Bitcoin Daily News – 2018-02-15

 


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Christoph H. Mayer


In the CBO forecasts, big future deficits arise from a combination of a rapidly rising health care costs and b rising short-term interest rates, in the context of c a rapid return to high employment and d continued low overall inflation.

This combination produces, mechanically, a very large net interest payout and a rapidly rising public debt in relation to a slowly rising nominal GDP. Even if CBO were right about recovery, which it is not, this projection is internally inconsistent and wholly implausible. Low overall inflation at two percent is inconsistent with the projected rise of short-term interest rates to nearly five percent.

Why would the central bank carry out such a policy when no threat of inflation justifies it? But the assumed rise in interest rates drives the projected debt-to-GDP dynamic.

Similarly, the rise in projected interest payments is inconsistent with low nominal inflation. Interest payments rising to over 20 percent of GDP by mid-century would constitute new federal spending similar in scale to the mobilization for World War II. Obviously this cannot happen with two percent inflation.

And although a higher inflation rate is undesirable, arithmetically it means a lower debt-to-GDP ratio. Finally, rapidly rising health care costs and low overall inflation are mutually consistent only if all prices except health care are rising at less than that low overall inflation rate — including energy and food prices in a time of increasing scarcity. This too is extremely unlikely. Either overall health care costs will decelerate relieving the so-called Medicare funding problem or the overall inflation rate will accelerate — reducing the debt-to-GDP ratio.

The unemployment and growth forecasts are implausibly optimistic, while the inflation and interest rates projections are implausibly pessimistic and mutually inconsistent. Good policy cannot be based on bad forecasts. As a first step in your work — long overdue — the Commission should require the development of internally consistent, and factually plausible, economic forecasts on which to base future deficit and debt projections.

The conclusion to draw from the above argument is that large deficits going forward are likely to have the same source as they do right now: The only way to reduce a deficit caused by unemployment is to reduce unemployment. And this must be done with a substantial component of private financing, which is to say by bank credit, if the public deficit is going to be reduced.

This is a fact of accounting. It is not a matter of theory or ideology; it is merely a fact. The only way to grow out of our deficit is to cure the financial crisis. To cure the financial crisis would require two comprehensive measures. The first is debt restructuring for the entire household sector, to restore private borrowing power.

The second is a reconstruction of the banking system, effectively purging the toxic assets from bank balance sheets and also reforming the bank personnel and compensation and other practices that produced the financial crisis in the first place. As a former top adviser in the Clinton White House, co-chairman Bowles no doubt knows that privately-funded economic growth produced the boom years of the late s and the associated surplus in the federal budget. He must also know that the practices of banks and investment banks with which they were closely associated worked to destroy the financial system a decade later.

But I would wager that the Commission has spent no time, so far, on a discussion of the relationship between deficit reduction and financial reform. But if the objective is to reduce public deficits, for whatever reason, then a large contribution from private credit is essential. If at the time the cuts take effect the economy is still relying on public expenditure to fund economic activity, then reducing expenditure or increasing taxes will simply reduce GDP and the deficits will not go away.

Further, if the finances of the private sector could be fixed, then an austerity program would be entirely unnecessary to reduce public debt.

The entire national experience from to , when public debt fell from to about 33 percent of GDP and again from to , proves this. In those years the debt-to-GDP ratio fell mainly because of creditdriven economic growth — certainly not because of public-sector austerity programs. And this is why the deficits returned, in and in , once the credit markets froze up and the private economy entered recession.

Thus until the private financial sector is fully reformed — or supplemented by parallel financing institutions as was done in the New Deal — high deficits and a high public-debt-to-GDP ratio are inevitable.

In the limit, if there is no private financial recovery, debt-to-GDP will converge to some steady-state value, probably near percent - a normal number in some countries - and at that point the public deficit will be the sole engine of new economic growth going forward. Only when the private sector steps up, will the debt-to-GDP ratio begin to decline. Entitlement cuts, no matter how severe, cannot and will not achieve deficit reduction. All they will accomplish is to impoverish vulnerable Americans, impairing the functioning of the private economy and the taxing capacity of the government.

If true, this is far outside any mandate of the Commission. Your mandate is strictly limited to matters relating to the deficit, debt-to-GDP ratio and fiscal stability of the U. Government as a whole.

Social Security and Medicare are part of the government as a whole, so it is within your mandate to discuss those programs — but only in that context. To make recommendations about the matching of benefits to payroll taxes — now or in the future — would be totally inappropriate. Within your mandate, the levels of payroll taxes and of Social Security benefits are relevant only insofar as they influence the current and future fiscal position of the government as a whole.

Their relationship to each other is not relevant. Such discussions, if they are occurring, should be subjected to a point of order. Government checks — which is to say so long as there is a Federal authority in the Republic. Social Security is a transfer program.

It is not a spending program. It merely reallocates a dollar from one potential final consumer a taxpayer to another a retiree, a disabled person or a survivor. It also reallocates resources within both communities taxpayers and beneficiaries. Specifically, benefits flow to the elderly and to survivors who do not have families that might otherwise support them, and costs are imposed on working people and other taxpayers who do not have dependents in their own families.

Both types of transfer are fair and effective, greatly increasing security and reducing poverty — which is why Social Security and Medicare are such successful programs.

