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I am trying to figure something out and any help would be appreciated.

Looking here:
http://www.dmo.gov.uk/rpt_parameters.aspx?rptCode=D5N&page=Gilts/Overseas_Holdings

I can see that the overseas ownership of the UK Gilt market is about 30%. Presumably (I couldnt find a breakdown), some of that ownership is by US gov(?)and citizens. So, wouldnt those debt obligations essentially offset each other in this game of "foreign debt is bad"?

Wouldnt the same be true of Japan and maybe China as well? (no luck finding data)

I'm something of a novice, so please forgive the dumb question:

What's the part in red? Is this basically the "borrowing" from social security?

Patrick:
Yes, those could be netted against each other. And regarding the blanket notion that "foreign debt is bad": there's a big difference between foreign debt denominated in the foreign currency versus foreign debt denominated in the domestic currency (the latter is safer for the borrower). In either case, however, the stronger the borrower's economy, the less of a concern foreign debt should be to anyone.

Chris:
Not a dumb question. The red slice is the amount the government owes to itself: almost entirely due to the social insurance trust funds. It makes the total debt appear to be almost twice as big as the publicly held debt, and it's misleading because of its focus on the liability only, when in fact it is offset by the value of the government bonds (assets) sitting in those trust funds. Politicians love to play rhetorical games with those assets by calling them "IOUs" -- which, although they never admit it, is also a perfect description for federally-backed currency and for federally-backed debt (bonds) held by the public. Will those bonds be worth anything in the future? As with bonds and money held by the public, it depends on the strength and growth of our economy.

The value of all that paper depends ultimately on the value of the real goods and services it represents.

Sorry. Perhaps a bit more skepticism is in order. Single entry bookkeeping is a con's misdirection for the fleecing of the under-informed.

Friedman's monetary relativity equation (MV=PO) should give pause to anyone drawing solace from the $800 billion "owed to ourselves."

The creation of this credit is the covert and stealth inflation tax that transfers wealth from all predecessor dollar holders to an elite few who earn fees acting as the privileged conduit of Fed fund "liquidity injections" into the capital markets that fund the twin deficits.

Why feel good about a nearly 10% dilution of the purchasing power of outstanding dollars?

Why feel good about the exacerbation of the impetus to revert to an ever more divergent mean?

As history and periodicity prove, the tendency to over-correct monetary mistakes increases not arithmetically, but exponentially.

David:
I guess you and I disagree on a very fundamental point.

The assertion that any increase in the money supply whatsoever is "inflation" is refuted by MV=PT (where M is money supply, V is velocity, P is price level, and T is the level of real transactions). If both M and T increase at the same rate, P remains unchanged, i.e., there is no inflation. Further, if M doesn't increase as fast as T, there is deflation, and probably also a stifling of growth below its potential.

Steve,

Do you also disagree with Friedman's proof that "all inflation, in all places and in all time is monetary in creation?"

Surely you don't suggest that credit creation and output/transactions increase proportionately, or simultaneously. To do so necessitates that you disregard Friedman's proofs in observation that increases in M reflex O (T) with 6 to 12 month lags and P with 12 to 18 month lags; that subsequence and feedback from M delta parlays into V alterations, as well.

David,

No, I don't disagree. Too much money for a given amount of goods and services is inflationary; too little money for a given amount of goods and services is deflationary. I would merely modify the statement to be more inclusive: "All inflation *and all deflation*, in all places and in all times, is a monetary phenomenon." Monetary policy is extremely important factor in a nation's economic outcomes.

Now all we need is some way of accurately measuring the money supply, which Friedman himself admitted was nearly impossible. In the meantime, we'll depend on the Fed to create just enough money to prevent deflation, but not so much that it creates unanticipated inflation.

I agree on the delta M cause of all delta P. And, yes, M is difficult to measure, given that every time anyone adds to the balance of their credit card they are adding to the money supply.

