Shownotes Transcript
Welcome the money for the rest of us. This is a personal financial on money. How what works, how to invest IT in, how to live without worrying about IT. I'm your host. David's time today is episode four.
Seventy seven is part one of our national debt master class in the next three episodes of money for the rest of us, in conjunction with our tenth anniversary, we wanted to have an debt discussion of one of the greatest potential long term risks or investors. U. S.
National debt is a topic we've covered over fifteen times on the podcast, and reality is, my view and concern regarding the national debt has changed in the past decade. In the past ten years, I estate, i've written and spoken at least three million words in connection with the money for the rest free podcast plus episodes, investment guides on the website, the insiders guide, email newsletter. And in one book that's equivalent, writing fifty books, five books a year.
With all that speaking and writing has allowed me to look at a specific topic, such as the national debt, from many different angles to go back to IT again and again. Trying to really understand the topic can get Better at explaining IT. As I come to understand IT for this national debt series, I will listen to a number of the episodes we released on the topic to see what I said and whether it's still applied.
Those earlier episodes are helpful in setting the stage for this national debt series. I want to share with you in part one portions of episode one in four from money for the rest of us released in may twenty fourteen as well as as a portion of episodes fifty seven released in may twenty, the audience has been remained red, although admittedly in twenty seventeen my delivery was a little too intense. How I speak on the podcast is one of the things that has changed in the past ten years.
Part one, then of this series, our national debt master class, focuses on the idea that a country that issues debt in its own currency can't default on that debt unless IT chooses to. A country can always create the money to make interest in principle payments. By doing so, IT replaces interest, very debt, with non interest burying currency, fiat currency.
Likewise, the country working through its central bank can control the interest rate. IT pays on the debt. And we will see in the case of japan in this episode, how that's done.
And finally, the ability to create unlimited amounts of money through government spending, quantitative easing and issuing bank loans means federal government borrowing can't crowd out the private sector, sucking up all the savings. So the private sector can't get access to capital IT just doesn't work that way. There is an unlimited amount of money.
What there isn't an unlimited amount of our real resources, land, people, projects, ideas. When the supply money overtakes the private sector's ability to produce goods and services, that leads to inflation or potentially hyperinflation. When a government actively destroys the private sector economy, as we see in this episode with veneur. At the conclusion of this episode, i'll give you a preview what will cover in part two of our our national debt master class.
So when we talk about money, we're not talking about theory, but it's now just digits. So mechanically, what happens that they just can change the digits because IT isn't anything. Money is nothing.
Why then do we invest? The main reason invest. Because we want to take this nothingness, which is money, to just numbers, which are just digits.
And we want to buy real resources. We want to take this nothing in and buy something, a value that creates income that will hopefully out pay inflation. How could the federal government go bankrupt? What would you take? what? How does the business go? Background t business has go.
Background t when they have so many expenses. And on the income, they don't need money. The money the federal government run out of money, I can't.
Because the federal government has a monopoly over the currency, they can create money at a thin air simply by spending. It's impossible for the federal government to go back unless politicians choose to. But mechanically, IT just can't be done because there's always money to pay off the debt.
And investors, if they're wise, they know that. They know that federal government debt, which is really treasury bonds and notes and bills, is this free? The government can go. Background, one of the things that dumb founds me, there's always this, this phrase, our children and our grandchildren are going to be having the payoff. Ff, this national, we're leaving in with his huge burden.
That perspective is only looking at one side of the season in your life, when was the last time anyone came and knocked on your door and wanted to collect the debt that your grandparents and great grandparents curr the federal government, federal government that decades ago, nobody comes in, collects federal government dead because the dead is somebody has as asset. And there is a huge demand to hold federal government debt because it's resort, the government go backup pt, so the national, that will never be paid off ever. IT hasn't been paid off since eighteen fifties. If the central government tried to pay off the debt, the only way they could do that is to run a surplus. And what happens when the government runs a surplus, that means the private sector, on the other side of the cesar, has to run a deficit, which means the private sector is spending more than they are taking in an income which they can do over an extended period time.
The federal government can't pay off, instead just won. Ever be able to?
Because as soon as IT runs a surplus for a year or so, the economy goes into a recession. The economy contract what happens when the economic contracts income goes down, which means is incomes go down, household and businesses are paying less income taxes, and so federal government revenue goes down because the tax dollars or less, you don't even have the chance, the tax rate, the tax dollars are less, with tax income drops at the same time, unemployment goes up. And so the other garments paying more unemployment benefits. And so the government's expenditure are going up by the income is dropping, which means they actually switch over from a surplus to a deficit. That's just when the math works.
okay. Those are portions of epo de one and four released in twenty fourteen. Let me share part of epson one fifty seven released in may twenty seventeen. We start off with the report by the congressional budget office that was released in twenty seventeen on the national debt situation at that time and some of their warnings that they gave in that report.
