Should the government create a law that requires Congress to balance the budget?

[fantome profane]

Fair, but many members of Congress are calling for a Constitutional amendment. Would that change things for you?

That is just not going to happen.

But for the sake of argument I might support such a thing, depending on exactly how it was worded. There would have to be exceptions for a state of emergency, like a global pandemic for instance.

 

[Wandering Monk]

China's debt to GDP ratio sits at about 350%, while the US is about 120%. China is also a currency manipulator. I doubt anyone trusts China enough to make the Yuan a significant reserve currency threat.

China's ownership of so much US debt makes them vulnerable. They can't dump their US bonds without a resulting global dump which would drive the prices down and make such a dump untenable. So, the US has China by the stones: If I owe you $10,000 I am in trouble. If I owe you $10,000,000, you are in trouble.

 

[Evangelicalhumanist]

He claims that "nothing will be done".
People sure do imagine extremes when
they disagree about something, eh.

Well, to a liberal, "nothing" is just about equal to what we think libertarians want from government. We all tend to exaggerate when we're discussing political points of view, don't we?

 

[Revoltingest]

Well, to a liberal, "nothing" is just about equal to what we think libertarians want from government. We all tend to exaggerate when we're discussing political points of view, don't we?

Liberals sure are generally hostile to libertarians.
Conservatives are generally kinder, even when we
disagree (which is often).
Things here have improved since the most fervent
flamer left the forum.

 

[Evangelicalhumanist]

Liberals sure are generally hostile to libertarians.
Conservatives are generally kinder, even when we
disagree (which is often).
Things here have improved since the most fervent
flamer left the forum.

I think, generally, that this liberal is only half hostile to libertarian thinking. On social issues, I suspect we're somewhat akin, except that I am likely more prone to providing government funding for social services, where needed. But I'd prefer to see those services provided by NGOs, unconnected with any religious or political organization, but in part or whole (as appropriate) funded through tax revenues.

Also, I'm not hostile to for-profit business, competition and cut-throat capitalism -- I merely want to see some rules pertaining to doing harm to persons or the planet. For example, companies mining the tar sands in Alberta could be required to put money into escrow for the clean-up operations both at preasent, and more importantly when there's no more oil to be got out. It just means getting the present and future cost of clean-up into the income statement and balance sheet, and ensuring that the present cleanup continues to happen. And government doesn't have to do that, just mandate it and let the tax departments ensure compliance.

 

[Revoltingest]

I think, generally, that this liberal is only half hostile to libertarian thinking.

That's why I don't cringe when I see that you've posted.

On social issues, I suspect we're somewhat akin, except that I am likely more prone to providing government funding for social services, where needed. But I'd prefer to see those services provided by NGOs, unconnected with any religious or political organization, but in part or whole (as appropriate) funded through tax revenues.

Also, I'm not hostile to for-profit business, competition and cut-throat capitalism -- I merely want to see some rules pertaining to doing harm to persons or the planet. For example, companies mining the tar sands in Alberta could be required to put money into escrow for the clean-up operations both at preasent, and more importantly when there's no more oil to be got out. It just means getting the present and future cost of clean-up into the income statement and balance sheet, and ensuring that the present cleanup continues to happen. And government doesn't have to do that, just mandate it and let the tax departments ensure compliance.

You sound like a filthy libertarian.

 

[Evangelicalhumanist]

That's why I don't cringe when I see that you've posted.

You sound like a filthy libertarian.

Definite mud-blood, that's me.

 

[We Never Know]

The government on budgets.... lol

Pentagon accounting error provides extra $6.2 billion for Ukraine military aid

Pentagon accounting error provides extra $6.2 billion for Ukraine military aid

The Pentagon says it overestimated the value of the weapons it has sent to Ukraine by $6.2 billion over the past two years, resulting in a surplus that will be used for future security packages. The total surplus is about double early estimates. Pentagon spokeswoman Sabrina Singh says a detailed...

apnews.com

 

[Heyo]

The government on budgets.... lol

The Pentagon on budgets.
They get so much money thrown at them that they've never learned to deal with it. They never had an audit they didn't fail, missing trillions of worth in assets.

 

[PoetPhilosopher]

I'll say up front that I'm against this idea. If you think it's a good idea explain the benefits that you think make it worthwhile.

-Cheers.

Isn't the government budget generally mostly balanced except in times of crisis, and the national debt counts debt by Americans? How would one manage the debt held by Americans?

That being said, on the other hand - I do think government needs to stop dipping into the social security fund for unrelated things.

 

[EconGuy]

Banks lend off fiat money that evaporates as soon as its gets paid back. But the interest you have to pay has to be real money. That's why the banks don't care about you paying back the loan as long as you pay interest.

