This is how it will play out in the next 20-30 years you are thinking about
> They can't do a firesale of US bonds
they aren’t buying a lot of new American bonds and keeping the bond market strong with private buyers. It is why the fed buying treasury bills in the quantities they do is troubling.
Interest rates aren’t going to back zero, they will drop from the current highs but interest will remain positive.
The debt to GDP ratio has jumped massively in last 40 years from 30 % to 60% in 2000s and now 120%, that is an impressive amount of spending considering how large the US economy is . [1]
At some point the either spending on programs have to be cut or taxation has to increased, or inflation has to be allowed to increase significantly to service it.
The policy paralysis in Washington almost by design will not allow for either of the first two solutions to happen which would be internal to the country, so likely in next 20-30 years we are looking at runaway inflation .
At the point dominoes will be too late to control, if dollar no longer is a strong reserve currency , interest rates will go up , either we default or massively rebalance the economy after getting a bail out (! No country or institution like IMF is large enough to remotely even attempt bailing out America ) .
The pain will be global of course , but nobody will be able to do anything about it.
[1] In itself the ratio is not a problem, In OECD countries high numbers can work for long while, Japan holds 250% + of debt to GDP ratio famously , but now after 30 years of weird economics they are slowly being forced to raise interest rates positive or face the yen falling and it will be costly either way
> In itself the ratio is not a problem, In OECD countries high numbers can work for long while, Japan holds 250% + of debt to GDP ratio famously
One of my missions-for-fun on HN is to figure out why anyone cares about Japan's debt:GDP ratio. The country is a net creditor [0]. The US is the worlds largest debtor by an order of magnitude in absolute terms, and up there with just outside the beyond-hopeless tier of debtors. Superficially the two countries seem to be incomparable. Japan's credit position is almost an anti-US on net, relative to GDP. Why would we look at a creditor to figure out how a debtor's default would work?
When you print the world's reserve currency, and currency can only be issued as debt, if the world economy grows faster than currency expansion, you'll have real goods/services deflation. It's a weird catch 22, the only way for the $ to remain the reserve currency is for it to continue being issued at a global growth rate, faster than a mature economy like the US can grow. International debts in $ can only be paid back in the same and that's part of the reason for rehypothecation, central bank swaps, and all sorts of other shenanigans. In turn that keeps US long rates artificially low.
The old adage holds true though, it's your problem when you owe the bank a little money. It's the banks problem, if you owe a lot of money. The same is true of inward investment into the US (or Russia or China). Who will end up owning that investment, if relations go south? The country where it exists not the investor, but debt is a negative investment. The Treasury can start issuing unsterilized currency (the trillion $ coin) and debase the currency any time there's a big enough issue, or simply not repay certain bonds. By the time that happens though, the international economy will already be a shambles. Markets end run this sort of stuff.
If it really happens quickly, owning lead (or uranium) will be more important than owning gold. Hopefully, it's gradual and we eek through another few decades of global growth before it does.
It was a footnote, to illustrate that even countries like Japan which are on the other end of spectrum are not immune to ratio affecting them , not a direct comparison
Perhaps I should have elaborated, this was not a technical presentation of the argument, just a picture everyone can understand.
This is irrelevant for this. They are deficit spending in their local currency. Their US dollars are going to a massive frenzy of commodities import. They are just diversifying their reserves, less US bonds, more physical goods like copper, coal, gold, etc.
> is irrelevant for this. They are deficit spending in their local currency
It's incredibly relevant for balance of payments [1]! This is international banking 101.
If they want a stable currency while deficit spending and maintaining monetary sovereignty, they need to sell assets and/or clamp down on capital flows [2].
If selling, it will mostly be dollars, because that's what folks want and what they have. That's what they're doing.
> They are just diversifying their reserves
No, their reserves are going down. They are also diversifying. But anything other than them net selling dollar assets would be incrediby weird.
Of course they're net reducing the dollar assets they hold. But you don't have to sell your bonds to do that. You can just let your current bonds mature and not roll them. That way there's no big selloff to spook the market.
> you don't have to sell your bonds to do that. You can just let your current bonds mature and not roll them
They're selling like $18bn a month [1]. That is 2% of the daily trading volume [2]. Until recently, the Fed was running off 4x as much [3]. (It's still, at $40bn per month, $25bn of which are Treasuries, running off more than China is selling.)
China is diversifying. But they're doing so about as cautiously as one could.
Another doomerism that will fail to materialize, I suspect. Sometimes too many people are almost eager for the other shoe to drop. But if America is too big and powerful to bail out, then maybe they won't need to get bailed out on...wait for it...debt denominated in their own currency. Fiat is powerful that way.
No, I think the way to continued prosperity are the old principles: Free Markets, Liberal governance, Property Rights, Fighting corruption, and Ensuring robust multilevel competition in the marketplace.
> I think the way to continued prosperity are the old principles: Free Markets, Liberal governance, Property Rights, Fighting corruption, and Ensuring robust multilevel competition in the marketplace.
Don't forget accepting immigrants and makin babies.
In terms of economic policy not much , increased deficit spending is the platform for both parties , whether by tax cuts or welfare is just about who gets the benefits of the spending.
Spending itself is not going to change between both parties
The world won’t fail , but the impacts are real when economic systems change .
We are already facing that , asset inflation is already run away , generational wealth is only way millennials can buy a house , the economic prosperity of boomers is long gone .
The cost of having children has gone up , that is changing demographics today.
It is not black and white between economic collapse and we go to trading cigarettes or everything is awesome , it is spectrum and we already feeling the real economic pain and nothing is indicating it will get better just worse
Of course it has. The slow but certain financialization of the economy since the 70’s has lead to all of this, including the deindustrialization you mention.
Sidebar and perhaps slightly off topic. One of the trigger moments in the Nazi's rise to power was the USA's stockmarket crash, and how the side effects of that ripped a nasty hole in the German economy.
In watching the Netflix doc on the eise of the Nazis, it enlightening how many actions (and inactions) of the USA contributed to the rise of the Nazis. No doubt Hilter & Co were an evil bunch but in terms of popular support and rising to power, they did not do it alone. They had plenty of help.
> They can't do a firesale of US bonds
they aren’t buying a lot of new American bonds and keeping the bond market strong with private buyers. It is why the fed buying treasury bills in the quantities they do is troubling.
Interest rates aren’t going to back zero, they will drop from the current highs but interest will remain positive.
The debt to GDP ratio has jumped massively in last 40 years from 30 % to 60% in 2000s and now 120%, that is an impressive amount of spending considering how large the US economy is . [1]
At some point the either spending on programs have to be cut or taxation has to increased, or inflation has to be allowed to increase significantly to service it.
The policy paralysis in Washington almost by design will not allow for either of the first two solutions to happen which would be internal to the country, so likely in next 20-30 years we are looking at runaway inflation .
At the point dominoes will be too late to control, if dollar no longer is a strong reserve currency , interest rates will go up , either we default or massively rebalance the economy after getting a bail out (! No country or institution like IMF is large enough to remotely even attempt bailing out America ) .
The pain will be global of course , but nobody will be able to do anything about it.
[1] In itself the ratio is not a problem, In OECD countries high numbers can work for long while, Japan holds 250% + of debt to GDP ratio famously , but now after 30 years of weird economics they are slowly being forced to raise interest rates positive or face the yen falling and it will be costly either way