The report includes the dire warning that, quote, the prospect of such large and growing debt poses substantial risk for the nation and quote specifically, the C, P, O believes that if the national debt row to the level IT is projecting, IT would, quote, hurt the economy and increased the likelihood of a fiscal crisis in which investors become unwilling to, that's a government borrowing unless they are component with very high interest rates and quote, the cbs states that the resulting jumping interest rates, quote, would reduce the market value about standing government securities, and investors lose money.
The resulting losses from mutual funds and funds, insurance companies, banks and other holders of government that might be large enough to cause some financial institutions to fail, creating a fiscal crisis. And quote that, scary. Now, the congressional budget office is a non partisan entity that produces cording to the website, independent analysis of budgetary and economic issues to support the congressional budget process.
The fact that the cbo is non partisan does not mean the organization does not have a point of view. IT does. IT has a theoretical bias about how the global economy and financial system Operate.
We need to understand what that biases in order to analyze their conclusions. The cbo believes large budget does IT require the federal government to borrow more money from the private sector to finance the deficit IT. If the government borrowed more, more people savings would be used to buy treasury security.
And does private investment would be crowded out? Crowded out? That's a key term. In other words, there would be, according to the cbo, less private savings, including bank deposits, which businesses could borrow in order to invest in product tivy enhancing projects because so much money will be sitting in government bonds.
The C, P, U rights with less investment, and capital goods factories and computers, for example, workers would be less productive, because productivity growth is the main driver of growth. People's compensation decreased. Investment also would reduce average compensation per hour, offering people less incentive to work.
The cbs, you and that of many economists, is that a limiting constraint on the economy is the amount of money. A higher federal debt level means the government up the increasing percentage of the limited money supply, leaving less for the private sector to save and invest in order to entice investors to financially ever larger budget deficits, interest rates will have to increase. This in turn, will result in less investment by private businesses in productive projects that can increase economic growth.
That's because the return on investment for individual products, we had to be greater than that would otherwise in order to pay higher interest cost on the debt used to fund the project. Higher hurdle rates would mean fewer viable investment projects, which means lower productivity for the entire economy and lower wages for workers if the economy doesn't become more productive, if businesses are not able to produce more goods and services for hour of of labor than workers won't get wages, if theory is a limited supply of money, then the federal government could indeed crowd out private sector investment as annual budget deficit reduce sector savings. This is the most important question of our time.
The most important economic question is the supply of money limited, or is an unlimited because of its limited, then we can have crowding out of the private sector. Interest rates could sky rocket, wine Prices would plunge, and that we could have a fiscal crisis. So that's a theory.
And i've done episodes on the national debt, and you kind of know where I stand. I do not believe that there is a limited supply of money. Some would call me, well, Michael tanner, for example, of the cato institute.
Not that I met him, but I just read his book or started reading his book. He would call me a dead denier because I do not believe in the terrible ramps, the national debt. But I choose to read his book because I want to see what the argument is, because I have the observation and I have the theory, but I could be wrong.
And so I want to read and learn what the other side they saying. What is the basis for their argument? So he has a book. He's a Michael tanny. He's a senior fellow at the cato institute. His book has called going for broke, he writes, government borrowing tends to crowd out private investment because a dollar borrowed by the government is a dollar no longer available for private use.
If the government takes IT, then a business the private sector cannot borrow that dollar and this crowding out and there's this competition and with and there's a competition to borrow, money rates potentially could go up because would would mean enough savings for the private sector to borrow. Tenner compares the federal government to a family sitting around the kitchen table discussing their household budget and realizing they spend more than they bring in. And that if they have been borrowing, as he says, the rest in living off credit cards for years, that same family has not put anything away from unexpected expenses and has promised to pay children's college tuition and will have responsibility for their ageing parents, he writes, if the U.
S. Government were a family that pretty much the situation IT would find itself in, except the U. S. Government isn't a family, is a entity with its own currency printing press and central bank that oversees a private banking system that has the ability to create an end less supply of money.
Former federal reserve chairman ben bern nai wrote in two thousand two, under a fia, that is, paper money system, a government in practice, the central bank, in CoOperation with other agencies, should always be able to generate increased namal spending and inflation. The U. S.
