The Problems With “Printing Your Way out of Debt”

[natrat]

By Bill Bonner
11/07/09 Beunos Aires, Argentina


Governments are running breathtaking deficits…and accumulating alarming debts. Japan has a national debt of nearly 200% of its GDP. Where did that debt come from? It came from 20 years of trying to buy its way out of a slump with borrowed money. Of course, it didn’t work. But now, Britain and America are following the Japanese lead…and the Japanese are still at it! At the present rate, Japan’s government debt will grow to 300% of GDP in 10 years. America’s debt could grow to 100%…and then 200% of GDP…over the next decade (depending on whose projections you believe). And Britain, if we read the report in The Financial Times correctly, will have debt equal to 200% of GDP within 3 years.

Just what kind of crisis do these numbers portend? It’s hard to say. Probably a combination of confidence, followed by debt default and inflation.

Would the US actually default? We agree with Paul Samuelson; the answer is ‘maybe.’ Samuelson, writing in The Washington Post:

“The idea that the government of a major advanced country would default on its debt – that is, tell lenders that it won’t repay them all they’re owed – was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn’t. Well, it’s still a very, very long shot, but it’s no longer entirely unimaginable. Governments of rich countries are borrowing so much that it’s conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?

“…People have predicted such a crisis for decades. It hasn’t happened yet. The currency’s decline has been orderly, because the dollar retains a bedrock confidence based on America’s political stability, openness, wealth and low inflation. But something could shatter that confidence – tomorrow or 10 years from tomorrow.

“Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates – and we don’t know when, how or whether that may happen.”

Why wouldn’t the US just “print its way out of debt?”

Because it’s not that easy. In effect, the feds are trying to print their way out of debt now. They’ve added huge amounts to the monetary base. But that money is not getting into the real economy. Instead, it’s going into vaults and speculations.

“Jittery Companies Stash Cash,” says The Wall Street Journal.

And banks, too, borrow…but they don’t lend. They can borrow at negligible rates of interest…and buy US Treasury bonds on a leveraged basis…producing a 20% yield. That means, the US dollar has replaced the yen as the go-to currency for speculators.

Net effect? Lots of cash in what appears to the Mother of all Carry Trades. The Financial Times:

“The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualized – as the fall in the US dollar leads to massive capital gains on short dollar positions.”

But in the economy itself? As in Japan, very little economic progress comes from this kind of speculation.

Bankruptcies rose 7% last month. Unemployment gets worse.

The financial markets bubble up. The real economy shrivels up. And people with any sense are stocking up.


http://dailyreckoning.com/the-problems-with-printing-your-way-out-of-debt/

[frazzled]

1. Gee, thanks for the right wing perspective

Now we can wrap some fish in it.

Bill Bonner? Are you kidding? National Taxpayer's Union? Partner of James Davidson, the Vince Foster conspiracist?

You're in the wrong place.

[natrat]

3. its a free world budy, if you don't want to read something don't. At least comment on the content

[Warren Stupidity]

6. The current GOP talking point strategy against HCR is 'DEFICITS! OH NOES!!!'

While of course the 500+B/yr spent on military idiocy is not part of the discussion, and somehow deficits were just not an issue back when Bush the Idiot was president.

So 'budy' if you are out propagating the talking points, intentionally or otherwise, you should expect to hear about it from other people on DU.

[natrat]

7. listen budy , the guy makes some good points, the bank scam is the most upsetting

“The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualized – as the fall in the US dollar leads to massive capital gains on short dollar positions.”

the idea that democrats in washington are some how righteous and are above criticism is complete and utter bullshit.The progressive caucus are legit, the rest suck. These people are crooked top to bottom. Banks borrow for nothing, short the dollar and make 20% through leverage while the taxpayer is drowned further in debt.

[DJ13]

2. ....tell lenders that it won’t repay them all they’re owed

All too often the same people benefiting from the government largess due to the excess spending are the same people who own the bonds that may be defaulted on.

I say they've already gotten paid and default on their asses ASAP.

[Andronex]

4. Printing money to get out of debt would be great !!!

well, it would be better than what we have now, for the past century the government has been borrowing and it's the Federal Reserve(really a cartel of private banks)that has been issuing the money and collecting the interests. If it was really the government that issued the currency as the constitution instruct, there would be no debt.

[Ghost Dog]

5. imho, the US (and UK) will definitely default.

They will then deliberately provoke World War.

This is already happening.

At best, this will, very painfully, bring about (perhaps only temporarily, as usual) Anarchic Revolution.

Locally, in some parts, something like Colonial Scrip - revolutionary-government-issued currency - will work to stabilise and promote (human-oriented) functioning (and perhaps even ecologically-viable) economies.

Internationally, something like a new Gold Standard will be required.

Do not be afraid to look at the data, think, debate, and eventually act (perhaps even alongside some, it may appear now, unlikely allies).

(I must leave for a few hours shortly, but will be back). If anyone does want to debate.