Significant decline in stocks as valuations skyrocket, fed warns!!!

[tsfx]

But the deficit isn't owed to anyone, and the bonds sold are exchanged for money already printed out of thin air and spent into the private sector. If you had a money machine in your basement the concept of debt would be meaningless to you as well.

Of course it is. Just not in a traditional way. The deficit is owed to confidence. That's what this money printing is all about. As long as the private sector bond buyers/holders accept 0 nominal rate (deep negative real rate) on gov bonds everything will be fine.

Everything is about the gov bond rate. You think Central Bank decides the level of interest rates? Stop buying gov bonds and you'll think again.

I wonder why the interest rate in emerging markets are high as fck if all of them have "the money machine in their basement" AND the free will to also engage in 0 rate policy. Ups, noone would buy those bonds then...

So, debt is never meaningless, it's just appears so on the surface because money printing in western economies works. FOR NOW.

And another long term concern, I believe, should be bond servicing, which we call "debt servicing" which is non-prefunded, non-discretionary spending.

Debt servicing will become a problem yes but ONLY if there is a meaningful interest rate. That pain level rate keeps on dropping in time as the debt level keeps on increasing. But if the rate is zero then there is no pain cause there are no expenses as you are never paying back the principal (well, for as long as the market gives you a rollover). And that's the beauty of the system right now. This 0 rate policy and, in many cases, negative bond yields are making the debt actually an investment. I think none of the CBankers ever imagined that the real world debt buyers would be this retarded to turn this show so brilliant. For now. (Unless of course there's over the counter agreements between the CB's and private buyers which we don't know about, then it's another story)

 

[SunTrader]

I know. The CBO thinks that the aggregate deficit is debt. But the deficit isn't owed to anyone, and the bonds sold are exchanged for money already printed out of thin air and spent into the private sector. If you had a money machine in your basement the concept of debt would be meaningless to you as well. Neither you nor I can print money whenever we want to buy something, but our government can. The important thing is how much money is created over time relative to productivity. And another long term concern, I believe, should be bond servicing, which we call "debt servicing" which is non-prefunded, non-discretionary spending.

True. The Fed and natty guv have no long term debt to be concerned about ... until it's citizens and the rest of the world stop taking the increasingly debased/deflated/destroyed currency and like all empires we collapse. Unless we .... nah forget about it.

 

[piezoe]

The deficit is owed to confidence.

That's a very interesting comment, and probably quite correct. Certainly the deficit, if it results in outside Federal money being spent into the economy more rapidly than productivity can absorb it , will cause inflation. That's real. We will notice it, talk about it. and it could cause a loss in confidence in the dollar.

Probably the administration is counting on productivity picking up rather rapidly; fast enough to cause the current inflation pulse to moderate. That's what I'm reading now coming from the Fed. They are saying the current boost in inflation is transitory.

We are coming out of extremely unusual economic circumstances. These circumstances will not last.

 

[piezoe]

True. The Fed and natty guv have no long term debt to be concerned about ... until it's citizens and the rest of the world stop taking the increasingly debased/deflated/destroyed currency and like all empires we collapse. Unless we .... nah forget about it.

I don't think this thinking is accurate. Where it fails to be correct I believe is in linking inflation to a fictitious government debt. We should stop talking about "debt" which for our federal government does not exist. Instead we should just call it what it is, a deficit created by the Treasury spending more into the economy than it takes back out in taxes. The "deficit" is that part of Federal spending that is accommodated by creating new money -- here, I'm not talking about transitory credit money that is created via fractional reserve banking, and can respond to interest rates, especially at extremes. For any economy in a nation with its own fiat currency that is growing in population and/or in productivity, deficits are essential to prevent deflation. By the same token, the rate of increase in productivity is at least to some degree dependent on deficits.

Deficits are also essential if it is desirable that the population have greater savings.

So from my perspective the important question is not whether there should be deficits, in general there must be!, but how much deficit over what time period is desirable.

Deficits that grow too rapidly will cause an undesirable level of inflation. On the other hand, we have plenty of examples of what seemed to be very large deficits not causing inflation. That's because these deficits were not too large, and in some cases what seemed at the time to be a very large deficit might have been still larger without causing significant inflation.

