16 April 2018 – There comes a time in every federal budget cycle when I have to find a way to talk about debt and, specifically, the Dems dangerous debt dance. This time I decided to switch things up and invited Frances Langum (Bluegal), from my favorite podcast, The Professional Left, to interview me and to provide push-back. Fran is someone for whom I have enormous respect but, like 99% of the Dems out there, she comes at economics from a purely Keynesian perspective…and that’s what I wanted. You are going to love the conversation and, I hope you find it an interesting way to get the MMT message out.
At the top of the show I refresh the information about the Rapid Response events taking place when (if) Trump does any of the following: fires Robert Mueller, fires Rob Rosenstein, pardons any key witnesses. Please go to Nobody Is Above the Law to register for the event closest to you. Our democracy cannot be allowed to go down without a fight. Also, on the day you can tune in to Netroots Radio for a live stream as events unfold.
During the rest of the show Will covers an item you may have missed on your news feed, the angry Scottish badger, as well as some of the larger issues surrounding the US/UK/French strike on Syria. I get into Mick Mulvaney’s appearance on Capitol Hill to give his bi-annual report from the CFPB. Both Joan McCarter, of Daily Kos, and David Dayen, for The Nation, covered this particularly well.
Be vigilant folks, things are getting real. – Arliss
I listened to the show, and I have a genuine question about China and debt, but it might sound dumb. I’m not trolling, I just don’t know how this stuff works. My mother’s husband believes based on radio shows he listens to, that China could recoup their American debt, not in American dollars, but in American property. As in, if they demand America pay for all the debt they have purchased, and we can’t or won’t, they could forclose on American families and kick them out of their homes. Is that possible?
Kristina –
You don’t sound like a troll at all! People hear such crazy things and I appreciate you giving me the opportunity to respond to your mother’s husband’s thoughts on China. Just to make things easier, I’m going to call your mother’s husband, “Bob.”
I should begin by asking you not to report to him that his thoughts actually made me laugh…out loud…for a while…repeatedly. He provided a bright spot in my day. 😉
Now, let’s get things going with this, if your next door neighbor can’t pay her mortgage, does the bank come and take your house? No, it does not. A default can only be redeemed by the entity holding the debt against the person who is the debtor. In other words, when playing Monopoly, you NEVER have to pay if someone else lands on Park Place.
The next thing is a bit more tricky so stick with me. American banks may be in debt to China through a number of different kinds of instruments. One of those instruments could be property. BUT, just like in the example above, if the US were to default on federal debt to China, China could not come after American banks. They are legally entirely different entities. Just like you are legally a different entity than your neighbor or the other person playing Monopoly.
It amazes me every single day how deeply the Federal Reserve is misunderstood by so-called fiscal conservatives. They frequently hold one or both of two completely wrong ideas in their heads and apply them at the most incomprehensible times. These ideas are as follows:
1. The Federal Reserve is the treasury of the United States and interchangeable with the Treasury Department. This is patently not the case. There IS an argument in the MMT community that it should be but let’s not get into that here. The Federal Reserve operates in conjunction with the US Treasury Department but they are separate entities and that is important. The debt China holds belongs to the US Treasury Department. The Federal Reserve markets US Treasury bills FOR the Treasury Department and the Fed tracks the T-bills but the debt belongs to Treasury, not the Fed. Okay so far?
Bob’s house may still have a mortgage. (Actually, probably not because he has whipped himself up into a needless fear about China.) Anyway, let’s assume that Bob does have a mortgage and that mortgage is held by Bank of America (BofA). One morning Bob wakes up and he hears that China is pissed and they want the US to pay back all of their debt…now…today. It does not matter how much BofA is in debt to China, the debt China would be trying to call in is with the US Department of the Treasury. There is NO legal link AT ALL between the Treasury and Bob’s mortgage. None. Zip. Zilch. This is for many reasons but the biggest is that even though the Department of the Treasury and BofA both bank in the same place, the Federal Reserve, the Department of the Treasury and BofA are NOT THE SAME LEGAL ENTITY. There is not now and never will be a link between China’s T-bill holdings and Bob’s mortgage. It is a matter of law.
2. The other belief Bob and his ilk tend to have is that the debt China holds is against the Federal Reserve…not the Department of the Treasury. They make this mistake because the Fed handles T-bill transactions for the Treasury and so they think the Fed IS the Treasury. Am I being clear enough? I’m not always sure I’m explaining well. Please feel free to ask about anything you aren’t following in all of this.
Anyway, back to Bob and his mortgage. If he believes this scenario he is thinking that if the Fed cannot “pay” the Chinese debt off than China would be able to come after the assets held by banks which are members of the Federal Reserve System, like BofA, and Bob’s asset would be one of those things China could grab up. Well, again, this is a straight forward matter of law, the Fed is just the bank, they aren’t the debtor. The debtor is the Department of the Treasury and Treasury is a legally a separate entity. Additionally, BofA is legally a separate entity. Bob and his friends are conflating legally separate things into one big mishmash and that’s just facially not the way it works..at all.
