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Millions are no doubt wondering how we know that the government has to reduce deficits by $4 trillion over the next decade. This appears to be the magic number that underlies the budget discussions between President Obama and the Republicans in Congress, and it is widely accepted by Serious People everywhere, but where did this magic number come from?
One place where it gained prominence was in the report authored by Morgan Stanley director Erskine Bowles and former senator Alan Simpson, the co-chairs of President Obama’s deficit commission. However, many other people have touted this $4 trillion number as the appropriate limit on the country’s debt burden.
The attachment to a particular debt number seems more than a bit peculiar for a number of reasons. The first and most obvious is that the financial markets don’t seem the least bit bothered by the current levels of debt and prospective future levels of debt. They presumably understand what most people in the Washington policy debate do not, the high deficits of the last 5 years are the result of an economic collapse, not profligate spending or huge tax cuts. This is why the interest rate on long-term Treasury bonds is at post-war lows.
The markets recognize that if the economy recovered, then deficits would again be at manageable levels. In the mean time, low interest rates reflect the fact there is little demand for capital.
However beyond the economic facts, the Washington debt mongers also seem confused on what the debt means. The proximate burden of the debt on the government is the amount of interest that we pay. Instead of being very high, this is in fact near a post-war low.
Source: Congressional Budget Office.
This raises another point that our Wall Street friends know well, the market value of the debt will fluctuate inversely with interest rates. This means that if we issue long-term debt at today’s low rates, but interest rates increase as the economy recovers, then the market value of this debt will fall. The figure below shows the market value of a 30-year bond issued today at a 2.75 percent interest rate under various assumptions about interest rates in 2015.
Source: Smart Money Bond Calculator.
As can be seen, if the interest rate rises from the unusually low current levels to a more normal 6 percent by 2015, then a 30-year bond will be selling for less than 60 percent of its face value. If the interest rate rises to 8.5 percent, a level that we saw in much of the 80s, then the market value would be just 40 cents on the dollar. And if we started to look like Greece and the interest rate rose to 12 percent, then debt would be selling for less than 30 cents on the dollar.
This suggests a very simple way to reduce the country’s debt. When interest rates rise, we can just buy up huge amounts of debt at discounted rates. For example, if the interest rate rose to 6 percent by 2015 we could buy up $2 trillion in 30 year bonds for just $1.2 trillion. In that way we could eliminate $800 billion in debt without raising a dollar in taxes or cutting a dollar in spending.
From an economic standpoint this would be a silly exercise. The interest burden on our debt will not have changed one iota. But if the problem is the size of the debt as the Serious People claim to believe, then we will have accomplished a huge feat and made the Washington Serious People crowd very happy.
Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.
15 Comments
It came to Obama from Pete Peterson via his side-kick Robert Rubin and the Rubinites from the Hamilton Project who swept into the White House on inauguration day 2009, e.g., Peter Orszag. And that number isn’t the objective. Rather it’s a ploy, in the true goal of imposing long-term austerity, in particular, reneging on prepaid entitlements.
Peter Richard Orszag (/ˈɔrzæɡ/; born December 16, 1968) is an American economist who is a Vice Chairman of Global Banking at Citigroup.[1] He is also a columnist at Bloomberg View[2], a Distinguished Scholar at New York University School of Law, and an adjunct senior fellow at the Council on Foreign Relations. Before joining Citigroup, he was a Distinguished Visiting Fellow at the Council on Foreign Relations and a contributing columnist for the New York Times Op-Ed page.[3] Prior to that, he was the 37th Director of the Office of Management and Budget under President Barack Obama.
https://en.wikipedia.org/wiki/Peter_R._Orszag
http://www.nakedcapitalism.com/2012/11/peter-orszag-of-bank-welfare-queen-citigroup-is-selling-catfood-futures-hard.html#kDWB6tVQTeUGUg5z.99
Which anyone reading this blog knows is utter bullshit. A scam for the great unwashed. The “problem” is that the uber rich want an even bigger share of the nation’s wealth than they already have and don’t want to have to share any with the rest of us in the form of “entitlements”. The whole debt bs is just a means to the end of more transfers from the 99% to the 1%. Or really, from the 99.9% to the 0.1% since that’s who’s really driving this train.
Perhaps increasing taxes on capital is a way to keep that demand low and consequently interest rates low as well.
Prior to his involvement with Obama, Orszag was a highly regarded expert on pension systems as is his brother, who operates mostly in the UK. In April 2006, Orszag co-founded the Hamilton Project with Robert Rubin. Their inaugural speaker was then-senator Barack Obama. Rubin was chief economics adviser to the 2008 Obama campaign and guided the staffing during the transition. It turned out that the Hamilton Project was a government-in-waiting.
After leaving the directorship of OMB, Orszag joined CitiGroup, so he now has Wall Street credentials to add to his resume. I’m betting that he is under consideration for Sec. Treas.
