4 ms·

For a long time I couldn't wrap my head around why defecits matter to the US when we print our currency. To be honest I still don't fully understand the hand wr

For a long time I couldn't wrap my head around why defecits matter to the US when we print our currency. To be honest I still don't fully understand the hand wringing over a balanced budget and reading more about modern monetary theory is leading me to believe that for a superpower which issues it's own currency the defecit is more of a political issue that a concrete one. The defecit just keeps ballooning but the only thing stopping the US government from running are self imposed restrictions on debt (the "debt ceiling"). The US is not a company, and it's not a normal household, why does the budget matter?

tanderson92 8y ago
It doesn't matter. And you're right, MMT is purely descriptive.
tropo 8y ago
Neither extreme viewpoint is good. On the one hand, you are very correct to point out that the US is not a company or household, and that the US is a superpower that prints currency. Too many people ignore this. Another point, shared with less-sovereign governments, is that the US can impose tariffs and fees and other taxes. On the other hand, the deficit leads to interest payments on debt. Defaulting crashes the economy, as does going to extremes printing money.
drewrv 8y ago
The US can also borrow at really good rates. If a business could borrow that cheaply it would be a no-brainer to take debt and build a new factory or whatever. Similarly, it makes a ton of sense for the government to borrow and then invest in future economic growth.
- nemo846 8y ago
  Hell of a gamble ... Correct me if I’m wrong. The current administration cuts the tax rate and borrows to make up for the shortfall in tax revenue. All this is in hopes that the economy grows enough such that the reduce tax rate can support government spending and pay back the debt + interest. If the economy goes south for whatever reason (e.g. China imploding, another bubble pops) ...
  - spiralx 8y ago
    What crisis would be so large that the US would be unable to keep up with it's repayments? Especially when you consider that it can borrow more to repay current debt instruments i.e. issue more Treasury bills, notes and bonds. Plus other countries always need to borrow dollars because it's what oil is sold in, which is one of the things that makes US Government debt considered the baseline or "risk-free" investment, with any other investment having increased risk, and accordingly increased reward.
nknezek 8y ago
The deficit mainly matters because we have to pay interest on the loans we take out. If the rates are good, it's actually a great investment. If the rates are bad, it hamstrings future growth, because now the budget is spent paying back old loans instead of building new things. Well, why can't we just print money? We can, but it runs the risk of inflation. Inflation is historically low, so yes -- we could totally just print a bunch of money to pay back our debts with relatively little risk of inflation in the short term. Essentially, debt doesn't matter, except that we have to pay interest. Interest doesn't matter because we print money, except that it might cause inflation. Taxes "destroy" money to dampen inflation. Thus, we can pay off our loans, but that might cause inflation, which might require us to raise taxes not to repay the loans, but to prevent inflation.
- 40acres 8y ago
  Yes but we also have an instution that controls interest rates, The Federal Reserve! As a poster mentioned earlier, the US also gets really good rates. Turns out being a superpower helps your credit score. There has been lots of ink spilled with respect to lagging productivity gains and I think the at this point concern about the budget may be a factor. There are enough big problems that can be addressed (infrastructure, health care, homes, etc.) if there was enough government spending to spark to investment and growth. I'm starting to believe that the real balancing act is a matter of controlling inflation rather than controlling the defecit.
- mercutio2 8y ago
  In other words, we don't have to pay interest, we choose to, because inflation would almost certainly rise substantially if we printed a ton of money, and we're cautious (some might say overcautious) about inflation. Of course there are some head-scratching rationalizations going around about why gargantuan deficits are good now, a decade into one of the longest economic expansions in living memory, but would have been bad to do when proposed in response to one of the deepest recessions in living memory.
MarkMc 8y ago
Yes, the US government could simply print all the money it needs then pay off all it's creditors. But how would those creditors respond? They would refuse to lend in US dollars in future, and the US government and private companies would be forced to borrow in a foreign currency. Net result is that the US loses a valuable asset - the ability to borrow in its own currency - and becomes more like Turkey or Argentina.
- spiralx 8y ago
  If creditors are paid off, why would that discourage them from making future loans? Creditors surely want to get their money back, and countries that have trouble borrowing money are those that don't make debt repayments, not those that do.
  - diggernet 8y ago
    Because printing more dollars reduces the value of each one, so they've been paid back with dollars worth less than the ones they loaned out.
    - spiralx 8y ago
      But even if that's true - does printing more dollars affect the price of crude oil on the international markets for instance - if the interest accrued on those loans exceeds the loss of value due to inflation, then they're still ahead overall. And that's the sort of thing that people take into account already when making investments. And that's not considering that the same would happen with any alternative investments, nor the fact that risk is an important part of an investment calculation, and US debt is considered "risk-free".
      - diggernet 8y ago
        This is all true, but look at the context of discussion... Why would someone be discouraged from making future loans if the government printed money for the purpose of paying them off? Because the government took action which directly and intentionally reduced the return on their investment beyond what they anticipated in their original analysis. That will effect their analysis for future loans, reducing the appeal of those loans. Thus discouraging them.
mwfunk 8y ago
Because printing more money isn't an option for one thing. It might be a short term fix for some things, but in the long run it just devalues the currency and lowers the US credit rating, with the worst case scenario being hyperinflation. Also, there's the question of who owns all that debt that the US relies on for its continued existence. For example, China owns a big chunk of it, like ~$1.2 trillion. They buy tons of US Treasury bonds because they're considered a safe investment. China gives the US a bunch of money up front, and the US has to give China a bunch more money back in the future, like over the course of 10 years. A lot of Americans also own US bonds, which help fund the debt, but they own them because they're a safe investment, not because they want to lend the government money. So, as long as the US is in debt, it's forced to rely on other countries and its own credit rating to keep it going. That's a problem. And at some point, the sheer amount of debt will lower that credit rating, making those US bonds less of a safe investment, and that would be the tipping point at which everything starts falling apart. It will be much harder to fund deficit spending, which could snowball into printing money, then fast forward 5 years and boom, zombie apocalypse (or at least a potential Venezuela or Weimar Republic type situation). TL;DR: the deficit is an existential threat the US if it's not kept under control.
- spiralx 8y ago
  The amount of debt isn't a problem for a country's credit rating as long as repayments are made on time, that's the same as for individual borrowing and their credit score. You have to explain why the US would fail to repay its debts before you can claim there's a problem. China owns just 5.3% of US debt, only slightly more than Japan, which owns 4.8% of it. Most US debt is owned by government programmes such as Social Security.

