Sunday, March 3, 2013

Michael Bloomberg's Confused Perspective on US Debt

NYC Mayor Michael Bloomberg, while discussing sequestration, had this to say:

We are spending money we don’t have. It’s not like your household. In your household, people are saying, ‘Oh, you can’t spend money you don’t have.’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the United States federal government, people do seem willing to lend us an infinite amount of money. … Our debt is so big and so many people own it that it’s preposterous to think that they would stop selling us more. It’s the old story: If you owe the bank $50,000, you got a problem. If you owe the bank $50 million, they got a problem. And that’s a problem for the lenders. They can’t stop lending us more money.
This commentary by  Bloomberg is total confusion. First of all, the comment that "they would stop selling us more," makes no sense in the context of Bloomberg's point. Foreign countries are creditors that are buying Treasury debt. They are not "selling us more."

But getting to the heart of the matter, the US debt situation is not like the situation of a single bank with an oversized private loan. If a debtor owes a bank $50 million that can't be paid back,  it may make sense for the bank to loan, say, another million, if it will result in completing a project. US government debt is a completely different type of beast. At present, there are multiple buyers of US debt. Anyone of the buyers can liquidate their position in the markets or simply wait for the securities to mature. Thus, the incentive to prop up the US debt is not the same as a single bank with a private jumbo loan. Indeed, China which had been a major buyer of Treasury securities has become a net liquidator of them.

This shows beyond any doubt that Bloomberg's analysis doesn't fit with the facts. The only buyer the US government can count on is the Federal Reserve, which can just print money out of thin air, to buy Treasury securities. The problem with this is, of course, that buying Treasury debt with newly printed money sets up the potential for major price inflation. By incorrectly framing the situation, Bloomberg completely fails to see this very real danger.

(ht Jon Cresante)


  1. the problem will come when those lenders can get better returns elsewhere and the Feds will have to match that.

  2. Bloomberg understands the situation perfectly and is merely a bad liar, or maybe just having a senior moment and forgetting how the cover lies are supposed to be spun. Or so I believe.