The Richest Country In The World Is Now Bankrupt

[ownyourfuture]

Now I'm really confused. If the debt can be repaid without raising taxes or reducing spending, then just were does the money to pay the national debt come from?

This reminded me of a quote from an article discussing modern monetary theory.

The basic argument from MMT promoters, is that “anything that is technically feasible is financially affordable,” because a government that creates its own currency can borrow in that currency & then pay off the resulting debt by creating more of it.

I file that under, if something sounds too good to be true............................

 

[target2019]

One thing I note about the growing US debt is that it gets a lot of attention. With a substantial divide between two positions arguing non-stop, we can be sure that attention will continue to be diverted away from other matters of national importance.

 

[flyingaway]

Well, I'll jump in here and ask a related question to my "how much debt is too much?":

"When did we reach the point that further debt was not a good thing for the US Government?"

The amount of current debt itself is a huge problem, the more serious problem is that the government doesn't seem to stop adding more to the total amount.

"I don't know how we can pay for it, just do it."

 

[Qs Laptop]

The amount of current debt itself is a huge problem...

The question is, "How much debt is too much?"

Your answer is a circular argument. Essentially you (and others) are saying:

"The debt is too much because the debt is too much."

 

[Aerides]

Ok, so let's say I say "I am 20 million dollars in debt" - woah, huge, terrible. Big numbers for a person.

But if I have a $50m home, and $200 million in property and a business with near-guaranteed income for the next 100 years...then would anyone be so worried for me?
Not really.

Debt, when not viewed against assets and income, is silly.

When I was 26, $7k in debt was crushing me. Today that would be a rounding error, probably less than I lost or gained yesterday.

$33T is unfathomable to any person, but the US is not a person, and the assets and income are also unfathomable.

 

[aja8888]

True, but absent extreme circumstances corporations just refinance debt, if their financial situation has improved the interest rate is lower or vice versa so your point really has negligible merit.

Corporations in trouble can only refinance debt if they find lenders. Sometimes they can't, and if you don't believe this, look at how many oil companies went under in the last 5 years as they were buying and drilling properties on leander's funds.

Bankruptcy court is full of corporations that went broke and can't get refinancing or new money due to lack of trust in them paying back loans.

My statement has lots of merit. You put corporations in the same sentence as the government's ability to "just print more debt", which is not a feature of corporate finance, especially for companies that are a bad credit risk.

 

[Qs Laptop]

Ok, so let's say I say "I am 20 million dollars in debt" - woah, huge, terrible. Big numbers for a person.

But if I have a $50m home, and $200 million in property and a business with near-guaranteed income for the next 100 years...then would anyone be so worried for me?
Not really.

Debt, when not viewed against assets and income, is silly.

Yep. Which is why the comparisons between a person with high credit card debt and/or a big mortgage and the US government debt are faulty comparisons. The comparisons are usually followed by a rhetorical question like, "If we can't run our households like that, how can the US government continue to do so?" Which is a totally inapplicable comparison.

I fear the opposite is true--People ARE running their household finances like the US government because they see the government getting away with it and figure they can too.

 

[MichaelB]

Eventually not paying corporate debt usually results in bankruptcy. Government just issues more debt and converts it to dollars until the currency fails via inflation

Big difference..

Corporations in trouble can only refinance debt if they find lenders. Sometimes they can't, and if you don't believe this, look at how many oil companies went under in the last 5 years as they were buying and drilling properties on leander's funds.

Bankruptcy court is full of corporations that went broke and can't get refinancing or new money due to lack of trust in them paying back loans.

My statement has lots of merit. You put corporations in the same sentence as the government's ability to "just print more debt", which is not a feature of corporate finance, especially for companies that are a bad credit risk.

I think your point is valid. Lenders and credit rating agencies hold both governments and businesses to similar standards, and the risk of loss is reflected in the rates being offered.

It’s safe to say current rates show lenders are not overly concerned about too much public debt.

The Federal government can’t just print more money, it’s not that simple, but it can borrow, and the central bank can buy all the debt, even when this risks bad outcomes.

 

[olyveoil]

"In a recent episode of "The Rich Dad Radio Show," financial educator and author Robert Kiyosaki expressed grave concerns about the United States’ financial health. As of Nov. 24, the U.S. national debt had reached $33.8 trillion. Guest speaker Jim Clark, CEO of Republic Monetary Exchange, highlighted that actual liabilities, including entitlements, could be as high as $200 trillion."
https://finance.yahoo.com/news/richest-country-world-now-bankrupt-141245951.html
What do we do then? Kiyosaki recommends gold and real estate.

Kiyosaki is selling something. I not buying.

 

[olyveoil]

The fact you are asking "when" means the question no longer is "if" and that's enough to warrant my concern. Default might not happen within my lifetime, but I care about leaving things in some semblance of order for future generations.

No...it doesn't mean when just because one charlatan asks it.

 

[pb4uski]

Corporations in trouble can only refinance debt if they find lenders. Sometimes they can't, and if you don't believe this, look at how many oil companies went under in the last 5 years as they were buying and drilling properties on leander's funds.

Bankruptcy court is full of corporations that went broke and can't get refinancing or new money due to lack of trust in them paying back loans.

