Everyone should know by now that the Treasury Department can borrow money at historically low rates. That is a major reason why some very smart economists think that the federal government should borrow more money in the short term (i.e., this year and next) and use that money to boost economic growth.
In the medium term (say, the next decade), however, the big question is how long we will be able to finance new government borrowing at such low rates. Today's low rates are a product of several factors. One is certainly the slow rate of economic growth, in particular the depressed housing market, which has reduced demand for credit. But another factor is the Federal Reserve's aggressive moves to keep long-term interest rates down; another is foreign central banks' appetite for Treasuries.
John Kitchen and Menzie Chinn have written a new paper (pre-publication version here) that attempts to disentangle these factors, which Kitchen summarized in a blog post. They show the large and growing role in the Treasury market played by the foreign official sector:
Kitchen and Chinn also measure the impact of purchases by foreign central banks on interest rates. They estimate that as those central banks increase their holdings of Treasuries by 1 percentage point of potential GDP, long-term interest rates (measured as the spread between 10-year and 3-month rates) fall by 0.33 percentage points. Since the Federal Reserve is expected to reduce its balance sheet as the economy recovers, if foreign holdings of U.S. government debt simply remain at current levels (as a share of GDP), they expect that 10-year yields would climb to 7.9 percent by 2020--rather than 5.4 percent as forecast in the CBO's baseline.
The underlying issue is that interest rates have been kept low in part by increasing foreign holdings of Treasuries; so to maintain those low rates, we need foreign central banks to continue buying more and more Treasuries, which cannot go on forever. The policy problem is that we don't want to overreact and shift to austerity prematurely (that is, while we can still borrow money cheaply), but we don't know how long foreign governments will continue increasing their Treasury portfolios.
The current privileged status of U.S. dollar debt is a recent phenomenon, which we describe in chapter 2 of White House Burning, and one that is by no means permanent. This is a major reason why we think that it is important to begin reducing structural deficits during the next decade. And that means we need to have an alternative to the scorched-earth policies of austerity (and tax cuts!) being pushed by Republicans and by a growing number of self-proclaimed centrists.
James Kwak is the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd. This post is cross-posted from The Baseline Scenario.
Follow James Kwak on Twitter: www.twitter.com/baselinescene
You say we must begin to reduce deficits in the coming decade. Why? Why not pay for deficits with Greenbacks rather than by increasing debt?
True, there is an upper limit – we will see inflation once full employment is reached. But why not incur Greenback-financed deficits till then?
They would be tax-and-Greenback funded balanced budgets.
You are getting close here to hitting the nail on the head.
Mr. Kwak is out in economics la-la land.
The debate NEED not be about the balanced budget.
The debate NEEDs to be about a scientific paradigm change to our view of money.
Nobelist Frederick Soddy discovered the ponzi-nature of our money system, calling it a 'confidence trick'.
Rather than trying to make the budget work, we NEED to make the money system work.
How?
We need to separate "DEBT" from "MONEY".
Money is the national circulating media that provides the grease for the exchange of the goods and services we produce and consume - in the national economy.
Scientifically, there is no reason for money to be created as a debt.
As soon as Mr. Kwak and the other quasi-progressive econs see the monetary light, they will realize that the "confidence trick" nature of debt-based money is an unnecessary fallacy that has driven the quasi-science of economics for 150 years.
The Bill to introduce the Greenback balance to funding our government budgets is available right here.
http://kucinich.house.gov/UploadedFiles/NEED_Act_FINAL_112th.pdf
Thanks.
Please real the following for an easy to understand explanation of our modern monetary system.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
then add more tax cuts for the rich....everything will be awesome....
Just sayin . . .
And so it was in 1970. We were a national economy. We are now involved with a global economy where central banks of foreign surplus trading partners have monetized our debt (Treasury notes) to suck up their respect trade surplus'. When the dollar is no longer the reserve currency and all those obligations are sold by foreigners, then.... the dollar tanks like a Latin American currency and the problems of Greece will look small in comparison. The global economy will take a global currency and that does not exist.
"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." Thomas Jefferson
"Give me control of a nation's money and I care not who makes it's laws" — Mayer Amschel Bauer Rothschild
26% by forign goverments....and that % has been rising greatly...
But if you quit saving, need money, borrow from yourself, then how can you afford another 4%. You can't. So you either don't repay it, or as our government does, borrow even more, often from "ourselves".
Eventually the bill comes due. In the case of retirement, you have nothing but an IOU for the money you borrowed years earlier. This is exactly what has happened to Soc. Security. Come to find out, money loaned to a bum is lost money, even if that bum is ourselves.
1) There is no evidence that a government borrowing and spending private investment capital creates economic growth.
2) The current low interest rates are an anomaly caused by the growing insolvency of the EU and will sky rocket after another 2-3 years of $1.3 trillion budgets.
Stop the madness and stop it now.
BTW, you can invest capital in debt or equity.
lol.....
Infrastructure is a long term enhancer of existing private GDP that takes years to pay off the original investment.
Apples and oranges.
Liberals have no clue about economics. This was a pretty good article for HP standards.
Of course, we will need to pay for all of this. Much, if not most, of the money to pay for it should come from increased revenues generated by the improved economy. Other money can and should come from (1) reducing the DOD budget to its pre-9/11 levels, (2) going back to the pre-Reagan income tax structure, adjusted for inflation, and (3) following the lead of all other industrialized countries by adopting either a national health care system or a single-payer health care system.
The only good news is that we are still large enough that we will drag the entire Western World down into Depression with US. Hurrah?
For states (income = taxes + debt) = (expenses + savings) and for USA, a creator of money,
(Federal Deficits = Net Private Savings+ net imports), which is quite different. States have to balance the budget all the time. USA, the money creator has to be in deficit to keep the economy alive, the more the deficit the better. This implies all govt debt must be equal to cumulative private wealth. It is actually true as shown in
http://pshakkottai.wordpress.com/2012/02/27/national-debt-and-national-wealth-compared/
Govt deficit leads to private wealth dollar for dollar!
The debt limit debate which stopped useful activity in Congress for quite a while was all kabuki.
The budget equations are the ones that the treasury departments, federal reserve use except it seems to be totally unknown.
Now I ask why should the (national govt debt / GDP) be limited to 100% when it means exactly a limitation of (national people wealth /GDP) to 100%?
Professors of economics are also propagating the big lie!
The plot is a fact which actually follows from the equation of balance (the accounting identity):
(Federal Deficits = Net Private Savings+ net imports) by summing over all years. If you don't believe this data you find a new explanation! The data stands on its own merit.
http://bilbo.economicoutlook.net/blog/?p=3773 "Zimbabwe for hyperventilators"
http://bilbo.economicoutlook.net/blog/?p=13834 "Printing money does not cause inflation"
http://bilbo.economicoutlook.net/blog/?p=17006 "Wir wollen Brot!"