National debt – a tale of two cities

By Chemrock

US national debt is now $19.7T and there are many who hold the view that it is still manageable due to the size and strength of the economy. There are yet others who maintain that debt is not a concern because the US can simply print money and pay it off no matter how big it gets because of the foreign demand for $ to fuel international trade or as a safe haven currency.

The laissez faire attitude towards debt is bewildering to some. I have written two articles on this (Rube Goldberg machine and Demise of the $) and here I’ll review a tale of 2 cities to show that there is serious money owed to people that needs to be repaid at some point with real value. It cannot forever be shielded behind hocus pocus political gameshows or a priori economic thinking.

The Debt to GDP ratio provides the insight into a country’s financial standing. There is no magic rate to adhere to, but many has indicated a 70% treshold is a fairly reasonable bet. All those countries that are having serious financial problems have very high debt ratios. Having said that, there are exceptions because of the peculiar situation of the countries, such as Japan 274%, Singapore 110%.

Ignore for our purpose here any academic discussion on the efficacy of using the Debt to GDP ratio as an indication of a country’s financial standing.

Singapore’s national debt:

Debt to GDP ratio – 110%
National debt – US$299 billion

Singapore govt operates on a balanced budget. With the exception of 3 years, the govt has had budget surpluses every year since independence. There is no need for the govt to borrow.

The national debt comprises of 3 securities that the govt issues :

– TB (Treasury Bills) which are short term in nature and SGS (Singapore Govt Secutities) which are longer term bonds, some up to 20 years. TB and SGS are basically for the purpose of driving a S$ capital market, these securities help to benchmark S$ rates and build a yield curve so S$ bonds have a means to price the issues. They are mainly accquired by local banks for liquidity ratio maintenance.

– SSGS (Special Singapore Govt Securities) which are specifically for the CPF (Central Provident Fund) to invest. The SSGS is the only security that the CPF can invest in. CPF holds the SSGS to maturity, and there is no secondary market for these securities. Since Singapore is AAA rated, the SSGS offers the CPF a zero risk security with an interest rate that is slightly above deposit rates.

The securities are purchased by local banks and the CPF. The funds from the sale of these securities are transferred to the MAS (Monetary Authority of Spore) in a special ‘Securities A/c’ which by law, cannot be used by the govt to cover budget allocation. These funds are managed by two govt agencies – GIC (Govt Investments Corp) and Temasek Holdings.

The funds from the SSGS sales go wholly to GIC. In addition to the funds from these securities, GIC and Temasek also manage the SWF (the Sovereign Wealth Fund) which were accumulated through past government surpluses, land sales receipts and the investment income earned on those assets over the years. Both GIC and Temasek manage their funds on a pooled basis, meaning they do not need to segregate their investments according to where their funds come from. By law, 50% of the NIRC (Net Investment Returns Contribution) goes to the “Consolidated A/c” for budget use. The last transfer was S$8B. These earnings allow the govt to embark on new priorities for the country, especially for various social safety nets. The other 50% of the NIRC is capitalised into the SWF.

Temasek is wholly owned by the Singapore govt. Temasek functions as an independent corporate entity and they do borrow from to time either as part of hedging strategies or simply to take advantage of cheap money to further enhance their investment portfolios. These borrowings are not reflected as national debt.

The Singapore govt Balance Sheet has assets way in access of their liabilities. This allows it to invest with longer term strategies searching for higher yields without worrying about short term obligations and with a full knowledge that it is always exposed to short term setbacks. From time to time it has been hit by short term losses, such as in those market crashes, but it is able to ride through difficult times and produce decent long term results. By taking the CPF funds and pooling it with the SWF, the govt is able to generate much higher ROI than a pension fund investing on its own ever could as the fund needs to take on lower risk with lower earning assets. By way of the SSGS the govt guarantees the pension fund an interest rate appropriate to a zero risk asset but earns for itself a higher ROI by pooling the pension funds with the SWF.

The US national debt :

Debt to GDP ratio – 104%
National debt – US$19.7 trillion

The US budget deficits of Obama have been explained away as consequential to the economic downturn where losses in tax revenues due to the middle income sector being destroyed is exacerbated by increased spending on unemployment benefits, social security and healthcare costs . However, this was the same status quo during Bush Jnr’s time, so it cannot explain the huge jump, particularly 2009 to 2013. It’s more puzzling when there were less wars in Obama’s time so discretionary military spending has been considerably less. Such a vast jump in 2009 can only be due to exceptional circumstances. My guess is that the cost of bailing out Wall Street in the subprime crash worked itself into the budget. The forecast for budget deficits for the next 5 years to 2021 is about $500B annually, if interest rates do not rise too much.

The US Federal Govt has never signed any loan agreement, it has never borrowed from anybody. It only has obligations for the Treasury securities that it issues. Let’s avoid getting into the details of Congressional approval. Basically when the govt needs cash, it prints Treasury securities. The US Treasury Dept prints TS for 3 purposes :
a. To retire maturing TS with new ones (rolling over old debts)
b.To fund budget deficits (creating new debts)
c.To create an instrument for Social Security Trust Funds to invest (creating new debts)

The (c) TS are purchased by Social Security Trust Funds which by law must invest their surpluses in TS. Their funds are transferred to the Federal govt’s consolidated a/c to fund the budget. Treasury sells (a) and (b) TS by public auctions. The US Treasury now has money in their a/c and can make all its payments simply by printing Treasury securities which is akin to printing money. The question is, is there nothing to prevent the Treasury from printing indefinitely? There are :

  • Demand – as long as demand is there. Treasury securities are sought by 4 types of buyers — (a) foreign govts who use it to park their foreign exchange reserves, (b) captive funds which are bound by law to invest their surpluses in Treasury securities (Social Security Trust and Social Disability Insurance Trust Funds), (c) Investors seeking zero risk assets (mostly pension funds), and (d) Banks and financial institutions who use it to manage interest rate risks or build trading portfolios.
  • Trust in the $ – the strength of the US economy since WW2 is what earns it the trust of the world in the $. But this trust is being shaken by the huge debt and budget deficits that can’t seem to be reigned in.
  • Interest – For decades, this has never been a concern. Now with debt at $19.7T, interest cost is going to weigh very heavily on the budgets. In a rising interest rate scenario, it’s going to get more nasty. There are some who say that it is now virtually mathematically impossible for the US to pay off its national debt.
  • International demand for the $ – Shrinking world trade and countries moving toward their own currency swap arrangements, or Euro, Yen,Yuan or gold, for trade settlements, spell a decreasing demand for $.

The rise in money supply:

The real impact on the money supply depends on the Fed’s monetary policy. If it wants to reduce liquidity in the economy, it sells Treasury securities in the secondary market. If it wants more liquidity in the market, it buys back Treasury securities. How does the Fed pay for their purchases of securities in the open market?  This is the wonder of the American system. The Fed actually purchases billions and billions of Treasury securities with money they never have. They simply credit the reserve a/cs of the seller’s bank and debit a ‘securities inventory a/c’. The Fed purchases the securities with money they never have. By the electronic credit entry to reserve a/c of the bank they put money into the a/c out of thin air. They created money. The quantitative easing policy (purchase of securities) from November 2008 to late 2016 the Fed created a vast amount of money in the economy. Money supply rose by almost $7T to $13.5T during the period, a figure that mirrors Obama’s budget deficits. There’s no coincidence, it’s scientific data.

The question is can the increase in money supply be absorbed by the US domestic and international markets? The charts below show the US economy in the past few years being basically flat and world trade is’nt as rosy as the IMF projected. Adding to this is the dumping of $ reserves by central banks worldwide. The capacity to absorb the huge increase in $ supply is questionable. Yet official inflation rates have been mild. Something has to give. Obviously the liquidity has gone into higher asset prices as evidenced by the equities and home price indexes which have now gone way over the levels of pre-subprime crash of 2008, and it also lends more credibility to the Charwood inflation index, a private enterprise initiative, that shows double-digit inflation.

Who owns all these US Treasury securities?

This table shows the distribution of the national debt of a slightly earlier date. Important things to point out here :
1. The international market’s insatiable appetite for these securities is a fallacy. Foreign holders represent only 32%.
2. Majority of the national debt is owed to Americans.
3. US retirement and pension funds account for 28%+.
4. The Fed holds $2.463T purchased in their open market operations

The national debt is worse than it appears:

Obligations under the various programs of Wall Street bailout for the subprime crash are not reflected in the national debt. These will only hit when the losses are realised since the national budget is on a cash instead of accrual basis. We are dealing with huge figures here.

1. Fannie Mae and Freddie Mac are govt-owned but their a/cs are never incorporated into the federal consolidated a/cs. The govt bailed them out in the subprime crash and the liabilities are huge. Their combined total liabilities, including off-balance sheet liabilities, are about $5 trillion.

2. Guaranteed obligations — The govt took on potential losses in guaranteeing the obligations of mutual funds, banks and corporations which are not included in the debt.

3. TARP (Troubled Assets Relief Program) These are funded programs so it’s already in the budget. The govt took on huge amounts of toxic assets. To that extent, certain % of the national debt is represented by these toxic assets remaining unsold. How much profit or losses have been incurred, and how much of these assets remain and their valuation is unknown.

4. Medicare, Mediaid and Social Security — These programs are in a mess. The govt has obligations to make payments from budget allocations. The trouble is they have exceeded the tax revenues and the payroll taxes allocated to them, so the additional funding has to come from borrowings. In an estimate in 2009, the present value of these borrowings were computed at $45.8T.

A Tale of two cities :

Key points to note are :

  • The Singapore govt issues the securities to exchange for values that has already been earned or saved. US Treasury issue securities to fund budget deficits. It has evolved into a mechanism the Fed has mastered to a ‘T to control liquidity in the economy.
  • Not a single S$ of the funds from the sale of securities has been spent by the Singapore govt as compared to the US Federal govt which uses the $ raised from Treasury securities to fund budgeted expenditures (with the exception of the TARP purchases). In other words, Singapore securities is a mechanism to generate more value for a pool of funds, the US Treasury securities is purely for consumption.
  • The Singapore govt’s obligations under the securities issued, that is the national debt, is fully backed by the assets held by GIC and Temasek. All debt repayment can look to realisation of the underlying investments. The US national debt is not backed by any assets, except some remaining toxic assets acquired under TARP. US debt repayment has to come from tax payers one way or another.
  • Singapore pension fund is guaranteed by the govt with investment portfolios to fully back it’s obligations. US pension funds holding Treasury securities have only the federal govt’s guarantee with nothing in the kitty.
  • The Fed’s holdings of Treasury securities in its inventory a/c lead to a situation which I wonder how will it be explained away accounting wise. In the table above, the Fed has $2.463T securities in its inventory. So the govt owes the Fed that much. To rollover, Treasury will auction off new securities and use the receipts to pay the Fed to retire the matured papers. Suppose the Treasury will pay off securities on maturity instead of rolling over. The govt uses taxpayers’ money and pays the Fed $2.463T. But remember, the Fed purchases securities with money they never had. They never paid anything for those securities in their inventory. They simply put money into the reserve a/c of the sellers’ banks by just a credit entry. I can’t figure this out. Seems like an accounting conundrum.


