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Experts and laypeople (and the press) will go on and on and on about national deficits, but what exactly is it that they are afraid of? It seems to me that the

by p-e-w 3y ago

Experts and laypeople (and the press) will go on and on and on about national deficits, but what exactly is it that they are afraid of? It seems to me that the past decades have convincingly demonstrated that countries really can keep running up debts basically forever, and nothing particularly problematic ever actually happens, except in a few cases where the economy overall is in an extremely bad shape for a variety of unrelated reasons. Can someone with more knowledge enlighten me what all the fuss is about?

Grimburger 3y ago
> nothing particularly problematic ever actually happens, except in a few cases where the economy overall is in an extremely bad shape for a variety of unrelated reasons. Quite sure you answered your own question here. Survivorship bias isn't a valid argument. Lebanon, Greece, Pakistan, Turkey all come to mind in the last decade, all with unsustainable amounts of debt. The modern monetary system is a faith based system which hands leeway to governments to create and destroy supply at will. When people lose faith it all collapses very quickly, the failure modes are never slow. The relatively small Silicon Valley Bank is a great example of this and the systemic collapse in confidence of banking.
- p-e-w 3y ago
  Sovereign defaults are very rare events outside of banana republics. It's not survivorship bias so much as it simply doesn't normally happen, despite the vast majority of advanced economies having been neck-deep in debt for a long, long time.
  - Grimburger 3y ago
    An average citizens quality of life has dramatically decreased nonetheless, default or not. > The currency has been devalued by 90% – still not enough to reflect its slide in full. Inflation is in triple digits. Public services have collapsed; without hiring a private generator, households can expect only an hour or so of power a day. Shortages of drinking water have contributed to disease outbreaks, including the first cholera cases for decades. Parents are sending their children to orphanages because they cannot feed them. A growing number of citizens have resorted to armed robbery as the only way to extract their own deposits (now vastly reduced in real terms) from banks when they desperately need to pay for basic services such as healthcare. The collapse of Lebanon, formerly known as the "Switzerland of the Middle East", has been described by Western media as one of the most devastating and worst financial recessions since at least the 19th century. https://en.wikipedia.org/wiki/Lebanese_liquidity_crisis https://en.wikipedia.org/wiki/Lebanese_liquidity_crisis
- plonk 3y ago
  Lebanon and Pakistan aren't exactly politically stable, Greece was incompetently managed for a long time. Don't know about Turkey. Compared to the national deficits of basically everyone in the EU, US, and big Asian economies, it does look like GP is right that big national deficits can be managed?
- throw0101c 3y ago
  > Quite sure you answered your own question here. Survivorship bias isn't a valid argument. Lebanon, Greece, Pakistan, Turkey all come to mind in the last decade, all with unsustainable amounts of debt. Incompetent government is the higher risk. And with Greece, the problem was only partly created by themselves: it was also the French and Germans who insisted that their bankers (who held a large portion of Greece's bond) be paid back and were willing to blackmail the Greek government. This is evidenced by the fact it all went away when the ECB said (Draghi: "whatever it takes") it would be the lender of last (like the US Fed is).
  - chii 3y ago
    > Incompetent government is the higher risk. or wrong incentives in gov't. Those countries that was listed in the quoted comment are basically subsiding large portions of the people - fuel, food, public sector 'jobs' (non-productive jobs), etc - and funded it via debt. I guess incompetence and 'malice' are indistinguishable at some point.
benrow 3y ago
I wouldn't say I'm someone with knowledge (non-US, non-economist etc). But I understand the interest payments on a large national debt can be a problem. Not sure if that's a significant factor here. I only just recently learned that national debt is sourced from bonds, purchased by individuals and companies as a safer place than cash, so take what I say with a pinch or two of salt.
naveen99 3y ago
The great post Covid inflation ended that fantasy world of low inflation despite deficit spending. There is a lot of uncertainty in the future. Will human population shrink ? Will robots get cheaper than humans for general tasks ? The federal budget doesn’t move as fast as bond traders. but in the end the fed can pump and dump short or long term bonds at will. But it generally is data driven as is the federal budget.
mimikatz 3y ago
You can run a moderate amount of deficit without anything bad happening, and governments can do it indefinitely. HOWEVER, the amount you can run is not unlimited and can collapse the system if it gets too high. So you should be very careful with how much debt you are actually carrying and how much you add to it. Also you need to be careful because the amount it costs to carry your debt can fluctuate. The same is somewhat true for corporations as well.
phendrenad2 3y ago
The debt isn't a problem, the problem is the debt-to-GDP ratio.

