Friday, September 4, 2020

Debt Matters

Debt Matters

(This is a draft of an oped. I got done and saw it's 1500 words, so I'm posting it for your enjoyment rather than go through a painful 600 word diet. Diet later. Maybe. ) 

Last week, the U.S. passed a milestone — US federal debt in private hands exceeded 100% of GDP. But does all this debt matter, or is worrying about debt passé?

This debate has been going on among economists for a while. One does not need to go to the incoherence of "modern monetary theory" to find support for the view that debt has few consequences. Olivier Blanchard, of MIT and the IMF, in his Presidential Address to the American Economic Association, (excellent summary here) declared that “there may be no fiscal costs” of additional debt. The core of his argument is that the interest rate on government debt may be lower than the growth rate of the economy so the US can roll over debt forever. 

Larry Summers, ex treasury secretary, President of Harvard, and adviser to presidents, surely the preeminent policy economist of our generation, has advocated that additional debt-financed spending may have so strong a multiplier as to pay for itself. (Paper here) As a result “expansionary fiscal policies may well reduce long-run debt-financing burdens," a super-Keynesian version of the Laffer curve

(I don’t mean to pick on Blanchard and Summers — they are only superbly distinguished representatives of widely held views.) 

Unlike MMT, these are logically consistent possibilities. But are they right? 

The interest rate on government debt is indeed slightly lower than good guesses of the economy’s growth rate, as sadly low as the latter is, so that if we roll over debt with no additional deficits, the debt to GDP ratio will slowly decline and the US can indeed run this slow-rolling Ponzi scheme. 

But how long will this happy circumstance of ultra-low interest rates continue? More to the point, how scaleable is this opportunity? Bond market investors lend 100% of GDP to the US government at 1% interest. Will they lend 200% of GDP at the same low interest rate, or will they start to require higher interest rates? A government that finances itself only with money and no debt need not pay back the money -- but, obviously, cannot double the opportunity. 

What happens when, rather than grow out of a given debt, the US piles on larger and larger debt to GDP ratios each year? The analysis is about sustainability of a large, but steady debt to GDP ratio. It does not justify a debt to GDP ratio that grows 10 percentage points per year.  At what debt to GDP ratio must the party stop and the growing out of it begin? 

Blanchard recognizes these limits are out there somewhere, and that debt crowds out private investment. But just where the limits are is less clear. That finding the limits will be unpleasant is clear. 

Summers’ view is likewise limited to a period of “secular stagnation” with perennially deficient demand, sticky prices and wages, and the other requirements of extreme Keynesianism.  Are we in such a period, or is covid a supply shock? Was the economy really suffering lack of demand when unemployment hit 50 year lows last February? 

Washington knows no such sophistication, but our politicians have grasped the logical implications of the proposition that debt does not matter with more clarity than have economists. 

The notion that debt matters, that spending must be financed sooner or later by taxes on someone, and that those taxes will be economically destructive, has vanished from Washington discourse on both sides of the aisle. The covid response resembles a sequence of million-dollar bets by non-socially distanced drunks at a secretly reopened bar: I’ll spend a trillion dollars! No, I’ll spend two trillion dollars! That anyone has to pay for this is un-mentioned. Well, perhaps nobody does have to pay. 

And who is to blame them, really? Markets offer 1% long-term interest rates. Blowout spending  financed by the Fed printing money — which is no different from debt — has resulted in no inflation so far. Faced with the deep concerns of current voters, worry that our children and grandchildren might have to pay off debt is not particularly salient. They’re either in the basement playing video games or out protesting for the end of capitalism anyway.  Politicians will take the cheap money as long as markets are happy to provide it. 

The economists, even the modern monetary theorists, envision debt issued to finance worthy investments, or valuable spending, all undertaken with a careful green eyeshade approach. Washington has figured out the logical conclusion of the idea that Federal debt doesn’t matter, in a way these economists have not: If debt and money printing have no fiscal cost, why be careful about how you spend money? Send checks to voters. Why not? It’s costless. No boondoggle project is objectionable. Send billions to prop up dying businesses. Why not? It’s costless. Why bother fixing the post office? Send them another $25 billion. Or $100. 

