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Discussion: (49 comments)

  1. morganovich

    well, in fairness, public debt has not been being defaulted on.

    according tho these folks, about 70-80% of the household deleveraging was accomplished by defaulting on debt.

    “The decline in household debt, however, doesn’t necessarily mean we’ve changed our ways. In fact, says Mustafa Akcay, an economist at Moody’s, “nearly 80% of deleveraging is caused by defaults.” Only 20% of the decrease comes as a result of what he calls “voluntary deleveraging,” i.e. the hard work of paying down our debts faster than we borrow.

    “Most of the decline in outstanding aggregate debt has been defaults,” agrees Brookings Institution economist Karen Dynan, who last year analyzed financial institution charge-offs of loans that have gone bad and found that the value of defaults was about two-thirds as large as the total decline in household debt.”

    http://business.time.com/2012/10/19/household-debt-has-fallen-to-2006-levels-but-not-because-were-more-frugal

    a deleveraging of only 1/5th the size would still be a much more positive trend that we are seeing in government to be sure, but i think it’s worth differentiating between defaulting on your mortgage and paying down your credit card.

    1. During the last five years, U.S. individuals have walked away from a staggering $585 billion in mortgages, credit card debts and other personal loans. That works out at about $6,000 per household. According to the Federal Reserve, U.S. household debt peaked five years ago at a gigantic $13.8 trillion. Since then it has declined to $12.9 trillion — a decline of about 7%. To put that in context, household debts today still exceed those seen at the end of 2006, near the peak of the bubble. They are three times what they were in 1998.

      via http://www.marketwatch.com/story/why-us-might-be-a-nation-of-deadbeats-2013-01-1515&ei=WDADUeOKL8fKrQGd-4CIDg&usg=AFQjCNGbmuyCh44s3KFTzc8rQCEUn2Z44g&bvm=bv.41524429,d.aWM

      1. It hasn’t defaulted recently, but has in the past, contrary to those claiming it’s never happened. The question is what gives when this intractable scenario finally can’t be kicked down the road anymore? I rate the possibility of central bank inflation as practically nil, especially considering that most of govt liabilities are inflation-indexed. That leaves massive spending cuts and default as the only options. I’ve been leaning recently towards default as the most likely outcome, but I now read Rivkin and Casey and they make a good case that default is not allowed under the Constitution, so massive forced spending cuts will likely be the outcome. So the only question is do we cut now when we can ease into it and start getting people’s expectations down or do we wait till we have to make much bigger cuts later? Given the complete irresponsibility of politicians and most of the populace, I expect the latter.

        As to Mark’s question, simple, they talk about it all the time. The politicians’ claim is that consumers, by paying down their debt instead of running out and spending more in this recession, are not spending enough, so the govt will borrow more and step in to keep spending up. Of course, when that govt action consisted of a tax decrease, there’s good evidence that was just used by consumers to pay down more debt. When it consisted of spending, the govt just shit it away on all the pork projects they couldn’t get passed for years, but now had an excuse to splurge on, effectively wasting tax money at precisely the worst moment to do so. They then turned around and blamed the rich and Obama won again. With an electorate this stupid, there’s really not much that can be done.

        1. Hmm, first link didn’t come through, here it is again.

          1. morganovich

            sprewell-

            there are other options as well.

            laws can be changed to take inflation adjusted out of the liability stream.

            this was a part of the “fiscal cliff” negotiation – moving to chained cpi for ss and medi to reduce the amount it rises.

            this same thing happened under clinton when cpi was adjusted then.

            if they take out the COLA adjustments, then they could inflate like crazy.

            if they do it, buy gold.

            i hope they don’t, but it’s possible that they could.

            i suspect the more likely scenario is that the SS and medicare are personal savings accounts not entitlements argument will be abandoned.

