$27,000,000,000,000 US debt

[abwillingham]

First time poster here.   

How will the historically high US debt effect the market?

How does an investor prepare for what is coming?

 

https://fred.stlouisfed.org/series/GFDEGDQ188S#0

[arcube]

It will start to matter only when Democrat is a president. ;)

 

First time poster here.   

How will the historically high US debt effect the market?

How does an investor prepare for what is coming?

 

https://fred.stlouisfed.org/series/GFDEGDQ188S#0

[scorpioncapital]

Throughout the history of nations it's been a combination of growth, default (inflation, financial repression, pension cuts), taxes and austerity (service cuts). I don't expect any difference going forward. A combination of all of the above.

[LongHaul]

Could you elaborate on that Scorpion?  Interesting comment.

[scorpioncapital]

I like these articles - https://scholar.harvard.edu/files/this_time_is_different_short.pdf ,

https://www.hks.harvard.edu/publications/sovereign-bonds-waterloo

 

Growth and innovation require investments (lately by governments because the state seems to have really taken over). Interest rates are low. These investments may reduce the need for full default.

 

I feel it's unlikely some default to creditors of money won't happen as the debt is growing faster than the growth and innovations.

 

Geography is often destiny. There are some real banana republics out there but they have great weather. They will always be desirable.

 

Politicians and powerful people often tax labour, sales taxes, service fees first and at high rates and reserve privileges for themselves on business, corporate, and investment taxation. This philosophy may be changing but...

 

In a global competitive world where capital is mobile and countries don't mind to perpetuate these anti-good for the human race economic structures (look at the regressive taxes and oligarchs in so many countries) what can one do? Capital controls, exit taxes, restrictions on travel or even living abroad (ahem, Covid )?

 

Has debt helped more citizens of a country than in countries that don't spend so much on their people? Are some social goals for the vast majority (even if it doesn't affect you but costs you higher taxes actually) worth accepting? What is the right balance? Lots of interesting questions. I find it strange thought that governments have taken such a big role for debt and investment. Why is it individuals and private business aren't taking on the debt themselves? Or if they have, why is so much more public debt needed?

 

 

 

 

 

[LongHaul]

I like these articles - https://scholar.harvard.edu/files/this_time_is_different_short.pdf ,

https://www.hks.harvard.edu/publications/sovereign-bonds-waterloo

 

Growth and innovation require investments (lately by governments because the state seems to have really taken over). Interest rates are low. These investments may reduce the need for full default.

 

I feel it's unlikely some default to creditors of money won't happen as the debt is growing faster than the growth and innovations.

 

Geography is often destiny. There are some real banana republics out there but they have great weather. They will always be desirable.

 

Politicians and powerful people often tax labour, sales taxes, service fees first and at high rates and reserve privileges for themselves on business, corporate, and investment taxation. This philosophy may be changing but...

 

In a global competitive world where capital is mobile and countries don't mind to perpetuate these anti-good for the human race economic structures (look at the regressive taxes and oligarchs in so many countries) what can one do? Capital controls, exit taxes, restrictions on travel or even living abroad (ahem, Covid )?

 

Has debt helped more citizens of a country than in countries that don't spend so much on their people? Are some social goals for the vast majority (even if it doesn't affect you but costs you higher taxes actually) worth accepting? What is the right balance? Lots of interesting questions. I find it strange thought that governments have taken such a big role for debt and investment. Why is it individuals and private business aren't taking on the debt themselves? Or if they have, why is so much more public debt needed?

 

Excellent post Scorpion.  Will check out.  Munger mentioned that he thought the democracies will get in trouble with debt. 

There is this very stupid notion out there that deficits and debt don't matter for countries.  I guess reality doesn't matter either - until it does.  Humans seem to need a crisis to learn basic stuff at times (I have been guilty of this too at times).  I think we will see some defaults or high inflation.  Italy anyone?

 

Sorta of related but I was reading part of Cody Lundin's book "When All Hell Breaks Loose" (I bought for a self insurance policy).  Great book but he is a huge advocate for self reliance and I think it is really pathetic that we are all so reliant on the government for so many things - and the media perpetuates this weakness and blame mentality probably because of their political ideology and kissing their customers asses. 