Deeper: Why should citizens have to pay back debts if the Federal government does not have to do so? Bail out student loans. Bail out bankrupt states and locals and their pensions. Cancel the rent. Cancel the mortgage. Why should anyone have to pay any debt if the Federal government has access to a money machine? Why work? Why should the federal government not just keep printing money and sending it to us? Other countries are not so lucky as we are. Why should emerging markets pay back debt if the US does not have to? Bail them out. 

Why indeed should anyone pay taxes? Here Stephanie Kelton, MMT proponent, has followed the logic. The only reason to charge taxes at all, in her view, is to expropriate the wealthy to rob them of political power. 

These are inescapable logical conclusions of the view that federal debt has no fiscal cost. If you’re uncomfortable with the end of the trip, perhaps you should revisit the assumption from which it inexorably follows. At least, you recognize that the opportunity to borrow with little fiscal cost is limited, so should be preserved. 

Advocates point to WWII. It is true, that the US exited an even greater debt to GDP ratio. It was not painless. Growth higher than interest rates was part of it, but not all. Two bouts of inflation, in the late 1940s and in the 1970s devalued much debt. The US ran steady primary (excluding interest costs) surpluses from the 1940s through the mid 1970s. Spending was low in the pre-entitlement economy, and nobody was totting up hundreds of trillions in unfunded promises. The war, and its spending, was over. Statutory personal taxes and actual corporate taxes were high. Financial repression and closed international capital markets kept interest rates on government bonds low, and deprived Americans of better investment opportunities and our and the world’s economies much needed investment capital. And we had an international debt crisis in the early 1970s, prompting the abandonment of Bretton woods and depreciation of the dollar. 

In short, the US grew out of WWII debt by not borrowing any more, by decades of fiscal probity, and by strong supply-side growth in a deregulated economy. We have none of these reassurances going forward. And this, and the UK exit from Napoleonic War debt in the 1800s by starting the industrial revolution are about the only historical examples of a semi-successful repayment of this much debt. Otherwise, the history of large sovereign debts is one long sorry tale of default, inflation, devaluation, and consequent financial chaos. The UK did not exit WWII debt successfully, leading to crisis after crisis, and everyone else did worse. 

Still, what should we be afraid of? The vision of grandchildren saddled with taxes, or even just unable to borrow more while the economy sits at its limit, of, say, 200% debt to GDP, is indeed not a salient brake to spending. 

That is not the danger. The danger the US faces, the danger we should repeat and keep in mind, is a debt crisis. We print our own money, so the result may be a sharp inflation that wipes away the value of debt rather than an even more disruptive default, but the consequences will be almost as dire. 

Imagine that 5 or even 10 years from now we have another crisis, which we surely will. It might be another, worse, pandemic; a war involving china, Russia or the Middle East. Imagine the US follows its present trends of partisan government dysfunction, so an impeachment is going on, a contested election, and even militias roaming the streets of still boarded up cities. Add a huge economic recession, but unreformed spending promises. 

At this point, the US has, say, 150% debt to GDP.  It needs to borrow another $5 - $10 trillion, or get people to hold that much more newly-printed money, to bail out once again, and pay everyone’s bills for a while. It will need another $10 trillion or so to roll over maturity debt. At some point bond investors see the end coming, as they did for Greece, and refuse. Not only must the US then inflate or default, but the firehouse of debt relief, bailout and stimulus that everyone expects is absent, together with our capacity for military or public health spending to meet the shock that sparks the crisis. 

Yes, I've warned about this before, and no, it hasn't happened yet. Well, if you live in California you live on an earthquake fault. That the big one hasn't happened yet doesn't mean it never will.  

