Greenspan: "I don't give a shyt if China and Japan decide to stop buying up bonds"

Discussion in 'Economics' started by Daal, Oct 4, 2006.

  1. Daal


    On a testimony before the Bugdet Commitee in feb 2005 he said that the effect of china and japan buying up bonds had on long-term interest rates was minimum and if they decide to stop the results will be similar, one congressman even praised him for 'debunking that myth'. What does everyone think of that
  2. LT701



    I'm almost 80, and I'm moving to Israel anyway - not my problem'
  3. LOL
  4. piezoe


    i am approaching 80 and i am not a fan of "Easy Al". But what he said was true. The converse is not true however. If bond rates are too low treasury will have a difficult time financing the debt. Furthermore high interest rates support the dollar and make it relatively easier for us to finance our massive public debt. On the otherhand it is abundantly clear that Treasury wants a weak dollar, since Treasury plans to inflate our way out of the debt. (Recall that there is not much choice here. You'll never get re-elected if you try to tax your way out debt!)

    I'll give you a specific example. Suppose the government is 10 bucks short and therefore can't pay its bills. It has several choices. 1. It can raise taxes and move 10 buck from the private sector to the public. (We know that's not going to happen!). 2. It can just print 10 bucks. Then there are 10 bucks more in circulation so the buying power of the money in your billfold goes down by an equivalent amount to the additional taxes you would have otherwise paid. This method of inflating our way out of debt is politically very popular because, in the short run, it goes unnoticed by the average citizen, and therefore does not harm ones re-election chances. It is ironic to note, however, that paying the public debt via inflation is essentially equivalent to raising taxes. Our gullibility as voters apparently knows no bounds. 3. It can borrow 10 bucks and agree to pay the loan back with interest. 4. It can use a combination of these three basic methods of covering shortfall.

    We are choosing to use a combination of 2 & 3. The beauty of this (if you don't mind a little dishonesty) lies in paying our creditors back with inflated dollars. In fact if we are very clever we might be able to inflate to the point where the interest rate equals the inflation rate, and thus borrow the money at no cost! This is exactly what is being done, or i should say being attempted, by Treasury. But our foreign creditors, China and Japan, are not so happy about this. It seems they are smarter then we thought. Consequently they are going to demand a higher rate of return on the money they loan us if we insist on playing this gotcha game. We also cheat US citizens who buy government bonds using the same "clever" mechanism.

    Of course the way out of this bargain with the devil would be to bring expenditures in line with revenues, just as you and i must do. But that's not going to happen!

    Ultimately, of course, the massive deficit spending we have engaged in these past 6 years will impact our standard of living. At least those of us who live long enough and are not excessively wealthy will be affected. But this could take a very, very long time to come to fruition. And we can joyfully take heart from observing that it is possible for countries to exist in a perpetual state of bankruptcy. Just witness Argentina. for example.
  5. djxput



    thanks for the explanation; that makes sense
  6. good post piezoe
  7. if I thought the character of the new "decentralized an 'democratized'" market was represented the sorts of posts I see on ET sometimes, I'd widen my market significantly.
  8. Tuneman


    but wait, you are assuming that our tax revenues would go up from a raise in taxes. That isn't always the case, as the Laffer curve shows us. Last quarter our tax revenues increased with a lower tax rate. Amirite?

    The problem is, the democrats can't understand this principle. Can we ever get the tax rate low enough to reach the optimal value?
  9. Nicely done... Pick out a relatively inconsequential statement, then, with the help of some creative logic, turn it into a bit of democrat-bashing.

  10. Tuneman


    there's nothing wrong with my statement. It is possible to gain tax revenue from lowering taxes, go back to ECON 201.

    Are you saying that the democrats are the ones wanting to lower taxes? I'm not bashing democrats, I'm a democrat myself. But to say that they are on the right end of tax policy is insane.
    #10     Oct 8, 2006