What have been the total effects, so far, of Bush's economic policies?

[China_Guy]

@Scylla

I do expect inflation to go up and the dollar to weaken in the short to intermediate term, just not disastrously.

In the current situation where government spending is increasing faster than receipts and government debt is increasing, we agree that inflation will go up and the dollar will weaken. We disagree on the magnitude of the effect.

@Scylla

The OP was asking what the effects were so far not the future effects. Your guesses are just that, and more like general assertions than reasoned arguments. You say it will do this… this… this… But you don’t say why.

When government debt grows in a mature economy beyond a certain level, it crowds out investment, leads to increased interest rates, slower GDP and a weaker currency. Empirical evidence demonstrates this quite effectively, but as you mentioned earlier there is no “magic number” for when it goes from an acceptable level and into a drag on the economy level or into hyperinflation. I’ll concede that inefficient markets up to a ballpark 3-5 year time horizon can defy economic gravity, but the price does get paid.

Cite for the bonds is really a tax arguement? It costs real money, USD400 Billion in FY06, to fund the debt market. Even if that $400B is partially offset by increased taxes, it’s not a profit center but unproductive debt servicing.

I’ll agree that an efficient treasury bond market and liquid currency is a good thing. It’s in the best interest of the US to have an effective debt market. However, at some point, the debt becomes too large and those same (in)efficient markets punish by demanding higher rates or flowing into alternatives.

Also you need to factor in the total government debt including social security. Remember FICA receipts are partially funding the government rather than as set aside to pay off social security debt as it comes due. What’s the current forecast for SS to go bankrupt? So, not only is Uncle Sugar going to have to pay off all these treasuries, but also SS with a greying population. Total government liabilities/debt is significantly higher than the Treasury market. A mature economy growing at a what 2-5% isn’t going to grow out of these liabilities.

Interest rate parity theorem. Essentially, currency has an inverse relationship with rates and inflation. Currency falls as rates and inflation rise, and vice versa. This is not an *exception * but empirically proven. Given the global interdependance of our economy, a depreciating dollar probably isn’t going to be as beneficial as it might appear on the surface. Look at the lesson of Japan from 1990 to now as a good example. Also given the global nature of the economy, a depreciating dollar will lead to imported inflation.

[Scylla]

@China Guy

Cite for the bonds is really a tax arguement? It costs real money, USD400 Billion in FY06, to fund the debt market. Even if that $400B is partially offset by increased taxes, it’s not a profit center but unproductive debt servicing.

I showed you the math that demonstrates it. The Government receives $10,000 in today’s dollars for a 30 year treasury (or $9,940, whatever.) Over the life of the bond including maturity, they pay out $4,000 and change.

Total government liabilities/debt is significantly higher than the Treasury market. A mature economy growing at a what 2-5% isn’t going to grow out of these liabilities.

Let’s examine that. If the currency is inflating at 3.1% and GDP Government receipts grow equally at 3.5%, than as long as the debt is gowing at less than 6.1% it can.

Sure enough, if I look, somebody can illustrate this point for me better than I can:
Check it out:

http://www.optimist123.com/optimist/2005/03/the_debt_thermo.html

Interest rate parity theorem. Essentially, currency has an inverse relationship with rates and inflation. Currency falls as rates and inflation rise, and vice versa. This is not an *exception * but empirically proven.

I got that. I don’t understand where you’re going with it. As I’ve said, a currency can be too strong.

Given the global interdependance of our economy, a depreciating dollar probably isn’t going to be as beneficial as it might appear on the surface. Look at the lesson of Japan from 1990 to now as a good example. Also given the global nature of the economy, a depreciating dollar will lead to imported inflation.

This is what I’m talking about when you look at exceptions. I recall reading that land values were so high in Japan, that a 100 sq. mile radius from Tokyo described a circle where on paper the value of that real estate exceeded that of the rest of the world.

Far from supporting your point, the Japan example illustrates mine. A too strong currency leads to all kinds of problems.

[China_Guy]

@Scylla

I showed you the math that demonstrates it. The Government receives $10,000 in today’s dollars for a 30 year treasury (or $9,940, whatever.) Over the life of the bond including maturity, they pay out $4,000 and change.