No, interest rates do not signal such problems. (Alan Blinder, covering such matters in the Wall Street Journal, "if the U.S. Treasury starts to supply more bonds than the world's investors demand, the markets will warn us with higher interest rates and a sagging dollar. No such yellow lights are flashing.) They never do. Greek interest rates were low right up until they weren’t. Interest rates did not signal the inflation of the 1970s, or the disinflation of the 1980s. Lehman borrowed at low rates until it didn’t. Nobody expects a debt crisis, or it would have already happened. 

We cannot tell when the conflagration will come. But we can remove the kindling and gasoline lying around. Reform long-term spending promises in line with long run revenues. Reform the tax code to raise money with less damage to the economy. And today, spend only as if someone has to pay it back. Because someone will have to pay it back. 

Blanchard concludes with “public debt.. can be used but it should be used right.” I agree. We are in a crisis, and thoughtful spending with borrowed or printed money is necessary. (How about a test a week for every American?) But keep constantly in mind, it will be paid back, steadily or chaotically. There really is no argument. Most of these points are in Blachard's Presidential Address. 

Whether a steady debt/GDP ratio can life with small steady primary deficits, rather than small steady primary surpluses is not the interesting question. There is a limit, a debt/GDP beyond which markets will not lend. On  this, I think, we all agree. There is a finite fiscal capacity. Even though in theory the r<g argument would allow a 1,000% debt to GDP ratio, or 10,000%, at some point the party stops. The closer we are to that limit, the closer we are to a real crisis when we need that fiscal capacity and it is no longer there. 


And now, dear fellow Americans, enjoy your Labor Day. Please listen to Dr. Fauci and don't run out to party like you did on Memorial Day. Let's be sensible and get this thing over with. 

Update: A new and better post More on Debt follows. 


  1. Your best and I am a Krugman fan. The more debt , the less reserve for the next crisis. You can live with x% of your kidney function and you die with ( x-1)%. The margin of life . Thanks.

  2. Here is the layman's dilemma: If I read Larry Summers, I find him compelling. The better proponents of MMT too. And then John Cochrane is very persuasive.

    Adding to the confusion, macroeconomists seem to talk past each other. Certainly Michael Woodford of Colombia is respected. He says QE in combo with federal deficits is a helicopter drop, or a money-financed fiscal program. (Ben Bernanke has advocated money-financed fiscal programs for Japan).

    As a practical matter, helicopter drops alongside building central bank balance sheets seem suspiciously close to MMT. Does anyone believe the Bank of Japan or the Fed will reduce balance sheets in the future?

    So, is federal debt real, or is it zapped through QE?

    I hereby firmly straddle the fence on the propriety of federal debt, and quote my late, great Uncle Jerry, who proclaimed, "If you are not confused, then you probably do not understand the situation."

  3. Tom Sargent at some stage said that the two parties are playing a game of chicken, left to see on whose watch the whole thing blows up.

    The smart economists cited are just playing, stuck in the short run.

    The fundamental should be fixed because one wants to borrow in emergencies [Covid] and for opportunities [Louisiana Purchase :-)]

  4. That a boy! Let the Republicans run up the debt to astronomical Heights and just as the Democrats are about to take over, start complaining about too much debt.
    Plus, this is pretty much useless if you can’t say where the breaking point is or what will trigger the breaking point.

  5. Unfortunately the American public stuck dealing with a crisis and an election shortly upon us will not hear and who knows when if ever from a voice that understands finance and economics. We are facing what i would describe as The Debt Trap with us being in it or approaching it with no voices out there in power that will get the American public to face the music.
    I say this as one view vast experience in restructuring of corporations and their balance sheets.