Government has a technology called a printing press, or today, its electronic equivalent that IT allows IT to produce as many U. S. Dollars as IT wishes at essentially no cost.
Frankie also route money is special. It's not only a zero interest liability, but also a perpetual liability. If you pull out a dollar bill across every piece of us issued paper, the words are written on the top federal reserve.
no. Te, a note in this context is a dead instrument issued by the federal reserve. The U.
S. Central bank. Is this paper no pay interests? no. Can you turn me into the federal reserve and redeemed for gold or for some other former payment? no.
If you brought a back for a hundred bills to the federal serve, national bank would either exchange IT for more cash or credit your bank account for the same amount. In other words, dollars are indeed perpetual liabilities of the federal government has issued by its bank, the U. S.
Fetal reserve here's how columbia university economist Michael woodford d puts IT. He wrote, a government that issues debt. The nominated in its own currency is in a different situation from that of private barbers.
And that is that promise only to deliver more of its own liabilities. A treasury bond is simply a promise to pay dollars at various future dates, but these dollars are simply additional government liabilities that happen to be interest earning. There is does no possible doubt about the government's technical ability to deliver what IT has promise the federal government can create an unlimited supply of money.
And how does he do that? IT does IT, by spending, have an art iva of the levy economics institute road when the treasury spans. Non government entities who receive the income also receive brand new bank deposits.
This is because the federal reserve clears the government expenditure IT credits private bank accounts with reserves. What does that mean? What that means that when the government spends money is all done electronically theyd make a pay.
Maybe IT clears with the feral al reserve that puts that deposit in the bank account of the entity. There is no need to wait for the money. From a technical stamp point, we can look at what happens Operative.
But from a technical standpoint, since it's all electronic digit, that's how money is created. Government spending creates new bank deposit for the private sector, doesn't have to find the money. The money is created through this accounting entity cleared by the federal reserve bank.
Deposits like paper currency, are also perpetual liabilities, although in the case of bank deposits, the bank may like th Epace o f i nterest o n t hem. When the government issues a treasury bond, all that is happening is none index iring notes dollars are converted into interest bearing assets. Likewise, when commercial banks make loans, they also create new bank deposits, which is a liability. The bank, while off setting IT on its accounting books with a new, as I called a loan receivable, and I discuss that in a great deal detail on absence ninety four, how money is created and destroy.
Before we continue, let me pause and share some words from this week. sponsors.
If the money supply is unlimited, then federal spending does not crowd out the private sector. But if IT is, then that does crowd out the private sector and that could lead to ballooning interest rates. So what do we do? We have to actually observe what is happening.
On september twenty first twenty sixteen, the bank of japan, japan's central bank, made a startling announcement. They announced a new policy framework and according from their press release, IT consists of two major components. The first is yield curve control, in which the bank will control short and long term interest rates, and the second is inflation overshooting commitment, in which the bank commits itself to expanding the monetary base until the year.
Your rate of increase in the observed consumer Price index inflation exceeds this Price stability targets of two percent and stays above that target in a stable manner. What are they saying? They're saying they're gona control interest, ate and gna create enough money to Spark higher inflation.
Are they going to do that in terms of controlling interest? They could they say in the press release, the bank will purchase japanese government bonds so that ten year J, G, B yells that short for japanese government bonds will remain more or less at the current level, around zero percent. That's what they said six months ago, more than six months ago.
And you know where the japanese tenured treasury is? IT is right, around zero percent. The higher was early, was at zero point one percent.
This is from a country with the highest public debt baLance in the world, the highest gross debt to GDP in terms of their national debt, two hundred hundred and thirty eight percent. That's what I was in twenty fifteen. Here's an article.
This was in a bloomberg Martin show is a senior economist at budget to research institute, tokyo. He says japan is a country where public that in private hands is falling the fastest anywhere. What japan's estimated growth, government debt is now over twice the size.
The economy, as I mentioned, two hundred forty percent, according to shelters calculation, using B, O, J data full of holdings from private actors like banks and households to the central bank is having a big impact. IT means dead in private hands will fall about one hundred percent of GDP, and two to three years from one hundred and seventy seven percent just before prime minister shenzhou abby took power in late twenty twelve. That estimates. So the bank of japan is buying government, but IT is monetising the dead at the same time its controlling interest ate. What's occurring is an observation, is not what's supposed to happen, do not facing this fiscal crisis where interested are skyrocketing despite the high dead branches.
