July 23, 2011
— Monty (Ace mentioned this piece in his post on the Greek default yesterday.)
Here are other entries in the "Economics at AoSHQ U" series:
What is an economy?
What is money?
Given the confusing stories coming out of the press regarding the debt-ceiling debate, I thought it might be helpful to clear up one area where even veteran financial reporters and politicians confuse things: the difference between a liquidity problem and a solvency problem.
There are two ways to be out of money.
One way is to have a lack of cash to meet an immediate payment or bill or debt-service. This is a common consumer problem, especially among the more hard-up among us: the rent is due on Friday, but I don’t get paid until the end of the month. I have the income to cover the obligation, but I don’t have it at the moment the payment is due. In financial terms, this is a “liquidity crisis”.
An asset that can be quickly converted into cash is considered to be highly “liquid”, whereas an asset that cannot be quickly converted is “illiquid”. "Liquidity" for practical purposes is a synonym for "cash" (or other readily-transferable assets).
For example, let's say I have an original letter from Robert E. Lee to Jefferson Davis that I found in the bottom of a trunk. It's worth a lot of money, but no one knows exactly how much, or who exactly would buy it. It's a highly illiquid asset, even though it is a valuable asset. The same is true for real-estate, art, antiques, or other kinds of valuables. IÂ’m broke in fact even though I might be a millionaire in theory and on paper. But I know I can sell my dirt-bike to Chet next door or pawn my guitar for a couple hundred bucks and then pay my rent -- my dirt-bike and guitar are more "liquid" than the letter from Robert E. Lee, even though the letter is worth considerably more in absolute terms. (Liquidity can also change over time -- if Chet already bought a dirt-bike from someone else and there is no other market for a used dirt-bike, my liquid asset has suddenly become illiquid.)
I could take out a loan against my Civil War-era letter (thus collateralizing it) rather than selling it outright, but this would also take a lot of time because the true value of the letter would have to be established first.
Another way to be out of money is to have obligations -- debt, payments, fees, and expenses -- that outstrip my ability to pay them from my income. Let’s say that I earn $2000 per month working as a janitor. I like to live the high life, however, and my monthly obligations -- rent, utilities, food, clothes, car payment, gas, insurance, gold chains, cover-charge at the clubs, and so on -- comes to $3000. In order to make up the difference between what I earn and what I owe, I’ve taken cash-advances from a credit card every month until my credit-line was maxed-out. Due to my parlous financial state, I can only afford to pay debt-service (the interest rate payment alone, with no money going towards the principal), and even that becomes a burden as the debt continues to inexorably grow. At that point, I am left with two options: reduce my expenses, or find a job that pays more money (increase my income). If I can find enough new income to pay down my debt and continue my style of life, all is well (unless I once again outspend my income, in which case I’m right back where I started). But let’s say that due to the poor job market and a lack of skills on my part, the janitor job is the best gig I can get. Given my income, I cannot ever hope to pay back my debt. I have cash in my pocket and other liquid assets like my gold chains, but not nearly enough to meet my obligations. In fact, given my prospects, I will never have enough to pay my debts. I am insolvent. “Insolvent” is just another way of saying “bankrupt”.
In terms of personal finance, a liquidity crisis is usually easily manageable via things like bridge loans (visiting the friendly neighborhood loan-shark), sale of assets (yard sale), or extension of terms (convincing your landlady to wait a week for the rent). A solvency problem is much more difficult -- sometimes impossible -- to fix. There are only two ways out of the solvency trap: raise income, or lower expenses. Sometimes you must do both. ThereÂ’s no other way.
The same principles that govern personal finance also govern sovereign finance. The problem is that too many people see a liquidity problem with sovereign debt when what we really have is a solvency problem. Greece is the best current example of a state that is insolvent: it has a debt-to-income ratio of about 150%, and no prospects for substantially raising their income via taxes or fees. So: they are bankrupt. An individual in this position would probably declare a legal status of bankruptcy to discharge his debts to creditors and “start fresh” (albeit with a heavy hit to his credit rating). A sovereign nation goes into a state of “default”, which means that holders of their sovereign bonds (many of them foreigners) must take a “haircut” on the value of the bonds they hold -- sometimes all the way to 100%.
It’s important to note, though, that terms like “bankruptcy” and “default” are legalisms. They are not states of nature. Insolvency, however, is a state of nature -- essentially, you have drawn more out of a given system than you have put in, and thus have accrued an energy deficit that must be rectified (since all energy must be conserved). It really boils down to a matter of physics. In a world of scarce resources, “insolvency” is usually a recipe for disaster. In most of human history insolvency usually led to penury, starvation, destruction of the family, debtor’s prison, or even a death sentence. For sovereigns, it meant social collapse, hardship, famine, and sometimes conquest by a foreign power. Nature will conserve the energy lost, in one way or another. Balance will be restored.
Insolvency is a much worse problem than illiquidity (though a liquidity crisis can often lead to a solvency crisis).
On an individual basis, staying solvent is a simple matter: donÂ’t overspend. Live within your means. Easier said than done, human nature being what it is, but there is no other way. Opportunities to increase your income dramatically are limited (you canÂ’t count on the lottery), so managing your spending is usually the only route to solvency. This much is common sense to most people.
But the kicker is this: the same thing is true for sovereigns. Every sovereign that is in danger of default right now (including the United States) got that way due to overspending, not because of insufficient revenue. And the prime driver of spending in this modern age is the so-called “welfare state” -- government-provided pensions, healthcare, and subsidies.
Sovereigns are learning an uncomfortable truth about how to avoid insolvency: limit the welfare state. It is good and necessary for a sovereign to look after the most weak and helpless and downtrodden among its citizens; it is both the civilized and the moral thing to do. But when the ranks of victims expands to encompass one-third to one-half of the entire population, something has gone badly wrong and disaster cannot be far away. Kindness is a moral virtue, but it becomes a positive evil when it threatens to collapse the state itself. “Kindness” that leads to insolvency is not kindness at all, because it brings much suffering and sorrow in its wake.
“Civilization” is just a word we use to describe the compact between an individual and the polity he lives in -- he contributes some of his wealth to the state to provide for infrastructure and defense, and in return the state provides the individual with an environment in which to be productive and live among other people of like mind and temperament. The state does not (or should not) guarantee success or happiness; it exists simply to provide ground in which those crops may flourish. But this civilizational compact is predicated on the idea that every member pulls his own weight and does not impose an undue burden on the rest of the citizens. When too many citizens consume more than they produce, it breaks the compact: it forces the producers to shoulder others' burdens in addition to their own. Even if the producers are willing to do this for a time, the end result must be insolvency -- because the aggregate income will always be outstripped by the obligations imposed.
The biggest fallacy of the modern fiat-money age is that citizens and politicians alike think we can raise our “income” any time we want by printing currency. In effect, there is a belief that we can bring real-world wealth into being ex nihilo via the printing-press, or avoid insolvency by issuing yet more debt. (Avoid insolvency by taking on even more debt? Only in the halls of Washington D.C. does that make any sense at all.) But what we need to remember is that money itself has no intrinsic value (especially fiat currency); it’s a signifier for things that do have value (like your own labor, or some good or service). Simply printing more currency actually dilutes the total wealth of the nation; it does not add to it. It actually increases the danger of insolvency because it provides the illusion of greater income, and hence leads to even more unsustainable spending.
(I won't address taxation here because tax is not additive in any real sense; it is redistributive. In energy terms, tax revenues do not add energy to the system but simply redirect existing energy to other purposes.)
The take-away is this: the sovereign-debt crisis that has grown out of the 2008 financial crisis is not a problem of liquidity. Many industrialized nations are simply insolvent. Their income will probably never be enough to meet their obligations. GDPs across the G20 nations have basically recovered from their 2008 lows, and have even increased (though at a slower rate of growth than many desire). However, their debt and social-welfare spending have outstripped the growth in their economies by a significant amount, and this disparity is going to get larger and larger with every year that goes by.
The welfare state has bankrupted us all.
UPDATE:
In AoSHQ shorthand, you can say it this way:
Illiquid: You're broke.
Insolvent: You're boned.
Posted by: Monty at
05:02 AM
| Comments (197)
Post contains 1797 words, total size 11 kb.
And who let them out of their hole anyway?
Surprisingly, some of my friends are becoming fans of Dodd-Frank. In particular, the section which allows/encourages them to rate bonds independent of the agencies.
Posted by: Marcus at July 23, 2011 05:10 AM (UUike)
Posted by: Dick Obama at July 23, 2011 05:11 AM (TVvXc)
If you had a letter from Robert E. Lee to Thomas Jefferson, that would be worth a lot of jack I'll bet.
Posted by: Dave in Texas at July 23, 2011 05:12 AM (WvXvd)
Posted by: krakatoa at July 23, 2011 05:13 AM (bbJJG)
Good post. One minor quibble: "bankrupt" literally means going to Bankruptcy Court and having the Court place your affairs under some provision of the Bankruptcy Code. In common parlance people tend to use the term as pretty much the same as "insolvent," but in fact you might have a serious liquidity problem, say with assets that are REALLY illiquid like your R.E. Lee letter and impatient creditors where you go to Bankruptcy Court for relief. that can only be resolved.