There is no doubt the US Treasury securities serve a useful function in the financial markets. It is a risk free instrument with a liquidity second only to money. So investors buy them for various purposes. In time the Fed mastered to a ‘T’ to use it as a tool for their monetary policy. It should be noted that this sort of evolved, it was not planned as a mechanism for this specific purpose. In 2000 it seemed the US was headed for budget surpluses and it was thought surpluses will be used to pay off debt. Treasury securities at the time were locked for pay-off and the debt would be fully paid by 2012. Studies were made on the scenario of ‘life after debt’. The main concerns were : (a) what can replace the role of Treasury securities in the financial markets. It was felt the financial market will find its own way,  possibly using interest rate swaps, or a basket of Triple A corporate bonds; (b) what can Fed use for monetary policy in place of Treasury securities. They will have to turn to corporate bonds in their open market operations. Huge budget deficits after 2000 made that study moot and academic.

It seems the US national debt is on a runaway train. The only way to par it down is first of all to balance the budget. This seems almost impossible with huge tax revenue decreases due to the decimation of the middle class, huge payments for social security and healthcare, and potential realisation of off-balance sheet liabilities from Wall Street bailout programs. I had at other times put the blame squarely on Obama, but a relook here seem to indicate the legacy of Bush Jnr’s coddling of Wall Street in the subprime crash mush have weighed heavily on the former.

The Fed monetary policy tool of the interest rate is now stuck in twilight zone. To ease the rate to nudge a sluggish economy, there is’nt any further lower it can go, having dropped to a negative real interest rate environment. To reign in a heated economy, it raises interest rate. But with a national debt so high, increasing the rate is going to seriously increase budget deficits even further with high servicing costs. There is only so much $ that can be pushed into a pressure cooker. The continued use of debt to fund budget deficits will see inflation rear it’s ugly head at one point or another, or a cycle of asset bubbles every 7 or 8 years. Considering the problems of the 2008 subprime crash is still with us, another financial meltdown will be extremely devastating. Another one is already right in front of our eyes in the real estate and equities markets.

Keynesians believe in spending out of a recession while others think with monetary sovereignty there is no limit to printing money to pay off debt. I’m old fashioned, I believe sometimes, some borrowing is necessary, but should be a temporal thing. We should live within our means. The US govt should get its financial house in order first. Balance the budget, and everything will fall in place. What will Trump do? Within the first few weeks in office he has repealed the Dodd-Frank Reform Act and the Fiduciary Rule. This is a harbinger that betrays his real priority is billionaire Wall Street fat cats. The pensioners will be left to swim for themselves. Balancing the budget? Nobody’s talking.

137 Responses to “National debt – a tale of two cities”
  1. karlgarcia says:

    Since Mcha is back, this is what she told me.

    “Karl please repeat after me : deficits are good.

    Don’t worry too much about revenue collection, magkakaroon ka lang ng maraming wrinkles nyan. 🙂”

    • chemrock says:

      Karl, everything is correct in its proper perspective.

      Deficits are good when economy is down and you want to spur spending. When the govt borrows it unlocks idle funds saved by others so it increases velocity of money. But the govt cannot just sit back and spend and viola the economy will jumpstart again. In has to be coordinated with all sorts of economic incentives, motivations, etc.particularly in the way the govt want to channel activities into.

      But the govt needs to watch the GDP to debt ratio as it borrows to ensure it can service debt. So there is a limit, no matter how rich you are. Note the America’s huge debt have been in the years of an extremely low interest rate regime. Wait till rates go to more realistic levels. Official inflation is now 3%, so a real interest rate should be about 3.5% thereabouts, but it is’nt, it’s artificially fixed by Fed. If rates ever go to just 3,4, or 5%, Americans will be screaming to get out.

      When govt borrows it does not increase money supply per se, it is simply taking existing money from someone else. But when the central bank does their QEs, they create lots of money to pay for their security purchases, thus money supply goes up, inflation in real goods and services, by Keynesian laws, go up. It if does’nt, the money has gone to build asset bubbles, unless the economy has grown so much that it absorbed the higher money supply.

      Look at almost all countries in the world now. All suffering the same problems brought about by easy printing of money to fund debts caused by prolonged years of deficit spending.

      • Micha says:

        1. Rates are dictated by the Fed chemp. No such thing as real interest rate dictated by the market.

        2. “But when the central bank does their QEs, they create lots of money to pay for their security purchases, thus money supply goes up…” Wrong. What QE does is increase the reserves of private banks. That does not get counted as part of money supply until it actually gets loaned to private entities, e.g. car loans, housing loans, credit cards, etc.

        • chemrock says:

          1. Of course I know the Fed dictates the rates, that’s why the whole world is being suckered. Elementary economics say interest is the reward for capital. And what should a realistic rate be? It should pay for inflation and risk.Not at the whims of a bureaucrat.If the Feds fix the rates as it is now, below inflation, meaning real interest is negative, and keeping this status quo prolonged, it will turn economics topsy turvy because capital is not rewarded.

          2. Micha, what QE does is the Fed credit banks reserve a/c to purchase securities. What are reserve a/cs? These are just operational or normal current a/cs the banks maintain at the Fed. They will keep balances there to comply with reserve requirements. Anything in access of that requirement is idle funds and no treasury manager will leave huge balances in access of their reserve requirements there even for overnight (except Central Bank of Bangladesh which kept an idle trillion $ there waiting to be stolen).Eg if Citibank has reserve balance of $1m and they sold securities of $10m, the Fed will credit Citi’s a/c and the balance goes up to $11m. Citibabk will take out the $10m and roll it elsewhere thus retaining their $1m reserve requirement. Say the $10m is loan to someone who deposits it in their current a/c with Bank America, viola money supply increased.

          If you can’t see the picture perhaps I can put it in question form. Why would anyone want to sell their securities and let their money remain in Citibank’s reserve a/c? Of course they want to take out the money. And where did the money come from. From the magic wand of Fed who electronically put the money into Citibank’s reserve a/c. Technically yes, the reserve a/cs do not get into M2. It serves as a conduit for the money created by the Fed to get out into the market.

          • Micha says:

            1. The setting of interest rate is a functional tool used by the Fed to control inflation, one of its dual mandate. If inflation gets high, it sets interest rate higher, if deflation is a danger, it sets interests lower.

            Capital gets rewarded by the real goods and services it is able to produce or create, not solely by its parasitic pursuit of income through interest payments.

            2. It’s good that you are essentially in agreement now regarding QE, i.e., it doesn’t form part of money supply until it gets loaned out to private individuals and businesses. Demand for loans is not automatically guaranteed, nor will the bank automatically grant it unless it feels confident enough on the performance of the bigger economy in general and the ability of the borrower to pay in particular.

            • chemrock says:


              Yes I understand how the Fed uses the interest rate. My point is rates should by right be established by market forces. Interest rate is the price for capital. It’s a paradox that in capitalism that works on the basis of free markets, interest rate which is the core of capitalism, comes from a central planning exercise.

              Factors of production (capital, labour and resources) produce real goods and services. Capital gets rewarded from profits or ROI or interest.

              • Micha says:


                The rule in the current monetary system bestows on the Fed the power to set (or target) short term interest rate. It is of course a man made rule and can be subject to change in some future time.

                Free market is largely a myth, at least in the American brand of capitalism. Businesses and corporations hate free markets because it is so unpredictable. Consumer behavior is unpredictable. There is a prevalence among corporations to merge and to monopolize the market. We see this in, for example, the merger of AT&T and Time Warner, Monsanto and Bayer Chemicals, Verizon and Vodafone, AOL and Time Warner, Pfizer and Warner-Lambert, Exxon and Mobil Petroleum, Altria and Philip Morris, ABC and Disneyland, NBC and Comcast, etc.

                The free market illusion also came into fore with the bailout of Wall Street banks in 2008. As Noam Chomsky said, it’s actually socialism for the rich and free market discipline for the common folks.

                Capital chasing income through interests payment is parasitic; it’s not doing anything socially useful.

              • That last line is powerful.

              • chemrock says:

                I agree with you on the imperfection of capitalism. But it sure as hell is better than standing in a long queue with voucher in hand to buy a loaf of bread from a national bakery.

                Yes, greed gets in the way in capitalism. But capital cannot be mobilised to good uses without it’s rewards. Remember, it gets rewarded because of risks it takes. I know there are billions of people who have been taught ‘interest’ is a sin. So to circumvent this sinful thing called ‘interest’, they started Islamic Banking. They say under IB you don’t earn interest, capital is rewarded by a share in the profits. But how is profits measured but by ROI which is an expression of sin “interest”? It’s not a duck they swear.

              • karlgarcia says:

                I think they just have their own version of interest. It is like any Pyramiding scheme’s introduction in every seminar: “We are not a pyramiding scheme”.
                Definitions of riba include: Unjustified increment in borrowing or lending money, paid in kind or in money above the amount of loan, as a condition imposed by the lender or voluntarily by the borrower. Riba defined in this way is called in fiqh riba al-duyun (debt usury).

              • karlgarcia says:

                If it looks like a duck, it must be a rabbit.

      • karlgarcia says:

        Thanks Chemp, I did not reply too soon, so as not to disturb the thread with Micha.
        Actually you are saying the same thing regarding QE, of course money circulation happens after the activities she mentioned. ( Activities and events again)

        Regarding Household debt bubble, I believe this is not only about the housing bubble, I think this includes all house hold loans like credit card, student loans,etc including mortgages,and it is happening sooner rather than later.

        • karlgarcia says:

          The report I read says that there are less delinquencies in 2016 compared to 2008.
          Maybe that is good news.

          Feb. 17 (UPI) — Total U.S. household debt climbed to a near-record $12.58 trillion by the end of 2016, a Federal Reserve Bank of New York report says.

          February’s 33-page “Quarterly Report of Household Debt and Credit” shows that every category of debt measured — including mortgages, credit cards, student loans and auto loans — saw an increase. The total increase of $460 billion in 2016 was the largest in a decade. Mortgage balances, now at $8.48 trillion, made up 67 percent of the household debt.

          At the current rate of growth, household debt is expected to break the 2008 record high, of $12.68 trillion, sometime in 2017. The year was marked by the start of a recession.

          The report indicates mortgages still make up the bulk of household debt, but student loans are now 10 percent of the total, auto loans are 9 percent of the total and credit card debt is 6 percent. Dollar amounts rose in each category in 2016’s fourth quarter. The rising debt indicates that banks are extending more credit to households.
          A major difference between the 2008 and 2016 debt levels, the report said, is that fewer delinquencies were reported at the end of 2016. In last year’s fourth quarter, 4.8 percent of debts were regarded as delinquent or late in payment, compared to 8.5 percent of total household debt in 2008’s third quarter. There were also 200,000 fewer consumer bankruptcies reported in 2016’s fourth quarter, a four percent decline, compared to the fourth quarter of 2015.

