The General Economics Thread

Mostly that nobody will want to lend to you in future is the big one.

Though even that doesn't apply to monetary policy if you issue currency, so... as long as faith in your economy doesn't go out the window, it doesn't matter?

Edited by RainehDaze on Mar 17th 2020 at 7:25:15 PM

By destroying debt, I mean paying it off and then not issuing any more. Sovereign debt takes two forms: cash, which can be used as currency; and bonds, which can be redeemed for some amount of cash in the future.

Let's say I'm a bank that issues its own currency. I give you $100. That represents an obligation that I owe to you. You can present that $100 and expect something of value in return. I can have all the cash I want; it is meaningless, since I can't pay myself to buy things from myself. So if I want to reduce my obligations, I destroy cash once it circulates back to me. On the other hand, if I want to increase liquidity (free cash) in the economy, I issue more of it and give it to people, at the risk of causing inflation.

Bonds work in a similar way but don't actually create new money. In that way, they act as a buffer against inflation. They also let people save their excess cash in a form that is guaranteed not to lose value. I take cash that people want to save (typically those with a lot of money), give them a bond saying they can have it back later, then use that cash to pay for something else, such as schools, roads, or armies.

The same logic applies: debt that I hold in my own hands has zero value. It only has value if it's circulating: if someone else has it. When I pay down debt through surplus revenue (tax or other income), that debt no longer exists. Nobody has lost anything.

Technically, the Federal Reserve could create as much cash as it wants, ex nihilo. That is its sovereign prerogative under the Constitution. However, Congress has set limits on the amount of currency that can be in circulation at any one time, as well as on the amount of national debt that can be outstanding at any one time. These are bad ideas, but that's a whole other topic.

Edited by Fighteer on Mar 17th 2020 at 3:37:21 PM

So that means that a country can effectively have a debt to itself?

Personally, I hope that legislation that gives out $1000 passes because Voltron 64 needs to upgrade his PS 4 to a PS 4 Pro to match his new UHD TV.

More brief summary: all money in circulation represents government debt. Take more taxes than you spend, less money. Spend more than you take, more money. Inflation and deflation change how much that money is worth in relation to goods and the rest of the world. Oversimplified but better than a household budget analogy.

And because the Federal Reserve is kneecapped the US government is intermittently at risk of not being allowed to make more money even though it could.

Yes. In fact, the United States government is the single largest holder of Treasury bonds, held by the Federal Reserve itself and by the Social Security trust fund.

Another fun debt myth is that we are "running up the credit card for our children to pay off". This is completely false; in fact, it's one of the most deceptive and destructive ideas about the national debt ever put forth.

The simplest thing to remember is that every dollar in debt is offset by a dollar in assets: that asset being a bond with a specified maturity date. When the government pays cash to settle that debt, the cash enters the economy and can be used for whatever. When the government issues debt, it is given cash, which is then paid out into the economy. The total amount of money remains the same. National debt has zero effect on the money supply.

Now, there is some truth to the idea that the bulk of the debt in private hands is held by wealthy individuals, mutual funds, and corporations. So the act of paying that debt off would make rich people slightly richer (in cash, not in net worth, since the bonds are themselves assets with a face value equal to their value at maturity). The point of having debt in the first place is to siphon off capital wealth and redirect it towards stuff the economy needs.

This is the concept of "fiscal multipliers": a dollar in the hands of a rich person won't generate as much total economic activity as a dollar in the hands of a poor person, because the poor person will spend it rather than save it, and that spending is someone else's income, who then spends it, etc., and all of that spending gets taxed for more revenue that can be itself spent or used to pay off the original debt.

Edited by Fighteer on Mar 17th 2020 at 4:07:30 AM

Yeah unless your country is going into debt to another country it doesn’t matter if you technically owe a private company money, one you can always just print money to pay them, two you can just turn around and tell them to get stuffed.

They can’t seize your stuff the way a credit card company can (a private company owed money by the Argentinian government once tried to seize a navy ship, they failed), so a governments debt is never comparable to private individuals debt, because there is no collection mechanism against a government and because a government never retires and stops earning the way a private individual does.

To correct you slightly, a sovereign government refusing to honor its debt would be a very bad thing, because the bedrock of the whole monetary system is confidence that the government will repay debt. The literal reason that T-bills are considered so safe is that the Federal Reserve has never failed to honor them, not once. Take that away and we will have a sovereign debt crisis, because the U.S. will suddenly become regarded as a deadbeat.

This is the sheer, mind-boggling folly behind Trump's (thankfully brief) flirtation with the idea of intentionally defaulting on the U.S. national debt a few years back.

Edited by Fighteer on Mar 17th 2020 at 4:17:36 AM

And to think that there are people who want Trump to run the country like an actual private business.

Well the US federal government doing it would be a huge thing globally, smaller economies get away with it every now and then, though it causes them great difficulties for a long time afterwards. It’s far from a good thing.

But even and it’s worst, nobody turns up and takes their stuff, which is what would happen it any of us defaulted on our debt.

