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Old 09-26-2011, 10:55 AM   #101
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You are confusing a currency issuer with a currency user. The US cannot "go bankrupt" nor can it find itself in a forced default scenario like Greece.
You are technically correct in that the US, as a fiat currency issuer, cannot go bankrupt in the same sense that a household or individual or business can go bankrupt.

However, in practical terms, what happens is that if the US inflates the currency in order to meet its debt payments, we risk inflation to the point of destroying our own economy. Technically, yes, the US won't go bankrupt, as it can always repay debts issued in US currency (though foreign lenders may not particularly appreciate being repaid in a rapidly devalued currency), but hyperinflation is no small price to pay for that ability.

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Old 09-26-2011, 11:14 AM   #102
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I think this is a great read:

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I occasionally broker commercial loans between finance companies and small businesses. It gives me a lot of pride when I bring together an American entrepreneur who is ready to risk all his assets on his own business, with a finance company that sees a way to help that businessman and make a profit himself.

For the past month, I’ve been working with a financier to bring funding to 30 entrepreneurs, eager and ready to start up their businesses. Yesterday I had the most dis-spiriting conversation of my professional career with my financier, whom I’ll call “Joe”.

Joe has a credit line with a Gigantic American Bank. The Federal Reserve has slapped the Bank, and all other banks big and small, with new regulations regarding how they loan their money, who they loan it to, and issued a mountain of compliance rules. The Bank cannot rely on their internal compliance auditors any longer, either. They must use independent auditors.

The Bank, in order to remain in compliance, must shove all these same regulations and compliance rules onto whomever they loan money to, including Joe, who also must engage an independent compliance auditor. Joe must shove all these same regulations and compliance rules onto whomever he loans money to, including these entrepreneurs, who also must engage an independent compliance auditor.

The cost of all these regulations and compliance audits, at the entrepreneur level alone, is $30,000. It costs a heck of a lot more as you move up the chain.

The entrepreneurs cannot afford this.

As a result, the entrepreneurs’ dreams of starting their own businesses die on the vine. They now must go back into the depressed job market to (not) find a job.

Sixty other jobs that would have been created by these entrepreneurs never get created.

The money these employees would have spent never enters the economy.

The commission I would’ve earned by brokering the deal is never earned, so that money never gets spent into the economy.

Joe never earns the interest he would have earned on the deal, so that money never gets spent into the economy, or invested in any other businesses.

The Bank never earns the interest it would’ve earned from the financier, so it has less money to grow, return to shareholders, or to hire other people to work at the Bank.

The independent auditors don’t even get hired because no deal exists to audit.

Does anyone — anyone at all — see a winner in this scenario?

I do. It’s anyone who calls Barack Obama a “Socialist”, a “Marxist”, or “anti-Capitalist”.

I have to be honest, until today, I never branded President Obama as any of these. I merely regarded him as misguided, foolish, and just economically clueless. But not anymore. Here’s why:

I asked Joe where this set of regulations come from, and why were they put into place. He replied:

“Barack Obama created these regulations by Presidential fiat. They are unrelated to any form of legislation. They have nothing to do with bank solvency. They have everything to do with his anti-capitalist ideology. This is the mindset of the current Administration: kill American business.”

Now, consider that this is just one story of one bank, one broker, one financier, and one set of entrepreneurs. Now extrapolate this to every American bank, broker, financier, and entrepreneur.

And is it any wonder — any wonder at all — why unemployment remains high?

Is it any wonder — any wonder at all — why Liberals complain about how workers are being trampled on, when it is their own policies that are trickling down to keep people on the unemployment lines?

I’ve been writing articles over at SeekingAlpha.com and InvestorPlace.com. Lately I’ve been doing a series on the Dow Industrials, and discovered that every company I was writing about had billions of dollars of cash on their balance sheets. In some cases, it was tens of billions. Why, I wondered, isn’t that money being spent?

My old high school math teacher taught me that if one uses reason, no question can go unanswered.

The answer is apparent. American businesses have no idea what to expect from an anti-Capitalist President. What regulations will he impose on businesses? They have no idea what’s coming down the pike. Why spend billions on some new initiative, some new invention, some expansion, some hiring, when it all may yield nothing because some regulation kills it? What costs will be imposed by Obamacare? How much will it cost to pay for a new employee’s health insurance? Will the GOP take over Congress and the White House next year and repeal Obamacare? They don’t know. So they don’t hire. Will the economy fall into a double-dip recession? Well, with anecdotes like mine, it sure as heck seems like it will! So why spend money to expand and hire? So they don’t.