This is somewhat relevant for me because I work on pension issues for a truly busted municipal government in a state that does not permit Chapter 9 municipal bankruptcy. We are still liquid, but may be approaching insolvency and could conceivably even wind up with a court-supervised workout plan, but unless the State changes its law to permit it, we can never be bankrupt.
Posted by: Marty at July 23, 2011 05:13 AM (YQI0J)
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights,[71] that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,.....
Somewhere along the lines we lost that.
Posted by: Vic at July 23, 2011 05:14 AM (M9Ie6)
Posted by: J.J. Sefton at July 23, 2011 05:14 AM (UlUS4)
Posted by: Islamic Rage Boy at July 23, 2011 05:14 AM (e8kgV)
Posted by: J.J. Sefton at July 23, 2011 05:15 AM (UlUS4)
Posted by: J.J. Sefton at July 23, 2011 05:15 AM (UlUS4)
Posted by: CoolCzech at July 23, 2011 05:15 AM (kUaEF)
Think about the implications of that for a minute.
Then, take one step further into the abyss and think about mutual funds tied to AAA ratings.
Posted by: Marcus at July 23, 2011 05:15 AM (UUike)
In any case what we said about actual bond buyers already factoring in the debt and possibility of default is still true. Interest rates have already gone up, or would have if the Treasury had actually been able to sell any of their bonds to anybody but themselves.
Posted by: Vic at July 23, 2011 05:18 AM (M9Ie6)
SUMMARY: If you want to get out of the deep hole we are in, the first step is to STOP DIGGING!
However, this simple realization is beyond the idiots in charge of our nation.
I am afraid I have reached a similar conclusion about our fate that your headlines sometimes emphasize: DOOM. It is coming, we cannot avoid it, we cannot reason with it, we cannot beg it to go away.
To quote the fleet commander in the Last Starfighter, we can only "prepare to die."
Posted by: GaryP at July 23, 2011 05:18 AM (0Le+E)
That's a good point: "bankruptcy" is, as I wrote in the essay, a legalism. It has a specific legal meaning when used in its proper context, but in popular usage it is a synonym for insolvency.
Posted by: Monty at July 23, 2011 05:19 AM (FC+dS)
Heard that more and more people are putting necessities on their credit cards. There was a massive switch this month from using the debit card to using the credit card, for stuff like food.
Posted by: curious at July 23, 2011 05:20 AM (k1rwm)
"Recession is when your neighbor loses his job. Depression is when you lose yours. And recovery is when Jimmy Carter Obama loses his."
Posted by: Vic at July 23, 2011 05:21 AM (M9Ie6)
Posted by: Caiwyn at July 23, 2011 05:21 AM (IxBYN)
Posted by: Vic at July 23, 2011 05:22 AM (M9Ie6)
Posted by: Jay at July 23, 2011 05:23 AM (Q2jDr)
It is so common it's almost ubiquitous, even on financial-specialty outlets like CNBC. That's why I wrote the article, because the difference between the two concepts is important: a liquidity problem is usually a fairly minor inconvenience; a solvency problem is really, really bad.
Posted by: Monty at July 23, 2011 05:26 AM (FC+dS)
Posted by: Presnit Barky at July 23, 2011 05:28 AM (yQWNf)
Posted by: J.J. Sefton at July 23, 2011 05:30 AM (UlUS4)
Posted by: Jean at July 23, 2011 05:32 AM (7P7Ij)
Another problem with the welfare-state is that it is ultimately destructive to the dignity of those people on the dole. Since they are essentially told that they are too incompetent to survive without assistance, they do not have an opportunity to learn self-respect: thus, since they do not respect themselves, they do not respect the persons and property of others.
We have created an underclass that is seething with resentment against the "winners of life's lottery" and will not take the shutting off of the flow of "free" money well.
Posted by: Retired Buckeye Cop at July 23, 2011 05:33 AM (S2+uh)
Posted by: curious at July 23, 2011 05:34 AM (k1rwm)
This kind of debt-financing is a death-spiral, because it has a strictly limited time-horizon: at some point, your debt-service is going to eat up the bulk of your income, leaving nothing for current-account expenditures. Servicing the debt becomes an ever-more-onerous burden if you don't pay the full interest-rate plus some principal every month -- the debt grows and grows without limit as the interest-rate clock ticks implacably away.
Sound familiar? It should, because this is exactly the bind that Greece (and the United States) are in right now.
Posted by: Monty at July 23, 2011 05:36 AM (FC+dS)
Illiquid: You're broke.
Insolvent: You're boned.
Posted by: Monty at July 23, 2011 05:40 AM (FC+dS)
Posted by: kelley in virginia at July 23, 2011 05:41 AM (VIqi1)
I long ago determined that financial shows were run by journalism degrees and not people who know anything about economics, and more important, business.
Even Cavuto who has been in the business for a long time is a failure this. He was preaching the Housing market" was not in a bubble right up until the collapse of the bubble.
Even the dumbest SOB in the world knew that housing in most parts of the country was in an unsustainable price escalation.
Posted by: Vic at July 23, 2011 05:42 AM (M9Ie6)
Posted by: '80sBaby at July 23, 2011 05:43 AM (o2lIv)
Insolvent: You're boned.
Posted by: Monty at July 23, 2011 09:40 AM (FC+dS)
I choose door 2!
Posted by: Barney Frank at July 23, 2011 05:43 AM (yQWNf)
Posted by: Dick Opresident is a whiny pissant at July 23, 2011 05:45 AM (G5BoP)
We ought to have this as our final offer to OPEC. They get to have $50 or nothing. Which way do they want it.
Once my gas bill is under control, everything else will fall into place.
Posted by: sTevo at July 23, 2011 05:45 AM (VMcEw)
It is against the law here for local governments and school boards to issue bonds (borrow money) to cover operating expenses because of that very reason Monty. Yet, because financing schools was converted over to sales tax and that has gone to shit, our local county tried to get the State legislature to pass a special exemption bill to allow them to sell bonds to cover expenses this year.
The legislature said "not only no but....". Needless to say the Democrat PR machine in the press went ballistic.
Posted by: Vic at July 23, 2011 05:46 AM (M9Ie6)
Posted by: Marie at July 23, 2011 05:48 AM (W7Seu)
No matter how big the numbers or how complicated the interplay between them, economics must at some point describe the world of real things -- and we all live in that world, even banks and sovereign governments.
Posted by: Monty at July 23, 2011 05:48 AM (FC+dS)
Growing up poor teaches people life lessons that growing up rich (or middle class) does not. Now we are going to get a taste of austerity whether we like it or not. For those of us who have experience at being poor, it won't be as bad, but for those of us that has never known austerity, it will be like torture. They deserve it and worse.
Posted by: DiogenesLamp at July 23, 2011 05:50 AM (t3mKS)
Posted by: Islamic Rage Boy at July 23, 2011 09:14 AM (e8kgV)
I would take the opposite approach. Let the name of "Obama" be made famous forevermore as the Idiot who was driving the bus when we all went over the cliff. In the dictionary, his picture should be next to the words "stupid" and "arrogant."
Posted by: DiogenesLamp at July 23, 2011 05:53 AM (t3mKS)
Posted by: chillin the most at July 23, 2011 05:54 AM (6IV8T)
Pretty much the only people I have any empathy for in this mess are the ones who did things as required--live within their means, prep for retirement, etc. Y'all know the litany.
The welfare pros--again you know who--it would trouble me nothing at all to see them disappear. By whatever means. Took a long time to get to that mindset, but here we are. Maybe it's time to see the carried pay the carriers something.
Posted by: irongrampa at July 23, 2011 05:58 AM (ud5dN)
Posted by: Palin/Steele at July 23, 2011 05:59 AM (2lf+r)
An additional analogy from personal to sovereign finance:
If you have several credit cards and get close to maxing all your credit lines, your credit score falls, even if you are making your payments on time. And if you have one big credit line and that creditor sees that you have maxed out all your other lines, that creditor may cut your line and leave you close to maxed out on that one, which will drop your credit score. This makes further credit harder and more expensive for you to get.
This is pretty much what the rating agencies are saying right now about the U.S. debt: we have maxed out our credit lines, and even if we get another one (i.e. raise the debt ceiling) our credit score is going to drop. The only way to get it back up is to start paying down some of those other lines, i.e. cut spending and actually start paying down some of our debt.
Posted by: rockmom at July 23, 2011 06:01 AM (lSyyU)
Posted by: Dave C at July 23, 2011 06:02 AM (2lf+r)
I'm thinking of writing another essay called "Tax the poor!" that builds on this very idea. We have too many people in this country with no skin in the game, tax-wise.
The income-tax is a lousy tax system in a slow-growth country anyway (how do you really define "income", anyway?). We need to move to some kind of consumption-based tax system (though I don't like the VAT schemes I've seen so far). But I don't want a consumption tax in addition to the income tax; I want a consumption tax in place of the income tax. And it should be written into law that any new tax revenue collected would be applied only to the national debt, and not to welfare-state programs.