        • chemrock says:


          “…course money circulation happens after the activities she mentioned.”
          My contention is different. When investor sells their securities to Fed, the investor’s bank’s reserve a/c at the Fed is credited with electronic money for beneficiary investor. The bank transmits the money to wherever the investor requested. let’s say to someone else’s bank a/c. M2 is immediately increased. Without fail, all money created by the Fed to purchase securities, although credited initially to banks reserve accounts by the Fed, will be move out immediately somewhere else, thus M2 increased.

          A housing bubble in itself is not that big a problem. Homeowners just continue to live in an over-paid house that’s all. Their problems come only if they sell so they get hit with a real loss, or if their income goes down and they cannot meet mortgage payments. But 2008 was different.

          Anatomy of sub-prime crash:
          The 2008 problem was essentially caused by inability to pay mortgages. And it was not a case of income going down. Financial institutions or developers finance home buyers via a housing mortgage. Other specialist financial houses use special vehicles to purchase these housing mortgages, then repackage them into asset backed securities and resell the securities earning huge fees in the process. The asset-backed securities were in great demand, so these special vehicles just snapped up more inventory of housing mortgages. So lenders try to push out more housing mortgages, they started to lower their criteria and extend to buyers who would normally not be able to secure housing loans. That’s why all those securities are called sub-prime, from low quality buyers. And why would people start buying if they can’t afford it. Because the whole process pushed up housing prices. Herd instincts kick in. You buy a house now, it’s gonna go up 20% next year ,etc. But they can barely afford the monthly payments. So lenders get creative. No interest, or smaller monthly payments for first 3 years, etc. So lower end buyers play the system. Buy house, get a loan with low payments in the first 3 years and sell within 3 years to reap capital gains. Housing deman goes up, prices go up. All this could only take place in an era of extremely low Fed interest rates and liquidity in the market, from QEs.

          But, like what I’m trying to explain in this article, all debts need to be repaid at one point or another. So, if a buyer did’nt dispose of his house by the 3rd year, he suddenly face a much higher monthly payment in the 4th year onwards. That’s when everything starts to crumble for the home owner. Credit card debts go up. Get other loans to service the housing loan, etc. Slowly and slowly, the industry finds that many buyers are months behind their mortgage payments. Many will be led eventually to foreclosures. The cresendo builds up to 2008 when it bursts. Housing loan lenders are spared if they have sold off the mortgages to the specialist vehicles. Those caught holding the asset-backed securities find their valuation plummet as housing prices collapse.

          Creative financial engineering caused that crash, and financial monitoring agencies refused to see it coming. Same thing happening now.

          • karlgarcia says:

            Thanks Chempo for the further enlightenment and correction, I just thought you are saying the same thing about money supply with the contention only on timing.
            And Since you said moved out immediately then there is money circulation in the economy.

            The report on less delinquencies may be another chicken and egg thing.
            Once the economy grinds to a halt, delinquency will follow asap.
            And that is how I understood your last three paragraphs.

          • Istambay sa Kanto says:

            Anatomy of sub-prime crash:
            The 2008 problem was essentially caused by inability to pay mortgages. And it was not a case of income going down. Financial institutions or developers finance home buyers via a housing mortgage. Other specialist financial houses use special vehicles to purchase these housing mortgages, then repackage them into asset backed securities and resell the securities earning huge fees in the process. The asset-backed securities were in great demand, so these special vehicles just snapped up more inventory of housing mortgages. So lenders try to push out more housing mortgages, they started to lower their criteria and extend to buyers who would normally not be able to secure housing loans.
            I think you hit the root cause of the problem.

          • karlgarcia says:

            I know you have explained the practical dide in all of these, but Micha maybe correct in saying that I am a slow learner with regards to these matters.

            Going to first para. You have explained well that M2 increased because there is no idle reserve,because it will move out immediately.

            Now I read the article below, that QE is not printing money and that the FED only creates money. (Treasury prints it)

            The author also said that money supply does not increase.


            ….and time again that the Fed’s relentless printing of money is increasing the supply of dollars, which will result in massive inflation, if not hyperinflation. There are problems with this simplified line of reasoning.

            It may come as a surprise, but when the Fed creates money, this new money does not increase the amount of money in the economy (there are some minor exceptions to be detailed later). Instead, the new money increases the size of the Fed’s balance sheet. The impact to the economy has to do with the composition of the money supply only. This claim demands more explanation so let’s use the current $85 billion dollar per month QE program as an example.

            When the Fed creates $85 billion, it uses this money to buy bonds – typically split 50/50 between US Treasuries and Mortgage Backed Securities (MBS). Here is what’s important: When the Fed creates and gives $85 billion in reserves to its member banks, it removes $85 billion worth of assets (bonds) from the balance sheets of those same member banks. The result is that no new net financial assets enter the economy. This bears repeating. Every time the Fed injects $85 billion in reserves (assets) into the economy, it removes $85 billion worth of assets from the economy. This process is not a one way flow of money into the economy, as interpreted by some.

            • chemrock says:

              I am astounded a financial site such as that link interprets the Fed’s QE process the way they did.

              Just look at it this way. The Treasury do the physical printing of the $ notes and deliver the cash to the Fed. If the Fed inventories the cash, then money was created but money supply did not increase. Banks requisite for cash daily from the Fed to meet their normal banking needs. Now if the Fed releases the newly printed notes, they get into circulation and money supply goes up. That’s fairly straightforward, right?

              I had earlier explained that if the Fed purchases securities through QE, they create money when they credit the banks’ reserve a/c, (this is known as reserve banking money creation) at this stage, the electronic money remains at the Fed so money supply is not affected. Whey that it is taken out, {almost immediately) it goes into circulation thus money supply increases. It is very simple to show why. The proceeds of the sales of the securities will end up with the sellers somewhere, and invariably end up in somebody’s accounts in some banks. The balances in those accounts are included in M2, thus money supply goes up.

              Micha said reserve banking money creation, money supply does not increase because the reserve account balances of banks are not included in M2. She is technically correct. So I went on to explain the money is almost always immediately moved out. Thus my explanation in above para that money supply do increase. For brevity in previous comments I left the explanation at that point. Since you endeavour to go deeper, I’ll clarify some more.

              Even technically speaking, Micha’s view is only partially correct because she looked only from the perspective of the Fed’s books. She did’nt look at the other side of a QE transaction. Sellers of the securities are banks themselves, and non-bank investors. There is a difference.

              When Fed purchase securities, – In the Fed’s books they credit the banks’ reserve a/c and debit securities inventory a/c.

              In the banks’ books their entries depends on whether they sell their own securities, or whether they are merely fund custodians for non-bank sellers :
              (1) Banks sell their own securities — in the banks’ books they debit their reserve a/c at the Fed and credit securities a/c. Micha is technically right, these balances don’t go into M2 so money supply not affected. But like I said, the banks will almost immediately use these funds, so it gets into circulation and money supply goes up. (Micha refers to bank loans – if no loans tkaen, no money supply increase. Well banks will place it in money market deposits, and these gets into the M2.)
              (2) Non-banks sell their securities — in this case, the banks are only receiving the proceeds for their customers, so their entries are debit the reserve a/c with the Fed credit customers a/c. The credit balances in customers a/c are included in M2 so money supply increased immediately.

              M2 compilation comes from the data from bank returns, not from the books in the Feds.

              The article you referenced goes into ivory tower type discussion. I’m nuts and bolts. I tell you what goes exactly into the m2 and how the money got there from QE. You remember the Baring Bank case where the bank closed shop due to complicated derivatives trading portfolios got them into bankruptcy? It’s exactly this type of ivory tower discussion at London HQ where things got blurred and nobody really knew what’s going on. A nuts and bolts man in their operations office could have unravelled the complexities.

              • karlgarcia says:

                Thanks nuts and bolts man. Sorry for the many questions.

              • karlgarcia says:

                Re: Barings.
                Was George Soros once a nuts and bolts man himself?
                Maybe he hired all the nuts and bolts people.

              • chemrock says:


                Those big time market players look at things differently from those of academia. They are better at weaving through complex stuff leaving theories to ivory tower practitioners. They relate market events down to very basic and practical levels of supply and demand – if this goes up, that goes down. If debt goes up, life styles are affected. In financial crashes of the past, there have been many market players who sounded the alarms, but regulators and the majority following the herd simply ignore.

              • karlgarcia says:

                Thanks again.
                That is why I am comfortable asking questions to you, you go out of your way to answer them.but don’t worry that would be the last for this article. I appreciate the knowledge imparted.

  2. Micha says:

    In some ways, I feel sorry for you chemp because, if I am not mistaken, you’ve been harping on this subject for at least 2 years now. I guess it’s just your ego kicking in when your predictions and warnings did not come true. I am glad though that you seem to have already grasp the mechanism on how the US exercises its monetary sovereignty.

    The threat to US global role and dominance could come in different ways (the $19 trillion debt is not one of them).

    1. Constraint of real resources posed by the effects of human induced global warming.

    2. The current apprentice-in-chief of the White House strangling and undermining American institutions which gave it supremacy in global economic, military, and political arena.

    3. Fiscal hawks and ignoramuses who continue to peddle suicidal austerity measures.

    QE was neither stimulative nor inflationary because it only involves asset purchase from private banks. Reserves do not form part of money supply.

    No need for me to go through the rest of your article since it’s all a rehash of what you have posted in the past.

    In a nutshell, Singapore is not America.

    It’s pointless to compare their fiscal and monetary standing.

    • chemrock says:

      Thank you Micha for commenting without reading.

      I have no objection to your views. We are simply on irreconceivable sides of the aisle.
      My first article was Nov 2015.

      I don’t predict. I assess and analyse and project. The doom and gloom is not going to happen tomorrow but if you ask me for a dateline of course I can’t, simply because the world is dynamic and situations change. Eg within the last 6 months, China has changed to a precarious status in their fiscal position. But dark clouds gathering, that’s my point.

      Sorry if you perceived a big ‘ego’ somewhere. For what it’s worth, I’m just sharing my views.

      Spore-America comparison shares some insight into responsible fiscal and monetary governance, notwithstanding vast differences between the 2 countries.

      • Micha says:

        Actually I did read your article in its entirety chemp, I just wasn’t compelled to comment on every points you have resuscitated because we have, I believe, taken those up in the past.

        Michael Hudson had asserted that, if anything, the danger lies not in gov’t debt but in ballooning private household debt – sort of a repeat of the 2008 bubble burst.

        • chemrock says:

          Thanks Micha
          I’m wondering where are you still awake at this time haha.
          Household debts are social problems, which govts can solve one way or another. But I dont’ know if you meant the residential homes market which is currently at record high that may trigger a repeat of 2008. Equities are also record high. But yes these are separate from the concerns of the high national debt. However, problems may be interconnected. If another housing or equities crash comes, is the highly indebted federal govt in good fiscal position to tackle them.

          • Micha says:

            “If another housing or equities crash comes, is the highly indebted federal govt in good fiscal position to tackle them.”

            If it will chose to rescue the too big to fail parasites again then yes, the federal gov’t has all the resources to do so, there is no constraint on its fiscal position at all. But it will be politically toxic thing to do. The constraint is political, not financial.

  3. NHerrera says:


    I know you are not predicting a date when something like a catastrophe will happen, but it is scary, especially your note about Trump and the adjustment of interest rate to reflect the inflation rate — “when the big guys sneeze we small fellows catch pneumonia” and all that.

