US debt as a percentage of GDP (i.e. our ability to pay off our debt) has basically remained static since COVID. I agree that the US requires a serious debate about our fiscal priorities and the appropriate levels of spending and taxation, particularly with automatic social security cuts looming. But it is nowhere near an emergency and fiscal decisions are the responsibility of Congress, not the executive.
My point is that our debt only grows unsustainably in response to severe crises (the great financial crisis, COVID). Our deficit is otherwise sustainable during "normal" times as our economy grows alongside it. We of course should want our debt to GDP ratio to be declining during periods of peace and prosperity (and it is evidence of political malfeasance that we haven't seen that happen since the late 90s). But our current spending is not a crisis in it's own right.
Why should you care if the national debt goes up or down? Why is it bad if it goes up? Do you actually understand the underlying mechanics, or have you just built a lot of eloquent abstractions around the idea of “number go up is bad”?
Go high enough, interest payments consume the entire federal budget. There is no way out except revenue growth (infeasible without breakthrough productivity improvements), taxation, and printing money (equivalent to taxation). Before that point, other bad things happen such as creditors losing faith in the government, making debt more expensive and destabilizing the dollar's position as global reserve currency.
Over the last few decades, debt has continued to rise as a percentage of the federal budget, and appears that trend will continue without drastic action.
Barring massive political instability, nobody is ever going to lose confidence in the dollar, regardless of debt ratios. Japan has a debt ratio of over 300%, economists have been predicting a crash and capital flight for decades, but none of it has come to pass.
At the end of the day, the Japanese market is huge and people want access to it. Same thing goes for the US.
If the private market doesn’t want bonds, the central bank can purchase them. That’s not inflationary. What is inflationary is how the government then spends that money, but that’s true for any government spending, regardless of how it was financed. Either way, the debt ratios is literally meaningless.
> If the private market doesn't want bonds, the central bank can purchase them. That's not inflationary.
Central bank buying bonds and increasing money supply absolutely is inflationary. That is precisely how FOMOs work, with the end goal being increasing or decreasing money supply depending on inflation and labour market. So if you already have stubborn inflation and you have a fiscal crisis then unmooring inflation expectations by lowering rates is exactly what you don't want to do (risk becoming a banana republic that inflates away it's debt). I don't think this will happen in the near future but it is absolutely a risk and you'd be foolish as a central banker not to consider it.
What do you mean "there's no failing for a country with a sovereign currency"? There are many, many examples of countries failing. Some of them had sovereign currencies. Sure they can't "run out of money" if they can print more. Along with many more examples of being able to adjust internal values and metrics. This is a very different thing from not being able to fail.
I’ll be clearer. The failure mode that you’re talking about, where debt ratios are so high that a country isn’t able to service its debt, is economically speaking impossible. This isn’t “too big to fail”, it’s the system working as intended.
I'm not sure why you think that's what I'm talking about, because I never brought that up. In fact I agree with that point. The apparatus will never report a failure because it has an incentive not to. The whole system is built and described in a way to make failure seem impossible because confidence is necessary for it to work. But when numbers and reality don't match, reality wins.
The interest still needs to be paid. That requires revenue growth, taxes, or printing money. Taxes and printing money makes everyone poorer - the IOUs of yesterday coming due. Japan has had many challenges over the past few decades.
I'm not an expert but I think I have a reasonable understanding of the situation. If the US debt to GDP ratio gets too high, purchasers of US Treasuries (bills, notes, and bonds) will lose confidence in the US government's ability to service that debt and demand a higher yield on US Treasuries at auction, which increases the cost of servicing the debt. At that point, the government has two choices; pay the higher yield which eventually results in fewer services/higher taxes and a contraction in the real economy, or to default on the debt which would result in very bad things happening (this is where I cop to ignorance on the scale and exact details of the badness). We should get ahead of that by reducing our services/raising taxes now so that we don't risk a loss of confidence that would restrict our ability to borrow in a time of crisis.
1. Nobody is losing confidence in the US over debt ratios. Japan’s debt ratio is over 300%, and they’ve had no issues with financing their spending or capital flight. This is a myth that has been proven false.