Posted by: Monty at July 23, 2011 06:03 AM (FC+dS)
Posted by: chemjeff at July 23, 2011 06:05 AM (s7mIC)
This is because a bank must perform due-diligence on the debtor -- debt-to-income ratios get skewed, which impacts the credit score retroactively. If you're spending 20% of your income servicing a $50K debt, you are a better risk than someone paying 60% of their income servicing a $5K debt.
Posted by: Monty at July 23, 2011 06:05 AM (FC+dS)
Posted by: Dave C at July 23, 2011 06:06 AM (2lf+r)
Posted by: Deety at July 23, 2011 06:06 AM (pGciH)
Posted by: dulce at July 23, 2011 06:10 AM (THMtB)
Posted by: Dave C at July 23, 2011 06:10 AM (2lf+r)
You have pleased your Emperor. Strip down, oil up, and enter the Imperial bedchamber ere the moon waxeth full.
Posted by: Monty at July 23, 2011 06:10 AM (FC+dS)
Monty - that's why Moody's and S&P are warning about cutting the US debt rating even if the debt limit gets increased. People really need to understand why this is happening. Unless and until the U.S. starts to substantially grow its GDP, the agencies are going to look at our debt-to-income ratio rising steadily and drop the rating. Either the debt has to fall or the income has to increase - preferably both.
We are in this mess now not just because of incontinent spending, but because of the severity of the recession and weakness of the "recovery." Much of which is the direct result of bad government policy that is killing business and scaring capital away from the U.S.
Posted by: rockmom at July 23, 2011 06:11 AM (lSyyU)
Posted by: The MFM at July 23, 2011 06:11 AM (2lf+r)
Der Krugman keeps claiming that we are having a liquidity crisis. It may even be partially true, IF there was a will in DC to sell off a bunch of national assets like the 1/3 of the nation's land that the feds own. IF they were willing to sell the mineral rights for exploration (think oil & gas leases).
We all know how the greenies and enviroweenies would react to any moves like this.
At the same time, the feds may be making a huge mistake in selling off all our helium reserves.
Posted by: GnuBreed at July 23, 2011 06:13 AM (ENKCw)
We need another Blue Ribbon Panel Commission Report to ignore. That's always money well spent, or should I call it an investment.
Posted by: Filet of Boned at July 23, 2011 06:13 AM (0ba8c)
The first part of the article was great. Unfortunately, then you jump to the conclusion that the welfare state is toast. Not so much as much as I would like it to be so. The reason there is a crisis in the US is because discretionary spending went out of control. Likewise, think of Germany. They are fine. The only reason there is any problem in the EU is because they insist on a single currency.
Modern technology is extremely productive. It can bail out the welfare state. The fundamental problem is that those who love the welfare state also hate technology.
Posted by: rick at July 23, 2011 06:14 AM (0+Xz8)
Posted by: Monty at July 23, 2011 10:10 AM (FC+dS)
I approve this message.
Posted by: Conan at July 23, 2011 06:16 AM (s7mIC)
"Insolvent: You're boned."
Your definition of "insolvent" is "spending more than you're taking in."
There is, of course, a quick and easy solution to that problem - stop spending. Let's remember: The United States has plenty of money to cover its bonds. That is ... we have plenty of income to avoid default on our borrowing. Federal government currently takes in about 10x what is required to pay interest on our debt obligations.
What we do not have is plenty of income to do that - AND ALSO FUND DEMOCRATS.
We can't fund the Democrat Party AND pay our bondholders. So we have a choice ... we can end NPR, cease funding Democrat Party colleges and Universities temporarily until the economy is better; reduce spending on teachers; reduce federal salaries across the board, etc. etc. etc.
Lots of these cuts can be temporary spending cuts. We certainly need to invest in research ... but that can be put off while we overcome our financial problems. We certainly need to support the arts. But certainly that can wait until the crisis is over, yes?
There are BILLIONS of dollars that ONLY SUPPORT DEMOCRATS in the federal budget that Republicans should demand that we put on hold.
The federal government is, in no way shape or form, insolvent.
We have oceans of money to spend. But too much of it is being take off the top from us by the Democrat Party and given to their members.
As a nation, we are not required to allow that to continue.
Talk of "insolvency" and "liquidity" should FUCKING CEASE until all the discretionary spending that ONLY SUPPORTS DEMOCRATS is removed from the federal budget.
After that spending has been REMOVED from the budget by REPUBLICANS, then we can talk about other things.
But so far, Republicans haven't done the thing we sent them there to do and that is to shut down the Democrat Party.
Posted by: someguy at July 23, 2011 06:16 AM (iIQ0a)
Since I can use it to increase my liver enzymes, I view it as an investment.
Posted by: Not Drinking Nearly Enough at July 23, 2011 06:16 AM (JEvSn)
Posted by: chillin the most at July 23, 2011 06:17 AM (6IV8T)
Hell, it's a plot point in I'll Take Manhattan by Judith Krantz when one of the characters needs money and her financial advisor goes through how paper rich she is and she's all "so you're saying that in reality I'm broke". I'm fairly certain that if the author of trashy trashy romance novels can get that point, our financial press should as well.
Posted by: alexthechick at July 23, 2011 06:17 AM (sf+iw)
Yep. I've been harping on this point for weeks as this stupid "debt ceiling" debate grinds on. The ratings-action is not because of the debt-ceiling; the debt-ceiling debate is simply a sideshow to the bigger carnival of government debt. We are not going to default unless we choose to, even if the debt-ceiling is not raised. Investors know that, Congress knows that, Treasury knows that, the Fed knows that, and President Obama knows that.
The fight is not about revenue (taxes) or debt-service. It's about the size and role of government, and the ratings agencies are serving notice that the government is too big and spends too much.
Posted by: Monty at July 23, 2011 06:17 AM (FC+dS)
Posted by: Monty at July 23, 2011 09:48 AM (FC+dS)
It seems to me that the government officials, bankers, and lawyers deliberately obscure any aspect of the real world as it should appear n the financial world so that we the people are at a disadvantage.
Posted by: Hrothgar at July 23, 2011 06:18 AM (yrGif)
Although I think this is a great post, there is one big flaw in it: comparing liabilities to income. Many people have plenty of experience of having liabilities that exceed their annual income. Most people have mortgages that initially exceed their annual income, and yet still manage to pay the mortgage off and live decent lives.
In 1815, Great Britain had public debt that exceeded its annual GDP and never missed a beat and gradually reduced the debt in total and drastically reduced the debt as a percentage of annual GDP over the next 99 years. In 1945, the US national debt was close to 100% of its annual GDP, and the US economy in the years thereafter was the wonder of the world.
Liabilities need to be compared to assets, and in the case of national governments, their basic asset is the power to tax. The Dems are quite right in theory that the national debt could easily be repaid over time out of increased taxes (of course in practise the Dems would then just spend the increased taxes so the debt would not get repaid or even stabilized). The problem is that high tax rates, particlarly if they are coupled with a high rate of transfer payments, discourage productivity by penalizing the productive and rewarding the unproductive. So there are two solutions to the debt problem: raise revenue or cut spending. It's no use pretending that increased tax rates are not, at least in theory, a quick-fix way to raise revenue. The point to hammer home is that it is the wrong way to address excessive debt, both in the short term and the long term.
The US government is not fundamentally insolvent: it is insolvent at this rate of spending and this rate of taxation. Tax rates are already too high so spending must be cut.
Posted by: JeffM at July 23, 2011 06:19 AM (zD0RO)
They are not fine. Like China, they depend utterly on exports to drive their economy -- they are dreadfully unbalanced in terms of output, and they have looming demographic problems just like every other European country. They are comparatively in good shape, but only compared to the rest of Western Europe.
Ever wonder why the Germans keep biting the bullet and bailing out Greece in spite of popular anger against it? It's because German banks are heavily exposed to sovereign bond-debt of Greece (and Ireland, and Portugal, and Spain, and Italy). German banks are a lot weaker than they're letting on, and if contagion takes hold, some big German banks are going down.
Posted by: Monty at July 23, 2011 06:20 AM (FC+dS)
Posted by: Grimaldi at July 23, 2011 06:20 AM (CgMAQ)
That was my immediate assumption. The Germans aren't doing this because they're such a kind, caring people. They're doing this because they are superplusdoubleboned if they don't.
I also hold the working assumption that every single thing we've been told about China's economy is a lie.
Posted by: alexthechick at July 23, 2011 06:23 AM (sf+iw)
That is because after 1945 there was no "rest of the world" economically. When the rest of the world starting recovering in the mid 60 we started sliding back again.
Posted by: Vic at July 23, 2011 06:24 AM (M9Ie6)
Posted by: Dave C at July 23, 2011 06:26 AM (2lf+r)
"Orion", "Austrian (as a language), discounting medical insurance bills by 3000%, too many, etc. to behold. And the masses and masses of people, who continue to stick by, and defend this ignorant, buffoon of a fraud, keep lining up for even more horse-shit.
