Will America's debt doom us?

https://www.usatoday.com/story/money/columnist/2019/09/22/debt-debt-doom-america/2384550001/

by spking • 7 years ago

117 236 7 years ago

The interest rates on US debt are artificially low because their default risk is based on the willingness, not the ability, of the USG to repay them. That's because the ability is a given, since the government can print the currency the debt is denominated in. Corporate bonds are a bad analogy because their risk is mostly in defaulting, whereas if something goes sideways in America, Treasury bonds will fail by causing high inflation.

NTDF94• 7 years ago

There's a difference. The govt doesn't have this ability to print money and pay debt. The Fed does.

Which means that the Fed has been keeping interest rates already artificially low by printing money.

It'll take one misstep or one recession for the debt requirements to be so high that the Fed will have to make a choice between keeping rates low, causing massive inflation vs high causing massive drop in gdp and jobs.

The govt will have to make a choice between cutting services vs paying the debt.

maxerickson3• 7 years ago

The government "prints money" when it sells treasuries on the public market.

The Fed creates most of the money, but it isn't the only mechanism.

raphaelj• 7 years ago

The Fed might be independent in the law, but the govt makes the law.

ikeboy3• 7 years ago

The Fed can't directly influence real interest rates, only nominal. What exactly are you claiming interest rates are "artificially low" compared to?

The scenario you describe can't happen. If money is so easy that it's leading to high inflation above the target, then tightening money until no excess inflation happens won't cause a drop in employment. Think about it like this: either the extra money being printed is going to inflation and propping up prices, or it's enabling more jobs. If the marginal extra dollar is adding to inflation, then removing it won't hurt jobs.

QuesnayJr2• 7 years ago

The government can overrule the Fed, if it really wants to.

danharaj• 7 years ago

The Treasury can mint new money at the behest of the Executive.

pjc507• 7 years ago

The normal management of inflation by raising interest rates works by slowing economic growth. There's no reason to raise rates in a recession.

cthalupa• 7 years ago

The govt doesn't have this ability to print money and pay debt. The Fed does.

The Federal Reserve is part of the government. The Board of Governors is an independent government agency, with members appointed by the President. The individual banks are set up more like private corporations, but it's the Board of Governors that set the orders for new money being minted. Saying that it isn't the government that has the ability to print money and pay debt when this is the case is a little obtuse.

ikeboy3• 7 years ago

This is wrong. The risk free rate is equal to the real risk free rate plus expected inflation. If there's a significant risk of excess inflation, then the yields on treasuries will rise correspondingly.

crusso2• 7 years ago

Like the housing bubble, our debt hasn't been a problem and it's not going to be a problem right up until it is a problem. It will be a black swan event and afterward everyone will claim that they saw it coming and "the other guy" ignored it.

throwaway66920• 7 years ago

This is a strange opinion to me because there’s many, many people see it coming so it wouldn’t be especially incorrect for people to say this

MuffinFlavored9• 7 years ago

In the mean time, are us Americans ever going to get a president that focuses on paying down the debt?

How much would taxes have to go up (because spending can't go down, right?) for citizens to contribute their fair share of paying down the debt?

maxerickson3• 7 years ago

There were budget surpluses from 1998 through 2001.

One thing you aren't accounting for is tax receipts going up because the economy grows. It's usually the case that spending goes up at the same time, but it doesn't have to go up.

lbotos• 7 years ago

https://econproph.com/2011/07/14/private-debt-vs-government-...

Government debt is different than private debt.

decoyworker• 7 years ago

Bill Clinton accomplished that but at some cost. My father still laments the cancellation of the superconducting supercollider that he had the pleasure to work on.

pjc507• 7 years ago

But why would you do that? That forgoes growth and investment now in exchange for .. what exactly?

commandlinefan• 7 years ago

I’m super libertarian and even I would like to see somebody raise taxes and cut spending to cut the deficit… although it would be a battle to get them to lower taxes again once the debt was paid off.

Pigo3• 7 years ago

Since most candidates are running on a platform of promising more free things, it doesn't seem likely.

hylaride• 7 years ago

In theory, the debt could also be "monetized", meaning converting it to cash via the fed. That should also lead to inflation, but that may be politically easier than raising taxes.

JackFr3• 7 years ago

for citizens to contribute their fair share of paying down the debt

What does "fair share" mean?

seanmcdirmid3• 7 years ago

Spending is bound to go up because of population growth and inflation. It would be more appropriate to look at spending and taxation as a portion of GDP (which also goes up with population and inflation). Spending:

https://tradingeconomics.com/united-states/government-spendi...

It has been going down since the Great Recession (44% in 2009 vs. 38% in 2016). Taxation:

https://fred.stlouisfed.org/series/FYFRGDA188S

Taxation was going up a bit relative to GDP towards the end of Obama’s term (which is why the deficit was shrinking), but taxation is now going down (hence the deficit is rising again under Trump).

nikofeyn• 7 years ago

How much would taxes have to go up (because spending can't go down, right?) for citizens to contribute their fair share of paying down the debt?

this seems like a weird statement. what is "fair share"? i am a middle class person with a job with fantastic benefits, yet i easily pay over 30% in taxes (probably closer to 40% if one really counts all the "hidden" taxes) and still have to put up with shit infrastructure, terrible public transportation, expensive non-public transportation, expensive insurance, etc. at what point is it considered that i and others are paying our "fair share"?

ur-whale2• 7 years ago

because spending can't go down, right?