 

 

 

 

 

[Cigarbutt]

I like these articles - https://scholar.harvard.edu/files/this_time_is_different_short.pdf ,

https://www.hks.harvard.edu/publications/sovereign-bonds-waterloo

Growth and innovation require investments (lately by governments because the state seems to have really taken over)...

 

Has debt helped more citizens of a country than in countries that don't spend so much on their people? Are some social goals for the vast majority (even if it doesn't affect you but costs you higher taxes actually) worth accepting? What is the right balance? Lots of interesting questions. I find it strange thought that governments have taken such a big role for debt and investment. Why is it individuals and private business aren't taking on the debt themselves? Or if they have, why is so much more public debt needed?

Excellent post Scorpion.  Will check out.  Munger mentioned that he thought the democracies will get in trouble with debt. 

There is this very stupid notion out there that deficits and debt don't matter for countries.  I guess reality doesn't matter either - until it does.  Humans seem to need a crisis to learn basic stuff at times (I have been guilty of this too at times).  I think we will see some defaults of high inflation.  Italy anyone?

Sorta of related but I was reading part of Cody Lundin's book "When All Hell Breaks Loose" (I bought for a self insurance policy).  Great book but he is a huge advocate for self reliance and I think it is really pathetic that we are all so reliant on the government for so many things - and the media perpetuates this weakness and blame mentality probably because of their political ideology and kissing their customers asses.

For those entering this debt and savings "crisis" territory, non-linear changes can happen but timing may be elusive as acute phases have apparently been reached since at least the 80s.

An interesting complementary article (perhaps more user-friendly) is the following:

https://dash.harvard.edu/bitstream/handle/1/11129154/Reinhart_Rogoff_Growth_in_a_Time_of_Debt_2010.pdf?sequence=1&isAllowed=y

i continue to be haunted by the threshold concept and by figure 4.

At the anecdotal level, it always amazes me how people save little and how they've come to rely (consciously or not) on the generosity of strangers (healthcare, pensions, old-age support, generic hardship etc) who, lately in the last few years, have decided to extend and pretend. Even the Fed is into social policy now. An inter-temporal mismatch can last for a very long time but an understanding of potential energy could be useful.

https://fred.stlouisfed.org/series/W207RC1Q156SBEA

The net national saving includes households, corporations and public entities. For the longest time (see Feldstein and Horioka for example (1980), during an era when a tall banker was aiming to raise interest rates), it's been shown that, through some short term noise, savings and investments are joined at the hip.

Conclusion: democracies will run into trouble with debt.

When will it matter?

[Xaston]

I think it is really pathetic that we are all so reliant on the government for so many things

 

Politicians want to get elected, and the message that we as the government will help you is a much easier message to sell to voters than the message that we as the government will not help you.

[Packer16]

When you look at the US debt, the collateral for the US debt is the US economy not just the US government as the Federal gov't can tax to get revenue (so it has a first lien against all cash flows the US economy generates)  We have less debt than either Japan or Europe.  So they will be the test for high debt servicing.  IMO we will not have any problems unless govt's decide to not pay debts which would imply that their first lien is impaired in some way. 

 

Debt reduces growth due to the cost of servicing the debt/repayment versus consumption. Given the low cost of debt (& the continued expectations of this as long as people repay the debt), the servicing cost is low. We will continue to have deflation as long a debt repayment occurs.  Lacy Hunt/Irving Fisher have a good framework to examine debt crises historically.  The podcast below outlines this framework along with Fisher's paper:

 

https://ttmygh.podbean.com/e/teg_0006/

https://fraser.stlouisfed.org/files/docs/meltzer/fisdeb33.pdf

 

As to innovation, innovation is the result of R&D & investment in intangible vs. tangible assets.  This investment is a cost according to accounting versus an investment.  The US investment in tangible & intangibles asset has increased from the low 20% of GDP in the late 70s to the mid 20% now.  The mix has changed from 14% tangible/8% intangible to 10% tangible/16% intangible. So US investment is still robust.  A big use of tangible assets going forward will be the rollout of a renewable energy infrastructure so tangible asset investment should go up going forward. 

 

 

Packer

[BPCAP]

There is no exit strategy for the debt. No plan or easy answers, especially in a democracy.

 

We will borrow and print money--until we can't.

 

At least we enjoy being in the brick house in the Pigs' neighborhood, with Europe and Japan (and many "emerging" countries) in the houses made of stick and straw. We'll see the Big Bad Wolf get others before us.