Posted by: Ginger Ale at July 23, 2011 06:27 AM (TN7KL)
Posted by: Rob in Katy at July 23, 2011 06:28 AM (PiTBB)
Posted by: GnuBreed at July 23, 2011 06:28 AM (ENKCw)
That is because after 1945 there was no "rest of the world" economically. When the rest of the world starting recovering in the mid 60 we started sliding back again.
A way of thinking about this is that the United States took on a huge debt, but also vastly increased our income at the same time -- in fact, our income increased manyfold over the size of the debt until 1970 or so, when the trend started to reverse (the growth of debt started to outstrip growth in income).
Remember: the size of the debt by itself doesn't have a meaning; it's the size of the debt relative to income that has meaning. There's a limit to how much income can go up at any level; when debt outstrips the top-end income-generating ability, insolvency can be the only result.
Britian is an instructive example. They were once the world's largest empire; they are now a smallish country with the same welfare-state spending problems as most other economies, with a moribund private sector, sickly banks, and a looming demographic crash.
Posted by: Monty at July 23, 2011 06:29 AM (FC+dS)
But what we need to remember is that money itself has no intrinsic value (especially fiat currency); itÂ’s a signifier for things that do have value (like your own labor, or some good or service). Simply printing more currency actually dilutes the total wealth of the nation; it does not add to it.
This is largely true, but not entirely true. In the end, money has value only because at least some portion of the population needs it to pay tax. There is no direct link between money and the stuff that exists, except for that fact. I need money to pay tax. I will therefore go to work to obtain money, either by selling things to the State, or selling to others who have. Money is spent into existence by the State (or created by the fractional reserve banking system). All money that is not obtained directly from those means is obtained by trading with those who obtain money from the state. All money is spent into existence, and then we circulate it among ourselves. When money is taxed, it effectively goes out of existence into oblivion from whence it came, and no longer exists. Tax receipts are an entirely notional concept, which we keep track of as part of the system for manageing the money supply.
When more money is "printed" you can not assume a 1:1 dillution rate, because there is no tie to anything real. As long as the productive capacity of the economy is heavily underutilized, the demand for dollars will remain high and the effects of spending will be greatly mitigated. If the 1:1 dillution were real, we should be seeing broad inflation as a result of the trillions of additional dollars spent into being by the State. That isn't the case. There are two things right now with increasing demand relative to dollars - food and fuel. Because that demand increase is relative to all currencies and not just dollars, those price increases are NOT the result of dillution of the currency, or at least not entirely. That is due to a reduction of supply and/or an increase in demand.
Further, it should be noted that our "debts" are denominated in dollars. Of which we really do have an unlimited supply except to the extent we choose to limit ourselves. Greece is not in this boat. Our debts are simply agreements to give someone more dollars later for removing some quantity of dollars from the system now. Greece has to pay its debts in things it can't produce - Euros. That was also true of Zimbabwe (dollar denominated debt) and Weimar (gold denominated debt). For us, our 'debt' really is nothing more than a conceptual number, and we manage that number only for the purpose of preventing a money supply problem that leads to inflation.
The good and valid reason to rein in government spending is that we want to limit the size and power of the state. Alas, even if spending is brought under control, we've already lost that battle. The state now tells us what we can eat and drink, whether we can smoke, what safety devices we have to wear, and what insurance we have to buy (that last one being the most recent). That is the bigger threat.
Posted by: Reactionary at July 23, 2011 06:30 AM (4nbyM)
alexthechick, did you ever watch Sex and the City? There was a classic couple of episodes when Carrie found out that her apartment building was going condo, and she looked around at other apartments and found out there was nothing remotely as nice as hers for the same rent, and she couldn't afford to pay much more than she was paying. So she applied for a loan to buy her apartment and got laughed at by the loan officer. Turned out she not only had almost no cash in the bank for a downpayment, but she had $40,000 in credit card debt and had been living paycheck to paycheck, thinking that as long as she was able to pay her minimum CC payments and rent she was fine.
I was disappointed that they resolved this by having Charlotte give Carrie her $30,000 engagement ring to make the downpayment and buy the apartment. It would have been a lot more realistic to have Carrie forced to move in with one of her friends and have to get a real full-time job.
Posted by: rockmom at July 23, 2011 06:30 AM (lSyyU)
Posted by: King Sovereign Barry at July 23, 2011 06:31 AM (FcR7P)
Posted by: Bald Ninja at July 23, 2011 06:32 AM (RSbF0)
Monty laid out an excellent explanation of how the financial system works for 99.99% of the world, however it does leave out the one exceptionÂ…. The top of the food chain.
If you borrow more than you can possibly repay, the lenders have options and means to compel you to turn over your assets to them in an effort to recoup whatever portion of the debt they can get. This works for everyone except when the debtor is the final authority that makes and enforces the rules.
What happens if the entity on top just says “fuck it, you lose” to the debtors? Where are they going to go for satisfaction? The U.S. is pushing the global reset button and simply saying all world debt (public and private) is null and void. Is China going to send the World Police to repo Yellowstone National Park? The U.S. is their major customer and the only hope for their economic future, so the only option, along with every other country, is to not only eat the loss, but to emulate the U.S., cancel all debt and continue as if nothing ever happened.
Imagine how wildly popular this action would be throughout the world.
Posted by: jwest at July 23, 2011 06:33 AM (qeYI9)
Posted by: Dave C at July 23, 2011 06:34 AM (2lf+r)
Posted by: USS Diversity at July 23, 2011 06:34 AM (Jyt+i)
That is because after 1945 there was no "rest of the world" economically. When the rest of the world starting recovering in the mid 60 we started sliding back again.
Posted by: Vic at July 23, 2011 10:24 AM (M9Ie6)
This cannot be pointed out often enough. How you can say that the American economy was great despite huge debt obligation when something on the order of 70-80% of the production capacity of our competitors had been literally destroyed (and some of it even atomized) is beyond me.
Obama 2012: Rise of the Nuke and Spend Democrats.
Posted by: alexthedude at July 23, 2011 06:35 AM (sUnsW)
No, I never did get into that show. I remember hearing about that episode though and didn't it turn out that she realized she had something like $100,000 in shoes? I vaguely recall people pointing out it could have been a great episode to point out the true opportunity cost of luxury goods until there was a Magic Fix.
Posted by: alexthechick at July 23, 2011 06:35 AM (sf+iw)
#88 I don't think Monty gave a "fiscal conservative view" of anything, he gave the FACTS. It is the liberals who are living in cloud-cuckooland and denying all of these facts.
I have a degree in economics and I honestly cannot understand how these liberals like Krugman can look themselves in the mirror. I've been saying for years that one of the real failings of our system is that economists cannot be prosecuted for malpractice.
Posted by: rockmom at July 23, 2011 06:36 AM (lSyyU)
Imagine how wildly popular this action would be throughout the world.
Because, you know, everything else about US is hugely popular. If we welshed, I think it would make us about even for a lot of shit.
Posted by: USS Diversity at July 23, 2011 06:37 AM (Jyt+i)
Posted by: Cheap Replica Dollas at July 23, 2011 06:38 AM (vwyaX)
I get into arguments all the time about what comes first: money or "wealth" (in the form of a larger economic output). My position is that wealth comes first, and drives the need for more currency, not the other way around. You cannot grow an economy by printing more money. The economy grows, and the demand for currency drives its production (classic supply and demand -- currency is a manufactured good, after all).
This is how things ought to work, any way, but sovereigns will persist in thinking they can create wealth out of thin air.
Posted by: Monty at July 23, 2011 06:38 AM (FC+dS)
At this point, the machines that make the printing presses for paper money are wearing out.
Posted by: Dave C at July 23, 2011 10:34 AM (2lf+r)
Well, prolly not. Paper money serves the people doing actual consuming of stuff. That's still way down, so there isn't much need for more paper money. That's part of our problem. So, worry not. The computers can handle the burden of moving electrons around just fine, and that where the money really comes from.
Posted by: Reactionary at July 23, 2011 06:40 AM (4nbyM)
Er...thanks...I guess....
Monty's posts -- just as good as Massengill's Medicated Douche -- and a lot cheaper!
Posted by: Monty at July 23, 2011 06:40 AM (FC+dS)
Of course, the elephant in the room right now is the VAT. It seems we are inexorably headed for one as we have clearly reached the top of the Laffer Curve in terms of revenues available from the income tax. (Though I do adamantly believe that our corporate tax system is extremely fucked-up and could throw off a ton more revenues if rates were dropped and the code simplified.)
Anyone who wants a good review of the Laffer curve and other related principles should try to find a copy of The Way The World Works by Jude Wanniski.
Posted by: rockmom at July 23, 2011 06:41 AM (lSyyU)
Posted by: Dave C at July 23, 2011 06:41 AM (2lf+r)
Posted by: t-bird at July 23, 2011 06:41 AM (FcR7P)
Posted by: Lord Humungous at July 23, 2011 06:42 AM (QK5lg)
To carry some shit that has no intent other than a free ride, and has no problem admitting that is becoming intolerable. Most especially when the ostensible intent of DC is to INCREASE that number, for the purpose of retaining power. I'm betting that the time is pretty near when those of us who are the carriers will say enough.
