Why I am so mad at the President (Not DOMA or Afghanistan or even SS)

[Kurt_and_Hunter]

All presidents will make mistakes.

All presidents will pander.

All Democratic Presidents are likely to feign some level of agreement with demented RW fantasies... the torrent of lies they have produced that have come to dominate the culture.

But to actually credit demented RW gibberish behind closed doors in making policy is beyond the pale.

President Obama went on Fox News 10 months ago (November 18, 2009) and said that more federal spending (aka stimulus) added to the debt could threaten to put us in a double-dip recession.

""There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we're taking a look at those," Obama told Fox News' Major Garrett.

"I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

http://www.foxnews.com/politics/2009/11/18/obama-warns-double-dip-recession/
http://krugman.blogs.nytimes.com/2009/11/19/invisible-bond-vigilantes/
http://economistsview.typepad.com/economistsview/2009/11/obamas-wrongheaded-thinking-on-the-deficit.html

That's a frankenstein-mix of a couple of RW theories that are irrelevant to our real economy today. In the real economy of today it is the opposite of the truth. (But it is a form of insanity that some Obama advisers may actually believe. Rubin sure seems to, for instance. And Summers may well.)

(ON EDIT: I may have been unclear in my phrasing at first. The repliers who I differed with were responding to clumsy phrasing. My bad. I fixed it up to be clearer.)

But pols say insane things sometimes... Reid and Dean's mosque-boozlement is insane too, and I don't think Reid or Dean are as ignorant as they're pretending to be. It is pure political pandering.

Here's why I am so mad at Obama.

He said something insane 10 months ago about how to handle the preeminent crisis of the decade and went on to govern for the last 10 months as if he actually believed it.

Does he actually believe it (frightening and hope destroying if true) or is it a meta-pander... a pander where you follow through with pander policy, guaranteeing mass unemployment for years?

Y'know... who cares? The policies have their real results regardless of the motive.

[tridim]

1. Do you think Obama knew 8 months ago that the R's would actually block loans to small buisiness?

[asdjrocky]

7. If he didn't know that-

Then he is naive. I knew that 8 months ago.

[Nite Owl]

31. Me too

8 months ago it was quite obvious how things would be going.

[Marr]

43. Look, he's playing multidimensional chess and you don't understand his subtltey.

He's also utterly naive, and easily duped-- depending on what we're talking about. What are we talking about?

[LWolf]

25. Is there ANYONE stupid enough to think they wouldn't? nt

[Skittles]

49. aw hell, there are a LOT of stupid people

MANY of them are on DU

[LWolf]

56. Unfortunately, it looks like you are correct. nt

[sinkingfeeling]

2. I'm not following you. You believe Obama calling the Federal Deficit 'bad' is insane? Then you

must believe Cheney's "Deficits don't matter".

[Kurt_and_Hunter]

5. A most disingenuous reading

If that was what you got from the OP then that's just what it is.

[sinkingfeeling]

15. I see you edited your post to clarify what you were talking about.

[Kurt_and_Hunter]

19. And said "on edit"

I found your reply frustrating, but at the same time it caused me to consider that I had perhaps not been clear enough.

(As noted below, pairing anyone with Dick Cheney for any purpose is unlikely to get a warm response.)

[geek tragedy]

10. Deficits are not only good but necessary right now.

Deficit spending is the only thing keeping this country from spiraling into a hole it will never dig itself out of.

The way to get rid of a deficit is to grow the economy.

[Kurt_and_Hunter]

11. +1

[Nite Owl]

32. It also depends on just what

the deficit is being increased for. Tax cuts for the wealthy no, job creation and things like infrastructure projects yes.

[girl gone mad]

23. Deficits do matter, but they aren't bad..

in and of themselves.

Deficits are our savings. I wouldn't say that Obama is "insane" for calling the Federal deficit bad, but I would say he is misguided.

[BeFree]

29. Deficits are our savings

Whoa, that's a new one. Doublespeak pops into mind.

Care to further elucidate? Or am I to dumb for you to converse with?

[girl gone mad]

39. The deficit represents private sector savings.

This is not new, complicated or controversial.

Most people erroneously believe that continual large budget deficits will bankrupt the nation. In reality, budget deficits are the only way that the private sector can save and accumulate net financial wealth.

Budget deficits represent private sector savings. Every bond the government issues adds to the financial wealth of the private sector. The sum of the private sector surplus equals the sum of the government sector deficit, and vice versa.

I'm excluding the foreign sector from discussion because historically trade has been balanced.

[BeFree]

44. Whoa, again

Deficits equal wealth?

That reminds me of the doublespeak: War is peace.

WTF?

[girl gone mad]

55. It's not doublespeak, it's standard double entry bookkeeping.

Like, whoa, dude..

Glad I could blow your mind with basic 700 year old financial accounting practices. Wait until you hear about movable type and this cat named da Vinci's theory of 'flying machines'.

[BeFree]

3. The last president,

...Cheney, claimed that the greatest president, ever, proved that deficits don't matter.

So, you are mad at Obama for disagreeing with Cheney?

And the big one: How is that being buried in debt is a good thing?

[Kurt_and_Hunter]

6. Is this the new talking point?

Anyone who reads this OP and responds by comparing me to Cheney either has an agenda or a deep disinterest in reading for comprehension.

