President Obama leaves soon to confront his counterparts among the G 20 countries. I say confront because in the main they have complained about Obama spending too much money to cure the economic crisis. We have the remarkable situation where leaders of such countries as Germany are calling the US too “socialist.”
I have stated several times that I support all of the President’s efforts to revive the economy except for the one to improve the personal balance sheets of property investors. I have also pointed out that all of these programs, except for the actual Budget for 2010, are being funded out of borrowed money, not current tax revenues. I also detailed the Feds’ borrowing potential and set it at up to $28 trillion, while the current national debt stands at about $11 trillion. To complete the basic equation I said the Feds are paying about 1% interest to borrow these funds. I do not view this as having borrowed and spent too much nor do I see this changing.
Yes, we will have to repay the borrowing and will do so most likely with new borrowing. But as I also said, the US has been in debt since 1791 and we will be so for the duration of the Republic. I also noted that the Feds have acquired some valuable assets with these borrowed funds and in all liklihood the future earnings from these will repay the borrowing, or at least a substantial part.
So I say to the Europeans who complain about Obama spending too much, why not do the same? Your economies are even more distressed than is ours. Do you plan to wait until your economy rises in the wake of a revived US economy as in the past, or will you work with us to improve the lot of all?
As for the natterings of the present EU President, the President of Czechoslovakia, thank God he is in a rotating position and will soon rotate out.
Leo Cecchini
March 2009
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Leo, I’d be really interested in what you have to say about all the money that’s being created by the Fed now and at what point its sheer volume makes it worthless. Just yesterday the Chinese, our biggest creditors, were saying they hoped we could find the proper lid, but of course they had no suggestions….
Ralph
The Feds are not creating money, they are selling Treasury Bonds or “T BIlls” on which they pay as little as .75% interest. In other words the Feds are not printing money, but sopping up funds owned by others, e.g. private investors who are putting their money into “cash.”
About half of these bonds are held as accounting entries by the Social Security System since excess Social Security collections may only be invested in Federal debt instruments. The Chinese and the Japanese own about 5% each of the total Federal debt. The Chinese hold these bonds since there are few, if any, other places to park the volume of dollars they hold. In any case the bonds are simply sopping up funds, not creating new money.
In one of my items I calculated that the current cost of carrying this debt would indicate that the Feds can borrow up to $28 trillion while at present the National Debt stands at $11-12 trillion.
Volume does not make US bonds worthless since they have the “full faith and credit of the USA.” They maintain their value as long as the USA stands.
One could ask if there is some level where investors would prefer to put their money into other investments. The constraint here is that no other investment offers the “full faith and credit” of the largest economy in the world. Moreover, there is no other investment large enough to absorb the amounts of money being discussed.
I hope this answers your question.
Thanks, Leo, it does answer “a” question, but I’ve been hearing from responsible quarters, including NPR interviews and Ben Bernanke himself on “60 Minutes,” that the Fed is quite literally printing money. Like Zimbabwe. Is all this talk merely rhetorical flourish, dramatic license to prove some point? If it’s not true I have to say it’s not at all helpful, either.
Ralph
As I said in my direct note to you, the Federal Reserve continues to print money as it has since it began. However, the TARP plan, the Stimulus Package, and other iniatives taken to overcome the credit market freeze and jump start the economy are being financed out of borrowed funds, not newly printed money.
It would probably take two years of steady growth, instead of decline, to turn our deflationary spiral into a rise in inflation. Plenty of time to ward off this potential problem.
Of course if we have a repeat of Paul Volcker’s increase in cost of borrowing of the late 1970s, we would see a cost push inflation in short order. But I do not see this happening this time.
See my latest for my prediction on when recovery will occur.