So enough of those two things, I’ll give you a couple of other reasons why Bob’s ideas are really, Really, REALLY completely wrong. The serious one is that what Bob is saying simply will not happen. Bob and his buddies think China would wage a financial war with us by calling their debt but the debt they hold is:
1. ONLY in dollars.
2. Just like the yuan, the dollar is fully fiat so it is based ONLY upon the “full faith and credit of the United States.” There are absolutely NO “backing assets.” US Treasuries (T-bills) are not backed by gold or silver or…property. …and the Chinese knew that when they bought them.
3. If China was to declare that they would not accept a dollar denominated debt in dollars they would be declaring that the dollar is worthless to them, which would work for us perfectly well. We would just wipe their debt off our books and stop paying them interest. WE would WIN in that event, NOT CHINA.
4. And China would never do that because they know that even though it would be a financial win for us it would be taken as a political attack and could lead directly to a shooting war which, no matter what Bob says, they don’t actually want.
The reality is that IF China was to do irreparable damage to it’s own economy by demanding full payment for all outstanding debt, the US could just keystroke those pixels into existence, just like we did for Quantitative Easing.
Yet another reason why it won’t happen the way Bob is thinking it could is because T-bills are sold in increments of time, as in a 6-month T-bill, a 12-month T-bill etcetera. China would never redeem all its debt at one time because the T-bills would not be mature and they would be forfeiting the interest.
And the last point is that if China did lose it’s mind and decide, via some imaginary, unicorn, back-asswords reasoning to kick Americans out of their homes, they would have to send the Red Army to do it and you can assure Bob that the US Army would have something to say about that.
I’ll tell Bob this for free though, China isn’t the threat to his mortgage, Wall Street is. While we have all been absorbed in the latest trash coming out of the Trump White House, the Trump Administration has been rolling back Dodd-Frank. They destroyed another huge chunk of it recently. This is, once again, allowing Wall Street to get deeply invested in the same kinds of exotic, dangerous assets which they used to crash the economy in 2007. It’s happening again. If Bob wants something to keep him up at night, that’s the thing to be worrying about because if BofA comes for his house, he’s screwed.
Again, Kristina, thank you for writing. This was fun for me!
Thanks for answering! This is so fascinating. I’ve never thought about government spending the way you talk about it. I knew it wasn’t backed by anything (like gold or silver) but I didn’t realize the implication of that, that we make up, or imaginate, the amount we have, and don’t have to choose between healthcare and military spending, or lunches for school kids or meals on wheels for elderly. We could do it all.
Do you think the reason we don’t do it all is because of old ways of thinking (family budget style, limited resources) or because politicians know very well we could, and they just flat out choose not to?
I’m glad Bob’s thoughts made you laugh, they usually leave me boiling mad and inarticulate! And you’re right, he doesn’t have a mortgage, he paid it off, partially out of debt fright, and partially following Dave Ramsey’s financial advice. This debt idea of his was something he mentioned before the election, and his other idea was that the army wouldn’t fight because Hillary would let the Chinese in, that she would give away our country (eye roll). He’s not worried about Wall Street because his mortgage is paid off, and he’s starting to invest. He thinks he can make Wall Street work for him.
But it’s more in China’s best interest to hold the debt and collect the interest, isn’t it? That’s where the money in debt collecting is, whether it’s China or debt collector for a small local bank.
Is there a way to reframe the conversation around debt in general discussion to open up that idea that we don’t have to choose between medicine and bridges?
I’ve been thinking about money a lot, and what society would be like without money. It is such a social construct. How would our lives be different if we didn’t have to trade our time for money, then money for food and shelter? When you think about it, money is just the measurement of exchange of value. Kind of makes you wonder about the value of our politicians, doesn’t it?😂
Kristina –
I’ve met plenty of “Bob’s” so it was easy to recognize him from your description. His Hillary regurgitation is just ignorant but that he is afraid of the Chinese waging financial war on us while deciding that he can beat the market gambling on Wall Street is akin to going to London, walking up to a busy street and then stepping off the nice, safe curb right into the path of a giant, red, double-decker bus. When he goes “splat” make sure to get a photo and put it up all over social media. Just, you know, because you can. lol
Money does serve important public purpose just in the same way that any kind of rule or parameter does. Like any rule or law, it can be used for good or ill. Right now the social equivalent of the way our country is using money is like white police officers and young black men. Both money and officers COULD be PART of society in a positive way which is centered on human dignity and how the fabric of society is woven into everything around it. But we know the real world isn’t like that…yet. But I’m not willing to give up on achieving social justice and I’m not willing to give up on obtaining fiscal justice either. Getting the word out on MMT is, for me, very much part of helping to shift this society toward light. Perhaps, as you learn more about MMT, you too will suddenly find yourself talking about it with friends, at dinner parties, and, maybe even one day, over a Thanksgiving meal with Bob. (For once you can torture him!)
It’s funny you should bring up framing. Every so often I talk about it on the show and I was going to do that again next week, provided the news cycle doesn’t make something else seem more urgent. I think you are right. JD Alt talks about this in a similar way, that we should frame MMT not in terms of the mechanism but in terms of what it makes possible. Instead of an Obama-like, “Yes we can,” maybe we live in the place of, “Yes we can do this …”.
Hmmmm—now my mind is buzzing. I’s going to be tough to go back to reading Abba Lerner.
Many, many carrots to you and yours (even Bob!) –
Arliss