    In your Nine Dash Line article, I confessed to the subject being mostly Greek to me. I see that the lively discussion has started; this blog and the comments promise again to be educational, lively and interesting to me; I will surely enjoy the ride.

    Thank you again for this continuation of your previous articles.

    • edgar lores says:

      I, too, will enjoy the ride. But, I suspect at the end, I will be none the wiser.

      • NHerrera says:

        “I suspect at the end, I will be none the wiser” — oh, I think we will be able to pick up a thing or two.

        Let your kangaroos continue to grow. I understand, the population growth of kangaroos is a bit of a problem there (?). When the US sneezes, you have your kangaroos. But please take care that the process is all done so SPCA will not complain. 🙂

      • karlgarcia says:

        Guru, your level of guruness is already overflowing as it is.
        As I told NH we will be non monetary billionaires by now because always become richer here in TSH. Richer and wiser.

      • Bill In Oz says:

        Yes Chempo, I was way out of my depth at times reading this post and so none the wiser at the end….

        The key issue I think is that the US dollar has been vastly over valued since about 1930’s…Major nations in the world have all needed wanted a de facto global currency to facilitate trade and finance…So these nations have since the 1960’s held substantial holdings of US dollars..This demand is the key reason for the US vast over valuation.

        And naturally US consumers have been able to benefit from this over valuation with cheap consumer goods, services, holidays, cheap purchases of overseas assets and cheap housing finance etc.

        The net result has been that US exports have risen greatly while imports have soared..It’s interesting, exports indicate actual production in the US and the workers & the government benefits from the process via wages & taxes. Imports by contrast in an age of low tariffs/free trade generate far less government revenue and export employment..

        But if Trump taxes stuff from China and Mexico, maybe that will change.

        • chemrock says:

          I’m sorry if you are not much wiser — it means i have not explained well enough even though I avoided theoretical stuff.

          A currency strenghtens because the country it has goods and services that other countries want. For the US$, there is an additional factor, as you mentioned, the demand for it as countries need to maintain $ reserves to support their intl trade. But you are not correct to say the $ is overvalued since 1930’s. The term ‘over-valued’ is incorrect – it implies rigging. $ strenghtened against economically weak countries, like Philippines, but weakened against many other countries, like Japan, EU, Spore, Taiwan,Sorkor and many others.

          The general convention is if your currency strengthens, it hurts exports, whilst imports become cheaper in local terms.

          Trump is giving planners and the Fed big headaches. Because his economic policy is incoherent at the moment. Border taxes are double-edged swords. The net repercussions remains to be seen.

  4. josephivo says:

    I’m missing or I don’t understand the “bigger” picture or how monetary policies influence the economy, the political agenda and its social consequences.

    1. What is the relationship between government debt and private debts in a given country? The total debts of financial institutions, corporations and citizens. And how to calculate the “net value” as debt of a citizen can be to his employer who has a debt to the banks.

    2. What is the relationship between government debt and government capital as infrastructure, real estate,… aircraft carriers? Some countries privatized most of their crown jewels, others still control a lot.

    3. Isn’t debt the result of a gap between money in and money out? And how do the 2 cities compare?
    3.1 What are the income sources? Tax on income, tax on consumption, tax on capital and income from selling properties or rights and financial results?
    3.2 What is the state covering? Defense, healthcare, education, pensions… And what percentage of all those are covered by individuals, private guns, private health insurance, schooling costs, private pensions…
    3.3 The efficiency in delivering all the above?

    4. Walls do not stop capital flows toward cheaper/safer capital heavens. How can individual states control these flows? A race to the bottom? US the safest? Tax paradises the cheapest?

    5. Who steers the “discussion”, who does the framing and the spinning? Isn’t the whole debate in the hands of the financial institutions and the super-rich? Aren’t they the winners with the interest on national debts collected by them and paid by tax payers?

    • josephivo says:

      … and a fool can ask more questions than thousand wise man can answer 🙂

    • chemrock says:

      I’m basically a nuts and bolts man with some ability to look at things at multi-dimensional perspectives and often skewed towards unconventional view of things.As writer of the blog it does’nt make me an expert of the subject matter. Just someone wanting to share some views and bounce off ideas from anyone interested.

      I’m hardly capable of discussing issues here up to thereotical levels — I leave that to RHiro, Micha and perhaps Caliphman.

      Your questions borders on social and philosophical angles, that’s even tougher cookies. I don’t see a fool here, perhaps a roving mind haha. But let me attempt nevertheless to enjoin you here.

      1. All the debts in a country — here’s how it looks like for the countries with most indebts overall.

      Note that when you look at debts this way, there is a lot of duplication. Eg a bank borrows by bond issue, then makes commercial loans from those receipts, some these loans go to car dealerships which extends hire purchase to buyers, etc.
      Note also first world countries have more total debts.
      Corporate debt per employee stats serve no purpose.

      2. That’s a big topic type question. In govt’s accounting debt-asset (or capital) relationship can’t be seen clearly. You can’t see Marcos’ $28B debt is reflected in which asset today. Some infra spending are expensed off — municipal roads, minor bridges, schools etc. Some are reflected in govt owned corporations. Some expensed off but with recurring income streams, etc. Some debts does’nt go into capital goods — most of US debts went into budget expenditure deficits.

      3. In a way it’s money in-money out. The difference between the 2 cities is money out by Spore is represented by the security investments under GIC and Temasek. For US money-out went to army salaries, teachers, healtcare, social security, etc.

      Other questions sound like thinking out loud types. I’ll leave it to other experts.

  5. karlgarcia says:

    The Time magazine cover story above agrees with Chemrock.

    The article below says the gigantic national debrptbis a good thing.

    • Micha says:

      There are many in the US who peddle the lie about its debt and solvency. The Peterson Institute and the CFRB readily comes to mind and they have propaganda outlets in mainstream media. The most damaging of course are members of the Republican caucus who enact policies in tune with their agenda of subsidy for the rich and austerity for the poor.

    • NHerrera says:

      Thanks Chief Librarian karl.

      I have not read your two links yet but will do after this. I don’t know if the authors are economists. They seem to be one-handed from the title of their respective articles. You are two-handed karl — on the one hand this article; on the other hand this other article? Just a joke. You are being fair is what. 🙂

    • RHiro says:

      So Karl has provided two links with two competing theories. James Grant however has been a lifelong hard money ideologue.

      Most hard money ideologues do not like the power to create credit given to humans. Once again the author of this post has misstated facts. He mentions the gross debt of the U.S. government.

      However over the past few years the Federal Reserve went on a Large Scale Asset Program. They used the magic wand Congress has given them to create almost $4.5 trillion in new money to buy treasuries and asset backed mortgages.

      So the federal government of the U.S. owns approximately $4.5 trillion in future cash when these assets mature. The fed is obliged to transfer the proceeds of these paper assets to the national government. Hence the net debt of the U.S. is actually far lower.

      The new money created was not transmitted directly to consumers as was the suggestion of a few. But it indirectly increased the money supply for bond purchases and thus tempered rate increases.

      Theorists from the Austrian school of economics believe that economics is also a morality play. Economic depressions are good for purging and punishing the bad investors.

      The other side of the coin believe that central banks are public utilities and are necessary for providing credit and managing the economic business cycle.

      Bond markets in the U.S. are the largest component of the financial markets in the U.S. However information regarding bonds are hard to come by as these are available only to the institutions that deal with them. (Brokers or underwriters)

      Kindly note the differing rates between Philippine debt paper and the U.S.

      Please note that budgeting for the government is an open process. Financial markets demand it.

      • chemrock says:

        If you will care to expand on these 3 paras :

        “However over the past few years the Federal Reserve went on a Large Scale Asset Program. They used the magic wand Congress has given them to create almost $4.5 trillion in new money to buy treasuries and asset backed mortgages.

        So the federal government of the U.S. owns approximately $4.5 trillion in future cash when these assets mature. The fed is obliged to transfer the proceeds of these paper assets to the national government. Hence the net debt of the U.S. is actually far lower.

        The new money created was not transmitted directly to consumers as was the suggestion of a few. But it indirectly increased the money supply for bond purchases and thus tempered rate increases.”

        We always talk of money creation, but to many, it’s a blur. most people’s concept is tokens being printed. My article explains the practical part of how the Fed creates money. I like to hear your version. How was the $4.5 created?

        Also having paid for the assets it purchased, how did the Fed not transmitted the money directly to consumers?

        • karlgarcia says:

          Found a source.

          “Declining growth expectations have put the U.S. Federal Reserve in a precarious position.

          Central bank officials want to return U.S. rates to a normal level after going more than nine years without a hike and more than seven years of keeping the rate anchored near zero, before hiking in December 2015. After a weak jobs report for May and fears that a British exit from the European Union could spark global and market turmoil, the Fed is unlikely to raise rates at its meeting later this week.

          History, though, may wonder at all the fuss. With central bank policies ineffective at driving growth — the Fed’s own economists have acknowledged as much — there’s reason to wonder why the Fed didn’t end the emergency measures sooner. The U.S. central bank has been responsible for about $3.7 trillion of the global QE post-Lehman Brothers, taking its balance sheet to $4.5 trillion.”

            • Micha says:

              Thanks for the link karl. Yes, it’s been wrongly assumed that QE will stimulate the economy. It never did because the money get stuck in the bank and at a time when most folks are trying to leverage their personal balance sheets, they don’t have the appetite for getting more loans. The way economic planners could have done it is through direct spending by the federal gov’t.

              • chemrock says:

                Sellers of the securities for sure took their money out and it got recycled. Where did all these cheap money go? It went to increase corporate debts. Bond debts reached historical levels, which is’nt a coincidence. But most of these corporate borrowings did’nt go into business expansion, as you indicated. So where did they go? As I explained in my previous articles, corporates took advantage of the cheap and easy money to borrow and buy back their own shares. Huge chunk of money went into share buy-back programs fuelling equities markets.

        • chemrock says:

          Thanks for the link Karl.

          So this link refers to the $4.5T RHiro mentioned.

          This is the same scenario in most EU countries and many others. The US went with their QEs the other countries had their equivalents. They all went on a securities buying spree to create money and thus liquidity in the markets. All these central banks ended up with huge increases in their balance sheets — their inventory of securities built up over the last several years.

          RHiro did’nt answer my question :”Also having paid for the assets it purchased, how did the Fed not transmitted the money directly to consumers?”
          The money for sure did not remain idle in banks’ reserve a/cs at the Fed. It has been taken out by the sellers of those securities and recycled elsewhere. Now theoretically, the Fed’s QE is to create money, make markets more liquid, consumption and business grow, thus create jobs, and economy improve. Why that did’nt happen is besides the point in my article. If it did’nt go into the real goods and services markets, where did it go? To the asset markets, in equities and housing which are now at indexes way past 2008 levels. That’s what my article shows.

          • karlgarcia says:

            That is what I always ask on every financial crisis, where did the money go?
            I echo what josephivo said.

            “a fool can askmore questions than thousand wise man can answer 🙂”

        • R.Hiro says:

          The Fed simply credited the accounts of the seller banks. Suggestions were made that the
          Fed directly issue money to fund deficits of the N.G. Or do a “helicopter drop” directly to households. This in response to the strong deflationary expectations building up.

