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More FAQS on deficits and debt: Where is the money coming from?

More FAQS on deficits and debt: Where is the money coming from?

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Former Federal Reserve Chair Alan Greenspan told CNBC last week that his “biggest concern” in regard to the economic outlook included too-high budget deficits. This concern is both completely misplaced, but widely expressed.

We have already addressed a number of FAQs about deficits and debt. Besides those FAQs, however, another common question people ask is “where is the money the government borrows coming from?” Related to this fear is concern that the source of borrowing (whatever it is) might dry up at any time, and, the result could be spiking interest rates that force firms to cut back on investment in productive private-sector investments, which in turn would slow economic growth in the future.

The short answers to these concerns are pretty simple: the money the government is borrowing comes mostly from ourselves, and that’s a key reason why we can be sure that interest rates won’t start rising unless and until we have reached a full recovery.

Below, we’ll explain what it means that federal budget deficits mostly amount to U.S. households borrowing from themselves.

In March and April this year, whole industries where U.S. consumers spend money were shut down (restaurants, hotels, air travel, gyms, etc.). While there are some substitutes for some of this spending (when restaurants close, people tend to spend more money on groceries, for example), these offsets are nowhere near one-for-one. This means that as the places where people spend lots of money closed, households spent less. Because one person’s spending is another person’s income, as household consumption spending collapsed, market-based incomes collapsed in turn (i.e., workers in COVID-19-shutdown sectors stopped getting paychecks and business owners stopped earning profits).

Absent any policy response, a horrific vicious cycle would’ve started. Laid-off restaurant and airline workers would’ve cut back spending on everything—including spending in sectors that COVID-19 had not directly shut down. At that point, workers in non-coronavirus-affected sectors would have seen cuts to their incomes and reduced their own spending—and the downward cycle would continue. The few months of significant economic support provided by the CARES Act starting in April didn’t just provide vital income support to laid-off workers—it also broke this vicious cycle and put up a firewall between the coronavirus-driven shutdowns and the rest of the economy.

The CARES Act was forecast to increase the federal budget deficit by just under $2 trillion. Concretely, this means that the U.S. Treasury had to issue bonds in this amount. When people express worries about where the money comes from for the government to borrow, or if rising deficits will lead to spiking interest rates, they are concerned that there will be no willing buyers for U.S. Treasury bonds at going interest rates, and that the Treasury will have to raise rates to find buyers for new debt. But since March, even as the supply of bonds exploded, interest rates have fallen sharply.

How did this happen? Apparently a huge source of new demand to buy Treasury bonds emerged starting in March. Where did this new demand for Treasury bonds come from? From the huge increase in household savings that was the flipside of the collapse in household spending. Households not experiencing income losses in March and April had far fewer opportunities to spend money as whole swathes of the economy shut down, so, their savings increased dramatically.

The figure below shows the personal savings rate up to the second quarter of this year—April, May, and June.

Figure A
Figure A

The spike in savings in the most recent quarter is obvious—and that spike mostly answers the question of where the money the government borrowed came from—it came from the increased savings of U.S. households. Basically, the increase in debt that financed the CARES Act’s few months of income support for laid-off workers recycled this increased household savings into somebody else’s income, and kept this household saving (or, non-spending) from acting as a pure anchor on the economy’s growth. Yes, the entire story is more complicated than that, but that’s the essence of it.

It’s a pretty familiar story as well—federal budget deficits swell as recessions hit and household savings increase to finance lots of these increases. Figure B below shows data from the four years before and after the beginning of the Great Recession (January 2008). Annual borrowing by the federal government rose from $375 billion on average in the four years before the Great Recession to $1,250 billion in the four years after—an increase of $875 billion. But households went from being net borrowers of $40 billion in the four years before the recession to lending $630 billion annually in the four years after, a swing of $670 billion, or, enough to account for more than three-quarters of the rise in federal borrowing (the rest can be more than accounted for an increase in business sector savings).

Figure B
Figure B

In some economic models, we don’t need the public sector to translate increased savings into somebody else’s incomes to avoid a slowdown in economic growth—it’s supposed to be done by private financial markets. In these models, a big influx of household savings puts downward pressure on interest rates, and the decline in interest rates induces firms to borrow more to finance increases in investment. [Note: the only things that count as business “investment” in macroeconomic terms is spending money to build plants, purchase equipment, add to physical inventory, or paying people to engage in research and development—exchanging ownership of already-existing assets (say through mergers and acquisitions) doesn’t count)].

These models that assume interest rates are the essentially the “price” of “loanable funds”, which are supplied by household savings and demanded by firms looking to undertake investment, are pretty misleading for a whole host of reasons. But, even if they were sometimes true, they’re obviously not true in a world where the interest rate needed to balance planned household savings and planned business investment is negative. The interest rates relevant to business investment decisions generally can’t go negative for any real length of time, and, yet—particularly in times of economic crisis—there is no guarantee that positive interest rates will indeed suffice to balance planned investment and planned savings.

In short, the hypothetical private financial system that nimbly translates an increase in household savings into increased business investment that exists in many economic models is a fantasy and cannot be relied on during crisis. But, in the real world we can instead have the public sector take the increased private savings, put it into a useful asset for households to store wealth in (Treasury bonds), and make sure it is spent out into the economy to support incomes.

In this case, the money the federal government borrowed to finance relief from the most recent economic crisis comes from us. This fact is key to explaining why there’s no need to worry about some sudden spike in interest rates that would make servicing the increase in debt ruinous. The exact same influence—the COVID-19-driven collapse in household spending and concomitant increase in planned savings—drove both the rise in public debt and the collapse of interest rates. As the economy recovers, household savings will be cut back, but so will lots of the public spending that was driving the increased federal budget deficits. As unemployment falls, for example, there would be steady decline in unemployment insurance payments even if we kept the post-COVID-19 enhanced benefit levels turned on (and we certainly should do that).

Could economic recovery happen so quickly—with households spending like mad and businesses eager to balloon their investments—that interest rates really would see some upward pressure as planned savings fell well short of planned investments and the Federal Reserve needed to ramp up policy interest rates to control inflation? This is theoretically possible, but it is supremely unlikely. The main macroeconomic problem in the U.S. economy for the past two decades has been trying to get spending to grow fast enough to keep unemployment at acceptably low levels, not trying to keep it muffled. And, an economy growing so fast that it threatens to spark inflation and interest rates is a challenge for sure, but it would be replacing a much worse challenge—an economy growing so slowly (or even contracting) that mass unemployment was crushing American families’ incomes. No state of the world is perfect, but I’d much rather policymakers err in overshooting in trying to get us out of the current state rather than go timid and let us stay mired in the one we’re in.

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The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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