[BeFree]

13. Project much?

The only reason I asked, well two reasons, is because you talk like an expert on financial matters, and you posted an OP about debt.

Should I apologize for reading your threads and for wanting to discuss these matters?

[Kurt_and_Hunter]

18. When sometime tries to pair you to Cheney do you respond warmly?

That's not really discussing, it's a bomb.

The OP is not about the effects of debt long term.

The OP is about claiming or believing that stimulus spending in 2009-2010 threatened to reduce Gross Domestic Product in the near term.

That is an invalid belief from any angle of analysis except the narrow RW delusion that government borrowing creates a supply-and-demand crisis in bonds.

Bonds are not priced based on whether the government is borrowing a lot. They are priced on expectations of inflation. Unlike bread, people do not have to buy bonds and the theory that people will grossly overpay for bonds is demented. It is some shit the RW cooked up to argue against government deficit spending categorically.

[BeFree]

21. On edit

You put in stimulus and, afaics, and GDP just now.

Sorry for reading your threads and making you get your panties twisted.

I'll think twice the next time.

[DURHAM D]

4. I read somewhere a week or so ago that Obama really does not

understand economic policy issues - doesn't concern himself with fiscal and monetary policy relationship to you and me. The same article also indicated he works with Summers exclusively on said issues.

I just don't think he is all that interested in that aspect of the job.

[geek tragedy]

9. Well, if you read it somewhere on the Internet

it must be true.

[geek tragedy]

8. I think Obama is a deficit peacock.

His 'spending freeze' idea turned out to be much ado about nothing, and the Senate has been killing his inflationary proposals. He's governing this way because that's what he can get through the Senate.

I agree with you on the overall policy issue--I just see him as posing on the deficit issue and not actually behaving like he means it.

[Milo_Bloom]

12. He's right about the debt.. the other thing is actually insane.

Why on earth does ANYONE think that providing a tax credit or cut will cause a business to hire. Businesses hire or fire based on DEMAND for their product and the profit they make for it.

I don't care how many tax cuts you give me, I will not hire a new employee unless I NEED one. Unless you are going to give me exactly how much that employee will cost me or MORE than that employee would cost me, why would I spend ANY money on something I don't need???

[JDPriestly]

14. Germany kept people working.

http://www.nytimes.com/2010/08/25/business/global/25euecon.html?_r=1

Their manufacturing production and exports are going up.

We saved the banks and let people lose their jobs. Our manufacturing production is down and our trade balance is worsening.

Europe is now able to tighten its belt a little. We aren't.

So, what is more important? Saving jobs and people's incomes or saving banks.

I would say that it is saving jobs and people's incomes.

We need to stop the outsourcing and importing.

Free trade has not worked for the U.S.

[sandnsea]

16. lol, oh yeah, *that* is what you're mad about

:rofl:

What-Ever.

Hillary lost. Get over it.

[geek tragedy]

17. He has a serious, substantive point.

There are PUMAs here, but K&H is not one of them.

[sandnsea]

22. In your opinion n/t

[Kurt_and_Hunter]

20. No, sandnsea

Anyone who reads my posts knows that the economy has been top priority for me throughout.

In fact, as you may recall, I was saying before Iowa that a key reason I supported Hillary was that I believed that the Clinton band-name meant "good economy" to people and that by election day 2008 voters would barely remember the Iraq War because the economy would be the overwhelming issue by that time.

And I was in the F'ing trenches here supporting Obama on the bail-outs. Half the people on my ignore list are hostile Obama fans and the other half are people who were against Obama on economic matters during the very early days of his term.

I agree with Obama on a lot. I cut him slack on some close-cases.

But on the economy I am very demanding... even shrill. Because it is that big a deal.

No margin for error.

[sandnsea]

24. You're getting a Clinton Administration

I can't for the life of me figure out why Clinton supporters are mad at anything Obama does. He's following the Clinton script straight down the line.

Clinton balanced the budget - remember?

[DURHAM D]

26. Right - and nothing else has changed since the 90s.

:sarcasm:

[Kurt_and_Hunter]

27. Hillary might have mishandled this economy as badly as Obama has

It is a very difficult situation.

And if Hillary listened to Bill's first top econ adviser Rubin she would be thinking the same dreadful things Obama might be thinking.

But Obama is the only president we've got and he HAS TO do a good job on the economy because it is a serious crisis.

I don't want him pilloried.

I want him to do a better job.

[sandnsea]

28. Uhm, she talks to him regularly

Bill talks to Rahm regularly.

You seriously can't look at the Administration and the policies and not know where they're coming from?

If anybody should be upset, it should be the original Obama supporters. WE hoped for a more progressive President and got Hillary Clinton instead.

Oh Well. It's still ten times better than any Republican. I'll take it and support it and be glad for it, just like I would if Hillary were the face of the policies.

[geek tragedy]

33. With this Senate, I think a Roubini/Stiglitz administration

would have had a similar lack of success.

[Kurt_and_Hunter]

38. Possibly true, but if so...

Possibly true, but if so then what's a president for? (I know, appointing judges... but it feels like there should be more than that.)

I recognize that had Obama demanded the right things be done he would probably have been thwarted.

In doing so, however, he would have made the ideas more mainstream and more popular, moved the perception of the center leftward and won some unexpected victories. (All scenarios include the unexpected.)