          “Congress is largely responsible for the incomplete recovery from the 2008 financial crisis, Ben S. Bernanke, the former Federal Reserve chairman, writes in a memoir published on Monday.”

          “Mr. Bernanke, who left the Fed in January 2014 after eight years as chairman, says the Fed’s response to the crisis was bold and effective but insufficient.”

          “I often said that monetary policy was not a panacea — we needed Congress to do its part,” he says. “After the crisis calmed, that help was not forthcoming.” NY Times

          The economy of the 1930’s is not the economy of today. Secular stagnation has set in.

          How do you pump prime the services sector that is digitizing and automating. Plus offshoring and outsourcing.

          Suggestions of economists who wanted the N.G. to do more to help workers cope with digitization and automation were given lip service.

          Ideologues of the right saw the crisis as the opportunity to reduce the role of the state in the economy. Now suggestions from progressives are calling for supply side socialism.

          Long term problems of entitlements can be solved with simple adjustments. Now the right in the U.S. will have a hard time repealing and replacing the Affordable Care Act.

          The turmoil in the west is still economic in nature. Xenophobia and racism are being used to destroy the opposition to neo- liberal economics.



  6. “Keynesians believe in spending out of a recession while others think with monetary sovereignty there is no limit to printing money to pay off debt. I’m old fashioned, I believe sometimes, some borrowing is necessary, but should be a temporal thing. We should live within our means.

    Absolutely agree, chemp!

    At the end of the day, it’s about living within one’s means (as individual or nation).

    Financial and economic theories notwithstanding, I’m now very interested in Micha’s and RHiro’s take re no limit money printing and deficit is good… I’m not too interested in another rehash of this guy’s theories and that guy’s theories (that’s all been done),

    but on the messaging (and the utility being aspired here).

    For example, I can easily get chemp‘s point of view here, summarized with “live within your means!”—- chemp, I know we both differ in how we view the business world, ie. Sec. Gina Lopez closing down mines which were causing havoc to the environment is a good thing, no matter how you cut it period; where you’d probably take into account say mining/logging’s contribution to GDP, etc. and say Sec. Gina Lopez has gone too far.

    So from a “Salvation by Austerity” perspective, “live within your means”, makes a whole lot of sense to me, chemp… now I would love Micha and/or RHiro to dumb this down further for me, but I doubt they’d just end up getting more theoretical and/or technical (fellas, but if you can please do, along with chemp’s).

    chemp, what are Micha and RHiro, actually espousing here, is it really as simple as just printing money? Again, not the theory, but the messaging. Pretend Micha and RHiro are parents giving sage advice to their kids, what would their advice be, the essence, once all this arcane theory/technical mumbo jumbo is whittled down?

    This is what the 5th or 6th go-around? Although I get your side, I still haven’t pinned down the core of Micha’s and RHiro’s proposal here, is their’s really to just print more money?

    Micha and RHiro I know you two tend to get insulting and smug, that’s fine with me (it’s your style), but can you guys whittle down your messaging, what’s the sage advice here? Thanks, guys.

    Whittle it all down, as chemp has with “We should live within our means”.

    • chemrock says:


      Regardng Gina Lopez – basically she is fighting the same too-big-to-fail enemy. The options are tough. Close the mines and get 1m folks out of job, or let the mines continue and screw the environment. I’m for business only where laws are being observed. Gina is simply pursuing 2 things. Close those mines which have’nt complied with some court orders. Here she is simply executing court decisions. Rule of Law. The other mines are failure of environmental audits conducted. She is doing her job with gusto, but I think some sort of compromise may be better outcome. Like hefty fines and extend time to comply audit failures, but no corporates should hold the country to ransom, so shut it down if they don’t observe environmental requirements. But court impositions should proceed.

      However, I think there’s some complicated manouvres going on in mining. Probably some industry grabbing. Change of oligarchs is the end game. They used to say Imelda Marcos was in the mining business, everything is mine, mine, mine!

      I understand Micha’s views. But RHiro’s views I don’t know because it’s difficult to understand him, with all due respects.

      Subject to her clarification — I think Micha views deficit spending is good because it drives economic activities and don’t see debt as a problem. It’s a view that sees austerity as anathematic to an economy seeking growth.

    • Micha says:


      The “living within your means” rule only apply to individuals like you and me, households, private businesses, corporations, municipal or city govt’s, counties, and states from Alabama to Wyoming.

      The federal gov’t is exempted from this rule because it is the sole sovereign issuer of the very currency that the entities above are using.

      You and I are “users” of the dollar, We need to earn (or borrow) before we can spend.

      The federal gov’t is the “issuer” of the dollar. If you are familiar with the board game Monopoly, it’s exactly like that. The designated banker doesn’t have to worry where he will get the money to get the game going, he simply “issues” money out of thin air.

      It has not, of course, always been like that. There was a time when the federal gov’t was constrained to issue only a limited amount equivalent to the value of gold in its possession. Richard Nixon got rid of that constraint in 1971. The dollar ceased to be convertible to gold.

      The rule was changed but the textbooks used by most economist did not get a revision or an update. That is where the confusion – yours and chempo and most everybody else – is coming from.

      In the now famous interview on 60 Minutes with Scott Pelley, this is how Ben Bernanke responded to the question:

      Pelley : “Is that tax money that the Fed is spending?”

      Bernanke : :“It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So to lend to a bank, we simply use the computer to mark up the size of the account they have at the Fed. So it’s much more akin, although not exactly the same, it’s much more akin to printing money than it is to borrowing.”

      Pelley : “You’ve been printing money?”

      Bernanke : “Well, effectively. And we need to do that.”

      • chemrock says:

        I understand your views, I just don’t share your views. There is no confusion. I just don’t believe in the infinity of the quantum $. Just because the mechanism and the system allows the Fed to ‘print’ does’nt mean the world can be flooded with $ to monetise infinite US budget deficits.

        On the contrary, I believe the US financial problems of today is the result of Executives taking the easy way out provided by Fed economists with modernist thinking.

        Paul Volcker : “This kind of stuff that you’re being taught at Princeton disturbs me.”. (After this speech, Paul Kruggman resigned from Princeton where he taught economics)>

        • karlgarcia says:

          I looked for the whole quote by Volcker.

          “The responsibility of the government is to have a stable currency. This kind of stuff that you’re being taught at Princeton disturbs me. Your teachers must be telling you that if you’ve got expected inflation, then everybody adjusts and then it’s OK. Is that what they’re telling you? “

        • Thanks, Micha & chempo!

          “The free market illusion also came into fore with the bailout of Wall Street banks in 2008. As Noam Chomsky said, it’s actually socialism for the rich and free market discipline for the common folks.

          Capital chasing income through interests payment is parasitic; it’s not doing anything socially useful.

 Re that last sentence, I know this is Islamic bankings call to arms. Given all the things gone awry re finance, I tend to agree with “income through interests” as “parasitic”—- and is totally IMMORAL, LOL! (i hope edgar didn’t catch me saying that 😉 )

          I totally agree with your left leaning bent, Micha, like i’ve said before I’m Cascadian at heart. So i agree with you re “free market illusion”; BUT I cannot follow this thread towards,

          “The designated banker doesn’t have to worry where he will get the money to get the game going, he simply “issues” money out of thin air.

          This is Al-Chemi to me, and not the Paulo Coelho feel good type, it’s always been close to you, neither, Micha… I’m talking about dark arts, satanic rituals type alchemy.

          If all this “illusion” is played at the highest levels, why wish it upon the masses? Shouldn’t the masses shield itself from this “illusion” thru various mechanism or definitions of wealth, ie. sweat equity; community; self-reliance, etc. etc., instead of diving, and going all-in full-retard inside this “illusion”?

          I don’t get the gamble here, Micha, is it simply to get yours while the going is good, knowing full well the mirage will dissipate? OR do you have sustainability in mind here?

          if it’s to play the dark arts to get yours, as a stop gap measure, so long as its temporary, I can see the gambit—– kinda like Bitcoin right before some big Sun induced EMP event rendering the digital age obsolete.

          But it seems like youre espousing playing into this “illusion” as long term strategy for getting rich (individual or nation), like this is the new normal—– you’re broke, just print more money!!! Make gold out of lead! Alchemy! voila!!! magic!!!

          So are you arguing temporary (stop gap) or permanent (new rules), here?

          The rule was changed but the textbooks used by most economist did not get a revision or an update. That is where the confusion – yours and chempo and most everybody else – is coming from.”

          If you are for some semblance of permanence, then can you explain (whittle down) further, this new rule??? Aside from just printing more money, explain how this deviates from the “illusion”, or is being totally part of this “illusion” the point here? Thanks, Micha!

          We definitely agree, more than we disagree, I feel our values coincide closer than chemp’s … I can probably drink beers with you, while I’d have to be sipping Cognac and smoking a fine cigar with capitalists like chemp 😉 (and for sure, chemp would be buying! LOL!) .

          • chemrock says:

            You’re dead wrong in your assessment of me. I believe in capitalism to spin the economic world around, but having achieved wealth, I believe in fairer mechanism for wealth redistribution than is currently being achieved in most parts of the world. The countries that comes closest to this paradise are the Scandinavian countries.

            Whilst I believe in capitalism, I’m a mild socialist, but I’m not a ‘bleeding heart’ politically. (For those who don’t understand, ‘bleeding heart’ refers to a person who is considered excessively sympathetic toward those who claim to be underprivileged or exploited). That’s why I don’t support the 2,000 peso increase in SSS pension hike. Bleeding hearts get taken advantage of easily.

            But of course I don’t believe in the excesses of pure capitalism and raping of mother Earth which is not the fault of capitalism, but human weaknesses.

            For you and Micha peeling away the capitalist illusion and seeing dark schemes of evil rich elite families, may I remind you the history of not too long ago of the experiment of an economic order of labour and government, without capital. It was called communism.

            I don’t smoke and I’m a coffee connoisseur, sorry again Lance.

          • Micha says:


            Judging from your response, I could tell you already have one beer too many.

        • Micha says:


          1. “I understand your views, I just don’t share your views.”

          – What I tried to explain to Lance Corporal are not my views, it’s a description of the current monetary and financial system of the United States. My views are unimportant. My views, whatever they are, have nothing to do with it.

          2. “I just don’t believe in the infinity of the quantum $.”

          – It would be helpful to set aside what you and I believe. For the purpose of this discussion, let’s just focus on the question of whether the federal gov’t debt is sustainable or not.

          3. “Just because the mechanism and the system allows the Fed to ‘print’ does’nt mean the world can be flooded with $ to monetise infinite US budget deficits.”

          – When one finally understands the concept of monetary sovereignty it would be much easier to understand that borrowing is a superfluous feature to federal budgetary spending and deficits. The practice of borrowing is a relic – a remnant – of the gold standard system which, unfortunately, is what most members of US congress still practice and think.

          4. “On the contrary, I believe the US financial problems of today is the result of Executives taking the easy way out provided by Fed economists with modernist thinking.”

