New column: The dollar in danger

Good column. But the part you had about the federal debt and deficit reminded me of a chart I saw recently that listed the deficit and the national debt as percentages of GDP since the 1950′s. I’d link to it if I could remember where I saw it, but the chart showed that despite all the doom and gloom about the amount of debt and deficit we’re carrying as a country, as a percentage of GDP, we’re actually doing pretty good comparatively.
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i.e., a trillion dollar deficit is worse than a 500 billion dollar deficit, unless your trillion dollars is coming out of a 13 trillion dollar economy and your 500 billion is coming out of a 3 trillion dollar economy. In which case the 500 billion is way, way, way worse.
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Just a thought that I haven’t really seen pointed out in a lot of places lately with all the focus on the absolute numbers.

Definitely, we’re nowhere near the debt/GDP ratio of the 1940s and 1950s. The concern is that within a decade we’ll be getting into that range, just as Social Security and especially Medicare begin to weigh ever more heavily on the budget.

I think the chart Sean and Justin are talking about is this one:

http://home.att.net/~rdavis2/debt09.html

We came out of WWII with debt of 120% of GDP. Over the next 35 years, under democratic control, we slowly and responsibly worked it down to 35%. Then came that familiar inflection point–1980–Reaganomics, and 30 years of mostly Republican control. It’s been going up ever since (except under Clinton…).

We’re at almost 100% of GDP no–almost unprecedented in non-wartime in a developed country. (Though Japan’s at 200%…)

We’re in the very sad situation of having to dig ourselves out of a hole dug via thirty years of magical thinking and fiscal irresponsibility–Republicans borrowing money abroad to buy votes here.

Sobering stuff. Is there a consensus building around the “a hole dug via thirty years of magical thinking and fiscal irresponsibility” narrative?

The ratio of debt/ GDP is meaningless — the classic apples/oranges comparison. Federal “debt” merely is a statement of the total, net money the federal government *ever* has created. GDP is the value of all goods and services created in a country in *one year*.

So, you have a strange comparison of all time money creation vs. one year product/service creation. It makes no sense. That is why there is no historical relationship between the debt/GDP ratio and any other measure of economic well-being. It’s a totally phony ratio.

Further, “debt” is a misleading term, when it comes to the federal government. The government borrows (i.e. creates debt) by creating unlimited amounts of T-securities out of thin air, then selling them. The only thing backing these T-securities is federal full faith and credit.

The government just as easily and prudently could create money out of thin air, also backed by full faith and credit, and dispense with the T-security creation and sales. In that event, there would be no debt, and the debt hawks could stop worrying about fiscal responsibility.

Instead of “debt,” if it were more properly called “net money created by the federal government,” we all could stop making false, anguished comparisons.

Rodger Malcolm Mitchell
http://rodgermmitchell.wordpress.com

In all this talk about our future debt I haven’t heard anyone talking about cutting back on our military expenditures. That’s where I think we’re headed. The US will no longer be the policeman for the world.

Tell that to the countries of South America that rapidly went into hyperinflation with debt-to-GDP ratio of just over a hundred percent. SAP (Structure adjustment policies) are already being implement in the US, and I bet this whole health-care thing will be brought about and within tens years it will be forked over to the private sector. They’re doing it in the UK and their debt-to-GDP is only 60% percent or so mainly because their credit rating is on the verge of being downgraded. And can you guess by whom? the same agencies that same rating agencies that rated CDO’s. at triple AAA.

Re: the weakening dollar:

Shouldn’t you also pay attention to the effect of the weakening dollar on the U.S. current account (imports and exports of goods) –http://en.wikipedia.org/wiki/Current_account
– and not just on the capital account?
http://en.wikipedia.org/wiki/Capital_account

And within the capital account shouldn’t you also mention the effect of the weakening dollar on assets, not merely investments?

It is true that a weakening dollar makes it less desirable for foreigners to invest in U.S. securities; but it also makes it more desirable to buy American assets — not always a bad thing. And more importantly, a weaker dollar means that American exports are more competitive and foreign imports less attractive (increasing domestic employment).

The pluses and minuses of the rebalancings of world currencies need to be calculated in regard to all their varied effects, not simply a few of them.

China’s artificial currency linkage to the dollar may indeed pose a problem in terms of exports and imports (because their dollar labor costs remain low). But their large stock of dollars and large positive balance of trade with the U.S. may also be a source of the dollar’s stability (because they need us to recycle them if we are to continue buying their products).

The real point is that before policy conclusions are drawn the subject needs empirical measurement, not just a focus on a few variables and the exclusion of all the others.