2. If the private market doesn’t want to purchase bonds, the central bank can do it. Either way, there is never a need to default on debt owed in your sovereign currency. This will never happen. The risk here is inflation, but that risk is always present, regardless of how spending is financed.
1. Japan is a net creditor nation, meaning it owns more foreign assets than it owes in debt. The U.S., on the other hand, is a net debtor nation, meaning it relies heavily on foreign investors to finance its deficits.
Japan also has a high domestic savings rate, and a large portion of its debt is held by its own citizens and institutions. This reduces capital flight risks compared to the U.S., which depends more on foreign investors (e.g., China, Japan, and others buying U.S. Treasuries).
The U.S. dollar is the world’s reserve currency, which gives the U.S. unique advantages, but also means its debt is held globally. A loss of confidence in U.S. debt could have larger consequences compared to Japan.
2. U.S. benefits from strong global demand for the dollar, but this is not guaranteed forever. If the Federal Reserve were to absorb all bond issuance ( basically monetizing the debt), inflation expectations would rise sharply, leading to a currency crisis or higher interest rates. Zimbabwe and Weimar Germany are extreme examples of this.
U.S. essentially "exports" its debt due to its persistent trade deficits.
U.S. runs large trade deficits, meaning it imports more goods than it exports. Other countries (like China and Japan) accept U.S. dollars in exchange for their goods, and then reinvest those dollars into U.S. assets, primarily Treasury bonds. This has helped finance U.S. debt at low interest rates for decades.
If global confidence in U.S. debt declines, foreign demand for Treasuries could drop, leading to a weaker dollar, higher interest rates, and inflationary pressures.
All of your comments in this thread are misleading.
This creditor/debtor dichotomy is meaningless. It doesn’t change the fact that the debt is owed in dollars and can always be serviced. If foreign investors lose confidence in the US and sell off their treasuries, the central bank can just purchase them and nothing would change. In fact, that’s what Japan does, and that’s why they’re a net creditor. And no, this would not lead to inflation. Again, look at Japan for an empiric example.
I already wrote about how Japan is different from the US and why that changes everything.
> debt is owed in dollars and can always be serviced. If foreign investors lose confidence in the US and sell off their treasuries, the central bank can just purchase them and nothing would change
It changes everything for US citizens. Zimbabwe's debt is also serviced, but I'm not sure US citizens would like to pay one trillion dollars for bread and get cut off from the majority of products and resources that the US imports, because the dollar would be worth as much as the paper it was printed on. It would also mean that the whole stock market would collapse because no one would recycle the dollar anymore. It would be a devastating blow to the US economy. It's so obvious to anyone that knows anything about economy that at this point you are just spreading lies.
No, you didn’t explain how Japan is different. Because in fact it’s not. The key point is that a government that issues debt in its own currency can always service that debt, and this is NOT inflationary.
Zimbabwe’s inflation happened because the country had debt denominated in USD and CNY, along with massive political instability, a shrinking economy, and a war happening all at the same time. Couple that with a useless central bank and you have hyperinflation.
How is that in any way comparable to the US? It’s not. This is obvious to anyone arguing in good faith.
> The key point is that a government that issues debt in its own currency can always service that debt, and this is NOT inflationary.
Hmm. Let's follow your argument to its conclusion. Why stop at 300% of GDP? Why stop at 300 times GDP? It seems that even a small nation with a sovereign currency can eliminate all taxation, borrow an infinite amount of money, buy an infinite amount of stuff, make all of its citizens infinitely wealthy, service its debt with printed money forever, and prices and interest rates will both be unaffected. It's amazing, then, that no nation has yet taken advantage of this exploit!
I feel confident that is not right. I think it may be right that (marginally?) there is not a big difference whether a fixed amount of government spending is financed by taxation or debt, because printed dollars and t bills are so easily interchangeable. But it seems that you are trying to use this argument to prove that if these things are equivalent that they are (in any quantity!) harmless, and that's a non sequitur.
Of course that’s not what I’m arguing, please don’t straw man me.
The constraint on public spending is the amount of real resources that can be utilized. Productive utilization of resources is not inflationary. For example, if you have 10% unemployment, a government can hire those people to build infrastructure regardless of the debt ratio. On the other hand, if you issue public debt to purchase commodities that’s obviously inflationary.
