5 ms·

Modern monetary theory is the only one that can adequately explain why it's not a problem in my opinion. The kind of people who say that the US's debt is total

Modern monetary theory is the only one that can adequately explain why it's not a problem in my opinion. The kind of people who say that the US's debt is totally going to be a problem any year now have generally being saying that for years, as well as saying that about Japan's since the early 90's. But MMT proposes that a monetarily sovereign currency issuer (like the US, UK, Japan, Australia, New Zealand, etc. but not Euro-using countries, or anybody with a gold standard, fixed exchange rates etc.) actually have the ability to service any debt denominated in their own currencies, and analysis to pretty confidently say that it would not be inflationary to just pay them out (i.e by money creation). The inflation risk was at the time when the spending of the bond money happened, so paying them out with new money is asset neutral - the only difference is it just gives the bond-holder a more liquid asset. Then there are other useful tools like sectoral balances, etc. that help explain the links between one of the things that really matters (private debt) and how it relates to Government spending and trade surplus/deficit. A few of the twelve or so people who accurately described the great recession a few years before it happened used this method at the core (e.g. Keen, Godley). It flies pretty hard in the face of conventional economic wisdom, but I haven't yet found an economic theory that holds up so strongly to real world observation, i.e. in explaining why Greece has huge debt problems but not Germany (Eurozone, but trade surplus) or the US (monetarily sovereign), and why Venezuela and Zimbwabe have their problems (debt denominated in foreign currencies, supply shocks, etc.) vs. Japan (monetarily sovereign) while they seem to do similar things, etc.

mikekchar 8y ago
The thing is that Japan is actually in a deflationary period. You can easily pay debt with increased money supply in that scenario. Similarly, in Japan the debt is owned by the people of Japan and a big question is whether or not that debt ever comes due. There is an ageing population (which means people will want their money back), but there is also no exemption on inheritance tax. Anybody who dies with money in the post office (which lends all its assets to the government) is essentially forgiving the debt for 30% of that money. Japan has also historically had very low taxes (for example very low value added tax) and this is slowly being corrected. It's placing itself in a better position to pay back debt (at the expense of the economy). Given that, I'm not really sure that Japan is a good example. The US, as well, is in a weird space. China has been quite keen to buy up US debt. This is propping up the US dollar, which I think is an important strategy for Chinese growth. However, I expect the other shoe to drop at some point. Once the Chinese economy is strong enough that they don't want to be the "cheap manufacturing country for the world" (see Japan and South Korea for other examples of this), I suspect they will drop US debt like a hot potato, favouring strong buying power over strong selling power. If the shift their economy and compete head to head with the US in the "value add" sector, I think that debt may cause significant problems. But this is complicated stuff and I really don't know what I'm talking about :-) It's fun to speculate, though.
- AlexCoventry 8y ago
  > Once the Chinese economy is strong enough that they don't want to be the "cheap manufacturing country for the world", I suspect they will drop US debt like a hot potato It's also a huge bargaining chip. If China dumped a trillion dollars of US financial instruments at firesale prices over the course of a year, that would cause a lot of mayhem.
  - refurb 8y ago
    But why would they do that? It makes no sense. It’s like buying a car from a friend then turning around and selling it for a dollar. You hurt yourself more than you hurt the other person.
    - michaelt 8y ago
      Same reason you might fire a $65,000 missile at a $500 truck: Because despite the greater harm to yourself, you believe you can take it and they can't.
      - conanbatt 8y ago
        China does not have that level of wealth
  - hak8or 8y ago
    Not really. China holds a very small portion (less than 10%) of USA debt. https://goo.gl/images/e6Jmrb https://goo.gl/images/e6Jmrb
  - smsm42 8y ago
    > I suspect they will drop US debt like a hot potato I mean they suddenly decide that the asset they bought in trillions as safest investment available around is suddenly worthless - and not only try to hide it, but actually loudly proclaim that all their holding are worthless (I imagine so that it would be easier to sell them at the best price?) I don't see China doing something like that. First, they would need to find a reason why US debt has become worse investment than yesterday - and second, even if they find this reason, they won't ever "drop it like hot potato" - that would be a suicide (in Chinese conditions, probably a literal one for somebody that would cause such loss of billions to the state). > If China dumped a trillion dollars of US financial instruments at firesale prices over the course of a year, that would cause a lot of mayhem. Why would they? Other than collective insanity, there'd be no reason for such behavior.
AlexCoventry 8y ago
> it would not be inflationary to just pay them out That depends on what the creditors do with the money. If they keep it in a bank account, the effect on prices is minimal. If they go out and buy a lot of goods and services or financial instruments like stocks, of course that will inflate prices.
pjc50 8y ago
Exactly this. MMT works fine for self-denominated debt. The classic element of currency crises and hyperinflation is always that you can't print foreign currency: if your trade+investment balance is bad enough, imported items become more and more scarce relative to local ones. This crucially includes oil.

