Thursday, June 20, 2013

Some more macro- calm Down About the Debt, part 2

It has long been understood that those who control the money supply can control the behavior of individual humans and society at large, for whatever they want to. It is now a good thing that such control is held by a democratically elected body.

Government borrowing is not really a net transfer out of the economy; the only concern may be the burden of interest payments, which just another form of government spending and is really a political problem. Bond holders are likely to be those that are already wealthy, and thus more government borrowing will, at least when it comes to paying interest, benefit the wealthy. However if this borrowed money is spent correctly it can do just as much to strengthen the poor and middle class, and higher levels of inflation may  negate the real rates of return that the wealthy receive on their treasury holdings anyway. Additionally, about $2.3 trillion of this debt is held by the Social Security and Medicare Part A Trust funds. The interest paid on these bonds is accrued in the trust funds and then passed on (as a higher provision of goods/services) to the recipients of these programs, the vast majority of whom are middle class Americans.

Now the Medicare/Medicaid scheme leads to the classic problem of a public/private partnership. Government is obligated to spend money into the healthcare sector, but has little say in how this privately controlled sector operates. The incentives are skewed away from efficient provision and towards lobbying for more funding and less oversight. This is the primary driver of our deficits. Even then, the problem is not that we are spending too much money, rather the problem is that too much of this nation’s real resources (people’s time and energy) is being wasted providing healthcare in an inefficient way. It would very interesting to see how much money could be saved if a single payer system, like the British NSA was adopted. (Or if a system like the VA’s Tricare was created at the national level and funded as Medicare is.)

This also may be a political issue if a lot of money is being taxed out of the US economy or created, diluting the value of currency in circulation, to make interest payments to bondholders overseas. This has led to a great deal of concern among Americans, but the reality is that China only holds about 10% of all our debt, and uses this lending to subsidize the American consumer economy, which in turn keeps Chinese unemployment low, and helps the government avoid a political crisis that could arise from high unemployment. (some argue the largest thing that the Chinese government fears is high unemployment. More than anything this could threaten the politburo’s power. )

Additionally, one of the reasons that the Chinese are now buying American public debt is that they got badly burned buying private sector debt after the 2008 financial crisis. Chinese investors got suckered into buying a lot of RMBS (and other instruments that were contaminated by them) so are now putting their money in much safer Tsy securities. 

Also, the Chinese have one of the highest personal savings rates in the world. Part of this is because of their cultural affinity for savings from a buddhist/taoist culture, but it is also because of a lack of government safety net. There is no Chinese counterpart to Social Security or Medicare. Therefore, the onus on providing for the future is entirely on individuals and families. Of of the ways the Chinese save is by putting their dollar holdings in a savings account at the Federal Reserve, otherwise known as buying Treasury securities. If and when the Chinese decide to start spending these US dollars (ie stop "buying our debt"), they can do two things: (1) Use these dollars to buy American goods and services (or any goods and services denominated in dollars), which will result in increased demand for US goods and services and a reduction in domestic unemployment or (2) Sell dollars in exchange for foreign currencies, which in the absence of countervailing actions by the US Fed, will result in a lower valued dollar, which in turn will make US goods and services more competitive globally, and thus domestic unemployment lower. As you can see, both scenarios resulting from the supposedly disastrous "Chinese dumping our debt" scenario, are quite positive, and similar in outcome. A weakening in the dollar would also make our imports, ie OIL, more expensive, which would be a problem. However, it is my desperate hope that by the time this happens, the US will have drastically reduced its fossil fuel consumption anyway; if not, we will have much more serious problems to deal with than debt and interest rates.

No comments:

Post a Comment