Scylla, do you have a credible cite for the ascertation that when factoring in inflation and direct tax on treasury debt related income that the US government makes a direct profit on treasury debt?

Let’s simplify your envelope so its clear that I understand. Take a 1 year US government debt sold at a 4% discount, no coupon and matures at par with a 3% inflation rate. On a like to like basis today, the cash flows would be US gvt gets $96 and pays out $97 (after adjusting for inflation and using a rounded number). Net-net, results in a direct interest cost of $1 that Uncle Sugar pays out (takes in $96 and pays out adjusted $97). Is this more or less in line with your logic?

Then is it your ascertation that the US government, through marginal tax on the interest income & capital gains, takes in more than $1? Again, do you have a cite?

@Scylla

Let’s examine that. If the currency is inflating at 3.1% and GDP Government receipts grow equally at 3.5%, than as long as the debt is gowing at less than 6.1% it can. Sure enough, if I look, somebody can illustrate this point for me better than I can: Check it out: http://www.optimist123.com/optimist/2005/03/the_debt_thermo.html

Via the multiplier effect, 50 year projections are shall we say easy to manipulate?

site assumes 2.2% inflation, 3% real growth in government spending, 1.8% risk premium over inflation demanded by the bond market, and 3.2% real GDP growth. Put another way, the cite postulates that government debt will be at a “safe” level as long as real GDP growth is 3.3% while keeping government spending and inflation under control.

Inflation in the past 10 years has averaged more like 3%, real GDP growth was more like 3% in the past 20 years, I have no idea on the goverment spending. Now if you use these GDP and inflation numbers, then in 50 years the US will be in the shit.

It’s one thing to say that an economy growing 8% per annum has a high probability of growing out of these types of problems. It’s another thing to say a mature economy, using rosy forecasts, will barely squeak by. There’s little margin for error for what the site is postulating.

Your link also highlights that **the bond market requires a 1.8% risk premium over inflation. ** How does this fit into your claim that the US government when adjusting for taxation and inflation, actually makes money on treasury debt?

If you look at the table provided in your link

We will need a seperate thread to discuss the Japan FX experience So, credible cite please for your main claim on the US government makes a profit on debt issuance.

[Scylla]

@China Guy

Scylla, do you have a credible cite for the ascertation that when factoring in inflation and direct tax on treasury debt related income that the US government makes a direct profit on treasury debt?

Yes. Math. I showed you the math.

Let’s simplify your envelope so its clear that I understand. Take a 1 year US government debt sold at a 4% discount, no coupon and matures at par with a 3% inflation rate. On a like to like basis today, the cash flows would be US gvt gets $96 and pays out $97 (after adjusting for inflation and using a rounded number). Net-net, results in a direct interest cost of $1 that Uncle Sugar pays out (takes in $96 and pays out adjusted $97). Is this more or less in line with your logic?

I used a 30 year coupon bond specifically to illustrate. The largest effect at work is the depreciation in terms of real dollars of the principle and those last interest payments.

Then is it your ascertation that the US government, through marginal tax on the interest income & capital gains, takes in more than $1? Again, do you have a cite?

Again, I showed you the math. If you think it’s wrong, dispute it. It’s not. It’s basic stuff.

Via the multiplier effect, 50 year projections are shall we say easy to manipulate?

I think you’re just being obstinate. The assumptions that go into it are there. If those assumptions are set (and they are) there’s nothing to manipulate.

site assumes 2.2% inflation, 3% real growth in government spending, 1.8% risk premium over inflation demanded by the bond market, and 3.2% real GDP growth. Put another way, the cite postulates that government debt will be at a “safe” level as long as real GDP growth is 3.3% while keeping government spending and inflation under control.

Inflation in the past 10 years has averaged more like 3%, real GDP growth was more like 3% in the past 20 years, I have no idea on the goverment spending. Now if you use these GDP and inflation numbers, then in 50 years the US will be in the shit.
[/quote]
3.1 and 3.3 respectively according to Ibbotson. Anyway, do the math or show me a cite that supports “in the shit,” and you might as well define that for me, too.

It’s one thing to say that an economy growing 8% per annum has a high probability of growing out of these types of problems. It’s another thing to say a mature economy, using rosy forecasts, will barely squeak by. There’s little margin for error for what the site is postulating.