 

But...you know in the real story, the Big Bad Wolf really did get the Pigs eventually in the brick house. He smoked them out, or remembered wolves live in packs, called his friends over, and they eventually found a way to gut the Pigs.

[Packer16]

The exit is to pay down the debt over time.  This will reduce growth over time.  We have seen the government debt go up but personal debt go down.  Worse come to worse there will be high taxes on either high income individuals or large companies as the first lien is called.  However, since most US debt is owned by US citizens most if not all the debt can be rolled indefinitely.  This is what is happening to Japan.  Watch Japan for clues to how a large internally owned debt is dealt with. 

 

Given the advances in technology & supply, we can monetize the debt with low/modest inflation. We have not reached the point where debt has crowded out investment as real rates are very low.

 

As outlined in the Fisher paper, as long as the debt is being serviced, any new money printed will decrease velocity thus no inflation & more deflation as aggregate demand is reduced to service/payback the debt. 

 

Packer

[BPCAP]

The exit is to pay down the debt over time.  This will reduce growth over time.  We have seen the government debt go up but personal debt go down.  Worse come to worse there will be high taxes on either high income individuals or large companies as the first lien is called.  However, since most US debt is owned by US citizens most if not all the debt can be rolled indefinitely.  This is what is happening to Japan.  Watch Japan for clues to how a large internally owned debt is dealt with. 

 

Given the advances in technology & supply, we can monetize the debt with low/modest inflation. We have not reached the point where debt has crowded out investment as real rates are very low.

 

As outlined in the Fisher paper, as long as the debt is being serviced, any new money printed will decrease velocity thus no inflation & more deflation as aggregate demand is reduced to service/payback the debt. 

 

Packer

 

All of that is the exit of course, but it's also the optimistic (maybe overly optimistic case) scenario, one that is fragile to adverse contingencies (war, demographics, pandemic, real socialism, etc.). An exit and plan/strategy are two different things, especially when people in control at any given point in time have 1) short term incentives vs. large, and 2) no skin in the game.

 

The necessary exit for someone in deep credit card debt is somewhat obvious, but he has no real chance of reform if he doesn't do anything differently.

 

I agree we can amass debts and print money for quite some time. Probably much longer than anyone thinks. Or how or when exactly that manifests itself beyond deflationary forces, greater share of public vs private when it comes to balance sheet and the economy, lower real returns, etc.--is anyone's guess. Something could break, hard. When? Who knows.

 

Thinking of all this makes me a little more understanding when it comes to those dabbling in gold or Bitcoin. Who am I to say their fears are wrongheaded or that what yhey're doing isn't appropriate?

 

[Packer16]

I think it reflects the reality today. To expect the system to blow up is the pessimistic IMO.  The government debt is different than credit card debt because someday the CC holder will die but not the US.  If the US dies, then there will be bigger problems than all of our portfolios.  The fear of the pessimistic case clearly is driving bitcoin & gold but there is a large opportunity cost to holding gold/bitcoin versus CF generating asset like stocks & real estate.

 

Packer

[Cigarbutt]

^The reality today is seeing many peaks.

 

1-Funds allocated to intangible assets are expensed from an accounting point of view but are captured in final GDP measures. American GDP per hour grew 1.79 per cent per year between 1870 and 1920, 2.82 per cent per year between 1920 and 1970 and 1.62 per cent per year between 1970 and 2014 (similar out to 2020). Where is the productivity miracle?

2-If there is no crowding out, why is the productivity of debt (amount of GDP per unit of debt incurred) falling in the US and globally?

3-Isn't the definition of a restructuring a new beginning and not an end in itself and is doing more of the same and hoping for something good to happen the best strategy?

 

Recently, a "friend" sent me a link in order to improve "productivity". i wonder if reading this link means wasting precious intangible time.

https://www.insidehook.com/article/advice/best-products-apps-productivity

Of public credit is a good essay.

 

[BPCAP]

I'm neither optimistic nor pessimistic, just acknowledging that it's perhaps not smart to either panic or totally dismiss the debt and money printing issue.

 

I, too, believe in buying quality, cash generating businesses with competitive advantages. I don't like the idea that one needs bonds, gold, bitcoin, etc. to get them where they want to go.