The fundamental problem we face is, I believe, misunderstood. We first must understand that it is the Congress that is in charge of deciding, quite indirectly however, how big the deficit should be. Congress receives guidance from expert economists; yet in the end Congress decides on the deficit's magnitude. This decision is completely out of the hands of either the Treasury or the Federal Reserve. By the time the Federal Reserve covers an overdraft in the Treasury's reserve account a deficit is a fait accompli. Under our constitution, neither the Treasury nor the Central bank can decide how much money the Federal Government should spend into the private sector. This decision is entirely in the hands of Congress.

What the Central Bank, i.e. "The Fed", can do is to raise, or lower, interest rates. The effect of this is to make credit more, or less, expensive; to lower, or raise, the price of bonds held by the private sector, and to raise, or lower, the government's cost of servicing new issues sold into the private sector.

Nevertheless, when it comes to controlling and reacting to inflation, Congress holds the high value cards. Because only Congress can increase or decrease the amount of money spent into the private sector, and only Congress can raise or lower taxes! Taxes take money previously spent into the economy back out without replacing it with a bond. Raising taxes can knock inflation on it's ass, so to speak, and can also cause a recession if not wisely implemented.

 

[SunTrader]

I don't think this thinking is accurate. Where it fails to be correct I believe is in linking inflation to a fictitious government debt....

It's truly basic 3rd grade eco ... deficit year to year, debt long term.

Word play gets us nowhere.

 

[tsfx]

I don't think this thinking is accurate. Where it fails to be correct I believe is in linking inflation to a fictitious government debt.

So from my perspective the important question is not whether there should be deficits, in general there must be!, but how much deficit over what time period is desirable.

Deficits that grow too rapidly will cause an undesirable level of inflation. On the other hand, we have plenty of examples of what seemed to be very large deficits not causing inflation. That's because these deficits were not too large, and in some cases what seemed at the time to be a very large deficit might have been still larger without causing significant inflation.

In a sense you are right, with a certain assumption. That assumption is again the good old conficence. You are assuming that there only exists one type of inflation - the good one aka the economic one aka the supply/demand driven. With this definition, everything you say is correct and logical starting with the need of deficits to manipulate with the balance between the supply and demand side to control the level of inflation. There is another inflation though...more on that below.

Deficits are also essential if it is desirable that the population have greater savings.

Well, sure, but it's like saying, money printing is essential if we desire more money. That's not a justification. Deficits nor money printing isn't a positive sum game. It's just playing with time, the delaying mechanism so to speak. Printing is actually a negative sum game with all the costs and "commissions" associated.

In the end, it's the still the debt that comes into play. Why ? Because the deficit game that you are playing makes the deficit ever increasing which keeps on lowering the interest rate level for max pain. So, for example, let's say you can handle a 3% rate on your debt now, when your debt grows 3x times, it'll be 1% that you can handle. So, as long as you can manipulate rates to be zero, everything will forever be fine. But remember, in order to keep this show going, you NEED a REAL buyer of debt! A person who has WORKED for his money and keeps on accepting negative return! Why this keeps on being the reality is a mystery to me. I'm pretty sure something else is going on behind closed doors

Anyways, that's why debt WILL be an issue in the future. One way or another your debt issue will get addressed. So the question is - whether it'll be through deficit cuts, through taxes, or interest rates rises or the combination of them all. But Debts CANNOT be ever increasing. Your REAL buyer of debt is gonna stop buying it. Then you need the FED to cover everything. 100% debt will be bought by the FED. Word gets out. "Zimbabwe phenomena" hits all over the place. This is your structure break so to speak. That OTHER inflation - the bad inflation - confidence inflation.

The fundamental problem we face is, I believe, misunderstood. We first must understand that it is the Congress that is in charge of deciding, quite indirectly however, how big the deficit should be. Congress receives guidance from expert economists; yet in the end Congress decides on the deficit's magnitude. This decision is completely out of the hands of either the Treasury or the Federal Reserve. By the time the Federal Reserve covers an overdraft in the Treasury's reserve account a deficit is a fait accompli. Under our constitution, neither the Treasury nor the Central bank can decide how much money the Federal Government should spend into the private sector. This decision is entirely in the hands of Congress.

Absolutely, I'm also confused why everyone is looking at the fed as if they are responsible or even have any power over spending. It's the goverment that holds all the cards and makes decisions.

Nevertheless, when it comes to controlling and reacting to inflation, Congress holds the high value cards. Because only Congress can increase or decrease the amount of money spent into the private sector, and only Congress can raise or lower taxes! Taxes take money previously spent into the economy back out without replacing it with a bond. Raising taxes can knock inflation on it's ass, so to speak, and can also cause a recession if not wisely implemented.