Why not? Or was that tongue-in-cheek?

logfromblammo3• 7 years ago

Banish "fair share" from your vocabulary when speaking of taxation. That is a guaranteed way to derail a productive conversation, by shifting it into arguing about what is fair, rather than what would solve the problem.

If we are intent on fairness, the generations that incurred the debts should be the ones forced to pay them off. So for the sake of argument, let's divide the populace by birth year, and institute a tax called the Debt Retirement Tax (DRT).

I took the historic debt from 1791, and divided it into 40 buckets. For each subsequent year, I charged each bucket 2% over inflation, dumped each bucket into the bucket to its left (except the leftmost), and divided the increase in debt, after interest, evenly across all 40 buckets. In years when the debt shrank, the reduction was divided evenly across all buckets with a debt balance.

This was to simulate the relative contributions to paying off and incurring more debt for working persons for each age 25-64, and all people 65 years or older. I presumed that age brackets younger than 24 have too little political power to significantly affect national debt. Scrolling down to 2018, the age 65+ bucket is now responsible for over 59% of the extant debt. Looking at the numbers over the years, and the clusters of zeroes in particular, whenever the debt is reduced, it is always the younger workers paying off the older people's debts. The eldest have never paid off their share of debt. At the 1835 minimum, the algorithm I used puts 100% of the responsibility for that last bit of debt on the age 65+ bucket. But instead of paying it off, they used their political power to charge up more debt, based on the willingness of the younger folks to work harder pay it off.

For the DRT, you could pay an income tax based on how much debt is in your age cohort's bucket, and if your year's bucket gets emptied, then you don't pay DRT the next year unless the debt goes up, and the interest charged on the other buckets doesn't cover your cohort's 1/40th share of it. The DRT can also include an inheritance tax component, so if you die with more debt in your age bucket, the state takes more out of your estate.

What is happening now is like identity theft. Elders are running up credit debt for their own benefit when their grandchildren's names are the ones on the accounts. What could possibly be "fair", when that situation is never addressed?

davinic• 7 years ago

The answer can be zero. We also own the printing presses. This could act as a general tax on the economy without a tax rate hike.

jnordwick• 7 years ago

Why would it possibly be a "black swan" event? All the numbers are public and we see it coming from miles away. Black swan event refer to something that isn't easily predicable because of their rarity. The government makes debt payments and calculations constanty. It's not like people just want up one morning and everything changes. That's not how markets work.

The people who pay these "everything will turn in a dine when people really understand" narratives are usually people who the markets are telling them they are wrong and cannot accept it.

aswanson• 7 years ago

What are your thoughts on Modern Monetary Theory, that the debt will never be a problem because the US is a currency issuer?

blunte2• 7 years ago

As with the climate, the old people in US power don't care about stuff that extends beyond their own lifetimes. The current policies and regulations (or lack of) are evidence of that.

fc_barnes• 7 years ago

So you basically didn't read the article, or it passed right over your head if you did...

crusso2• 7 years ago

Could you rephrase that in a way that isn't so insulting that it makes me just want to ignore you?

m10i• 7 years ago

I don't trade at all, but I am curious if there are any prominent indices/securities whose values are tied to the U.S. debt/GDP/etc. ?

pjc507• 7 years ago

Betteridge's law says no.

Less glibly, this article presents a good set of arguments for why not. The doomsayers need to be clearer with exactly how their proposed doom would come about - and why there would be no effective government response, and how this could happen without the rest of the world economy also getting into trouble and fleeing to the safety of the US dollar.

yasp2• 7 years ago

What amount of debt would doom us, Mr. Fisher?

_edo2• 7 years ago

Because debt-to-GDP is apples-to-nonsense.

No it's not. Debt is measured in dollars. GDP is dollars per year.

Debt/GDP is $/($/yr)=yr

This ratio converts debt, a number it's hard to have intuition for, to years. It tells us how many years of productivity we owe. For those of us who don't manage $30 billion in assets years of productivity probably carries more meaning than big numbers with 12 zeros.

QuesnayJr2• 7 years ago

This is a very clear explanation.

JimboOmega• 7 years ago

It does, but the author's point, I think, is that dividing by GDP isn't particularly meaningful. They argue that the cost of additional borrowing is a better measure - will people loan you more or are they getting nervous they won't get their money back?