"In the meantime, we'll depend on the Fed to create just enough money to prevent deflation, but not so much that it creates unanticipated inflation."

Please exclude from "we'll" those of us who have watched the global explosion of M at a rate exceeding the more difficult to measure rate of increase in O.

Les Thurow deconstructed China's alleged GDP in last Sunday's NYT. It should give pause for reflection on other optimistic assessments.

Keep in mind the rosy scenarios forecast, and the glowing recaps of employment, incomes, inflation and growth are disembled, er, disseminated by the same Administration that has proclaimed, for over four years now, the progress and corners we've turned in Iraq. wink.

Those of us who are more skeptical anticipate that the Fed will continue to mearly follow the markets, handcuffed between markets freezing up from default impaired assets that bid gap down from ask, and hamstrung by the prospect of accelerating the 40% drop in the dollar index in 3 years and sparking trade inflation... and the recycling of Smoot-Hawley redux.

Now why are we supposed to be happy about the $800B (and compounding) that we've had drawn on our account in order to permit foreign manufactures consumption and unsustainable inter-generational income transfers at the expense of domestic capital reinvestment and saving?

Steve,

In light of this new evidence, are you or did you reduce the publicly held debt on your debt clock? Also, since publicly held debt is probably more important, have you decided on a proper %GDP range that would be safe to keep the publicly held debt to?

I am really happy, like you, with how the fed has been doing their job, I'm just torn between being afraid they will follow in their own historical footsteps and stifle growth by tightening for too long, and being afraid they will listen to the cries of the market and loosen before they should. Are you concerned about either or both of these?

P.S. I'm aware that most global central bankers have been pumping out M at the same furious pace as the Fed in order to prevent unfavorable exchange rate movements that would lower their exports and employment.

It is with this global fiat environment that I model the sensitivity of increased rates of delta M in excess of delta O increases and thereby ferret out the estimate of the rate of speculative financialized P that when combined with the much flawed CPI correlates more agreeably with what we've witnessed in share, bond and comodities markets.

The speculative imbalance will strive with greater power to revert as it manically struggles, like Sisyphus, up an unsustainable, compounding slope.

All debt is eventually removed from the books: contractually paid-off, re-written and re-funded (when lender/borrower concur) or written off (when they don't.)

Opinions make markets, not vise versa. As concern increases it displaces optimism. Fundamentals, (the most trailing of indicators), will even persuade the most bullish.

Mike:
I recalibrate the debt clock(s) once a month, as soon as the latest Treasury data points yield a new trend line. You can see why the publicly held debt clock is decreasing if you look at the graphic at the very bottom of the end note to this article:
http://tinyurl.com/2bd3fa

I think the Fed is doing a terrific job, given that it has always been difficult at best to measure inflation, let alone predict what it will be 9 months from now (which is how long it takes Fed policy to affect things).

I am also extremely happy we were not in a gold standard straitjacket last Thursday-Friday, and were not in a Friedmanesque "4% money growth no matter what" straitjacket either. A lot of people would now be looking for jobs and places to live if we had been. Bernanke pumped vital liquidity into the banking system at just the right time to avert a panic-driven deflationary spike of discontinuity.

David:
Seems to me our fundamental disagreement is the definition of inflation. Correct me if I'm wrong, but you seem to define it as any increase whatsoever in the quantity of money (...however you'd like to define "money").

"Inflation" is as "inflation" does; and, since "inflation" is doing 1.9% Core PCE, I guess we can just lay back and "enjoy the ride."

And, please don't yell at me about how you have to eat, and drive. Terrorism, and Weather-induced Price "Increases" are NOT Inflation.

David:

"Why feel good about the exacerbation of the impetus to revert to an ever more divergent mean?"

Thats just too much. Hilarious.

Please tell me you talk like that in real life.