But in either case, the constraint is real resources and inflation, not the debt ratio.
You asked why countries haven’t done this already? They have, it’s called quantitative easing and they do it in financial crises to absorb the productive capacity that the private market isn’t utilizing anymore.
>> Zimbabwe’s inflation happened because the country had debt denominated in USD and CNY, along with massive political instability, a shrinking economy, and a war happening all at the same time. Couple that with a useless central bank and you have hyperinflation.
No mention of velocity or the role of human behavior in an inflationary environment.
> Japan’s debt ratio is over 300%, and they’ve had no issues with...
I don't know what the fallacy of "something is the same along one dimension, therefore the situation along some other dimension(s) must be the same too" is called, but this is a clear example.
This doesn't make any sense. Crises planning should be a fundamental function of the government. Just exceptin that every crises puts us close to being ruined and eventually one will, but it's fine because with no crises were doing ok, is unacceptable
"Since COVID" is a bad baseline, I would draw a parallel with someone who's condition "stayed stable since they entered the hospital a few days ago". It is too recent and the situation pre-COVID was quite bad. The US is the most indebted entity [0] in history. But it is not obviously the most productive; since that title may sit with China now. It is a precarious position.
Complaining about the “national debt” is the clearest sign that someone does not understand economics.
What do you think happens if the debt goes up? Do you think the government is gonna go bankrupt? That’s literally not how it works.
Do you think inflation is gonna happen? Again, literally not how it works. In fact, too low public spending means you get deflation which is even worse than inflation.
Infinite free money hacks is literally how fiat currencies work.
The government wants the economy to operate at close to full capacity, so it creates money and spends it into the private sector.
Eventually that money makes it to individuals, who want to save some of that money. There’s also foreign agents that might want to hold on to your currency, and trade happening that means some of your money leaves your country.
If the government maintains steady spending, this money supply slowly dwindles, which leads to a shrinking economy.
So governments issue debt to offset that dwindling money supply. The catch is that spending that doesn’t create real resources is inflationary, so you have to spend money on things that eventually earn you more money.
At the end of the day, that’s the idea of macro economics. Spend enough to get your economy growing, while making sure inflation doesn’t go up too much. Which is why people that complain about debt have no idea what they’re talking about.
The reason Trump won was because “the economy is doing great since Joe Biden”, meant the billionaires tripled their wealth as mega corporations went from less than a trillion market cap to more than 3 trillion, while me and millions others fixed salaries went up 5% if you were fortunate.
Biden governed far too much as a center-right President, I agree. Meanwhile Trump had those same billionaires with front row seats at his coronation. So the situation will continue to get much worse.
Those billionaires didn’t choose to inflate the money supply. I have no issue with them having assets that go up in value. That just doesn’t mean the economy is doing great. The point is there is way too much spending, and this includes Trump, yet it seems like they really are trying to make a dent in our federal spending, and Musk going in and looking at USAID, is quite awesome.
Trumps net worth actually went down from being in office, and so far so has Elon’s, so I ain’t worried.
I don’t see how that’s relevant to the macro economics discussion, and I don’t see how Trumps tax cuts for billionaires are going to help you in any way.
If you don't see how that's relevant to the macro economics discussion, i don't see how the macro economics discussion is relevant.
We're sending in the young guns to save on government spending because trump won partly on "Biden ruined the economy". The government spending leads to the increase of government debt. Or is the debt coming from a separate source?
I think you're arguing against a position that not many people here hold - people aren't worried about bankruptcy so much as inflation.
My understanding is that the reason the USD is unusually resistant to inflation is that there's artificially high demand due to international demand for the currency as the global reserve currency.
But yeah, if that effect weakens (and the BRICS are trying to challenge the USD as reserve currency), then I think you'll see the USD weaken/inflation spike in response to large deficits.
> What do you think happens if the debt goes up? Do you think the government is gonna go bankrupt? That’s literally not how it works.
You're the one that has no idea what hes talking about.
Debt uncontrollably going up without something to balance it means exactly that. If the debt exceeds the GDP, which is where the US is clearly going, we are looking at a collapse of the US dollar and its global influence. Theres no telling what will happen after that because its unfathomable
This is also why the techbros are staging a coup on the US, so the US doesnt come for the billions when it goes bankrupts
Well, yes. Japan as a nation is a net creditor. Net creditor don't generally struggle when paying back their debts. The question of where the money will come from has an obvious answer. If the US was a net creditor then the story would be completely different.