  6. Blanchard's "r<g" argument has already been proved empirically wrong, as far as I know... cf.

    Fabrizio Ferrari

  7. While I agree that debt matters, I don't recall your opposition to the tax cuts of 2017, 2003 or 2001 all of which added to our permanent structural deficits. In 2000, Al Gore ran on securing the then surpluses to fund existing SS commitments did; did you endorse him or the guy with the unfunded tax cut plan? If you only worry about debt when it's used to get us through a financial or health crisis or perhaps in the future to avert a climate crisis, you don't actually care about debt, and your expressed concern is just a pretext to oppose polices you don't agree with or to hobble democratic administrations.

  8. “One does not need to go to the incoherence of "modern monetary theory" to find support for the view that debt has few consequences. Olivier Blanchard, of MIT and the IMF…”

    Only problem with that idea is that with the increased prominence of MMT, Blanchard has shifted his ground to a more “MMT compatible” view over the years. I.e. any idea that Blanchard as for MANY YEARS promoted the idea that “debt has few consequences” of wide of the mark. E.g. see this article from 2016 where he predicts Armageddon for Japan with its rising debt.

    This is a classic example of “First they ignore you, then they mock you, then they claim it was their idea all along.”

    And when Blanchard was chief economist at the IMF, the material produced by the IMF on debts was as good as incoherent, at least according an article by Bill Mitchell written in 2013 and entitled “IMF still away with the pixies”.

  9. Excellent comments, but I would title the blog "fiscal capacity matters". The party of pilling up debt will stop, eventually, but my agonizing question is when? It must be a reason that the US approaches the Greek levels of unsustainable debt, yet there is no impact on US borrowing costs. All economists predict an upcoming catastrophe but fail to provide specifics

  10. I was having a good morning until I opened today's posting. Now I am depressed; none of the political "leaders" now in a position to do anything have any motivation. MMT is functionally what guides Congress, and probably the decisions the Administration regards as "practical" (increase the debt limit vs. thinking about the future).

    I am a grandfather and my daughter is soon to have another. I will not probably have to live through whatever comes, but they will. Certainly the clown show in progress is entertaining.

    1. A gentleman and a scholar recently posted a blurb addressing Federal Debt from an intergenerational equity standpoint. Will the Kids be Alright? Who can Say:

  11. Hey John,

    You had a nice piece recently in which you said that injecting politics into economics writing is unnecessary and makes the arguments less persuasive. Yet in this piece, which is purportedly about economics, you manage to insult a whole generation of people and wade into the charged debate about whether the right time to fix the post office is months before an election during a pandemic.

  12. "But keep constantly in mind, it will be paid back, steadily or chaotically."

    John, how do you square this with your earlier acknowledgement that money and debt are the same thing? Money does not have to be "paid back." I think you probably mean inflation but, if so, this should be made clear every time someone says "needs to be paid back."

  13. I know this is an economics blog, but I can't resist bringing up the moral angle to all of this.

    Even if it were possible to roll over 200% GDP debt forever, when did a redistribution from the future to the present become morally OK? Did our great-grandkids agree to this, either individually or collectively?

    (And if future to present redistribution is OK, why worry about say, climate change? Why bear the costs now, if our descendants will be richer anyway?)

    Or to take the theme of your previous post, imagine someone other than the government doing this. Suppose I max out my credit cards, year after year. If I justified it by saying "don't worry, I have the legal right to push the interest costs on my grandkids", would that be OK? Why should I pay for my own spending, if my grandkids will probably be richer than me?

  14. In my opinion, individuals (and therefore entities) spend less consciously when they use debt. I don't care what the interest rate is. People buy more expensive cars when they borrow, they buy more expensive houses when they have low down payments, and they just generally overspend when they borrow.

    Considering that politicians are spending other people's money, the negative effects are multiplied.

  15. The reckless fiscal largesse of the boomers will require austerity from young workers. It will be ok, grandma can retire on her pension and full social security that she earned for working 20 years, and the millenials can eat a debt crisis, triple housing costs, and 0 real yields on all financial assets for the next few generations.

  16. I have one question, and it comes about from this statement:

    'Reform the tax code to raise money with less damage to the economy. . .'