Evidently David is a Cartesian and believes that there is, or ought to be, a static equation that, if known, could be used to keep inflation to zero. In practice, inflation is probably inherently uncertain and cannot be reliably or perfectly predicted no matter how much info one has.

Given that inflation is a dynamic system and not a static one, the problem becomes one of prediction (how much will my resources be 'worth' in the future compared to what they can be used for now?) and reliability (how can I 'know' how much my resources will be 'worth' in the future?) That is, we want to know that our work will continue to pay off.

If every transaction was 'in the moment' we wouldn't worry about inflation (much). We would spend immediately what we have now. Since much of our lives will be based on what we plan to do in the future, estimating inflation is important to us.

So, in one sense it's not important how much inflation is, just how predictable it is. Of course, human psychology can only stand so much change (inflation) even if it's really predictable. So, we prefer low amounts of inflation for psychological reasons.

I understand that deflation has possibly even worse effects but having never lived through a prolonged period of deflation I can't say that for sure.

Anyway, the problem is predictability and the transparency necessary to make use of it. That is the Fed's real job.

Jorg:

I agree, and have a few things to add.

First: I (and most others) define inflation as an increase in the general price level, *not* as an increase in the money supply. In other words, when an economy with 1000 loaves of bread and $1000 money supply grows to a million loaves of bread and a million dollars money supply, its inflation rate is zero.

Second: Zero inflation is an impractical and undesirable goal. Reason is because the Fed needs approx. 2% cushion between its target percentage and zero percent. The cushion accommodates two things: (1) approx 1% inaccuracy in the imflation measurement due to inaccuracy in the quality and productivity measures in economic output; and (2) a 1% range for lowering interest rates to combat deflation or disinflation -- because a central bank cannot lower interest rates below zero percent to combat deflation; just ask Japan.

As long as there is no deflation, and inflation is low and *predictable*, the producers and consumers of real goods and services, as well as the borrowers and lenders of money, can confidently plan for wages and prices to slowly increase, with little to no impact on anyone's ability to purchase a loaf of bread. (Anyone living on income from capital can, at a minimum, invest in treasury inflation protected securities, if not something better.)

A Fed target of 2% inflation, along with reasonable success at pulling it off, minimizes the private sector resources wasted on worrying about and trying to avoid deflation or unexpected inflation.

Interestingly, those who stubbornly advocate a gold standard or a system of fixed exchange rates (i.e., a pseudo gold standard) almost always avoid the topic of deflation -- as if it's not something to worry about -- therefore avoiding the uncomfortable question of how to avert painful recessions and depressions when a simple shortage of money is the cause. Borrowers love unexpected inflation; lenders love deflation; it's been that way ever since the invention of money many thousands of years ago. Ignoring deflation is ignoring half of the danger.

As I've said before, I'd much rather depend on trained American citizens (the Fed Board of Governors) appointed by elected American officials to keep us out of recessions, depressions, and hyperinflations, instead of depending on foreign gold mine owners to do the right thing for the American economy.

*** Why feel good about the exacerbation of the impetus to revert to an ever more divergent mean? ***

Exacerbation - impetus - divergent mean? OK, this "David Sternfeld" is obviously a parody. Fess up, who's doing that?

Kevin/Patrick:

Yeah, my family and clients are amused, but my record of accurate prophecy wins their respect and love, too.

Chuckle at my vocabulary or syntactical preferences, not at the meaning of history. The word may have morphed into an insult intended to diminish knowlege of the past as obsolete (as in "that's history, dude.") the fact remains that history, while not repeating exactly, has a nasty, even deadly persistent habit of paraphrasing.

What smug words have you for this speaker?

"Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

If he'd said, "Booms lead to busts. Most investors get destroyed in the panic. Read Studs Terkel's "Hard Times, an Oral History of the Great Depression, or Galbreath's "Crash of 1929" if you want to avoid the self-pandering of, "Its different this time."

My regret is that it is you who are ironically hysterical. And, sorry, no parody, but an inherently oxymoronic contemptuous homage to Mr. Greenspan.

