Government debt needs to be repaid, and other myths about the federal deficit

https://www.barrons.com/articles/federal-deficit-debt-trillions-fed-investors-c8df4121

by MBCook • 3 years ago

33 53 3 years ago

I don’t see why anyone would trust future payments in the dollar. It’s not backed by anything but trust. Sure, you’ll get your social security at $5k/month in 30 years, but the money will be worth toilet paper. Sure, your army pension will be there, the raw $$ amount, also worthless.

Gabriel_Martin2• 3 years ago

To me, it seems there are two sides to your point, one about trust, and the other about dollar value in context to growing federal debt. As for the trust, I think part of where things go beyond trust comes from a sort of self-reinforcing economic strength.

When the average monthly expenses for an American household add up to about $5,500, certain industries (like transportation (16.8 percent of those expenses), or food (12.8 percent) will always view the American economy as a leading market to operate in. At a macro level, it would seem that many businesses making this similar judgement call would create a dynamic that goes beyond trust.

Regarding the buying power of pensions point, I believe there are cost of living adjustment laws for buying power which require Army or Social Security pensions to react to USD's changing buying power over time.

maxerickson• 3 years ago

The existence of a rule doesn't mean the thing will happen.

(There's no reason for government policy to eschew abundance, so I'm not particularly worried for the future, but that is because of the dynamics of the situation, not the laws that are in place)

Supermancho2• 3 years ago

It’s not backed by anything but trust.

It's backed by the ability of the US government (and military) to ensure that the US is operating. As long as the US maintains a world hegemony, it's a safe bet. If it loses a series of engagements (not a single theater of economic interest), it's time to hop on to another currency. Ofc, that's just how I see it.

a-user-you-like5• 3 years ago

Sure, backed by a large army that ensures the fed prints the value of your pension away.

riku_iki9• 3 years ago

As long as the US maintains a world hegemony, it's a safe bet

but does US maintain a world hegemony? How does it demonstrate hegemony?

riku_iki9• 3 years ago

I don’t see why anyone would trust future payments in the dollar.

the issue is that other currencies can be trusted even less.

Gabriel_Martin2• 3 years ago

It's interesting to me how visceral of a reaction the ideas that underpin this article create in so many different individuals' comments I've read in threads like this, despite economics and monetary policy typically being so boring.

One of the fascinating threads to pull within it is the origin of debt and credit creation. It raises some fun questions (some of which are just more random offshoots related to my interests than monetary policy or economic theory):

1) Did all private wealth held in USD originate as monetized federal debt at one point?

2) If banking systems didn't have access to fraction reserve systems, would they be effective tools for debt/wealth creation?

3) Is debt creation the same was wealth creation? How can labor and commodities even be effectively monetized without fluid systems of debt creation?

4) If the lowly game of poker was once used as way to build ad-hoc credit and wealth, before more sophisticated financial systems were more commonplace, how rigidly should we look at debt creation at all, federal or otherwise? Perhaps more gamified and ad-hoc systems would create a higher baseline of wealth globally? [1]

So many interesting questions.

1: MIT 15.S50 Poker Theory and Analysis, IAP 2015 https://www.youtube.com/watch?v=IZZ4y5GfdOU

onionisafruit2• 3 years ago

Has any state that has eschewed these myths and run their monetary policy accordingly? If so, how is it going for them? Seems like a recipe for inflation, but what do I know.

bryanlarsen3• 3 years ago

The article states that too large of a deficit causes inflation.

onionisafruit2• 3 years ago

I see that now. Completely missed it before.

dragonwriter3• 3 years ago

Has any state that has eschewed these myths and run their monetary policy accordingly?

Essentially all of them that make their own decisions? Especially "government debt needs to be repaid". Running perpetually increasing nominal debt balances is fairly normal.

The myths are much more common (in incoherent, shifting, inconsistent combinations) in public political discourse about government policy than in actual policy, except policy directed by externally-imposed constraints from (mostly) the IMF.

bryanlarsen3• 3 years ago

We know what will happen if it is repaid, because Andrew Jackson paid off the debt in 1835. The result was arguably the worst recessions the US has ever experienced.

AnimalMuppet2• 3 years ago

Given a sample size of one, it seems hard to be certain that is causation and not just correlation.

dragonwriter3• 3 years ago

Given a sample size of one, its pretty hard to be certain that its correlation, either. Even if it was relevant, which its not, because in 1835 the US was on the silver standard, not US-issued fiat.

halJordan• 3 years ago

Einstein had zero samples when he asserted special relativity. Now im not saying evidence is worthless. I am saying that demanding evidence and sample sizes isnt and shouldn't be a bludgeon you use to win an argument or discredit a plausible logic.

smitty1e2• 3 years ago

The comments on The Famous Article are interesting, capturing the spectrum from "Spot on!" to "MMT is bollocks."