And he would not *own* this freaking economy to the same extent.

There is a perception that presidents thrive on victories. It is largely true. But it is a shallow and incomplete view of presidential politics. Reality does play a role in politics. It isn't 100% focus group perception.

The real economy matters.

Obama's breezy "I got this" confidence on the economy has become a perception of impotence. He said he had it. He didn't.

Had he been presenting two contrasting visions and making demands it would have been good for the country and probably good for him politically.

His moves only make sense if he, personally, underestimated the intensity of the economic problem.

That is a by-product of precisely the sort of optimism it takes to become president in the first place. I understand it.

He faced an economy so bad that if he had approached it correctly then his agenda would be put on hold. If there were highly credentialed advisers saying one thing and highly credentialed advisers saying the opposite and one view meant setting aside HCR then he would naturally gravitate toward the other view.

I don't think he is a villain. But I can still be mad at him. It's his job to do better.

[geek tragedy]

45. I can't disagree.

Of course, his standing right now is relevant only to the extent it affects Congressional races.

The truth be told, I'm most mad at the independent white male dipshits who are going overwhelmingly vote Republican and who've already decided that we were better off under Bush.

Democrats can't win elections without them, and gawd the sacrifices are enormous to do so.

[grantcart]

30. Krugman clearly advises that the deficit is a major concern

http://www.nytimes.com/2010/06/21/opinion/21krugman.html?_r=2&ref=paulkrugman


At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.

Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.

Any politician that doesn't express some concern about the deficit isn't facing the reality of the budget.

Forget the deficit entirely for a moment.

Interest payments are going to swamp the US budget. They will soon exceed the Defense Budget.





So in fact there is universal agreement that the deficit is a problem. Krugman may well be right that the only way out is more public borrowing, and I think we would all agree with him that there is no hope in the long term of bringing down the debt without even more cost containment.

In the meantime any politician that doesn't address the deficit problem is being foolish because the percent of the US budget that is going to interest payments is growing faster than any other part of the budget and way ahead of any possible projected increase in revenue.

There is another part of the problem. That is to creditors.

We have had this discussion many times before and you have always dismissed any need for the President to address the debt issue as part of a campaign to reassure countries that are loaning us money.


I believe that the facts have clearly shown that China has been warning the US about its concerns about the debt and now they are taking action

http://www.pennypayday.com/archives/2818


Today it was reported that China has reduced its treasury debt holdings by $24 billion, down to $843.7 billion. Many are closely watching foreign demand for U.S. debt, as our government continues to spend and increase deficits. A drop off in foreign demand for Treasury bonds will lead to higher interest rates in the United States, compounding our economic problems due to expensive borrowing.

Two year yields fell again for the fifth month in a row this August. China seems to be ahead of the learning curve and is beginning to dump U.S. debt in preparation for any further decline. It was also noted yesterday that China has surpassed Japan as the world’s second largest economy at $1.337 trillion in GDP. Japan slid to $1.288 trillion. It is plain to see who is coming for the U.S. China exudes quite a bit of control over our currency through debt holdings and exports. As always, in investing, confidence is key. Should the world lose confidence in the resiliency of the U.S. it will be extremely detrimental to both our psyche and economic condition.

There are a number of threats to the economy that could effect a double dip. One of them is China (and Saudia Arabia and other's) concern about US debt. I am convinced that had the Euro not gone through an even bigger crises that they would have moved earlier. I really don't know a lot about economics but I do follow the Chinese closely.

A continued shift from China (and the other large creditors) would mean that US would face increasingly higher interest payment charges and that would obviously create an even greater problem for the US budget.

We have had this discussion before and I know that you think that everything that is discussed in the media is all about domestic framing. When you are in the President's position you also have to listen to those that are telling you what the lenders are saying. Anyone with a basic understanding of compound interest payments knows, as Krugman has clearly stated, that we are in a difficult position. With the China reducing its US treasury debt at a time when we need to sell a lot more I would say that anything the President says is significantly influenced by what the State and Treasury Department is saying that our creditors are saying, perhaps even yelling.

[Kurt_and_Hunter]

35. Hi Grantcart. Your post is medium-long term. Mine is short-medium term

A double-dip recession is defined in GDP terms.

The president's statement was about near-medium term. He said that there was a danger of government spending causing a double-dip recession.

A double-dip recession is a near-term phenomenon... otherwise it would just be a later recession.

There is only one economic theory that comports with the president's statement: The belief that government debt is a prime driver of higher interest rates and that government spending could cause runaway interest rates so sharp as to overwhelm the stimulative effect of the spending itself in a short enough time-frame to be talking about a double-dip recession.

There is nothing right in that. No matter what people who oppose government spending idealogocaly have promulgated, the federal deficit is not a prime driver of interest rates. It is at best an indirect driver of interest rates. (Insofar as one believes it may predict inflation. There are probably 100 better indicators of inflation than the federal budget deficit so why would some people focus on federal spending as the prime indicator/mover? Because they are idealogues, not quality economists.)

Interest rates are, first and foremost, predictions of inflation. Then you add a risk premium based on the nature of the loan.

When the world is teetering on the brink of deflation and nobody is predicting robust growth for a decade there is no expectation of inflation. So why would interest rates go up? (Risk premiums are higher due to the economy being weak, which is clearly not caused by government spending.)

