Who will pay back the debt?

[Tim Eriksen]

@ Tim,

 

1. Lower oil prices shrinks our trade deficit substantially.  We import around 2.5 billion barrels per year.  So that is a $100 to $150 billion decrease.

That implies that USA will maintain its production quota with WTI @ $47 ?!? Production will fall and imports will rise putting pressure on the trade deficit. Plz read EIA paper on projection.

 

2. Is a trade deficit inherently bad?  We exchange x dollars for a barrel of oil.  How is that not a wash?

Depends on what side of equation you are on. Importing more than exporting for decades, buying more than you produce for decades and borrow to do so - yes that is inherently bad for future americans imo. A constant outflow of USD will at some point find its home again.

 

3. You seem to blur a trade deficit with fiscal deficit.  Two totally different things.

The discussion is about the trade deficit.

 

4. So far Buffett has been shown to be wrong on the whole issue.

'So far' does not mean permanent.

 

I think it is a interesting topic since it touches “intergenerational inequities”. It will be very interesting to see how the US will handle the debt level when it becomes inbearable. For decades the US has been selling pieces of the country coupled with increasing the debt level. If thus the Fed start embracing highly inflationary policies (which I believe is the case) the holders of USD will most likely opt for US land instead of US Bonds and, a true colonization of USA by purchase would be initiated.

 

Rgds

 

1. Can you show me the math on that?  2.5 billion barrels at $100 per barrel = $250 billion per year.  Oil is now $45.  Imports would have to rise to 5.5 billion barrels ($250 bn / $45 per barrel = 5.56).  Current daily usage is about 16mm bopd.  We import 7mm bopd, produce 9mm.  To have the trade deficit from oil increase, we would need production to fall by 3 billion barrels per year.  In other words usage remains at 16mm per day but import rise from 7mm bopd to 15.2mm bopd.  Thus US production would need to fall from 9mm bopd to 0.8mm bopd.  I have a hard time believing that is what anyone projects.  BTW we don't have a production quota, but a production level. 

 

2. Who is borrowing to do so?  This is where you blur trade deficit with debt.  I don't export anything, but I buy imports so I have a personal trade deficit.  My net worth has climbed.  Sure the Fed may need to pull dollars out of the system at some point.  So. 

 

3. Glad you cleared that up (sarcasm).  If so, then isn't the only way to "pay it back" to run a surplus??  Yet  you use terms implying it is similar to real debt.  How do you inflate away a trade deficit?  How does Treasury forgive the debt? 

 

4. Correct.  "So far" does not mean permanent.  Pretty sure it means "to date."  Buffett has been wrong since 1987.  As he admits in the article "But first I need to mention two reasons you might want to be skeptical about what I say. To begin, my forecasting record with respect to macroeconomics is far from

inspiring."  He has been wrong on a many macroeconomic, political and tax issues.   

[jb85]

are our children really going to have to be paying back our debt in any meaningful way?  If we go from public debt of 100% of GDP to 50% of GDP over a 20 year period, thats only 1/40th of our wealth produced over the next 20 years that goes to paying down the debt?  Is that really going to ruin lives?

 

 

another question, which is actually serious, but may not sound that way.  I see a lot of money printing discussion here.  But if new printed fed notes are simply held in the banks reserves and not loaned out, is it really fair to call that "money printing"? M2 as a % of GDP have been fairly stable over the last few decades.  I don't see a ton of money that is actually flowing all the way through to the public's hands

 

richard koo had a whole book kinda addressing this very point.  QE hasn't been as effective as say pure helicopter money b/c its all being held by the banks and not getting loaned out

[anders]

@ Tim,

 

 

If it sounded that I had an offensive tone, it wasnt my purpose.

 

 

1) I would prefer not to deep dive into math and sources. I simply red EIA report 2014 and their projection and thought it made sense -  that is, US oil production will decrease and US oil consumption increase over the next coming years and as a corollary will put negative pressure on the trade deficit. IMO it is very unlikely that USA will maintain its production level the coming years if prices stay at these levels.

