Why should you care if the national debt goes up or down? Why is it bad if it goes up? Do you actually understand the underlying mechanics, or have you just built a lot of eloquent abstractions around the idea of “number go up is bad”?
Go high enough, interest payments consume the entire federal budget. There is no way out except revenue growth (infeasible without breakthrough productivity improvements), taxation, and printing money (equivalent to taxation). Before that point, other bad things happen such as creditors losing faith in the government, making debt more expensive and destabilizing the dollar's position as global reserve currency.
Over the last few decades, debt has continued to rise as a percentage of the federal budget, and appears that trend will continue without drastic action.
Barring massive political instability, nobody is ever going to lose confidence in the dollar, regardless of debt ratios. Japan has a debt ratio of over 300%, economists have been predicting a crash and capital flight for decades, but none of it has come to pass.
At the end of the day, the Japanese market is huge and people want access to it. Same thing goes for the US.
If the private market doesn’t want bonds, the central bank can purchase them. That’s not inflationary. What is inflationary is how the government then spends that money, but that’s true for any government spending, regardless of how it was financed. Either way, the debt ratios is literally meaningless.
> If the private market doesn't want bonds, the central bank can purchase them. That's not inflationary.
Central bank buying bonds and increasing money supply absolutely is inflationary. That is precisely how FOMOs work, with the end goal being increasing or decreasing money supply depending on inflation and labour market. So if you already have stubborn inflation and you have a fiscal crisis then unmooring inflation expectations by lowering rates is exactly what you don't want to do (risk becoming a banana republic that inflates away it's debt). I don't think this will happen in the near future but it is absolutely a risk and you'd be foolish as a central banker not to consider it.
What do you mean "there's no failing for a country with a sovereign currency"? There are many, many examples of countries failing. Some of them had sovereign currencies. Sure they can't "run out of money" if they can print more. Along with many more examples of being able to adjust internal values and metrics. This is a very different thing from not being able to fail.
I’ll be clearer. The failure mode that you’re talking about, where debt ratios are so high that a country isn’t able to service its debt, is economically speaking impossible. This isn’t “too big to fail”, it’s the system working as intended.
I'm not sure why you think that's what I'm talking about, because I never brought that up. In fact I agree with that point. The apparatus will never report a failure because it has an incentive not to. The whole system is built and described in a way to make failure seem impossible because confidence is necessary for it to work. But when numbers and reality don't match, reality wins.
The interest still needs to be paid. That requires revenue growth, taxes, or printing money. Taxes and printing money makes everyone poorer - the IOUs of yesterday coming due. Japan has had many challenges over the past few decades.
I'm not an expert but I think I have a reasonable understanding of the situation. If the US debt to GDP ratio gets too high, purchasers of US Treasuries (bills, notes, and bonds) will lose confidence in the US government's ability to service that debt and demand a higher yield on US Treasuries at auction, which increases the cost of servicing the debt. At that point, the government has two choices; pay the higher yield which eventually results in fewer services/higher taxes and a contraction in the real economy, or to default on the debt which would result in very bad things happening (this is where I cop to ignorance on the scale and exact details of the badness). We should get ahead of that by reducing our services/raising taxes now so that we don't risk a loss of confidence that would restrict our ability to borrow in a time of crisis.
1. Nobody is losing confidence in the US over debt ratios. Japan’s debt ratio is over 300%, and they’ve had no issues with financing their spending or capital flight. This is a myth that has been proven false.
2. If the private market doesn’t want to purchase bonds, the central bank can do it. Either way, there is never a need to default on debt owed in your sovereign currency. This will never happen. The risk here is inflation, but that risk is always present, regardless of how spending is financed.
1. Japan is a net creditor nation, meaning it owns more foreign assets than it owes in debt. The U.S., on the other hand, is a net debtor nation, meaning it relies heavily on foreign investors to finance its deficits.
Japan also has a high domestic savings rate, and a large portion of its debt is held by its own citizens and institutions. This reduces capital flight risks compared to the U.S., which depends more on foreign investors (e.g., China, Japan, and others buying U.S. Treasuries).