And why focus on federal borrowing? Net borrowing in the USA is down, not up. Recognizing that, how could federal borrowing be a pressing current problem? Again, net borrowing is down. T-Bills compete with mortgages compete with corporate bonds compate with munis... and that pool of borrowing is smaller than it was.

What happened was this. After the first big shock the economy bounced back a bit, and the stimulus and other stimulative measures were a big part of that. People got optimistic. Treasury rates went from 2.5% to 4.0%.

Now, there are two theories of why that happened.

1) because debt obviously causes inflation (a statement that is demonstrably false in our unusual current circumstances, and with Japan as a bonus handy recent example) inflation expectations were driven up by the stimulus spending and Fed actions, or

2) because people thought the economy was doing better. We had narrowly escaped a depression and a lot of folks were looking at past recoveries that typically featured explosive recovery growth for a while. Inflation expectations arising from a rebounding economy, as opposed to a specific monetary/policy crisis/defect, are a feature, not a bug. That's actually what we want.

The rates then dropped back down from 4.0% to 2.5%. Note that the theory of explosive recovery was disproved by events but the debt didn't get any smaller. This is a rather persuasive datum for option 2. (Politicians paying lip service to the deficit does not move T-bill rates 1.5%)

Only a RW loon would see 1 as the cause... or a veteran of the 1990s like Rubin or Summers who cannot grasp that this recession is nothing like 1992. They had a good experience with keeping rates lower than expected by balancing the budget and are stuck on that idea, even though it cannot possibly apply in a liquidity trap. They also overlook that the budget was balanced by the internet bubble, an artifact of unexpectedly low rates and a useful data point in talking about whether actually balancing the budget is a good idea. (It isn't... huge deficits are bad in the long run but actually balancing the budget is probably a tad destabilizing.)

The president was laying out a bogus reason for not stimulating, that stimulus could cause a double-dip recession. He was utterly wrong, and called out at the time.

Recent history has shown just how wrong he was.

And none of that has anything to do with long-term debt issues.

Without robust and steady GDP growth there is no possible solution to our debt situation except monetizing it.

In O'Henry ironic fashion, nobody on Earth has a plausible suggestion for how to get to the pre-requisite for even thinking about the debt (growth) that does not involve more debt.

Sad but true.

And the President should 1) know that, and 2) not give comfort or ammunition to the people who espouse the opposite.

[Kurt_and_Hunter]

37. re: China

What are they buying instead? A lack of faith in the resiliency of the US economy is not a lack of faith in the likelihood of the US actually paying off the bond.

Perhaps China sees the dollar dropping some. That would be a good reason to avoid Dollar-denominated bonds paying 2.5% which is a no-margin-for-error proposition.

The dollar dropping some would not, however, automatically be tragic for the US.

And China is only the third largest US bond-holder.

Is China buying the same number of bonds as before? Germany's exports to China have ballooned recently. Maybe China is preferring German debt. If so, that wouldn't mean the US is a basket case... only that someone thought some other guy's bonds were a better deal.

Why are T-Bill rates continuing to fall even in the face of China backing out of the market?

I agree that these are potential long-term problems.

And if we do not restore a decent level of steady GDP growth they will reach crisis proportions a lot faster (from falling revenues), even if government spending is slashed to the point of provoking riots.

I am not happy or sanguine about the long-term situation. But short-term deficit hawkery is the single greatest threat facing America,IMO.

It feels like we are chasing the firemen with hoses away from a house engulfed in flames because we don't want the furniture to suffer water-damage.

(An appropriated metaphor)

I have always been strong in stating that short-term deficits are essential to ever solving th debt crisis. It's not that deficits "don't matter" but that they do.

In any event, we are really talking about long-term healthcare costs anyway. That's the problem to be fixed and has little to do with short-term stimulative actions.

[girl gone mad]

40. There is not universal agreement.

Most of the top economists who have actually been correct about the crisis thus far - Galbraith, Stiglitz, and Roubini, for example - believe that unemployment and weak consumer demand are at the heart of our continued economic malaise and that these issues, not the deficit, are what need to be addressed. The deficit should be way down on the list of concerns because inflation is not a real risk right now and a return to solid growth is the only sure way to diminish government deficits.

[grantcart]

41. Well as stated the problem is not with the deficits but those pesky

interest payments that are ballooning. As Krugman points out, and anyone who understands compound interest, compounding increases in debt while revenues remain stagnant will mean that in a relatively short period of time the interest payments will grow and outsize the budget.

This isn't a discussion about the wisdom of taking on huge short term debt to 'prime the pump' it is simply an acknowledgment that trillion dollar deficits are worthy of discussion and consideration.

Personally I think that liberals should be talking about debt because it is liberal policies that will most effectively deal with the debt.

Again theoretical economists have the luxury of speaking in two dimensions. They can speak to each other and for domestic consideration. The President has to speak in three dimensions. His words have to convince the people that are actually funding the debt, our creditors. The fact that the Chinese are reducing their Treasury holdings means that if that trend were to continue there would be higher interest on Treasury Bonds and that would have a disastrous impact on those pesky interest payments.

So your reply is really off point because the discussion of my post has nothing to do about specific policy suggestions or about how much debt and what time frame that accumulation should occur, so your ambiguous citations are off point.