            SS will have means testing and likely an eligibility age hike. or they will just let benefits slide and commence paygo earlier than planned. payments into SS over a career already exceed the lifetime expected benefits and that could just keep going.

            medi is trickier, but the real killer is part b. rates either need to rise dramatically (like 2-3X dramatically) or services will get cut etc.

            that could happen several ways. it might be that the feds will just start dropping procedures from coverage or capping lifetime benefits, but that’s going to be politically unpopular.

            the alternative seems to be that the fed will keep cutting reimbursement as a cost control and fewer and fewer doctors will accept medicare until we wind up with wait lists like canada and care will be rationed that way.

            many doctors are already not accepting new medicare patients and some large centers have stopped accepting it all together.

            http://www.azcentral.com/arizonarepublic/business/articles/2009/10/09/20091009biz-mayoclinic1009.html

            i suspect this may be the preferred route for the feds as they can then blame this on the private market, claim market failure, and seek more regulation to drive toward single payer.

    2. Private debtors would be much less likely to default if they could also confiscate money by force.

  2. PeakTrader

    “Obamanomics” has largely been ineffective, because when you borrowed $10,000 too much for a car, for example, the government borrowing $10,000 to pave the road won’t help you much.

    And, so, there are two $10,000 bills.

      1. broken record – Obama cannot spend a thin dime unless Congress approves it.

        1. broken record – Obama cannot spend a thin dime unless Congress approves it“…

          Good one spam boy, yet again you have proven that you either didn’t read the posting or weren’t smart enough to comprehend all the words in it…

          1. nope. we do read the postings but they are often disingenuous because the imply that Obama is spending the money that is causing the debt – and he is not.

            Congress approves the spending – not the POTUS.

            The debt we have came from Congress – GOP and Dem.

            They last voted – both GOP and Dem, both in the majority to continue full-rate deficit spending in Sept 2012:

            http://clerk.house.gov/evs/2012/roll579.xml

            the guys and gals who said “aye” on the roll call are the ones that caused the debt.

          2. spam boy whines: “nope. we do read the postings but they are often disingenuous because the imply that Obama is spending the money that is causing the debt – and he is not“…

            Gosh! You really do seek new levels of stupidity every chance you get…

          3. Sorry spam boy that much debunked libtard drivel (which I linked to previously just for you) still proves you’re an idiot for you hopes of it morphing into something sensible…

          4. Forget it spam boy, I soved that particular link your quite awhile ago…

          5. GOP hypocrites who voted FOR Medicare Part D: Marsha Blackburn, Roy Blunt, John Boehner, Eric Cantor, Phil Gingrey, Bob Goodlatte, Pete Hoekstra, Duncan Hunter, Darrell Issa, Pete King, Steve King, John Mica, Paul Ryan, and 100 others.

            now these same hypocrites say we have a “spending problem” but as far as I can tell not one of them has advocated killing Medicare Part D that they voted for.

            how do you square that position Juandoze?

          6. now these same hypocrites say we have a “spending problem” but as far as I can tell not one of them has advocated killing Medicare Part D that they voted for.

            how do you square that position Juandoze?“…

            Gosh spam boy! Did you take excessive dose of stupid pills today or what?

            Why don’t you ask a republican that question?

            There’s even a contact form that you can use…

        2. “broken record – Obama cannot spend a thin dime unless Congress approves it.”

          This is the same Larry who gloats about how Obama kicked the GOP’s ass in the fiscal cliff standoff.

          Larry’s too stupid to understand his own contradiction.

  3. Citizen B.

    “…households are de-leveraging and have less debt relative to disposable personal income in a generation. What’s going on?”

    Households have to repay debt. The federal government doesn’t, collectively, think it has to, as evidenced by borrowing forty cents for every buck the guvmint spends.

  4. Households spend their own money and the monkeys in the Potomac Swamp spend ours. The people doing the spending aren’t doing the paying.

  5. Fed debt as percent of GDP but household debt and financial obligations as percent of disposable income… what a weird comparison. Fed debt as a percent of tax revenue versus household debt and financial obligations as a percent of household income seems like a less weird comparison to me, though still weird since one side earned while the other plundered.

    1. good point. As a percent of gdp implies that all of GDP is at the government’s disposal – its theirs. How ominous.

      1. SeattleSam

        They believe it IS theirs. That’s why anything that allows you to keep more of what you earn is labelled a “tax break”.