You could divide by other numbers - an example the author gives is hard assets- and come up with a different percentage.

platz• 7 years ago

so, 103 years of productivity for the US?

bb123• 7 years ago

Isn't it 1.03 years?

dustingetz2• 7 years ago

The book "Looting Greece" by progressive economist Jack Rasmus explains in technical detail the "twin deficit" strategy budget deficit is balanced by trade deficit, which hints at why USA has aircraft carriers stationed around the world, projecting power that tilts the free markets in its favor which is what makes this strategy work. Here is an excerpt: http://www.dustingetz.com/:rasmus-usa-twin-deficit/

theflyinghorse• 7 years ago

I don't understand why US having military presence around the globe tilts the free markets in their favour. Realistically, no military outside of perhaps Russian could stand up against the US but I don't think US are outright forcing trade agreements at a gun point, or am I wrong?

gnode• 7 years ago

It's more nuanced than that. The debt/GDP number is talking about future dollars above the divider, and present dollars below the divider. FutureUS$ / (PresentUS$ / yr) is meaningless.

The government could choose to reduce the productivity value of the debt by reducing the value of the dollar (quantitative easing), or numerous other monetary policy levers it can pull. How many years of "productivity we owe" isn't a sensible metric when it's not to be paid now, and we can manipulate the number between now and maturity.

topkai22• 7 years ago

His proposed alternate metric, interest as a percentage of tax revenue is also deeply flawed- it misses the obligation to pay the principal, which has tripled since the low point in the early 2000s.

I like the finance wonks word for debt- leverage. Taking on debt is like going out further on a lever- the debter is more exposed to swings in the overall economy. While it's worked out fine so far, a high debt to gdp ratio exposes the US to higher risk on the downside.

pjc507• 7 years ago

But so long as the debt rollover remains straightforward, the principal never has to be repaid. Large parts of the economy probably couldn't survive repayment of all outstanding treasury bonds, they're too useful. They behave more like huge denomination bills with a tiny coupon.

JackFr3• 7 years ago

it misses the obligation to pay the principal

But you never really have to do that. You can just keep rolling them. If we could keep the debt at the same absolute level inflation and productivity increases would drive it into insignificance.

Of course the idea of keeping it at the same level is a fantasy.

pjc507• 7 years ago

How long do we expect roads to last? Or the investments that have to be made over someone's lifetime to enable them to retire? Even the big "high tech" weapons and aircraft investments which consume a big chunk of spending have 30-50 year project lifetime. The B-52 fleet is 55 years old, not counting the design time. Is it not reasonable to spread payment for that over the lifetime of the asset?

_edo2• 7 years ago

The financing of long-term Public Goods has to be one of the best arguments for government debt there is.

I'm not against debt[0] so much as I like interesting units and metrics. If you want to compare debt levels of different countries across history getting the local currency to cancel out means no converting 1870 dollars to 2019 dollars, no converting 1920 Yen to 1995 Azerbaijani Manats, etc.

The fact that Debt-to-GDP reduces to years, even if it's unclear what that means, lets us make years-to-years comparisons and makes charts like this possible[1].

[0] - Though I think what it's being spent on really matters cough: https://en.wikipedia.org/wiki/United_States_federal_budget [1] - https://en.wikipedia.org/w/index.php?title=File:Gdp_to_debt_...

treis3• 7 years ago

It tells us how many years of productivity we owe.

That's not accurate though. We can pay off the debt tomorrow and skip the years of productivity. It really is an apples to oranges comparison. The debt isn't denominated in productivity. It's denominated in dollars that the government can create for "free". Of course there are knock on effects of creating enough dollars to zero out the debt, but it's not equivalent to the entire country working for years.

0x445442• 7 years ago

that the government can create for "free"

One of the very smart things the U.S. has done is take a good portion of those printed dollars and invest in weapons which allow us to force the world to accept the same printed dollars. That's what really allows our government to be in that globally unique position. Resistance to this by other nations has various consequences. If you're a country that doesn't have a certain level of military deterrent you become victim of "regime change". If you are a country that meets that deterrent threshold you become victim of the foreign boogeyman FUD.

JohnFen• 7 years ago

It's denominated in dollars that the government can create for "free".

The government cannot create wealth "for free". It can print more dollars, but in doing so it makes each dollar worth less. No wealth is actually gained.

there are knock on effects of creating enough dollars to zero out the debt

Doing that is impossible, though. Reducing the value of a dollar means that you'll need even more dollars to repay that debt than you would have needed otherwise. There is no net gain here.

littlestymaar• 7 years ago

Debt/GDP ratio for a state doesn't make more sense than a debt/turnover ratio for a company.

years of productivity

You got the units wrong: the GDP isn't productivity, it's production (it's even consumption actually,but this is another subject).

RealityNow• 7 years ago

You're being pedantic and ignoring the whole point of the article.

dskjbfsakljb2• 7 years ago

I'll add that debt is the integral (well sum) of deficits. deficit/GDP, or deficit/revenue ($4T/$3T = 33%? is that right?) is far more worrying than just the debt/GDP.

However, I will concede that GDP as a measure of productivity is hard to measure, easy to manipulate, and less effective than other measures of productivity.

tehabe3• 7 years ago

The problem is, state debt is not like personal or corparate debt. If you cut your spending to pay of a loan, it is usually not a problem. If the state cut its spending to pay back a loan, it means people have to spent more money on another spot to make up for the budget cuts.