Actually, that's not true in any sense.

I run into a lot of people that believe that banks lend deposits. Deposits are also called reserves. Banks are required to keep reserve balances to ensure that at the end of every day all transactions clear. That is the primary function of reserves. Interest paid on reserves also sets the rate floor which banks charge as interest. But, despite the requirement to maintain a reserve level of 10% (in most, not all cases), banks are in no way constrained on making loans based on reserve levels (something I can explain). The real constraint is capital. Remember that reserves are only lent within the banking system between banks (which means the reserve level doesn't change, just who holds them), when banks lend to you and I they do so by expanding the liability side of their balance sheets and use capital as the incentive to avoid bad loans (as investors will lose money if banks don't manage risk well).

Put simply, if you and I wanted to run a bank, you were the owner and I provide the capital. Let's say $20 million dollars.
$20 million is the measure of the banks assets. How much you can lend is tied directly to how much capital or assets the bank has. Remember it's my $20 million and I expect to get it and more back.


Lending rules allow you to leverage the banks capital depending on the risk sometimes 1 to 1 some times many to 1. Homes have lower risk because the home make fantastic collateral, 2008 not withstanding. The Basal III accords sets targets. I don't know if there statutory or voluntary, but I suspect if you want to play in the global market you are expected to abide by them.

Ok, let's say, using my diagram a few posts back you lend $25k to 10 people. all to purchase a new car. You expect to make $3k in interest or $30k of course, that $30 will be gross profit. You have to pay for the costs to run a bank and pay dividends to me as the holder of all your stock (just for this example). Let's say that 50% of your profit will need to go to costs associated with running the bank, that means $15k in profit for the (10) $25k loans. But, without getting too detailed, if interest collected doesn't cover the costs to run the bank, then you as the bank owner must use my investment (the banks capital) to repay the unpaid portion of any loan that is defaulted.

In other words, investors pay for unpaid portions of any loan that isn't covered by collateral. Despite what most people think, investors lost billions, maybe trillions in the post 2008 debacle. If there is a sin in the banking industry, its that no one in banking or government is held accountable for excessive risk taking (banks) and poor oversight (government). But it's not true to believe that bank money is funny money that just evaporates when people don't repay. Yes, the government propped banks up in the 2008 era by purchasing bonds and buying toxic assets (this is an oversimplification) in order to boost the asset side of the banks ledger, which in turn kept banks solvent, but it didn't prevent investors from losing money. Of course upper management and the C-Suite all got their bonuses, something the government should have negotiated away from poorly managed banks, but I suspect that would have been harder than you think and probably illegal (this is where we blame the US Congress).

Now there are a lot of problems with the banking system, mostly surrounding the incentives and regulatory capture, but the system itself is actually brilliant once you understand it. It is amazingly elastic, if managed correctly it can manage incentives quite well and it's resilient. But it's complex, not in that it requires degrees in accounting or finance (actually watch a video on double entry accounting on your 80% of the way to understanding modern banking, but it is some what counter intuitive.

Thoughts?

Respectfully,

EG.

 

[EconGuy]

Isn't the government budget generally mostly balanced except in times of crisis, and the national debt counts debt by Americans? How would one manage the debt held by Americans?

That being said, on the other hand - I do think government needs to stop dipping into the social security fund for unrelated things.

Few thoughts....[ digs though the bowels of the interwebz ]...Ahhhhhh here it is:

This chart can be downloaded from Whitehouse.gov, here

As you can see, I've taken a screen shot of the period 2005 to 2023 (recipts are taxes and outlays are spending).

The number are in trillions of dollars and as you can see, the deficit is quite large every year.

As far as the "Social Security Fund" There is no fund and there never was, but that's not only ok, that's the only way it could ever be. Why?

Ooof....Ok, let me see if I can explain it like this.

Movie theaters can print tickets and sell them.

People buy them.

Every person that has an unused ticket is holding something of value

Every unused ticket is a debt from the theaters point of view as they owe every ticket holder a seat.

If the theater has no outstanding tickets that it owes at the end of the day it has no debts and there are no ticket assets out in the world.

Now, do you think that the theater could accept some of it's tickets in payment for a seat and put them in a bucket and save them? I mean sure they could save the paper ticket itself, but could the theater save the value? Does that even make any sense?

No, theaters can never have surplus value in their own tickets. Why? Because they can print as many tickets as they like. That is to say, from the theaters point of view there is no such thing as scarcity when it comes to tickets. So why don't they sell as many as they can? Because the real constraint on ticket sales has NOTHING TO DO WITH TICKETS!. It's the number of seats the theater has that constrains ticket sales.