This is exactly true, and yet a lot of people don't get it. Those scares we had a while back about China "calling in our debt" and repossessing the United States or something, that led to such delightfully bad games as Homefront: The Revolution, were based on fundamental (and possibly intentional) misunderstandings of how sovereign debt actually works.

If we don't pay our debt, China goes bankrupt ^note (or would have; it's diversified a lot recently, in part thanks to the threat of U.S. default). And then the world enters a global currency trade crisis, likely leading to a Great Depression, and nobody trusts us ever again.

Edited by Fighteer on Mar 17th 2020 at 5:28:16 AM

Well, it's a little more complicated than that. The implication of debt that rises faster than GDP is that there is a restriction on the money supply, and with it the risk of deflation. Were prices to fail to rise fast enough, wages would also eventually stagnate, and GDP growth would also decline. If this situation lasts long enough, unemployment and bankruptcies would eventually begin to rise. Artificially restricting the money supply acts as an artificial limit on demand, which cant catch up with supply. This provides the kernal of truth behind the common Republican/conservative claim that high debt "suck the money out of the economy", but of course the US is nowhere near this situation. At worst, Trump's borrowing policy will is that wages, employment and GDP growth will be lower in the immediate future than they otherwise would have been. That isn't a catastrophe, but it's esp. hypocritical for the Republicans to create a large debt, then blame the Democrats for not maintaining a balanced budget.

Reducing debt implies more money in circulation, which would tend to expand GDP provided that the money supply doesn't increase so fast we experience inflation. If prices were to rise faster than GDP growth, it would leave wages behind, consumption would decline, people get laid off, and eventually we get a recession. As you can see, the government (mostly in the form of the Federal Reserve) plays a delicate game in which these various forces are held in a balance.

The coronavirus epidemic threatens to cause a recession because demand is falling as people stay at home and spend less money. My concern is that the stimulus spending that the Trump administration is now suggesting (huh, stimulus spending never works unless a Republican suggests it) won't help the economy as much as it otherwise would, because the pandemic will restrict spending no matter how much money people have. This is not an argument for not providing assistance to people who are esp. harmed by the pandemic.

The pandemic will likely peak by early summer, so the economic effects should be temporary, unless Trump does something really stupid, like not getting the testing kits out in time, or encourages states to end their business shut-downs too soon.

Did you know that stock buybacks were illegal until 1982? It's true. The SEC, operating under the Reagan Republicans, passed rule 10b-18, which made stock buybacks legal. Up until the passing of this rule, the Securities Exchange Act of 1934 considered large-scale share repurchases a form of stock manipulation.

Makes the airlines even more reprehensible.

I'm not sure that demand will recover fully even after the pandemic peaks, since people will still worry about getting the virus from travel or from large public events.

As to the airline industry, maybe a new administration could take advantage of the crisis to push for more sustainable alternatives, like the Obama administration did with renewable energy after the banking crisis.

From CNN's First Move: "We're in a state of war" and "into the breech once more" in reference to the stock markets.

Well, thats not encouraging.

I also heard depression era unemployment fall. The mood is decidedly grim.

There is also talk about closing the markets altogether.

Edited by Redmess on Mar 18th 2020 at 2:11:26 PM

There are a number of risks with closing the markets, including the inability of people who depend on stock-based income (retirement accounts in particular) to get cash out. While the precise social situation may be somewhat unique, the economics are straightforward. If commerce in general dramatically slows down, there will be a global liquidity crisis. This will cause a cascading string of failures and bankruptcies, starting with the most vulnerable individuals and businesses.

Unlike past crises, however, the playbook for governments to respond is written down and well understood. The major obstacle is not knowledge, but ideology.

Looks like the Dow is in for another limit down breaker.

Market Watch has an article on the history and merits of market shutdowns.

Paul Krugman weighs in on Twitter about the sudden spike in corporate bond rates. This is a very bad sign because it means that the all important credit markets may be starting to seize up as panic sets in about liquidity.

This is bad. Like bad, bad. We could be looking at a complete meltdown on Wall Street if serious intervention doesn't happen soon.

You mean a worse meltdown than what's happening now? Yeah, that seems pretty bad indeed.

Selling stocks is just moving money around. Sure, it's bad for grandma's retirement income, but in the overall scheme of the economy it's largely meaningless. I've discussed this repeatedly in the past, and don't feel like doing so again.

However, a liquidity crisis among financial firms is a big deal, because it could trigger a cascading series of bank failures, much like we saw in 2008. That was the real start of the Great Recession, not the housing market imploding.

I have a question for you guys.

Why does the stock market value of a currency go into a nosedive if the government declares measures to keep both companies and populace from going bankrupt due to the current pandemic's containment measures? Isn't said measures supposed to be a good thing by keeping the economy going?

My guess would be that that is because it is either unclear what and if measures will be taken, or that people do not trust these measures to be effective.

Plus the measures haven't actually passed.

In that case I'd say it is low confidence in the bill actually passing.