When you can find economists who assert that any of the following are advisable please provide the links:

1) The President should accumulate huge amount of debt but should not attempt to frame or enter the discussion about the problem that the deficit occurs as part of his leadership responsibility in the body politic.

2) The markets have an unlimited amount of deep pockets for Treasury Bond financing and have no concern that exponential increases in debt as a percent of the US budget while revenues show no sign of returning to previous levels, let alone showing Krugman's rather ambitious 4% growth average and so there is no need for the President to make public statements that will reassure nervous lenders.

3) A clear prediction that the Chinese are going to change their Treasury Bond policy and increase their purchases so that we will have sufficient purchases AT LOW INTEREST so that the huge shortfalls that will occur in the next 3 years will be met.

[Kurt_and_Hunter]

50. re: #3

What evidence is there that our near term (3-year) shortfall will not be financable at low interest?

The only economists who say otherwise were proven decisively wrong in their last major prediction-set.

Why should interest rates be distinctly different if debt is 112% of GDP or 93% of GDP? There really is no argument for it except the assumption that it must be so.

This is one of those deals where you and I are both right in a sense because the difference is in the weighting of factors. You are overestimating the supply-and-demand component of bond pricing. If China never bought another US bond that would not mean that interest rates would have to go up much. Interest rates would go up some because the bidding pool *at current rates* would be somewhat smaller and because the short-term actions of non-China traders who also overestimate the supply-and-demand component of bond pricing, but would quickly return to "value"

Interest rates would go up... trivially.

Nobody has to buy US treasuries. It's not like gasoline where people must have it and compete for what's available. People buy bonds if the bond is priced well versus risk. The default risk on US treasuries is low. The inflation risk is low because the world economy is incapable of creating inflation right now. And it is the combined opinion of everyone in the world that a 10-year note at 2.6% is a fair deal.

If China dropped out entirely what changes? Say the rate goes from 2.6% to 2.8%. Now bond buyers who did not find treasuries a good fit last week move some money from other bonds to US treasuries. The international bond market is very efficient.

Thee is not a finite pool of money for US treasuries. There is an incredible amount of cash on the sidelines and a galaxy of buyers of other bonds who would be buyers of treasuries at slightly higher rates. And since our recent and future debt increases are far less than the shortfall in total borrowing in the global economy we are in a seller's market for treasuries.


And, unlike any other borrower, the US is in a position to improve the quality of its debt. Say we borrowed another 3 trillion tomorrow. We could, and certainly at less than 3.5%. And say we used it wisely and economic growth followed and the Fed did what is absolutely necessary in setting a multi-year inflation target of 3-4% and the economy picked up.

Then we would have changed the quality of our debt. Three trillion at 2.5-3.5% is a steal in a growing economy.

Te interest on the debt is one issue. The interest on necessary debt we have and must continue to accumulate now is another matter. When money is this cheap borrowing is a lot smarter than usual.

[grantcart]

51. Rate of interest

Why should interest rates be distinctly different if debt is 112% of GDP or 93% of GDP? There really is no argument for it except the assumption that it must be so.

Obviously the rate of debt has NO DIRECT relationship with interest rates.


There is a rather significant INDIRECT relationship with interest rates just ask Greece.


Interest rates are determined by the purchaser in a classic supply and demand matrix.


If a country has virtually no debt and say the debt is 20% of GDP then it will get one rate while the country that is trying to finance its debt and is carrying 150% debt to GDP will pay another.


It is not the level of debt that determines purchasers perceptions and interest but the LEVEL OF RISK that they think that those debts carry. In this case purchasing of US Treasury Bonds carries two forms of risk 1) devaluation due to exchange rate fluctuation and 2) likelihood of default.


If the creditors feel that the political establishment of a country does not have a realistic handle of the debt and that its leaders are not informing the public of the sacrifices, short term, medium term or long term, they will become increasingly reluctant to finance what appears to be a bottomless pit of borrowing.


Now here is how Greece proves my point. The only reason that creditors have not abandoned the Treasury Bonds and forced us to face higher interest rates NOW is because of what happened in Greece. Purchase of Euro bonds are an even greater risk because some European countries are in AN EVEN GREATER debt crises than we are so while our debt problems are great and real we still have a temporary advantage.




However because the scale of the problems that Euro based debt affected countries are smaller than ours (even though the rates of debt are much higher) we may be faced with a situation where the Euro starts to rebound, creditors use the opportunity to further reduce exposure to the USD and we would be faced with higher interest rates.

All of which goes back to the basic point of your OP and one that we have been disagreeing with for some months. You base your criticism on the President's words and actions on a 'domestic only' criteria where I believe that the President has received some very hard messages from the people that actually write the checks and they have considerably reduced his maneuverability and require him to publicly address issues of debt.

[girl gone mad]

54. You're analysis is pretty shallow.

How would you account for Japan's low interest rates?

[grantcart]

58. lol what an indepth and penetrating question lol

I am not an expert on the subject and again the topic of the discussion is not debt ratios or the level of debt necessary to jump start or prevent a double dip recession but rather the need for the President to work on more than purely domestic concerns when it comes to Treasury Bonds, given the fact that the customers are all external.


Having said that looking at Japan the first thing I wondered is what is their external debt in relationship to others.


Oh look Japan's external debt is a fraction of the US, and in fact given that it is the second largest economy, a fraction of others.