The value of a currency has nothing to do with how that country’s economy is doing. It’s mostly a factor of international trade. That has nothing to do with debt ratios.
1. I don't think you have a theory for how it works.
> means you get deflation which is even worse than inflation
2. People regularly come up with this theory that prices dropping is a terrible thing. An extraordinary claim for which I've never seen an argument I accepted and the evidence is as thin as a rake. Typically the countries that experience the horrors of deflation go on to be unusually wealthy and prosperous - I'd like to see more of it. But it is easy to see why the governments would believe deflation is bad that since they are typically enormous debtors and inflation favours debtors.
Frankly I suspect that if prices go down all else equal most people will be better off and able to afford more stuff. Wild take, I know.
People who bring up this theory, bring the great depression as evidence, forgetting that the problem there was caused by the law forbidding to reduce salaries, which made prices going down equivalent to minimal wage going up, which of course leads to unemployment.
Given the confusion around, eg, the 2008 financial crisis I just flat out reject that there was 1 lesson in the 1930s that was so unambiguous that the debate is settled. It is a ridiculous claim. There was so much going on and so many people always pop up in a crisis trying to muddy the waters to get their preferred policy through. Look at the minimum wage debate - still unsettled despite what I would consider overwhelming evidence in theory and practice. And whatever anyone's personal beliefs, if that can't be settled there is no way at all that the inflation/deflation question has a firm answer from one event in the 1930s.
Especially given that "prices always up"="good" is counter-intuitive and I can't find anyone with a clear argument in favour of inflation. There is lots of gobbledegook and occasionally people who make arguments equivalent to holidays being bad because they reduce economic output. Which is an argument but not very persuasive, I'd prefer to optimise towards an end state where I get to live out a permanent comfortable holiday; even if the economic metrics go down. I like comfort.
Well if I want to talk about inflation we have things like the Nazis, Zimbabwe, a long list of collapses that countries never really recover from. But if we look up deflation... https://en.wikipedia.org/wiki/Deflation#Historical_examples
EU - Still to see the long term consequences, but it isn't obvious the deflation was the bad thing in the story.
Hong Kong - Jewel of Asia.
Ireland - Very high HDI and GDP ppp per capita.
Japan - Economic success story.
UK - Can't argue that they're a success! But their problems after WWI wasn't the deflation.
US - Some good some bad, lots to debate, but the latest episode (Great depression in the 1930s) set them up to conquer the world and establish the Not-An-Empire they have now. If that is a bad outcome I fear the good ones.
I'm not seeing the Zimbabwe equivalent. In fact it looks a lot like deflation is associated with - if not a precursor to - long term economic success and prosperity.
Is there an example where you can explain how the deflation actually led to economic success? The above feel like very distant correlations more than a result.
'prices dropping' often includes labor as well, since currency is primarily a medium of exchange.
I'm not arguing that deflation leads to economic success. I'm arguing the evidence that it is bad is nonexistent. Although it has some interesting interactions with the tax system and government policies.
If you go through the arguments, inflation/deflation are both mostly neutral because people just adjust their expectations by whatever they think the rate will be. In practice though inflation policy is typically masking money printing projects or policies that destroy wealth. And by reversing that, deflation is usually positive but only because it suggests that the political leadership at the time was interested in honest market signals rather than seizing an opportunity to conduct handouts.
> 'prices dropping' often includes labor as well, since currency is primarily a medium of exchange.
Inflation or deflation, by definition, doesn't impact how much someone can buy in real terms. Because wages and goods are theoretically changing at the same rate.
Deflation is bad because it’s literally your economy shrinking. It’s not prices dropping, it’s less spending across the board. Depending on your demographics you end up with huge unemployment numbers or a standard of living for the older generation that can’t be sustained by the new generation.
If you’re arguing a fringe point of view please make that clear up front. If I knew you think deflation is good I wouldn’t have ever replied.
And by the way, you say Japan is an economic success story because of deflation, but I guess you never bothered looking up their 300% debt ratio that they have been running for decades, exactly because they didn’t want deflation to ruin their economy.