    How does that work? When both sides: 1) Will hardly talk to one another; and 2) Are so factionized, that one talk about tax will turn the room dead quick than a snap of a finger.

    Another question is: how to do this to where the Robin Hood tactics won't come into play?

    Given how Jackass-in-Chief is a known, habitual failed businessman, and doesn't have a clue on fiscal responsibility. That this worries me even more.

    Also, thanks for the blog, it is good read.

  17. It is not the future, is is today. It is protest going on. Both the left and the right are protesting and the main cause? Both groups cannot afford the cost of a bank account as Fed taxes bear down on banking.
    Remember, all the signiorage is a tax on collateral making retail banking inefficient. So today, as we speak, as we make models, before we post our comments; the Fed taxes are have already booted half the kids from fair banking. with access to a fair S/L the agent has no future and may as well rebel.

  18. Didn’t Samuelson say ——was it 60 years ago——that we can do this forever——so it’s not a new idea. Somehow it seems like a ludicrous idea—-as JC said—-it works until does not. I have also wondered why nominal rates are so low. Maybe there is some unanalyzed link between rates and debt/GDP ratios. That would make it possible to go on forever. As it relates to Govt spending—-one reason not to like it is it has to be inefficient. There is no check on it as there is in the private sector, as the latter must compete. If we are going to have high debt to GDP ratios I prefer we have zero taxes and less spending. Summers reached his peak at age 27. Is their any empirical evidence that deficit spending has a multiplier effect? All I see are models. Just thinking Debt to GDP does not matter feels like we have given up on thinking——like an economic equivalent of “God is dead”. Nihilism to the extreme.

  19. The existence of debt proves that it is a problem.

    If debt caused "multiplier effects" that boosted GDP to the point where government revenues offset the debt, then the government would run a surplus that would eliminate debt. The fact that such surpluses have failed to materialize in the past, mean they won't in the future.

    Also, the idea that the government can just print money or inflate away the debt is also wrong, demonstrated by the same logic. If it were so easy to print money, the government could just print money instead of running a budget deficit. The fact that they cannot simply print money, run a deficit, and collect it back in taxes to instantly eliminate the budget deficit proves this is a problem.

    There is an essential problem here of confusing "rates" with "levels." The level of debt is a much smaller problem as long as the rate of debt growth is negative. Essentially, if you're paying principal with your mortgage every month, you're OK. But the US is not doing that.

    Further, there is no reason to think the US will have an easy time controlling the rate of debt growth, given that the same tips and tricks have not worked for the past few decades.

    As Taleb says, only trust experts with skin in the game. Summers clearly has none.

  20. "The interest rate on government debt may be lower than the growth rate of the economy" is one of the most "fool-yourself" kind of argument you can use (no matter who is using it). It is akin to say:

    "I have been spending huge amounts on "extraordinary" items with very regular precision (in 2001, 2008-13 and 2020, this last two, actually big time). But, IF from now on I don´t need to spend in "extraordinary items" then we are fine. OK ... and if I were George Clooney my life will be more exciting, but ...

    The missing part is that the relevant comparison is not between interest rates and the growth of the economy. It is between:

    a) The interest rate on the existing debt, PLUS
    b) The primary deficit (as a % of GDP) in the "ordinary budget" (meaning annual deficits without the likes of 2001, 2009 or 2020 extraordinary expending), PLUS
    c) The "extraordinary" expending (as a % of GDP) that we KNOW for sure is going to be needed from time to time. We can call it "extraordinary”, but we are just fooling ourselves if we think is never going to happen again in the future.