          – If you are talking about the federal gov’t, it’s financial problem exist only in the austerity addled minds of notorious conservatives such as Pete Peterson, Paul Ryan, and the whole gangsta members of Republican caucus.

          5. “Paul Volcker : “This kind of stuff that you’re being taught at Princeton disturbs me.””

          – It’s not clear what “stuff” Volcker is referring to, would you know? Incidentally, he is one of President Nixon’s economic adviser when the latter delivered the Nixon shock.

          • Lance,
            You’re dead wrong in your assessment of me.”

            chemp, I meant that Cognac/cigar bit as a joke.

            Of course I know you’re a good guy, chemp,

            I’ve been the recipient of your fairness (you’ve always gone to bat for me, when either facing suspension and/or moderation-censorship). you and edgar both (remember right before Thanksgiving and edgar re-produced my last comment addressed to caliphman, 60 days prior?). If Ireneo and Wil taught me Filipino culture; both you and edgar taught me fairness (or maybe you guys’ sense of fairness is more in-line with mine).

            Though we might not see eye-to-eye re capitalism and say usury , please keep in mind that I do hold your views with the highest esteem. You are a fair guy, chemp. And whether we’re enjoying Cognac with cigar, or coffee and cigar it would be an honor to do so with you , but you’re still buying 😉 .

            “– What I tried to explain to Lance Corporal are not my views, it’s a description of the current monetary and financial system of the United States. My views are unimportant. My views, whatever they are, have nothing to do with it.”


            Now you’re playing the amorality game. The only difference is you are espousing a view, one which IMHO is not consistent with your pattern of commentary here (this pattern makes up your views).

            That’s why I want you to whittle down the rule(s) of this game further.

            From the looks of it, you understand this “illusion”, yet promoting collusion with it as some form of democratization of said “illusion”, ie. if the rich can play this game, why not everyone else.

            The democratization aspect in context with your world view (pattern of your commentary) , I understand, it jibes, and it’s consistent with where you’re coming from IMHO ; BUT

            like you said it’s an “illusion”, so what I want to know, is where this whole printing money ad infinitum angle add to or subtract from this “illusion”. I’m essentially asking what the utility of your argument here, what’s the big strategy.

            So here’s a bit more context of my world view, Micha, which IMHO jibes with your pattern of commentary here—- hence I’m between you and chempo in this spectrum, but closer to you I would surmise.

            Aside from my Cascadian values,

            I also saw first hand the hypocrisy of democracy and capitalism. In the 3rd world, where “progress” and/or “development” is being sold, it’s usually the same players that’s Fossil fuel industry, the Aid industry, and Mining/logging industry ( I notice mining and logging in the 3rd world are joint at the hip, kinda like if you opened a grocery store, makes sense to have a little eatery too, so you cook that which you can’t sell; same with mining dig below and sell what’s on top) ,

            then there’s the banking/finance guys but you don’t see them on the ground, but theres loans and “investment” schemes being offered all around.

            Granted there are a few folks like chempo, who wanted to do business but in fairness. I would say those types are the exception and not the norm. The norm was that it was all a hustle.

            The mining towns I saw in Mindanao, not so much the multi-national/national entities, though they were responsible for the most of pollution; but aside from the official operations, were the small time , on the side operations, which didn’t have to worry about regulations. This is where I came to know of this Cesar Mancao character (same one associated with De Lima tapes, i mentioned in the past).

            If you’re familiar with the history of Southern Arizona, it was very much like that in Mindanao. the difference I think though is how American mining converted all that profit for bigger things, like the University of Arizona (in Tucson), and other institutions. You get a sense that all that profit is being spent where it’s being made, whereas in the 3rd world, it’s gone—- hence the hustle and hypocrisy.

            So i do share your incredulity of this “illusion”, Micha. the disconnect or dissonance if you will , is in your promotion of this printing money as a valid solution,

            where I’m equating printing of money with the very illusion we both are criticizing here, you seem to be promoting it.

            Which just doesn’t compute in my mind, hence my request for the logical end of your position, what’s the big strategy here, Micha?

            “may I remind you the history of not too long ago of the experiment of an economic order of labour and government, without capital. It was called communism.” and “The countries that comes closest to this paradise are the Scandinavian countries.”


            I’m not espousing communism here of the Soviet kind. But IMHO, had the labor movement which transpired in America been championed by American communists, of which there were none, hence the experiment took root in Europe first, and grew in the USSR, who were more agrarian than workers.

            But workers rights started over here , chemp, that May Day everyone celebrates happened here first, in response to American industrialization. We had a century of Soviet communism. I hesitate calling it American communism, but its of the spirit of American pioneers, probably more in line with Plato’s description of communities carving their own economic niche separate from those of big corporations.

            Whatever this new American small-batch, off-grid, community based economy, won’t be the socialism in Scandinavia or communism of the Soviets. Simply because Americans unlike Scandinavians and Soviets (Russians) look different from one another.

            Scandinavian socialism and Soviet communism worked because of affinity and familiarity, ie. Scandinavians and Russians look alike. We don’t have that in the US, Americans all look different (hence all this push back re welfare system, which if you notice is already happening too in Scandinavia with their influx of non-Scandinavians).

            I can’t forecast how this American “communism” will look like, chemp, but after your prediction of the fall of the all mighty dollar, it’s the most likely system in place set to take over. Whatever it is it’ll truly be a workers movement, unlike other communist movements in the past century which were actually agrarian movements.

            (Joe, I hope this passes muster for you , but i’d rather comment in bits and pieces informally— i understand it’ll be hit and miss—, than have to write a full-on essay every time… the informal tit-for-tat is what makes the commentary enjoyable after all. Please re-consider.)

            • It’s in the balance, the content, the approach. I just ask for reasonable responses and a sensitivity about the editorial guidance given. Content about the Philippines, respectful, pushing knowledge, not agenda. The idea of devil’s advocate can be either pushing knowledge, pushing agenda, or reflecting a personal need to win arguments. I think yours is a strong voice, and at times goes down the wrong track, or is overmuch. Just help the blog grow into something genuine and informative. There is enough gameplaying around already.

            • chemrock says:

              Lance, your introduction of homogeneity makes a lot of sense, I agree with you. The current immigration, if left unabated, is the sowing of seeds of problems for future generation in EU, especially Germany.

              btw I can see a joke when I see one, don’t worry about that. Cigars it is, but Filipino-rolled.

          • chemrock says:

            Now this is the Micha I like.
            I’m OK with what you say although you still can’t convince me of (3).

    • josephivo says:

      Macro-economics and finance things I do not really understand, just as IT and so many others. So it is important to me that people I can trust sit around the table when important decisions are taken. Since too long time only billionaires and scam artists have a voice at those tables, directly or via politicians they control. This makes me worrying, especially when you see that taxes of the rich will go down, scammers get all their rights to scam again, that polluters can start polluting again. How they all do it, I don’t know in detail but financial politics are a major part of the mechanism for the redistribution of wealth from the bottom to the top.

      • Totally agree, josephivo! 😉

      • karlgarcia says:

        Scams here happen every year from pyramid schemes to rent a car schemes plus what they call the change scamming.

        Above they say congress controls the monetary policy, but who controls congress?
        Who controls the money has the control. (paraphrasing RHiro)

        In bottom up redistrution.
        Unfortunately Finding fortune at the bottom of the pyramid is but an ideal theory or lip service.
        How can you profit from the poorest of the poor?

        Cct, microfinancing, 5-6
        There are lots of anti poverty measures.

        All is for nothing because of all the things you said above.

        • “How can you profit from the poorest of the poor?”

          the Foreign Aid industry (USAID/UN, to Christian missions) does exactly that, karl. In Africa and the ME these folks roll around in the fanciest rides and eat with expats, diplomats and businessmen in 3rd worlds, I’m not saying all but this industry profits from the poorest of the poor.

          Notice no nation on earth which relies on this Aid industry ever actually gets rich.

          • karlgarcia says:

            Thanks for your views on the aid industry.

            This is the concept of the fortune at the bottom of the pyramid.

            “……… discusses new business models targeted at providing goods and services to the poorest people in the world. It makes a case for the fastest growing new markets and entrepreneurial opportunities being found among the billions of poor people ‘at the bottom of the [financial] pyramid’. According to Bill Gates, it “offers an intriguing blueprint for how to fight poverty with profitability.” ”

            In short budget cars, budget hotels,budget restaurants, low cost housing….etc.

            It has to go in tandem with microfinancing, otherwise the so called affordable will never be affordable.

            If that is still not working then I hope this new concept of basic income works.

            It is like an unonditional cash transfer.

        • josephivo says:

          When I talked about scammers I was thinking at the institutions too big to fail offering product too difficult to understand for everybody and staffing half of Trumps cabinet.

        • josephivo says:

          Bottom up redistribution, look at the figures of the % of capital by different income segments. Its not so much the poorest of the poor, it is the middle class that is not getting their fair share.

        • josephivo says:

          e.g. Who buys bonds and gets the interest? Where does this interest money come from? Who pays when an institution fails? What is inflation really? Who pays proportional more taxes, income, VAT, custom duties….? Who can smuggle, pay of customers, cheat with cigarette stamps…? Who can pay expensive tax experts? Park capital abroad? The tool box for the top 1% is almost unlimited.

          • karlgarcia says:

            You said it, it is dificult to understand. There is even a school of thought that says that smuggling helps bring down inflation.

  7. NHerrera says:


    You may find this interesting if not useful:

    Nothing harms a thinking man more than lack of opposition — Stefan Zweig.

    Of course you and others here at TSH know that already.

  8. NHerrera says:

    As if the world, especially the developed parts of the world, does not have trouble enough, here comes the prospect of 60 percent of jobs being lost to robotics and AI in 20 years.

    What do we do, or the likes of some demagogue leaders do? Burn the robots and all knowledge of AI, as some in the world ages ago burned books?

    The link suggests that if the prediction becomes a reality those who lost their jobs should be paid some basic income so they can consume the products. That seems to be a way out economic thinking?

    • karlgarcia says:

      I was still reflecting on the comment of RHiro when I read your post.

      “How do you pump prime the services sector that is digitizing and automating. Plus offshoring and outsourcing.”

      Soon call centers will be automated, but before that my worry is the Philippines may lose call centers to Tijuana Mexico who capitalizes on deportees who has lived in the US for 20, 30 even 50 years.

      Going back to
      The service and manufacturing sector will be replaced by robots?

      Ched and Deped made that report a few weeks ago, but I think they were not convincing enough because the news died within a few days.

      Driverless cars, let us see that work in the Philippines, were resistance to change remains strong, The transport sector do not want phasing out of old jeepneys, what more dilapidated buses.

    • Seems familiar , NH. déjà vécu.

      Here’s Watson (re BPO vs. AI, “Cognitive Engine”) :

      I’m with Micha, at the end of the day it’s still “illusion”.

      Good food, clean water, fresh air, comfortable shelter and community. Everything else is luxury, but notice how robots and “cognitive engines” don’t need all that. Voyager 1 (were you involved in this, NH?) is still sending data back, so there’s no fighting the inevitable.