From here forward, on-topic comments are welcome, but ad hominem attacks will be deleted.

"David: Seems to me our fundamental disagreement is the definition of inflation. Correct me if I'm wrong, but you seem to define it as any increase whatsoever in the quantity of money (...however you'd like to define "money")."

Steve,
Thanks for your wise moderating.

I'm not sure we disagree. I recognize inflation as the loss of purchasing power of a unit of money. It is caused by credit creation, but not with a quid pro quo or a linear Cartesian associative property, but rather it is supple in its delaying and iterative in its feedback and adjustment. As with hydrology, not every drop of water at the source flows into the tributaries and the sea. Some seeps into the aquafer, some evaporates, some is sipped by a mule deer at the banks, and pissed away in a meadow two miles away.

I find fault with the usual sadly uninformed nostrums and simplistic falacies surrounding the largely misunderstood attributes and appearance of inflation.

Some decry the increase of prices for consumer items, yet cheer the increase of prices for financialized items (shares of equity, bonded debts, synthetics and realty). I suppose this is the result of the failure to examine and learn financial history.

We know both classes increase prices due to the result of the same phenomena (delta M exceeding delta O assuming V largely constant) and are simply accounted for differently.

Accountants and regulators wrestle most often to determine that which belongs on the balance sheet vs. that which belongs on the P&L, ie., "Can we capitalize what we spent the money on or do we have to charge it against income?" The treatment which is acceptable often depends on matching the timing of the spent money with the correlated revenue.

Larger disconnects are fashioned as ever more complex synthetic structures are engineered as financial repositories for burgeoning credit creation. The difficult and tenuous application of the matching principal becomes unreliable for long-term predictive purposes. Compare current loan pool values with those of a few weeks ago. It makes a mockery of models that predict short-term pricing and risk.

As M is the cause of the price increases for both classes of items ("securities" and "CPI market baskets"), when misallocated resources invariably and eventually stunt productivity, the speculative pricing corrects. The bigger the mistake, the bigger the correction.

If you think productivity is increasing at a rate greater than the rate of increase of the opposing forces (misallocation of resources and its errant evil twin bullish speculation) then all is well.

I'm not that sanguine.

A coupla thoughts.

First, SS is about half the intragov debt on the books.

The rest is OPM, civil service retirement, HHS, medicare, military retirement, and military retiree health care, as well as a number of small accounts, like Air Transport Trust fund and highway funds.

Second, the $800B in Fed owned T Bills represents accumulation of $800B in dollars printed faster than productivity increased.

I think M. Friedman would call that inflation from the fed.

Third,

I have some paper I wish to sell to the fed.

Great price, put it the Fed vault next to the US T bills.

Or maybe some of the repos bought.

Nothing here is less than safety net for the rich.

Socialism for the top wealth holders.

It ever has been thus.

Thanks to the NY Times this AM.

dont know what you are thrilled about (800 billion)... are you (the US) gonna spend it again or just wipe it off the debt ??

David:

You said:
"If you think productivity is increasing at a rate greater than the rate of increase of the opposing forces (misallocation of resources and its errant evil twin bullish speculation) then all is well."

Riddle me this. How much would it have cost to even put yourself in a position to have this debate with Steve or someone like him in 1995 for you? Your cost this week was quite slight comparatively. Where does that show up in the CPI and doesn't that create a bias toward showing monetary inflation and against showing the dis-inflationary effect of growth due to actual productivity?

-Gene

David:

You said:
"If you think productivity is increasing at a rate greater than the rate of increase of the opposing forces (misallocation of resources and its errant evil twin bullish speculation) then all is well."

Riddle me this. How much would it have cost to even put yourself in a position to have this debate with Steve or someone like him in 1995 for you? Your cost this week was quite slight comparatively. Where does that show up in the CPI and doesn't that create a bias toward showing monetary inflation and against showing the dis-inflationary effect of growth due to actual productivity?