    Some facts:
    • Noninterest payments have outpaced revenues for 35 years of the last 50 and for every single year since 2001. And the primary deficit averaged 2.1% in the 2013-1019 period (which was a “Alicia in Wonderland” kind of period for the US economy). Let´s say this is a quite representing “average” for “normal periods” under current politic dinamic. And this is only Federal debt. "Ordinary" deficits at the local level should also be included here.
    • Significant “extraordinary expending” has taken place in 2001, 2009-13 and 2020. So, it would be sensible to assume that “extraordinary” means “happening once every 10 years” with an impact around 1-2% of GDP per year ("to be paid” every ten, "balloon way"). And, again, "extraordinary expending" at state and local level should also be included here.

    That means growth must be bigger than, very likely, 5-6%, not the 1% interest rate, for the debt to be sustainable. Or in other words "debt is not sustainable and the relation between interest rates and the rate of growth is one of the most irrelevant ratios to evaluate that" (at least less relevant than "ordinary" and "not-so-extraordinary" annual and "pluriannual" deficits). Focusing on the less meaningful driver can only lead to the wrong conclusions/policies.

    So, what Olivier Blanchard really means is:
    a) interest rate on government debt, PLUS
    b) deficits on "average" years, PLUS
    c) "extraordinary spending we know for sure are going to happen in the future, although why dont know why or when as of yet (expressed as annual percentage of GDP), THEN (AND ONLY THEN),

    the government debt may be sustainable.

    That's very different from what many people (probably including himself) think he meant.

    Who is he trying to fool and why, are the most interesting questions.

    1. ..... PLUS

      c) "extraordinary spending (expressed as annual percentage of the GDP). We know for sure this is going to happen in the future, although why dont know why or when.

      are lower that the growth rate of the economy,

      THEN (AND ONLY THEN) ...

      (a missing part in the previous comment).

      And what is relevant, by the way, is not the growth rate of the economy but the growth rate of the tax income. The assumption can be proved wrong. Arguably both ways. But in the kind of economic contradiction that Cochrane likes to point out, given the progressivity of the tax code, you can not expect to happen simultaneously:

      a) Inequality to be reduced
      b) The tax income, as a % of the GDP, to increase

    2. And what is relevant, by the way, is not the growth rate of the economy but the growth rate of the tax income. The assumption

      "of the tax income as a % of the GDP being constant"

      can be proved wrong.

      (again a missing part)

    3. El emperador,

      Bingo, you have hit the nail on the head. Take average interest rate x total of all outstanding debt. If that total interest cost exceeds available tax revenue then the bond market blows up. In essence bond holders will be paying the interest to themselves - aka Ponzi finance.

  21. Thanks John, great write up. Small typo here: "
hat is not the danger." Missed the T for "That"

  22. Forget the debate among economists, MMT is the panacea for the next problem for policy makers. Currently, debt matches GDP. If the Fed issued long dated bonds or consols at 4%, they could borrow up to 500 trillion. At that point, debt service would equal current GDP. Long before we reached 500 trillion, I suspect interest rates and inflation will have accelerated dramatically. Another problem. MMT is a fertile field for moral hazard. Yeah folks, debt matters, particularly during default and/or bankruptcy.

  23. The "moral hazard" is not related with the "debt" ... as far as this "debt" is "private".

    The lender is just an investor (another kind) and he assumes a risk in whatever he is financing. If private investors decide to trust the ability of the US government to pay back its debt (with money that has any real value to buy goods and service) no big deal, all the financially healthy mechanism are in place.

    The "moral hazard" is related with the FED “buying” the government debt. No matter how you look at it, it does not included any of the "financially healthy mechanisms" available in capitalism: not skin in the game, not the right incentives, not the wipe out of the "dumb player" ...(actually the dumb player, the FED in this case, will, very likely, increase its bet when proved wrong)

    In the absence of any of this mechanism, we are in the hands of central planners and macroeconomist ... they don´t have a very good track record to say the least.

    1. El, you state,"(actually the dumb player, the FED in this case, will, very likely, increase its bet when proved wrong)

      In the absence of any of this mechanism, we are in the hands of central planners and macroeconomist ... they don´t have a very good track record to say the least." My point exactly. The moral hazard is the FED taking risk at the expense of the tax payer and future generations hit with more taxes and inflation.

