Monday, December 12, 2016

Hussman on the Government Debt Bubble

This week's essay:

Sure, you can devalue those claims through inflation, but only if the debt is in the form of long-maturity bonds (which is why the recent discussion of issuing 50-100 year Treasury bonds seems understandable but also a bit nefarious). At shorter maturities, inflation just raises the interest rate that the government has to pay when the shorter-term debt is rolled over. Though the weighted-average maturity of Treasury debt is currently longer than normal, the average is still only 5.8 years, and half of the debt will have to be rolled over by 2019, at whatever interest rates emerge in the interim. Ultimately, debt implies a future transfer of purchasing power, and provides only a few choices. Either you raise adequate tax revenue, or you denominate the debt in long-term bonds and devalue them through inflation, or you default, or you violate the social contract made with those who don't hold paper claims (e.g. Social Security beneficiaries) in preference for those who do.

Had the borrowing resulted in productive investment, future output would be easily available to meet those claims. Instead, what’s going on is a quiet dilution of future living standards. That’s only going to be reversed by thoughtful policies, focused more on long-term productivity than near-term gains. Even massive debt-financed spending will not help unless the projects are intentionally designed to durably enhance the long-term productivity of the U.S. economy, to avoid duplicative capacity, and to relieve constraints that threaten to become binding in the future (personally, I remain convinced that renewable energy should be central to that list).
I've written that "a treasury bond is a certificate that money has successfully been expended on section 8 housing, or on make-work military 'jobs'."

Also, Hussman understands that another piece of the problem was the falling worker/retiree ratio.

1 comment:

whydibuy said...

Da bears play the same 'ole tune over and over.
Back in 1980, sjw company W.R. Grace ran television scare bear ads depicting some children from the future holding a trial for adults who let the debt get out of control ..... up to TWO TRILLION DOLLARS!!!!!!!

Heck, that is not even going to be 1 years deficit. And here we all are, just fine and dandy with a much much higher stock market ( Dow 800 then,lol ) and the economy doing just fine.
You bears really need some new material already.