That’s not true at all. Did you look at the last chart? It basically allows you to plug in your own numbers.

Your link also highlights that **the bond market requires a 1.8% risk premium over inflation. ** How does this fit into your claim that the US government when adjusting for taxation and inflation, actually makes money on treasury debt?

Because the tax rate exceeds the inflation premium and because long term bonds suffer severe inflation depreciation.

One more time:

30 year bond. 4.75% coupon issued at par, 3.1% inflation. (par makes calculation easier, but doesn’t significantly effect anything.) 10k bond.

Government receives 10k today. At maturity they pay out 4k in today’s dollars. Now, we have to add that to the carrying cost. In the first year, the carrying cost is 4.75% minus 3.1%, that’s 1.65%. If it’s taxable taxes take away a little under a third, call it .5%. We are at 1.15% in the first year. But wait we haven’t corrected for inflation! Let’s call it .03%. We are at 1.12%. In year two we again correct for inflation and we are 1.09% than 1.06 in year three, etc etc etc.

By year 30 we are at .4something% carrying cost. So you see, I’m being generous by claiming the carrying cost is 1%. It’s going to be significantly less. Even in a taxable account the number is still going to be around 1% over 30 years.

The carrying cost depreciates with the principle in terms of today’s dollar. On long term bonds the government is servicing the latter payments and repaying the principle in deflated dollars. In real terms we can look at this like a tax as far as the government is concerned. They make money on long term bonds in this environment in real terms.

We will need a seperate thread to discuss the Japan FX experience So, credible cite please for your main claim on the US government makes a profit on debt issuance.

I am the cite. It’s basic math. If you worked on a trading desk dealing with treasuries you should understand this. Grab a financial calculator, and do a future value calculation on the sum of payments on a 4.75 of 5/1/37 at par, depreciated at a constant 3.1% inflation.

[pantom]

Scylla: Interestingly clear explanation of how the government makes money off inflation.
The problem is that sooner or later investors figure this out. Given a depreciating currency against their home currency, they demand progressively higher rates until the situation you describe, which is essentially an arbitrage, is reduced to zero, or worse. The depreciation of the dollar against just about everyone else is baked into the cake given our other, far more important deficit, IMO, the current account deficit. The fiscal deficit is mere peanuts in relation to it.
The current account deficit is the problem that Bush inherited from Clinton. Unlike Clinton, who inherited a fiscal deficit problem from Reagan/Bush and solved it, Bush not only did not solve the current account deficit problem he inherited from Clinton, he exacerbated it by throwing a fiscal deficit on top of it, and then piled war spending on top of that, and on an unsuccessful war at that, exactly like LBJ back in the Sixties. I was, I have to admit, flabbergasted when he was re-elected anyway, whereas LBJ was forced to abdicate. If Bush doesn’t have to deal with the collapsing dollar that will result from this, his successor, a la Nixon in 1971, will. Whether his successor acts as irresponsibly and arrogantly as Nixon (and John Connally, his Treasury Secretary) did will be the interesting question.

[Scylla]

@pantom

Scylla: Interestingly clear explanation of how the government makes money off inflation.

Thank you.

The problem is that sooner or later investors figure this out. Given a depreciating currency against their home currency, they demand progressively higher rates until the situation you describe, which is essentially an arbitrage, is reduced to zero, or worse. The depreciation of the dollar against just about everyone else is baked into the cake given our other, far more important deficit, IMO, the current account deficit.

Who says they haven’t figure it out? The riskfree return can be negative.

The current account deficit is the problem that Bush inherited from Clinton. Unlike Clinton, who inherited a fiscal deficit problem from Reagan/Bush and solved it, Bush not only did not solve the current account deficit problem he inherited from Clinton, he exacerbated it by throwing a fiscal deficit on top of it, and then piled war spending on top of that, and on an unsuccessful war at that, exactly like LBJ back in the Sixties. I was, I have to admit, flabbergasted when he was re-elected anyway, whereas LBJ was forced to abdicate. If Bush doesn’t have to deal with the collapsing dollar that will result from this, his successor, a la Nixon in 1971, will. Whether his successor acts as irresponsibly and arrogantly as Nixon (and John Connally, his Treasury Secretary) did will be the interesting question.