 

Underlying the buy and hold thesis (and putting one's head in the sand when it comes to bigger picture analysis) is the assumption that stocks, etc. can only go up over time. That's been the case in the U.S. for quite sometime,;but worldwide and over time, we have been quite the exception rather than the rule. There's no guarantee our good fortune is permanent or unbreakable.

 

Countries of prosperity and law often found themselves in a very different system. I was told two stories, of investors in France in 1939 and Shanghai in 1949. Both never thought they had to do much differently as there would be a return to the mean and things would blow over. The only investment decision for both investors was to get out of town, forever, in retrospect.

 

Those stories and others like it have stuck with me (talk to an immigrant, especially ones from SE Asia, Africa, Eastern Europe and you'll have a greater appreciation and definition of risk). They have made me grateful for the time and place I was born. They also make me realize nothing is certain, despite what Bogle and Buffett say.

 

But, of course, I hope (and still think), these wisemen are more likely than not to be right.

[rkbabang]

There is no exit strategy for the debt. No plan or easy answers, especially in a democracy.

 

We will borrow and print money--until we can't.

 

Exactly.  The best analogy for democratic government is it is like a cancer that will grow and consume more and more resources right up until it can't because the host is dead.

 

[LongHaul]

I have no idea when country defaults will occur but if history is any guide they will occur.  There have been waves of cycles of default in history.  Frankly I don't think ANYONE really knows when and if a default or high inflation will occur - way too many variables.  Even the PHD economists have no idea and I don't trust their viewpoint.  In the US historically before ~1970 it seems like both sides wanted and had low debt.  THat is now gone and the mantra of more debt - no problem defies common sense.  Which means it is likely a higher probability to occur in my opinion.

 

https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises

 

[Packer16]

IMO there are 2 factors most forget when talking about debt.  First, the debt is the first claim (via taxes) on the economy of the country.  As long as the country is viable, the debt never has to be repaid but just serviced.  Also, in the case of large domestic debt countries (incl US), the debt of a country is the lowest risk asset available to investors.  These are the reasons why Japan will not explode until either there savings disappear and/or there economy (GDP) declines sharply & permanently.  I am not saying changes in financial conditions will not effect the currency on the edges but in the currency game you are compared to the next best alternative & at this point all large alternative are worse.

 

Packer

[wabuffo]

I tried hard to resist this topic - but its like cat-nip - so here goes.

 

1) Everything about how we think and talk about US Federal debt is wrong.  The framing is wrong and the structure is wrong.  Other than that...  8)

 

A sovereign issuer of currency that doesn't peg to gold runs a pay-go system.  There is no debt to pay back - its an accounting fiction.  "Debt", such as it is, will always get "paid back" by rolling it over at redemption time with new "debt".  There can't ever be a default for many reasons.  What matters is the real-time deficit spending relative to the size of the US and world economies, in the case of US deficit spending.  A sovereign spends first, creating a bank deposit somewhere in the private sector and then withdraws some of it via taxes or fees or legal judgements, etc...  In fact, what gives a sovereign currency its initial value is that it is the only thing with which the private sector can extinguish its tax obligations to the sovereign.  But that's an initial condition, after which the whole monetary system begins to run on its own as a flywheel.  The important thing to key in on is that sovereigns must run a perpetual deficit year-in and year-out. If they try to run a multi-year surplus, they will reduce money and unleash deflation.  So what matters is running a deficit that is "reasonable" in size over time.

 

Not all governments are sovereigns - state, provincial, local (even national governments in Euroland) don't control or issue a currency and as such are like you and I.  Their debt is real debt and they can and do default - since in these cases they must find a way to balance cash flows over time (or run out of money).  Sovereign governments that issue sovereign debt in a foreign currency can also default. A sovereign that pegs to gold (like the old days) and then issues debt is also issuing debt in a de facto “foreign currency” if its currency is redeemable in gold.

 

2) The sovereign government's deficit spending is what provides "money" to the private sector.  The private sector then decides what the composition and mix of that money will be (including how much Treasury debt it wants to hold). 

 

In the case of the US government - it comes in three forms (via the US Treasury and its "bank", the Federal Reserve).  Here are the real-time balances of each liability type (as at Sep 2, 2020).

