People forget that every transaction has two parties. Someone's debt is another's asset. The national debt is mostly owned by Americans. That means the national debt is an asset to the private sector. This is the way all money works because money IS debt.
The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government. The only reason to downgrade is if there is a real risk the US government will collapse and cease to exist for political reasons. There is no fiscal risk.
The deficit hawks don't understand how money works. The real concern is private debts, not government debts. But you never hear about that in the media.
> The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts.
Right, but it isn't like the government controlling the money supply is some sort of get out of jail free card. If it was, why would the government even have debts? US could just pay off all the debt right now.
If the government starts printing money to pay interest on or pay off our $35+ trillion dollar debt, that will cause inflation, which is like a regressive tax. If the government doesn't start printing money, then a greater and greater share of our tax revenues go towards paying the interest. Neither of those outcomes seem particularly good to me.
Debts in the private sector have other downside like economic instability, but it seems to me that private sector lending is responsible for a lot of great economic developments (of course including our little VC funded corner of the world).
The government doesn't need to sell bonds, but does for practical reasons. It provides a safe asset for wealthy people and organizations. If you haven't realized, but banks only insure accounts up to $250k. There needs to be a safe mechanism to store more and treasuries serve that purpose. Also bonds help drain bank reserves! Selling bonds actually slows down bank lending and reduces risk taking in the banking sector. Also too many reserves make monetary policy from fed ineffective.
The national debt is simply all the money the government created minus the money it destroyed from taxes. Another way of thinking about it is it's national savings.
The boom and bust cycles happen because of private sector debt cycles not government debt.
So is it your assertion that if the government decided to stop selling bonds (because let's say it no longer cared about those "practical reasons") and just paid off all the debt by printing money, that doing so would NOT cause high levels of inflation? Or that it would, but that high inflation is not a problem? Or that the status quo of ~20% of tax revenues going to interest payments is not a problem?
I guess I don't see the great societal benefit of the super wealthy a safe asset to park their wealth in, but I do see the societal harms of government borrowing (mentioned above).
Bonds are just money that pays interest. If you exchange interest bearing money with money that doesn't return interest, you tell me what you think will happen.
It’s extremely well known what happens in this scenario: When governments start printing money like nothing matters and there are no consequence, the currency collapse into a hyper inflationary death spiral.
You act like that interest payment is just a technicality or something. It’s not. It’s a market rate that reflects the world’s belief in the soundness of the currency and government.
Throw that away and it all comes crashing down.
The US doesn’t exist in global isolation. We still buy things internationally as inputs to our factories and to make everything work. If we start a hyper inflationary currency death spiral where the government prints money out of thin air as a solution to spending problems, the value of our dollars becomes progressively less, hence the inflation. Then we all, including the government, have to spend more of those dollars, so the printing increases, and it becomes a self-reinforcing cycle.
This entire line of thinking that it doesn’t matter is basically quackery. It has been tried. It does not work.
Interest rates will fall but beyond that it's very non-obvious what will happen. Money becomes a hot potato? Cashflow-generating assets get bid up to extreme valuations? Speculative assets like crypto gets carried along for the ride? An increase in private borrowing, the money supply, the velocity of money, and inflation?
On the other hand, the government debt interest burden goes down, which means a slowdown in the growth of the base money supply (even while borrowed money increases). Perhaps this slows long-term inflation, but that in turn might mean inflation driven by growing private debt and speculative malinvestment swings well past equilibrium and turns into a bubble that pops into eventual deflation.
How would swapping interest bearing money for non interest bearing money cause inflation? If anything it would force people to chase yields and you will get a boom in prices for other assets. But that money isn't going to be used to buy t-shirts, electronics, and cars because it's mostly owned by rich people and organizations.
Those rich people and organizations invest in stuff like businesses and real estate. The businesses spend money on things (including labor) driving up costs. Rent and land costs get more expensive too
Usually increasing money supply creates demand for new businesses. Under normal economic times this isn't inflationary because supply increases with growth in money. It's inflationary only if there are resource constraints (think covid).
I guess I would agree if there were no resource constraints, money supply increase wouldn't be inflationary, except I think there are resource constraints.
US is basically at full employment. Labor is a very constrained resource and quite inelastic (for example, it takes ~30 years to grow and train a new doctor). Housing supply in the US is increasing, but the timelines here are glacial. I don't see how increasing the money supply won't increases wages and land values. And labor and land pretty much feed into the costs of everything else.
Sure, a few things which are mostly imported or automated (t-shirts, some commodities, etc...) might be relatively stable in price, but the bulk of household budgets isn't t-shirts. It's stuff like housing and services (healthcare, education, etc...); if wages and land prices go up, housing and services get more expensive.
> The national debt is simply all the money the government created minus the money it destroyed from taxes. Another way of thinking about it is it's national savings.
