Tag Archives: debt

Donald Trump Obliterates the Deficit!

by OYGBridget Posted on February 26, 2017

Mother Jones

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Behold the echo chamber. Here is Gateway Pundit two days ago:

Here is Herman Cain this morning:

Here is Donald Trump shortly afterward:

The strangest thing about this is that…it’s true. I’m not really used to that from Trump. I guess accidents do happen, though.

Now, it’s also meaningless, and not just because Trump hasn’t actually done anything yet. The deficit bounces up and down monthly depending on how much the government happens to spend and how much tax revenue it takes in. For example, take a look at the following chart:

The month of April is shown in blue. Let’s make that into its own chart:

Impressive! During Obama’s presidency, he turned around America’s finances. We went from a deficit of $80 billion in 2010 to a surplus of over $100 billion in his final year. Why didn’t the mainstream media ever report that?

Because who cares, that’s why. You know what happens in April? Everyone pays their taxes. Does that mean the deficit is in great shape every April? Of course not. That just happens to be when a lot of the money comes in.

But it doesn’t matter. As I’ve mentioned before, Trump’s tweets are for for his fans, not for us. And his fans now think that in his very first month Trump has erased the deficit. The guy promised action, and by God, he’s delivered. It just goes to show that all this deficit stuff wasn’t really so hard to solve after all. It just needed a man of action to go in and straighten things out.

Not that the FAKE NEWS media will ever admit that, of course.

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Donald Trump Obliterates the Deficit!

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ERP Blogstorm Part 2: Education

by GilbertRied Posted on December 18, 2016

Mother Jones

Part two of our series of charts from the Economic Report of the President is all about higher education. First off, here’s the college premium over time:

When I graduated from my local state university in 1981, I had no debt because attending public universities was practically free. On the other hand, my earning prospects were only about 20 percent higher than a non-college grad. Today, college grads often have tens of thousands of dollars in debt, but their earning prospects are 70 percent higher than non-college grads. So who got the better deal? That’s not entirely obvious.

Next up is a different measure of the value of a college education:

This helps answer the question, “How high can university costs go?” The answer is, “Pretty high.” Even with higher tuition, college is still a great deal. A bachelor’s degree, on average, pays off nearly 10:1. That means there’s a lot of room to raise tuition and still provide enough of a bargain that anyone who’s qualified will be willing to pay. Treating higher education this way may be a bad idea, but nevertheless, this chart suggests that states can continue to raise prices if they want to.

The first two charts have been all about nonprofit schools: community colleges, state universities, and private universities like Harvard and Morehouse. But for-profit institutions—which are typically trade schools—have exploded over the past three decades:

The number of trade schools has skyrocketed since 1987, from about 300 to well over a thousand. And that brings us to our final chart:

At first glance, this chart seems odd: the students with the smallest debt have the highest chance of defaulting. There are multiple things going on here, but the biggest one is that a lot of these students attended trade schools for a semester or a year and then dropped out. Their debts aren’t the biggest, but with not even a trade school certificate they can only get low-paying jobs that make it very hard to pay back their loans.

Too often, for-profit schools cajole people into signing up with promises that the government will pay for everything. Unfortunately, a lot of their students just aren’t suited for further schooling, so they drop out and end up with less than nothing: no certificate, and a big chunk of debt. The trade schools themselves don’t care much, since they get paid whether anyone graduates or not, but it’s a helluva bad deal for the students who end up broke. This is why President Obama’s recent crackdown on the worst offenders among for-profit trade schools is so welcome.

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ERP Blogstorm Part 2: Education

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NYT: We’ve Figured Out How Trump Gamed the Tax System

by Rita7799phdn Posted on November 1, 2016

Mother Jones

A few weeks ago the New York Times got hold of the first page of Donald Trump’s 1995 tax return. It showed a net operating loss of $916 million, which Trump was able to use to offset his income over the next 20 years, thus avoiding millions of dollars in income taxes. But while solving one mystery, it opened another: Just exactly how did Trump manage to declare such a big loss? Several theories made the rounds, but the Times now thinks it has the answer, thanks to a cache of “newly obtained documents.” Here’s the nutshell version of the Times’ explanation:

Trump was a terrible businessman and lost a huge amount of money on his casino operations in the early 90s.
As part of his bankruptcy negotiations in 1991, he persuaded banks to forgive hundred of millions of dollars in loans.
Forgiven loans count as “Cancellation of Debt” income, which should have offset his huge operating losses. But somehow they didn’t. Why?
The Times says it was because Trump used a legally dubious “equity-for-debt” swap. Basically, he swapped the bonds he couldn’t pay for new bonds that he classified as equity shares in the casino partnership.