 

a) currency in circulation                                                                                                ($ 2.022 trillion USD)

b) bank reserves                                                                                                            ($ 2.851 trillion USD)

c) net Treasury bills/bonds held by the public (less: holdings of Tsy debt by the Fed)          ($16.444 trillion USD)

 

Thus at this point in time, the total liabilities of the Federal government are $21.316 trillion (the headline to this thread is wrong). These are by definition private sector assets and represent the cumulative sum total of total net deficit spending by the US federal government in its entire history. 

 

When I say the mix of these three liabilities is determined by what the private sector wants in terms of mix - it helps me to think of these three types of liabilities in the context of the Federal Reserve acting as a bank for the US private sector.  Like a bank, it offers its bank "customers" three types of accounts (which of course are liabilities of the bank):

 

1) vault cash  (= currency in circulation)

2) demand deposits  (= bank reserves)

3) time deposits, locked up for 30-days up to 30-years  (= treasury bills/bonds).

 

Historically, the US private sector has preferred the time deposit option because it is more liquid and because it earns interest (1 and 2 don't although 2 has in the past).  In fact, interest rates on all these liabilities are not free-market set - instead they are at the discretion of the US Treasury/Fed.  2) is less liquid because it can only be held by banks and thus not very helpful to the private sector.  The time deposits are risk-free and super-safe and thus are the world's best collateral for lending. In other posts on WFC and the Fed, I also showed that as the US Treasury deficit spends, bank reserves would accumulate in large and unhelpful amounts, so Treasury debt issuance performs an important reserve maintenance function.

 

3) Of course, we knows this but part of the deficit spending/US money creation goes overseas because of the trade deficit. 

 

The US more so than Japan, China or Euroland has more fiscal space because the rest of the world wants to net save a portion of its rising wealth in USD and USD assets by net exporting to us.  So not only does the US Federal govt need to run a deficit big enough for domestic savings needs, it must run an extra larger deficit to also accomodate the foreign sector’s need for the reserve currency.  The trade deficit causation is usually talked about in terms of over-consumption by the US when in reality the cause is net exporting by other countries to the US.  It is estimated 60% of 1), 30% of 2) and 20% of 3) are held by non-US residents, foreign banks or organizations and thus circulate outside the domestic US economy.

 

Will the US continue to be the world's super-power and reserve currency?  The US doesn't just have an advantage due its political system (constitutional republic) but more so than other countries it also has geographic advantages as well that reinforce its political and economic advantages.  I certainly wouldn't want to bet against it.

 

4) So - nothing to worry about?

 

Of course not.  But its not paying back the debt that we should worry about.  Its the real-time deficit spending.  As it spends in real-time, the federal government is competing with the private sector in buying goods and services and therefore it is affecting prices.  It is also affecting the real-time supply of money.  I like to measure the real-time growth in federal liabilities (money) by looking at the gold price.  That's because gold supply rises 1.8% per year.  Its not a perfect benchmark - but I feel it is the best one out there. Will that lead to currency debasement because right now federal liabilities are increasing much faster than 1.8% per year?  Gold seems to be feeling it.  Of course, supply is one factor, but demand for money is another.  In late March, worldwide demand for US dollars surged because of a global panic due to the virus.  Gold actually fell pretty sharply for a few weeks in March even as supply of dollars was increasing faster than gold's 1.8% typical increase.  That global panic has receded now, but supply of USD is still ramping though at a lower rate than April-June.  Time to worry?  Maybe - I own some GLD and GLD LEAP calls as insurance - so I'm not agnostic about all this stuff.

 

Anyway - this is all my opinion and of course, I could be wrong.  But its the model that I use in my head to try to understand the macro monetary flows and has served me well in trying to understand what's going on.

 

wabuffo

[LongHaul]

Great post Wabuffo.  There is much regarding this I don't understand, not from your writing but because of the complexity of the topic.

[cubsfan]

Great post Wabuffo.  There is much regarding this I don't understand, not from your writing but because of the complexity of the topic.

 

Ditto -  Fabulous post Wabuffo and great contribution. Learned a lot in how to think about the topic.

[scorpioncapital]

Excellent post. I would also say that for those parts of society/government that can go bankrupt or have no printing press there is a very real risk of reduced quality of life. Usually this creeps on through user fees, more aggressive 'penalties' for all kinds of daily transgressions you may not even know you had done. Sometimes higher direct taxation. In a crisis, how much can a government squeeze its residents before they start cheating? Actually you see a lot of black market and corruption in some countries because people have lost faith in the government. Not just lies or policy, but too high costs, low services, and insufficient incomes.

