3 ms·

From my understanding, this logic is incorrect. Debt is not serviced from GDP. Debt is serviced by printing free cash (which raises inflation rates). And debt

From my understanding, this logic is incorrect. Debt is not serviced from GDP. Debt is serviced by printing free cash (which raises inflation rates). And debt buyers buy it exactly because of inflation, with the majority of the debt actually being held by US funds (pension, endowments, etc) as a way to escape inflation with very little risk. So this is a sort of perpetual self-balancing feedback loop. Even if the economy will go down, all of this capital still needs to be stored in some non-depreciating form. And government can always just increase inflation by simply printing more cash to service debt. In a way, funds are also very much dependent on the government and are happy to give money in exchange for escaping inflation. And it’s government that controls the model properties. I guess that is until there’s another super-stable government and holders can start buying their debt instead (not sure if this is regulated or not). And I guess this is a major reason for the US to have a global monopoly on stability and try to actively destabilize emerging global powers once in a while to worsen their debt risk profiles. I’m not an expert, so please correct me if there’s a flaw in this logic.

opportune 4y ago
Money is fungible so debt can be considered serviced by whatever portion of the federal budget comes from taxes vs more debt. With no deficit spending it would be 100% taxes. With no taxes it’d be 100% more debt. It’s fine to service debt with more debt if the tax base grows faster than the debt load. When you raise interest rates the debt load goes up quickly though, faster than the tax base. If you issue too much debt the only way to repay it after a certain point is more debt, which increases the monetary base, which leads to inflation. We are not at that point, but we are at the point where something has to give - either rates, government spending, or taxes - to reduce inflation. Inflation is considered bad because nobody wants to use a currency with too much inflation. Sure the government can always print more money (actually when it’s “printed” it’s the Federal Reserve buying debt from the government with money created de novo) but runaway inflation is one of the worst possible outcomes, and past a certain point becomes the only option. I don’t know exactly what other points you are trying to make but it’s not true that this is self-balancing. The balancing is done by the Federal Reserve in concert with the rest of the government (who set taxes and spending) through interest rates and open market operations. There is also not an infinite capacity for US debt at the rates the Fed wants which is why the Fed has to buy the debt itself sometimes.

opportune 4y ago

Money is fungible so debt can be considered serviced by whatever portion of the federal budget comes from taxes vs more debt. With no deficit spending it would be 100% taxes. With no taxes it’d be 100% more debt. It’s fine to service debt with more debt if the tax base grows faster than the debt load. When you raise interest rates the debt load goes up quickly though, faster than the tax base. If you issue too much debt the only way to repay it after a certain point is more debt, which increases the monetary base, which leads to inflation. We are not at that point, but we are at the point where something has to give - either rates, government spending, or taxes - to reduce inflation. Inflation is considered bad because nobody wants to use a currency with too much inflation. Sure the government can always print more money (actually when it’s “printed” it’s the Federal Reserve buying debt from the government with money created de novo) but runaway inflation is one of the worst possible outcomes, and past a certain point becomes the only option. I don’t know exactly what other points you are trying to make but it’s not true that this is self-balancing. The balancing is done by the Federal Reserve in concert with the rest of the government (who set taxes and spending) through interest rates and open market operations. There is also not an infinite capacity for US debt at the rates the Fed wants which is why the Fed has to buy the debt itself sometimes.