The Times makes a good case that Trump’s own tax lawyers told him this plan was extremely risky (see the excerpt from the official tax opinion on the right) and would most likely be disallowed by the IRS. But we don’t know if it was. The trail stops cold in 1995.

If I’m reading this right, the basic story is that Trump gave his banks “New Bonds” in place of their old bonds and classified the new bonds as equity shares in the casino partnership. Trump then valued the equity as equal to the old debt, thus showing no net loan forgiveness and therefore no COD income. This despite the fact that, in reality, the equity was close to worthless.

So Trump then had $916 million in operating losses, but no debt forgiveness to offset it. “Even in the opaque, rarefied world of gaming impenetrable tax regulations,” says the Times, “this particular maneuver was about as close as a company could get to waving a magic wand and making taxes disappear.”

At this point, the question of how Trump gamed the tax system is mostly a matter of academic interest. Still, I’ve written about this before, and figured I should follow up with the latest theory. And this is it.

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NYT: We’ve Figured Out How Trump Gamed the Tax System

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Are Bonds Opaque and Confusing Because They Have to Be?

by Rosario38U Posted on October 25, 2016

Mother Jones

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A few days ago Brad DeLong tagged a piece by David Warsh that promises to be a preface of sorts to a 14-part series about some new research into the nature of finance and the origins of the Great Recession. It actually looks pretty interesting, but I confess I’m a little unclear about one of its central points.

As we all know, one of the problems the Great Recession uncovered was the brave new world of rocket science derivatives, which were so complex that no one truly knew what they represented. Warsh suggests that this is no accident:

Stock markets existed to elicit information for the purpose of efficiently allocating risk. Money markets thrived on suppressing information in order to preserve the usefulness of bank money used in transactions and as a store of value. Price discovery was the universal rule in one realm; an attitude of “no questions asked” in the other.

….This new view of the role of opacity in banking and debt is truly something new under the sun. One of the oldest forms of derision in finance involves dismissing as clueless those who don’t know the difference between a stock and a bond. Stocks are equity, a share of ownership. Their value fluctuates and may drop to zero, while bonds or bank deposits are a form of debt, an IOU, a promise to repay a fixed amount.

That economists themselves had, until now, missed the more fundamental difference — stocks are designed to be transparent, bonds seek to be opaque — is humbling, or at least it should be. But the awareness of that difference is also downright exciting to those who do economics for a living, especially the young. Sufficiently surprising is this reversal of the dogma of price discovery that those who have been trained by graduate schools in economics and finance sometimes experience the shift in Copernican terms: a familiar world turned upside down.

I can’t do justice to the whole idea in an excerpt, but this gives you a taste of Warsh’s thesis. But it confuses me. Certainly he’s right that mortgage-backed securities of the aughts were astonishingly opaque, but why does that lead us to believe that bonds, in general, “seek to be opaque”? For most of the 20th century and before, bonds were considerably simpler than the derivatives of the 21st century. The value of a corporate bond depended on the likelihood of bond payments being made, which in turn depended on the profitability and overall growth prospects of the firm. The value of a company’s stock also depended on the profitability and overall growth prospects of the firm. If you knew one, you knew the other. Bonds, in general, were no more opaque than stocks. And none of this had any relation to bank money, did it?

Maybe this will all be explained later. If Warsh is arguing that the transparency of the debt and equity markets have changed over the past decade or so, that’s one thing. But if he’s arguing that they’ve always been fundamentally different, then I have some questions. I hope he answers them over the next 14 weeks.

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Are Bonds Opaque and Confusing Because They Have to Be?

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Weekend Catch-Up: How Did Donald Trump Lose $916 Million?

by DaleneX56466 Posted on October 3, 2016

Mother Jones

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Surprisingly, I had some real-life stuff to attend to this weekend, which means I’ve only just caught up on the latest Trump meltdown. I might as well share it with you, since maybe a few other people need to catch up too.

On Saturday, the New York Times published copies of the first page of Donald Trump’s 1995 state tax returns from New York, New Jersey, and Connecticut. They show that Trump declared a net operating loss that year of $916 million—about $1.5 billion in today’s dollars. Questions abounded:

Where did the tax returns come from? They were sent to the Times anonymously, so no one knows. But rumors swirled around Marla Maples, Trump’s second wife, who might have gotten them as part of her divorce proceedings in 1999.
Did Trump really lose that much money in a single year? It seems all but impossible. Among millionaires who declared losses in 1995, the average amount was $614 thousand.
It seems likely, then, that Trump’s gargantuan loss was basically an accounting fiction of some kind. John Hempton, an Australian hedge fund manager and former expert on tax avoidance for the Australian Treasury, has a theory that Trump may have “parked” the debt from his bankruptcies with a dummy party offshore, where it was never collected but never officially forgiven. This would allow him to declare $916 million in losses even though he never truly lost anything.
What was the point of all this? Most likely, the Times speculates, it was used as a tax loss carry forward, which allowed Trump to declare zero income—and thus pay zero taxes—for as long as 18 years.