        Seriously, no business would measure debt as a percent of revenues. They would measure it relative to free cash flow and/or real assets. Despite all the rhetoric, there really is an upper bound to the portion of GDP the federal government can extract without dramatically slowing growth. Historically it’s been in the upper teens.

        1. morganovich

          sam-

          this is not unusual for government.

          any private business that tried to use government accounting around budgets would be in deep trouble. the cfo would be in jail.

          the feds refuse to use GAAP. they use a modified form of cash accounting where a promise made this year to spend money next year is not counted as expenditure as it would be under GAAP. this creates a terrible incentive to spend in later years through unfunded liabilities.

          under GAAP, the us government has not had a balanced budget since eisenhower and is currently running deficits of something like 40% of gdp, which is to say about 2.5X federal revenues.

        2. Yep. Income and investment tax rates have fluctuated wildly since the 1930′s, yet tax revenue as a percentage of GDP has averaged 18% over the same period.

          Increasing tax rates (particularly on top earners) never has and never will increase tax revenue, it’ll only disincentivize productivity and incentivize rent seeking.

  6. Benjamin Cole

    I am all for reducing public debt.

    But Perry might also wish to compare total private debt to total public debt.

    You would be surprised. Total private debt is much larger and grew much faster than public debt until 2008.

    If the USA is over leveraged—and it may be—it is due to huge amounts o unsustainable private debt.

    1. morganovich

      benji-

      that’s a bad comparison.

      if you buy a house with a mortgage, that’s debt, but it’s debt secured by an asset.

      if you run up debt to pay for medicare, that is unsecured debt. not the same thing at all.

      further, if you look at the debt of the US public, which, admittedly, is likely too high and compare it to their DPI and then take federal debt and compare it to federal revenues to get a like vs like comparison, the consumer is FAR less levered that the feds.

      total federal debt of $16 tn is 500-600% of government revenues.

      the consumer is nothing like that levered and much of their debt is a mortgage which is secured debt.

      1. Benjamin Cole

        Morgan-

        Good points.

        Still, if you look at total private debt—including corporate—you will see an explosion since 1990.

        As for privateer debt being secured by an asset—well, we saw how that worked in 2008. Homeowners and commercial property owners walked.

        AIG got killed, you know.

        The US debt public debt is too high, although for the federal portion they can print money to pay it off. So no concerns there about default.

        I do think corporate income should not be taxed, ever, so that shareholding as opposed to bond holding would make more sense.

        1. morganovich

          ben-

          having a debt secured by an asset is no guarantee it will be paid, no doubt about that. but it did at least get the lenders something. they may not have recouped the full amount they lent, but 60c on the dollar is a helluva lot better than nothing. if a bank sold a house for 60% of the price it was bought for and lent 90% of the value, they got 2/3 back + whatever interest and principal had been paid prior to default. that’s a lot better than the greek holders did.

          regarding aig, they are not even in the lending business in any significant way. what killed aig was the hubris and stupidity of one small trading group in london that basically was the entire market for CDS’s for a year or 2. they wrote insurance on mbs’s and other debt at 200:1 leverage and failed to understand the correlations of the underlying securities and thus got creamed. this was not bad lending nor poor collateralization, it was just flat out stupidity with regard to risk assumption and the pricing of CDS’s. the assumption that defaults between assets would be uncorrelated was shockingly stupid.

          there is no question that debt has exploded in the private sector. but we need to make some distinctions here.

          if you can borrow at 4% and invest in a new project that returns 8%, then such borrowing can actually be a sign of growth. we have to look at the ROI of the investment made by borrowing.

          if you borrow $100k and use it to expand a business that is different than buying a house or using it to fund living expenses. one of the big issues with government debt is that it engages in a lot of activity with no or negative roi and so that debt has nothing to support it save for the productivity of those taxed, which, of course, becomes harder to support when they pay out more in tax.

          again, i am not arguing that us consumer debt is low or not of concern. i think it’s a real issue and that little has actually been paid down as opposed to defaulted on.

          regarding the fed debt, there is more than 1 kind of default. printing huge piles of money is not a de facto default, but i doubt that made the holders of weimar bonds feel any better.