-Gene

embuter:
We won't ever do anything with it. We're just gonna leave it on the books forever and ever. It will probably last longer than those planes parked in the Arizona desert.

Here's something to consider based on this quote from the article:

"Anyway, the Chinese still don't own nearly as much of our federal debt as the Japanese do—and neither of those countries has been purchasing nearly as much as the British have. Here's an idea: Maybe if the Chinese would sell their excess US treasury securities to the Brits, everybody (Chinese, Brits, American doom-peddlers) would be happier, and we could spend more time debating how best to grow the economy faster, and less time conjuring up nightmares about when the Chinese government might turn itself into a financial suicide bomber by dumping their US treasuries all at once."


Have you considered that all those foreign holders of Treasuries could possibly all at once, en-masse, dump that paper?

In the event of a calamitous man-made disaster brought about by the American Government, it could happen...but then nobody would really care because everything would be smoking.

Here's something to consider based on this quote from the article:

"Anyway, the Chinese still don't own nearly as much of our federal debt as the Japanese do—and neither of those countries has been purchasing nearly as much as the British have. Here's an idea: Maybe if the Chinese would sell their excess US treasury securities to the Brits, everybody (Chinese, Brits, American doom-peddlers) would be happier, and we could spend more time debating how best to grow the economy faster, and less time conjuring up nightmares about when the Chinese government might turn itself into a financial suicide bomber by dumping their US treasuries all at once."


Have you considered that all those foreign holders of Treasuries could possibly all at once, en-masse, dump that paper?

In the event of a calamitous man-made disaster brought about by the American Government, it could happen...but then nobody would really care because everything would be smoking.

China Tattler,

Yes, if we assume that foreign governments will act entirely against their own pecuniary interests, en masse and simultaneously, then there could be some problem.

But only if you believe those countries are willing to sink their own relatively tiny economies on the Rock of Gibraltar American economy. (China's economy is about 1/7th the size of America's economy, you see.)


Lets not ignorantly forget that there are those elitists who prefer to eliminate 80% of the worlds population. And These elitists do not respect soviergnty or their own countries any more than they do the victims of 9/11.

The conspirators who themselves admitt, and whos plans have been revealed, did not create The Federal Reserve for the benifit of we the people. Anyone who does not factor these historical truths in is in denial or plain ignorant.

I am no Monetary expert and cant speak the verbal fireworks as some have posted but its not all about a show. The historical facts and motives can not be excluded and expect such optomistic results. The fact that the middle class is being iliminated is enough for any genuinely concerned of his fellow citizens and future generations, ragardless of what educational background and impressive websites the promote.

-hiddentreasure.ws

Let me simplify..

for all the rest of us lay people. As the God inspired founders promoted, and as I know to be true...

There can be NO nobility in promoting a system that was based on fraud.

Pie slicing will not change these truths.

http://globaleconomicanalysis.blogspot.com/

http://urbansurvival.com/week.htm

http://globaleconomicanalysis.blogspot.com/

Thanks for providing clear and understandable answers. Could you summarize the relationship between deficit spending, trade imbalance and the value of the dollar?

Woojin:
There are dozens of posts here about those topics; browse a few of the "popular posts" for starters. Then search the site for a few of the key words you're interested in researching.

Bottom line: deficit spending is harmless, even desirable, if the debt growth it causes remains less than or equal to economic growth.

Failed to mention Federal Reserve Banks. They hold about $1T of the debt from what I remember.

"Bottom line: deficit spending is harmless"
-- False. Deficit spending is a way to steal from the citizens and reward special interest groups. Otherwise it would be a tax and approved by the citizens. Many financial and political leaders in history have pointed to the inflation/debt/money printing as a way to enact an un-approved tax. It's not harmless. It's theft. $13T from citizens at a time when fewer and fewer companies offer retirement is outright Viking raiding.

