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The Global Rush to Deficit Finance - Who is Lending?


Riverwind

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When governments run deficits they have to find someone to lend them the money.

In normal economic environments this is not a big deal, however, we are in a stituation where the global economy is contracting because banks are not able to lend money (i.e. there are too few lenders out there). This makes me wonder whether these huge deficits being racked up by almost every country will only exacerbate the problem by diverting loans that might have gone to the private sector to governments.

i.e. any stimulus provided by the additional government spending will be offset by a reduction in the pool of money available for private loans.

Breaking this viscious circle will require that the central banks start buying government bonds. But that is a path that leads to hyperinflation.

What a nightmare.

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C'mon Riverwind every party has to end some time. Way deep down inside I think we've always known capitalism would fail one day. I'm reminded of Woody Allen's; "I'm not afraid of death, I just don't want to be there when it happens".

It sucks to be us is all. Maybe people will one day look back and pity us, assuming they've forgiven us.

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C'mon Riverwind every party has to end some time. Way deep down inside I think we've always known capitalism would fail one day. I'm reminded of Woody Allen's; "I'm not afraid of death, I just don't want to be there when it happens".

It sucks to be us is all. Maybe people will one day look back and pity us, assuming they've forgiven us.

It really sucks, we have the highest standard of living in the history of the planet.

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It really sucks, we have the highest standard of living in the history of the planet.

I know. OTOH the standard of living for many other species on the planet has deteriorated to a point it hasn't been at for millions of years. This correlation does imply causation.

Capitalism as we know it is just plain unsustainable on many levels, starting at the most fundamental. There's just too many people all trying to achieve the same standard and the margins required to do just aren't there. Something has to give and if its the ecosystems that capitalism relies on for growth, well... I've said it before and will continue doing so, you can have a natural ecosystem without a human economy but not the other way around, at least not for very long. I think we're mostly running on momentum at the moment.

I'm just as dissapointed at the reality of our predicament. I grew up expecting we'd be populating the moon and sending exploration ships out to Jupiter by now. It looks like everyone's expectations have been a little too big for our own good. We obviously screwed up somewhere along the way maybe long before any of us were even born.

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When governments run deficits they have to find someone to lend them the money.

In normal economic environments this is not a big deal, however, we are in a stituation where the global economy is contracting because banks are not able to lend money (i.e. there are too few lenders out there). This makes me wonder whether these huge deficits being racked up by almost every country will only exacerbate the problem by diverting loans that might have gone to the private sector to governments.

i.e. any stimulus provided by the additional government spending will be offset by a reduction in the pool of money available for private loans.

Riverwind, you are referring to something known as the loanable funds model. In its best form, it is a simple accounting identity.

The problem now is that many people are afraid and have retreated into cash or near-cash instruments (typically issued by governments). In such a situation, it is easy for the government to borrow (that is, to issue bonds). The market for GICs and T-bills has grown tremendously in the past few months.

Governments are dealing with this crisis in two ways: first, they are providing cash and other government paper to people so that they are not afraid. In addition, governments are trying to guarantee private loans to ease credit markets. Second, governments are directly hiring firms to undertake work (and replace the lost work due to tough credit markets).

C'mon Riverwind every party has to end some time. Way deep down inside I think we've always known capitalism would fail one day. I'm reminded of Woody Allen's; "I'm not afraid of death, I just don't want to be there when it happens".

It sucks to be us is all. Maybe people will one day look back and pity us, assuming they've forgiven us.

Capitalism is hardly failing. Markets have been around far longer than any State regime currently existing. The NYSE outlasted Karl Marx and about three French republics. Edited by August1991
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If you want to point at an environmental disaster it was the eastern block socialist countries. Humans period are the problem.

Absolutely. Impoverished people are least able to afford to give the environment its due. From an environmental perspective capitalism can claim to raise living standrads higher than socialism for a little bit longer but in the end the result may be the same due to the same cause, unsustainable drawdown of natural capital, which includes both consumables and the capacity to recycle our waste stream.

I suspect its like this on most planets where life evolves to the technological level our's has and can't control its tendency to mimic a tumor.