  24. There is no "crowding out". This is a nonsense myth. Interest rates are whatever the Fed says they are PERIOD. The Fed can keep them at essentially ZERO (risk free short rate; long rate managed through long securities purchases/sold).

    Moreover, inflation is easily managed in these circumstances. For example, the Job Gty/Green New Deal law should include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
    a) Income Taxes,
    b) Sales/VAT Taxes
    c) Asset Value (or Wealth) Taxes
    That'll cool things off pronto. (The key is to have the taxes inserted in the law AHEAD of time so they kick in automatically and become another automatic stabilizer - in addition to the stabilizing effect of the Job Gty.)

    1. Inflation happens when the government prints (or promises to print) + spends more money than it collects in taxes.

      The problem is that if it prints a lot of money, eventually it would have to collect so much money in taxes, that doing so would crush the economy.

      The funny thing about debt is that problems happen only at the tail. So you never expect to get into debt trouble but it happens all the time.

      Don't forget that the FED has no magical divine christening that gives it magical financial abilities. Whatever the FED can do, Argentina can do. Whatever Argentina can't do, the FED can't do.

    2. Inflation is too many dollars chasing too few goods and can come from different mechanisms. For example, it can come from:
      1) an external shock in a commodity that an economy needs to import - such as the oil embargo in the 1970s, causing a price increase in gasoline -> fertilizer -> food -> and labor through union cost of living contracts.
      2) excessive borrowing in an external currency or commodity and then a rise in that commodity and falling into a spiral as the country prints in order to make ever increasing payments (Weimer Republic making payments in gold, Venezuela, USSR, Argentina borrowing in dollars),
      3) a catastrophic supply shock in the production of a key output/export product coupled with foreign currency debt or import requirements (Weimer Republic - > France took over their steel making capacity when they fell behind in gold payments; Zimbabwe -->Mugabe expropriated farms from experienced white farmers and giving it to his inexperienced urban cronies resulting in a 40% drop in grain production, swinging the country from grain exporting to grain importing.
      - Its actually kind of hard to induce inflation (see: Japan in last 20 years and US in last 8 years)

      RE: "... The problem is that if it prints a lot of money, eventually it would have to collect so much money in taxes, that doing so would crush the economy. ... ..."
      • Why would it crush the economy? By definition, at that point you would be at full employment and beyond, and taxation merely cools the economy down. The important thing is you maintain a Job Gty in place at all times.

      RE: "... Whatever the FED can do, Argentina can do ..."
      • Except Argentina’s problem was that it borrowed in a foreign currency.

  25. The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

    1. So what is preventing the government from repaying it today? Why has the government not repaid it already?

      Whatever you answer for the above question is the reason why government debt is a problem.

    2. Nothing is preventing the govt from repaying its debt today. But it basically knows that it doesn't have to. There is no reason to, except for Republicans using it as a hammer to make Democratic presidents "one term presidents". (See: interest rates)

  26. Charles Calomiris provided an interesting review of debt and crises in his One Day Univ lecture and his book "Fragile by Design". Perhaps you can engage with him on the question of what are the next crises in line.

  27. Just like we did not prepare for a pandemic until there was a pandemic, nor prepare for a mortgage crisis until there was a mortgage crisis, we will never have the political will to prepare for a financial collapse until there is a financial collapse.

    Long before "climate change" achieves its potential for destruction, there will be the collapse of the federal debt bubble.
    The best we can do is to individually prepare.

  28. "In short, the US grew out of WWII debt by not borrowing any more, by decades of fiscal probity, and by strong supply-side growth in a deregulated economy."

    Wrong, the debt burden after World War II shifted from the U. S. federal government to the private sector. The fundamental thing to understand about private sector debt is when the borrowing entity perishes (whether that be a failed company or an individual), the liability (debt) perishes with them. That is not the case for government debt that gets rolled over.


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