          and in the us with cpi/cola escalators on much of government spending, such printing will deepen the later crisis by increasing costs. that’s how you get a death spiral.

          regarding corporate taxes, i think we need to be a bit careful there. i’d love to live under a system of no corp tax, but it would also lead me to shift almost all my income to a corporate entity and pay for much of my life through it as well. i doubt it would take long for an awful lot of us to figure that out and income tax would basically go away, at least for most top earners who are paying the majority of it.

          i’d rather see a flat tax on income for corporations and individuals set from dollar 1 at some low rate, allow corporations to deduct dividend payouts above the pretax line to prevent double taxation, and perhaps even a shift to a VAT as opposed to an income tax.

          cap gains should not be taxed, nor inheritance, nor bond interest.

          i thought there were some real merits to cain’s 9-9-9 plan. our current code discourages saving and investment and promotes debt accumulation and consumption which seems like a poor idea.

          ultimately, i’d like to see that tax code made dramatically simpler. you ought to be able to figure out your taxes on one sheet of paper.

          1. i doubt it would take long for an awful lot of us to figure that out and income tax would basically go away, at least for most top earners who are paying the majority of it.

            That sounds like a benefit.

  7. Still learning

    IMO we have become accustomed to living beyond our means. We don’t want to admit, and it is politically easier to avoid, the fact that our sustainable standard of living is several notches below where we have been for several years. Unsustainable debt-financed personal spending has been replaced by unsustainable debt-financed government spending to keep just enough voters comfortable. This illusion of prosperity is irresponsible and dangerous. We are being bribed…with our own money, leveraged further with borrowings against the future.

  8. While federal debt has surged, it has done so at a diminishing rate in recent years. A nice way to illustrate this is to examine the recent deficit. You will notice from both a receipts and disbursements perspective, things are improving at the federal level:
    http://www.ritholtz.com/blog/wp-content/uploads/2013/01/receipts.jpg

    As you pointed out, both households and businesses have de-leveraged considerably in recent years. While a large share is the result of defaults, I would think the political theater (among weak wage group, slow spending growth, and other things) we’ve seen has fostered uncertainty and perhaps created an environment which encourages reducing debt, rather than taking on additional obligations. I’m inclined to think that since consumers and businesses have lessened their debts considerably by historical standards, the trend will not continue for a prolonged period of time. I’m optimistic that they will reallocate those funds towards additional investment, consumer spending, and hiring.

  9. re: debt as a percent of GDP. But that’s also how we characterize defense spending..right?

    I think anytime we are talking about debt, deficits, and spending as a percent of GDP – we’re automatically disconnecting ourselves from the reality of what our actual tax revenues are from which we pay for spending.

    that’s what you’d do in your household. You’d certainly not be looking at your debt relatively to your productivity. It would make no sense -especially since productivity can increase without your wages increasing.

  10. Our economy has been a giant, debt-fueled Ponzi scheme since the 80′s.

    Consumers are tapped out, and businesses have too much good sense, so the uber-Keynesians in Washington DC are taking up the slack by borrowing, printing, and spending with reckless abandon.

    http://www.wcvarones.com/2010/12/student-loan-suckers-last-poor-schlubs.html

  11. t c phillips

    Two Americas

  12. Citizen B.

    Here is what Barak Obama said as a Senator in 2006 about raising the debt limit:

    “Mr. President, I rise today to talk about America’s debt problem.

    The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. Increasing America ‘s debt weakens us domestically and internationally. Leadership means that, ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”

  13. Dave Thomas

    Isn’t state and municipal debt missing from this picture? How about unfunded liabilities for pensions, social security, and Medicare?

    1. no such thing as unfunded liabilities for SS. By law, benefits paid out cannot exceed what the FICA tax brings in.

      automatic reductions to match revenues.

      we should be so lucky to have the rest of govt run this way.

      1. morganovich

        larry-

        not exactly.

        SS becomes paygo only after the “trust fund” that is so conspicuously absent is paid out.

        SS paid out more than it took in last year.

        this is going to continue for some time.

        i also have real doubts that paygo will be allowed to actually happen. it’s going to be too politically unpopular and the US has evidenced a strong propensity to dismantle such cuts before they occur.

        further, paygo in a pension scheme is different from reductions in say, military spending.