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Absolutely. Impoverished people are least able to afford to give the environment its due. From an environmental perspective capitalism can claim to raise living standrads higher than socialism for a little bit longer but in the end the result may be the same due to the same cause, unsustainable drawdown of natural capital, which includes both consumables and the capacity to recycle our waste stream.

I suspect its like this on most planets where life evolves to the technological level our's has and can't control its tendency to mimic a tumor.

Cleanliness is a luxury good and richer societies are cleaner societies. People don't like to live in filthy circumstances and if they have the means, they will avoid dirt.

Western Europe and urban North America were dirtier one hundred years ago than they are now. The best way to protect the environment is to allow free markets to raise people's standard of living.

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The problem now is that many people are afraid and have retreated into cash or near-cash instruments (typically issued by governments). In such a situation, it is easy for the government to borrow (that is, to issue bonds). The market for GICs and T-bills has grown tremendously in the past few months.
My understanding is GICs and other cash instruments help firm up the bank's balance sheets and the banks will be weakened if these monies are moved into government bonds.

I agree that the deficits have a psychological impact that goes beyond their immidiate monetary impact.

That said, the fed announced today it would consider buying US government bonds which suggests my concern is not misplaced.

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My understanding is GICs and other cash instruments help firm up the bank's balance sheets and the banks will be weakened if these monies are moved into government bonds.
GICs, government bonds are largely similar. That is what people (and private banks) want now. They fear other financial paper.

In its extreme form, this was the source of the credit crisis.

I think that Bernanke has wielded a sledge hammer and got us beyond that stage - or he will have perhaps around Summer 2009. (I miss Greenspan. He would have done the same in a few minutes with a few mumbled words before a Congessional panel.)

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Capitalism as we know it is just plain unsustainable on many levels, starting at the most fundamental. There's just too many people all trying to achieve the same standard and the margins required to do just aren't there. Something has to give and if its the ecosystems that capitalism relies on for growth, well... I've said it before and will continue doing so, you can have a natural ecosystem without a human economy but not the other way around, at least not for very long. I think we're mostly running on momentum at the moment.

It is state socialism and the idea of money that does not exist, fractional reserves that cause unsustainable progress booms and ecological damage. Money that does not exist is socialist. Capitalism works with .. oh I don't know, capital. Somthing that exists. If you produce a basket, that is capital. You produce nice feelinga with your lover, that is capital. Do no't let Marx fool you about what a capitalist is. If progress was produced off capital.. we would not be as advance as we are today. All rapid progrees is fake! All concocted by the state and fiat money or monetary devaluation and coersion (slavery).

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  • 2 months later...
In normal economic environments this is not a big deal, however, we are in a stituation where the global economy is contracting because banks are not able to lend money (i.e. there are too few lenders out there). This makes me wonder whether these huge deficits being racked up by almost every country will only exacerbate the problem by diverting loans that might have gone to the private sector to governments.

Yes, this is currently a problem. Your right.

i.e. any stimulus provided by the additional government spending will be offset by a reduction in the pool of money available for private loans.

Breaking this viscious circle will require that the central banks start buying government bonds. But that is a path that leads to hyperinflation.

Currently under way. What's worse is that with inflation comes increased interest rates. Which increases the debt service costs for the government, forcing them to borrow more money, forcing the Fed to print more money, forcing inflation higher, forcing interest rates up, forcing the government to pay more in interest costs, forcing the government to borrow more money, forcing the Fed to print mor.... I'm sure you see it now.

It really sucks, we have the highest standard of living in the history of the planet.

Finanaced by some dude sitting on his couch laughing at you in Beijing. Even if your not in debt Wilbur, someone else is borrowing on your behalf. Chances are your company finances your wages, and your government is borrowing so you don't have to pay as much tax. Lots of people are borrowing in your name. Canada isn't in bad shape. But in the US, it's ugly. The government has borrowed about $125k on the backs of the average family of 4.

Capitalism is hardly failing.

Your right, it's not. But the balance of power is shifting from those that borrow the money to those that have the money.

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Your right, it's not. But the balance of power is shifting from those that borrow the money to those that have the money.
I would argue that a successful society, like a successful individual or family in the long run, depends on their ability to generate wealth. The US economy is still capable of generating great wealth.

Money is just a claim on real assets. It is the ability to produce real assets (goods or services) that matters.

