December 21, 2009
Podcast on the federal debt
EconTalk hosts a podcast of a conversation I had with George Mason Professor Russ Roberts on deficits and the debt. At the end we also get to a discussion of oil markets. You can participate in the discussion with your own comments either here or over at EconTalk.
Posted by James Hamilton at December 21, 2009 05:54 PMdigg this | reddit
George Carlin, an obscure economist from the 70s, told us they would get our social security.
I think he's right, but we will also get a VAT(Democtrat version) or National Sales Tax(Republican version) too. No one will be paying income tax, so the government will go for consumption side revenue.
Posted by: Cedric Regula at December 21, 2009 06:40 PM
One comment on what the nature or sequence of events in outright default, implicit default, and/or currency crisis is in historical cases around the world they have been accompanied by capital and exchange controls. They make it illegal to hold anything but local currency or government bonds, and make it illegal to move capital outside the country. Britain and Brazil come to mind, and if I bothered to research it extensively I would probably find more.
So you might say the US can do a soft default, ie print money to finance and roll over debt, or really the sneaky way is QE because the Fed can print money to buy 30 year treasuries if it wanted to and economists will show how growth can pay them off in 30 years and shrink the Fed balance and that is not national debt anyway.(why not kick the can down the road 30 years at a time?). But I'm still pretty sure this results in a currency crisis, because we are a net debtor nation combined with high concentrated net personal worth, and this will strain our suspension of disbelief, and we and foreign investment will all head for the exit.
This of course will result in another round of market interest rate increases, and the resulting sovereign debt spiral that lesser countries have fallen prey to. Not to mention the crowding out effect on the economy, tho the Fed can keep trying it again and see if it works any better the 2nd and 3rd time.
So we may have inertia going for us, but the mechanics are pretty much the same.
Posted by: Cedric Regula at December 21, 2009 07:27 PM
I'm kind of conflicted over oil. On one hand there are alternatives, but they are not cheap either and require some significant departure from biz as usual.
3 billion Asian car drivers is scary, tho I don't think we get there from an oil availability standpoint or a climate change standpoint.
Saw a CNBC segment on Brazil. A PBR rep stated that they have estimates they may be able to recover the ultra deepwater reserves(4 miles down) for $40 cost. They were saying $65 a couple years ago. Don't know if I believe that because Chevron was saying that US Gulf deepwater(1 mile down) costs $45.
But Brazil is having good results with sugar ethanol. They said the reason they don't export it to the US is because of a 55 cent protective tariff courtesy of our government.
This did get me wondering about the possibility of growing sugar cane in Asia or India. I suspect there must be some Asians and Indians that are not good at math, engineering and computer programming, so there could be employment opportunities outside the electronics, industrial, and software sectors. China doesn't have the right climate as far as I know, but SE Asia sounds about right, and maybe parts of India would work. Possible subject for a G20 meeting or maybe an IMF paper, I would think.
Posted by: Cedric Regula at December 21, 2009 07:58 PM
I saw there was some question about how much influence the Fed has had over long term rates. The Fed has been trying to get a handle on this too, and going back to the days when people were worried about the Chinese going away, the Fed did estimate that if China says bye-bye, that would make the yield curve go up about 1.3%. I have no idea how they calculate this, but they wanted to put worries about a massive interest rate spike to rest.
More recently they have tried to estimate the effect of ending QE on mortgage rates. They put it around a half percent. Since mortgage rates are supposed to be composed of treasury yield (around 7-10 year maturity) plus spread, they must add together the completed $300B treasury purchases and the not quite completed $1.4 trillion in MBS purchases.
The mortgage market(just residential) is $11 trillion. The public traded part of the national debt is around $8 trillion. So they bought $1.7 trillion in order to influence a $19 trillion combined debt market. The bang for the buck is a half percent lower mortgage rate. They plan to end QE in a couple months but the deficit is a still moving gear.
So that is the cost-benefit, for what it's worth.
Posted by: Cedric Regula at December 22, 2009 04:23 AM
Thanks for this. I have been an avid listener to EconTalk for some time. Russ Roberts is a great interviewer even if he disgrees with his guest. I would encourage those here to become a regular listener of EconTalk. It will definitely expand your economic range.
Posted by: RicardoZ at December 22, 2009 05:18 AM
C/O Calculated risk, we get some insight to what Bernanke is really thinking. CR catches him in a little lie during a Times interview.
So Ben passed up on an adjustable mortgage reset DOWN to 3.75% this year and opted for a 5% fixed 30 year mortgage.....is this considered inside trading if a Fed Chairman does it?
Posted by: Cedric Regula at December 22, 2009 06:16 AM
At the 35:40 mark you made me laugh when talking about the Chinese keeping the yuan from appreciating. You tell us that accepted theory says that such monetary acton is not the way to enrich a country, but suprisingly the Chinese seem to be doing just fine (not a surprise to me). What your are saying and observing is the fact that the Chinese are attempting to have money function at its best, as a stable medium of exchange. All the theories of depreciating currencies enriching countries by increasing exports just fall flat in the real world.
I do have to take issue with you a little. I do not believe the Chinese are preventing yuan appreciation, rather they are holding the yuan stable with the dollar. It is the American monetary authorities who are complaining because their theories of dollar depreciation are not working and are actually making things worse.
At the 37:30 mark you almost sounded like a supply sider concerning taxes and growth. Watch out! You could ruin your reputation.
Now on oil – For the data you choose to analyze your analysis is good but because you select such a narrow time frame your analysis is not complete.
