
When will USA's burgeoning public deficit bite it back? - silentsea90
It seems there are no bad consequences of running a massive public deficit, and therefore, no perceived cost of printing money. Is there a point at which there will be a reckoning of sorts here? What will it look like and when do we expect it to hit?
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bitxbitxbitcoin
A reckoning won't happen until another currency usurps the USD as global
reserve currency. The timeline of that is up to speculation but taking
historical perspective in mind it's a matter of when not if.

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adventured
There are numerous aspects at play. The first and most important for the next
10-20 years, is the debt interest cost.

That is, the federal net interest payments. You want to look at that as a
share of the economy and budget (and actual tax revenue as well).

As a share of GDP that was around 1.8% for 2019. In 1996 it was 3% by
contrast, on a much smaller pile of debt. As a percentage of government
outlays it was 9% in 2019, versus 15% in 1996.

Most likely the US can safely go up to $40 to $50 trillion in public debt,
holding the average interest rate on the debt where it is now, without
suffering a severe event.

That's not what will happen however. The Fed will press the cost of the debt
persistently lower over time and hold rates low permanently. But but but, I
can hear other people say: what about inflation?!? The increasing debt
maintenance costs rob the economy of dynamism and growth, and largely prevent
traditional consumer inflation from running out of control (this is why Japan
couldn't spark traditional inflation, despite low rates forever; they had to
forcibly take a hatchet to the Yen to get the result they wanted). You will
see considerable asset inflation however, and it'll also show up in many (but
not all) commodities. It helps that the other global currencies are
simultaneously debasing as well, the US just has to compete with peer fiscal
disaster mostly (China, Eurozone, Japan; all three are debt and growth
nightmares). The winners will be nations in great fiscal shape that have
independent currencies, their purchasing power will soar - they'll become
wealthier in real-terms - versus the major currencies over time.

At 1% rates on the US debt, you can run up $60 trillion in magic Fed backed
debt and only be paying about the same debt interest we are today. Can they
squeeze the debt load down to that average rate? Yep, and they will.
Eventually the US will issue debt at zero rates as in Europe, and economic
dynamism will approach heat death as in most of Europe and Japan.

That's impossible, to push rates so low on the debt? Of course it's not. The
ECB is doing it right now and Japan has already done it. Both of those central
banks have monetized far larger shares of their respective economies than the
US Fed has so far.

So to answer your question: this can continue for a very long time. 20 to 30
years at a minimum before the US reaches where Japan is at today, and 10 to 15
years before the US reaches where Europe is at. The doom forecasters are going
to be persistently very distraught as their scenarios fail to play out
(they'll endlessly be baffled by it; the professional economists will be
baffled at the lack of traditional inflation, but that's trivially easy to
explain).

In several decades, after the US maxes out on how low it can push rates on the
debt, then it'll move to the last resort: hatchet debasement of the USD, as in
Japan with the Yen. That's when you just start cutting down the population's
standard of living in aggressive drops (done to debase the debt; that has to
continue until you crawl out from under the debt enough to be able to pay your
government bills again (ie until you can afford your welfare state &
entitlement obligations again); this is a point where there is no choice, the
outcome happens regardless of whether anyone decides to aggressively debase
the currency or not). That stage, is in summary simply shifting from eating
fat, to eating muscle and bone; you're eating your nation's assets and the
value of its output very aggressively, in an almost direct swap to debase the
debt.

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csense
This doesn't really make sense to me.

One sentence you're saying the Fed will "press the cost of the
debt...lower...and hold rates low permanently." If I'm reading this right,
you're talking about the government rolling over its maturing debt into new
debt with lower IR.

Then you're talking about the effect of "increasing debt maintenance costs"
\-- but if the Treasury gets to sell low-interest debt to pay off high-
interest debt, isn't that going to _decrease_ its debt maintenance costs?

> The increasing debt maintenance costs rob the economy of dynamism and growth

Hold on a second, I thought we were talking about Treasuries? How does that
affect the the private sector?

I get that private IR usually moves in lockstep with government IR (at a
mostly fixed offset representing relative risk levels).

But I don't get why a low IR is bad for business. Don't the low rates
stimulate companies to build themselves up faster with cheap borrowed money?

> the lack of traditional inflation...[i]s trivially easy to explain

Could you explain it, then, please?

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dglass
I think you should read up on Modern Monetary Theory (MMT). There are quite a
few people that would argue that printing money is not an issue as long as the
debt is held in the same currency you're printing the money with. In theory,
you could continue to print enough money to pay off the deficit.

The argument against that is that printing money will cause inflation. While
this is true to an extent, it is not always the case. Only about 3% of money
in circulation is actually "cash", while the other 97% is credit or a balance
in a bank's computer system. Cash + Credit = people's ability to spend. When
credit dries up, people aren't able to spend as much. In order to keep the
system running the fed can print money to counterbalance the reduction in
credit. The amount of money in the system stays the same, it's just that
there's more cash and less credit. This is done to ensure that people continue
to spend and keep the wheels of the economy turning. Printing money is not
always bad.

Also, it's important to understand that while printing adds money to the
system, taxes take money out of the system. The taxes the government collects
don't actually get recirculated back into the economy. Remember, lots of taxes
are paid electronically, which is just a debit on your bank account and a
credit on the government's balance sheet. It's not like they're taking your
physical dollar bills and spending it again by handing them back out. That
money leaves the system and is effectively "destroyed". The government just
goes ahead and prints the same amount of money again to balance everything
out.

A "balanced budget" means that the government spent or printed the same amount
of money that they took out of the system with taxes. While most people would
argue this is a good thing, you have to realize that if there's no change in
the amount of money in the system, people's wages and wealth effectively
remain the same. Inequality can quickly creep in as certain populations of the
economy amass more and more wealth. With a balanced budget, it is always a
zero-sum game, with a winner and a loser.

By running a deficit (spending more than collecting in taxes), you're raising
the amount of money in the system. A rising tide lifts all boats, and so more
money in the system means more spending, more jobs, and people earn more. More
people can build wealth and live a decent life. Of course, it's a balancing
act though. But when done right, it can raise the living standards for all
people in a nation.

I'm no MMT expert, but here are some resources I've found to be helpful:

How the economic machine works by Ray Dalio:
[https://www.youtube.com/watch?v=PHe0bXAIuk0](https://www.youtube.com/watch?v=PHe0bXAIuk0)

Soft Currency Economics II (This introduced the idea behind MMT):
[https://www.amazon.com/gp/product/B009XDGZLI/ref=ppx_yo_dt_b...](https://www.amazon.com/gp/product/B009XDGZLI/ref=ppx_yo_dt_b_d_asin_title_o01?ie=UTF8&psc=1)

Diagrams & Dollars: Modern Money Illustrated:
[https://www.amazon.com/gp/product/B00HUF6POI/ref=ppx_yo_dt_b...](https://www.amazon.com/gp/product/B00HUF6POI/ref=ppx_yo_dt_b_d_asin_title_o00?ie=UTF8&psc=1)

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positr0n
> The taxes the government collects don't actually get recirculated back into
> the economy.

I don't understand what you mean by this. Sure a small percentage of taxes go
towards expenses in foreign countries or to foreign companies. But social
security? Medicare/Medicaid? All those defense contractors? The roughly 2
million federal government employees? All those expenses are going straight
back into the US economy are they not?