Tim:
We disagree, obviously.

"Deficit spending is a way to steal from the citizens and reward special interest groups."

Deficit spending, on the contrary, is a way to borrow from willing lenders as an alternative to 100% taxation funded spending. If you don't like some of the things government spends money on, by all means, argue against the spending. But don't argue against a mix of debt-and-equity to fund whatever spending level is decided upon in the end. For every dollar of spending cuts, there should be a dollar of tax cuts. Deficit spending that does not increase the debt to GDP ratio is harmless, even desirable.

This guy is a true joke. This line of garbage he puts out is what keeps the politicians up late at night prepared to "raise" the debt ceiling in the public chamber at the stroke of midnight and package it into an Iraqi War funding bill.

If Steve were to be asked about the demise of the Titanic he would MOST certainly admit that indeed it did sink but it was NOT a loss as the White Star Lines merely converted it to use as a Deep Ocean Botton Mining Trawler.

The 1500 lives lost and the insurance claim paid to the operator after the tradgedy are, in his view, merely inconvient debit entries in the ships log book....never to be seen by anyone ever again.

Gentleman...forgive me for intruding in your arcane debate. I'm just a simple consumer who sees bread, milk and other staples
' prices increasing faster than my income.
Someone or some thing, I think primarily the Fed and the Congress that just got another automatic pay raise, is benefitting in this "transfer of wealth".
Primarily, the country should never spend more than it takes in. Give me one logical reason why a government shouldn't balance it's books anymore than a corporation or a family?
We need to tank the Fed and substitute our current "debt" economy with treasury notes backed by the Federal government and simultaneously require higher reserve requirements for banks pro tanto.

DD and Robert:

I see you disagree.

Can you name one way that the current deficit, or any previous deficit, has hurt you personally?

Would you like it if the government increased your taxes to "fix" the deficit?

Starting with your grandfathers, what has happened to the total family mortgage debt outstanding, which I presume has grown for two or three generations. Also, what has happened to total family income? Also, is there a family plan to eliminate total family mortgage debt, and never again take out any mortgages? If not, why not?

Oh my friend, ignorance must be bliss. You only ha e the story half right. The Federal Reserve is about as federal as Federal Express. They are a private bank that is operated for profit by undisclosed private owners. They are paid interest by our government to loan money and print our nations money supply! They do not pay any income tax on the interest they collect from the debt they issue. Every dime of that 800 Billion is accruing the FED interest and the principal will eventually have to be paid back. Watch the movie "Money Masters". It gives the most detailed account I've seen to date on the Federal Reserve System of Banking,

Awesome article! Maybe this thread is dead, but I'd like to comment.

First, I don't think the Fed is officially part of the U.S. Gov't, which means that the $800B that the "government owes itself" is misleading. It's owed to the Fed. When interest payments are made on that debt (when the Fed redeems Tbills), that interest is (according to the Fed website) credited to the U.S. treasury.

Second, why be happy about only the $800B? It's no coincidence that $800B is about 10% of the federal debt, and 10% is about the reserve ratio of banks. In other words, the Fed's $800B "freebee" was paid in high-powered money, and the rest of the debt is checkbook money created by banks based on that high-powered money. In other words, as long as the Fed keeps injecting liquidity at right rate, the federal debt NEVER has to be paid off -- indeed, it SHOULD grow, despite desperate cries of the well-intended but less informed.

QUESTION: Has anyone else written (in a book or blog) my conclusion, that the federal debt is not at all a concern because of Fed purchases of Tbills? If so, I'd like to learn more.

Steve,

Your blog has been incredibly informative to me, and helped me better understand the way our money system and government actually works.

But I have a question about the distinction your emphasize between "public debt" and the debt the government owes to itselt.

Once Social Security stops running a surplus, won't the "red part" (social insurance trust funds) start shifting over to the private sector or foreign owned sections?

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