 

 

...Quota // Level... Since english is not my mother tongue I do appreciate all help I can get improving it thank you, but you dont need to feel that you have to do it for my sake.

 

 

2,3) But it is not two totally different things. Fiscal policy and balance of trade is interlinked and the topic is "who will pay pack the debt". And I believe that balance of trade is where you find the root of increased debt level in a society and thus where I find it most interesting to disuss, it is where it begins. And if you factor in income and payments to get to current its still negative since decades.

 

Blending in fiscal policy; A goverment surplus = trade surplus + excess of investment over private saving. So if USA keeps its spending fixed and lower the taxes thereby go into deficit, then either the trade surplus or investment over saving must decline, or both. So can you imagine USA to raise taxes to cover a negative balance of trade?!? Is there any example of where USA have a budget surplus and current deficit?

 

Every budget is balanced, there is no thing as an unbalanced budget and the true tax in a country is how much the government is spending and how much the country is buying goods from other countries. And the citizens are paying for it, if not through direct taxes than indirectly in the form om inflation or borrowing debt. No way a country can directly raise taxes and not increase its production without harming its citizens buying power. This is why average joe have seen his dollar decline over 90% over the last 90 years.

 

 

4) Yes, I never argued differently, but I think it is pretty clear that somewhere down the road, USA will face some hard choices. And Buffett has made a great job in raising a big red flag for what he thinks awaits the next generations of americans. Its simple arithmetic, Japan will at a point default, USA continuing at same pace will at some point default. Not acknowledging this is imho ignorence.

 

-----

 

Since 1940, the US has had 12 budget surpluses out of 74.. roughly each 6th year. How is that a recipe for success without somewhere on the road correcting the balance sheet? And how does this effect future americans ? Will USA be able to make trade surplus - through production or FED devaluing the USD increasing export? or will the treasury just write off the debt to the FED? or will it be colonized by purchase with cheap dollars?

 

 

I apologize for previously being blurry and I hope I better illustrated my point. I would much appreciate that we skip the deep diving, take a step back and I would very much appreciate your thoughts on who you think will be standing left with the bill ?

 

 

Rgds

[anders]

@ JB,

 

I would call it "deflationary money printing" if there is a word for it. And my reason is since it gets stuck at the banks it becomes unproductive borrowing thereby the money velocity declines and a weakening economy follows. If it gets out to the public, it becomes productive since money volocity increses and strengthes the economy.

 

I believe that the intention from the fed is for printed money to reach out in all corners of the system but the banks hold it as insurance. I believe FED lost its power to influence rates and can only guide where they like it to be in future. And after going up x bs and economy starts to halter again.. the mother of all QEs will arrive.. And when the printed money starts its journey out into the system the velocity will be impossible to stop.. I hope Im wrong..

 

Best,

[yadayada]

@RKA: The US government pours like 700bn$ in the economy of borrowed money (the budget deficit). So that is why the trade deficit is so large. They do not directly do trade with other countries, but this number indirectly ends up outside the US. Let's say the government pays a government official with that borrowed money, and that government offical spends it with you. Now you did not borrow that money, but your income depends on borrowed money. Now those dollars find themselves to mostly China because you import products with the money you earned. They get turned into Yuan. Now the Chinese owns those dollars, and they have to put it somewhere. So they invest it in the US, or they buy government bonds with it. Like that crazy chinaman who wanted to buy the wall street journal. Saying he was good at working with jews. You will get a lot more of that in the future.

 

Also note that part of those factories in china are owned by Americans. So part of that trade deficit number ends up in American pockets.

 

So if that goes on for a long time, then after a while, most assets (government bonds, real estate, stocks) in the US will be owned by foreigners. And remember that corporations mostly run things in your country. So if they start pouring in money to the government, they will slowly take over your country if it goes on long enough. That is why the US army is so huge. If that happens, and it goes too far, the US can forcefully take back those assets.

