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Correct me if I'm wrong but isn't there an inherent vicious cycle in that if the price gets too high our ability to pay it off becomes uncertain, at which poin

by zug_zug 17d ago

Correct me if I'm wrong but isn't there an inherent vicious cycle in that if the price gets too high our ability to pay it off becomes uncertain, at which point the premium for the risk would shoot up dramatically (and so on)?

nostrademons 17d ago
That's correct. The root cause is that the government is making promises it can't keep, which make those promises worthless. The correction is usually that that government falls, and a new government starts making smaller, more achievable promises that restores trust in it.
- cyanydeez 17d ago
  Unfortunately, divestment of the US dollar is like lighting a match in a house looking for the gas leak.
howeyc 17d ago
Nope. Government debt has existed for a long time in the US. There is no plan to pay it off ever. Headlines will scream that the debt is too high for a long time to come. Government debt yields on the short end are set by the Fed. Long yields are "set by the market" based on inflation fears, and mostly guessing what the Fed will set rates to over the next 10+ years. Japan had way higher Debt-to-GDP for decades, yet the long term yields were low. Why? The central bank said "we anticipate yields to be set low for a long time" and did so for a long time. Recently they said they are going to "respond to inflation" like all other central banks and suprise, surprise the long end is creeping up. "Bond vigilantes" came into existence as soon as the central bank changed their policy.
- nostrademons 17d ago
  The inflation fears are part of the vicious cycle. The typical mechanism by which a government would get rid of inconvenient amounts of debt denominated in their own currency is to monetize it and inflate it away. Bond purchasers know about this, and build inflation expectations into the interest rates they are willing to accept. This increases the amount of interest the government has to pay, which makes its financial position even more precarious, which builds in future expectations of either a default or a soft-default through inflation, which pumps interest rates even more. It is possible to break this cycle, but it requires getting spending under control. As long as you operate in deficit, it requires finding private capital to finance future operations of the government. That private capital will require interest commensurate with the expected future devaluation of its principal to lend; otherwise they are just suckers. If you can bring spending into balance then you can hike rates and bring inflation under control and you'll be somewhat insulated from what bond purchasers are willing to accept, but if you can't then increases in rates just increase government spending as well. Japan operated at extremely high levels of debt-to-GDP because their deflationary trap turned all major Japanese corporations into large net savers. Why would you hold debt when you have to pay it back in more valuable yen in the future? That created a very large oversupply of private capital, which crowded into government bonds as the spender of last resort.
mono442 17d ago
The US government only borrows in the us dollars. It's not possible that they won't be able to pay it off. The yield increase is basically the market pricing in the interest rate increases since they're expected now.
- immibis2 17d ago
  It is not possible that they won't be able to pay it off, but it is possible they will not pay it off anyway, and it is also possible that they will repay it with useless scraps of green paper.
Ekaros 17d ago
USA won't ever default so you will get money back at maturity date. But I will largely question the inflation at that point. If inflation goes significantly higher than the rate you are being paid it becomes self-destructive loop.
- immibis2 17d ago
  The USA could still choose to default, due to internal dysfunction.
- seanmcdirmid 17d ago
  US could choose defaulting as a better option to hyperinflation. It would lose all its credibility either way. The only thing it should do now is seriously jack interest rates, and maybe consider some austerity, but the working class is already at a breaking point and asking them to sacrifice even more for the billionaires isn't going to go over well politically (and the billionaires...).
drmathias 17d ago
Only of the government both simultaneously refuses to raise taxes and refuses to control spending. Because the central bank can choose to set the rate, as Japan did for decades. Given the wealth distribution of the population has become so unequal, raising taxes for the purposes of lowering the deficit is a politically impossible option. So the only politically feasible option is controlling spending.
- BugsJustFindMe 17d ago
  > "Given the wealth distribution of the population has become so unequal, raising taxes for the purposes of lowering the deficit is a politically impossible option. So the only politically feasible option is controlling spending." I'd like you to spell out your thought process, because I completely disagree with the relationship between your given and your conclusion, and I'd like to know what you're thinking.
  - fallingfrog 17d ago
    I would assume the thought process is that the people with all the wealth are able to use that wealth to purchase political power, and they will not allow themselves to be taxed.
    - BugsJustFindMe 17d ago
      Your assumption came from your head, not theirs. There are other possibilities too. We gain nothing of value by assuming.
  - drmathias 16d ago
    In Britain for example, 64% of the population oppose raising income taxes and 84% oppose raising inheritance taxes. The only politically popular tax is a general wealth tax which has 77% in favour. It is generally accepted a wealth tax will not directly meaningfully lower the deficit. There's also examples of those who would be affected spending massive sums of money lobbying against such taxes and threatening capital flight. These are generally the same group of people as political donors. Studies also show 84% of people across the top 36 major countries believe wealth inequality is a problem in their country. This leads me to draw the conclusion that politically popular tax policy and wealth inequality are closely intertwined. All these things considered, a political party evaluating the risk of policy changes on their polling would always pick the option of reducing spending.
barchar 17d ago
No, there is no credit risk, they print the money.