We see this currently in Germany, the German government is proud of their budget but at the same time the infrastructure is crumbling, trains are delayed, bridges are in need for repair or even replacement, broadband doesn't reach all places and I don't want to talk about climate change and the structural issue to which it will lead.

There is also one more thing about state debt, many people invest in state debt because it is a secure investment for the retirement and when a country no longer takes debt, this possibility is gone.

The ideology to have little or no state debt is hurting the economy and will do so in the future. And I'm not even talking about a recession or a depression which will come sooner or later.

samsonradu• 7 years ago

German infrastructure is top-class, trains work quite well and bridges are not collapsing. May I ask where you got this from?

EDIT

Please don't turn this into a flame war. I am slightly worried about the effects of mainstream media, as I've seen these kind of posts on Reddit also.

People keep hearing about the low/inexistent economic growth of countries like Germany or Japan and start thinking that these countries are a deep mess. The reality is quite far from it.

abugheratwork• 7 years ago

The ideology to have little or no state debt is hurting the economy and will do so in the future.

Ideology can be pretty dangerous. This seems like your main point. Back up, though:

[...] state debt is not like personal or corparate debt. If you cut your spending to pay of a loan, it is usually not a problem.

How is it less of a problem for a person, or for a corporation, than for a government, to have to reduce spending?

yellowstuff• 7 years ago

No single number will tell the whole story about a country's debt. GDP today is not a perfect proxy for GDP in 10 years (Japan's will probably be about the same, the US's will probably grow a bit, China's has a decent chance of growing a lot.) GDP today is not a perfect measure of economic activity today (Ireland has a really high GDP because companies are incorporated there but don't really pay much in taxes or do much to benefit Ireland. Actual Individual Consumption may be a better measure of a country's wealth. https://johnhcochrane.blogspot.com/2017/04/consumption-vs-gd... ) So Debt/GDP isn't nonsense, but it also could be potentially misleading.

Current interest rates can give a somewhat distorted picture for the US. Banks buy US debt because they have to due to regulation, other countries buy US debt as part of their economic policy, the net effect is that the US government is able to borrow money more cheaply that it should based purely on credit risk. Even so, the US is able to borrow money at historically cheap rates.

My understanding is that if current trends is health care costs and economic growth continue then in the long run the US will be unable to service its debt and maintain its current spending programs without raising taxes. Most spending is on the military, Medicare, Medicaid and Social Security, so there will be some difficult political decisions. However, that doesn't mean the US is close to a debt crisis today.

Someone2• 7 years ago

”No single number will tell the whole story about a country's debt.”

I don’t think anybody is making that claim. Problem is: if you can only rank values that have a total order (https://en.wikipedia.org/wiki/Total_order), so if you want to rank countries, you have to simplify.

For the judgment of “how deep is a country in debt” it also seems desirable to have the property that splitting a country into equal parts yields smaller countries that are equally deep in debt.

If you want that, “debt” on its own doesn’t cut it. Debt/population and debt/GDP are two metrics that have that property. They also are simple, so do not seem doctored, which correcting for modeled/guessed at/hoped for future growth or correcting for the age distribution of the population, average fertility, etc. easily could.

”GDP today is not a perfect proxy for GDP in 10 years”

Again: I don’t think anybody is claiming ‘perfect’.

dandare• 7 years ago

“If something cannot go on forever, it will stop.” [Herbert Stein]

Every dollar we spend on interest is not spent on investment.

wefarrell• 7 years ago

When interest rates are lower than inflation you're not spending money on interest.

glofish2• 7 years ago

How would you know where the money earned as interest is spent?

viburnum• 7 years ago

That’s not actually true. There more demand for liquidity than there are actual investments. That’s why government debt helps the economy. Same way poker chips help a casino.

JackFr3• 7 years ago

But that's misleading. The federal government itself owns more than a quarter of U.S. debt, money the government essentially owes itself. It’s an accounting entry. As an asset and a liability, it effectively cancels out.

Well, no. These bonds are held in the Social Security Trust Fund, and while yes in one sense they are both an asset and a liability, they are also funding a future liability (although not all of it). So you can cancel them out against the future liability or the current one, but not both.

(As to Social Security being underfunded, I had an econ professor explain Social Security could be fully funded immediately if the Treasury could just issue a new class of bonds which cost a penny and are redeemed for a trillion dollars in ten years, and sell them to the Trust Fund.)

ThrustVectoring4• 7 years ago

You cancel them out against the current liabilities. Retiree spending is entirely funded by current production; the only real question is whether it's through taxation or savings (savings is, after all, current production that is sold and not consumed. This is essentially a tax.)

Social Security's funding level is completely irrelevant - what matters is primarily how wealthy society is when current workers retire, and secondarily how much future workers will be willing to save and pay taxes.

rrggrr• 7 years ago

https://carnegieendowment.org/chinafinancialmarkets/78304

... the U.S. current account deficit and the country’s high level of income inequality distort the structure and amount of American savings.