Another court from the article, this is by a dare Turner, whose chairman of the institute for new economic thinking, he write, I do not believe there is an incredible scenario in with japanese government debt can be repaid in the Normal center of the word repay IT would therefore be useful to make clear to the japanese people that the public debt does not all have to be repaid and some of IT can be permanently monitise ed by the bank japan, that's exactly what happening. They are monitise ing the debt and controlling interest rate. That's what we're observing.
And that contrar dict, the theory, at least as put up by many economists, that there is a limited supply of money and that the public sector is crowding out the private sector because the center bank is creating the money to buy those bonds. And they are creating the money to buy the bond they can control in, and they have been successful. 那 我 跟 他 这个。
To observe and see how these things play out. But as of now, the theory and the logic as we walked through how the banking system work, says that the federal government can create unlimited supply of money, that the private banking factor that is overseen by the feed dba reserve can create an unlimited supply of money through their lending activities. And so there is not a rowing out.
And so IT is not a given that interest rates will Spike and that the the federal dead get out of control because here we have the largest country in the world, japan, or the largest debt baLance in the world. And they're be able to pull down that public debt baLance as a percent of G D P as I monotoned ed debt. And they've not seen inflation in japan economy.
IT does obviously have its issues. He's been doing relatively well on a per capital basis. They struggle because the demographics are not their favorite. The population is shrinking, and that makes IT hard to grow the overall economy because they don't have more workers.
But at the same time time, they are becoming more productive and GDP per capital since nineteen ninety, once over the past twenty five years. So the amount of economic output per person has grown at zero point seven percent. That's real per capital GDP.
Zero point seven percent gone from forty thousand dollars in nineteen ninety one to forty seven thousand and hundred and forty dollars at the end of teen that using two thousand five dollars, you compared that to the U. S. Gone for thirty seven thousand five hundred dollars in one thousand nine hundred and ninety one to fifty two thousand, one hundred and ninety five dollars per person at the end of twenty sixteen.
So about a one point three percent grow. So a little higher for the us, japan, you know, they hang in in there. In twenty fifteen, I read the book bone clocks by David mitchum gypt.
IT was disturbing. IT had government collapsing, roving gangs, corruption, cacos, which is terrifying name not enough food. And I was reminded of that the other day when I read an article in the wall street journal that talked about ela and their people are starving.
The article profiled gene peer plane chart, who's a year old? He's got a drawn face. And i'm raining from the article now of an old man and a cry that is a little more than a winter. His rib show through his skin. He wasted seven pounds.
His mother, maria plancher, tried to feed him what he could coming through the trash graphs of chicken in her potato SHE finally took him to the hospital in cars where he praised a right smoking culture keeps her son alive. I watch him sleep and sleep, getting weaker all the time, losing weight, SHE said. I never thought i'd see then as well like this.
Her country was once in america's Richard, producing food for export. But as well, I now can't grow enough food, defeat its own people in an economy hubbard, by the nationalization of private farms and Price and currency controls. Then as well, he has the world's highest inflation, seven hundred and twenty percent.
Last year is rising up, up at least twenty percent a month in this year. Since twenty thirteen, economy has run twenty seven percent. According to local investment bank to reno capital, the articles on IT says horns of people, many with children, are told one mage through garbage and uncommon side.
A year ago, people in the countryside pick farms clean at night, stealing everything from fruit and trees, the pumpkins on the ground, adding to the mystery of farmers heard by shortages of seed and fertilizer. Looters target food stores, family padlock their refrigerators. What in the world is going on in Venus? Well, the Venus where the government can create money, but they have a problem, the wealth of a nation is the ability to produce goods and services, then, as well as ability do.
That has been completely undermined by corruption, by the state taking over many private businesses. By putting in private Price controls, they have essentially destroyed their economy by trying to manage IT from the top down. Theyve taken over fourteen hundred private businesses the government has expropriated since nineteen ninety eight.
Recently, gm plan, the car plan was shut down, taken over by the venezia la authorities, and G, M, laid off twenty seven hundred workers of all three. Journal article profile a pog farmer, troon I his forty eight. He works at the hog farm that his father and italian immigrant founded in the nineteen seventies.
His business has now been battered by Price controls, a shortage supply and criminal gangs. The farm has gone from two hundred female pigs, eight producing a dozen piglets, to fifty mr. troon.
I can afford the high protein feed and medicines. He once used four grown pigs, now one hundred fifty five pounds. Instead of two hundred forty, we used to send one hundred and twenty two hundred fifty pigs a month slaughter, mister trionel said. Now it's fifty, sixty animals, a joke. He makes ninety three cents per kilogram, or two point two sounds of me, he said, but needs a dollar seventeen to make a profit.