And that's what i think will be the future. A modern apporach to raising rates without actually touching the FED rate. It's the taxes. And more specifically and to put it in a single phrase - speculation targeted taxes. The rich and the speculative world will get taxed more than those that just work and want to buy a home for themselves. Just blindly raising interest rates for EVERYONE when prices are ALREADY HIGH is ridiculous and that has been the mistake the CB's around the world have made in the past. Issues will be addressed specifically and case by case, no longer just throwing antibiotics all over the place.

 

[piezoe]

It's truly basic 3rd grade eco ... deficit year to year, debt long term.

Word play gets us nowhere.

I do understand how difficult it is to accept something we have heard all our lives, is spoken of continuously in the common media, is written in text books and appears before our very eyes to be true, is in realty not true. I as virtually everyoine else in my generation believed precisely as you, it is only in the past ten years or so when I became a serious student of economics that I learned what we all thought was true is not. Now I am somewhat embarrassed to admit the stupid things I used to say and believed were true.

Probably the easiest to understand of the evidence of our misguided thinking is the realization that long before we , our Federal government that is, appears to borrow so much as a nickel, they have long since spent that nickel they appear to be now borrowing. Try that at home and see how that works out!

But by far the most convincing evidence comes from detailed consideration of the consolidated Treasury and Federal Reserve Accounts. Then it become clear that the Treasury always money finances its expenditures, i.e., The Fed "prints" for the Treasury whatever it needs beyond its receipts. It only later appears to be borrowing. But that operation, while not actually borrowing, does generate the Treasury Securities that are needed to facilitate commerce, serve as an interest bearing store of money, and act as an important tool of the Central Bank (The Fed) in carrying out monetary policy.

But none of this hard reality should be taken to suggest that the size of the deficit and rate at which it is added to is not important. It impacts the Fed's difficult to achieve mandate of maintaining a stable currency in profound ways.

But what we can learn from a correct understanding of Federal Government finances is that talk of paying back the "debt" by running surpluses is nonsense.

 

[SunTrader]

I do understand how difficult it is to accept something we have heard all our lives, is spoken of continuously in the common media, is written in text books and appears before our very eyes to be true, is in realty not true. I as virtually everyoine else in my generation believed precisely as you, it is only in the past ten years or so when I became a serious student of economics that I learned what we all thought was true is not. Now I am somewhat embarrassed to admit the stupid things I used to say and believed were true.

Probably the easiest to understand of the evidence of our misguided thinking is the realization that long before we , our Federal government that is, appears to borrow so much as a nickel, they have long since spent that nickel they appear to be now borrowing. Try that at home and see how that works out!

But by far the most convincing evidence comes from detailed consideration of the consolidated Treasury and Federal Reserve Accounts. Then it become clear that the Treasury always money finances its expenditures, i.e., The Fed "prints" for the Treasury whatever it needs beyond its receipts. It only later appears to be borrowing. But that operation, while not actually borrowing, does generate the Treasury Securities that are needed to facilitate commerce, serve as an interest bearing store of money, and act as an important tool of the Central Bank (The Fed) in carrying out monetary policy.

But none of this hard reality should be taken to suggest that the size of the deficit and rate at which it is added to is not important. It impacts the Fed's difficult to achieve mandate of maintaining a stable currency in profound ways.

But what we can learn from a correct understanding of Federal Government finances is that talk of paying back the "debt" by running surpluses is nonsense.

Every government does the same. Prints money before receiving same.

And every government, throughout history, that prints beyond a certain level (whatever that is in each instance) fails.

Defense of excessive money printing is ... nonsense. No free lunch, yesterday, today or tomorrow.

Prosperity has to be earned, not printed.

 

[tsfx]

Defense of excessive money printing is ... nonsense. No free lunch, yesterday, today or tomorrow.

Prosperity has to be earned, not printed.

By all rational measures, that has to be true. But why are there still private bond buyers ? They are are the ones providing that free lunch. That's what makes this environment so confusing.

(Ofc, i'm referring more so to Eurozone, US actually have very attractive long dated yields)

 

[SunTrader]

By all rational measures, that has to be true. But why are there still private bond buyers ? They are are the ones providing that free lunch. That's what makes this environment so confusing.

(Ofc, i'm referring more so to Eurozone, US actually have very attractive long dated yields)

Because other than the inflated stock and real estate markets where do you put cash - especially if you already have a lot in the aforementioned?