It is frustrating to see someone like Tony Robbins, with such a big audience, spend 20 minutes fear mongering about an imaginary problem – that of the U.S. government’s debt.
Of course Tony Robbins isn’t alone. Everyone believes the US Government has the same kind of debt as households. That myth is causing the entire country to be focused on the wrong problem. And the solutions to this imaginary problem will turn the actual problem into a nightmare. Our country has been teetering on the brink of a deflationary Depression – capital D as in the Great Depression – and only the size of the US debt and deficit has saved us so far.
As much as we all hate to hear about money being spent on food stamps, unemployment checks and medicare, that spending is saving the country from tent cities, bread lines and much worse unemployment. That type of spending, in my opinion, isn’t nearly as bad as people believe. I’ve heard critics cry that “trillions have been spent on the poor”. Well, the poor are still poor, so who has the money? The answer is that businesses, workers and savers ended up with it. Money spent on the poor immediately gets spent by them which employs people like the local grocer, the farmer or food company who produced the food, and truck drivers and all kinds of other workers up and down the line. Some of that money also comes back as taxes from those down the production/earning line. Food stamps more than likely also keeps people away from crime as a source of money which saves local governments and hospitals money, not to mention the non-financial benefits of not allowing kids to starve and keeping the streets safer. Yes, there are better ways to spend, but not spending at all would force the kind of economic disaster that Greece, Spain and other countries are living through right now.
But back to Tony Robbins. Tony, if you’re listening, let me try to explain why the US Government debt doesn’t need to be paid back, and their debt is nothing at all like your or my debt.
The simplest explanation is the government can simply print to spend. You might counter that printing would cause inflation, but that’s another discussion. The possibility of inflation doesn’t change the simple fact that the government can print money and therefore can always do that to pay its debts. Households can’t do that. They must either work to earn money, or default on their loans. The Government NEVER has to default.
There are a number of routes I can go for a fuller explanation. But let’s tackle the related myths. One is that “China funds us”. Nope, they don’t. We do NOT borrow money from China. China earns U.S. dollars via their trade surplus with us. Americans send over their hard-earned money for toys and iPads. Companies like FoxConn exchange their dollars for Yuan, and in that sense WE, the citizens, FUND THEM. Next the Chinese government who has a printing press that spits out Yuan whenever they please (and my understanding is that they are adding as much as 17% to their money supply annually for a number of years now – and we’re afraid of 3%), so they try to figure out what to do with these green pieces of paper. The U.S. government will not let them buy strategic things like our oil fields or oil companies, so they are left with buying golf courses, buildings, or… we let them buy U.S. Treasury bonds.
Everyone claims that is them funding the Treasury, and that now the Treasury owes the Chinese. And that is technically true, but look at it another way. Bonds are a savings account just like when you deposit money into a savings account at your bank… now your bank owes you that money. So are you bankrupting them if you deposit $1 trillion? With that money in the bank, is that bank now going broke? Laughable when you think about it that way. Of course you may counter that “they would be going broke if they spent it on medicare and food stamps”. But again, the U.S. can’t go broke since they have a printing press. There is no chance the Treasury, working with the Fed, can’t pay China back if it ever demands U.S. dollars instead of U.S. bonds.
A quick sidebar for the tin foil hat types who are all over the comments section of your youtube video. They claim that the Fed is independent, and owned by private bankers, and that the Government ceded control of the printing presses to them, and so the Treasury might be stuck holding the bag. This is laughably ludicrous. Firstly, it is far more accurate to describe the Fed as a fourth branch of government. They aren’t truly private, for example, Ben Bernanke can’t print himself a billion dollars and go out and buy a house. Yes, there were bailouts for bankers during the financial crisis, but GM got bailed out too, and Congress and the President were in on the bailouts and could have stopped them at any time. The worst part of all this misunderstanding is that you, me, Congress and the President were not knowledgable enough to stop the bailouts and realize there were other ways to solve the financial crisis. But that’s also for another post.
You may ask “why do we call it debt, or why does the U.S. borrow to spend?” First, the U.S. does not need to “borrow”. They could simply end the entire process and not issue any bonds. The biggest savers in the economy (including the Chinese, hedge funds, the uber-wealthy, pension funds and grandma) who buy U.S. bonds could be told to save elsewhere. Congress can pass a spending bill, and the Treasury could just debit the necessary accounts. The Fed could be ended too, although they provide the useful service of setting interest rates (there is no such thing as a “bond vigilante” in the U.S.) We use an arcane process started during the gold standard days, which was not changed when our system changed in 1971. You can find very technical descriptions that would satisfy any open-minded economists at sites like debtdeflation.com/blogs, pragcap.com, monetaryrealism.com and neweconomicperspectives.org
Of course you may immediately realize the good news if what I’m saying is true….. that is no one’s taxes need to be raised. Obama doesn’t need to “pay for” any new spending. Millionaires and billionaires can keep their money. I personally think their taxes should be raised – but that is my ideology speaking, my belief system that says those sitting on trillions in savings while 80% of the country is flat broke, just isn’t right. But in reality, we do not need their money. They can keep it. However, without redistributing money in the system the US government debt and deficit MUST be increased to inject new money into an economy that doesn’t have enough.
