3 ms·

There are a lot of misconceptions about the nature of national debt. You should read about Modern Money Theory. https://www.youtube.com/watch?v=TDL4c8fMODk http

There are a lot of misconceptions about the nature of national debt. You should read about Modern Money Theory. https://www.youtube.com/watch?v=TDL4c8fMODk https://www.youtube.com/watch?v=TDL4c8fMODk https://www.nytimes.com/2017/10/05/opinion/deficit-tax-cuts-trump.html https://www.nytimes.com/2017/10/05/opinion/deficit-tax-cuts-... Remember, the US is monetarily sovereign. The government has the ability to create and destroy US dollars. Things you don't need to worry about: - Default. If it happens, it would be a purely political move, not an economic or financial one. The US federal government can always afford payments. A check from the federal government never bounces. They can always just credit bank accounts. In fact, the government can abolish the debt instantly. They can simply redeem all Treasuries with bank reserves. - Interest rates. The Federal reserve controls short-term interest rates. And the supply of long-term Treasuries doesn't impact interest rates: increased government deficits lead to an increase in the size of bank reserves which lead to an increase in demand in Treasury bonds that matches the increased supply, since banks want to swap low-paying reserves with higher-paying debt instruments. - China. Treasuries are like a savings account, while bank reserves are like a checking account. If China or pension funds (or anyone) sell off their Treasuries, it's akin to transferring money from a savings account to a checking account. What's the harm in that? And why would they do that? That would decrease their interest income. Here are real concerns about ballooning national debt: - Inflation. This can happen since the government is stimulating aggregate demand, in a classical Keynesian way. But it hasn't happened for a while, and if it does, the government can raise taxes. That shrinks the debt and decreases aggregate demand. - Foreign exchange. With all the new USD floating around (because government spending = money creation and taxation = money destruction), there's a risk of a weaker dollar. But that has its upsides. And China's currency peg at least keeps the prices of Chinese goods fixed. - Spending it unwisely. The government can't buy everone a pony. There aren't enough ponies in the world, and it would wreck the pony market.

Gustomaximus 9y ago
Thanks for the comprehensive answer. From some of your points I see it differently; NYT article: This comes from an economist that loves to push MMT. I actually studied economies under the guy that coined this term. He's a super smart guy but I dont agree with it in the theory probably works in a bubble. It seems a classic case of academia vs reality. Very unusual for economists haha. I'd suggest you read some criticisms of MMT if you haven't before you push it as a truism. - Default: This attitude is cant happen to a monetarily sovereign nation is a little ignorant of history. Sure US can print/credit but then inflation. And being the worlds reserve currency give a bunch of leeway but this isnt a fixed variable, and is increasingly under threat. End of the day it's a confidence point and the US can lose this creating a run domestically and/or internationally. - Interest rates are only under control while the market has confidence they will be repaid. Sure some FI's are held to a certain level of treasuries but plenty of existing market demand can leave, taking with it the Feds ability to control rates. At the end of the day if the risk/reward ratio get outta whack the fed will lose their ability to control rates at any scale and especially when they attempt to recycle existing debt. - China. I dont understand your logic here. It's a supply and demand market. If its (do I understanding you?) as easy as the Feb buying up any excess demand that is a limited game. The FED probably did well with QE but that's a limited tool, needs to unwind at some point, and we wont truly know the effect for some time. Inflation: Possibly. What if we hit stagflation? And US has a strong resistance to tax increases. There is a possibility for US to inflate their way out of this debt. It would need to be well managed for many decades which seems low probability with the current political management. Don't get me wrong. I am not saying default will happen. We'd needs some serious events to trigger this. I do feel it is a possibility and am amazed some people feel it's in the risk likelihood of a meteor strike.
- jganetsk 9y ago
  - Default: Yes it can happen, but it's voluntary and done politically. It's not a technical requirement. The US government can always service the debt. Here's an article from the Economist, "Countries rarely default on their debt" https://www.economist.com/news/finance-and-economics/21732808-venezuela-exception-rule-countries-rarely-default-their-debts https://www.economist.com/news/finance-and-economics/2173280... - Interest rates: the Fed controls overnight interest rates, afaik. But what happens with long-term rates is that the Fed uses those bonds as a "reserve drain". https://www.nakedcapitalism.com/2010/08/why-treasury-bonds-do-not-fund-our-federal-deficit.html https://www.nakedcapitalism.com/2010/08/why-treasury-bonds-d... Long term interest rates have been going down for decades, despite the size of the debt consistently going up. - China: the point is that they already have over $1 trillion in Treasuries, what is the difference between holding Treasuries vs holding cash? It's just two different kinds of bank account at the Federal Reserve. And the former pays interest, so why convert to the latter? They would only do so to spend it. Which either means a trade surplus for the USA (a boon for the economy) or converting their holdings into another currency, which just means transferring ownership of the Treasuries to someone else. In both cases, inflation and foreign exchange rate are the biggest risk. Do you think there is interest rate risk here? As for the Fed, I don't see limits to their powers. - Inflation: I see the causality in reverse. Increased government debt leads to inflation (because government debt is money, money supply has gone up, and aggregate demand through government spending has gone up) rather than the government trying to inflate to pay off the debt. Stagflation in the 70s was caused by a supply shock (oil prices). If inflation happens because of the money supply, then the government can fix that problem by shrinking the money supply. If it happens for other reasons, then the government needs to address those issues. What is the problem with the debt then? How is that a concern?