Ok, so how does this example compare to the US government? Just as the theater cannot "save" tickets, the US government cannot "save" dollars (save as in "set aside" not, save as in not spend) because just like the theater, from the government's point-of-view there is no scarcity in the US dollar. The US government can create all the dollars it wants, but just like the theater, there is a constraint. The constraint is available goods and services that can be bought. If the government creates too much money and spends it into the economy to buy everyone a new home, then the demand for homes will quickly rise and the supply will quickly vanish causing prices to skyrocket.

Thus, in theaters seats constrain the theater ticket sales and the real economy constrains government spending.

Why? Because the government cannot in any reasonable sense set aside a "bucket" and drop dollars in it and call it extra money. Because the government could just as easily create new money. I like to say, the government can never have it's own money, only less debt. The most money the government could ever, ever have (in an economy similar to the one we have today) is ZERO. However if the government has zero it means everyone has zero (that's a story for another post).

There is no "trust fund", that being a special pile of saved money just for paying for social security, that's a fiction that the government tells us because they don't know how to explain what I just tried to explain.

Respectfully,

EG

 

[Heyo]

Actually, that's not true in any sense.

I run into a lot of people that believe that banks lend deposits. Deposits are also called reserves. Banks are required to keep reserve balances to ensure that at the end of every day all transactions clear. That is the primary function of reserves. Interest paid on reserves also sets the rate floor which banks charge as interest. But, despite the requirement to maintain a reserve level of 10% (in most, not all cases), banks are in no way constrained on making loans based on reserve levels (something I can explain). The real constraint is capital. Remember that reserves are only lent within the banking system between banks (which means the reserve level doesn't change, just who holds them), when banks lend to you and I they do so by expanding the liability side of their balance sheets and use capital as the incentive to avoid bad loans (as investors will lose money if banks don't manage risk well).

Put simply, if you and I wanted to run a bank, you were the owner and I provide the capital. Let's say $20 million dollars.
$20 million is the measure of the banks assets. How much you can lend is tied directly to how much capital or assets the bank has. Remember it's my $20 million and I expect to get it and more back.


Lending rules allow you to leverage the banks capital depending on the risk sometimes 1 to 1 some times many to 1. Homes have lower risk because the home make fantastic collateral, 2008 not withstanding. The Basal III accords sets targets. I don't know if there statutory or voluntary, but I suspect if you want to play in the global market you are expected to abide by them.

Ok, let's say, using my diagram a few posts back you lend $25k to 10 people. all to purchase a new car. You expect to make $3k in interest or $30k of course, that $30 will be gross profit. You have to pay for the costs to run a bank and pay dividends to me as the holder of all your stock (just for this example). Let's say that 50% of your profit will need to go to costs associated with running the bank, that means $15k in profit for the (10) $25k loans. But, without getting too detailed, if interest collected doesn't cover the costs to run the bank, then you as the bank owner must use my investment (the banks capital) to repay the unpaid portion of any loan that is defaulted.

In other words, investors pay for unpaid portions of any loan that isn't covered by collateral. Despite what most people think, investors lost billions, maybe trillions in the post 2008 debacle. If there is a sin in the banking industry, its that no one in banking or government is held accountable for excessive risk taking (banks) and poor oversight (government). But it's not true to believe that bank money is funny money that just evaporates when people don't repay. Yes, the government propped banks up in the 2008 era by purchasing bonds and buying toxic assets (this is an oversimplification) in order to boost the asset side of the banks ledger, which in turn kept banks solvent, but it didn't prevent investors from losing money. Of course upper management and the C-Suite all got their bonuses, something the government should have negotiated away from poorly managed banks, but I suspect that would have been harder than you think and probably illegal (this is where we blame the US Congress).

Now there are a lot of problems with the banking system, mostly surrounding the incentives and regulatory capture, but the system itself is actually brilliant once you understand it. It is amazingly elastic, if managed correctly it can manage incentives quite well and it's resilient. But it's complex, not in that it requires degrees in accounting or finance (actually watch a video on double entry accounting on your 80% of the way to understanding modern banking, but it is some what counter intuitive.

Thoughts?

I'm confused.

"Put simply, if you and I wanted to run a bank, you were the owner and I provide the capital. Let's say $20 million dollars.
$20 million is the measure of the banks assets. How much you can lend is tied directly to how much capital or assets the bank has. Remember it's my $20 million and I expect to get it and more back."

If the bank has put out $20M in Stocks and you have purchased the $20M, then you are the owner of the bank. You may install me as a CEO and pay me wages but I'm not the owner.
Or are you another bank and I have borrowed that money from you? (In which case the $20M don't count as capital but as a liability, so ???)