So how did Team Trump respond to this? Notably, nobody denied anything. Rudy Giuliani declared that Trump was an “absolute genius.” Chris Christie also applauded Trump’s genius, and remarked improbably that this was a “very good story” for Trump. Trump himself said nothing except that he had paid lots of other kinds of taxes, and that yes, he is a genius:

Needless to say, Trump knows nothing about tax law at all. He has accountants and tax advisors who do all this stuff for him. Nonetheless, the main message from Trumpville is that Donald Trump is a genius.

Elsewhere, reaction was a wee bit more restrained. It turns out that lots of people think that billionaires probably ought to pay income tax. All of us little people have to, after all.

So what’s next? Well, when the New York Times was asked if they have any more of Trump’s tax returns, they answered “No comment.” That might mean there’s more to come. Next Sunday’s debate should be fun, shouldn’t it?

POSTSCRIPT: Team Trump is trying to bury this story by directing all their attention to Bill Clinton’s sexual escapades; suggesting that maybe Hillary has cheated on Bill; and blathering about Hillary being mean to the women who accused Bill of misdeeds in the 90s. It’s not working. Nobody really cares much about this stuff anymore, and even the small interest that remains was wiped out by the tax story.

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Weekend Catch-Up: How Did Donald Trump Lose $916 Million?

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BinC Watch: Donald Trump Still Has No Idea How Government Debt Works

by Carina76B36539 Posted on May 9, 2016

Mother Jones

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Donald Trump last week:

I’ve borrowed knowing that you can pay back with discounts. I’ve done very well with debt….Now we’re in a different situation with the country, but I would borrow knowing that if the economy crashed, you could make a deal. And if the economy was good it was good, so therefore, you can’t lose.

Donald Trump today:

It was reported in the failing New York Times and other places that I want to default on debt. You know, I’m the king of debt. I understand debt better probably than anybody….But let me just tell you, if there is a chance to buy back debt at a discount, in other words, interest rates up, and the bonds down, and you can buy debt, that’s what I’m talking about.

….But in the United States, with bonds that won’t happen because in theory the market doesn’t go down so that you default on debt and that’s what happened. So here’s the story, just to have it corrected. If we have an opportunity where interest rates go up and you can buy debt back at a discount, I always like to be able to do that, if you can do it. But that’s all I was talking about. They have it like I’m going to go back to creditors, and I am going to renegotiate and restructure debt, it’s ridiculous and they know it’s ridiculous.

I’ll give Trump this much: it was ridiculous and everyone knew it was ridiculous. It was pure Trump bullshittery. But here’s the thing: even if you accept that this was what Trump was talking about, it’s still ridiculous. The US government isn’t a third party trading Treasury bonds. It’s the issuer of the bonds. If interest rates go up, should the Treasury refinance? No: it should keep paying the lower interest rates on its outstanding bonds. But what if interest rates go down? The answer is still no. Let’s hand the mic over to the Economist:

The interest rate on Treasury bonds is fixed. If the government issues debt during a low-rate period, that’s good news. To refinance that debt in a period of higher bond yields i.e., lower bond prices, the government would have to borrow from the market at much higher rates….Currently, most of the US’s longer-term debt trades above par value because it was issued at a time when bond yields were higher. For example there is a bond with a 2030 maturity and a 6.25% coupon; it trades at 152 cents on the dollar. Would it be worth offering 155 cents on the dollar upfront, and refinancing the debt at today’s lower rates? The dollar value of US debt would rise, not fall, in such circumstances.

In short, any voluntary deal with the market would require the government to pay fair value. And unless you think the Treasury bond market is mispriced (and it is the most liquid market on the planet), the government is unlikely to profit. It might be sensible for the government to alter the patterns of new Treasury issuance; borrowing long-term to lock in low rates for a generation. The Treasury has discussed the idea of refinancing illiquid bonds to improve market liquidity. But that is quite a different idea from Mr Trump’s proposal; the interest savings would be trivial.

Here’s the scary thing: debt really is one of the few things that Trump probably knows a bit about. It’s certainly bitten him in the ass often enough. And yet he still has no idea how it works. He continues to think that the federal government is basically the same thing as a trader on the Goldman Sachs trading desk.