My statement has lots of merit. You put corporations in the same sentence as the government's ability to "just print more debt", which is not a feature of corporate finance, especially for companies that are a bad credit risk.

I guess we'll have to agree to disagree on your statement having "lots of merit". And I didn't say anything about the government's ability to "just print more debt" so please stop making stuff up. The point is that this whole silliness about the US debt having to be paid at some point is crazy-talk. US government debt is the most sought after in the world and I don't see that changing.

 

[Gumby]

MODERATOR NOTE: We can disagree without being disagreeable.

 

[Markola]

I suspect this same discussion will have more intensity as low interest government (and corporate debt) is refinanced with higher interest rates. Total debt might be an abstraction to some here but the higher payments will will have to come from somewhere. I suspect the money will be squeezed from programs, extracted from higher taxes and, most of all, conjured from thin air. The latter is just an indirect way of taxing everyone, because the purchasing power of our dollars is diluted with the monetary expansion.

So how do you think the higher debt payments in this higher interest rate environment will be paid? Someone has to pay the piper.

 

[USGrant1962]

Wharton school suggests that the current trajectory will become unsustainable in the financial markets within 20 years. They suggest that a debt-to-GDP of 200% is about the limit that the economy can absorb. They are not saying explicit or implicit default is inevitable, but rather we have a limited time to control spending and/or increase revenues.

https://budgetmodel.wharton.upenn.e...-does-federal-debt-reach-unsustainable-levels

• We estimate that the U.S. debt held by the public cannot exceed about 200 percent of GDP even under today’s generally favorable market conditions. Larger ratios in countries like Japan, for example, are not relevant for the United States, because Japan has a much larger household saving rate, which more-than absorbs the larger government debt.
  
• Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation). Unlike technical defaults where payments are merely delayed, this default would be much larger and would reverberate across the U.S. and world economies.

Oh, and it's a model ... see below.

 

[Qs Laptop]

Wharton school suggests that the current trajectory will become unsustainable in the financial markets within 20 years. They suggest that a debt-to-GDP of 200% is about the limit that the economy can absorb. They are not saying explicit or implicit default is inevitable, but rather we have a limited time to control spending and/or increase revenues.

https://budgetmodel.wharton.upenn.e...-does-federal-debt-reach-unsustainable-levels

Thanks for posting this.

 

[pb4uski]

Moral: We need to do something to reduce annual deficits... and soon.

But IMO if increased taxes are off the table as the DC political climate suggests, then I think we are doomed as it can't be totally done on the spending side.

 

[MichaelB]

Moral: We need to do something to reduce annual deficits... and soon.

But IMO if increased taxes are off the table as the DC political climate suggests, then I think we are doomed as it can't be totally done on the spending side.

I like Warren Buffet’s suggestion to balance trade by limiting imports to export values. Eliminating the trade deficit would allow fiscal reduction without a corresponding decline in aggregate demand. In other words, public spending would fall but there would be no loss of employment.

The trade off to this would be a decline in the value of the US$ and probably a loss in “reserve power”. The US$ would be a less effective foreign policy tool.

Edit to add: I think there’s a fair chance that the US population would be unwilling to pay the price for a more balanced economy.

 

[Gumby]

I like Warren Buffet’s suggestion to balance trade by limiting imports to export values. Eliminating the trade deficit would allow fiscal reduction without a corresponding decline in aggregate demand. In other words, public spending would fall but there would be no loss of employment.

The trade off to this would be a decline in the value of the US$ and probably a loss in “reserve power”. The US$ would be a less effective foreign policy tool.

Edit to add: I think there’s a fair chance that the US population would be unwilling to pay the price for a more balanced economy.

We had an interesting discussion in 2011 about the fact that we will have a budget deficit so long as we have a trade deficit. (Discussion here: https://www.early-retirement.org/fo...trade-deficits-and-budget-deficits-55045.html)

 

[MichaelB]

We had an interesting discussion in 2011 about the fact that we will have a budget deficit so long as we have a trade deficit. (Discussion here: https://www.early-retirement.org/fo...trade-deficits-and-budget-deficits-55045.html)

Very good memory, Gumby. Nothing has changed since then.

An interesting interview yesterday in the FT with Claudia Sahm (here), a well know economist who spent time at the Fed. A few snippets

My view is that it’s completely misguided to have a discussion about the size of the federal debt. The entire conversation about r minus g, while maybe useful for macroeconomists to think about, ignores that it matters what we spend on.

Sahm: The way I’d frame it is that the stakes are higher and higher for doing spending in a responsible way. If the government is spending in a way that is targeted and effective, say, at raising productivity, that’s money well spent. I would never want to say that spending will “pay for itself”, because that claim has a very dubious history. And yet if you do it right, it does, at least to some extent.*

The other piece is getting into the weeds of what the federal debt is: social security and Medicare. If you do not do something to pull in those expenses, you’re done. That’s a very difficult, delicate conversation.

But as macroeconomists, we’re not setting up a framework that really pushes policymakers to think in those terms. We just say, “It’s too big!”

She argues that increasing productivity is the way to deal with debt.

It should be noted that prominent macroeconomists (Summers et al.) do not share her view on this, nor did they agree on inflation in early ‘21, but her view has shown to be more accurate.