"Ok, let's say, using my diagram a few posts back you lend $25k to 10 people. all to purchase a new car. You expect to make $3k in interest or $30k of course, that $30 will be gross profit. You have to pay for the costs to run a bank and pay dividends to me as the holder of all your stock (just for this example). Let's say that 50% of your profit will need to go to costs associated with running the bank, that means $15k in profit for the (10) $25k loans."

Peanuts.
Using your $20M as reserve I can lend $25k to 8000 people. I.e. I can create ex nihilo $200M. I expect to get the $200M back plus, at 12% interest, $30M. The $200M was just book money, so, after it being paid back (or defaulted) it vanishes into the thin air it was created from.
But the $30M is real money. This is the net revenue - at least if all the debitors pay their loans back.
Lets say 80 (1%) don't. But that is just cost of doing business. I don't have to take it from your $20M. I subtract it from the revenue. So, instead of making $30M, I only make 30M - 2M - 240K (the interest I didn't get on the defaulted 80) = $27.76M
From that I subtract the costs to run the bank (including my wage), Let's make it easy and say that's $17.76M.
After all is set and done, the $200M I have lended away have returned to the aether and there are now $10M of real money additionally to your initial $20M - which you take away as the dividend.

Did I go wrong in any step?

 

[EconGuy]

If the bank has put out $20M in Stocks and you have purchased the $20M, then you are the owner of the bank. You may install me as a CEO and pay me wages but I'm not the owner.

I was trying to keep it simple, obviously large publicly traded banks would have thousands of stockholders. Those would the greatest shares (greatest investment) would sit on a board, but usually they hire a CEO.

Or are you another bank and I have borrowed that money from you? (In which case the $20M don't count as capital but as a liability, so ???)

Again, I was trying to keep it oversimplified, apologies for the confusion.

Using your $20M as reserve I can lend $25k to 8000 people. I.e. I can create ex nihilo $200M. I expect to get the $200M back plus, at 12% interest, $30M. The $200M was just book money, so, after it being paid back (or defaulted) it vanishes into the thin air it was created from.

The amount you lend depends on risk-weight of who you are lending to and what they are using the money for assuming a bank is adequately capitalized.

Remember, reserves are NOT what determines the amount you can lend, despite what soooo many sources and videos say. It's wrong and based on a system that ended decades ago. Thus the amount you can lend would start with assets minus liabilities to determine capital. Capital will determine the amount that can be lent.

being paid back (or defaulted) it vanishes into the thin air it was created from.

Correct, when a bank creates ex-nihlo money (as you put it) it creates a liability on it's balance sheet (and adds the promissory note from the borrower on the asset side) for that same amount that must be repaid to get that account back to zero. If the account defaults, the money is taken from the banks capital (reducing the amount the bank can lend) or recovering the asset pledged as collateral and selling it to repay the outstanding balance.

Lets say 80 (1%) don't. But that is just cost of doing business. I don't have to take it from your $20M. I subtract it from the revenue. So, instead of making $30M, I only make 30M - 2M - 240K (the interest I didn't get on the defaulted 80) = $27.76M

Not sure I follow all of that, but I think what you are saying about bank operations being paid from profit, you are right.

So the only part I think, and I'll ask you to correct me if I've misunderstood, is that I think you used reserves to determine the amount you can lend. The 10% compounded over several layers of deposits is not how it works anymore. Reserves can easily be acquired, even after the fact. Even if all goes wrong the Fed can lend reserves (at a higher rate), so reserves in no way functionally constrain lending.

All of that said, I should mention that these rules in the US only apply to Fed member banks. There are some banks that lend money on hand, but most of us wouldn't come in contact with those kinds of banks

Respectfully,

EG

 

[Heyo]

The amount you lend depends on risk-weight of who you are lending to and what they are using the money for assuming a bank is adequately capitalized.

[...]

So the only part I think, and I'll ask you to correct me if I've misunderstood, is that I think you used reserves to determine the amount you can lend. The 10% compounded over several layers of deposits is not how it works anymore. Reserves can easily be acquired, even after the fact. Even if all goes wrong the Fed can lend reserves (at a higher rate), so reserves in no way functionally constrain lending.

That is the part where I was oversimplifying. I'm aware that the 10% is not an axiomatic number and there has been much controversy about lowering that threshold - though I'm totally ignorant how it is regulated now. Iirc, in Europe it is still 10 (8) % for all consumer and real estate business but I'm not sure.
What remains is the fact that banks can lend money they don't have, i.e. create book money.