Apes2• 7 years ago

It's always great to see an extremely intelligent person try to rationalize a core belief that's at direct odds with the cold, hard, and unforgiving reality they live in. The amount of mental gymnastics done here are Olympian, and this guy deserves a gold medal.

However, even the fanciest mental tricks are never going to change the fundamental laws of reality.

In the entire article he dances around second order effects and demonstrates why they're meaningless. Great, but there's one measure that actually matters: the percentage of our annual budget spent servicing existing debt. Right now that number is at 6%, and there's some share under 100% where it will cause our country to effectively go bankrupt. The closer we get to 100%, the exponentially higher the chance of bankruptcy.

Right now there's two things which make me scared this number is going to go up considerably:

One, US tax revenue is going up around 2% a year, but our outstanding debt is going up around 20% a year. The debt is rapidly outpacing economic and tax revenue growth. If nothing changes, paying off the debt will be 25% of our national budget in around 20 years, and 50% in 40 years. That's well within most our lifetimes, and is well in the extreme bankruptcy risk area.

Two, the US has access to unprecedented low rates of interest right now. The average rate on it's 23 trillion in debt is 1%. If that were to go up to a more historical 3%, interest repayment would jump to 24%. Due to the length of government debt, this transition would probably take around 20 years to fully happen.

Now combine the two into a nightmare scenario: debt continues to rise over the next 20 years at its current rate, and interest rates return to their historical 3%; and within 20 years repaying debt will explode to 75% of our budget. There is your potential black swan event.

Hopefully action is taken before any of this happens, but something has to give from where we are now, and pretending that there's no troubled waters on the horizon is absolutely insane and irresponsible.

zarro2• 7 years ago

+1 rep

istjohn• 7 years ago

On the other hand, top marginal tax rates are a fraction of what they were at their peak last century. We could double tax revenue at the drop of a hat, paying down our debt and ameliorating toxic wealth inequality simultaneously.

dpc_pw6• 7 years ago

I agree that in principle the inequality is causing instability and , and as much as I detest socialism, I don't see a peaceful way out of where we are not involving the "tax the wealthy... a lot".

Some comments: income taxes are the most stupid taxes ever. Rich people don't have incomes, they have capital gains. Increasing income taxes hurts middle-class: the rich wannabe. We need to abolish income tax, and turn it into asset tax, or at very least increase the capital taxes significantly. Tax people that are already rich, not the ones that are motivated to try to get there! Once they get there - then you can tax them.

Having said that - the taxes can't be too high, because people don't like taxes and rich people have plenty of resources to run away with their wealth.

So... there's no really easy way to get out of this mess.

bpt33• 7 years ago

Effective tax rates haven't changed that much over time [0]. Doubling the tax rate on the rich is unlikely to double tax revenue, and could easily decrease income tax revenue.

If we want to increase tax revenue to fund our current and future liabilities, the money is almost certainly going to have to come from tax increases on the middle class (who don't pay meaningful amounts of federal income tax for the most part) in the form of a VAT, as almost every other developed nation has already determined.

[0] https://taxfoundation.org/taxes-on-the-rich-1950s-not-high/

EGreg• 7 years ago

After Bretton-Woods, there is a lot of demand for US dollars as a reserve currency. And due to the petrodollar, US dollars are also needed to buy oil.

The US is in a unique situation that lets it print a lot more money than other countries. At the end of the day, we will end this debt by printing money. Anyone buying bonds has to factor in the possibility that the US dollar the coupons are paid in will be devalued. It's not a "risk-free asset". It just depends on when and how the US will start printing money, and where that money will go. We did quantitative easing for years, but the banks didn't increase lending very much.

A good economy is when we should have been raising taxes and paying down our debt. But instead, the Trump administration presides over the biggest debt, deficit and trade deficit in our country's history. So it seems to me that the next Bernie administration will absolutely need to do large infra projects a la FDR, Green New Deal etc. because the recession may be severe.

tabtab• 7 years ago

Re: At the end of the day, we will end this debt by printing money.

Normally this risks runaway inflation, but inflation has been subpar of late such that some "printing" may not hurt. However, it's a bad habit to get into.

To force discipline, we need something similar to a balanced budget amendment that allows Keynesian stimulus when warranted. However, it will probably have to have a "timer clause" to kick in several years away and gradually, because the side-effects could be a dampening of the economy, hurting current law-maker's reelection. Spreading the bitter medicine out over time may make it more politically acceptable.

dpc_pw6• 7 years ago

Low rates are a result of boomeres all over the world saving for retirement (+ CB manipulation). As soon as they start using that savings, instead of accumulating them both inflation and yields will tend to naturally raise again. More people to care for, less people to do the work -> inflation. Inflation expectation -> higher yields.

That $175T wealth figure is measured at the peak of everything bubble in the US. Real estate, stock market, bonds - everything is at the all time highs, after debt and low yields fueled decade. And yet still, according to the article government would have to confiscate 10% of all wealth in the America to pay the debt.

And that's just the official debt. What about unfounded liabilities, which are many, many times higher? https://www.forbes.com/sites/johnmauldin/2017/10/10/your-pen...