 

Also a thing people forget is that the US racked up enourmous liabilities to the 65+ population, which is growing. While the base of tax payers is shrinking. Those liabilities cannot be inflated away, and they are much larger then the debt held in the bond markets.  There comes a point where those have to be cut, and that would (or should) lead to enourmous distrust in the government and lead to unrest. Ofcourse there comes a point where all the tax money goes to: servicing debt, the army of the US and paying pensions and health care for old people. And it seems young people will not take that as they are the ones paying for it.

 

Also an interesting thing to note is that Buffett with his buy and hold strategy started that right around the bottom of this graph:

http://static4.businessinsider.com/~~/f?id=49d74ad14b54372b00134f9f

 

Note how graham started investing during the delevering, and he only liked net nets. And right around the relevering, buffett started liking quality companies. And if you look at population growth, you see that it was close to 2% (compared to .7% now)

http://www.multpl.com/us-population-growth-rate/table/by-year

 

So when population growth started to flatten, growth came largely from a debt build up.

 

In that period you had 1%+ of population growth, and debt grew a crazy amount in 50 years. If he would start now with this strategy, he would likely not do nearly as well in the next 50 years. Because GDP growth comes mostly from population growth and debt growth. If population growth slows down, and debt has ballooned already, you will see a few decades of very low gdp growth.

 

So then the only growth that you wont see in gdp numbers, can come from productivity growth. But that has now the risk of eliminating a lot of jobs and tax payers, to pay back that enourmous debt! Interesting times for sure.

[Ham Hockers]

Like that crazy chinaman who wanted to buy the wall street journal.

 

WTF

[yadayada]

Like that crazy chinaman who wanted to buy the wall street journal.

 

WTF

http://imgur.com/HKy39ed

That is his business card lol. No joke.

[Tim Eriksen]

@ Tim,

 

 

If it sounded that I had an offensive tone, it wasnt my purpose.

 

 

1) I would prefer not to deep dive into math and sources. I simply red EIA report 2014 and their projection and thought it made sense -  that is, US oil production will decrease and US oil consumption increase over the next coming years and as a corollary will put negative pressure on the trade deficit. IMO it is very unlikely that USA will maintain its production level the coming years if prices stay at these levels.

 

 

...Quota // Level... Since english is not my mother tongue I do appreciate all help I can get improving it thank you, but you dont need to feel that you have to do it for my sake.

 

 

2,3) But it is not two totally different things. Fiscal policy and balance of trade is interlinked and the topic is "who will pay pack the debt". And I believe that balance of trade is where you find the root of increased debt level in a society and thus where I find it most interesting to disuss, it is where it begins. And if you factor in income and payments to get to current its still negative since decades.

 

Blending in fiscal policy; A goverment surplus = trade surplus + excess of investment over private saving. So if USA keeps its spending fixed and lower the taxes thereby go into deficit, then either the trade surplus or investment over saving must decline, or both. So can you imagine USA to raise taxes to cover a negative balance of trade?!? Is there any example of where USA have a budget surplus and current deficit?

 

Every budget is balanced, there is no thing as an unbalanced budget and the true tax in a country is how much the government is spending and how much the country is buying goods from other countries. And the citizens are paying for it, if not through direct taxes than indirectly in the form om inflation or borrowing debt. No way a country can directly raise taxes and not increase its production without harming its citizens buying power. This is why average joe have seen his dollar decline over 90% over the last 90 years.

 

 

4) Yes, I never argued differently, but I think it is pretty clear that somewhere down the road, USA will face some hard choices. And Buffett has made a great job in raising a big red flag for what he thinks awaits the next generations of americans. Its simple arithmetic, Japan will at a point default, USA continuing at same pace will at some point default. Not acknowledging this is imho ignorence.