      I’m thinking culinary industry will rise; environmentalism/water & air protection industry; off-grid living; and community making… BPO is gone, and other robotics/AI open fields, though the “illusion” will persist, people will still demand (more so than before) good food, clean water, fresh air, comfy shelter and community.

      • I’ve deleted a couple of your comments, as you seem to be roaming and commenting at will. I used to proclaim that this is not a chat room, but a discussion thread. I sense the need to restate that. I’d encourage you to pick one line of discussion and develop that, not as devil’s advocate, but to generate positive discovery. I tire of your questions, pushing others to cater to your agenda. I don’t care to kick you out, but I’m not finding satisfaction in what you bring to the blog.

    • chemrock says:

      NHerrera, you stated your own solution — universal basic income, or unconditional basic income or some other names. The poor are given a sum of money each month and all other social programs are dispensed with. Proponents say this has advantages over the various social welfare programs — it saves significant admin cost, it’s a simple concept, tests have shown that people given a sum of money with discretionary spending gives them more dignity and power to spend more efficiently.

      • NHerrera says:

        Two things:

        1. That idea of human dignity seems key, and one I like, as a rationale for the “basic income” to give to those difficult to retrain in the regime of AI and robotics. In time with younger people trained in the new regime, those mostly elderly given this basic income will decrease percentage wise. Good of you to give the rationale for that practical idea. You are a “beautiful economist with a heart” to use the Miss Universe Pia Wurtzbach’s words.

        2. The idea of the “basic income” came from the linked article. And my implied question was how that would be rationalized or explained economically. You did it for me thanks.

        • chemrock says:

          It’s actually an economic idea being toyed with in ivory towers. There was actually an experiment conducted in a certain community in Finland and Canada.. You might like to google and check out that experiment, it’s interesting. I don’t have the link offhand

  9. edgar lores says:

    This much I gather:

    1. The US government has a burgeoning national debt.

    2. The debt is owed mostly to the American people.

    3. The debt is mostly in the form of securities.

    4. The securities were raised by the US Treasury to finance government expenditure.

    5. The securities are purchased from the Treasury by the Fed (Federal Bank) with money it never had.

    6. In turn, the Fed distributes the securities to seller banks by crediting their reserve a/c.

    7. In turn, the seller banks sell the securities to the people and the people buy the securities with money they have.

    7.1. Result: Government has real money to spend.

    8. When the securities mature, the Fed will either:

    8.1. rollover the securities
    8.2. or use taxpayers’ money to pay the people
    8.3. or raise new securities from the Treasury

    9. Do we know which option is most likely — 8.1, 8.2 or 8.3 — or what the percentages are for each option?

    10. I would surmise that 8.3 is resorted to when there is a shortfall. That is when 8.2 is not sufficient to pay off the maturing securities.

    11. Option 8.3 looks like Micha’s MMT to me.

    11.1. It also looks like a Ponzi scheme — where the Treasury is the eternal late investor. That is eternal until Chemrock’s prophesied catastrophe happens.

    • chemrock says:

      Edgar, allow me to check off and clarify. If I can clear the fog for a wise man, he becomes wiser.

      1. The US government has a burgeoning national debt. – CHECK

      2. The debt is owed mostly to the American people – CHECK

      3. The debt is mostly in the form of securities. – The debt is ALL obligations under Treasury securities.

      4. The securities were raised by the US Treasury to finance government expenditure.- CHECK

      5. The securities are purchased from the Treasury by the Fed (Federal Bank) with money it never had. — NO. Treasury issues the securities and sell them through public auctions (The Fed is the residual buyer in case the issues are not fully sold. This is to protect the interest setting. Let’s leave this out, it tends to complicate the process. Just imagine all issues are fully sold, which is often the case)

      6. In turn, the Fed distributes the securities to seller banks by crediting their reserve a/c.- The Fed has no role here.

      7. In turn, the seller banks sell the securities to the people and the people buy the securities with money they have. — Treasury sells via public tender. Anybody can buy and do whatever they want. These investors buy with money they have. They pay US Treasury by transfers into the govt’s banking accounts.

      7.1. Result: Government has real money to spend.— CHECK. Note there is no money creation.

      8. When the securities mature, the Fed will either:

      8.1. rollover the securities
      8.2. or use taxpayers’ money to pay the people
      8.3. or raise new securities from the Treasury

      To rollover the securities, Treasury will issue new securities, auction them off, receive the payments, use the receipts to pay off holders of matured securities.

      9. Do we know which option is most likely — 8.1, 8.2 or 8.3 — or what the percentages are for each option?
      It has been said in the US Treasury securities history, no issues have been repaid off from govt funds. They were all rolled over. But I suspect there may be some repayments out of govt surpluses in 2000/2001.

      10. I would surmise that 8.3 is resorted to when there is a shortfall. That is when 8.2 is not sufficient to pay off the maturing securities.
      See answer to (9)

      11. Option 8.3 looks like Micha’s MMT to me. NO. 8.1 and 8.3 go together and there is no money creation. The US Treasury receives payment from buyers with money they had.

      11.1. It also looks like a Ponzi scheme — where the Treasury is the eternal late investor. That is eternal until Chemrock’s prophesied catastrophe happens. EUREKA.

      Edgar – Micha’s MMT comes into play when the Fed does their QEs. The Fed buys securities in the open market and they pay to the seller simply by crediting the reserve accounts of the sellers’ banks. The Fed credits the ‘Banks’ Reserve A/cs’ and debit ‘Securities Inventory a/c”. Thus out of nowhere, the Fed has created money through reserve banking system. Micha has correctly pointed that banks’ reserve a/c balances are not included inM2 thus they do not affect money supply. But it is inconceivable that sellers will leave their money idle with their bank. They would have taken out and recycled elsewhere almost immediately. Even if the sellers leave the proceeds of the securities with their bank of a single day, the bank will move it out and plave it overnight in the money market. Thus it is a fact that the Fed creates money and increase money supply throught the reserve banking system when they purchase securities.

      • edgar lores says:


        1. So:

        1.1. The Treasury increases national debt when it raises new securities.
        1.2. The Fed increases the money supply when it buys new securities.
        1.3. Therefore, the Treasury does indirectly print new money.

        2. Will the prophesied catastrophe ever occur?

        2.1. Probably not: The national debt will continue to increase, but the debt to the people will always be repaid by rollover or by issuing new securities.

        2.1.1. (Perspective: It is stated that the debt is equal to about 104% of the previous 12 months of GDP.)

        2.2. Probably so: The catastrophe might occur when the new securities cannot be issued because, say, of the debt ceiling… and politicians cannot agree to raise the debt ceiling.

        3. In other words:

        3.1. The immediate national debt (the maturing securities) will always be repaid.

        3.2. The non-immediate national debt need not be repaid until some future time.

        3.2.1. By definition, the event horizon of the national debt black hole will always be ahead of present time. And it will never come to pass that the US will slide over the event horizon and be swallowed into the hole.

        3.2.2. Famous last words?

        • chemrock says:

          1.1-1.3. CHECK. That’s why for short cut discussion, people talk about US Treasury printing money. Explaining the whole process complicates discussion.

          2-3.2. CHECK.

          3.2.1. Two schools of thought — Micha’s and mine.Of course there are many experts that have the same view as Micha, that the blackhole will not come to pass. There are equally many others who have same fears as mine. The difference is — Micha’s side tend to be lots of academecians, mine side tend to be the pros out there hustling in the market place.

  10. popoy del r cartanio says:

    15 deaths on the road; BUS KILLS

    Out of topic: anecdotal yarn on the bus tragedy on the slopes of the Tanay Sierra Madre. I did my farm practice there in sitio Pinagitlogan, Sampaloc Tanay in the summer of ’58. There the stumps of the cut down Balete trees keep burning, lighting the mountain dark nights, smoking for days or weeks in preparation for kaingin farming. In preparation for “bakal” upland rice planting, thick forest floor bushes had to be burned. Caught in the smoke one could die of asphyxiation unless one will drop down and dig a hole (like gas mask) for breathing until the winds had blown away the thick smoke that kills. My yarn is not about kaingin farming it’s about the place where 15 people recently perished by a bus accident waiting to happen. I was there before in Marlboro country where I had to walk a mile just to buy my Camels. The short zigzags there of the road is better engineered than the Kennon road to Baguio City which only followed the river. Dangerous roads are only as safe as the dangerous buses that travel on them. Dangerous buses are not rolling coffins but rolling morgues on the roads.

    The preliminary point of this comment is about resigned consultancy and refusing payments for deemed inutil service. A colonel West Pointer assigned to clean up the Transport Regulatory Boards (air, land and sea) requested my college for assistance. Why? I did not know but I was sent (bida na naman eh) to do a management study (euphemism for audit). First I did was Work Simplication study coming out with a flow chart on the issuance of franchises. Then I presented a designed system for adoption to the division chiefs. Told them legalistics is a problem in performing what is purely an economic function of transportation. Before that I learned about payments for hearings with lawyers, required by law may not be that necessary, inspection of buses paid for by operators which were never done because of lack of personnel could have dire consequences, gifts (or lagay) could be house and lot; a casual employee have his own regular casual employees (fixers) to move papers; the Filipino value of “pakikisama” dominates office culture, be a maverick employee at your peril; etc., etc.

    After three months I told the West Pointer, my Dean said it’s okay for me to get out of there. The colonel said he will expedite my three months consultancy fees (sayang din). I said, No, I have not accomplished anything there and I have regular pay from UP. He said I must explain why I am leaving to the Division Chiefs. In a manner of politically correct blah blah I told them I am needed somewhere and I could be just taking much of their precious time and thanked them for their sincere cooperation.

    THE MAIN POINT of this out of topic yarn is: the unnecessary death of 15 people while on an educational field trip has made CHED upon recommendation of Commissioner De Vera (proactive and responsive guy) to approve a moratorium on field trips and camping schools, colleges, and universities. No more field trips for now. I will say Popoy to Popoy: the problem is not about field trips, Popoy. It is somewhere else; it’s in the bus transport sector. HOW MANY of our buses on the road were purchased second hand from the car and truck cemeteries of Japan, South Korea and China? Which needed constant monitoring and inspection? If you can Popoy whisper to your Boss: since martial law several decades ago, the transport sector of governance is the third sickenest (along with BIR and Customs) organ of the bureaucracy. Public welfare and safety is systemic. A pain in the little finger is felt by many parts of the body.

    I can talk to Popoy of CHED because a Popoy who remained nobody can still talk to Popoy now a somebody who was once a junior staff. That’s how life is a beauty in the academe. So sorry JoeAm if I had just hijacked this space.

    • popoy del r cartanio says:

      Hindi naman seguro, pero parang mayroon eche bucheche sa news tungkol sa incidente. Hindi raw naka-preno yung driver; overloaded daw yung bus. Kahit sa mga siyudad sa KaMaynilaan, lundag at belly up nangyayari sa mga bus. Mga air cond tumatakbong morgue.

    • chemrock says:

      “No more field trips for now. I will say Popoy to Popoy: the problem is not about field trips”

      Reminds me of something I heard in Philippines. A politician was shown around his township. The entourage chanced upon a bridge and he observed ‘Oh there are people living under the bridge’. A subordinate told him many of the homeless end up seeking refuge under bridges. To which the politician exclaimed in his Eureka moment ‘Oh, then we must build more bridges’.