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2079rank.html


In other words Japan finances most of its debt internally and needs very little (relatively speaking) external funds to finance its debt. So while Japan's public debt is high its private debt is not, in fact Japanese households are creditors and not debtors

http://www.bis.org/publ/bppdf/bispap46i.pdf

The average Japanese household has a financial balance sheet that is far more conservative
than that of the representative household in other industrialised countries: in the case of
Japan, cash and deposits represent half of total financial assets (Table 1). In contrast, the
ratio for US households is only 16%, while Europeans hold about one fourth to one third of
financial assets in these safe and liquid products.

With the Yen gaining 30% against the Euro Japan reinforces the point I made earlier that percent of GDP isn't the only, or even the first issue traders are looking for when they are investing in Government Bonds.

http://www.exchange-rates.org/Chart.aspx?iso_code=JPY&base_iso_code=EUR&mode=G&filter=180


So if you were holding Euros in April when it was trading at 130 Yen to a Euro and you bought Japanese Treasury Bonds exchanged One million Euros you would have purchase 130 million Yen. If you now sell those Yen and buy Euros you would have gained 226,000 Euros that and the fact that Japan's private credit surplus (meaning that a government bankruptcy would be impossible) makes Japan a very attractive purchase. Foreign buyers are in effect bidding against domestic markets to keep the rate low.

http://online.wsj.com/article/BT-CO-20100824-704184.html dated August 24th.

LONDON (Dow Jones)--The yen rose to a new 15-year high against the dollar and to nearly a nine-year high against the euro as deteriorating global growth prospects kept safe-haven currencies in demand.

The yen attracted additional support as Japanese officials continued to show little appetite for currency-market intervention or new policy moves to prevent the yen from rising further.

Exasperation over the lack of official response helped to push the Nikkei Index down under 9000 for the first time since May 2009.

The move into safe havens came as economic data from most ...

That was my point above. I founded and ran a furniture company with 400 people in the 80's. I admit that I am not an expert on international currency and find it very challenging but most of the time we made more money buying forward US Dollar contracts than we did working making all of that furniture.

Again I am not an expert but I know that safe haven currencies trump any one statistic (like public debt as a % of GDP which what was behind your question).



Now in your earlier reply I challenged you to bring your economic expert citations to the point of the OP (what level should the President engage in discussing the debt problem) and you have not.

Now you have asked a very shallow question in a very patronizing manner. I have answered your question about Japan's interest rate, in fact I ground the assumption that you question held (that the Japanese Treasury Rate had a mysteriously low rate) into fine dust and then took it to the banks of the Ganges River where it now mingles with the residue of millions of departed souls both washed and unwashed.. In answering it I have found additional data to my basic point, that when the President speaks about Debt he is addressing a three dimensional world that must include that part of the world that is actually writing out checks and paying for our debt. I have seen some pretty elaborate attempts to try and make the President look capricous but I would have to give yours 5 stars for effort even if they bore absolutely no substance of any kind.

[girl gone mad]

60. Yes, you clearly lack expertise on the matter.

You are stuck in a gold standard view of money. We're not on the gold standard any more. Neither is Japan.

We live in a fiat currency world, and a fiat currency regime can satisfy any commitment in its currency, if it so chooses. It could credit accounts electronically to fulfill its commitments, without need to issue bonds. Insolvency, bankruptcy, and even higher real interest rates are not among the actual risks to our modern system.

[grantcart]

61. lol oh my "without need to issue bonds" what laughable gibberish

Where have I mentioned anything about a gold standard. Pointing to the Yuan as a regional reserve currency (downthread) is about as far from a gold standard as you can possibly get. And again all completely off point from the OP, off point from the first reply and off point from the above reply.

You are simply spouting nonsense but I know that you want the last off point response so go ahead . .

[girl gone mad]

62. You have nothing to offer in the way of debate...

except for lame insults and "lol"s.

The comments you've made in this thread, including the "laughable gibberish" remark only make sense in the context of a confused view of monetary operations. You write as if you believe our government is involuntarily financially constrained, which is simply not the case.

[Kurt_and_Hunter]

57. Grantcart, the world is financing our debt because it's good business

And if the whole world boycotted us despite our bonds being a good buy we could self-finance our debt easily if we paid slightly higher rates.

(One must assume that Americans would accept T-bills at a lower rate that state and municipal bonds, no? Or individual mortgages?)

The comparison to Greece makes little sense -- the risk is vastly higher than in the US.

Greece has no control over its own economy because it has no sovereign currency. Greece couldn't respond well to their troubles if they wanted to. Greece may be forced to leave the Euro which would be wildly disruptive. Greece may be taken over by political factions that favor default... and so on.

(The difference in pricing a bond between 0.1% chance of disaster and 0.01% chance of disaster is large. I am not saying Greece will be taken over by communists, but that the chance of that is vastly larger than in the US.)

US treasuries are a freely traded commodity.

If these concerns are as pressing as you believe than either

1) They should be somehow discoverable in price action, or
2) Everyone is missing them.

It is possible for everyone to miss things, as our current post mortgage-mania troubles indicate, but it is not possible for everyone to miss something when the powers that be want it to be found.

There was no shortage of willful suspension of disbelief in the internet bubble and housing bubble because they were good for the rich, for traders and for financial institutions. There was a great motive for everyone to pretend there was no problem because people were booking big short-term profits.

