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The US has a huge trick they can pull with debt. The US borrows in its own currency. Ultimately, if the US government debt burden becomes to large it can choos

• stephen_g 9y ago
  Most advanced economies are in a similar position - having their bonds denominated in their own currency and having a central bank that can never run out of that currency. The Eurozone are an exception, which is probably going to cause the currency to eventually collapse, but that's another story. There aren't really 'huge costs' to paying down debt with new money. People assume that it would cause problems, but when you look into the mechanics of how both central banks and commercial banks work, some things become clearer. The first thing to note is that the money supply is actually constantly expanding, even without the central bank creating money, because new money is also created when central banks issue loans (see [1] for an explanation from the Bank of England, central bank of the UK). So money creation by itself is not inherently inflationary. Inflation actually happens when aggregate demand over some period is greater than the amount of goods and services produced in that period. Money creation generally does add to aggregate demand, but so does all spending in general (i.e. increasing the velocity of money). So, if money creation is properly managed (to keep it from adding too much to aggregate demand), then it can be done without any inflationary consequences. But that only applies for a Government creating money to spend. Changing bonds ("debt") into central bank reserves is actually asset-neutral. The bond is an asset worth a certain amount that can already be bought and sold. Replacing it with central bank reserves makes it more liquid, but doesn't actually add new assets into the system. Of course, there's not much point to paying down bonds like that. Since the Government can't run out of its own currency, their bonds are basically meaningless. Since the gold standard was dropped, they exist mainly because the private sector likes having a zero-risk asset to invest in. What really needs to happen is to stop pretending that bonds and taxes actually finance Government spending, which hasn't been the case since 1971... 1. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte...
• dragonwriter 9y ago
  > The US borrows in its own currency. Ultimately, if the US government debt burden becomes to large it can choose to print money to print itself out of debt. A major reason independent central banks exist and have monetary policy entrusted to them is to assure lenders that this—a common problem when fiscal and monetary policy are controlled in the same place, which is a short-term fix foenthe government thst crushes it's long-term credibility—won't happen. > There are huge costs involved in pulling these sorts of tricks, but it's far cheaper than a nuclear confrontation with China. Debatable. It's probably cheaper for the US in the short rub than a total nuclear exchange with China, but “nuclear confrontation” is a broader concept encompassing many less-costly potential outcomes. And it has pretty enormous consequences that include, even in the intermediate term, a great escalation of security risks. Not that war with China over debt, directly, is the alternative (war with China over resources as both countries try to secure growth is more likely, though.)
  • int_19h 9y ago
    > A major reason independent central banks exist and have monetary policy entrusted to them You mean to say, "delegated"? Because that's the nature of the relationship between the state and its central bank in practice, and just like any other delegated authority, it can be revoked.