
The U.S. Debt Ceiling Expired on March 1 and Nobody Cared – But They Will - ohiovr
https://www.forbes.com/sites/teresaghilarducci/2019/04/25/the-u-s-debt-ceiling-expired-on-march-1-and-nobody-cared-but-they-will/#a67ac006b3f9
======
j7ake
Debt is worth it if you think your economy is going to grow in the future. It
multiplies growth of an economy. Unfortunately, this multiplier is a double
edged sword, during times of shrinkage.

Most modern economies have done well with debt since WW2 because the economy
has been growing on average. During times of economic expansion, countries who
don't put on more debt get left behind during the boom. The bust hurts those
who took more risks, but it seems like on average it has worked out well for
the debt takers in the last few generations.

~~~
mac01021
Debt that must be repaid by a future generation (or just by other people under
a different administration) will _always_ be worth it to the borrower.

This truth can lead to frivolous borrowing that does not in the least benefit
those who must pay back the debt.

At least in theory. In practice, I guess things seem to be pretty ok for Japan
in spite of their mountain of debt and shrinking population?

~~~
atq2119
The thinking about debt being repaid by a future generation is deeply
misleading because government debt is an _asset_ to the private sector and
those treasury bills are largely owned by US citizens (directly or indirectly,
e.g. via pension funds).

So it's not that the debt has to be repaid by a future generation. Rather, the
debt causes the government to indirectly cause transfer payments among the
future generation, from those who don't own US treasuries to those who do. Put
differently, the debt is a vehicle for perpetuating the current social
stratification (who's rich and who's poor) into future generations.

If you're genuinely and honestly worried about the effect that the debt has on
future generations, then your answer has to be some combination of (a) wealth
tax and (b) moving the country's pension systems away from asset-backed
pensions towards pay-as-you-go / transfer systems. (Though presumably
combining this with a socially owned social wealth fund would work as well.)

~~~
mac01021
Thank you for this.

I don't think you've told the whole story here - for example, when it comes
time for the government to pay the future debt they can do it by raising taxes
on one part of the population or the other, or simply by printing money
(leading to inflation) and not all of those solutions work out the same way
for any given person.

Even so, you've shown me a more sophisticated way to think about this issue
and I'll surely end up having different, better founded opinions as a result.

~~~
nostrademons
Inflation is itself a form of transfer payment - from creditors to debtors,
and from people in markets with no pricing power (high competition) to people
with high pricing power (no competition), and from cash-holders to asset-
holders. You're right that this has very different winners & losers than just
paying interest on the debt, but it's the same general principle: government
debt and money itself are both fictions, so the only way they can influence
_aggregate_ welfare is if they disincentivize productive work.

------
mdorazio
Why would markets/buyers of treasuries care? It's been shown multiple times
over the last few years that there will be a bunch of political shenanigans,
but ultimately the ceiling will be raised again and that T-bills will continue
to be highly desirable and safe despite all the fuss.

~~~
all2
I don't want this to happen. But I think it will.

Debt is not a good thing, especially when it is ignored.

~~~
jmchuster
You can easily find many articles explaining why the national debt is very
different from how we think about personal debt (e.g.
[http://money.com/money/4293910/national-debt-
investors/](http://money.com/money/4293910/national-debt-investors/)).

And then even in the personal finance space, "debt is not a good thing" is
just an incorrect statement, because it always makes perfect sense to borrow
money at a lower interest rate than you can make via investments.

~~~
mehrdadn
> You can easily find many articles explaining why the national debt is very
> different from how we think about personal debt (e.g.
> [http://money.com/money/4293910/national-debt-
> investors/](http://money.com/money/4293910/national-debt-investors/)).

Article: _" Things aren’t at a boiling point — yet."_

Well I am now definitely comforted...

~~~
ianai
Chris Hayes did a podcast that helps explain the difference. Basically, the
government is the sole source of money. If it were to balance its books it
would mean the entire economy was zero sum. The government being in debt means
its leaving value out in the economy. There’s a surplus of money on the not-
government balance sheet.

Source: [https://www.nbcnews.com/think/opinion/debunking-deficit-
hyst...](https://www.nbcnews.com/think/opinion/debunking-deficit-hysteria-
stephanie-kelton-podcast-transcript-ncna1003301)

~~~
mehrdadn
Glancing through it I can't find any mention of what's supposed to happen when
the country ends up with so much debt that most of the government's income
ends up going toward interest... leaving little/no funds for all its other
expenses. Or for the rest of the interest it'll accumulate the following year.
Is the idea that you just print money and the problem goes away ("what could
possibly go wrong?")?

~~~
User23
The most likely outcome is that interest rates will asymptotically approach
zero as debt increases and the theoretical claim that the natural rate of
interest is zero will be proven. And obviously a zero interest treasury
security is essentially the exact same thing as a normal currency note.

Keep in mind that a 0% federal funds rate doesn't mean commercial banks won't
charge interest. Which, by the way, leads to another important point.
Something like 90% of the money in use isn't even created by the government,
rather it's created from thin air by licensed banks. This is why a banking
license is a huge deal. It is, subject to some restrictions, an actual license
to create new money.

~~~
mehrdadn
Sorry, I don't follow. Zero interest? Are we talking about the same interest?
We're paying hundreds of billions of dollars to China in interest. In what
world is China going to let the US keep its money and lower the interest it
receives in return to zero?

~~~
atq2119
In the world where China wants to keep its own currency at a low value in
order to continue the export-driven economic policy.