Walt,
Hyperinflation historically is not related to a comparison between the net amount of money the U.S. government *ever* has created in its 200+ years of existence (aka “national debt”) vs. the value of goods and services its economy created *this year* (aka “GDP”).
The last I looked, about 20 countries have a higher ratio than we do, included Japan’s which is nearing 200%. Ours also has been much higher in the past.
Currently, we are more concerned about deflation, even with our 0% interest rate.
Anyway, as I said earlier, we could eliminate federal borrowing, tomorrow. Instead of creating T-bills from thin air and selling them, we just as easily and prudently could create money from thin air. No difference. That would eliminate the debt/GDP ratio, while depriving the debt hawks of another misleading non-issue.

Rodger Malcolm Mitchell

Hey dad – As a percentage of GDP, defense spending is down about 50 percent from the fall of the Berlin Wall and breakup of the Soviet Union. It is now quite a small part of the federal budget (about 3.5 percent, if memory serves).

Reasonable people can debate whether the current defense number should be larger or smaller, but the fact of the matter is that further cuts in defense spending aren’t going to produce a lot of savings relative to the budget or deficit. By far the largest and fastest growing part of the budget is entitlements spending. We either have to grow revenues (greater taxation or economic growth) or shrink entitlements spending (difficult both politically and legally). But ongoing stimulus spending is much greater than defense spending, and more problematic if we don’t find a way to reach closure on it.

I’m talking total credit market debt which is reaching 400%.

And do you know that allow banlster to make billions of $$$ YOY

The root cause of hyperinflation is excessive money supply growth, usually caused by governments instructing their central banks to help finance expenditures through rapid money creation. Hyperinflations have mostly occurred in a context of political instability, adverse economic shocks and chronically high fiscal deficits. Hyperinflationary episodes are characterised by a general loss of confidence in the value of money, a flight into real assets and hard currencies, a surge in barter trade, and a shrinkage of financial intermediation and thus of the banking system.

Link this excerpt.

http://www.morganstanley.com/views/gef/archive/2009/20090129-Thu.html

I think Morgan Stanley knows just a little more about this Rodger Malcolm Mitchell

I agree with all you said, Walt, even the gratuitous slap at the end. However, nothing you said disagrees with my earlier post, which made two fundamental points:

1. The debt/GDP ratio is meaningless as the numerator measures scores of years and the denominator measures one year — apples/oranges.

2. We could eliminate federal debt if the government created money directly rather than creating T-bills and selling them

What does Morgan Stanley say about that?

Rodger Malcolm Mitchell

P.S. I’m sorry M.S. returned their bailout funds. That’s $10 billion less in the economy

Credit is money and money is credit, It usually takes X amount of credit to move a unit gdp to X amount, and from my observation gdp isn’t moving. All this debt isn;t moving the economy anywhere, Thus IMO we are heading into a very high rate of inflation. And as for MS they’ve invested that into who know what, just like GS invested their bailout in sercurties traded on behalf of thier account.

And Mr. Fox made a great point in the Mag of Time of how banks are getting money at )% interest rates and the rushing into T-bills to our goverment at interest. Martin Mayer made a great point of how the FDIC does rough the same thing in his book; The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry.

I appolgize for that slap; it was in bad taste.

“Credit is money and money is credit. True. All money is a form of debt, so why are people afraid of debt?

The added money has prevented the GDP from falling as far as it would have, and GDP now will begin slowly to increase. When the government cuts back on deficit spending, we will fall back into recession, as happened in 1937.

Ever since we went off the gold standard in 1971, there has been no relationship between deficits and inflation. See the graph at: http://rodgermmitchell.wordpress.com/2009/11/14/how-to-eliminate-federal-debt-and-save-the-economy/

Don’t blame the banks for making money. The government made the rules.

By the way, what do you think of my suggestion to stop creating and selling T-securities and instead, to create money, directly? That would eliminate the misleading concept of “federal debt.”

Rodger Malcolm Mitchell

Could the greenback be in danger?

It has been on a falling trend in the past months, pushing most other international currencies up (including lightly the stubborn yuan). If this drop is not arrested somehow or soon enough, the days of the mighty dollar are numbered.

The Fed ought to be especially obliged and charged with the task to steady (if not strengthen) the dollar by every possible measure at the very earliest, particularly in this crucial yet unstable juncture when recovery is said to have begun.

Meanwhile, oil keeps shooting up to near $80 from a low of $36 several months ago. Does any body want a repeat of 2008?

The dollar is right where the Fed wants it. They believe a weak dollar helps exports, which helps our recovery.

Oil also is close to where the Fed and OPEC want it, For the Fed, not so high as to slow the economy, but high enough to keep alive oil exploration, as well as alternative energy research. For OPEC, not so high as to stimulate massive exploration and a large move to alternative energy, but high enough to make a good profit.

The theoretical danger of a weak dollar is inflation, but so long as inflation remains low, the Fed will keep interest rates (and the dollar) low. Many economists feel 0% is the ideal Fed Funds rate.

Rodger Malcolm Mitchell

I bet those economists reside deep in some back room of the nation’s banks.

Not really. They are everywhere. They are known as “chartalists.” See: http://en.wikipedia.org/wiki/Chartalism

Rodger Malcolm Mitchell