[Cigarbutt]

The insights in this thread are interesting, especially the fiscal room concept and the unrecognized intangible aspect.

 

The following will be light on numbers but here’s the most recent long term CBO outlook:

https://www.cbo.gov/system/files/2020-09/56517-Budget-Outlook.pdf

 

Of note, the CBO people periodically report how reliable their “forecasts” are but base their self-administered conclusions on short term segments (year to year) in an auto-correlated way and longer term trends are missed, often wildly so. It’s hard to “see” the longer term outcome from here as the picture will be, as always, very dynamic but there are reasons to think that economic growth (tax revenues) will be muted and that government expenditures may surprise on the upside. The potential resilience is enormous so this exercise is more like trust but verify. The fiscal room and human ingenuity will be tested, i would say.

 

Back to the future (unaudited), from previous CBO disclosures (all debt measures correspond to government debt held by public):

-From 2000. The theme had to do with surpluses(!). Mid-range scenario expected for public debt to GDP, for 2020, was an actual net negative position (all debt reimbursed and more!).

-From 2010. The theme was more like a new normal. Worse-case scenario expected for public debt to GDP, for 2020, was at 80 to 90%.

-From 2020. Public debt to GDP will be at about 98%. The theme is (IMHO) unusually optimistic under the circumstances as it is assumed that, somehow, the very deep secular trend that has been deeply entrenched for decades will resolve with a free lunch and a debt to GDP at 109% is expected by 2030..

 

-----

 

Let’s try to kill the pessimistic thesis. The US is used as an example because of its size but similar concepts are playing out in most large developed economies and even China. Japan just reported that there was actually no limit whatsoever under any circumstances concerning the amount of government debt that they can issue… The US has the cleanest dirty shirt but it holds the international reserve currency.

 

--

 

From an international perspective, in 2003, Mr. Buffett weighted in on the question.

https://archive.fortune.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm

 

Since then, the trade deficit has relatively decreased to some degree but remains somewhat negative, meaning that there are net capital flows going into the US. Looking back, this happened also to a similar degree in the late 1800s when the international capital was invested in productive capacity: industrialization, not consumption. Where is the international capital going now and is it invested in productive capital? Mr. Buffett was worried that a persistently high negative current account balance would mean a declining ownership of real domestic assets. If one follows the numbers, this has not really happened. Dissecting the numbers, the net international capital flows going into the US, mostly, are not coming in as equity purchases or foreign direct investments, they are coming in to buy US government debt. This results in a situation where the international holders of the debt assets (who are also the prospective buyers of newly issued US government debt) would not benefit from rising rates or from a depreciation of the USD. Even in the absence of the final gold restraint repealed in 1971, the US continues, absolutely unabated, to hold an exorbitant privilege. Isn’t it bothersome that there does not exist a limit on how negative the trade balance can be for a country that has a growing net negative investment international position? So, the net capital flows go into debt, as a first but non-effective lien on US economic capacity and that part does not really answer the question as to the productivity of the negative balance so let’s look at the domestic aspect.

 

--

 

From a domestic perspective, playing with basic math, domestic savings equal domestic investments adjusting for the current account balance. Since the negative current account balance (savings glut from others) is funneled to additional debt, one can focus on the domestic aspect of this question: is the net debt issued at large going to productive use or to consumption?

 

It appears clear that the only way total debt could reach today’s levels is because of low and declining interest rates and it is quite obvious that rising interest rates with today’s and tomorrow’s debt levels are simply an impossible proposition. Given that interest rates have become now mostly managed (and to be yield-curve controlled), domestic policy makers have developed a domestic exorbitant privilege, thereby removing another natural restraint to debt.  Isn’t it bothersome that there does not exist a limit on how high the government debt can be for a country that has growing unrecognized off-balance sheet liabilities? The key question therefore remains: Is the debt going to productive purposes? Can we grow out of it, eventually, assuming present secular trends?

 

Net national savings (government, households and corporates) have been going down and are now net negative meaning a corresponding trend for net investments. This means that the capital assets after depreciation will have a tendency to go down. The general conditions of infrastructures may be a reflection of that. From that perspective, it is hard to argue that debt (government included) is going to productive purposes. This would suggest a negative self-feeding and eventually non-linear loop.