Bush inherited an overheated economy from Clinton. Really though, blaming the economy on the President, whoever it may be, may feel good but it’s not very accurate.

Some problems resolved under Clinton and some more under Bush. They were different problems. Those solutions create other problems. This is the way economies go.

Clinton did right as far he could with an overheated economy, and I think Bush did alright with the aftermath. Big spending in a low interest rate recessionary environment was a good thing.

The real test is what happens in the next 18 mos.

[pantom]

Who says it’s a risk free return? For domestic investors, inflation is a real risk. For foreigners buying Treasuries, chronic depreciation will put them off and they will begin to demand higher rates to compensate them for the exchange-rate risk. And everyone by now is tense over the possibility of a sharp fall in the dollar because of the current account problem. This is the reason the Chinese find it necessary to soak up so much of the debt flying out of the government and the until-now manic mortgage market. But this causes the Chinese to have problems with their own overheating and with bubbles in real estate and stocks - see the Shanghai market, which just keeps on soaring. (Just checked it over on Yahoo, and it’s up another 2% as I write this. Zany.)
As to problem-solving by Presidents, I thought Bush would be OK since I expected he’d cut taxes, and that, it seemed to me, would probably wind up being well-timed, given the recession everyone could see coming back when he was first elected. What I didn’t expect was that he would simultaneously start to again pour money into defense unopposed (the Afghan war, being small, was no real excuse. Iraq, OTOH, gave him the excuse he needed.) and that he would continue to cut taxes for years, and not just income tax rates, but the estate tax and the dividend tax cut (which, as I have observed before, I’m for for other reasons, but in combination with all of these others it just winds up as part of the same toxic brew, unfortunately).
Clinton did inherit a fiscal mess, and he did solve it. Bush did inherit a current account mess, and he has industriously ignored it throughout his term. As it turns out, this will probably wind up being smart politics for him, since the real problem, it looks like, will land on the next guy’s lap. That doesn’t make it the right thing to do, though.

[China_Guy]

Scylla, you’re making an extremely strong claim that the US government net net makes a profit off of the issuance of treasury bonds. Since the US government paid out approximately USD500 billion in 2006 in interest payments, the amount of money here is substantial. Given that, I would expect that there are very good empirical studies out there, PhD dissertations, peer reviewed financial articles, etc.

Again asking for a cite since this is GD among other things.

As for risk free, there is another scenario. Exceptions called stealth defaults when administrative fiat caps bond rates. The last of these was seen in the 1940s and 1950s under Regulation Q when real rates were negative for 15 years. They were also negative during the 1970s inflation and post the last three major wars the US was involved in (two of them rather late it has to be said).

[Scylla]

@China Guy

Scylla, you’re making an extremely strong claim that the US government net net makes a profit off of the issuance of treasury bonds.

Long term bonds under current conditions, yes.

Since the US government paid out approximately USD500 billion in 2006 in interest payments, the amount of money here is substantial. Given that, I would expect that there are very good empirical studies out there, PhD dissertations, peer reviewed financial articles, etc.

I suppose.

Again asking for a cite since this is GD among other things.

Your request is innapropriate. My assertion is provable with simple math. I have done so. I think at this point in time a reasonable person would either agree that I have factually demonstrated my assertion or question my math. I see no reason to provide a cite for that which can be proven mathematically. I mean no offense, but it is not my job to educate you, just to prove what I have said.

[Scylla]

@pantom

Who says it’s a risk free return?

The risk free return is a hypothetical instrument usually denoted by a 3 mos. treasury rate. A negative risk free return will extrapolate to a negative return on longer securities in certain circumstances… like a flat or inverted yield curve like we have today.

[China_Guy]

@Scylla

Long term bonds under current conditions, yes.

If you limit to the long bond, then maybe there is a “tax” like effect. However, it does not neccessarily follow that treasury bond issuance by the US government is significant in generating revenue when adjusted for inflation. Nor is it a fair arguement to imply that all US government bond issuance creates direct net income for Uncle Sugar. Now I conceed it’s possible you meant sprecifically the long bond only in this thread and I have a comprehension problem.