      • karlgarcia says:

        like my comment above that says smuggling brings down inflation levels, so lets allow smuggling.

      • popoy del r cartanio says:

        sorry chemrock didn’t get it, a William holden and grace Kelly a bridge too far for me. looks like a toilet humour kind of below the belt mocking and insulting politicians and could be invented only by a condescending alien. There is no township in the Philippines, most towns have bridges so low flowing waters makes it very dangerous to go near or live under bridges. In cities, the homeless squats under flyovers or overpasses. Quezon, Jones, and McArthur bridges have no people living under them. “A politician was shown around his township.” Which the politician did not know? You must have heard it in Mars, not the Philippines.

        • karlgarcia says:

          Take it easy Popoy.
          Under Flyovers maybe and under the MRT.
          Remember the song “May pulis sa ilalim ng tulay” I think it was about a cop hiding in the underpass.

          • popoy del r cartanio says:

            Chemrock and Karl, sorry I got PIKON there’s a point in them photos there, I was like that politician a President like Maybe Cory, Fidel, Erap, Gloria, Noynoy, now Digong who have closed eyes to the nooks and corner of towns and cities. Building bridges to shelter squatters is is queenly to let the people eat cake for food, like calling a dirty shovel a clean spade. I’d like to have a little compassion even in jokes and pictures the absence of which tells a little about the Marquis dichotomy of sadism and masochism in political discourse.

            • popoy del r cartanio says:

              come to think of it: it’s true pictures convey a thousand words, but those photos is like a kind of sadism washing dirty linens in public seldom seen in other more humanely progressive countries.

              • We have homeless living under bridges too, popoy. Though not for lack of resources, you see they’d rather have freedom (hint: to use drugs and drink), than to subject themselves in homeless shelters.

                Every storm that comes washes away some dead bodies but many many more syringes, which inevitably washes to shore, and volunteers congregate to clean up the beaches (every storm). So even in the 1st world, where there are resources, people still live under bridges, popoy—- i guess the difference is police/firemen attempt to either shelter them for the duration of the storm before the storm comes, or actually rescue them during the storm.

            • chemrock says:

              No problems bro, it’s easy to go emo sometimes.

  11. Micha says:


    The illusion I refer to was about the free market concept in capitalism. OTOH, there is nothing illusory about the federal government’s feature of being monetarily sovereign.

    • OK, Micha. So free market concept is illusion, yet printing money out of thin air is not? It’s a dissonance I can’t get past. But hey we tried.

      • Micha says:

        You think the power, ability, and authority currently endowed on the US Department of Treasury and the Federal Reserve is an illusion?

        • No, “the power, ability and authority” I equate with “free market concept”, which is same same illusion, now printing money out thin air, in and of itself that is illusion. They are both illusions is my point —- the first we agree, but the second we should agree (based on similar world views) but don’t, instead I’m agreeing with my capitalist friend chempo.

          • Micha says:

            The power and authority endowed on the Treasury Department and the Federal Reserve is what gave them the ability to create money out of thin air.

            • edgar lores says:


            • chemrock says:

              Fed independence was long established in the Fed-Treasury Accord signed in 1951. After this, all fiscal and monetary policy matters of the mighty USA were surrendered to the Fed, or the Financial Tyranny that Josephino was asking above. There was a time when the Fed need to make periodic reports to Congress on their inflation and money supply targets, but over time this practice stopped. There is chaos in the US as Trump and Yellen are not in sync.

            • Micha,

              That’s why I was asking you about the end game , the logical end if you will of your position above! Unlike chempo, I want to be convinced—- but it seems you’re just stuck on the illusion part of this.

              The business of security is also illusion, you can say police/military get their “the power, ability and authority” from the state, hell if you go back further it was from “god(s)” himself.

              Training 3rd world military is an illusion it’s 80% theatrics, you play a part they understand well, which weirdly coincides with Hollywood movies they see. Crowd control is illusion, 1,000 to 100 ratio is untenable, but thru illusion, mainly pomp and circumstance, gear and posture, 90% of the time the crowd is tamed. Posturing is illusion, and that’s the bulk of what the military/police does.

              Eventually, this illusion crumbles, and its crumbling is usually related to your illusion’s crumbling (ie. the system crumbling).

              In and of itself, illusions are useful, Micha, but they’re called illusions because we know they’re not real (ie. printing money out of thin air), they are bubbles of reality, you’re not suppose to fall prey to them, you’re suppose to manage said illusions.

              Hence I’m asking the end game here, Micha, how far are you willing to extend this illusion, for what advantage, and what’s the exit plan? What’s the plan when the bubble burst? But mainly I’m interested in the advantages you’re attempting to win within said illusion, that’s my question.

              I’m not a theories guy , I’m a real world’s guy, keep that in mind.

              Unlike chempo, I want to be convinced, Micha. Please proceed.

              • Micha says:


                If you think everything in the federal gov’t and the economic system itself is an illusion, I am not a specialist to fix your mental state.

              • OK, Micha, so there is no more to printing money out of thin air, than just that printing money out of thin air.

                Unless we’re talking about this, , then we’re effectively talking about an illusion (or are they the same, hmmmm…) and don’t forget, .

                Like I said, we tried, Micha. Thanks. 🙂

              • Micha says:

                Now I understand what JoeAm meant about you pushing a certain agenda. Since I had not been following all the discussion in this forum for sometime, what is your agenda corporal? Do you subscribe to the Marxian critique of capitalism? Are you a unitarian religious activist or something?

              • Hahaha… my agenda is also an illusion, Micha.

                We’re both magicians, only difference is you only have one act—- not saying that’s bad mind you. That one act can make a world of difference 😉 , as Bruce Lee once said,


                Remember that, Micha… again we tried. Thanks!

              • Micha says:

                I see that you’ve gone into woo woo land.

                I shouldn’t have wasted a qubit trying to make sense of what you’re saying. But thanks anyway. Bye.

  12. Harry Tan says:

    Superb blogging again by Chemrock. Thank you po, sir!

    Alas, here is his soul: “Keynesians believe in spending out of a recession while others think with monetary sovereignty there is no limit to printing money to pay off debt. I’m old fashioned, I believe sometimes, some borrowing is necessary, but should be a temporal thing. We should live within our means.”

    I totally agree on living within your means.

    • chemrock says:

      Thank you Harry.

      Do note that living within your means does’nt mean we should’nt dream, aspire, and plan for better things. At the personal level the world is your oyster. Just make sure you get your own oyster, don’t take from others and along the way help others to get others if you can.

  13. karlgarcia says:

    You are the SDA expert here. Back in the days when the BSP was preventing the peso to appreciate to Php 40.00, they flushed out 1.85 trillion of SDAs into the economy. Was this our version of QE. Did it work?

    THE BANGKO SENTRAL ng Pilipinas’ (BSP) attempt to “collapse” special deposit accounts (SDAs) is its version of an unconventional monetary policy approach aimed at supporting the economy, Citi said.

    With the central bank having reduced interest rates and on Monday further limiting access to the facility, it is intent on flushing out the P1.859 trillion in SDA deposits into the economy, the global bank said in a report.

    “An SDA collapse that unleashes all that liquidity is BSP’s version of quantitative easing, in our view,” Citi said.

    Developed countries have been relying on quantitative easing to bring their economies out of the rut created by the 2008 global economic crisis. Central banks, among others, have resorted to buying assets from banks, instead of bonds from government, to manage interest rates and money supply.

    “Like in the United States, Japan, and other countries that pursued unconventional monetary policies to shore up their economies and weaken their local currencies, we suspect the BSP wants to do the same but with the focus on stalling the likelihood of peso appreciation,” Citi said.

    The peso in recent years has become one of the world’s strongest-performing currencies. It was the third-biggest gainer as of April, having appreciated by 25% since 2007. Only the Chinese renminbi and the Singapore dollar saw sharper gains at 29% and 26%, respectively, over the same period.

    The BSP has been working to temper the appreciation, but the influx of foreign investors moving to emerging markets for better yields have been supporting the peso’s strength.

    One of the investment outlets favored were SDAs given the higher interest rates on offer. Looking to stem the rush of funds and prevent speculation, the BSP last year barred non-residents from placing money in SDAs. This year it slashed SDA rates by a total of 150 basis points, taking these down to 2% from 3.5%.

    On Monday, the central limited SDA access for trust entities, which will now only be allowed to make placements for fund management activities, specifically unit investment trust funds (UITFs). Other fiduciary business and investment management accounts (IMAs) were banned from SDAs.

    According to Citi, other fiduciary business totaled P1.49 trillion last year, dwarfing UITFs of P970 billion. IMAs are estimated at about P1.9 trillion. Investors may move their money from IMAs to UITFs as a result, which may be more acceptable to the BSP.

    “Since UITF exposure to SDA would also be diluted by exposures to other asset classes, it won’t have the same ‘devil we know’ familiarity,” it said.

    UITFs pool funds from numerous investors and invest them in various instruments. IMAs, meanwhile, are for singular investors and their sole underlying instrument tends to be the SDA.

    If the BSP succeeds in its quantitative easing, Citi said the peso should remain at P41.50 versus the dollar in the near term.

    This forecast was supported by ING in a separate report yesterday where it estimated that the local currency would “remain bearish” and move in the P41-41.50 band.

    @ Chempo,
    If RHiro would not be able to answer, you can give your take. Many Thanks.

    • Interesting question, karl.

    • chemrock says:


      The SDA was introduced in 1998 as a monetary tool to manage liquidity. SDAs are very short term deposits from overnight to 30 says. A term deposit has two faces — Bank A places a deposit with Bank B which accepts the deposit. In banking lingo, Bank A sees it as a ‘placement’ whilst Bank B sees it as an ‘acceptance’. So the SDA was basically Bangko Sentral’s ‘acceptances’. Basically, Bangko Sentral accept deposits above market rates thereby attracting qualifying parties to place their money with the central bank. In this way, lots of money are taken out of circulation and parked temporarily with the central bank. By taking acceptances, BS mops up liquidity in the market thus helping to lower inflation. To release the money back into the market the BS will simply stop taking acceptances, and maturing SDA deposits will be retunred to depositors. To that extent it is similar to QE. However, there are 2 major differences with the Fed’s QE :

      1. The FEDs QE creates money in the reserve banking system and in turn increases money supply. There is no money creation in SDAs.

      2. The Fed’s QE involves buying of securities so there may be profit or loss opportunities. Bangko Sentral’s SDA are acceptances at above market rates. Thus Bangko Sentral takes tremendous interest losses via this operation. This is the heavy price the central bank pays to maintain price stability.

      As to weather the SDA was used successfully for it’s inflation killing objectives, the facts seem to support that it does. Especially around 2007 there was a lot of liquidity in the market which the SDA mopped up.

      SDA is history since mid 2016 when the Bangko Sentral implemented the IRC (Interest Rate Corridor) which is a programme to manage interest rates. This gives them new tools to manage their monetary policy. In place of SDA is TDF (Term Deposit Facility) which is basically similar in nature.

      Hope this helps.

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