The idea of a bond bubble is the opposite. The entire money propaganda and money politics class has been hunting for a bond bubble for two years. They are desperate for it. We have an entire political party dedicated to it existing, another political party largely convinced of it and a president who seems to have been using the assumption that it must exist as a basis for policy. Members of the Fed believe it. Members of most central banks believe it. Warren Buffet made a spectacle of himself proclaiming it.

In the face of that the odds that everyone is missing it are low.

The parties who actually do the close math work and trade on the basis of 0.005% differences continue to price US debt at less than 2.6% and anyone in the world is welcome to come short that. Where are they? Why don't they?(Actually, they are... just not enough to offset the large demand.)

We cannot reach a credit availability crisis in the next three years. Seriously... what new *relative* risk premium can develop in that time in the context of a world economy that is broadly down?

We remain the best bet in town until something incredible happens that doesn't happen to the other first world economies.

We will agree to disagree on this point.

[grantcart]

59. I said that US benefits right now because Treasury Bonds are seen as

a good buy, but that is only because the Euro has lost so much value







So a bond trader that used 1 million Euros on Dec 1 to buy 1.5 million US Dollars would now see a gain of 200,000 Euros if he were to sell now.

The reason that they are buying US Treasury Bonds is not for their interest but their value as a foreign exchange mechanism. When the Euro turns around and gains against the dollar we will be facing much higher interest rates.

No one is talking about a bond bubble but a reverse in the dollar and that is the relative risk premium you wonder about.

As discussed in the reply above Japan has a much higher % of GDP as public debt, but their overall debt is in a much better position and they retain safe haven status as a currency.

http://www.ibtimes.com/articles/46227/20100825/reversals-in-us-bonds-and-yen-provide-some-minor-relief.htm

With the entire stock market now one computerized trade, the 'US bonds/Japanese Yen' safety trade reversed after some huge runs, providing some relief to equities. Throughout 2008 and 2009, and indeed even during the European debt crisis in early 2010 the US dollar was the safe haven in currencies (almost all major world currencies are representative of poor structural economies so buying among the Euro, Yen, or Dollar is just picking amongst the ugliest swan). Remember all those months you did not have to do anything other than stare at a US dollar chart? Each time it rallied you had to sell any risk asset and vice versa - the true dumbing down of investing in the computerized, highly correlated age.

However with the U.S. economic situation deteriorating dramatically the past 90 days, it appears the Japanese Yen has replaced the dollar as the 'safety trade' this time around. The fact the U.S. is comparing unfavorably to Japan says just about all you need to know about our country. The yen is actually at 15 year highs to the dollar - ironically hurting Japanese exporters (Japan cannot catch a break).

So with the intraday reversals in these 2 names, the algos can go buy equities and our "monolithic market" where every instrument is just a S&P 500 derivative continues on. These charts need a breather, especially the U.S. Treasuries, although the move in the yen - considering its a currency - is 'break neck' in relation to how currencies usually move.

Seriously... what new *relative* risk premium can develop in that time in the context of a world economy that is broadly down?

Seriously what new risks? lol well talk about soft underhand pitches;



1) Continued deterioration of the housing market triggers second recession


http://www.reuters.com/article/idUSTRE67P2VV20100826

Foreclosures could head higher in coming months, however, as the percentage of borrowers at least one payment behind resumed its rise after easing late last year, the MBA said in a report that covers more than 85 percent of the market.

The pipeline of delinquencies and huge rise in properties on balance sheets of financial institutions last quarter has aggravated concerns that the critically important housing sector will drag the U.S. economy back into recession.

2) Quantative easing forces banks to reduce their assets and they are forced to reduce lending in order to improve their bottom line

http://www.safehaven.com/article/17902/what-problems-lie-ahead-for-the-us-dollar


That's happening today, because instead of lending money, banks are investing in Treasury and Agency securities. Their holdings of such assets increased to $1.57 trillion at the end of July, up 40% from $1.12 trillion in mid-2008. The government is borrowing in a rush, to shore up its deficit, growing fast at the moment. The projected 2010 deficit of $1.47 trillion will be a record, and equivalent to 10% of the economy. China and most other people expect such a growing deficit will lead to a significantly weaker Dollar.

At worst, such a prospect has the potential to deter foreign investment in the U.S., shoving up interest rates. If the U.S. Dollar Index falls below 80 , the Dollar will fall quickly and heavily and further discourage investment in Dollar assets.

3) China decides to internationalize the Yuan and make it a regional reserve currency.

http://www.digitaljournal.com/article/266928

The Yuan will soon replace the dollar as the new Asian Regional Reserve Currency. This confirms that China now will dump much of her trillions of dollars and Treasury Bills - a horrific switch for America with dangerous economic and US dollar impacts.
Whilst stumbling over the internet in search of some news I came across a detailed article on the Asia News website headed "Chinese Yuan Set to Replace Dollar". I was somewhat stunned at this headline. This article describes that Beijing is introducing a serious currency experiment - because of the dollar's volatility and unreliability - to aid in the stability of the Asian economy. But in the Asian News article, it is fairly clear what China's intentions are - which is to completely decouple both China and Asia from the American Dollar and introduce the yuan as the regional reserve currency. My guess is that other Asian governments will fall over themselves to join with this new reserve currency. This will be horrific news for America and all Americans, since it is apparent that China(and eventually all Asia) will have little further use for the sick US dollar in this heavyweight economic region. This implementation of the yuan as the regional currency of Asia is also entirely legal - ever since Nixon trashed Breton Woods by decoupling gold from the dollar in 1971(And this is what initiated the US government's Treasury Bill/Debt exchange standard for the world). So now Asian members of this new reserve currency will be able to buy commodities like food and Oil for yuan in Asia. Ouch!! That's really going to hurt the greenback...
With the likelihood of China, Russia, Korea, Taiwan and Japan all eventually joining and also dumping most their reserve dollars in favour of the yuan currency, the outlook seems somewhat grim for the future of the American economy.