So basically optimists here say, that to pay the debt the government will need confiscate more than a half of all the total wealth in US, at its peak, without causing economic slowdown and without causing inflation (and thus yields) to spike. And that assuming the government doesn't accrue any new debt as it is running a balanced budget. And considering that fiscal spending is an important part of keeping this struggling economy going ... that balanced budget would have to come from the tax... like you would never seen before (basically double?). And again... all these taxation without crippling the economy.

And all that inflation and taxation, without people noticing and trying to counteract to preserve their wealth (tax avoidance, running into PM, crypto, foreign assets, whatever.)

Yeah... whatever keeps you sleep well at night. :D

plantain• 7 years ago

Low rates are a result of boomeres all over the world saving for retirement [citation needed] How did you come to that conclusion?

dpc_pw6• 7 years ago

There is 70M of Boomers in US. (Generally) about to end a decade or two of their most productive years: highest skills, highest level jobs, house paid off, kids out, etc. - trying to save and invest enough to give themselves a good retirement. Just yesterday I was listening to some YT podcast and boomers own ~74% of all US economical activity. Many of them accepted low salaries, for the promise of pensions and so on. Paid taxes but were promised medicare and other benefits that they expect to eventually get. They are (in great part) the savings glut: https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-a...

How else would your explain negative interest rates? That have not happened in the recorded history before and doesn't really make sense. There is a certain CB manipulation involved, sure, but generally - it's the result of many people competing to preserve and invest their savings. This trend will reverse - and then... wow... these Boomers are in for a surprise when it turns out we've spent their money on stuff like WeWork and other huge startups with no positive cash-flow, and rest was spent by the government.

ThrustVectoring4• 7 years ago

Inflation is basically necessary at this point in order to collapse the various asset bubbles without causing a mass default spiral on the debt issued to finance it. The housing crisis is a good portion of this; we cannot build our way out of housing without putting homeowners underwater on their mortgages en masse, and young people cannot tolerate the current trends of housing prices near areas of economic opportunity indefinitely. The only way out of this double-bind is to inflate away homeowner's mortgage debt as we make more available housing to prevent housing prices from inflating along the general trend.

dpc_pw6• 7 years ago

Agreed. But ... can there be A Beautiful Deleveraging https://www.youtube.com/watch?v=wI0bUuQJN3s ? I don't think so. It is all a dynamic system. I think there will be no inflation for a while, and when it appears it will be massive and almost uncontrollable. It is hard to "trade" on it, because I could imagine even a decade of politicians and CBs struggling with a deflation, until they winds change, and all their efforts finally start "paying of" and we have a period of a very high inflation. Or alternatively ... a severe stagflation for a decade or two, where it is hard to pay mortgage (afford a new one) despite prices generally falling - because eating comes before investing.

simplecomplex• 7 years ago

Some say debt to GDP does not matter, because we can print dollars. My question to them is: Would a 1000% matter? 100000%?

At some point people will start demanding the government provide everything because they’ve been told debt doesn’t matter and we can print money. It looks like we’re reaching that point because “Main Street” seeemingly realized in 2008 that there was no limit. That it’s a game of chicken with the Fed. Let’s give everyone $2000 / mo and free healthcare and education. Why have any limit on government spending? The Fed will monetize it after all!

Yang might not win this time around, but Yang #2 will be more popular and have bigger demands. Especially when another downtown and another bailout occurs. It’s getting very hard to convince Joe Sixpack that the printing press should only be used for the banks. Yang is the canary in the coal mine.

glofish2• 7 years ago

As the joke goes:

If you owe someone 100K and you cannot pay - you are in deep trouble.

If you owe someone 1 trillion and cannot pay - they are in deep trouble.

PeterStuer2• 7 years ago

What stands between the USD and the Zimbabwean Dollar is the worlds largest military/intelligence power not just prepared but using it's full strength to enforce the petrodollar.

PeterStuer2• 7 years ago

I don't mind the downvotes, but I would rather see rebuttals that would change my mind.

Corazoor• 7 years ago

Since you specifically asked for it: What really stands between the USD and the Zimbabwean Dollar is printing press funded spending.

The Fed is doing something similar with quantitative easing, but at a by far smaller scale, and the money mostly goes to banks anyway. It's injecting printed money into the real economy that spells trouble, and that is currently not happening in the US.

Also, while the military is definitely a boon to the US economy, most of that is indirect via guaranteed jobs and income, not via projected force.

Plus, in case of a hyperinflation, the military would become unmaintainable very quickly, exactly because of it's size.

All that said, your comment had basically nothing to do with the topic (debt), so there is where the downvotes come from.

Mikeb852• 7 years ago

Of course it won't. Worst case scenario, if the economy tumbles, the government prints money to pay debt, inflation happens, confidence is shaken and the economy slows. But at the end of the day, an economy is characterised by its ability to produce things and keep people busy (working). Money is simply the value of labour and production shifting hands. The nominal value doesn't matter as much as the real value (ie. the shit that's actually being produced).