It’s not. Whatever Trump is talking about, it won’t work. Sovereign debt is sovereign debt, and it gets paid off at 100 cents on the dollar. Trump may think everyone except Trump is an idiot, but I’m pretty sure the folks at the Fed and the Treasury are already keenly aware of how to handle open market operations to maximize value for the US government. Someone at the Trump Organization needs to clue him in about how all this stuff works.

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BinC Watch: Donald Trump Still Has No Idea How Government Debt Works

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After GOP Implosion, Paul Ryan Says He’s Willing to Be Speaker of the House

by EvelyneOgles Posted on October 21, 2015

Mother Jones

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After a week of speculation in Washington, Rep. Paul Ryan (R-Wis.) said for the first time on Tuesday that he would be willing to officially throw his hat in the ring for the position of House speaker, provided that all House Republicans support his candidacy.

The announcement comes less than two weeks after Rep. Kevin McCarthy (R-Calif.), the House majority leader, withdrew his name from consideration for the post. McCarthy’s exit came after a widely publicized gaffe, in which he admitted that the Benghazi committee was in part a smokescreen intended to damage Hillary Clinton’s candidacy for president. Since then, Ryan has been the GOP favorite for the position. However, up until Tuesday he’s insisted that he had no interest in the job.

To win the post, Ryan needs the approval of the House Freedom Caucus, the group of conservative House Republicans that helped force the resignation of John Boehner. Ryan met with the group on Tuesday. According to Politico reporter Jake Sherman, Ryan told the group that he wanted to know by the end of the week whether he would have the full caucus’ support of his candidacy. He also suggested restructuring the position to be more about managing the party’s message and less about fundraising.

Rep. Jason Chaffetz (R-Utah) and Rep. Daniel Webster (R-Fla.) have also announced their candidacy for the speaker post, but Chaffetz said in a tweet on Tuesday that, should Ryan run, he’ll drop out of the race and throw his support behind Ryan.

Boehner had planned to leave his post at the end of this month but has said he’ll stay on in the job until his successor is named. Adding to the pressure to quickly name a new speaker: Congress must raise the debt ceiling by November 3 or risk a federal government default on the nation’s debt.

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After GOP Implosion, Paul Ryan Says He’s Willing to Be Speaker of the House

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Millennials Living In Their Parents’ Home Is Finally Starting to Taper Off

by DannielFrantz Posted on July 29, 2015

Mother Jones

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Pew has a new report out showing that even five years after the recession ended, more young adults are living with their parents than before the recession. This is despite the fact that unemployment among 20-somethings has dropped dramatically. What’s more, this trend is pretty widespread:

The decline in independent living since the recovery began is apparent among both better-educated young adults and their less-educated counterparts….This suggests that trends in young adult living arrangements are not being driven by labor market fortunes, as college-educated young adults have experienced a stronger labor market recovery than less-educated young adults.

Trends in living arrangements also show no significant gender differences during the recovery. However, in 2015, 63% of Millennial men lived independently of family, compared with 72% of Millennial women. But a similar gender difference existed during the Great Recession, and both young men and young women are less likely to live independently today than they were five years ago.

But the news might not be quite as bleak as Pew suggests. Take a look at the arrows in the chart on the right. The upward trend in living at home continued to rise through 2013, but it finally began to drop a couple of years ago. That’s not surprising since it’s pretty likely that there’s a certain amount hysteresis in this phenomenon; that is, a lag between the economy improving and kids moving into their own places. This might be because wages remained low for several years after the technical end of the recession. It might be because higher debt levels took a while to pay down. It might be that it simply took a few years for recession-induced fear to end. Why move out if you’re not sure the economy is really on a long-term roll?

There’s not much question that 20-somethings of this generation have it worse than my generation, which in turn had it worse than the previous generation. That means the recession hit them especially hard. But if these trends are right, it looks like optimism about work and income is finally starting to slowly improve. It’s not great news, but it’s good news.

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Millennials Living In Their Parents’ Home Is Finally Starting to Taper Off

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Here’s What’s at the Heart of the Crisis in Greece

by MalcolmA33 Posted on January 29, 2015

Mother Jones

If you’re in the market for some interesting commentary on Greece, there have been a couple of good ones recently. The first comes from Paul Krugman, who, among other things, makes a point that often gets missed: Greece is already running a primary surplus. That is, they’ve cut spending enough over the past few years that their budget would be balanced if it weren’t for interest payments on their gigantic debt. What’s more, their primary surplus is slated to rise to 4.5 percent in the future:

If Greece were to adhere totally to the previous terms, over the next five years it would make resource transfers of about 20 percent of one year’s GDP. From the point of view of the creditors, that’s a trivial sum. From the point of the Greeks, however, it’s crucial; the difference between a primary surplus of 4.5 percent of GDP and, say, 1.5 percent of GDP for the Greek economy and the welfare of its citizens is huge. The only reason for the creditors to play hardball would be to make Greece an example, to discourage other debtors from trying to negotiate relief.