 

[EconGuy]

That is the part where I was oversimplifying. I'm aware that the 10% is not an axiomatic number and there has been much controversy about lowering that threshold

In Canada, the United Kingdom, New Zealand, Australia, and Sweden all have zero % reserve rate policies. Even in the US the number depends on the size of your bank. Smaller banks in the US have a zero % requirement. Reserve requirements have nothing to do with lending capacity.

What remains is the fact that banks can lend money they don't have, i.e. create book money.

And intuitively that might seem like a bad thing. There was a time when I thought this was crazy, but remember every dollar created is eventually destroyed. At any given moment there is money that exists only as loan and that will cease to exist when the loan is repaid. But what that means is that the amount of money circulating is in some relation to peoples capacity and desire to borrow and that borrowing facilitates productivity which in turn facilitates jobs. That is to say, that the system is elastic and can respond to real ships in demand. The system, for all it's faults, and there are many, is quite frankly brilliant.

If you fix the sum of money in a system, you effectively cap productivity, which in terms you put a hard cap on the number of jobs an economy can have.

 

[Heyo]

In Canada, the United Kingdom, New Zealand, Australia, and Sweden all have zero % reserve rate policies. Even in the US the number depends on the size of your bank. Smaller banks in the US have a zero % requirement. Reserve requirements have nothing to do with lending capacity.

And intuitively that might seem like a bad thing.

Especially when you have a traditional view of money. Imagine a farmer in 1920s who just deposited $1k in your bank for 5% interest that you are going to lend his 1k ten times out for 10%. I.e. you make $1k and give him $50 and bag $950. I guess on that premise Ford would have been right.

There was a time when I thought this was crazy, but remember every dollar created is eventually destroyed. At any given moment there is money that exists only as loan and that will cease to exist when the loan is repaid. But what that means is that the amount of money circulating is in some relation to peoples capacity and desire to borrow and that borrowing facilitates productivity which in turn facilitates jobs. That is to say, that the system is elastic and can respond to real ships in demand. The system, for all it's faults, and there are many, is quite frankly brilliant.

If you fix the sum of money in a system, you effectively cap productivity, which in terms you put a hard cap on the number of jobs an economy can have.

In a system with usury, you can't fix the sum of money, it doesn't work that way. But that also means that that system depends on increasing production. It is therefore not sustainable. In the finite, real world, growth, especially exponential growth is not feasible. I.e. the monetary system is bound to crash periodically.

 

[EconGuy]

Especially when you have a traditional view of money. Imagine a farmer in 1920s who just deposited $1k in your bank for 5% interest that you are going to lend his 1k ten times out for 10%. I.e. you make $1k and give him $50 and bag $950. I guess on that premise Ford would have been right

It's all a question of who takes the risk. The problem is a familiar one. Privatize gains and socialize losses. The trick, IMO, to fixing the system is less of the socializing losses part and you'd see a lot less gambling in markets. But they gamble to the point that failure to socialize the loss means that average people suffer or suffer more. There are structural solutions, but the real change won't happen until people recognize the there are a moral element. If things here in the US are any indication, it's going to be a while before things change.

That's why the system we have needs to be tightly regulated to prevent risk. Precent risk and you limit boom and bust, which btw the wealthy don't make money just in the good times, they make money in the swings between the highs and lows. They want volatility, they want swings. Stability is something the ultra wealthy loath.

In a system with usury, you can't fix the sum of money, it doesn't work that way. But that also means that that system depends on increasing production. It is therefore not sustainable. In the finite, real world, growth, especially exponential growth is not feasible. I.e. the monetary system is bound to crash periodically.

I've heard intellectuals proclaim that "infinite growth on a finite planet is something only an economist could believe". I think this statement sounds pretty profound and it lends itself to our intuition, but it's simply false and is easy to refute.

While the planets resources are finite, there are enough to sustain human kind for millennia as long as we don't send ourselves back to the stone age with nukes. Further, no economist worth his salt believes in "infinite growth". The human population will stop growing before the next century when we hit a population of between 10-12 billion. Less if per family children remains on the decline.

It's only a matter of time before resources in space will be exploited, probably the next 50-75 years. I potable water will be the biggest challenge, but I wrote a post a while back, potable water will always be available, its just that the costs will increase. Those in first world countries will do ok with the higher cost, it's the 3rd word that will suffer.

 

[fantome profane]

It's only a matter of time before resources in space will be exploited, probably the next 50-75 years.

Fifty years might also be when we have efficient functional nuclear fusion power plants.

 

[EconGuy]

Fifty years might also be when we have efficient functional nuclear fusion power plants.

I hope your right, but personally I have my doubs.