Ambele2• 7 years ago

If you believe that inflating the debt away is a viable strategy then I have a 100 Trillion Zimbabwe dollar note to sell you for 40 cents. The Zimbabwe government tried that and look at what happened to their dollar! Also, I have a loaf of bread to sell you for $1,000.

Nowadays, America's largest export isn't soybeans or corn, it's the American Dollar. See this link for more info on the Petrodollar: https://www.thebalance.com/what-is-a-petrodollar-3306358

throwaway156503• 7 years ago

I no longer know how to view these concerns. The only mechanism I now know of that creates money in modern economies in order to purchase goods and services directly, without obtaining funds from circulation from other businesses, is debt created from financial institutions. In order to have healthy economies and create money and move capital, you must therefore have debt.

How did western economies function prior to this? I wish I was educated on the matter. I've not found good reading for this topic outside of the enclave of academia.

Mikeb852• 7 years ago

Land is a type of capital, landowners could produce agricultural products, accrue wealth, and debt was a thing back in the day as well. Often projects would be bank-rolled by wealthy landowners or even royalty (who accrued their wealth by taxing others). Labour also used to be extraordinarily cheap (or free). Go back far enough, everything was produced by individual labour, and things were simply traded for other things.

burke_holland• 7 years ago

This is some SERIOUS misrepresentation of the facts. Just as an example: "One-third of the debt is money the government owes to itself". To itself? And whom might that be? Oh right, THAT'S US.

That money is owed to the people, and they're probably doing to need it. Especially considering that Social Security, Medicare, and Medicaid account for 36% of the federal budget - which is....let me do the math - one third.

https://www.thebalance.com/u-s-federal-budget-breakdown-3305...

AnimalMuppet7• 7 years ago

And they're probably going to need it? Well, when is Social Security projected to run out of money? I think they're going to need all of it by then. (Yeah, I know, some is Medicare. It's also projected to run out of money, just a bit later.)

mylons• 7 years ago

i read some speech from a chinese community party member who's in charge of some aspect of financial planning, and they're basically counting on this happening. the speaker said the debt was more or less impossible to recover from, and it's just a matter of time and patience.

SomeOldThrow• 7 years ago

The only real problem is resource distribution. While we have the resources we’re gonna be fine. So power adjusts and America has less. As long as I’m eating I don’t care. If the government won’t feed its people, well, that leaves something truly magical in the air.

neilwilson3• 7 years ago

The US debt is a problem in the same way that the earth constantly falling into the sun is a problem.

You've missed a velocity vector in your analysis.

Ask yourself this: if you get dollars for your maturing Treasury, where do those dollars end up in aggregate? They are either taxed away due to them circulating past tax points as they are spent and respent, which eliminates the need for a bond, or they are saved which increases the demand for a new bond from the individual, the deposit holding bank and the central bank (on the same dollar due to the hierarchy of money).

Where's the problem?

Apes2• 7 years ago

Your analogs are poor fits:

The solar system is an extremely stable system, while our economic system is not at all stable.

Your proposed money cycle is based on the concept of a closed system, which the US economy is definitely not.

If the US government starts having to pay an unbearable amount of debt, money is going to outflow to other countries and make it harder for the US to issue new debt.

If the US just issues enough money to pay the debt off, then interest rates are going to go through the roof and overcompensate for what just happened, making the situation even worse. The US economy would probably collapse.

neilwilson3• 7 years ago

The dollar economy is a closed system. Dollars cannot be converted. They are always exchanged. So where do they go and what do people do with them? A paper dollar is just a receipt for a liability entry in the US treasury - wherever you are in the world.

For interest rates to go up, bond prices have to go down. If the Fed just buys up bonds that drop below par with new dollars, how can interest rates go up?

AnimalMuppet7• 7 years ago

If your velocity enables you to stay in orbit, there's no problem. If not, then you're just falling, which is also fine... until you hit the ground.

As for your analysis of what happens when you receive payment for a bond, you seem to be saying that the government gets the money back, either by taxing spending or by you buying a new bond. I don't buy that analysis, for two reasons. First, I could receive payment for a Treasury, and buy some other investment with it. And second, your analysis would remain unchanged even if the result was hyperinflation (that's "hitting the ground" in my first paragraph).

neilwilson3• 7 years ago

"First, I could receive payment for a Treasury, and buy some other investment with it."

You could. But that is just an asset swap. The person who gets your cash is then faced with the same choice you were - spend it (which will result in taxation) or save the money (which ends up with a bond purchase).

Always remember that money doesn't stop at the first use.

cryptica• 7 years ago

It seems like the whole financial system depends on the time delay between people agreeing to get a certain salary/price and then actually getting paid and spending it. By the time they actually get paid, the money is actually worth less than what they had originally agreed to. It seems that large corporations should be able to make a profit on that delay alone, even if they produce nothing of actual value. I guess it explains why huge powerful corporations like Apple and Amazon always ask for money up-front and then delay payment to suppliers for as long as possible. Seems like a vulnerability in the system.

maneesh• 7 years ago

Fascinating. What brought you to this conclusion?

ikeboy3• 7 years ago

Every company tries to accelerate revenue and delay expenses.

