy, in a hope that it offsets the loss of value in the dollar - which never works.

Again, if the debt is in dollars the U.S. will never have to pay more to service that particular debt. The only way it will cause inflation is if the Chinese refuse to take dollars in the future or require more dollars for their goods or require more interest for future borrowing. There will be numerous considerations for the Chinese at that point before making that decision, including their need to stoke their export economy and their desire not to devalue their huge store of dollars. We have never had inflation which could be positively linked to deficits or money supply.

The MMT folks have thought this through pretty well. http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf I'm not saying I buy this completely or they are 100% right, but the pat answers you are giving are also not the end of the story. Mosler's book does not take long to read but it often seems that most who reject the theories out of hand have not done so.

[adr1an]

I'll have a read through that PDF later on Gene.. I'm always happy to examine all sides of a debate based on the facts at hand..

My one immediate statement though is - The assumptions about the current Chinese Debt Relationship with the US may seem sound based on the past decade.. but I don't believe its as solid a position to hold as it once was. Further - Chinese goods are getting more expensive - from memory at least 4% last quarter.. this is due to the increase in min-Chinese wages among other things.. they aren't going to be able to strangle the Yuan over there for ever.

Anyway - will look forward to reviewing the PDF tonight..

[deadwolfbones]

welp,

http://www.nytimes.com/2011/07/17/sunday-review/17economic.html?_r=2

[newarts]

While increasing the money supply does impose inflationary pressure, it doesn't seem to have historically been a real problem until full production is reached. That's because the increased demand for goods and services can be satisfied by increasing production - more people get employed at the prevailing wage and prices need not rise. We are far from that condition now.

[newarts]

welp,

http://www.nytimes.com/2011/07/17/sunday-review/17economic.html?_r=2

Good read.

The most frightening thought in the article to me was that our manufacturing days are over - we have allowed (and encouraged) it to move offshore. Our consumption/production based economic engine is not recoverable because our domestic production apparatus is not recoverable.

If that is the case and we cannot compete in the world's industrial market, what alternative is there to substantially grow wealth?

[adr1an]

Our consumption/production based economic engine is not recoverable because our domestic production apparatus is not recoverable.

Jeffkrol said you'd just move it back all onshore again. I pointed out that isn't possible given the contraction - but he assures us otherwise ?

[newarts]

Jeffkrol said you'd just move it back all onshore again. I pointed out that isn't possible given the contraction - but he assures us otherwise ?

It is conceivable but would be slow and politically difficult don't you think?

On the other hand, Germany certainly has built and maintained a very strong production base along with a high standard of living.

[adr1an]

It is conceivable but would be slow and politically difficult don't you think?

Yes.. I did indicate whilst its an arguable solution - it is perhaps overly utopian to succeed. Its no different to suggesting this will solve the problem of rising Chinese Goods.. it isn't a simple matter of reversing the process.. as I said earlier "More expensive" doesn't mean "Cheaper to make in the US".... a problem all too familiar here in Australia...

On the other hand, Germany certainly has built and maintained a very strong production base along with a high standard of living.

Just dont mention the war!!

But seriously - a good example in point. But they have likewise had very , by American standards, 'progressive' socialistic type policies concerning minimum wages, social services, etc... I think a large part of what makes that industrialization so successful is because of that and the fact that by and large German Manufacturing Employees are very very happy and socially aware citizens... can the same be said for the US Domestic Manufacturing sector ?? (I don't know...)

In Germany, they are very happy to have just one LCD and catch Public Transport.. not so much in the US, were 'wealth' and therefore employee 'value' is measured in making sure you have 3, or 4... 3 cars.. etc etc...

I think that cultural difference plays a large factor too - don't you ?

[newarts]

.....
I think that cultural difference plays a large factor too - don't you ?

Yes I do. And that's slow to change.

[jeffkrol]

I'll have a read through that PDF later on Gene.. I'm always happy to examine all sides of a debate based on the facts at hand..

I have a nagging suspicion that you said this earlier in another thread. COULD be wrong though........ my apologies if incorrect.
Matter of fact have you really read any of the MMT stuff??

My one immediate statement though is - The assumptions about the current Chinese Debt Relationship with the US may seem sound based on the past decade.. but I don't believe its as solid a position to hold as it once was. Further - Chinese goods are getting more expensive - from memory at least 4% last quarter.. this is due to the increase in min-Chinese wages among other things.. they aren't going to be able to strangle the Yuan over there for ever.

chinese economy is full of energy and material giveaways from the Gov. Yuan was pegged to the dollar and needed to be free floating.

China Yuan Down Late On Higher Fixing, Broad Dollar Strength - WSJ.com

SHANGHAI (Dow Jones)--China's yuan fell against the U.S. dollar late Monday, after the country's central bank guided the currency lower via a higher daily reference rate and as the U.S. dollar gained against regional currencies.

On the over-the-counter market, the dollar was at CNY6.4687 around 0830 GMT, up from Friday's close of CNY6.4630. It traded between CNY6.4642 and CNY6.4697.

The yuan has risen 5.2% against the U.S. unit since June 2010, when China effectively ended its currency's two-year peg to the dollar and vowed to make the yuan more flexible..
Another trader at a Shanghai-based local bank said she expects the yuan to remain weak "for a while" as the dollar index may test the psychological level of 76 in the next few sessions.

"Some are arguing the U.S. dollar is no longer a safe-haven currency, but the European debt crisis is really what's going on and a lower euro will push the dollar higher," she said.

Offshore, one-year dollar-yuan nondeliverable forwards rose to 6.4000/6.4050 from 6.3900/6.3970 late Friday, and implying a 1.1% rise by the yuan against the U.S. currency over the next year.

In the offshore yuan market in Hong Kong where the Chinese currency floats freely, the dollar-yuan exchange rate was at 6.4685 late Monday, up from 6.4635 late Friday.

[adr1an]

I have a nagging suspicion that you said this earlier in another thread. COULD be wrong though........ my apologies if incorrect. Matter of fact have you really read any of the MMT stuff??

No - haven't come across it before actually - unless I missed it ? Certainly not said I'd read it yet. Will hopefully get to it tonight still once I've finished screwing with these pics for a friend... But I would have said I am more than happy to examine all sides previously.. have no problem finding out opposing views and applying devils advocates philosophies to my opinions