4) The Congressional election elevates Republican power in Congress but because they are involved in an internal fight for 2012 they remain opposed to all legislative activity and the US government is virtually frozen for 2 years until the 2012 elections.



But what we really disagree with is the basic assumption that the President doesn't have to worry about the concerns of the people that are actually writing the checks for our deficit. That two dimensional view simply doesn't square with the facts that I have consistantly presented included the FACT that the Chinese are reducing their USD holdings. This is what I predicted the last time we went around on this.

Until you factor the hard feelings of the major bond players you will continue to view the President's messaging as purely domestic in nature. It will continue to drive you to high levels of anger (this is the thing that makes you most angry about the President) and use outlandish and irresponsible terms like "mega-pandering". You are judging a three way tug of war with two dimensional glasses.

[girl gone mad]

52. Interest rates remain extremely low.

Our debt is serviceable. China owns only a small percent of our debt. Why obsess over their potential actions? We are perfectly capable of meeting our debt obligations, regardless of Chinese demand fluctuations.

As long as the private sector continues to net save, the government must run deficits or we will suffer a severe recession. A recession which would drive us deeper into the red. See Greece and Ireland, for example.

My reply is on point and my citations unambiguous. Address them or don't, no need to play games.

[Dr.Phool]

34. Go after the main source of the deficits! Bush tax cuts.

And while you're at it, rework Medicare Part D to allow negotiation on prices!

But, true to form, they'll extend those cuts, and he already promised Billy Tauzin that he wouldn't fuck with Big Pharma.

[grantcart]

42. Returning to the Clinton era tax schedules will not have as big an impact

as people think.

A large part of the income was a result of impressive capital gains in the markets. That is not going to happen for some time.

Of course we should allow the Bush tax cuts to expire.

But we will need to control health care costs and significantly reduce the defense department.

[MilesColtrane]

36. All of the sudden John Maynard Keynes is persona non grata...

because Obama feels like he has to play defense against the teabagger's entitlement strangling agenda?

Fuck that...very foolish.

The numbers show a double dip happening whether he wants to admit it or not.

[depakid]

46. Once it became obvious in April and May that economists with the track record were right again

about the size and targeting of the stimulus in the 1st place, Keynes came back into favor.

Unfortunately, by then the administration and the Dems in Congress were out of political capital.

Just as predicted.

See, e.g. http://krugman.blogs.nytimes.com/2009/10/05/the-story-of-the-stimulus/

[Hawkowl]

47. At best he's an idiot

And it pains me to say it. He really doesn't appear to know the difference between his ass and the economy. He just blathers whatever his appointed Wall Street cronies whisper in his ear. I can't believe a man who's wanted to be president for decades, neglected to learn FUCKING ANYTHING ABOUT GODDAMN ECONOMICS.

[TheKentuckian]

48. Priorities. The country has an extremely limited scope of focus.

The debt hand wringing is counter-productive when you are years into the inability to even tread water on job generation after a nasty blowout after decades off structural declines, flat wages are declining, foreclosures continue to blow up, the wealth and income disparities are absurd and growing, and our infrastructure from roads to bridges to water to sewage to electrical grid is all going to hell in a handbasket after decades of neglect and that doesn't account for the need for some serious need for modernization.

Does anyone think these matters can be ignored or frugally picked at for any amount of time?
It is craziness and almost suicidal. The Invisible Hand is not keeping the wolves at bay while we get the medium and long range structural debt under control while doing very little to directly increase revenue and even less systemically.

At that point we are swirling down the bowl unless you are depending on magic to create demand and ability to compete globally or to have self sufficiency.

Self cannibalizing our way to health when we are already very feeble and very ill with cancer is probably not going to happen.
In the end, we won't have the revenue to pay the interest and will have let the country crumble, crushing our people at the same time.

Certainly we must be wise spenders because wasted borrowed money is a problem compounded but trying to take money out of the hands of a increasingly desperate populace seems basically fucking batshit to me and letting the country fall down and way behind is stupid.

Deficits matter as folks who were advising against creating them well know, but in the situation we find ourselves they will definitely have to take a number.

The very loudest criers on this are for the most part, the fucking deficits don't matter crew, which makes it head popping

The triage on this situation is not rational but rather slavish devotion to a disproven ideological secular religion. We may as well slit our own throats as make the deficit among the first patients seen in this crowded trauma center.

Capitalizing casino dragons and killing the last possible source of demand is not good medicine for this sick patient. Kicking the stool of the safety net out from under people is even more a disaster both human and for the broader economy.

[Poboy]

53. Excellent OP, K&R