I really, really want a Liberal reader to try and justify this course of action by the government. And I want it to lack schadenfreude. Because if it doesn’t, all it does is confirm the stereotype of the anti-profit Liberal.

Then I want that same Liberal to justify voting for Obama again next year.

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Old 09-26-2011, 12:01 PM   #103
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Originally Posted by Scrappy Jack View Post
Speaking of history, do you know how many periods in US history (since 1776) the government has run a significant budget surplus after a period of substantial debt reduction?
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Originally Posted by Braineack View Post
It speaks to your last question about ressions. I dont know the answer, but this illustrates that when we invest in new, not old, the unemployement drops every time after a recession.
As far as I understand - and I am happy to be corrected - since 1776, the USA has had seven periods of significant federal debt reduction leading to a fiscal surplus.

1817 - 1821
1823 - 1836
1852 - 1857
1867 - 1873
1880 - 1893
1920 - 1930
1993 - 2000

They all have one thing in common. The last one has one important thing differentiating if from the first six.

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Originally Posted by mgeoffriau View Post
You are technically correct in that the US, as a fiat currency issuer, cannot go bankrupt in the same sense that a household or individual or business can go bankrupt.

However, in practical terms, what happens is that if the US inflates the currency in order to meet its debt payments, we risk inflation to the point of destroying our own economy. Technically, yes, the US won't go bankrupt, as it can always repay debts issued in US currency (though foreign lenders may not particularly appreciate being repaid in a rapidly devalued currency), but hyperinflation is no small price to pay for that ability.

Inflation is absolutely the risk (not insolvency) for a sovereign, monopoly issuer of the currency in which its debt is denominated. I really do not like the term "hyperinflation" as I think people are too quick to misunderstand/confuse it.

Hyperinflation is really better described as a "currency rejection." These events are incredibly rare for a country with a monetary system like the USA's and are almost always preceded by some major shock - like losing a war or a regime change that puts a dictator in place. I cannot think of an example currency rejection that would fit the USA's monetary system.

I think it is more accurate to say the likely risk is high inflation. This is generally a much more probable risk when capacity utilization is high (typically signified by high employment). That is not to say you cannot have periods of cost-push inflation combined with low capacity utilization.

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Originally Posted by Braineack View Post
I think this is a great read:
That reads like some sort of chain email that you have to "forward to all your friends and family if you love the United States of America!" I do not doubt that it is possibly accurate, but I would really need to see some specific regulations cited and some specific information on regulations passed via Presidential whim rather than legislation.

I also think it grossly oversimplifies the reason firms are not doing more hiring (and won't, for a while in my opinion). If you are going to try and boil it down to one reason*, it should be qualified demand. If Toyota had so much demand it could not keep up - and expected that demand to remain at least relatively constant - they would hire new employees, regardless of current regulatory uncertainty overhang.

The same goes for banks. If they had enough qualified borrowers - borrowers that met their criteria for risk-adjusted return expectations - they would be kicking out record amounts of loan growth.


* That is not to say that added regulatory burdens or political uncertainty don't hamper hiring. I absolutely believe that it does and is one element of the low employment growth but I believe it is a subordinate aspect to demand.
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Old 09-26-2011, 12:36 PM   #104
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it was written by this dude: http://en.wikipedia.org/wiki/Laurence_Meyer
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Old 09-26-2011, 01:39 PM   #105
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1993-2000

The Myth of the Clinton Surplus.
If you understand the real, not fraudulent accounting of Medicare, the surplus disappears. Medicare was funded with intra-governmental debt.
http://www.craigsteiner.us/articles/16
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Old 09-26-2011, 02:33 PM   #106
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Originally Posted by Braineack View Post
it was written by this dude: http://en.wikipedia.org/wiki/Laurence_Meyer
Larry Meyer has a legitimate resume, but I would still want to see some data to support those claims.

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Originally Posted by JasonC SBB View Post
1993-2000

The Myth of the Clinton Surplus.
If you understand the real, not fraudulent accounting of Medicare, the surplus disappears. Medicare was funded with intra-governmental debt.
http://www.craigsteiner.us/articles/16
I should have anticipated that and been more precise with my wording. I'll skip over the "trust funds" for now.

Change my wording above from "periods of significant federal debt reduction leading to a fiscal surplus" to "periods of significant federal budget deficit reduction leading almost to a fiscal budget surplus" and the point will remain. Using the data from your cited source, the deficit was reduced almost 94% from FY 1994 to FY 2000.

Or, said another way, the fiscal budget deficit dropped from approximately 4% of GDP ($281 billion / $6.67 trillion) to approximately 0.2% of GDP ($18 billion / $9.95 trillion).