> Deflation is bad because it’s literally your economy shrinking.
Well, this comment is off to a bad start. What about a very small economy of 1 widget that can be produced and sold for $2 per unit time, then a technological change that causes the equilibrium to move to 2x widgets for $1 apiece in over the same time? The real production of the economy has doubled, and experienced 50% price deflation. The same basic scenario can be developed at any economic size and complexity. No unemployment. No standard of living drop. Just people affording more stuff.
Deflation, in fact, is literally not the economy shrinking. It is a systemic reduction in prices.
> And by the way, you say Japan is an economic success story because of deflation, but I guess you never bothered looking up their 300% debt ratio that they have been running for decades, exactly because they didn’t want deflation to ruin their economy.
This is pretty typical of anti-deflation comments in my experience - what are you trying to say here? Countries manage to overwhelm themselves with high debts with inflationary monetary policy too; the problem - if there is one - is the borrowing of money. It is hard to end up in debt without borrowing money and investing it unproductively. That decision is independent of monetary policy.
And I didn't say Japan was an economic success because of deflation. There wasn't a "because".
> Inflation or deflation, by definition, doesn't impact how much someone can buy in real terms. Because wages and goods are theoretically changing at the same rate.
From your earlier post:
> Frankly I suspect that if prices go down all else equal most people will be better off and able to afford more stuff. Wild take, I know.
As you mention above, this isn't likely to actually be that different.
But:
>In practice though inflation policy is typically masking money printing projects or policies that destroy wealth
Inflation rewards moving money into goods, and deflation rewards moving money out of goods. Generally, an economy where money moves around is better than one where it sits idle. Yes, it does penalize saving cash (), which offends many puritan mindsets (including mine), but it rewards risk-taking and committing your currency towards capital, both of which tend to make the economy more productive.
() - So, if your 'wealth' is in currency, then inflation does devalue your wealth. But if your wealth is in capital, that capital should fluctuate with the currency, and inflation doesn't devalue that.
Heh, you noticed. I was being a bit sneaky in my word choice [0] there - the commonly used measure is the CPI [0] which doesn't include wages - so in practice it would often measure "deflation" which is really just prices going down due to technology improvements and people becoming better off. Think what has been happening in the tech world for however long. If not for pro-inflationary policy the overall economy would tend to stable prices except for massive drops in the cost of tech goods, leading to measured "deflation" (not really deflation but error in the measure) and people getting wealthier.
That was why I said "prices go down" instead of "deflation" - because the measure in practices is a price basket which doesn't directly include wages.
> But if your wealth is in capital, that capital should fluctuate with the currency, and inflation doesn't devalue that.
In the abstract, yes. In practice, after you factor in the interactions with capital gains tax it actually means there is a wealth tax (transaction tax? Extra tax on the principle, anyway) which is relatively punishing to anyone trying to save for their old age.
EDIT [0] With benefit of 24 hours hindsight, it would have been more proper to say "consumer prices" to distinguish the CPI from inflation.
>US debt as a percentage of GDP (i.e. our ability to pay off our debt)
US debt as a percentage of GDP doesn't demonstrate the continued ability to pay off the debt, since the ability to pay off the debt is dependent on that debt's interest. The issue with the debt in the current environment is that it is going to start rolling over into higher interest rates. If the debt is structured to pay higher interest then that lessens the ability to pay off the debt even if the debt as a percentage of GDP stays the same.
Some people have a lot of unexpressed sadness and anger and fear from the pandemic (and housing crisis before that) and are projecting it on to indirectly or totally unrelated things.
there are distributional impacts from crowding out and potential long term effects on AS, never to mention that the inflation risks are very real… debt is likely already politically constraining the fed right now
You're upgrading from a crisis that impoverishes a bunch of people to ... a crisis that impoverishes everyone. Unclear what the improvement was. And potentially literally how you get Hitlers running the government, inflation is one of those effects that breeds political instability.
You said we - possibly there is a flaw in my grammer. How should I be referring to this "we"? Isn't the "I" to "We" transform applied to "you" still "you"? I thought "you" could be plural for groups.
I don't think going from "we" to "they" would be appropriate although in hindsight it might have been a better choice.
