David Leonhardt has a great catch from a recent Larry Summers speech up at the Times Economix blog today. In the speech, Summers made the following observation:
… even with the dramatic action of the Treasury and the Federal Reserve, the total level of borrowing in our economy is actually lower than in normal times, not higher. Accordingly, the volume of securities that have to be absorbed by market participants is lower, not greater, than normal.
Leonhardt translates:
Even with the big recent increase in government debt, the total amount of debt generated by the United States economy has not been growing especially fast. That’s because the amount of debt being taken on by households and companies has been falling, as they have cut their spending during the recession. Thus the amount of American debt that investors (“market participants”) must buy has not been growing very fast, despite the government’s spending of billions and billions of dollars in response to the financial crisis.
He notes that "total nonfinancial debt grew 6 percent in 2008 and has been growing at annual rate of less than 5 percent this year. It grew at least 8.1 percent every year from 2003 to 2007." Now, obviously, if the government is still borrowing in huge quantities once businesses and consumers start borrowing more heavily, then the supply of debt could start to exceed investors' appetite for it, which would drive up interest rates. On the other hand, since borrowing is related to overall demand, it makes sense for government to step in and borrow more than usual at a time when businesses and consumers have scaled back. It's the basic logic of Keynesianism.
I understand the Keynesian logic, but gee, wouldn't it be great if the "fiscal conservatives" who were in charge for the better part of a decade HADN'T been increasing the debt by 8.1% (!) when the economy was booming? Then perhaps we wouldn't be skating on such thin ice when we actually need to take on the debt.
I understand the Keynesian logic, but gee, wouldn't it be great if the "fiscal conservatives" who were in charge for the better part of a decade HADN'T been increasing the debt by 8.1% (!) when the economy was booming? Then perhaps we wouldn't be skating on such thin ice when we actually need to take on the debt.
What would all these investors do with their money if they weren't buying treasury bonds? If they lend it to businesses, the money doesn't just vanish, now its in the business bank accounts, what do they do with it? Ultimately no matter how many times that money is transferred among parties, the last bank account it ends up in, the bank holding the excess reserves is going to lend it to the Federal Reserve at the overnight rate. So the government doesn't need to anyone to buy it's debt. All the excess reserves in the banking system, one way or the other end up at the Federal Reserve/Treasury at the end of the day.
What would all these investors do with their money if they weren't buying treasury bonds? If they lend it to businesses, the money doesn't just vanish, now its in the business bank accounts, what do they do with it? Ultimately no matter how many times that money is transferred among parties, the last bank account it ends up in, the bank holding the excess reserves is going to lend it to the Federal Reserve at the overnight rate. So the government doesn't need to anyone to buy it's debt. All the excess reserves in the banking system, one way or the other end up at the Federal Reserve/Treasury at the end of the day.
Hi acria - I'm still struggling with something here.
A lot of the problem with the debt (as I understand it) is that it is being held by foreign actors, and hence the interest we pay is not necessarily circulating around our economy.
Also, and I apologise if you've answered this before and I missed it, but surely at a certain point there can be to much debt, as the interest burden becomes a drag on the economy?
Hi acria - I'm still struggling with something here.
A lot of the problem with the debt (as I understand it) is that it is being held by foreign actors, and hence the interest we pay is not necessarily circulating around our economy.
Also, and I apologise if you've answered this before and I missed it, but surely at a certain point there can be to much debt, as the interest burden becomes a drag on the economy?
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