How that plays out is anyone's guess.
Posted by: irongrampa at July 23, 2011 06:43 AM (ud5dN)
Posted by: rockmom at July 23, 2011 06:43 AM (lSyyU)
Posted by: Lord Humungous at July 23, 2011 06:43 AM (QK5lg)
The whole field has gotten politicized, just like everything else in academia these days. If you read Krugman's scholarly stuff, he's much less ideological and hysterical. You wouldn't even know it's the same guy sometimes -- a lot of the stuff Teh Krugman screams about in his NYT columns are directly opposed to stuff he wrote years ago in his academic papers. Same goes for Brad DeLong -- a liberal economist whom I like, by the way, but who lets his leftist ideology override his economic common sense much of the time.
Economists as a class are very prone to feeling that theory overrides actual results. They consider their field a "science", when in fact it has much more to do with sociology and psychology than anything in the hard-sciences wing.
Posted by: Monty at July 23, 2011 06:44 AM (FC+dS)
Posted by: rockmom at July 23, 2011 06:45 AM (lSyyU)
Monty, one of my favorite economist jokes is an old one that says, the definition of an economist is someone who tries to find out if what works in practice can work in theory. ;-)
I studied monetary economics and that seems to be a field that isn't overcome with ideology. I took a class on fiscal policy at Harvard from Ben Friedman, who is a very liberal guy, but I didn't get a lot of liberal ideology. But guys like Stiglitz and Krugman just mystify me. I don't understand how a degreed economist can say stuff like government spending has a higher multiplier than private spending.
Posted by: rockmom at July 23, 2011 06:49 AM (lSyyU)
Posted by: Reactionary at July 23, 2011 10:40 AM (4nbyM)
My first read on this was the electrons word was really elections! With the ø and the Dems in charge, it works with both ways
Posted by: Hrothgar at July 23, 2011 06:53 AM (yrGif)
I have a degree in economics and I honestly cannot understand how these liberals like Krugman can look themselves in the mirror. I've been saying for years that one of the real failings of our system is that economists cannot be prosecuted for malpractice.
Posted by: rockmom at July 23, 2011 10:36 AM (lSyyU)
I do also, and it was interesting because neo-classical and Keynesianism were taught side by side and we were to argue the merits of each.
It was astonishing because the basis for most of the pro-Keynesians was that they believed it would lead to "more fair", rather than sound, economic policy. It really didn't matter to them that it would drag everybody down so long as the wealthy took a bigger hit.
One of my best professors was a Russian defector, a strident capitalist, who was actually shot when he jumped ship from the naval vessel he was serving on. God was he hated by the more left leaning students
Posted by: beedubya at July 23, 2011 06:53 AM (AnTyA)
I'd like to introduce you to the work of Milton Friedman
Posted by: beedubya at July 23, 2011 06:56 AM (AnTyA)
http://tinyurl.com/3r3g6zg
Posted by: Hrothgar at July 23, 2011 06:56 AM (yrGif)
I can't find that at NRO, are you sure that was where it was at?
Posted by: Vic at July 23, 2011 06:57 AM (M9Ie6)
Sure, they say it in op-eds. But I wonder if they'd say it in a peer-reviewed paper. I bet not. Oh, they might take five pages of academese to try to make the same point in a roundabout way, but ultimately they'd hedge the argument with conditionals and hypotheticals. In op-eds, they state these things as Received Truth. In short, they believe it, but at the same time they know it's a belief, not a fact.
To be honest, it's not just a liberal disease -- even giants like Friedman, Mises, and Sowell have their ideological blind spots (I just have a hard time seeing them because I have many of the same blind spots!).
I have come to think as I get older that the Austrian (as in economics school) of "first principles" is the only solution -- demystify economics, de-complexify it, so the average person can understand what the hell is going on. Finance doesn't need to be this complicated, neither at the micro level nor at the macro level. We've added complexity to the process without adding any real offsetting value. In fact, much of the complexity introduces great dangers -- as in the role of CDS/CDO (and other derivatives) in the subprime meltdown, for example.
Posted by: Monty at July 23, 2011 06:57 AM (FC+dS)
Posted by: Monty at July 23, 2011 10:38 AM (FC+dS)
It is true that the government can't spend real wealth into existence. But what it can do is soak up idle capacity with very limited effects on the rest of the economy. When more is spent into existence to buy what no one else needs or wants, that does very little to harm the value of the currency, since the private economy isn't being deprived of anything. And when the government doesn't shameless waste (it's normal mode) it is capable of making a few things that really do qualify as investments - durable and efficient infrastructure being among those things.
Well, I understand your point but my view is that people need to get rid of the idea that money and other forms of wealth are directly linked. Most of us were programmed to think that money had a link to something with value, and were never deprogrammed from that. Including the people running the government, it seems. I myself suffered that delusion a long long time - not consciously, but certainly unconsciously. Money is a commodity like any other, and it's only use is to pay our obligations to the state. How we get that is largely up to us, but we have to do it, directly or indirectly, by providing goods and services to the state, or to those who have done so. Only the US govt can make (real) dollars, and only real dollars satisfy my tax burden. I must have what only the state can make, and I will do what I must to get those dollars so that the men with guns don't come to jail me, enslave me, shoot me, or take all my other non-dollar stuff away.
All fiat money represents a credit against obligations owed to the issuing state. Nothing more. Taxes work like a reserve drain to keep the supply of money low enough that people need to get more to pay their obligation to the state, thus supporting demand for new dollars. "Borrowing" is nothing more than a tool for draining reserves of that currency now, in exchange for access to a slightly greater amount of reserves later, serving to satisfy the public demand for savings vehicles with high degree of safety, vulnerable only to inflation. And what should also be noted is that a balanced budget isn't possible in a fiat system without a deflationary death spiral. People need extra money to come into existence each year in order to save and to cover money lost or destroyed in the normal course of circulation. The only question is - what is the right SIZE of the deficit? A trillion $ is prolly too much...
Posted by: Reactionary at July 23, 2011 06:58 AM (4nbyM)
They're the same ones who argue that unemployment payments create jobs
Posted by: beedubya at July 23, 2011 06:58 AM (AnTyA)
Posted by: Dick "Shovel Ready" Obama at July 23, 2011 06:58 AM (/q/kQ)
Isn't it amazing of how now some of the most strident defenders of true capitalism are escapees from the communists.
Ayn Rand was just a few decades early.
Posted by: Vic at July 23, 2011 06:59 AM (M9Ie6)
Posted by: USS Diversity at July 23, 2011 06:59 AM (Jyt+i)
guess not..
Posted by: Dave C at July 23, 2011 10:41 AM (2lf+r)
No - it was solid Dave C. I got it. I just find myself stuck in "humorless preacher" mode sometimes...
Posted by: Reactionary at July 23, 2011 07:01 AM (4nbyM)
Thanks, he is saying some of the same stuff I have posting for the past few days. I am FOR a tax increase for those 51% that don't pay any income tax.
Posted by: Vic at July 23, 2011 07:01 AM (M9Ie6)
What's driving me crazy is the way the term "technical default" is being passed around. Technical default is when you are in violation of the terms of your loan, sort of like if you drop your home insurance when you have a mortgage outstanding.
In the case of a city or a sewer system, technical default means you've done something that endangers your ability to pay your debt and thus violated the terms of your contract with bondholders. It does not mean you have missed a principle or interest payment.
Talking heads are using the term "technical default" to mean when we actually do miss a principle or interest payment. And it is making me crazy.
Posted by: spongeworthy at July 23, 2011 07:01 AM (rplL3)
The mid 60's is when the US started to engage socialism in a big way. Lyndon Johnson's "Great Society" was the beginning of the end of capitalism in the US.
I don't deny that the US had a huge advantage over the rest of the world as it escaped WWII relatively unscathed, but we could easily maintained our lead if we stuck with what worked.
Posted by: RayJ at July 23, 2011 07:02 AM (LYiL5)
Posted by: PaleRider at July 23, 2011 07:03 AM (5CusZ)
We started engaging in socialism in a big way in the 30s. That is what put us in great depression 1.0.
Posted by: Vic at July 23, 2011 07:04 AM (M9Ie6)
Posted by: Vic at July 23, 2011 07:04 AM (M9Ie6)
Posted by: progressoverpeace at July 23, 2011 11:01 AM (G/MYk)
Well, that and the fact that the Greeks can't print money. As a result, they really do have "income." The US federal government just has a reserve drain. I'd also suggest that the Greeks have far less idle productive capacity than the US has. If people wants to start spending all those pent up US dollars sitting in their checking accounts, we'd see a rise in demand for US goods and a corresponding rise in economic output. Alas, that is not the case, in large part due to trade policy bent on freezing out US participation in their markets. And it's not just the Chinese. The Krauts are also masters of hidden, low-key trade barriers.
Posted by: Reactionary at July 23, 2011 07:06 AM (4nbyM)
Posted by: Vic at July 23, 2011 07:06 AM (M9Ie6)
yeah, Ron Paul's view resonate with a lot of people, especially young, stupid people, who we need.
It'd be smart for the GOP to embrace some of Ron Paul's better views on certain things.