 

-----

 

Since 1940, the US has had 12 budget surpluses out of 74.. roughly each 6th year. How is that a recipe for success without somewhere on the road correcting the balance sheet? And how does this effect future americans ? Will USA be able to make trade surplus - through production or FED devaluing the USD increasing export? or will the treasury just write off the debt to the FED? or will it be colonized by purchase with cheap dollars?

 

 

I apologize for previously being blurry and I hope I better illustrated my point. I would much appreciate that we skip the deep diving, take a step back and I would very much appreciate your thoughts on who you think will be standing left with the bill ?

 

 

Rgds

 

I realized after I posted that I shouldn't do it first thing in the morning.  I was clearly a bit on the grumpy side.  Since I am not fluent in any other language I am impressed with anyone who can learn a second one, and to be able have a more technical discussion in their non native language is even more impressive. 

 

I would say deep dives into math are essential (not that what I did was a deep dive, it was more back of the envelope).  It often provides greater clarity.  In other words the math shows that lower prices will decrease the trade deficit not increase it.  Of course the money consumers are saving may be directed to other imports. 

 

It seems to me that you reference Buffett as the basis for part of your argument, yet Buffett is not worried about the fiscal deficit at this level.  So he doesn't see the same link between the two as you do.   

 

 

[Ham Hockers]

Like that crazy chinaman who wanted to buy the wall street journal.

 

WTF

http://imgur.com/HKy39ed

That is his business card lol. No joke.

 

It's pretty funny when someone doesn't realize he's acting like an ass.

[yadayada]

It seems to me that you reference Buffett as the basis for part of your argument, yet Buffett is not worried about the fiscal deficit at this level.  So he doesn't see the same link between the two as you do.

 

700 billion$ is basicly inserted in the economy in the form of government debt. 1/3 of that comes from outside the US on average, and the rest from savings inside the US in the form of insurance flaot and pension money. So that is about 230 billion $ /  16800 billion $ = 1.4%. Population growth that is dwindling and at 0.7% in 2014. Which adds up to roughly the 2.5% in 2014.  Now savings have to come in here somewhere. If they are increasingly tapped, that would mean a growing GDP too. But I cannot figure out how to calculate that. But on average over longer periods, that should not matter right? Net savings is like 400 billion$, so there is not that much room there.

 

So please correct me if im wrong, but my theory is that real gdp growth in the past has come from mostly 2 things, population growth (which was closer to 2% a long time ago) and debt growth. Everyone provides a certain amount of value to the economy, so the pie can only grow if the number of people who can provide value is growing. So if the deficit would close at some point (which it has to if you dont want a default), Real GDP growth will almost grind to a halt to below 1% unless fertility rises and population will grow faster again. And it will become very difficult for the governemnt to pay all those older people their pensions and health care since they cannot be inflated away? And the debt/gdp number and debt/tax revenue ratios will become worse.

 

And where increasing productivity (for example fusion energy would be nice right about now) would come in is that a larger % of that GDP number could be spent on paying off debt, because that would increase spending power of the dollar by lowering costs as fewer people have to be paid for the same thing. Like how oil is cheaper now, more money can be spent elsewhere (on deleveraging for example).

 

It seems at the end of the day this is a balancing game, and something has to give.  Every move you make has consequences. And technology and increasing human ingenuity (which would result in massive increases in productivity) is the wild card here that makes macro economics so incredibly difficult to predict.

[anders]

I realized after I posted that I shouldn't do it first thing in the morning.  I was clearly a bit on the grumpy side.  Since I am not fluent in any other language I am impressed with anyone who can learn a second one, and to be able have a more technical discussion in their non native language is even more impressive. 

 

I would say deep dives into math are essential (not that what I did was a deep dive, it was more back of the envelope).  It often provides greater clarity.  In other words the math shows that lower prices will decrease the trade deficit not increase it.  Of course the money consumers are saving may be directed to other imports. 

