More than you want to know about government debt

from Neva Yevsisyan and Randall Wray here.  They do the usual Modern Monetary Theory (MMT) debunk of government debt as a baddie, and add evidence to the notion that the Federal Reserve raising interest rates isn't a good idea to fight inflation.

Excerpt:

 "While high interest payments by government do not threaten the solvency of the Treasury, they are inefficient (in terms of promoting growth and employment), can increase inequality (interest payments mostly go to the already rich), and can be inflationary (by boosting spending of those rich folk). High interest rates also hurt the private sector—by raising business costs (interest is a major business expense that must be covered by prices charged—potentially adding to inflation pressure) and by increasing payments on mortgages and consumer debt."

 

"... Remember when President Clinton announced that the federal government was finally running a budget surplus, and predicted it would continue to do so for 15 years, allowing the government to retire all its debt? He was cheered by deficit hawks and those with debt phobias. We at the Levy Institute said it would not happen. It did not happen, because the housing, commodities, and stock market bubbles burst, with the economy weighed down by Clinton surpluses that morphed into renewed deficits.

"Projections of Trump or Harris administration debt ratios will also likely prove false—although we expect that the debt ratio will continue its slow, secular, 250 year and counting, rise. This is because good economic performance in the US requires that the government generally spend more into the economy than it pulls out through taxes, allowing the domestic private sector to save safe government bonds (and to import more than it exports to the rest of the world—points well-established by Levy’s sectoral-balance approach)."

"...The problem is not the deficit or the debt, but what the government spends on. The higher the Fed’s interest rate target, the more additional spending is devoted to servicing the debt—spending, that as we have explained, is not efficient in terms of meeting our policy goals.

"It makes more sense to use tools that can target the sources of potential inflation. President Biden’s American Rescue Plan was a step in the right direction—as it included spending to boost capacity to avoid bottlenecks that would create price pressures. Government can also use targeted taxes to release resources for alternative use (for example, taxing fossil fuels to release resources for alternative energy), and subsidies to boost production where needed (for example, to increase the supply of low-income rental apartments). Lessons from the WWII experience can be used, if necessary, to prevent excessive demand during the transition to an environmentally sustainable economy: a temporary, broad-based income tax surcharge (with exemptions for low to moderate income), postponed consumption, and patriotic saving.

"Reining in the Fed makes sense; cutting important social programs does not.

"While there are real world wolves—Leonhardt mentions climate catastrophe and autocratic leaders, and we would add rising inequality and the concentration of economic and political power in the hands of billionaires—the federal debt is not one of them."

 

The Democracy Disease - distribution of everything but votes is unequal

(c) by Mark Dempsey

From Arnaud Bertrand: "[W]hen Trump undoubtedly attempted to showcase America's might, he's only achieved a brilliant demonstration of its impotence and, by contrast, highlighted China's diplomatic and economic adeptness. Basically, we're in a new world where America simply cannot bully its way around anymore: when they do so, they end up hurting themselves first and foremost." 

In a classic demonstration of how mob rule overtakes reason, President Trump blames immigrants and trade partners for the economic policy failures for the last two generations (at least). Industrial policy in particular and distribution of the benefits of the global trade architecture--including the US-dominated IMF and World Bank--were created as part of the US' post-WWII neocolonial empire.

The premise that poor countries somehow have cheated Americans with unequal terms of trade and debt bondage under which they have labored primarily for the benefit of elites and US multinational corporations is ridiculous scapegoating, not an accurate assessment of a problem.

Nevertheless, Trump voters often understand this very well and have voted for Trump not because he's going to  fix this system, but because he's promised to destroy it, and that destruction is well underway. Some disagree, citing Trump's appeal to racism and xenophobia, but even if those were real considerations the anti-system candidates' appeal--including Bernie Sanders'--would be a significant contributor to a Trump election victory

The voting public understands that the American economy is rigged to serve the rich, and tariffs won't change that, but they may destroy that postwar American empire. The plutocrats might wake up to the destruction they've wrought, or they may suffer as the aristocrats did during the French revolution, either way, Trump is in the driver's seat now.

Those non-aristocrats who have suffered because the system is rigged have decided they would rather destroy it, even if it means they themselves will suffer too. His voters have not mistaken Trump for a competent administrator. On the contrary he's the anti-Obama. He's sabotaging trade deals, not making them. He's tearing the bureaucracy apart, not employing it for public purpose. 

A recent instance of Trump sabotage means health care, and particularly mental health care has been gutted.  This makes sense. The revenge of the Trump voters impoverished by a rigged economy is that the inmates are now running the asylum. The politics of threats, extortion and fear has been turned loose on the population at large. 

So yes, Trump is terrible, but he's the symptom. This outcome is the consequence of the PMC refusing to address genuine problems, particularly the distribution of the fruits of America's computer-enhanced productivity. Wages have stagnated despite rising worker productivity.