Posted by: lolsoothsayer at July 23, 2011 07:08 AM (QxQJ6)
Posted by: C'ntessa Brewer at July 23, 2011 07:09 AM (FcR7P)
I also hold the working assumption that every single thing we've been told about China's economy is a lie.
Posted by: alexthechick at July 23, 2011 10:23 AM (sf+iw)
I thought boned was as bad as it gets, isn't spdb kind of like 'He's double dead, Jim.' ? My random thought of the day
Posted by: Red Shirt at July 23, 2011 07:09 AM (FIDMq)
The problem with taxing income is that the sovereign must define exactly what "income" is. Just try to do it -- it's notoriously difficult to do (even more so in barter or in-kind transactions). The definition itself ends up being a prybar the sovereign uses to increase revenues -- any time the sovereign needs more revenue, they change the definition of "income" to generate higher tax receipts.
The main limitation on kings and potentates in previous ages was not the desire to tax at maximum rates (the lust of the sovereign for more wealth is inexhaustible), but their ability to do so. Tax collectors tend to get waylaid and murdered when taxes skyrocket; more peasants flee into the king's woods and poach his deer; more soldiers desert; more nobles hide their gold and plead poverty.
Even with those problems, though, taxing income works in a high-growth economy because the income outstrips the pain-in-the-ass of collecting it. But as growth slows, the problems of tax collection begin to outstrip the income potential until it becomes no longer worthwhile. This is the essence of the fabled Laffer Curve.
Posted by: Monty at July 23, 2011 07:10 AM (FC+dS)
Posted by: progressoverpeace at July 23, 2011 11:06 AM (G/MYk)
Excellent points.
Look at how the spendulus was squandered. It could have done at least SOME good. Prolly not commensurate with its size, but some good. Instead it just propped up failed state governments for a while longer or went directly into the pockets of connected Democrats. Total waste.
Posted by: Reactionary at July 23, 2011 07:10 AM (4nbyM)
I'm in a dining area inside a library at one of the most esteemed universities in the world. And you wouldn't believe the shit I'm hearing.
They speak like children. And they spout all of the leftist/pc talking points.
Posted by: lolsoothsayer at July 23, 2011 07:13 AM (QxQJ6)
How about that.
Posted by: lolsoothsayer at July 23, 2011 11:10 AM (QxQJ6)
Yeah - weird. I came here hoping for a post. Maybe someone's writing one. I need the scoop. I heard on the radio is was "an anti-muslim fundamentalist" who did it, which sounds like BS.
Though if it was, I suddenly have mixed feelings.
Posted by: Reactionary at July 23, 2011 07:13 AM (4nbyM)
Posted by: t-bird at July 23, 2011 07:15 AM (FcR7P)
Bull! It is NEITHER good nor necessary for a sovereign to undertake the task of social welfare programs: it makes government the oppressor of the People rather than their protector, as it involves government agents seizing and "redistributing" (chiefly to government bureaucrats) the People's livelihoods. The essential and legitimate functions of government are police, courts and military to protect individual rights to life, liberty and property. Show me a government which goes beyond that, and I will show you a government which has become a systematic violator of rights to life, liberty and property. It is neither civilized nor moral.
Posted by: ILoveCapitalism at July 23, 2011 07:16 AM (yX8eO)
He and some other suspect, who is believed to work in agriculture (who had access to bomb-making materials) are described as "Norwegian fundamentalist-Christians with anti-Islamic views."
What's most strange, imo, is their choice of targets. If they're so darned anti-Muslim, why didn't they blow up/shoot up a mosque?
Posted by: lolsoothsayer at July 23, 2011 07:17 AM (QxQJ6)
Posted by: t-bird at July 23, 2011 07:19 AM (FcR7P)
... which should be practiced by the People, not by government. Government is a gun. What it does, it does by forcing people. The excuse (or the necessity) for government is that physical force must be removed from the People's day to day relations; it must be brought under the control of an impartial third party, namely government. That should be government's only task and focus, because a government which loses sight of it rapidly becomes itself the oppressor from which the People need defending.
"'Civilization' is just a word we use to describe the compact between an individual and the polity he lives in..."
You really think that is all it is? You don't know much about civilization then, do you Monty? Think harder.
Posted by: ILoveCapitalism at July 23, 2011 07:22 AM (yX8eO)
Rob in Katy, 82: Good example. Here's a similar one I like to use:
You own an apartment house. You have an asset (the house), you have debt (the mortgage), you have income (rent), and you have expenses (maintenance, taxes, heating oil, etc.). The house has radiators throughout; you pay for the fuel oil to keep those warm in the winter. Each apartment also has electric baseboard heaters, but the tenants never use those because that would go on their personal electricity bills. You don't mind, though, as you consider yourself a decent landlord and you advertise "heat included" for all the units.
Everything's good. The bank saw the numbers for the house and financed 70% on a low-rate, ten-year mortgage. You can easily make the mortgage payments and pay all of the house's expenses from the rent you collect.
Then, out of the blue, the price of oil doubles. You project your cash flow and foresee a problem. You solve it by going to the bank to refinance your mortgage. It's a 15-year loan this time, and the interest rate is a little higher, and it's for 80% of the house's value. You're a bit more in debt, but the numbers work.
The price of oil doubles again. You do something unpopular, but there's no getting around it: You raise rents. This helps, but there's only so much you can get for each apartment. Even if one tenant moves out, the reality is that there's a limit on how much any tenant will pay to live in your house. You're at that limit. It's a struggle to pay your expenses, so you refinance your house again. A 30-year loan will reduce your monthly mortgage payment, but it will take twice as long to get out of debt.
Oil goes up again, and you don't know what to do. You also realize that if this trend continues, the price of fuel oil alone will be more than all the rent you collect. You ask fellow landlord for advice. He suggests taking out a home-equity loan. You think about this: The extra cash will cover the bills, but the bank will own all the equity in your house, and your monthly payments on two loans will put permit you to break even over the course of a year, barely, maybe. In accounting terms, you'll in effect have no assets any more, an eternal liability, and income roughly equal to expenses for now. You're ready to accept this, but before you apply for the loan you seek more advice.
The next guy tells you to let your tenants heat their own apartments with the electric basebaords. You really, really don't want to do this because you've established decent, long-term, stable and workable relationships with your tenants -- except it's not really working any more. It's not your tenants' fault that they've had free heat for years. You didn't expect them to pay for that, and they didn't, and they've gown accustomed to free heat and have made their personal budgets accordingly. They'll be quite upset when you tell them the news that they're going to have to pay for their own heat. This is going to be very unpleasant for everybody, and you'd do just about anything to avoid this situation.
You figure that maybe, hopefully, you can get through the winter, and in the spring maybe (hopefully) the price of fuel oil will have gone down, or maybe (hopefully) some other circumsance, yet unforeseen, will arise and you won't have to have this conversation. So you decide to put it off and hope things get better.
Posted by: FireHorse at July 23, 2011 07:30 AM (gTGz3)
Posted by: toby928™ at July 23, 2011 07:37 AM (GTbGH)
That's the kind of "wealth effect" feeling one gets when the new paycheck has been cashed. Anyone who's worked in a bar sees it on Fridays, the guys who have a wad of cash in their wallets and drink till they fall down, buy rounds for everybody, order from the menu. Same with those who go shopping or to the clubs after the paycheck is cashed. This is very common in the feast or famine trades like commercial fishing and construction.
Jones and his comrades see a fresh wad of cash in the wallet and a nice balance in the checking account and figure we can splurge and be generous, worry about the bills when they come.
Baghdad Ben encouraged this thinking with the "wealth effect" of pumping up the equities and housing markets.
Posted by: kbdabear at July 23, 2011 07:38 AM (so1xa)
speaking of the economy...
Which phrase does CNBC use to describe the current US economy downturn?
a) Depression
b) Recession
c) Recovery
d) "soft patch"
Posted by: soothsayer at July 23, 2011 07:39 AM (QxQJ6)
Posted by: toby928™ at July 23, 2011 11:37 AM
I need YOU to get that second job. Everyone has to sacrifice you know, share the wealth, eat your peas.
Posted by: King Barry the Grownup at July 23, 2011 07:39 AM (so1xa)
Posted by: Vic at July 23, 2011 07:40 AM (M9Ie6)
That's a great point. Cash-in-hand is the most addictive drug there is.
Posted by: Monty at July 23, 2011 07:40 AM (FC+dS)
Posted by: Anachronda at July 23, 2011 07:42 AM (7qVXL)
Posted by: Monty at July 23, 2011 10:44 AM
DeLong wrote an unintentional comedy piece about how California is in great shape and will lead America's new boom. He's also a protoge of Jim Cramer.
Anything he says should be accompanied by a laugh track
Posted by: King Barry the Grownup at July 23, 2011 07:42 AM (so1xa)
To David Ayers
March 3, 1836
Take care of my little boy. If the country should be saved, I may make for him a splendid fortune; but if the country be lost and I should perish, he will have nothing but the proud recollection that he is the son of a man who died for his country.