by p-e-w 3y ago

Grimburger 3y ago

> nothing particularly problematic ever actually happens, except in a few cases where the economy overall is in an extremely bad shape for a variety of unrelated reasons. Quite sure you answered your own question here. Survivorship bias isn't a valid argument. Lebanon, Greece, Pakistan, Turkey all come to mind in the last decade, all with unsustainable amounts of debt. The modern monetary system is a faith based system which hands leeway to governments to create and destroy supply at will. When people lose faith it all collapses very quickly, the failure modes are never slow. The relatively small Silicon Valley Bank is a great example of this and the systemic collapse in confidence of banking.

p-e-w 3y ago
Sovereign defaults are very rare events outside of banana republics. It's not survivorship bias so much as it simply doesn't normally happen, despite the vast majority of advanced economies having been neck-deep in debt for a long, long time.
- Grimburger 3y ago
  An average citizens quality of life has dramatically decreased nonetheless, default or not. > The currency has been devalued by 90% – still not enough to reflect its slide in full. Inflation is in triple digits. Public services have collapsed; without hiring a private generator, households can expect only an hour or so of power a day. Shortages of drinking water have contributed to disease outbreaks, including the first cholera cases for decades. Parents are sending their children to orphanages because they cannot feed them. A growing number of citizens have resorted to armed robbery as the only way to extract their own deposits (now vastly reduced in real terms) from banks when they desperately need to pay for basic services such as healthcare. The collapse of Lebanon, formerly known as the "Switzerland of the Middle East", has been described by Western media as one of the most devastating and worst financial recessions since at least the 19th century. https://en.wikipedia.org/wiki/Lebanese_liquidity_crisis https://en.wikipedia.org/wiki/Lebanese_liquidity_crisis
plonk 3y ago
Lebanon and Pakistan aren't exactly politically stable, Greece was incompetently managed for a long time. Don't know about Turkey. Compared to the national deficits of basically everyone in the EU, US, and big Asian economies, it does look like GP is right that big national deficits can be managed?
throw0101c 3y ago
> Quite sure you answered your own question here. Survivorship bias isn't a valid argument. Lebanon, Greece, Pakistan, Turkey all come to mind in the last decade, all with unsustainable amounts of debt. Incompetent government is the higher risk. And with Greece, the problem was only partly created by themselves: it was also the French and Germans who insisted that their bankers (who held a large portion of Greece's bond) be paid back and were willing to blackmail the Greek government. This is evidenced by the fact it all went away when the ECB said (Draghi: "whatever it takes") it would be the lender of last (like the US Fed is).
- chii 3y ago
  > Incompetent government is the higher risk. or wrong incentives in gov't. Those countries that was listed in the quoted comment are basically subsiding large portions of the people - fuel, food, public sector 'jobs' (non-productive jobs), etc - and funded it via debt. I guess incompetence and 'malice' are indistinguishable at some point.

benrow 3y ago

I wouldn't say I'm someone with knowledge (non-US, non-economist etc). But I understand the interest payments on a large national debt can be a problem. Not sure if that's a significant factor here. I only just recently learned that national debt is sourced from bonds, purchased by individuals and companies as a safer place than cash, so take what I say with a pinch or two of salt.

naveen99 3y ago

The great post Covid inflation ended that fantasy world of low inflation despite deficit spending. There is a lot of uncertainty in the future. Will human population shrink ? Will robots get cheaper than humans for general tasks ? The federal budget doesn’t move as fast as bond traders. but in the end the fed can pump and dump short or long term bonds at will. But it generally is data driven as is the federal budget.

mimikatz 3y ago

You can run a moderate amount of deficit without anything bad happening, and governments can do it indefinitely. HOWEVER, the amount you can run is not unlimited and can collapse the system if it gets too high. So you should be very careful with how much debt you are actually carrying and how much you add to it. Also you need to be careful because the amount it costs to carry your debt can fluctuate. The same is somewhat true for corporations as well.

phendrenad2 3y ago

The debt isn't a problem, the problem is the debt-to-GDP ratio.