I fall into the latter camp. I think the tidal musical chairs is going to halt the sound, see the tide gonout, and expose copious corpulent cabooses in the buff.

AnimalMuppet2• 3 years ago

Even Krugman says that MMT is bollocks.

You can decide whether that makes you believe it less, or more ;-)

dragonwriter3• 3 years ago

Even Krugman says that MMT is bollocks.

Krugman seems to be fully in line with the policy positions typically associated with policy advocates associated with MMT, his disagreement with MMT is that given the theory's position (he has shifted over time between characterizing this as an apparent and a clear position) on the limitations of traditional monetary, a strict application of MMT would actually come to a more conservative policy recommendation on government fiscal policy because MMT denies (or seems to deny) that traditional monetary policy can backstop fiscal policy if the monetary effects of such policy aren't what is intended. He agrees with MMT (both theorists and most of the MMT-influenced policy activists) that the only real constraints on fiscal policy are monetary effects (the positions most MMT critics take issue with), but disagrees with (what he sees as the position of) MMT theorists on traditional monetary policy being ineffective at its monetary goals. I'm not familiar with the source work in MMT to know if the position he takes issue with is actually the position of MMT theorists, but I'm familiar enough with the less academic policy advocates associated with the MMT movement that I've always considered their advocacy to be in line with orthodox Keynesianism more than even most policy advocates who rhetorically are Keynesian, because the latter tend to -- despite embracing the positions which clearly make it out to be a false constraint -- adhere rather strongly to the preference that the government play-act as if the finite public purse (the "fisc") were a real thing outside of the domain of monetary policy, though they'll embrace things like countercyclical deficits, whereas MMT-influenced advocates tend to embrace that a fiat currency budget doesn't have a fisc and is constrained only by the monetary effects of the money it creates by spending and destroys by taxing.

But these MMT-influenced advocates don't generally advocate around the view of the uselessness of traditional monetary policy as currently entrusted to the Fed that Krugman takes issue with; they tend to prefer using traditional fiscal policy within its monetary constraints more actively for the purposes of traditional monetary policy because its easier to fine-tune the distributional impacts within the aggregate target, not because the Fed controlling rates doesn't work for macro-level monetary functions. So, in a sense, academic MMT may be a different thing that policy-world MMT, with the latter being mostly Keynsianism without fiscal policy cosplaying a commodity money constraint in a fiat money system.

MuffinFlavored2• 3 years ago

A related myth is that the government needs to repay its debt. “Debt” is a misnomer; government debt is just money (or purchasing power) in another form. A $20 bill is a liability of the Fed, which makes it a liability of the federal government. A $20 bill never has to be repaid; it just is. Fundamentally, Treasuries aren’t much different.

A debt-like characteristic is interest. We "owe interest" to those who hold our debt.

https://www.marketplace.org/2023/05/26/who-does-the-u-s-owe-...

As of July 2023 it costs $726 billion to maintain the debt, which is 14% of the total federal spending.

https://fiscaldata.treasury.gov/americas-finance-guide/natio....

fjskskfj3• 3 years ago

Right, but at an interest rate that the fed sets…

ageek123• 3 years ago

No, the market sets the interest rate. The government issues bonds to fund the government, and they have to offer an interest rate high enough to get buyers for all of the bonds they are selling.

throwoutway• 3 years ago

Imagine the day when the US will so much in interest that it's budget will be constrained and it can't pay salaries, and it will never pay back the principal

wait_a_minute• 3 years ago

Does interest need to get paid? Yes. It is true that gov debt is not like household debt, but it isn’t an infinite lever. Those interest payments can get really steep.

fjskskfj3• 3 years ago

Unless the fed chooses to lower interest rates… and that’s before you talk about minting a coin

naveen99• 3 years ago

Overnight debt gets repaid daily at the (federal funds rate). and long term debt which averages around 4 years probably, gets 1/(365*4) paid daily.

raincom• 3 years ago

Government debt doesn't need to be repaid, as long as exporters can swap their real assets with nominal currency USD. Sitting on such a luxury, one can preach to the world that 'govt debt doesn't need to repaid'. Go and ask all countries who can't borrow money in their national currencies, and instead have to borrow in USD.

andreskytt• 3 years ago

Underneath that high-level hand-waving there’s still a pretty simple concept. If I buy T—Bonds, I bloody well expect them to be cashed at maturity. Otherwise, who’d buy them? And I am under no obligation to buy goods and services from the US for the dollars received.

Government debt needs to be repaid, and other myths about the federal deficit

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