 

What about the intangible investments that may not be recognized as lasting value because of modern accounting’s ‘failure’ to grasp the lasting value of these expenses? There may be some kind of delay and evolutionary changes may become revolutionary but, so far, these productive expenses have not showed up in productivity numbers and in overall GDP growth, in fact, quite to the contrary.

 

So far, tangible effects of residual tangible and intangible investments are not supporting the argument that debt is going into productive use and are supporting the argument that debt is going mostly into consumption, various non-productive ‘services’ and status-quo maintenance.

 

--

 

Periodically, it has been argued that the market has been better suited to recognize the intangible value created by intangible investments. A basic premise here on my part is that the net worth of a country should be correlated to its net earnings. The graph can be updated to September 2020.

https://fred.stlouisfed.org/graph/?g=Egr#0

 

Clearly, something has been going on here, with an upward trend occasionally disturbed by incomplete(?) corrections.

 

Right around the first peak (following link from 1999), it was argued that the market should be relied upon to judge the value of intangible investments. Recognizing realized gains and market value of traded securities would have better reflected the ‘true’ economic progress. The proposed reform would have also conveniently contributed to deeply needed upward adjustments in the national private savings rate.

https://fraser.stlouisfed.org/files/docs/historical/frbphi/businessreview/frbphil_rev_199907.pdf

 

Right around the second peak (housing bubble), it was argued that raising house prices were based on fundamental and often unrecognized intangible (including hedonistic) principles. Mr. Bernanke, in real time, failed to appreciate the disconnect and failed to assess the potential consequences as the downturn started. In retrospect, he (and his tribe) attributed the “bubble” to others (!) including international cash flows leading to global demand of mortgage-backed securities (!) and to the fact that financial institutions were affected by a growing component of intangible assets and “declining quality of capital” during the run-up (!) among others, giving little attention to the very unusual low interest post dost-com response leading itself to unusual leverage and, in large part, to the result we know of now and to the more-of-the-same monetary policy response that the Fed has engineered, so far, in response to the central thought process.

 

And the trend is again up, reaching new heights, and the underlying justification is still based on the notion of unrecognized intangible value. It may be different this time?

 

--

 

http://www.haver.com/comment/200911r.png

It is being reported that the US annual deficit will reach about 26K per household for 2020.

 

A country (especially if it can print money) is different from an individual or a household as it is, in theory, a perpetuity. However, individuals and households have to live with certain constraints that are conducive to survival which equates to a variable but definite deadline. There was no doubt that the country would survive the virus as the concern was always centered on the host. The virus will be eventually conquered and may even disappear but the crying wolf says that the host will live on.

 

In David Copperfield, Dickens described how the difference between happiness and misery was really a function of the bottom line. I wonder about the risk of the transition between Great Expectations and Hard Times.

 

Apologies for the shared negativity but it seems to me that the debt expansion is extremely foolish and nobody I know gives a hoot.

[LongHaul]

Wabuffo,

 

What is your best guess then to how this plays out in the US and Japan which have a lot of debt but also have their own currency?

Seems like could be a big cost at some point.

 

Is the most likely scenario high inflation and higher taxes with lower spending in the US and Japan?

 

Also,  how about historically all the countries that defaulted - Russia and Argentina in the last 25 years.  They had their own currency but issued dollar debt but still defaulted - couldn't one have argued that they could of just issued more debt in local currency and paid back their USD bonds rather than defaulted?  I wonder if it is sometimes easier politically to just default and screw the creditors.

 

It is interesting to me that if there is debt to the public of 200% of GDP then at "normal interest rates of say 5% interest costs alone would be 10% of GDP which is much harder to keep paying.

 

 

[wabuffo]

From 2000. The theme had to do with surpluses(!). Mid-range scenario expected for public debt to GDP, for 2020, was an actual net negative position (all debt reimbursed and more!).

 

CB - one of the more interesting periods of economic history (for a nerd like me) was the 1997-2001 period of consecutive federal surpluses.  The United States was actually paying down its Treasury debt!  But be careful what you wish for.  It unleashed a period of monetary deflation and (along with China's entry in the WTO in 2001 ramping up the trade deficit) triggered the beginning of the mortgage crisis that blew up years later.  There is an interesting macroeconomics book to be written about this period but no one is writing it, unfortunately.  Sad.

 

wabuffo