mikekchar 8y ago

The thing is that Japan is actually in a deflationary period. You can easily pay debt with increased money supply in that scenario. Similarly, in Japan the debt is owned by the people of Japan and a big question is whether or not that debt ever comes due. There is an ageing population (which means people will want their money back), but there is also no exemption on inheritance tax. Anybody who dies with money in the post office (which lends all its assets to the government) is essentially forgiving the debt for 30% of that money. Japan has also historically had very low taxes (for example very low value added tax) and this is slowly being corrected. It's placing itself in a better position to pay back debt (at the expense of the economy). Given that, I'm not really sure that Japan is a good example. The US, as well, is in a weird space. China has been quite keen to buy up US debt. This is propping up the US dollar, which I think is an important strategy for Chinese growth. However, I expect the other shoe to drop at some point. Once the Chinese economy is strong enough that they don't want to be the "cheap manufacturing country for the world" (see Japan and South Korea for other examples of this), I suspect they will drop US debt like a hot potato, favouring strong buying power over strong selling power. If the shift their economy and compete head to head with the US in the "value add" sector, I think that debt may cause significant problems. But this is complicated stuff and I really don't know what I'm talking about :-) It's fun to speculate, though.

AlexCoventry 8y ago
> Once the Chinese economy is strong enough that they don't want to be the "cheap manufacturing country for the world", I suspect they will drop US debt like a hot potato It's also a huge bargaining chip. If China dumped a trillion dollars of US financial instruments at firesale prices over the course of a year, that would cause a lot of mayhem.
- refurb 8y ago
  But why would they do that? It makes no sense. It’s like buying a car from a friend then turning around and selling it for a dollar. You hurt yourself more than you hurt the other person.
  - michaelt 8y ago
    Same reason you might fire a $65,000 missile at a $500 truck: Because despite the greater harm to yourself, you believe you can take it and they can't.
    - conanbatt 8y ago
      China does not have that level of wealth
- hak8or 8y ago
  Not really. China holds a very small portion (less than 10%) of USA debt. https://goo.gl/images/e6Jmrb https://goo.gl/images/e6Jmrb
- smsm42 8y ago
  > I suspect they will drop US debt like a hot potato I mean they suddenly decide that the asset they bought in trillions as safest investment available around is suddenly worthless - and not only try to hide it, but actually loudly proclaim that all their holding are worthless (I imagine so that it would be easier to sell them at the best price?) I don't see China doing something like that. First, they would need to find a reason why US debt has become worse investment than yesterday - and second, even if they find this reason, they won't ever "drop it like hot potato" - that would be a suicide (in Chinese conditions, probably a literal one for somebody that would cause such loss of billions to the state). > If China dumped a trillion dollars of US financial instruments at firesale prices over the course of a year, that would cause a lot of mayhem. Why would they? Other than collective insanity, there'd be no reason for such behavior.

AlexCoventry 8y ago

> it would not be inflationary to just pay them out That depends on what the creditors do with the money. If they keep it in a bank account, the effect on prices is minimal. If they go out and buy a lot of goods and services or financial instruments like stocks, of course that will inflate prices.

pjc50 8y ago

Exactly this. MMT works fine for self-denominated debt. The classic element of currency crises and hyperinflation is always that you can't print foreign currency: if your trade+investment balance is bad enough, imported items become more and more scarce relative to local ones. This crucially includes oil.