by zug_zug 17d ago

nostrademons 17d ago

That's correct. The root cause is that the government is making promises it can't keep, which make those promises worthless. The correction is usually that that government falls, and a new government starts making smaller, more achievable promises that restores trust in it.

cyanydeez 17d ago
Unfortunately, divestment of the US dollar is like lighting a match in a house looking for the gas leak.

howeyc 17d ago

Nope. Government debt has existed for a long time in the US. There is no plan to pay it off ever. Headlines will scream that the debt is too high for a long time to come. Government debt yields on the short end are set by the Fed. Long yields are "set by the market" based on inflation fears, and mostly guessing what the Fed will set rates to over the next 10+ years. Japan had way higher Debt-to-GDP for decades, yet the long term yields were low. Why? The central bank said "we anticipate yields to be set low for a long time" and did so for a long time. Recently they said they are going to "respond to inflation" like all other central banks and suprise, surprise the long end is creeping up. "Bond vigilantes" came into existence as soon as the central bank changed their policy.

nostrademons 17d ago
The inflation fears are part of the vicious cycle. The typical mechanism by which a government would get rid of inconvenient amounts of debt denominated in their own currency is to monetize it and inflate it away. Bond purchasers know about this, and build inflation expectations into the interest rates they are willing to accept. This increases the amount of interest the government has to pay, which makes its financial position even more precarious, which builds in future expectations of either a default or a soft-default through inflation, which pumps interest rates even more. It is possible to break this cycle, but it requires getting spending under control. As long as you operate in deficit, it requires finding private capital to finance future operations of the government. That private capital will require interest commensurate with the expected future devaluation of its principal to lend; otherwise they are just suckers. If you can bring spending into balance then you can hike rates and bring inflation under control and you'll be somewhat insulated from what bond purchasers are willing to accept, but if you can't then increases in rates just increase government spending as well. Japan operated at extremely high levels of debt-to-GDP because their deflationary trap turned all major Japanese corporations into large net savers. Why would you hold debt when you have to pay it back in more valuable yen in the future? That created a very large oversupply of private capital, which crowded into government bonds as the spender of last resort.

mono442 17d ago

The US government only borrows in the us dollars. It's not possible that they won't be able to pay it off. The yield increase is basically the market pricing in the interest rate increases since they're expected now.

immibis2 17d ago
It is not possible that they won't be able to pay it off, but it is possible they will not pay it off anyway, and it is also possible that they will repay it with useless scraps of green paper.

Ekaros 17d ago

USA won't ever default so you will get money back at maturity date. But I will largely question the inflation at that point. If inflation goes significantly higher than the rate you are being paid it becomes self-destructive loop.

immibis2 17d ago
The USA could still choose to default, due to internal dysfunction.
seanmcdirmid 17d ago
US could choose defaulting as a better option to hyperinflation. It would lose all its credibility either way. The only thing it should do now is seriously jack interest rates, and maybe consider some austerity, but the working class is already at a breaking point and asking them to sacrifice even more for the billionaires isn't going to go over well politically (and the billionaires...).

drmathias 17d ago

Only of the government both simultaneously refuses to raise taxes and refuses to control spending. Because the central bank can choose to set the rate, as Japan did for decades. Given the wealth distribution of the population has become so unequal, raising taxes for the purposes of lowering the deficit is a politically impossible option. So the only politically feasible option is controlling spending.

BugsJustFindMe 17d ago
> "Given the wealth distribution of the population has become so unequal, raising taxes for the purposes of lowering the deficit is a politically impossible option. So the only politically feasible option is controlling spending." I'd like you to spell out your thought process, because I completely disagree with the relationship between your given and your conclusion, and I'd like to know what you're thinking.
- fallingfrog 17d ago
  I would assume the thought process is that the people with all the wealth are able to use that wealth to purchase political power, and they will not allow themselves to be taxed.
  - BugsJustFindMe 17d ago
    Your assumption came from your head, not theirs. There are other possibilities too. We gain nothing of value by assuming.
- drmathias 16d ago
  In Britain for example, 64% of the population oppose raising income taxes and 84% oppose raising inheritance taxes. The only politically popular tax is a general wealth tax which has 77% in favour. It is generally accepted a wealth tax will not directly meaningfully lower the deficit. There's also examples of those who would be affected spending massive sums of money lobbying against such taxes and threatening capital flight. These are generally the same group of people as political donors. Studies also show 84% of people across the top 36 major countries believe wealth inequality is a problem in their country. This leads me to draw the conclusion that politically popular tax policy and wealth inequality are closely intertwined. All these things considered, a political party evaluating the risk of policy changes on their polling would always pick the option of reducing spending.

barchar 17d ago

No, there is no credit risk, they print the money.