In other words, the EU is demanding that Greece not just balance its budget, but run a large surplus that it will mostly send to large countries for whom it’s a trivial sum. For Greece, though, it’s a huge sum, the difference between years of penury and a return to growth. This is at the heart of the conflict between Greece and the EU.

The second commentary comes from Daniel Davies, who makes the point that Greece’s gigantic debt doesn’t really matter as debt. Everyone knows Greece will never be able to pay it back. But if everyone knows this, why are Germany and the rest of the EU so hellbent on refusing to write it off?

Don’t think of the Greek debt burden, either in cash € terms or as a ratio to GDP, as an economic quantity. It basically isn’t an economically meaningful number any more. The purpose of its existence is as a political quantity; it’s part of the means by which control is exercised over the Greek budget by the Eurosystem. The regular rituals of renegotiation of the bailout package, financing of debt maturity peaks and so on, are the way in which the solvent Euroland nations exercise the kind of political control that they feel they need to have if they are going to be fiscally responsible for the bills.

….It is, therefore, totally inimical to the Eurosystem to hold out any hope of the kind of debt writedown that Syriza wants, as opposed to some smaller, cosmetic face value reduction or maturity extension. The entire reason why Syriza wants to get a major up-front reduction in the debt number is to create political space to execute the rest of their program. The debt issue and the political issue are the same issue. Syriza understands this, and so does the Eurosystem.

In other words, Greece doesn’t want to run a large budget surplus. They want to increase government spending in order to dig their way out of their massive economic depression. The rest of the EU wants no such thing. They’re afraid that if they let Greece off the hook, then (a) everyone else will want to be let off the hook, and (b) Greece will go right back to its free-spending ways and soon require another bailout. If the price of that is years of pain and unemployment, so be it.

There’s more at both links, and both are worth reading.

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Here’s What’s at the Heart of the Crisis in Greece

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Bitcoin Is a Fiat Currency, But That’s Not Its Big Problem

by Isela Harris Posted on February 25, 2014

Mother Jones

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Mt. Gox, the biggest name in Bitcoin exchanges, has apparently suffered a huge, ongoing theft amounting to several hundred million dollars. Today, their website is shut down. All is chaos, and science fiction author Charles Stross doesn’t have much sympathy:

C’mon, folks. Mt. Gox was a trading card swap mart set up by an amateur coder and implemented in PHP!….I’ve written software that handled financial transactions for a dot-com startup—a payment service provider, now a subsidiary of Mastercard. Been there, got the scars.

….You can’t do this shit on an amateur basis and not get burned….Datacash grew from a tiny seed (about 30 credit card transactions in our first three months) to something that was handling around 20,000 transactions per server per day when I left in early 2000, following 30% compound growth per month for an extended period; the early codebase was retired as rapidly as was feasible, the company had penetration testers, an in-house crypto specialist, and coding standards with test harnesses and QA well before it was handling 10% of MtGox’s turnover … and still shit happened. From what I’ve read, I’m not convinced that MtGox ever understood what financial security entails. But the fault isn’t theirs alone. The real fault lies with Bitcoin itself.

A real currency with a fiscal policy and the backing of a state that could raise loans would be able to ride out this insult. It’d be extraordinarily painful, but it wouldn’t devastate the currency in perpetuity. But Bitcoin doesn’t have a fiscal policy: it wears a gimp suit and a ball gag, padlocked into permanent deflation and with the rate of issue of new “notes” governed by the law of algorithmic complexity.

Personally, I consider Bitcoin useful in one narrow way: it forces people to think about what a fiat currency really is. Bitcoin, after all, is the ultimate fiat currency: just a bunch of ones and zeroes on a computer with no intrinsic value. But so are all currencies. The difference is that it’s more obvious with Bitcoin because the entire enterprise is actively marketed as nothing more than algorithmically-created data. It’s one of their big selling points.

So that forces you to think about what the ultimate value of a Bitcoin can be. And if there isn’t any, then why do dollars and yen have value? Why do IOUs passed around in prison camps have value? Or babysitting chits? Once you figure out what ultimately underlies the value of these various fiat currencies, you’ve taken a big step toward understanding why some currencies are better than others and why playing games with the debt ceiling is so stupid.

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Bitcoin Is a Fiat Currency, But That’s Not Its Big Problem

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