The national debt is all the money spent minus money collected via taxes
If a government starts printing money like nothing matters, we already know what happens: Hyperinflationary death spiral. The government gets money to spend, but it crushes the value of the currency in the process. In crushing the value of the currency, they then need to print more money for the next round of spending, which further devalues the currency, which accelerates the cycle.
It's not "just 250k." There are different classifications that the insurance covers. For example, a trust account (considered any account with a beneficiary listed) should cover 250k + 250k per beneficiary, with a cap (might not be implemented yet) of 1.25m.
In addition to that, most FIs purchase some form of excess share insurance to cover deposits beyond the 250k.
You would need a very large amount of deposits at a single institution to run up against the insured limits. If you are ever concerned about that, you can reach out to your financial institution(s) and ask them if you have any uninsured deposits.
> Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government.
> The deficit hawks don't understand how money works.
I’m afraid it’s you who doesn’t understand how national debt works. The US government doesn’t have infinite leverage to do whatever it wants with its currency with no consequences. We have to sell our debt on the public market. If we start acting like we’re going to pull currency tricks as the way to fight the debt, the interest rate we have to pay on the debt goes up quickly.
As it goes up, we have to pay more every year to service the interest on that debt. If we’re in a situation of high budget deficits the only way to service that additional interest charge is by issuing more debt, which turns into a debt spiral.
Waving it all away as a non-issue is a severe misunderstanding of the threat.
If you were to just erase private sector debt, not much happens on a socio-economic scale. If a company is owed money, but at the same time owes people money, the debt on either side is cancelled out.
With government being the actual source of money, if it owes a lot of money, it has to "print" it, which is exactly how you historically get inflation, which then causes rising prices. This literally happened during Covid.
Lets also not pretend that the current administration actually understands anything about economy either.
>There is zero risk the government couldn't pay it's dollar debts if there is still a US government.
The real concern is not that the government cant pay it, it is that the government has to pay it out of revenue alongside obligations, leading to runaway inflation and economic damage.
In theory, governments can run on new printed money. It just makes for a terrible market to conduct business.
High inflation wipes out currency denominated debt holders and creates a terrible environment for investment and contracting.
It increases transaction costs to a level that is often prohibitive.
> In theory, governments can run on new printed money.
Anyone who thinks this is an infinite money glitch for governments should see what has happened when other governments have tried it. Hint: Search for “hyperinflation”
If you just start printing money to spend it, the currency crashes in value, which necessitates printing even more money to maintain the same level of purchasing power, which crashes the currency even further. It’s how you end up with people paying for bread with trillion dollar bills. Sure you can keep printing that money, but acting like it’s a cheat code or even a positive thing is to ignore all of economic history.
Yep, I have lived in a country during such a hyperinflation, when all the ordinary people, including myself and my family, have lost their entire lifetime savings.
Initially, my salary as an engineer has decreased quickly in value to the equivalent of $2 per day. Then, for a long time, my salary has been approximately doubled every month, so that by the beginning of the month it was worth the equivalent of about $2 per day, but by the end of the month it was worth only the equivalent of about $1 per day.
Before the hyperinflation started, I had saved all the money for buying a new car. Unfortunately, I had not predicted what would happen, so I have not closed a deal quick enough. In a few weeks you could no longer buy even a TV-set with that money. A short time later, you could barely buy some decent food with it.
Buying some electronics or programming book could require the salary for 2 months. Funny times.
Inflation only correlates with money supply growth if there are real resource constraints, otherwise you just get new businesses and services. Also people also tend to save more when they can, which takes money out of circulation.
That's one possibility, but it depends a lot on where the money gets injected and where the inflation happens. If it balloons real estate prices before wages catch up, you don't necessarily get that growth of investment into productive areas. Instead it gets more expensive and riskier to start a business, with higher rent payments, and meanwhile a lot of asset-owners retire on their newfound wealth. It gets harder to convince lenders and investers to put money into real production when speculating on land and collecting rents starts getting such good consistent returns.
When there is inflation, nobody can save anything, because the value of any savings decreases too quickly.
Everybody who has made prior savings loses them, unless they predict the inflation and buy something valuable, like real estate, with all the money they had.
As long as there is excessive inflation, any money earned must be spent immediately, before losing too much value. For ordinary people and small businesses this makes it very difficult to buy expensive things, because it is hard to save money for that and credits may become too risky.
What about the labor market? Where are you getting more workers given unemployment is extremely low and the current administration is against immigration?
That should lead to salary increases which could lead to inflation.
The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government. The only reason to downgrade is if there is a real risk the US government will collapse and cease to exist for political reasons. There is no fiscal risk.
The deficit hawks don't understand how money works. The real concern is private debts, not government debts. But you never hear about that in the media.