Gustomaximus 9y ago

Thanks for the comprehensive answer. From some of your points I see it differently; NYT article: This comes from an economist that loves to push MMT. I actually studied economies under the guy that coined this term. He's a super smart guy but I dont agree with it in the theory probably works in a bubble. It seems a classic case of academia vs reality. Very unusual for economists haha. I'd suggest you read some criticisms of MMT if you haven't before you push it as a truism. - Default: This attitude is cant happen to a monetarily sovereign nation is a little ignorant of history. Sure US can print/credit but then inflation. And being the worlds reserve currency give a bunch of leeway but this isnt a fixed variable, and is increasingly under threat. End of the day it's a confidence point and the US can lose this creating a run domestically and/or internationally. - Interest rates are only under control while the market has confidence they will be repaid. Sure some FI's are held to a certain level of treasuries but plenty of existing market demand can leave, taking with it the Feds ability to control rates. At the end of the day if the risk/reward ratio get outta whack the fed will lose their ability to control rates at any scale and especially when they attempt to recycle existing debt. - China. I dont understand your logic here. It's a supply and demand market. If its (do I understanding you?) as easy as the Feb buying up any excess demand that is a limited game. The FED probably did well with QE but that's a limited tool, needs to unwind at some point, and we wont truly know the effect for some time. Inflation: Possibly. What if we hit stagflation? And US has a strong resistance to tax increases. There is a possibility for US to inflate their way out of this debt. It would need to be well managed for many decades which seems low probability with the current political management. Don't get me wrong. I am not saying default will happen. We'd needs some serious events to trigger this. I do feel it is a possibility and am amazed some people feel it's in the risk likelihood of a meteor strike.

jganetsk 9y ago
- Default: Yes it can happen, but it's voluntary and done politically. It's not a technical requirement. The US government can always service the debt. Here's an article from the Economist, "Countries rarely default on their debt" https://www.economist.com/news/finance-and-economics/21732808-venezuela-exception-rule-countries-rarely-default-their-debts https://www.economist.com/news/finance-and-economics/2173280... - Interest rates: the Fed controls overnight interest rates, afaik. But what happens with long-term rates is that the Fed uses those bonds as a "reserve drain". https://www.nakedcapitalism.com/2010/08/why-treasury-bonds-do-not-fund-our-federal-deficit.html https://www.nakedcapitalism.com/2010/08/why-treasury-bonds-d... Long term interest rates have been going down for decades, despite the size of the debt consistently going up. - China: the point is that they already have over $1 trillion in Treasuries, what is the difference between holding Treasuries vs holding cash? It's just two different kinds of bank account at the Federal Reserve. And the former pays interest, so why convert to the latter? They would only do so to spend it. Which either means a trade surplus for the USA (a boon for the economy) or converting their holdings into another currency, which just means transferring ownership of the Treasuries to someone else. In both cases, inflation and foreign exchange rate are the biggest risk. Do you think there is interest rate risk here? As for the Fed, I don't see limits to their powers. - Inflation: I see the causality in reverse. Increased government debt leads to inflation (because government debt is money, money supply has gone up, and aggregate demand through government spending has gone up) rather than the government trying to inflate to pay off the debt. Stagflation in the 70s was caused by a supply shock (oil prices). If inflation happens because of the money supply, then the government can fix that problem by shrinking the money supply. If it happens for other reasons, then the government needs to address those issues. What is the problem with the debt then? How is that a concern?