Ya, the math part. 28% individual tax rate is unrealistic. IIRC 35% is the amount of treasuries held by foreign governments, surely that’s not taxed by Uncle Sugar. There will be more held by foreign corporates not subject to US taxation, as well as in individual tax free accounts such as IRA’s. At what point does your math turn into a tax? Before 10 years or between 10-30 years (and we all know that Notes/Bonds are issued with a 2, 3, 5, 10 and 30 year maturity)? What % of US government debt is issued with a 30 year duration? Maybe your math only works for the US long bond held by individuals subject to personal taxation in the US, and I’m guessing here that’s a pretty small number compared to the USD400 billion in interest payments the US made in 2006.

Either my search fu is weak or there isn’t anything on the web showing that US bonds as tax is actually realized or significant in real life. If empirical evidence does support the preposition, then how significant is it vis-a-vis with seignorage?

[Scylla]

@China Guy

If you limit to the long bond, then maybe there is a “tax” like effect.

There’s n maybe about it.

However, it does not neccessarily follow that treasury bond issuance by the US government is significant in generating revenue when adjusted for inflation.

The US public debt is 8.3 trillion dollars, of which 5 trillion or so is held in marketable securities. Two trillion of this is in notes and half a trillion or so in bonds. For the sake of argument let’s assume an average maturity of ten years for these latter two. That’s going to be somewhere around 75 cents on the dollar that the government has to pay back in real terms at maturity. This amounts to about 625 billion dollars.

I would consider that significant.

Nor is it a fair arguement to imply that all US government bond issuance creates direct net income for Uncle Sugar. Now I conceed it’s possible you meant sprecifically the long bond only in this thread and I have a comprehension problem.

Well… since I haven’t made that argument and you concede I haven’t, why would you bring it up?

Ya, the math part. 28% individual tax rate is unrealistic. IIRC 35% is the amount of treasuries held by foreign governments, surely that’s not taxed by Uncle Sugar. There will be more held by foreign corporates not subject to US taxation, as well as in individual tax free accounts such as IRA’s. At what point does your math turn into a tax? Before 10 years or between 10-30 years (and we all know that Notes/Bonds are issued with a 2, 3, 5, 10 and 30 year maturity)? What % of US government debt is issued with a 30 year duration? Maybe your math only works for the US long bond held by individuals subject to personal taxation in the US, and I’m guessing here that’s a pretty small number compared to the USD400 billion in interest payments the US made in 2006.

I did some of this, but there are two components to consider. One is the cost of carrying the debt and the second is the cost of paying the principle. If the sum of these two in real terms is less than the present value received for the bond, it’s a profit.

At any rate, the Gov borrows money very cheaply right now and in some cases at a profit, which supports my original statement that the debt load is not a big problem in the current environment.

Either my search fu is weak or there isn’t anything on the web showing that US bonds as tax is actually realized or significant in real life. If empirical evidence does support the preposition, then how significant is it vis-a-vis with seignorage?

I just gave you a guesstimate. Notes are 2-10 years, bonds are 10-30. I assumed an average maturity of 10 years.

You can go here and read up on the makeup of the debt:

http://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm

[Guy_Anonymous]

@BrainGlutton

You tax the national economy you have, not the national economy you wish you had.

You spend the money you have, not the money you wish you have. :dubious:

[China_Guy]

@Scylla

The US public debt is 8.3 trillion dollars, of which 5 trillion or so is held in marketable securities. Two trillion of this is in notes and half a trillion or so in bonds. For the sake of argument let’s assume an average maturity of ten years for these latter two. That’s going to be somewhere around 75 cents on the dollar that the government has to pay back in real terms at maturity. This amounts to about 625 billion dollars.

Take your assumptions at face value, that works out to about USD20b per year, while the 2006 interest payment was USD400 billion, or 5%.

@Scylla

At any rate, the Gov borrows money very cheaply right now and in some cases at a profit, which supports my original statement that the debt load is not a big problem in the current environment.

You have the sell side economics pitch down well, I’ll give you that. Debt not an issue, interest rates not an issue, comptetitive devaluation not an issue, current account not an issue, but buy gold 'cause it’s gonna sky.