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Arnold Kling

Lenders and spenders: Confronting the political reality of debt

It gets worse.

Many of the securities that the Fed has acquired are long-term bonds and mortgages. As inflation and interest rates increase, the value of these securities plummets. (A bond that pays 2.5 percent interest loses roughly half its value when market rates rise to 5 percent.) In this scenario, the Fed will be incurring losses, which will require a subsidy from the government budget. Thus, the challenge with balancing the budget gets even more difficult.

Another term that economists have coined in the context of government debt is “sudden stop.” What that means is that when all other sources of lending have dried up and the public’s tolerance for hyperinflation has been exhausted, the government must suddenly balance its budget. That is how government debt crises typically end. At that point, the irreconcilable expectations of Lenders and Spenders are resolved, one way or another.

The political conflict created by the debt in the United States is as large as it is in Greece. I believe that Americans will not be as prone to violent demonstrations, but the underlying anger will be there nonetheless.

The burden of the debt is that we create an ever-deeper conflict of interest between Lenders and Spenders. Yes, if you think of Lenders and Spenders collectively, you can say that “we owe the debt to ourselves.” But that is a dangerously vacuous way of looking at it. Large government debt is a recipe for a bitter political stew.

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I believe that Americans will not be as prone to violent demonstrations, but the underlying anger will be there nonetheless.

White Private Enterprise Employed Americans might not be prone to violence. Other Americans, I am not very convinced are not prone to violence.

Union membership in general seems to increase violent tendencies about 3000%.
Public Union Membership halves the potential for being a non violent union member.
Minority status seems to increase your violent tendencies about 1000%.

So, I would suggest that the non violent working white Americans buy guns and lots and lots of ammo. As in order an entire production lot at a time…

astonerii on November 24, 2012 at 12:45 PM

Just as a thought experiment – what if the US government stiffs the fed?

Rebar on November 24, 2012 at 12:45 PM

With this ‘moneywe owe to ourselves’ meme, do you get the inkling that the debt bomb is just a quick and dirty way of “redistributing the wealth”?

Galt2009 on November 24, 2012 at 1:02 PM

None Dare Call It Default

M2RB: The Black Eyed Peas

Resist We Much on November 24, 2012 at 1:08 PM

Finally someone talks about reality. Obama, he never will. He never will. Obama is the worst.

Paul-Cincy on November 24, 2012 at 1:12 PM

Interesting link in article to Economics One site

Fed Bought 77% of Federal Debt Increase in 2011: The Data Source
During an interview on CNBC Squawk Box this morning and in my Wall Street Journal oped of last Friday (June 1), I mentioned that the Federal Reserve purchased 77% of the net increase in the debt by the Federal government in 2011. Several people have asked for references for that amazing percentage. The calculation is due to my colleague John Cogan, and is based on data reported in the Federal Budget, FY2013 Historical Tables, Table 7.1: Federal Debt at the End of Year: 1940–2017.

Here is how it is calculated. Table 7.1 shows that federal debt held by the public increased from $9,018,882 million at the end of fiscal year 2010 to $10,128,206 million at the end of fiscal year 2011 for an increase of $1,109,324 million during fiscal year 2011. The same table shows that Federal Reserve holdings of federal debt increased from $811,669 million to $1,664,660 million during the same period for an increase of $852,991 million, which is 77 percent of $1,109,324 million.

And what did Congress the House get for pushing this forward to the fiscal cliff? Re elected,

With this ‘moneywe owe to ourselves’ meme, do you get the inkling that the debt bomb is just a quick and dirty way of “redistributing the wealth”?

Galt2009 on November 24, 2012 at 1:02 PM

De facto. Accelerated by the Pigs-in-the-Trough feast of the new Obamians. The first year of Clinton was also a pig out. Then, for some reason, Clinton decided not to waste the country.

Obama’s gang is more like Barabarians, Inc. If the nation falls, great.

People do not understand the Barbarians are already in the gate. As capitalism is stifled, and businesses go against the wall, they are being snarffed up by the scavengers in a slow mo debtors auction.

When I was researching Grupo Bimbo’s offer to buy Hostess, I found Grupo had taken over Entemanns, Thomas, Boboli, Brownberry, Sara Lee Baked Goods … Mexican Bimbo is not only the largest baker in the world, but now the largest baker in the USA. It wanted Hostess too, and offered half what it offered before this last strike.

entagor on November 24, 2012 at 1:51 PM

In this scenario, the Fed will be incurring losses, which will require a subsidy from the government budget. Thus, the challenge with balancing the budget gets even more difficult.

The Fed will just print the money. Everything will be paid in increasingly value-less dollars. Then it will all collapse due to hyperinflation. There will never be serious spending cuts.

The good news? After the collapse of the currency, we might have the evils of hyperinflation burned into our psyches, the way that the Germans do following their Weimar experience.

Revenant on November 24, 2012 at 2:17 PM

Michael Moore told me that we have plenty of money!!!

All is well.

ButterflyDragon on November 24, 2012 at 3:14 PM