William B. Travis (1809-1836)
The men who crossed the line in the dirt at the Alamo knew, when they stepped across it, that they were going to lose their lives, for the sake of the promise of a free republic.
At worstÂ… at worst the Republicans in Congress will lose their jobsÂ… in order to preserve a free republic. The choice seems easy, to me. Why not to them?
Posted by: jrg at July 23, 2011 07:49 AM (BkQvr)
Posted by: rockmom at July 23, 2011 07:52 AM (lSyyU)
Posted by: rockmom at July 23, 2011 07:56 AM (lSyyU)
What happens if the entity on top just says “fuck it, you lose” to the debtors? Where are they going to go for satisfaction? The U.S. is pushing the global reset button and simply saying all world debt (public and private) is null and void.
Imagine how wildly popular this action would be throughout the world.
Posted by: jwest at July 23, 2011 10:33 AMIt's a one shot fix at best, and it doesn't suddenly bring on austerity and common sense in spending.
Within a short time, the debtors would have to borrow again, you've ruined the people who lent to you before, and the only ones who are going to even talk to you will demand very high interest rates because you've already established that you're an ultra high risk who'll fuck over your creditors
Posted by: kbdabear at July 23, 2011 07:59 AM (so1xa)
I'm not sure that's a bad thing. Market discipline and all.
Posted by: toby928™ at July 23, 2011 08:02 AM (GTbGH)
Yep. I've been saying for a long time that Democrats will die on the entitlement hill because that's the only ideological core any of them have. Socialism is discredited, Marxism is a failure, the labor movement is moribund, and race- and class-division politics is fading in importance for most people. The Donks have nothing left to define themselves except being the guys who hand out free cash.
They are also, almost without exception, believers in the "And then a miracle happens!" theory of economics. ("Ask and ye shall receive", in biblical terms.)
Posted by: Monty at July 23, 2011 08:04 AM (FC+dS)
Posted by: kbdabear at July 23, 2011 08:08 AM (so1xa)
Posted by: Monty at July 23, 2011 08:14 AM (FC+dS)
Yep. I've been saying for a long time that Democrats will die on the entitlement hill because that's the only ideological core any of them have.
.....
They are also, almost without exception, believers in the "And then a miracle happens!" theory of economics. ("Ask and ye shall receive", in biblical terms.)
Posted by: Monty
I think that is a very instructive point. We are always insisting that our guys "die on this hill" to defend this or that principle. But that is, in essence, the foundation of the modern Democrat Party. Without that, they are nothing. So yes, while some of the Republicans are indeed looking for a rationale way out of the mess, the core of the Democrat party (and the "moderates" pretty much got un-elected in 2010) will die on that hill. And burn the country down in the process, in the idiotic self-deluding rationale of "fairness". Or vote-buying, take your pick. 
They fully expect some miracle to save them, some new sacrifice to be offered up, some new target of their fiscal cannabalism to be manifested. It's "the rich", corporate jets, "Big oil" and on and on and on.
Posted by: Reader C.J. Burch writes... at July 23, 2011 08:28 AM (sJTmU)
Posted by: rockmom at July 23, 2011 08:34 AM (lSyyU)
Posted by: Islamic Rage Boy at July 23, 2011 09:14 AM (e8kgV)
If B+rry is queer then his name is enshrined in Commiefornia school textbooks for all time.
Pederasty is cool in California schools.
Posted by: torabora at July 23, 2011 08:37 AM (eoej+)
Yep. I've been saying for a long time that Democrats will die on the entitlement hill because that's the only ideological core any of them have.
That's why Richard Miniter's piece on the pending implosion of the Democratic Party is so important. Peter Ferrara riffs on this as well in the AmSpec this week. We are witnessing the End Times of liberalism, if we can just hold fast and stop bitching at our own leaders. Barack Obama may well turn out to be not the modern day FDR but the new Gorbachev. For a while, Gorbachev rode high as the new face of Communism, but eventually the rot forced him from the field and once the people got a taste of feedom and capitalism Communism died a quick death. Socialism is dying all over Europe as it becomes clearer that there isn't any more Other People's Money to spend. Greece is already in the death rattle.
Posted by: rockmom at July 23, 2011 08:39 AM (lSyyU)
Posted by: Monty at July 23, 2011 08:52 AM (FC+dS)
Posted by: curious at July 23, 2011 08:56 AM (k1rwm)
Posted by: The Adult in the Room at July 23, 2011 09:00 AM (gTGz3)
Posted by: The Adult in the Room at July 23, 2011 09:03 AM (gTGz3)
It's another failure of the public schools in this country -- people are terribly ignorant about even basic concepts of economics. Even many rock-solid conservatives I know are blank slates when it comes to very basic economic knowledge...and these are smart people, engineers, teachers, one a commercial chemist.
Our economic woes are in part tied to our failure to learn from past mistakes, and in teaching children to think in terms of what should be (by liberal lights) rather than what is. The citizens of this country have become disconnected from the actual levers that make the world move.
Posted by: Monty at July 23, 2011 09:07 AM (FC+dS)
Posted by: The Adult in the Room at July 23, 2011 09:09 AM (gTGz3)
One of the things that always irritated me about Scientists, and economists... is that they take fairly simple concepts.... wrap them in Big words... then say us poor unedumactated folks don't get to have an opinion, because we don't use their words...
Yet when you look at the base principles, they, like physics, are pretty simple.
Thanks for the Explanation, in English....
Now, if you could just do one to send to the Politicians... explaining the TANSTAAFL Principle? (There Aint No Such Thing As A Free Lunch).
Posted by: Romeo13 at July 23, 2011 09:14 AM (NtXW4)
What frightened me so much was that what I know to be fact, they were disputing. And, they were visibly angry with me for even discussing the subject. They don't want to know. On guy said "so it's a little tough now but we'll get over the hump and things will get better. It's the republicans who are sabotaging the country so we can't get out of this and, in the mean time, I'm replacing every bathroom in my house dirt cheap, so what's wrong with that". this was the point at which my friend realized the lynching mentality was in the air and that I should just shut up and leave the store. I literally started to cry when we got to the car and I'm not going to ever make fun of boehner again for crying. If this is what he constantly hears, no wonder he's crying.
Posted by: curious at July 23, 2011 09:15 AM (k1rwm)
My usual response to this kind of thing is, "Wishful thinking is not a plan." (It's also a good example of the "And then a miracle occurs!" theory of economics.)
Posted by: Monty at July 23, 2011 09:19 AM (FC+dS)
My usual response to this kind of thing is, "Wishful thinking is not a plan." (It's also a good example of the "And then a miracle occurs!" theory of economics.)
Posted by: Monty at July 23, 2011 01:19 PM (FC+dS)
Deus Ex Machina School of Economics?
Posted by: Romeo13 at July 23, 2011 09:28 AM (NtXW4)
Posted by: davisbr at July 23, 2011 09:33 AM (uCShA)
Posted by: SFGoth at July 23, 2011 09:38 AM (m6PIT)
the "And then a miracle occurs!" theory of economics
... except the Republicans keep saying No to the miracle.
/not sarcasm, sadly.
Posted by: FireHorse at July 23, 2011 09:40 AM (gTGz3)
In AoSHQ shorthand, you can say it this way:
Illiquid: You're broke. Bush's faultInsolvent: You're boned. See above
Posted by: Pezident Tittybaby at July 23, 2011 09:49 AM (F2lG1)
Posted by: rockmom at July 23, 2011 09:57 AM (lSyyU)
Posted by: curious at July 23, 2011 09:58 AM (k1rwm)
...we can raise our “income” any time we want by printing currency...
Or, for the average citizen, taking out a "debt consolidation loan" or "payday loan"
It used to be only a stupid joke, but you actually CAN pay the Veeza with the MassaCard. Crap, the banks even bombard cardholders with mailings encouraging them to do just that.
No wonder we're boned! (But you'll know it's really bad when the pawn shops start folding.)
Posted by: stillwater at July 23, 2011 10:19 AM (0GpN4)
Posted by: I'm in a New York state of mind at July 23, 2011 10:28 AM (4sQwu)
Exactly. And Statists intentionally bastardize the Constitution in this instance to "promote the general welfare."
By the way, nice summary, Sir DOOM.
Posted by: AnonymousDrivel at July 23, 2011 10:34 AM (r4t7/)
I thought Fox was going to recalibrate yesterday when even Chris Wallace got down on Obama. But no, the weekend F&F came back with Superbama can do no wrong and evil Boner will not negotiate.
And every newspaper I looked at this morning was the same way. The most childish petulant address by a President in modern times and they all masticated his ball.
Posted by: Vic at July 23, 2011 10:35 AM (M9Ie6)
Well it makes perfect sense to me. And I'm Scrantonese.
Posted by: Joe Biden at July 23, 2011 10:36 AM (r4t7/)
What a great post, it explains clearly why we are heading for hell in a handbasket. Turning things around is going to be very interesting considering how many people don't see the current state of affairs as a problem, or don't care.