Humor me for a moment and assume that the price of gold actually tells us the quality of our money. If we look at the period prior to Nixon removing us from the gold standard, we are hard pressed to find any instance where we actually have an oil crisis. For those about my age remember the gas price wars? But during the 1970s after Nixon took us off of a gold standard the price of gold shot through the roof and the oil crisis became front page news almost every day.
Then when we moved into the 1980s and the price of gold once resumed a narrow trading range around $400/oz, oil also became stable once again. No longer was the oil crisis front page news. This condition continued through the first half of the 1990s with the price of gold as stable as it had ever been under a floating currency regime, but then came the Greenspan deflation of the late 1990s. In 1997 the price of gold began a serious decline so that by 1999 the average for the year was $279 and remained there in 2000. This deflation pushed the price of oil down such that oil profits almost disappeared. There was no incentive for investors to put any money into oil as they had in the past because they could earn a better return with a money market fund. Infrastructure bottomed for the oil industry: limited exploration, no new stroage, no new refineries, no expansion but measured decline especially in Texas.
That brings us to where your analysis begins. As your analysis tells us there was strong growth in the emerging economies as the prosperity of their implementation of supply side became manifest, and demand exploded. But in 2000s rather than return to the growth policies of supply side that brought the prosperity, the world, following the lead of George Bush and Barak Obama, fell into the contraction of Keynesian redistribution. Rather than allowing the market to distribute a growing pie, the governments of the world began to redistribute wealth away from growth, to redistribute a declining pie.
The ratio of oil to gold today is about where it has been for decades, so contrary to popular myth the price of oil is not out of line, and, as can be observed at the pump, consumption of gasoline is about where it has always been. Inflation has supported the price and so consumption at higher price has not fallen.
I would also like to talk about worries of a decline in oil reserves in the world but my post is already too long. Let me just say that even if there is a shortage of oil reserves it is not a problem. The world is not really concerned about oil itself, but about the energy it produces. If oil is not available at a reasonable price relative to other sources, energy will still be produced only in other forms.
Posted by: RicardoZ at December 22, 2009 07:33 AM
If we look at the period prior to Nixon removing us from the gold standard, we are hard pressed to find any instance where we actually have an oil crisis.
Prior to the peak of US production in 1972, Texas/Oklahoma were the world's swing producers, and had been for decades. The Texas Railroad Commission set production levels, honored in both states, that resulted in stable prices. Any analysis of oil in the 1970s needs to also include the transition of swing producer role from Texas to the Middle East.
Posted by: Michael Cain at December 22, 2009 04:48 PM
So Michael Cain you assume that the Texas Railroad Commission did a better job of controlling the price of oil than OPEC? Why? Also how do you account for the volatility of oil prices in the 1970 the stable oil prices in the late 1980s and 1990s?
You have bought into the propaganda and myth.
Posted by: RicardoZ at December 23, 2009 01:12 PM
so how do you account for the volatility of oil prices in the 1970 the stable oil prices in the late 1980s and 1990s?
I'm no expert but I think the 1970s can be explained by the producers nationalizing their fields (as late as 1966 the US & UK controlled the majority of reserves) and reaching for the brass ring as far as how much we were willing to pay them for their oil.
The stability of the 1980s and 90s is due to North Sea supply coming online in a big way, AFAIK.
Posted by: Troy at December 23, 2009 05:40 PM
And the Saudis brought their huge field online. Ghawar! At this point with $2 production costs they ceased to be mad at us due to Nixon going off the gold standard.
Posted by: Cedric Regula at December 23, 2009 09:26 PM
So I was able to listen to the podcast on the drive over to family this holiday. . .
I found the unclarity about the cause of the present recession rather humorous.
The Federal Flow of Funds report is pretty explicatory.
At the end of 2000, the Personal Sector had $10.3T in liabilities. By 2004 this had risen to $16.4T, and consumer debt peaked at $20.2T in Q308.
How had the American consumer finagled a way to carry this additional $10T in debt?
I think the answer lies in the growth of mortgage debt. It was $6.4T at the end of 2000, and peaked at $13.6T in Q308, yet median incomes didn't rise to support this additional burden; rather home prices were driven up by the (temporary?) Bush tax cuts and tax credits of 2001 and 2003, declining mortgage interest rates, the wide availability of pick-a-pay, IO, negative-am mortgages, loan underwriters qualifying borrowers on the non-amortizing and/or teaser rates, and the greatly increased availability of stated-income "liar" loans, and of course the steadily rising M3 fueling and/or fueled by the global economic expansion, money supply cycling around thanks to our import partners being ready and willing bond buyers.
All these factors increased the buying power of home-buyers, and since real estate is rather fixed in supply, as more money starts chasing this supply, buyers could not buy "more" home for their money, but rather just ended up bidding up the prices of existing homes!
In a self-fueling feedback effect, these increased home prices and sales volumes threw off tremendous income streams for real-estate sector jobs -- sales agents, brokers, loan specialists, home construction, housing-related retail, plus the quick equity in home values allowed millions of home-owners to live temporarily two or three pay-grades above their actual incomes.
But all this economic resurgence was largely on borrowed money --- around 8% of disposable incomes during the bubble period 2004-1H06.
What happens when 8% of disposable income disappears? Party's over, that's what.
Posted by: Troy at December 26, 2009 12:58 AM
If you want to hear things you have never heard before go to EconTalk and listen to the two interviews after Dr. Hamilton. I am well aware of the facts in these interviews but I doubt most students have been exposed to this since most of their teachers are not aware of these facts.
Posted by: RicardoZ at January 5, 2010 12:50 PM