Now let’s handle some of the objections. First, one must realize that the U.S. dollar only comes into existence in one of two ways. Without one or both, there are no U.S. dollars – and Tony, I assume you like those dollars in your savings account, right? #1 is when you take out a loan – let’s say to buy a house. Your bank literally creates money out of thin air. You’ll hear the phrase “loans create deposits”. That is your loan ends up in newly created U.S. dollars in the bank account of where ever that money is going. Yes, your lender creates a liability, and is owed that money back. But that too is created out of thin air. And when you pay that loan back the bank doesn’t get to keep the principal… the liability, and therefore the money, simply disappears just as it magically appeared. So debt repayments make money evaporate.
This is important because households created trillions and trillions of dollars to build and buy homes in recent years. That new money creation led to massive jobs growth. Take note of that – new money created jobs. The problem with this is two-fold. First, easy credit conditions during good times leads to serious malinvestment. Families with 2 kids don’t really need 4 bedroom homes, and 2nd and 3rd homes. Construction jobs are also temporary jobs. Once the home building stops, those jobs disappear.
But worse, is when the bubble collapses, the new money creation also ends. The boom becomes a bust, and for more than the obvious reasons. When new money stops being created, and old money/loans are paid back, money is being destroyed – money is leaving the economy therefore shrinking the economy. So we went from a situation where trillions of dollars were being created to one where trillions are being destroyed. When more money is evaporating from the economy than is being created, jobs are lost. First it was construction jobs, but as money evaporates there is less demand for all goods and services, and so job losses spread to all sectors.
This brings us to the second source of new money. The US government spending more than it taxes, otherwise known as the annual deficit. The US debt, which is the tally of all past deficits, and stands at roughly $15 trillion dollars. One thing Tony missed, as does everyone else, is that private sector debt is 3x the governments, and was 4x to 5x in 2008 when the collapse of the private sector’s debt caused the global financial crisis. The other thing that Tony misses is that the Government doesn’t need its money back. When taxes are collected, it too destroys money by removing it from the private sector. Banks need their money back. But again, there are only 2 sources of money – one is contracting right now, and without government deficits the economy would contract. Government surpluses would make the money contraction even worse.
Think about what happens when money gets paid back. Pay both the banks back (which is happening) and the government back (which thankfully is not) and then there is no money left in the economy. How you like them apples Tony? We do need money in the economy – right? Which do you prefer, for households and companies to be deep in debt, or the government? One has a printing press, the other doesn’t. Case closed.
Of course household and business debt is useful. People see an opportunity, take out a loan, and hopefully create wealth, and then pay back their loans. Wealth remains in the economy (a new house, a new gadget, etc) and the money disappears. Of course if you want to re-sell that house, a new person takes out a new loan and new money enters the economy once again. I call that “monetizing wealth”. If the private sector can’t or won’t take out new loans, we can not “monetize wealth” and we can not grow. So that ONLY other choice is for the Government to spend.
Since I know inflation is a major objection let me end by tying up loose ends. Note that when the private sector is paying back, or defaulting on, their loans faster than they are taking on new loans, the money supply is shrinking. This is DEFLATION. If the Government ran a balanced budget the economy would shrink and the deflation would get worse and worse as consumers would hold off all purchases assuming the next day would bring an even better price. Deflation is obviously the opposite of inflation. Inflation favors people in debt, deflation favors people with cash. Today we have a very small percentage of savers sitting on trillions of dollars, and the vast majority of the country broke and deep in debt. So I’m personally in favor of inflation right now.
But are we getting inflation? People point to oil and gold and claim we have terrible inflation. But those are both worldwide commodities. China’s money printing, and their and India’s demand for oil and gold are what is causing oil and gold inflation, not what the U.S. is doing. But we pay the same worldwide price as they do. In fact China’s prices at the pump largely match our most expensive markets in California, while Japan is 50% higher and Europe’s prices at the pump are double.
One last benefit of inflation is that it encourages production rather than sitting lazily on your savings. As more money gets pumped into the economy there is more incentive to go after it, as well as the incentive of your saved dollars losing value. Deflation does the opposite. Why work so hard when your savings increases in value, and the value of your work goes down.
In summary, the U.S. Government’s spending is called “debt” but it really is just spending. They don’t need their money back because they have a printing press. If we pay them back, the economy loses money and we enter a deflationary Depression. The debt of the U.S. government is simply their past spending. It is savings in the private sector, or it might have already been destroyed by paying back private sector loans. Finally, China does not fund the U.S. government. No one other than the U.S. government funds the U.S. government. Your and my debt is 3x the government’s, and unlike the Government, we do need to pay our loans back. Tony, get on board with this and you’ll see there is an enormous amount that can be done to fix the economy, get people back to work, get real productivity and production back on track, but none of this will get done if we fear monger about an imaginary problem, and don’t actually understand the true meaning of money creation and U.S. government debt.