Transfers of this kind are also indefinitely sustainable — in fact there can intrinsically be no problem of sustainability with transfer programs. Apart from their effect on individual security, a true transfer program uses by definition no net economic resources. But there is no risk of this so long as the financial crisis remains uncured. Under present conditions Social Security and Medicare are bulwarks for stabilizing a total demand that would otherwise be highly deficient.

Similarly, cutting Social Security benefits, in particular, merely transfers real resources away from the elderly and toward taxpayers, and away from the poor toward those less poor.

The conclusion to be drawn is that Social Security should in any event be off the agenda of your Commission, as it is a transfer program and not a program of public spending in the economic sense. In particular it does not use capital resources and will not drive up interest rates. Markets are not calling for Deficit Reduction; now or later. Let me turn next to a larger economic question. Do deficit projections matter? Was the President well-advised to frame the mandate of the Commission as he did?

What, in short, are the economic consequences of a high public deficit and a rising debt-to-GDP ratio, and what if any benefits are to be expected from creating an expectation that deficits will come down and that the debt-to-GDP ratio will fall? The idea that US economic policy should aim for a path of reduced deficits in the future, is shared by liberals and conservatives, and it is, from a political standpoint, a very powerful idea.

Yet your charter does say why this is an appropriate goal. It cites no study to which one might refer. It does not explain why is the right target date, as opposed to say or even It does not spell out the economic consequences — if any — of failing to meet the stated objective. Does the requirement make economic sense? I shall tackle that question in two parts.

The first accepts the view most people hold of the fiscal and financial world. The second reflects, from an operational standpoint, how that world actually works in practice. Most informed laymen believe that the Federal government must borrow in order to spend. They believe that the interest rate on Treasury securities is set in a market for government bonds. The markets impose discipline on the government. Accepting this view for the moment, what does the present level of long-term interest rates tell us?

As I write, thirty year Treasury bonds are yielding just over four percent — or just a little more than half their yield a decade back. On the argument just given, this must be an extraordinary success of virtuous policy. It seems that Wall Street has made a strong vote of confidence in the fiscal probity of our current policies. This vote is unqualified, backed by money, contingent on nothing. On this theory, it follows that the mandate to reduce the primary deficit to zero by is unnecessary.

Such an action can hardly reduce interest rates — neither short nor long-term — which are already historically low. But wait a minute, some may say. Yes interest rates are low at the moment. But bond markets are fickle, they can turn on a dime. Yes, it is possible that interest rates could rise. But the problem with this argument is that it takes us away from the premise of rationality. If bond markets are fickle and arbitrary, who is to say what they will do in response to any particular policy?

In the face of irrational markets, the sensible policy is to borrow heavily for so long as they are offering a good deal. One may say that all good things end, and perhaps they will. The conclusion from this section is that one cannot logically argue that markets insist on deficit reduction.

Such risks exist, of course, for private individuals, for companies, for state and local governments, and for national governments such as Greece that have ceded monetary sovereignty to a central bank. But the situation of the United States government is quite different.

It does so by writing checks — in fact simply by marking up numbers in a computer. Those numbers then appear in the bank accounts of the payees, who may be government employees, private contractors, or the recipients of federal transfer programs. The effect of government check-writing is to create a deposit in the banking system. Thus they demand a US Treasury bond, which pays more interest without incurring any form of credit or default risk.

This is like moving a deposit from a checking to a savings account. The Treasury can meet that demand, or not, at its option — it can permit, or not permit, the stock of US Treasury bonds in circulation to increase. So long as U. And if it chooses to issue Treasuries to meet the demand, it can do that as well. There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail.

In the real world, the government creates demand for bonds by spending above the level drained by taxation from the system. The extent to which those bonds are held locally, or abroad another common source of worry depends on the US current account deficit. This also has nothing to do with approval or disapproval by foreign bankers, central bankers, or their governments of American deficit policy.

A foreign country cannot acquire a US Treasury bond unless someone outside the United States has acquired dollars to pay for them, which is generally done by running a trade surplus with the United States. And when foreigners do acquire those dollars, then like domestic banks they prefer to earn interest, which is why they buy Treasury bonds.

Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. The actual risks in this system are to a minor degree inflation, and to a larger degree, depreciation of the dollar. However at the moment there is wide agreement that a lower dollar would be a good thing — against the Chinese RMB and now also the euro. So it is difficult to believe that the goal of deficit reduction per se serves any coherent, or presently desirable, economic objective.

We can conclude that there is actually no economic justification for the target of reducing the primary deficit to zero by or any other date. The right economic objectives are to meet real problems, not those conjured from thin air by economists. Bringing about a rapid end to unemployment, caring properly for an aging population, cleaning up the Gulf of Mexico , coping with our energy insecurity and with climate change are all far more important objectives than reducing a projection of future budget deficits.

In many cases — yours is no exception — the goal is to defer recognition of the difficulties for as long as possible. You are plainly not equipped by disposition or resources to take on the true cause of deficits now and in the future: Specifically, if cuts are proposed and enacted in Social Security and Medicare, they will hurt millions, weaken the economy, and the deficits will not decline.

Thus the interesting twist in your situation is that the Republic would be better served by advancing no proposals at all. Thank you again for the opportunity to present this statement. And for all Bitcoin orders will receive 10 in free merchandise from Club13! Geneva Switzerland to host Blockchain amp Bitcoin Conference for the first time.

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