If any readers think I am bringing this up to praise the fiscal and monetary policies of the Clinton Administration/Gingrich Congress, you are not connecting the dots with the date list posted above.

Last edited by Scrappy Jack; 09-26-2011 at 02:45 PM. Reason: Added data for deficit relative to GDP
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Old 09-26-2011, 02:59 PM   #107
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i cant play your games; all these questions. I sucked as a scholar, thats why i went to art school.
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Old 09-26-2011, 04:11 PM   #108
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i cant play your games; all these questions. I sucked as a scholar, thats why i went to art school.
Sorry, I thought you were the history buff. I'm a big fan of the Socratic method as I (usually) find it helpful in making sure my explanations are correct and more engaging as a discussion rather than a lecture. I get as much or more out of it than the people I am talking with.

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Originally Posted by Scrappy Jack View Post
As far as I understand - and I am happy to be corrected - since 1776, the USA has had seven periods of significant federal [deficit] reduction leading to [or almost to] a fiscal surplus.

1817 - 1821
1823 - 1836
1852 - 1857
1867 - 1873
1880 - 1893
1920 - 1930
1993 - 2000

They all have one thing in common. The last one has one important thing differentiating if from the first six.
Here are six dates that correspond with the dates above.
1819
1837
1857
1873
1893
1929
What they have in common: Those are dates of major recessions or depressions in the USA.

What sets the 1993 - 2000 apart: it was the only period listed which occurred under the current US monetary system (free-float, sovereign, fiat).
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Old 09-26-2011, 05:05 PM   #109
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The powers in the US government want the currency to continue to lose value because it means less actual value has to be given away to satisfy its debts.

Example: I build valuable and rare widgets that are valuable because they have my company's quality name on them. Part of the reason they are valuable is because they are rare. I have a prepaid purchase order from johnny for one hundred widgets next year. So I decide to hire a dozens of unskilled people to come help me build widgets quickly and deliver them to johnny. I also had my workers build hundreds more cheap widgets to flood the market. I fulfilled the order, but johnny isn't happy because the widgets aren't worth nearly as much as they were supposed to be even though I met the letter of my obligation. Johnny got his widgets but it cost me significantly less to supply them and they aren't worth what johnny originally expected when he made the deal.

The US prints more currency so that the actual outlay of value is less that it has to pay. This includes what it is obligated to pay to other countries, bondholders, recipients of all US government checks (welfare, medicare, social security, agency and military salaries), etc.

This is part of the reason why the politicians wanted to go off the gold standard back in the sixties.
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Old 09-27-2011, 12:00 AM   #110
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Originally Posted by Scrappy Jack View Post
Sorry, I thought you were the history buff. I'm a big fan of the Socratic method as I (usually) find it helpful in making sure my explanations are correct and more engaging as a discussion rather than a lecture. I get as much or more out of it than the people I am talking with.



Here are six dates that correspond with the dates above.
1819
1837
1857
1873
1893
1929
What they have in common: Those are dates of major recessions or depressions in the USA.

What sets the 1993 - 2000 apart: it was the only period listed which occurred under the current US monetary system (free-float, sovereign, fiat).
Correlation is not causation. Booms precede busts, and booms tend to increase tax collection and reduce deficits. It's not that deficit reductions cause recessions.
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Old 09-27-2011, 10:36 AM   #111
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Originally Posted by JasonC SBB View Post
Correlation is not causation.
Absolutely. But when you have 100% correlation, it is worth examining.

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Originally Posted by JasonC SBB
Booms precede busts, and booms tend to increase tax collection and reduce deficits. It's not that deficit reductions cause recessions.
Agreed that there are tons of moving parts with major recessions/depressions. One of those parts that, I believe, is often overlooked is sectoral balances. It's not that deficit reductions on their own cause recessions, but what happens wen you have a ~2%+ current account deficit wile bringing the fiscal deficit close to zero?
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Old 09-28-2011, 05:51 PM   #112
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Old 09-28-2011, 06:59 PM   #113
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sixshooter - I didn't watch the video but I skimmed your linked article. Without having any way to verify its validity, I wouldn't be surprised at all. Such a waste.

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Originally Posted by Scrappy Jack View Post
Agreed that there are tons of moving parts with major recessions/depressions. One of those parts that, I believe, is often overlooked is sectoral balances. It's not that deficit reductions on their own cause recessions, but what happens wen you have a ~2%+ current account deficit wile bringing the fiscal deficit close to zero?
The answer to this question is: you reduce the private sector surplus.
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