 

It seems to me that you reference Buffett as the basis for part of your argument, yet Buffett is not worried about the fiscal deficit at this level.  So he doesn't see the same link between the two as you do.

 

Thank you for a great debate.

 

It seems to me we are talking around the same argument. Net energy imports account for about half of the total U.S. trade deficit and value of the trade flow moves of course with production, consumption, and prices. With higher oil price, production and energy export increase and import decline which improve the energy trade deficit (why USA reached its lowest trade deficit in 2013, and also the reason why saudi arabia is not keen on cutting production since they are on the losing side of the trade). My assumption is that with lower oil prices, production level for export will decline and import rise thus increasing the trade deficit. If US oil import would be absent, the US trade deficit would go from -700bn to -300bn.

 

Yes, Buffett is the basis for my argument. I have a vague memory of him saying that only looking at gov debt to gdp is misleading and also need to take in total asset base into consideration. Also him speaking on charlie rose about the fiscal deficit being a stimulans and not worried unless it go more than -10% of gdp. But not worried at this level doesnt mean a link does not exist (in economics they are interlinked and you can read all about it at NBER) and, it does not mean he wouldnt be worried if it gets worse.

 

My interpretation when I first red the article, it that he is concerned for the future of USA, and he explains it quite colorful.

[anders]

yadayada,

 

Check out gapminder, great tool that visulizes data.

 

Best,

[Tim Eriksen]

Not to resurrect the prior debate, but I was thinking a bit about this.  The US imports more goods than they they export, thus a trade deficit.  Oil is a big part of that gap.  So a US refiner buys oil and refines it and sells it domestically in order to make a profit.  So it has a huge trade deficit.  They exchanged dollars for oil and are happy to do so in order to make money.  Do they owe anyone?  No.  Is there areal debt? No.  Did US dollars leave the country?  Yes.  But look at all the business and consumer benefits to having twice the amount of oil products (transportation and thus goods are substantially cheaper)

 

On the other side is a company in a foreign country which produced oil and sold it for dollars to a US refinery. Thus it contributed to a trade surplus (on its side).  They presumably earned a profit, but they also reduced reserves.  They exchanged oil for dollars.  They are happy. They can convert the dollars to local currency or use the dollars to pay for further investment or dividends, etc.    Are they now a creditor?  No. 

 

Yet unrelated third parties believe this is bad in aggregate.  I don't see an alternative method that is better.  Do we want tariffs?  Do we want to limit free trade?  Has free trade intertwined other countries reducing the frequency of wars?  If ultimately a trade deficit contributes to currency depreciation is that worse than slower growth?         

 

note: I do understand that the argument is more favorable regarding oil than say crappy toys from Asia.  But even then have we not exported prosperity to countries like China which has resulted in a larger middle class and a softening of their totalitarian communism?  How do you measure the benefits of that?

 

[krazeenyc]

It seems to me that you reference Buffett as the basis for part of your argument, yet Buffett is not worried about the fiscal deficit at this level.  So he doesn't see the same link between the two as you do.

 

700 billion$ is basicly inserted in the economy in the form of government debt. 1/3 of that comes from outside the US on average, and the rest from savings inside the US in the form of insurance flaot and pension money. So that is about 230 billion $ /  16800 billion $ = 1.4%. Population growth that is dwindling and at 0.7% in 2014. Which adds up to roughly the 2.5% in 2014.  Now savings have to come in here somewhere. If they are increasingly tapped, that would mean a growing GDP too. But I cannot figure out how to calculate that. But on average over longer periods, that should not matter right? Net savings is like 400 billion$, so there is not that much room there.

 

So please correct me if im wrong, but my theory is that real gdp growth in the past has come from mostly 2 things, population growth (which was closer to 2% a long time ago) and debt growth. Everyone provides a certain amount of value to the economy, so the pie can only grow if the number of people who can provide value is growing. So if the deficit would close at some point (which it has to if you dont want a default), Real GDP growth will almost grind to a halt to below 1% unless fertility rises and population will grow faster again. And it will become very difficult for the governemnt to pay all those older people their pensions and health care since they cannot be inflated away? And the debt/gdp number and debt/tax revenue ratios will become worse.