The U.S. dollar is the world’s reserve currency, which gives the U.S. unique advantages, but also means its debt is held globally. A loss of confidence in U.S. debt could have larger consequences compared to Japan.
2. U.S. benefits from strong global demand for the dollar, but this is not guaranteed forever. If the Federal Reserve were to absorb all bond issuance ( basically monetizing the debt), inflation expectations would rise sharply, leading to a currency crisis or higher interest rates. Zimbabwe and Weimar Germany are extreme examples of this.
U.S. essentially "exports" its debt due to its persistent trade deficits.
U.S. runs large trade deficits, meaning it imports more goods than it exports. Other countries (like China and Japan) accept U.S. dollars in exchange for their goods, and then reinvest those dollars into U.S. assets, primarily Treasury bonds. This has helped finance U.S. debt at low interest rates for decades.
If global confidence in U.S. debt declines, foreign demand for Treasuries could drop, leading to a weaker dollar, higher interest rates, and inflationary pressures.
All of your comments in this thread are misleading.
This creditor/debtor dichotomy is meaningless. It doesn’t change the fact that the debt is owed in dollars and can always be serviced. If foreign investors lose confidence in the US and sell off their treasuries, the central bank can just purchase them and nothing would change. In fact, that’s what Japan does, and that’s why they’re a net creditor. And no, this would not lead to inflation. Again, look at Japan for an empiric example.
I already wrote about how Japan is different from the US and why that changes everything.
> debt is owed in dollars and can always be serviced. If foreign investors lose confidence in the US and sell off their treasuries, the central bank can just purchase them and nothing would change
It changes everything for US citizens. Zimbabwe's debt is also serviced, but I'm not sure US citizens would like to pay one trillion dollars for bread and get cut off from the majority of products and resources that the US imports, because the dollar would be worth as much as the paper it was printed on. It would also mean that the whole stock market would collapse because no one would recycle the dollar anymore. It would be a devastating blow to the US economy. It's so obvious to anyone that knows anything about economy that at this point you are just spreading lies.
No, you didn’t explain how Japan is different. Because in fact it’s not. The key point is that a government that issues debt in its own currency can always service that debt, and this is NOT inflationary.
Zimbabwe’s inflation happened because the country had debt denominated in USD and CNY, along with massive political instability, a shrinking economy, and a war happening all at the same time. Couple that with a useless central bank and you have hyperinflation.
How is that in any way comparable to the US? It’s not. This is obvious to anyone arguing in good faith.
> The key point is that a government that issues debt in its own currency can always service that debt, and this is NOT inflationary.
Hmm. Let's follow your argument to its conclusion. Why stop at 300% of GDP? Why stop at 300 times GDP? It seems that even a small nation with a sovereign currency can eliminate all taxation, borrow an infinite amount of money, buy an infinite amount of stuff, make all of its citizens infinitely wealthy, service its debt with printed money forever, and prices and interest rates will both be unaffected. It's amazing, then, that no nation has yet taken advantage of this exploit!
I feel confident that is not right. I think it may be right that (marginally?) there is not a big difference whether a fixed amount of government spending is financed by taxation or debt, because printed dollars and t bills are so easily interchangeable. But it seems that you are trying to use this argument to prove that if these things are equivalent that they are (in any quantity!) harmless, and that's a non sequitur.
Of course that’s not what I’m arguing, please don’t straw man me.
The constraint on public spending is the amount of real resources that can be utilized. Productive utilization of resources is not inflationary. For example, if you have 10% unemployment, a government can hire those people to build infrastructure regardless of the debt ratio. On the other hand, if you issue public debt to purchase commodities that’s obviously inflationary.
But in either case, the constraint is real resources and inflation, not the debt ratio.
You asked why countries haven’t done this already? They have, it’s called quantitative easing and they do it in financial crises to absorb the productive capacity that the private market isn’t utilizing anymore.
> Japan’s debt ratio is over 300%, and they’ve had no issues with...
I don't know what the fallacy of "something is the same along one dimension, therefore the situation along some other dimension(s) must be the same too" is called, but this is a clear example.