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Money is just a claim on real assets. It is the ability to produce real assets (goods or services) that matters.

The US generates most of it's "wealth" through Americans buying and selling houses to each other and packaging and selling the associated debt. That's not real wealth. The value of what the US exports to the world is significantly lower than what it imports (services included). Investors just love sending their money to the American banks to lend to individuals and companies that buy and sell houses. That's really all they've got August. Houses. Back and forth. Nothing more. No one does anything real in the US other than service others that buy and sell houses or borrow against the house they buy.

When the trade in houses slows, the economy dies. That's what your seeing today.

The US produces very little to the world. They just sell their debt to foreign investors. Money is not a claim on real assets, but a claim on the future expected worth of the economy. A piece of equity or debt is a claim on an asset, and who holds those? Foreigners.

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The following article touches on this subject:

The $33,000,000,000,000 Question

The final cost* of this crisis is being estimated as high as $33 trillion (with the US on the hook for $15 trillion).

With total world savings estimated to be ~$100T then the globe is looking at 1/3 of total savings going to just absorb this financial crisis.

Ouch.

*They really mean the change in government deficits with a resulting bond issuance.

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  • 2 months later...

Came across this excellent PDF file the other day:

The problem is the solution

I particularly liked this part:

It may not surprise you to learn that the largest percentage owner of US debt is the United

States Government itself. Perhaps this doesn’t make immediate sense to some readers, but

it is a fact. The debt holdings are held in accounts for the various trust funds the US

manages for its future obligations - the largest of which are set aside for Social Security and

Medicare. These trust funds are lumped together and referred to as “Intragovernmental

Holdings”. The only ‘assets’ held by these ‘trust funds’, however, are special-issue Treasury

Bonds. Why? Because the US Treasury takes the Social Security and Medicare payroll

taxes and uses these funds to pay for anything from aircraft carriers to education to welfare.

To cover this drawdown, special-issue Treasury Bonds are deposited into the trust funds for

Social Security and Medicare as IOU’s. When the government issues a bond to one of its

own accounts, it hasn't established a claim against another entity or person. It is simply

creating a form of IOU from one of its accounts to another. Put simply, there are no real

economic assets that can be drawn down in the future to fund benefits. Instead, they are

claims on the Treasury, that, when redeemed, will have to be financed by raising taxes,

increasing borrowing or reducing expenditures. For all intents and purposes, Social Security

and Medicare receipts are essentially considered to be another source of government tax

revenue that can be spent each year.

Governments sure like to use those IOU's.

Oh, and this is why debt can be a problem - not for any kind of moralistic nonsense [see "HD's" reply almost half way down the page] .

No, borrow too much, particularly when you borrow for unproductive purposes like, if you're a country, a war or two, and if you're an individual, say, a big screen tv a new kitchen and a large truck, then real economic lessons will be learned and all the while compounding....

Hint - the lesson is to borrow when the net benefits exceed the net costs. Spending billions on bombs to then drop them is the ultimate in shovelling ditches and filling them in again.

Spending money on depreciating assets (fancy tv, truck, and, oh my, yes, real estate does go down) can also be an unproductive waste of borrowed funds. [A further problem with real estate is the link between an increasing unemployment rate and the ability to move to find another job - renters tend to be more labour mobile than owners which is an advantage in a recession.]

Just some random thoughts on a Saturday when one is a slave to sprinkler regulations - got to go move the sprinkler one more time before shutting off the taps.

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This is not credible at best, and laughable at worst, as the US does indeed produce much "to the world". That's why it is a frequent topic on a Canadian forum.

The issue here is one of debt verses GDP, according to the mainstream economists. Just as long as you can make the payments there is no problem. What I find funny about this concept is that it makes the assumption that the GDP is even accessible to the government which it isn't. The government relies on taxation to produce revenue streams. So how in the hell does GDP factor into the question at all?

America produces leverage which in turn produces wealth. America still produces computers and parts for them, a growth industry to say the least. In addition America owns a hefty chunk of high tech products and services which they sell. The big ticket item is the defense industry which employs more folks than just about any other sector and provides huge revenues and profits. Don't write off America with such swift abandon folks. They are the worlds only superpower, at least for now.

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