tanderson92 8y ago

It doesn't matter. And you're right, MMT is purely descriptive.

tropo 8y ago

Neither extreme viewpoint is good. On the one hand, you are very correct to point out that the US is not a company or household, and that the US is a superpower that prints currency. Too many people ignore this. Another point, shared with less-sovereign governments, is that the US can impose tariffs and fees and other taxes. On the other hand, the deficit leads to interest payments on debt. Defaulting crashes the economy, as does going to extremes printing money.

drewrv 8y ago

The US can also borrow at really good rates. If a business could borrow that cheaply it would be a no-brainer to take debt and build a new factory or whatever. Similarly, it makes a ton of sense for the government to borrow and then invest in future economic growth.

nemo846 8y ago
Hell of a gamble ... Correct me if I’m wrong. The current administration cuts the tax rate and borrows to make up for the shortfall in tax revenue. All this is in hopes that the economy grows enough such that the reduce tax rate can support government spending and pay back the debt + interest. If the economy goes south for whatever reason (e.g. China imploding, another bubble pops) ...
- spiralx 8y ago
  What crisis would be so large that the US would be unable to keep up with it's repayments? Especially when you consider that it can borrow more to repay current debt instruments i.e. issue more Treasury bills, notes and bonds. Plus other countries always need to borrow dollars because it's what oil is sold in, which is one of the things that makes US Government debt considered the baseline or "risk-free" investment, with any other investment having increased risk, and accordingly increased reward.

nknezek 8y ago

The deficit mainly matters because we have to pay interest on the loans we take out. If the rates are good, it's actually a great investment. If the rates are bad, it hamstrings future growth, because now the budget is spent paying back old loans instead of building new things. Well, why can't we just print money? We can, but it runs the risk of inflation. Inflation is historically low, so yes -- we could totally just print a bunch of money to pay back our debts with relatively little risk of inflation in the short term. Essentially, debt doesn't matter, except that we have to pay interest. Interest doesn't matter because we print money, except that it might cause inflation. Taxes "destroy" money to dampen inflation. Thus, we can pay off our loans, but that might cause inflation, which might require us to raise taxes not to repay the loans, but to prevent inflation.