Another example of badly distributed resources: the US has more vacant homes than its homeless population. The deregulated, neoliberal "pure" capitalism promoted for more than 40 years now has given us the beggar-on-every-corner economy in which the billionaires gained enormous wealth, and everyone else has been crushed.

Investigative reporter David Cay Johnstone reports that real median income for the bottom 90% has increased $59 since 1972. If that were an inch on a bar graph, the bar for the top 10% would be 141 feet high. The bar for the top 0.1% would be five miles high. Saying this is unsustainable is an understatement. 

Trump voters understand this, and have their vengeance: a fundamental rebalancing of power between China, the rest of the world, and the US, and an end to the era of US economic, military and political dominance. Perhaps predictably, there are few signs of repentance from the Democrats who helped set this up.

 

Miscellany

 Today's koan:

Who would you be if you had no memories?

 

A theatrical event to anticipate:

"Waiting for Godot, the musical"

Socialism from the Democrats...Eeek!

Written in response to a plea from Kentucky historian Warren Greer for Democrats to abandon non-centrist ideas.


(c) by Mark Dempsey

Dear Professor Greer,

I read your recent Courier-Journal column with interest. In it, you plead with Democrats to get more "centrist" in their appeals to the public, and abandon left-leaning ideas like [gasp!] socialism. In your account, socialism has failed throughout history, with its "centralized control [that] requires the suppression of individual freedom and dissent. Simply calling it democratic socialism doesn’t make it safer — it masks the coercive machinery that lies beneath."

But isn't one point of a modern state an apparatus to manage coercion, for example, catching and punishing crooks? Or are we to allow people to drive on the left side of our roads? The fantasy of an uncoercive state--say, one without taxes or punishment for crimes--would have to rise several levels before it reached "ridiculous."

You say that the "Soviet Union and Cuba offer clear examples [of the failures of socialism]: both promised justice and equity but delivered authoritarianism, censorship, and economic disaster. These outcomes weren’t incidental—they were baked into systems that centralized power under the guise of the collective good."

Note that Russian per-capita incarceration is a little more than half the US rate, which is roughly three times the world average. Socialist China incarcerates just under 22% of the US per-capita rate, while (socialist) Denmark incarcerates just under 13% of the US rate. Could these bits of "authoritarianism" have escaped your notice? And if capitalism is so beneficial and "freedom enhancing," why are so many people in jail?

And never mind "Declassified Biden-Era Domestic Terror Strategy Reveals Broad Surveillance, Tech Partnerships, and Global Speech Regulation Agenda"

You also ignore the Princeton study that says the US is a power-centralizing oligarchy, not a democracy. Just to clarify: The oligarchs who are centrally planning US public policy are not elected and are rewarded not for how they serve the public, but for how they line their own pockets. If Democrats can't acknowledge this and provide some remedies, they are beyond useless.

Meanwhile, neoliberal "centrist" capitalism has given the US the beggar-on-every-corner economy. Somehow, the non-beggar success of Scandinavian democratic socialism remains unmentioned, and certainly the sabotage attacks by "democratic" USA visited on Cuba merit no comment. 

Back here on planet Earth, professor, despite your unhappiness with socialism, some economies appear to do better when not guided solely by profit. Socialized medicine in Canada is inarguably cheaper and provides better health outcomes than the US variety of medical care. Compared to Canada's socialized medicine, US medical care produces shorter life expectancies, worse infant mortality, and, among other things, more than half a million medical bankruptcies annually. 

The joke goes like this: When the fire department puts out the fire at your house, that's capitalism. When the insurance company denies your claim, that's capitalism.

In an odd coincidence, I've had political conversations with those shocked by the mere mention of democratic socialism in publicly-owned buildings. One such building was in the midst of a publicly-owned park to which we had all driven over publicly-owned roads. We all drank water from publicly-owned water districts, and our sewage was processed in a publicly-owned regional sewer plant. Several of us enjoyed public sector pensions and (socialist!) Social Security, never mind the (socialist!) single-payer healthcare for the elderly we call "Medicare."

The idea that something so ubiquitous as public ownership would be taboo, even shocking, is simply bizarre. Yet, that is the current state of play in the US. Anti-socialism rhetoric like your column, professor, has been so heavily marketed that many people simply can't conceive of something good coming from public ownership. 

During big emergencies--World War II is a good example--government takes over large swaths of the economy. In WWII government took over roughly 50% of the US economy. The supposedly unaffordable Green New Deal would only consume 5% of the current economy.