Posted by: Boots at July 23, 2011 10:37 AM (neKzn)
You're taking the difference between illiquidity and insolvency and drawing a bright line between them, but there is an unspoken assumption in there regarding time. For illiquidity, you say, "I have the income to cover the obligation, but I donÂ’t have it at the moment the payment is due." For insolvency, "In fact, given my prospects, I will never have enough to pay my debts." Both of these imply a certain time scale -- the income will happen before you're dead; you won't have enough before you die.
But governments have no such limitations. For them, they can merely posit that citizens as yet unborn can be coerced into funding the scheme using taxes that don't exist over transactions that may never happen. They can turn fundamental insolvency -- income 60, outgo 100 -- into mere time shifting -- "we'll run deficits today, but extend that tax for another 50 years".
At least they can until someone calls, "bullshit".
For humans who grow old and die, there is a bright line. Home mortgages run for 30 years because that's about as long as a private obligation can reasonably exist. For governments, however, there is a field of grey fog that fades off into obscurity.....with a huge invisible pit somewhere in the middle labeled "credibility". The reason that Dems could successfully run up another $6T in debt over the last couple of years was because they gambled -- correctly -- that they could run out into that field. Now, there's not so much unexplored field left.
Posted by: cthulhu at July 23, 2011 10:47 AM (kaalw)
44 Growing up poor teaches people life lessons that growing up rich (or middle class) does not. Now we are going to get a taste of austerity whether we like it or not. For those of us who have experience at being poor, it won't be as bad, but for those of us that has never known austerity, it will be like torture.
Oh how true!! I grew up with g-parents who raised their own children through G-Depression #1, and for the rest of their lives they lived frugally. Why? Because in their minds you could never know when the next G-Depression would start so why be wasteful.
They suffered through decades of austerity, making do, putting up fruits and vegetables in the fall, saving their pennies and shopping at stores that gave out S&H greenstamps so they could get stuff they wanted for "free".
Posted by: Boots at July 23, 2011 10:51 AM (neKzn)
Well it makes perfect sense to me. And I'm Scrantonese.
Posted by: Joe Biden at July 23, 2011 02:36 PM (r4t7/)
Is there another way.
Posted by: John Maynard Keynes at July 23, 2011 11:26 AM (k1rwm)
Meh. Okay, that was pretty compelling (and DOOMY!) *swoons* but in what way, is it different from Oblahblahs, understanding of economics?
I just envision him and all of his Czars, doing their best to nail -down the circumference of the pie, so as to slice it up, the way they see fit.
Even in this economy though...
It can't be constrained!
I'm still gonna offer my *not fucking, Rocket-Science!* services, to whomever will pay me.
Sure, we went through a dip, where NO-ONE was paying people like me to do what we do, and I think that 30 hours per week, at $11 per, is pretty fucking insulting, at this point in my "career" but I'll takes it!
I have no other, viable option...
I'm a nibbler...
I like to nibble around gigantor corporations and see what they do, and how they do it...
Someday, I'm gonna go back to school, and get a Masters in Accounting or sumpfin so's I can larn how to watch this dance more closely.
Not now, though...
I'm too busy paying bills and forwarding the goals of a multi-national food corporation with my "boots on the ground", "store presence"!
"No man, I'm serious!! You gotta look at this sell-sheet, and build me a display! NAOW!
"Deety, you were ALWAYS "serious", especially when you had to 'enforce" Corporate Mandates, that's why we love you!!"
"Meh, I'm not from Corporate now, but don't you know, that I -still- pick and choose my stores, based apon their ability to Display and Move certain items?"
"Are you saying, you went easy on us?"
"Oh, hellz no! This store? If a mandated display weren't there,when I was supposed to check, I would effing BUILD IT MYSELF!!
"Did you build missing displays in ALL our stores?"
"Ehrm, no." *tiny squeeky voice* Some stores, weren't worth it, Sir... I just dinged them for non-compliance, and moved on ...
"So you were giving us special treatment!"
"Uhm, yeah. Sorry, but your location and clientele can take it!!!"
"So, you want me to help you put up diplays for your NEW client? Who is not Corporate?"
"That about sums it up, Sir."
"When did I become a "Sir"? Stop that!"
"You became a "Sir" once I left the company that let me boss you around, Sir. It's been almost 2 years now..."
"Yet, you kept on BOSSING."
"Well, why not? Seemed more efficient, honestly"
"Hah! You are funny, Deety! Don't ever tell another Store Mngr. this! They will hate you!"
"Yep, I figured that."
"So, your new Company wants a display, and YOU, DEETY think that this is the store to do it"
"Uhm, Yep. 'Bout sums it up, Sir..."
"Do what you will! Side stacks,pallets, 3-tiers...Get some of these boys to help you with the heavy-lifting!"
"SRSLY, Sir?"
"Yes, seriously. You wouldn't place a display in my store for no reason and Stop calling me Sir! It's creepy!"
"Okay, Mister!"
Posted by: Deety at July 23, 2011 11:32 AM (pGciH)
Posted by: curious at July 23, 2011 08:57 PM (k1rwm)
However, just as there is a difference between insolvent and illiquid - there is a difference between Deficit and Debt.
The Deficit is the difference between amount of money the Federal government takes in as taxes and the amount that it spends - provided that the tax revenues are smaller than the amount that the government spends. If the government spends less than it takes in as taxes it has a budget Surplus.
Debt on the other hand is incurred when it collects currency from an external source and agrees to pay that source back that amount of currency plus interest. An example of Government debt is US Savings bonds. Assets are increased by the amount of debt sold. Liabilities are also increased by the amount of debt sold plus interest. Because of interest it is obvious that incurring debt causes a long term trend toward insolvency of the government.
Please note that Debt has nothing to with Deficit. It is quite possible for a government to incur Debt while running a budget Surplus.
If you have a hard money system (gold standard) the sum of tax revenues plus the money acquired by the government in the form of new debt plus the sale or acquisition of hard money Assets owned by the government must equal government expenditures.
Example: the government takes in one billion dollars in taxes (gold). The government issues one million dollars in new debt (gold taken in for government bonds). The government spends 800 million dollars during the same fiscal year. Thus the government runs a surplus of 300 million dollars during that fiscal year. At the end of the year the government assets on hand are 300 million dollars greater than they were at the start of the year. In a addition government liabilities have increased by 1 million dollars (the new debt taken on) plus interest.
Conversely if tax revenues plus new debt are less than government expenditures the government has a decrease in assets by the amount that the expenditures are larger than the gold flow into the government. The government is physically unable to spend more money during a given year than it has in the form of tax revenues, new debt, and assets - because it simply does not have the physical gold to do so.
This is straight forward and hopefully completely understandable.
However a fiat money system behaves differently than a hard money system.
The critical difference is this: in a hard money system - money in possession of the government is an asset, in a fiat system money in possession of the government is not an asset.
Because of this fact governments simply burn whatever fiat cash they bring in as either tax revenues or new indebtedness since they are not destroying an asset to do so. The government can simply print new money to replace what ever it burns because the new money it prints is also not an asset while it is in government hands.
While a hard money government can become insolvent a fiat money government (which prints its own currency) can technically never become
insolvent. What can happen is that there can be runaway inflation of the currency which causes its practical value to fall to a very small amount. This happened to the Continental Congress during the revolution (Hence the phrase: not worth a Continental) - as well as to the Wiemar Republic in Germany after WWI.
There is a corollary to the fact that fiat money possessed by the Government is not an asset; borrowing by a fiat money government does not increase the Government's assets. Borrowing money by a fiat money government does not allow it to pay bills any better than the Government would have been able to pay the bills without the borrowing.
That last is a key point that conservatives miss. The Liberals are running a flim -flam con on conservatives who don't understand the critical differences between a hard money system and a fiat money system. The Liberal flim-flam is to set the new debt every year equal to the deficit - as it would have to be in hard money system where the Government had no assets. Why are they doing this? Because to Liberals the US is the worst country that ever existed and they want it destroyed.
If we keep piling up debt we will be.
Posted by: An Observation at July 25, 2011 07:26 AM (ylhEn)
I am not interested in listening to a bunch of quibbling. Here is the dictionary definition of Quibbling:
"To attempt to evade the truth or importance of something by raising trivial exceptions and distinctions."
Left wing academicians have taught their students that Quibbling is acceptable - it is not and is destructive intellectual discourse - for all the reasons that left wing academicians want intellectual discourse destroyed.
Posted by: An Observation at July 25, 2011 07:52 AM (ylhEn)
Example: the government takes in one billion dollars in taxes (gold). The government issues one million dollars in new debt (gold taken in for government bonds). The government spends 800 million dollars during the same fiscal year. Thus the government runs a surplus of 201 million dollars during that fiscal year. At the end of the year the government assets on hand are 201 million dollars greater than they were at the start of the year. In a addition government liabilities have increased by 1 million dollars (the new debt taken on) plus interest.
Posted by: An Observation at July 25, 2011 08:27 AM (ylhEn)
Posted by: facebook at July 26, 2011 12:59 AM (AoXGj)
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This will help me explain this mess to my daughter, who is FINALLY understanding what the conservatives are upset about.
Thanks!
Posted by: Miss Marple at July 23, 2011 05:08 AM (Fo83G)