        SS already provides negative returns on investment. as paygo bite, that will get worse and worse. it winds up being a massive intergenerational wealth transfer that destroys money.

  14. Derek Tomczyk

    This is exactly what counter-cyclical government policy is supposed to do. The government spends more temporarily to allow the private sector to de-leverage. If the government tried to de-leverage at the same time the private sector would fail to do so (everyone can’t save all at once since S=I). The next prediction is that the government debt burden should now recede as the GDP picks up (and in turn also means less spending on social assistance, unemployment etc.) since the Debt/GDP ratio will have the denominator rising and the numerator falling. No new laws, spending cuts or tax increases needed.

  15. Max Planck

    You want comments, Dr. Perry?

    Here’s an observation for you:

    http://www.ritholtz.com/blog/wp-content/uploads/2013/01/receipts.jpg

    1. Max Planck

      Also:

      http://www.stlouisfed.org/publications/re/articles/?id=2323&utm_source=Twitter&utm_medium=SM&utm_campaign=Twitter

      Total home-mortgage debt increased from $53 billion in the first quarter of 1952—15.1 percent as large as annualized gross domestic product (GDP) at that time—to $9.5 trillion in the third quarter of 2012—60.1 percent as large as annualized GDP.2 This ratio reached its peak during the first quarter of 2009, when home-mortgage debt totaled $10.5 trillion, or 75.5 percent of the level of annualized GDP (Figure 1). Compared with the market value of all residential real estate, home-mortgage debt was 62.7 percent as large at the peak. At the end of the third quarter of 2012, the ratio of home-mortgage debt to the value of residential real estate was 55.2 percent. Both ratios had increased substantially during recent decades and especially during the 2000s. They remained at historically elevated levels in late 2012.

      “Adjusting for inflation and population growth, the average American family nearly doubled its mortgage debt between 1999 and 2008″

  16. $16.5 trillion in debt?

    Pffffffffffffftt….. just the tip of the iceberg.

    Going MUCH higher

  17. Dismayed

    Lots of teabagger drivel here. We have a fiat currency, and the US Government is the monopoly supplier of the currency, so default can never happen usnless teabaggers cause it for poitical reasons. The only constraint on spending is inflation, and we have so much slack capacity that it’s not going to happen amytime soon.
    As for the observation that government debt is increasing while private debt falls – it’s an accounting identitiy. Transacions are two sided. Look up sectoral balance on Google.

    1. juandos

      Lots of teabagger drivel here“…

      So I take it you’re intimately involved with the TEA party or are you just parroting Chris Matthews?

      Now this is rather inane but not unexpected libtard statement: “We have a fiat currency, and the US Government is the monopoly supplier of the currency, so default can never happen usnless teabaggers cause it for poitical reasons“…

      Maybe you should refresh your memory on just what fiat money is…

      The only constraint on spending is inflation, and we have so much slack capacity that it’s not going to happen amytime soon“…

      LOL! Can you say, “quantitative easing“?

      I knew you could…☺

      1. Dismayed

        Typical right wing respone. Just call people names, such as “Libertard”. That’s what you reort to when you don’t understand fiat currency. reraed what I said. And do a google search on “Sectoral Balance”. ordo you rely on right-wing spam for your “news”?

        1. juandos

          Typical right wing respone. Just call people names, such as “Libertard”. That’s what you reort to when you don’t understand fiat currency“…

          Quit whining you punk, you after all brought up the ‘tea bagger drivel‘ in your headlong but successful attempt to get it wrong on fiat currency…

          reraed “…

          Do what?

  18. I would be embarrassed to present such a misleading argument. Shame on you. You are comparing apples and oranges. You are comparing total debt of the government to debt payments by individuals. It’s like comparing my monthly house payment to someone else’s total loan balance! Household debt as a percent of GDP is at a similar level to the US government – 80-100% of GDP, depending on how you count it. Same thing with corporate debt. 2013 payments on the government debt are 6% of the budget – less than the household percentage. Both are low now because interest rates are low.

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