$4 trillion is roughly what the CBO projects will be paid in net interest over a decade (IIRC, $3.8 T for current law, $4.8T for current policy).
That’s definitely the low-lying fruit;
– Congress can order the Fed to permanently peg a low policy rate (somewhere between Warren Mosler’s 0% to Marriner Eccles’s 0.375%),
–use tax policy to throw a boat anchor on interest rates (peg Tom Harkin’s transaction tax rate to, say a tenth of previous quarter 3 month T-bills0 or simplest of ill,
– forward the bill to the Fed. They can buy T-bonds (and rebate the interest) or they can buy coins (the Mint collecting seigniorage from the asset sale, Tsy should be putting that on-budget anyway).
I like the last option. Unlike the first two, Congress wouldn’t have vote for it. The Fed can set whatever interest rate they want, net interest would be pretty much zero in any event. The Fed could still peg policy rate by paying interest on reserves and by selling their newfangled Fed CDs (its because of the Term Deposit Facility that the Fed stopped asking Congress permission to sell Fed bonds, they just went ahead and did it).
http://www.frbservices.org/centralbank/term_deposit_facility.html
Let’s assume that we do need top reduce the deficit by four trillion bucks over the next decade.
Since the Bernie Sanders’ audit of the Federal Reserve revealed Bernanke’s generosity in distributing some fifteen to sixteen trillions of dollars, supposedly as loans to his buddies who own Big Financial Firms, and since experts on this situation claim ay least 4.7 trillions of these dollars will never be paid back, let’s start right there.
Impound some 4.7 trillions dollars from the banks that got these loans. Of course, some of the financial concerns are not even located in the USA.
Somewhere there is a limit in how much the debt can grow.
One factor that isn’t noted much, boycotts and embargos disrupt the international financial system not just too much debt.
Only the US thinks a Dutch Bank owed the US any money over violating an illegal embargo of Cuba, when it comes to Iran world opinion is divided. The Bank humored an otherwise good customer rather than have trouble the same way pirates are routine payed ransom, rather than risk merchandise ruined and people killed. But if give disappears in the economic system all this would lead to fights since no gold or even stacks of $20 bills are lying around a situation would develop where the same 600 million would be argued to be in a Dutch Bank and at the US Treasury at the same time and no one would no the exchange rate between the dollar and the yen,
http://www.radiozamaneh.com/english/content/dutch-bank-fined-violating-us-sanctions-iran-cuba
The seriousness of the debt the US owns China is not how big it is but how we get along.
Let’s cut a base expensive plane and embargo right now!
http://my.firedoglake.com/richardkanepa/2012/11/27/don-t-forget-the-huge-military-budget-vastly-larger-than-social-security-with-ripe-spots-easier-to-cut/
Coin seigniorage has always covered a portion of the government’s appropriated expenses. As you noted in January 2011, with the 1996 passage of 31USC5112(k), Congress authorized the Secretary of Treasury to increase that up to 100%.
Well, that’s what I meant they should be putting it all on-budget, but I didn’t want to go into the weeds.
But since we’re there– Current Tsy accounting practice is to count net earnings from private coin purchases on-budget and Fed coin purchases off-budget. Making this distinction seems to conflict with the 1996 law requiring Mint Public Enterprise Fund earnings (regardless of source) to be swept into TGA as “miscellaneous receipts”.
Get this, Tsy’s definition of “debt held by the public” includes the Fed in “the public”, but Tsy’s definition “exchange transactions with the public” excludes the Fed from “the public”. And that’s the only reason Tsy, erroneously, includes one and not the other on-budget. I don’t think you can find anywhere in the US Govt another example of either “miscellaneous receipts” or public enterprise fund profits that aren’t counted on-budget upon deposit in TGA.
One other thing, 5112(k) simply authorized the Secretary to mint platinum coins. In theory, the Secretary could have minted jumbo gold coins prior to 1996, the trouble with that is that there are still, on the books, a slew of now-obsolete laws and regulations from the gold standard days. Using a gold coin, even a fiat gold coin, is bound to lead to all sorts of legal headaches. The beauty of platinum is that its a blank slate with no unexpected legal tripwires.
Anyway, what you’re talking about is the law creating the Mint Public Enterprise Fund (31 USC 4136), which actually passed in 1995.
http://www.law.cornell.edu/uscode/text/31/5136?quicktabs_8=2#quicktabs-8
Ugh, not 4136, its 31 USC 5136 (the link is correct).
Dood! Thanks for that stuff.
So, let me get this clear. 31USC5112(k) allows the Sec. Treas. to mint platinum coins of arbitrarily large value. Also, by 31USC5112, those coins are legal tender, and therefore the Fed must accept them on deposit to the Treasury’s general account, from which the Treasury can pay congressionally appropriated expenses. Right?
Thanks.
the winner.