Monday, November 21, 2011

Let's Take Perspective on Debt | The Main Problem (Naked Capitalism)


Satyajit Das: The Main Game Looms – The Problem of US Debt (Updated)

Yves here. As much as I am a big fan of Das, this post is a classic example of arguing that the US, a sovereign issuer of currency, is in the same position as a household. The problem is first, unlike a household, a sovereign issuer of currency cannot go bankrupt (it can always issue more currency to pay off its IOUs). It can VOLUNTARILY default, as Russia did in 1998 (which shocked the international markets, the Russian government debt outstanding was a very small % of GDP and widely seen as sustainable). The real economic danger is inflation, not default. But with considerable deflationary pressures underway via private sector deleveraging, government deficit spending is actually desirable to accommodate the private desire to save more (as in the private sector is not generating sufficient use for incremental savings in the way of new investments). Second, a household can cut spending without affecting its income. This is not true of a modern government, whose spending is a meaningful portion of GDP. In an economy, everyone’s income is someone else’s spending. Cutting government spending has a contractionary effect greater than the amount of the deficit reduction (we’ve seen this proven again and again in Europe, as the imposition of austerity is making debt to GDP ratios worse).
By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)
In the first of three articles, the problems of US debt are outlined. The next two articles look at how America needs to control its public debt and how given political exigencies it may actually be dealt with.
Greece and the other debt burdened European countries are merely the first carriages in the derailment of the “Sovereign Debt” Express train service to nowhere. The big carriage has ‘USA’ painted in red on it.
To understand the US financial position, just remove 8 zeros and pretend it’s a household budget (The analogy was originally suggested at
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
The US is trying to bring their budget under control. This year they implemented total budget cuts of $385. Assuming they don’t spend more than they raise in taxes, it will take them 370 years to pay back this debt. The bi-partisan US Super Committee is currently discussing proposals to cut spending by $12,000 over 10 years. At $1,200 in saving per year and assuming they balance the budget, it will then take them a mere 119 year to pay back the debt.
That should clarify the position.

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