 

And where increasing productivity (for example fusion energy would be nice right about now) would come in is that a larger % of that GDP number could be spent on paying off debt, because that would increase spending power of the dollar by lowering costs as fewer people have to be paid for the same thing. Like how oil is cheaper now, more money can be spent elsewhere (on deleveraging for example).

 

It seems at the end of the day this is a balancing game, and something has to give.  Every move you make has consequences. And technology and increasing human ingenuity (which would result in massive increases in productivity) is the wild card here that makes macro economics so incredibly difficult to predict.

 

Just a comment on population growth. I think you're missing something regarding U.S. Population growth forecasts -- Immigration. (This is off the top of my head, numbers may be slightly off) While the U.S. birth rate, around 1.8, is under the replacement level of 2.1 -- the U.S. population growth is still projected to grow faster than most of the developed world through 2050 -- due to the massive immigrant inflows. (Of course, the projections could turn out to be wrong, or I could've read some bad research).  Also, due to immigration inflows, our median population is expected to age slower than the most of the developed world as well.

[Guest longinvestor]

It seems to me that you reference Buffett as the basis for part of your argument, yet Buffett is not worried about the fiscal deficit at this level.  So he doesn't see the same link between the two as you do.

 

700 billion$ is basicly inserted in the economy in the form of government debt. 1/3 of that comes from outside the US on average, and the rest from savings inside the US in the form of insurance flaot and pension money. So that is about 230 billion $ /  16800 billion $ = 1.4%. Population growth that is dwindling and at 0.7% in 2014. Which adds up to roughly the 2.5% in 2014.  Now savings have to come in here somewhere. If they are increasingly tapped, that would mean a growing GDP too. But I cannot figure out how to calculate that. But on average over longer periods, that should not matter right? Net savings is like 400 billion$, so there is not that much room there.

 

So please correct me if im wrong, but my theory is that real gdp growth in the past has come from mostly 2 things, population growth (which was closer to 2% a long time ago) and debt growth. Everyone provides a certain amount of value to the economy, so the pie can only grow if the number of people who can provide value is growing. So if the deficit would close at some point (which it has to if you dont want a default), Real GDP growth will almost grind to a halt to below 1% unless fertility rises and population will grow faster again. And it will become very difficult for the governemnt to pay all those older people their pensions and health care since they cannot be inflated away? And the debt/gdp number and debt/tax revenue ratios will become worse.

 

And where increasing productivity (for example fusion energy would be nice right about now) would come in is that a larger % of that GDP number could be spent on paying off debt, because that would increase spending power of the dollar by lowering costs as fewer people have to be paid for the same thing. Like how oil is cheaper now, more money can be spent elsewhere (on deleveraging for example).

 

It seems at the end of the day this is a balancing game, and something has to give.  Every move you make has consequences. And technology and increasing human ingenuity (which would result in massive increases in productivity) is the wild card here that makes macro economics so incredibly difficult to predict.

 

Just a comment on population growth. I think you're missing something regarding U.S. Population growth forecasts -- Immigration. (This is off the top of my head, numbers may be slightly off) While the U.S. birth rate, around 1.8, is under the replacement level of 2.1 -- the U.S. population growth is still projected to grow faster than most of the developed world through 2050 -- due to the massive immigrant inflows. (Of course, the projections could turn out to be wrong, or I could've read some bad research).  Also, due to immigration inflows, our median population is expected to age slower than the most of the developed world as well.

 

+1. Of all things going right for the US in the coming decades, this takes the cake.

 

US is the envy of developed nations when it comes to immigration. Especially compared to Western EU. The US may not have it perfectly dialed in, but it's immigration policy is substantially correct while EU has it all wrong.