Incidentally, the neoliberal Democrats who advocate those "centrist" ideas laid a lot of the foundations of the public's disgust with the current economic system that rewards the plutocrats, but leaves the public at large in debt peonage. Here's a quote that puts it quite succinctly:

“Trump will not be defeated by educating voters.... Highlighting what’s wrong with him is futile; his supporters didn’t elect him because they mistook him for a competent administrator or a decent man. They’re angry, not stupid. Trump is an agent of disruption — indeed, of revenge.....Workers now sense that economic justice — a condition in which labor and capital recognize and value each other — is permanently out of reach; the class war is over and it was an absolute rout: insatiable parasites control everything now, and even drain us gratuitously, as if exacting reparations for the money and effort they spent taming us. The economy itself, and the institutions protecting it, must be attacked, and actually crippled, to get the attention of the smug patricians in charge. Two decades of appealing to justice, proportion, and common decency have yielded nothing." - Thomas Greene (Noteworthy): 

One cannot remedy these systemic problems without enterprises that include public benefit, not just personal profit, in the calculations that guide them. Professor, you may call what you're proposing "centrist," but it sounds like more of the flapdoodle Ronnie Reagan would endorse to me.

 

Amish Community to the Rescue!

 

🚨#BREAKING: A wild report from a firefighter in Tennessee confirms that an Amish community whose sawmill completely burned to the ground on the night of April 8th...

...had been COMPLETELY REBUILT AND WAS ALREADY FUNCTIONING on April 17th, just 8 days later

Read that again. pic.twitter.com/EeaSQCUK15

— Matt Van Swol (@matt_vanswol) April 23, 2025

China (once again) Owns the US

(from a tweet)
Arnaud Bertrand

@RnaudBertrand

Responding to this previous tweet: WHITE HOUSE CONSIDERS SLASHING CHINA TARIFFS TO DE-ESCALATE TRADE WAR, SOURCES SAY -- WSJ

If this gets confirmed and Trump indeed folds, this will be seen as one of those seminal events that confirm, beyond all the propaganda, a fundamental rebalancing of power between China and the US, and an end to the era of US economic dominance. Factually speaking, the US launched an extraordinary attack on China's economy, as according to Trump and others around him the tariffs were largely about a "grand encirclement" plan of China (Bessent's characterization: https://bloomberg.com/news/newsletters/2025-04-12/bessent-has-a-grand-encirclement-plan-for-china-bloomberg-new-economy…). 

But China didn't get intimidated and responded in kind, and 21 days after not a single country - not one - made a "deal" with the US against China, or even signaled their intention to do so. Quite the contrary, many countries publicly stated their intention to get closer to China as a result and to derisk from the US. 

Furthermore, as we all know, the US lost trillions of dollars in its stock market, saw the cost of its debt soar like rarely before and the value of its currency crash. And I'm not even speaking about the thousands and thousands of companies and individuals in the US complaining about how the tariffs are already affecting them negatively. 

The impact on China's side was much less pronounced: the CSI 300 Index is virtually unchanged, and so is the cost of China's debt, standing at 1.67% for their 10Y bonds vs 4.4% for US 10Y bonds. Due to the tariffs, the IMF just predicted a reduction of only 0.5% in China's GDP growth (down to 4%) vs a loss of 0.9% for the US's GDP (down to 1.8%), meaning that China would keep growing at more than twice the rate of the U.S. despite the tariffs, and would be much less affected by them than the U.S. 

In short, when Trump undoubtedly attempted to showcase America's might, he's only achieved a brilliant demonstration of its impotence and, by contrast, highlighted China's diplomatic and economic adeptness. Basically, we're in a new world where America simply cannot bully its way around anymore: when they do so, they end up hurting themselves first and foremost.

...

Meanwhile, from Molson Hart's tweet:

The White House has put itself and the country in a bad situation but doesn’t realize it yet. 

Around April 10th China to USA trade shut down. 

It takes ~30 days for containers to go from China to LA. 

45 to Houston by sea, 45 to Chicago by train. 55 to New York by sea. 

That means that there are no economic effects of what was done on April 10th until about May 10th. 

Around that time (it’s already started to happen) trucking work is going to dry up. Warehouses will start doing layoffs because no labor is needed to unload containers and some products will be out of stock, reducing the need for shipping labor. 

All this will start in the Los Angeles area. 

After about 2 weeks, it’ll start hitting Chicago and Houston. 

Let’s say the White House, after 3 weeks, changes its mind, on May 31st. “This isn’t working out like we thought it would. Tariffs back to 0.” 

Let’s say China says “bygones be bygones, we’ll go back to how things were”. Let’s say every factory in China that got screwed by their orders being cancelled says the same thing “no problem, we’ll make and ship”. 

The problem is, even under the most favorable conditions of China and the factories restarting economic ties as though nothing happened, it will be at least another 30 days before economic activity is revived. 

And that’s just in LA. 

In Chicago/Houston, you’ll need to wait another 45 days. 

New York, at that point, will still be getting containers from before April 10th, they will then have 50 days (May 31 minus April 10) of zero economic activity at the ports, in trucking of Chinese goods, in warehousing. 

The whole situation is a bit like lockdowns. Once you shut down, it takes a long time to get economic activity back to where it was, if you ever can. 

And again, this assumes, that China and its factories, which make things you can’t buy elsewhere, will start right back up again as though nothing happened, which is unlikely. 

It’s almost like we’re speeding towards a brick wall but the driver of the car doesn’t see it yet. 

By the time he does, it’ll be too late to hit the brakes.