Since twenty twelve, eighty two percent of venezuela pig producers have closed and production has fAllen seventy one percent, according to industry representatives, the agricultural companies the government has taken over, including milk factories and distributions of fertilizer and feed, are closed or barely Operating, according economist s in farm group, says a wall street journal. But that's scary that that is what's happening. And Venus well and another having massive protests and we'll see what happens.
A big problem with venezuela is they have the largest oil reserves in the world, but it's been mismanage. Their economies been mismanaged for decades. There's a policy paper put out by the cattle and still link to this and the show notes.
This policy paper talked about venez. Venezuela went from being one of the most well off countries in land amErica and worldwide in the nine hundred and fifties to a period of stagnation and even decline over two decades. Its real income per capital declined by twenty five percent.
In one thousand eighty eight, two point four percent of Venus vaLance were living below the poverty line. But by one nine hundred and ninety eight, when hugging vez was elected president, bad figure had reason to eight, ten and eight percent, which is one reason he was elected and was able to man a form of socialism and or communism. The articles goes on.
Few people realized that when, as well as current oil reserves are the largest in the world, they are about a dozen times larger than what venezuela at disposal in the nineteen eighties, and as well a has been hurt by falling oil Prices. At the same time, a large percentage of their national debt is born and dead is the nominated in U. S.
Dollars, which doesn't give them the flexibility that the U. S. Has or japan has with their dead, is the nominated in their own current, can be monetize.
And so they can control interest rates. And IT doesn't have flexibility and y've missed manage their economy. And they have try to control IT from the top down.
And the wealth has participated because the wealth is their ability to produce goods and services. And now literally, their people are starving and IT. IT is very, very sad. So back to the most important economic question of our time.
Can the federal government that issues its own currency and has its debt denominated in its own currency, can I create an unlimited supply money? Can IT control interest rates? Can IT not crowd out the private sector? absolutely. And we're seeing IT happen. We're seeing IT happen in japan.
But does that mean the federal government can do anything I want to create an unlimited supply money? No, the constraint is the ability of the private sector to produce goods and services, and if too much money is created, that will lead to inflation and can lead to market interest rates, even though maybe the government bond rates controlled market interest rates for borrowing debt will be much, much higher, and so the constraint is the governments ability to make sure inflation is kept in check, that not too much money is created, and not undermine the private sectors ability to become more productive and to continue to use our city and and hire more workers. We be more focused on big important issues of how to increase productivity by focusing on our educational system.
How can we have more educated students? How can we get more people out of poverty so they more opportunity, so they can be productive workers. Why is that? The health care costs is pointed out by warn buffet in the us.
As a percent of GDP is seventeen point one percent, significantly higher than other developed countries such as germany at point three percent, japan at ten point two percent, britain at nine point one percent. It's a competitive disadvantage to the U. S.
Has relative to other countries in terms of their productivity, their ability to compete. Those issues we should be focusing on, not some issue many years down the road of regarding the national debt. We're not having a financial crisis, a fiscal crisis in the U. S. North in japan.
And if we look at how the financial system actually works and not how IT work, fifty years ago, and we we were on the gold standards where there was the inability of the government to create unlimited amount of of money, and they could crowd out the private sector, because every dollar could be exchanged for gold. Now, money is digital. It's electronic.
The federal government has a printing press and electronic printing press. Private banks create money by lending. So the constraints is not the ability to create money in service. Det, the constraint is making sure we have a responsible government that they are not creating too much money and leading to inflation.
So those are a portion, several episodes from twenty fourteen and twenty seventeen, and money for the rest of us. We covered four principles. One, the national debt won't be paid off.
Two, government can control the terms of its dead issuance, including interest rates. Three, government debt doesn't crowd out the private sector's ability to borrow in, invest in. The fourth, prince boys, there is no free lunch. Too much money creation leads to inflation.
In our next depot, part two of the series we focus on, while these four things are true, the private sector, including commercial banks, can choose not to play the game, to not hold the government, that or the currency. We have a choice. Private sector has a choice.
We look at the ramifications of of that choice not to want to hold the fiat currency or the national debt issued in that fiat currency. In our next episode, episode four seventy eight, did you know you may be missing some of the best money for the rest of this content? Our weekly insider guide, e monuc letter goes beyond what we cover on podcast episodes and help cell vate your investment journey with information that works best in written or visual format.
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Dot, come. Thanks for listening to part one. Everything we've shared with you in this episode for general education have not considered your specific risk situation, have not provided investment advice, this is simply general education on money investing in the economy. Have a great week.