Nothing wrong with that, and if everyone knows about it it's hardly misleading anyone. They all take it into account.

big_chungus• 7 years ago

Our government does the same thing. "Tax witholding" means that I lose out many months of arbitrage. I could have invested that money, saved it an gotten interest, done any number of things. Tax day is once a year; no one ought to pay before then. It's a nasty trick to hide just how much people are paying from those who can't afford fancy financial advisors.

esoterica2• 7 years ago

Why do you think you are entitled to not pay a cent before tax day?

munk-a• 7 years ago

Oh darn, we're talking about the debt again? I guess it's time for Democrats to be elected, be blamed for letting the debt run away, and cobble together a half-assed fix that the next Republican presindent blows away.

bobby444• 7 years ago

The debt to GDP ratio has been a major concern for years. That's why I recently moved me and my family to Texas. Texas is a no income tax state and I need to keep more of my money and then reinvest it in gold. Maybe I am a little paranoid but also now have all of my info going to a PO box like a company, https://physicaladdress.com just in case gov goes crazing with trying to take more and more of my hard-earned income.

jeffdavis• 7 years ago

I don't see the point of talking about the $23T number, which doesn't account for unfunded liabilities.

I guess the thinking goes that we can it's easier to renegotiate social security and medicare benefits than to renegotiate the interest payments on a bond. Not sure that's true -- it seems like inflation is the only reasonable solution to either of those problems.

omani• 7 years ago

dont know why people would want to pay back debt.

without debt there is no money. the art is to not inflate too much too quick.

ur-whale2• 7 years ago

Legend has it Picasso used to pay as much as he could using checks [1]

TLDR: not many of these were cashed, because people loved the idea of having his signature on a piece of paper and kept the checks.

So, effectively, every time he paid with a check, he essentially got products and services for free.

Now, if you take the dollar - essentially a fed IOU - and in theory ultimately redeemable against some sort of tangible piece of American property (real estate, infrastructure, intellectual property, etc ...), it is very tempting to draw a parallel, namely;

As long as the dollar is the world's currency reserve and people stockpile it, greenbacks are just like Picasso's checks: the IOU never gets exercised.

And America can keep on issuing debt for ever ...

[1] https://www.fool.com/investing/small-cap/2004/12/08/picassos...

boyadjian• 7 years ago

Yes, of course. Every Ponzi scheme has an end. It is just a question of time.

Ambele2• 7 years ago

Yes this will doom us if it is not taken care of but I expect the American people will get smart and elect congressional leaders that will care of the growing national debt before we default.

9.8% of all of our government's revenues (tax dollars) are wasted on paying interest on the $22 trillion dollars of national debt(1)(2).

1) https://www.cbo.gov/publication/55342

2) https://www.usdebtclock.org/

Sumaso• 7 years ago

Please read the article.

dusrus• 7 years ago

For most households bankruptcy happens slowly, then quickly. I think we need to be more mindful of our debt. Most people I talk to are like, "It's not a problem yet." Which implies we will deal with it when it is a problem... which is dumb.

WalterBright• 7 years ago

If the GDP grows faster than the debt, there's no need to ever pay it off.

Similarly, if you borrow money and invest it, and the investment pays more than the interest on the debt, there's no particular reason to ever pay back the debt.

TimPC• 7 years ago

The big difference between debt taking 18% of budget at historically high interest and 8% of budget at very low interest is that if the low interest ever becomes very high again (say around 9x what it is now, which has happened historically) you're talking about interest taking 72% of budget which would be catastrophic. 18% at the historic high would require 4X the historic high (an 80%+ interest rate, which we have good reasons for believing won't happen in the US).

rnernento• 7 years ago

This is not a well written or useful article.

First it says debt as a percentage of GDP used to be higher so it should have been scarier. Then it says current interest rates are low but doesn't give anywhere near the weight to that statement they should.

Even in the article they state 8% interest was normal 30 years ago but then go on to say sustained 8% interest going forward is crazy talk. WHY? Why wouldn't interest rates go up? They certainly can't go much lower...

If they did go up our debt would take a much higher percentage of the budget than the 18% of the 80's and 90s. This is a very real problem.

coliveira• 7 years ago

The end of the American empire is determined by the fact that the USA won't be able to pay for the expenses of maintaining its military force. The US is already wasting more than half of its discretionary spending on the military. These military expenses already account for 89% of the federal government deficit, which will be $1.101T in 2020 [1]. These expenses are going up faster than GDP growth, and are not expected to go down, since this administration refuses to close the 20-years old wars on Afghanistan and Iraq, and is now actively operating in other fronts of the general war on the Middle East. The US also has to maintain more than 800 military basis in 70 countries. It takes huge amounts of money to keep a military force of this kind, especially when the country is under severe deficits, which is the current situation of the US government. It seems that it will take a few years for the shoe finally drop, but all the bravado of the Trump era is moving the US into a situation in which it cannot afford to maintain its empire.

[1] https://www.thebalance.com/u-s-federal-budget-breakdown-3305...

zarro2• 7 years ago

crypto will save us

Will America's debt doom us?

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