Look, obviously China can sell its US treasuries in exchange for "cash"
(electronic balances in a current account). If it did that, the US would only
benefit.

If China then exchanged this USD "cash" into another currency, the worst that
would happen is for the USD to reduce in value in the foreign exchange
markets, which would boost US exports and therefore boost the US economy.

Yeah, US consumers would have somewhat less purchasing power for some time,
but that only balances out the fact that US consumers currently have somewhat
more purchasing power than they would "naturally" have.

~~~
ianai
That’s the most straightforward explanation ive seen yet!

------
User23
From the article: "Interest rates, already one of the fastest rising costs in
the federal budget, will rise as the political crisis builds, because foreign
borrowers will demand an additional risk premium."

Wrong. Interest rates will rise if the Federal Reserve raises interest rates.
They will not if it does not. The Fed controls 100% of overnight rates and
virtually all of the rest of the yield curve[1]: "as we went out on the curve
the correlations remained very tight (FFR at 100%, 3 month at 97%, 1 year at
96%, 5 year at 91%, 10 year at 86%, 30 year at 87%). Even at the longest
duration there is an 87% correlation between the movements of the Fed Funds
Rate and the 30 year bond. In other words, the bond market is the Fed’s
whipping boy. Not the other way around."

What the Fed does not control is the US dollar's foreign exchange rate. So
it's entirely possible that debt ceiling worries will cause a weaker dollar.
Paradoxically though, they might cause a stronger dollar since the government
not issuing debt actually constrains the dollar supply. Sovereign finances are
deeply weird, and global reserve currencies are too.

[1] [https://www.pragcap.com/i-want-to-come-back-as-the-
federal-r...](https://www.pragcap.com/i-want-to-come-back-as-the-federal-
reserve-you-can-intimidate-everybody/)

~~~
ohiovr
My theory is the fed isn't all powerful with interest rates. They have target
rates they wish to achieve and one way is to buy and sell treasuries on the
open market. Treasury prices are still up to the results of an auction
process. But there is usually a secondary market you can buy from from
treasuries that have already been awarded to someone.

The debt itself is not fearful. Being unable to sell treasuries at low costs
will be a big change. The fear is that todays political climate could indeed
be too messed up to act in time so that congress has the authority to spend.
Missed payments are going to be a problem if it happens.

But I'm not a finance expert.

~~~
dfrage
Your theory proved correct in the 1970s, things got so messed up "everything"
rose, both unemployment and inflation driving a stake into the heart of the
Phillips Curve, and what people demanded to buy private or Federal debt. The
latter got so bad "Carter bonds" were created, denominated in West German
Marks or Swiss Francs:
[https://en.wikipedia.org/wiki/Carter_bonds](https://en.wikipedia.org/wiki/Carter_bonds)

~~~
ohiovr
Very interesting. I did not know non dollar deominated us treasury debt
exited.

------
username90
Am I wrong or do USA have an extreme discrepancy between government spending
and tax revenue? Isn't it strange that the American Government is spending 38%
of gdp, but only collecting 27% of gdp in taxes?

Compare Japan with USA

Japan tax pressure: 35.9%.

USA tax pressure: 27.1%

Japan gov spending: 38.9%

USA gov spending: 38.0%

As you can see to a naive person it might look like Japan has a much bigger
government than USA, but they are actually very similar.

[https://tradingeconomics.com/united-states/government-
spendi...](https://tradingeconomics.com/united-states/government-spending-to-
gdp) [https://tradingeconomics.com/japan/government-spending-to-
gd...](https://tradingeconomics.com/japan/government-spending-to-gdp)

[https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven...](https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_to_GDP_ratio)

[https://ourworldindata.org/grapher/historical-gov-
spending-g...](https://ourworldindata.org/grapher/historical-gov-spending-
gdp?time=1880..2011&country=DEU+JPN+SWE+CHE+GBR+USA)

------
astazangasta
It's worth noting that the debt ceiling is not a brake on spending, which
continues apace. It is a brake on paying back debt. The analogy to personal
finance that debt hawks love would be to rack up a bunch of debt on your
credit card, and then balk when the bill comes due.

~~~
User23
It's actually even more ridiculous than that. All the expenditures debt
issuance "funds" have already been appropriated by congress, which is to say
the agreement to pay has already been made. The debt ceiling is just an
accounting gimmick based on the legal theory that the US Treasury's demand
account at the Federal Reserve can't overdraw. Treasury could very much just
write the checks (and probably is legally obligated to!) and then it would be
up to the Fed to clear or bounce them. I don't see any Federal Reserve
Chairman personally signing off on forcing a government default.

------
an4rchy
It's interesting that there's no legal consequences, for the politicians, to
raise the debt ceiling.

Is this the same in other countries as well?

~~~
Someone
Are there other countries with a US-like debt ceiling? Australia had one
between 2007 and 2013
([https://en.wikipedia.org/wiki/Australian_government_debt#Deb...](https://en.wikipedia.org/wiki/Australian_government_debt#Debt_ceiling))
and the EU stability and growth pact
([https://en.m.wikipedia.org/wiki/Stability_and_Growth_Pact](https://en.m.wikipedia.org/wiki/Stability_and_Growth_Pact))
limits debt to 60% of GDP, but its measures are a lot drastic than what the US
does, and its limit was softened in 2005
([https://en.wikipedia.org/wiki/Stability_and_Growth_Pact#Refo...](https://en.wikipedia.org/wiki/Stability_and_Growth_Pact#Reform_2005))