40acres 8y ago
Yes but we also have an instution that controls interest rates, The Federal Reserve! As a poster mentioned earlier, the US also gets really good rates. Turns out being a superpower helps your credit score. There has been lots of ink spilled with respect to lagging productivity gains and I think the at this point concern about the budget may be a factor. There are enough big problems that can be addressed (infrastructure, health care, homes, etc.) if there was enough government spending to spark to investment and growth. I'm starting to believe that the real balancing act is a matter of controlling inflation rather than controlling the defecit.
mercutio2 8y ago
In other words, we don't have to pay interest, we choose to, because inflation would almost certainly rise substantially if we printed a ton of money, and we're cautious (some might say overcautious) about inflation. Of course there are some head-scratching rationalizations going around about why gargantuan deficits are good now, a decade into one of the longest economic expansions in living memory, but would have been bad to do when proposed in response to one of the deepest recessions in living memory.

MarkMc 8y ago

Yes, the US government could simply print all the money it needs then pay off all it's creditors. But how would those creditors respond? They would refuse to lend in US dollars in future, and the US government and private companies would be forced to borrow in a foreign currency. Net result is that the US loses a valuable asset - the ability to borrow in its own currency - and becomes more like Turkey or Argentina.

spiralx 8y ago
If creditors are paid off, why would that discourage them from making future loans? Creditors surely want to get their money back, and countries that have trouble borrowing money are those that don't make debt repayments, not those that do.
- diggernet 8y ago
  Because printing more dollars reduces the value of each one, so they've been paid back with dollars worth less than the ones they loaned out.
  - spiralx 8y ago
    But even if that's true - does printing more dollars affect the price of crude oil on the international markets for instance - if the interest accrued on those loans exceeds the loss of value due to inflation, then they're still ahead overall. And that's the sort of thing that people take into account already when making investments. And that's not considering that the same would happen with any alternative investments, nor the fact that risk is an important part of an investment calculation, and US debt is considered "risk-free".
    - diggernet 8y ago
      This is all true, but look at the context of discussion... Why would someone be discouraged from making future loans if the government printed money for the purpose of paying them off? Because the government took action which directly and intentionally reduced the return on their investment beyond what they anticipated in their original analysis. That will effect their analysis for future loans, reducing the appeal of those loans. Thus discouraging them.

mwfunk 8y ago

Because printing more money isn't an option for one thing. It might be a short term fix for some things, but in the long run it just devalues the currency and lowers the US credit rating, with the worst case scenario being hyperinflation. Also, there's the question of who owns all that debt that the US relies on for its continued existence. For example, China owns a big chunk of it, like ~$1.2 trillion. They buy tons of US Treasury bonds because they're considered a safe investment. China gives the US a bunch of money up front, and the US has to give China a bunch more money back in the future, like over the course of 10 years. A lot of Americans also own US bonds, which help fund the debt, but they own them because they're a safe investment, not because they want to lend the government money. So, as long as the US is in debt, it's forced to rely on other countries and its own credit rating to keep it going. That's a problem. And at some point, the sheer amount of debt will lower that credit rating, making those US bonds less of a safe investment, and that would be the tipping point at which everything starts falling apart. It will be much harder to fund deficit spending, which could snowball into printing money, then fast forward 5 years and boom, zombie apocalypse (or at least a potential Venezuela or Weimar Republic type situation). TL;DR: the deficit is an existential threat the US if it's not kept under control.

spiralx 8y ago
The amount of debt isn't a problem for a country's credit rating as long as repayments are made on time, that's the same as for individual borrowing and their credit score. You have to explain why the US would fail to repay its debts before you can claim there's a problem. China owns just 5.3% of US debt, only slightly more than Japan, which owns 4.8% of it. Most US debt is owned by government programmes such as Social Security.